Notices. Notice of application for an order under section 12(d)(1)(J) of the Investment Company Act of 1940 (“Act”) for exemptions from, alternatively, sections 12(d)(1)(A) and (B) of the Act, section 12(d)(1)(F)(ii) of the Act, and section 12(d)(1)(G)(i)(II) of the Act, and under sections 6(c) and 17(b) of the Act for an exemption from section 17(a) of the Act
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BILLING CODE 8010-01-M SECURITIES AND EXCHANGE COMMISSION [Release No. IC-26600; 812-12462] Federated Investors, Inc., et al. September 17, 2004. AGENCY: Securities and Exchange Commission (“Commission”). ACTION: Notice of application for an order under section 12(d)(1)(J) of the Investment Company Act of 1940 (“Act”) for exemptions from, alternatively, sections 12(d)(1)(A) and
(B)of the Act, section 12(d)(1)(F)(ii) of the Act, and section 12(d)(1)(G)(i)(II) of the Act, and under sections 6(c) and 17(b) of the Act for an exemption from section 17(a) of the Act. Summary of Application: The order would permit, alternatively, certain registered open-end management investment companies
(a)to acquire shares of other registered open-end management investment companies that are within and outside the same group of investment companies,
(b)to invest pursuant to section 12(d)(1)(F) of the Act but charge a sales load in excess of 1 1/2 % and
(c)to invest pursuant to section 12(d)(1)(G) of the Act but invest also in securities and other financial instruments. Applicants: Federated Investors, Inc. (“Federated”); Federated Advisory Services Company, Federated Equity Management Company of Pennsylvania, Federated Global Investment Management Corp., Federated Investment Counseling, Federated Investment Management Company, Passport Research Ltd. and Passport Research II, Ltd. (together with entities controlling, controlled by or under common control with these entities, the “Federated Advisers”); Brown Brothers Harriman & Co., CB Capital Management, Inc., Hibernia National Bank, M&I Investment Management Corp., Morgan Asset Management, Inc., Provident Investment Advisors, Inc., SouthTrust Bank, MTB Investment Advisors, Inc., WesBanco Bank, Inc., BB&T Asset Management, Inc., and Huntington Asset Advisors, Inc. (together with entities controlling, controlled by or under common control with these entities, the “Proprietary Advisers” and with the Federated Advisers, the “Advisers”); Cash Trust Series, Cash Trust Series, Inc., Cash Trust Series II, Federated American Leaders Fund, Inc., Federated Adjustable Rate Securities Fund (formerly Federated ARMs Fund), Federated Core Trust, Federated Core Trust II, L.P., Federated Equity Funds, Federated Equity Income Fund, Inc., Federated Fixed Income Securities, Inc., Federated GNMA Trust, Federated Government Income Securities, Inc., Federated High Income Bond Fund, Inc., Federated High Yield Trust, Federated Income Securities Trust, Federated Income Trust, Federated Index Trust, Federated Institutional Trust, Federated Insurance Series, Federated International Series, Inc., Federated Investment Series Funds, Inc., Federated Limited Duration Government Fund, Inc. (formerly Federated Adjustable Rate U.S. Government Fund, Inc.), Federated Managed Allocation Portfolios, Federated Municipal Opportunities Fund, Inc., Federated Municipal Securities Fund, Inc., Federated Municipal Securities Income Trust, Federated Short-Term Municipal Trust, Federated Stock and Bond Fund, Inc., Federated Stock Trust, Federated Total Return Government Bond Fund (formerly Federated U.S. Government Securities Fund: 5-10 Years), Federated Total Return Series, Inc., Federated U.S. Government Bond Fund, Federated U.S. Government Securities Fund: 1-3 Years, Federated U.S. Government Securities Fund: 2-5 Years, Federated World Investment Series, Inc., Intermediate Municipal Trust, Edward Jones Money Market Fund (formerly Edward D. Jones & Co. Daily Passport Cash Trust), Edward Jones Tax-Free Money Market Fund, and Money Market Obligations Trust (together with any future registered open-end investment company advised by a Federated Adviser and in the same “group of investment companies,” as defined in section 12(d)(1)(G)(ii) of the Act, the “Federated Funds”); BBH Prime Institutional Money Market Fund, Inc., BBH Common Settlement Fund II, Inc., BBH Fund, Inc., BBH Money Market Portfolio, BBH Trust, Golden Oak Family of Funds, Hibernia Funds, Marshall Funds, Inc., Regions Morgan Keenan Select Funds (formerly Regions Funds), The Provident Riverfront Funds, SouthTrust Funds, MTB Group of Funds (formerly Vision Group of Funds), WesMark Funds, BB&T Funds, and The Huntington Funds (together with any future registered open-end investment company advised by a Proprietary Adviser and in the same group of investment companies, the “Proprietary Funds,” and together with the Federated Funds, the “Funds”). 