DRAFT PROPOSED AMENDMENTS TO RULE 17F-5 AND ASSOCIATION OF CUSTODIAN BANKS' CORRESPONDENCE REGARDING THE DRAFT AMENDMENTS

[9697] February 20, 1998 TO: SEC RULES COMMITTEE No. 14-98 RULE 17f-5 WORKING GROUP RE: DRAFT PROPOSED AMENDMENTS TO RULE 17f-5 AND ASSOCIATION OF CUSTODIAN BANKS' CORRESPONDENCE REGARDING THE DRAFT AMENDMENTS ______________________________________________________________________________ As you know, there has been a great deal of concern expressed with recently amended Rule 17f- 5 as it applies to compulsory depositories. Attached for your review are draft amendments to the rule intended to make it practically more workable for compulsory depositories. The draft amendments would create a safe harbor for the evaluation of compulsory depositories using several objective criteria. Under this approach, if a compulsory depository satisfies certain objective criteria, it would be deemed to provide reasonable care under Rule 17f-5. The objective criteria would include requirements regarding the compulsory depositoryGs financial strength and internal controls. In addition, it would require the compulsory depository to provide periodic reports to its depositors regarding safekeeping of investment company assets and to be subject to periodic review, such as audits by independent accountants or inspections by regulatory authorities. The draft amendments also would clarify that the contract required with respect to fund assets must be with a qualified foreign bank (that would be a depository participant), not with the depository. Earlier versions of the amendments have been reviewed by a working group of members and by the Association of Custodian Banks. (A brief explanation of the changes suggested by each of these groups is attached.) As you will see from the attached correspondence, the Association generally agrees with the draft amendments. We intend ultimately to submit the draft amendments for the Securities and Exchange Commission staffGs consideration jointly with the Association. Please provide me with any comments on the draft rule text no later than March 3rd by phone at 202/ 326-5821, facsimile at 202/326-5827, or e-mail at donohue@ici.com. Dorothy M. Donohue Associate Counsel Attachments