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January 13, 1989
TO: OPERATIONS MEMBERS NO. 7-89
SEC RULES MEMBERS NO. 3-89
RE: SEC DENIES ICI REQUEST FOR AMENDMENT OF MARGIN RULE
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The SEC's Division of Market Regulation, in the attached
letter dated January 9, 1989, declines to grant the Institute's
request for amendment of Rule 11d1-2 under the Securities
Exchange Act of 1934 to eliminate the 30-day waiting period
before extension of credit on mutual fund shares.
The Institute submitted its request on August 10, 1987,
arguing that the elimination of the 30-day hold was appropriate
since Congress never intended to include mutual funds within the
prohibitions of Exchange Act Section 11(d)(1); that the type of
offering and manner of pricing of mutual funds differ
significantly from that of industrial issuers so that the
potential abuses the statute was drafted to protect against are
not a concern, and finally, that an unwarranted competitive
disparity exists between independent discount brokers and other
broker-dealers (See Memorandum to SEC Rules Committee No. 42-87,
dated August 19, 1987).
In its response, the Division of Market Regulation states
that it believes with the concurrence of the Division of
Investment Management states its belief that it would not be
appropriate to amend the rule at this time. The letter states
that although it is true that in general the distribution of
mutual fund shares differs from that of corporate issuer shares
(price is not affected by supply and demand, and dealers in fund
shares do not take a market risk) a distribution of corporate
shares in a "best efforts" underwriting would be similar in this
regard.
In addition the staff is concerned that brokers selling
shares that include a sales charge greater than the standard
commission would have an incentive to arrange for extension of
credit in circumstances where it would not be appropriate.
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Susan P. Hart
Assistant General Counsel
Attachment