1 1 All Funds that currently intend to rely on the order are named as applicants. Any other investment company that relies on the order in the future will comply with the terms and conditions of the application. Applicants intend to amend the order periodically to enable future Proprietary Advisers that are not controlling, controlled by, or under common control with any of the current applicant Proprietary Advisers, and the Proprietary Funds advised by any of these Proprietary Advisers, to rely on the requested relief. Any such future applications to amend the order will be filed by Federated, the new Proprietary Adviser and the new Proprietary Fund(s). Filing Date: The application was filed on March 2, 2001 and amended on June 13, 2001 and on September 10, 2004. Hearing or Notification of Hearing: An order granting the application will be issued unless the Commission orders a hearing. Interested persons may request a hearing by writing to the Commission's Secretary and serving applicants with a copy of the request, personally or by mail. Hearing requests should be received by the Commission by 5:30 p.m. on October 12, 2004, and should be accompanied by proof of service on applicants, in the form of an affidavit, or for lawyers, a certificate of service. Hearing requests should state the nature of the writer's interest, the reason for the request, and the issues contested. Persons who wish to be notified of a hearing may request notification by writing to the Commission's Secretary. ADDRESSES: Secretary, Commission, 450 Fifth Street, NW., Washington, DC 20549-0609; Applicants, c/o Victor R. Siclari, Esq., Reed Smith LLP, Federated Investors Tower, 1001 Liberty Avenue—12th Floor, Pittsburgh, PA 15222-3779. FOR FURTHER INFORMATION CONTACT: Stacy L. Fuller, Senior Counsel, or Michael W. Mundt, Senior Special Counsel, at
(202)942-0564 (Division of Investment Management, Office of Investment Company Regulation). SUPPLEMENTARY INFORMATION: The following is a summary of the application. The complete application may be obtained for a fee at the Commission's Public Reference Branch, 450 Fifth Street, NW., Washington, DC 20549-0101,
(202)942-8090. Applicants' Representations 1. Each of the Funds is an open-end management investment company registered under the Act. Certain of the Funds are comprised of separate series (each series, also a “Fund”). Each Adviser is registered under the Investment Advisers Act of 1940. 2 2 Three of the Proprietary Advisers are registered, and render investment advisory services, through a separately identifiable department or division: Hibernia National Bank is registered, and rends investment advisory services, through Hibernia Asset Management; SouthTrust Bank is registered, and renders investment advisory services, through SouthTrust Investment Advisers; WesBanco Bank, Inc. is registered, and renders investment advisory services, through WesBanco Investment Department. 2. Applicants request relief to permit
(a)certain Funds (“Investing Funds”) to acquire shares of registered open-end management investment companies that are part of the same “group of investment companies,” as defined in section 12(d)(1)(G)(ii) of the Act, as the Investing Funds (“Same Group Funds”) and shares of registered open-end management investment companies that are not part of the same group of investment companies as the Investing Funds (“Other Group Funds”) in excess of the limits set forth in section 12(d)(1)(A) of the Act, and the Same Group Funds and Other Group Funds to sell their shares to the Investing Funds in excess of the limits set forth in section 12(d)(1)(B) of the Act, 3
(b)Investing Funds that invest in Other Group Funds pursuant to section 12(d)(1)(F) of the Act to charge a sales load in excess of 1 1/2 % and
