October 3, 1994
TO: INTERNATIONAL COMMITTEE NO. 17-94
SEC RULES COMMITTEE NO. 105-94
RE: INSTITUTE LETTER TO SEC STAFF ON RULE 17f-5
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Enclosed is a copy of a letter prepared by counsel to the
Institute and submitted to the SEC's Division of Investment
Management concerning revisions to Rule 17f-5, the rule under the
Investment Company Act of 1940 that allows fund assets to be
maintained in foreign custody. The letter describes the
Institute's position with respect to amendments to Rule 17f-5
proposed by a coalition of custodian banks.
As you may know, the Institute submitted two previous
letters to the Division of Investment Management recommending
amendments to Rule 17f-5. Our letter of January 18, 1993
proposed changes that would permit a fund's board of directors to
delegate the selection and management of foreign custody
arrangements to the fund's adviser or U.S. custodian. (See
Memorandum to SEC Rules Committee No. 9-93, International
Committee 3-93, dated January 22, 1993.) Our letter of October
13, 1993 recommended changes in the rule's definition of
"eligible foreign custodian." (See Memorandum to SEC Rules
Committee No. 95-93, International Committee 23-93, dated October
27, 1993.)
The Institute's letters were followed by a February 9, 1994
submission to the SEC staff by a coalition of seven banks that
serve as custodians for registered investment companies. The
coalition banks generally supported the Institute's
recommendations, but suggested a number of modifications.
As set forth in the attached letter, the coalition proposal
addresses certain issues that our submissions did not, and we
support a number of their recommended changes. Their submission
also includes some provisions that we do not support, and that we
were unable to resolve in meetings with coalition
representatives. In particular, we disagree with the provisions
of the coalition proposal that would a) retain within the rule
various "country risk" determinations, b) exempt the use of
compulsory foreign depositories from certain of the rule's
provisions, and c) qualify the standard of care to be used in
selecting an eligible foreign custodian in a manner that we
believe is inconsistent with the best interest of investors.
Angela C. Goelzer
Associate Counsel