INSTITUTE LETTER ON SEC PROPOSAL REGARDING PAYMENT OF FUND EXPENSES THROUGH BROKERAGE/SERVICE ARRANGEMENTS

October 18, 1994 TO: ACCOUNTING/TREASURERS COMMITTEE NO. 51-94 SEC RULES COMMITTEE NO. 110-94 RE: INSTITUTE LETTER ON SEC PROPOSAL REGARDING PAYMENT OF FUND EXPENSES THROUGH BROKERAGE/SERVICE ARRANGEMENTS __________________________________________________________ The Institute submitted the attached letter on the SEC's proposed rule and form amendments to enhance disclosure by investment companies of expenses paid by broker-dealers in connection with the allocation of a company's brokerage transactions ("brokerage/service arrangements"). The Institute's letter is substantially similar to the draft letter that was previously circulated. (See Memorandum to Accounting/Treasurers Committee No. 48-94, SEC Rules Committee No. 103-94 and Soft Dollars Task Force, dated September 23, 1994.) In summary, the letter expresses support for the proposed requirement that funds "gross up" expenses paid through brokerage/service arrangements in the statement of operations, fee table, financial highlights table and yield calculation. The letter also supports a requirement that funds make similar adjustments to reflect expenses paid through arrangements, other than brokerage/service arrangements, "where there is an understanding between the parties that such arrangements will be used in lieu of cash payments." The letter opposes the proposal to require funds to disclose in the financial highlights table the average commission rate (in cents per share) paid by the fund because such information not only is meaningless, but also could be confusing to investors. The letter also opposes adjusting fund expenses to reflect research and other services permitted under Section 28(e) of the Securities Exchange Act of 1934 because of the significant complexities and practical difficulties involved in doing so. Finally, the letter requests that the Commission clarify that the use of brokerage/service arrangements is but one of many factors that the board of directors might consider in overseeing a fund's brokerage allocation policies and, therefore, a board will not have violated its fiduciary duty if a fund does not use such arrangements to reduce fund expenses. Amy B.R. Lancellotta Associate Counsel Attachment