(c)Investing Funds that invest in Same Group Funds pursuant to section 12(d)(1)(G) of the Act also to invest, to the extent described in the relevant prospectus, in, among other things, domestic and foreign common and preferred stock, debt obligations, futures transactions, options on the foregoing and other instruments, including money market instruments (“Direct Investments”). 4 Applicants also seek relief, to the extent necessary, to permit Same Group Funds and Other Group Funds that become affiliated persons of an Investing Fund to sell shares to, and redeem shares from, the Investing Fund. 5 3 The following Funds currently intend to serve as Investing Funds: Federated American Leaders Fund, Inc., Federated Adjustable Rate Securities Fund (formerly Federated ARMs Fund), Federated Equity Funds, Federated Equity Income Fund, Inc., Federated Fixed Income Securities, Inc., Federated Government Income Securities, Inc., Federated High Income Bond Fund, Inc., Federated High Yield Trust, Federated Income Securities Trust, Federated Income Trust, Federated International Series, Inc., Federated Investment Series Funds, Inc., Federated Limited Duration Government Fund, Inc. (formerly Federated Adjustable Rate U.S. Government Fund, Inc.), Federated Managed Allocation Portfolios, Federated Stock and Bond Fund, Inc., Federated Stock Trust, Federated Total Return Government Bond Fund (formerly Federated U.S. Government Securities Fund: 5-10 Years), Federated Total Return Series, Inc. and Federated World Investment Series, Inc.; and certain portfolios of BB&T Funds, MTB Group of Funds (formerly Vision Group of Funds), The Huntington Funds and Marshall Funds, Inc. 4 Direct Investments will not include shares of any registered investment companies that are not in the same group of investment companies as the Investing Fund. 5 Applicants state that the relief requested in the application is not intended to permit Investing Funds to purchase shares of Same Group Funds that are money market funds as part of a cash management program. 3. Applicants state that each Investing Fund will provide a consolidated and efficient means through which investors will have access to a comprehensive investment vehicle through which advice in several types of investment securities will be available. Applicants assert that, in the absence of such a vehicle, investors would have to evaluate and acquire shares of each Same Group Fund and Other Group Fund separately in light of their investment goals. Applicants' Legal Analysis A. Sections 12(d)(1)(A) and
(B)of the Act 1. Section 12(d)(1)(A) prohibits a registered investment company from acquiring shares of another registered investment company if the securities represent more than 3% of the total outstanding voting stock of the acquired company, more than 5% of the total assets of the acquiring company or, together with the securities of other investment companies, more than 10% of the total assets of the acquiring company. Section 12(d)(1)(B) prohibits a registered open-end investment company from selling its shares to another investment company if the sale will cause the acquiring company to own more than 3% of the acquired company's outstanding voting stock or more than 10% of the acquired company's voting stock to be owned by investment companies generally. 2. Section 12(d)(1)(J) of the Act provides that the Commission may exempt any person, security or transaction from any provisions of section 12(d)(1), if the exemption is consistent with the public interest and the protection of investors. Applicants seek an exemption under section 12(d)(1)(J) to permit Investing Funds to acquire shares of Same Group Funds and Other Group Funds, and Same Group Funds and Other Group Funds to sell their shares to Investing Funds, beyond the limits set forth in sections 12(d)(1)(A) and (B). 3. Applicants state that the proposed arrangement will be structured to mitigate the potential abuses from which sections 12(d)(1)(A) and
(B)are designed to protect investors, such as undue influence by a fund of funds over underlying funds, excessive layering of fees and overly complex fund structures. Accordingly, applicants believe that the requested exemption is consistent with the public interest and the protection of investors. 4. Applicants state that the proposed arrangement will not result in undue influence by an Investing Fund or its affiliates over any Same Group Fund or Other Group Fund. To limit the influence that an Investing Fund may have over an Other Group Fund, applicants propose a condition prohibiting (a)(i) the Adviser of an Investing Fund,
(ii)any person controlling, controlled by or under common control with the Adviser and
(iii)any investment company or issuer that would be an investment company but for section 3(c)(1) or 3(c)(7) of the Act advised or sponsored by the Adviser or any person controlling, controlled by or under common control with the Adviser (“Adviser Group”), and (b)(i) any investment adviser within the meaning of section 2(a)(20)(B) of the Act (“Subadviser”) of an Investing Fund,
(ii)any person controlling, controlled by or under common control with the Subadviser and
(iii)any investment company or issuer that would be an investment company but for section 3(c)(1) or 3(c)(7) of the Act (or portion of such investment company or issuer) advised or sponsored by the Subadviser or any person controlling, controlled by or under common control with the Subadviser (“Subadviser Group”), from controlling (individually or in the aggregate) an Other Group Fund within the meaning of section 2(a)(9) of the Act. 5. Applicants also propose conditions A.2-A.7, stated below, to preclude an Investing Fund and its affiliated entities from taking advantage of an Other Group Fund with respect to transactions between the entities and to ensure the transactions will be on an arm's length basis. Condition A.2 precludes an Investing Fund and its Adviser, any Subadviser, promoter, principal underwriter and any person controlling, controlled by or under common control with any of these entities (each, an “Investing Fund Affiliate”) from causing any existing or potential investment by the Investing Fund in an Other Group Fund to influence the terms of any services or transactions between the Investing Fund or an Investing Fund Affiliate and the Other Group Fund or its investment adviser(s), promoter, principal underwriter and any person controlling, controlled by or under common control with any of these entities (each, an “Other Group Fund Affiliate”). Condition A.5 precludes an Investing Fund and Investing Fund Affiliates (except to the extent they are acting in their capacity as an investment adviser to an Other Group Fund) from causing an Other Group Fund to purchase a security in an offering of securities during the existence of any underwriting or selling syndicate of which a principal underwriter is an officer, director, member of an advisory board, Adviser, Subadviser or employee of the Investing Fund, or a person of which any such officer, director, member of an advisory board, Adviser, Subadviser or employee is an affiliated person (each, an “Underwriting Affiliate,” except any person whose relationship to the Other Group Fund is covered by section 10(f) of the Act is not an Underwriting Affiliate). An offering of securities during the existence of any underwriting or selling syndicate of which a principal underwriter is an Underwriting Affiliate is an “Affiliated Underwriting.” 6. In addition, as an assurance that an Other Group Fund understands the implications of an investment by an Investing Fund operating in reliance on the request from sections 12(d)(1)(A) and (B), prior to any investment by the Investing Fund in the Other Group Fund in excess of the limit set forth in section 12(d)(1)(A)(i), condition A.8 requires the Investing Fund and the Other Group Fund to execute an agreement stating, without limitation, that their boards and their investment advisers understand the terms and conditions of the order and agree to fulfill their responsibilities under the order. Applicants note that the Other Group Fund has the right to reject an investment from an Investing Fund. 7. Applicants do not believe that the proposed arrangement will involve excessive layering of fees. With respect to investment advisory fees, applicants state that, prior to reliance on the order and subsequently in connection with the approval of any investment advisory contract under section 15 of the Act, the board of directors or trustees of an Investing Fund (“Board”), including a majority of the directors or trustees who are not “interested persons,” as defined in section 2(a)(19) of the Act (“Independent Trustees”), will find that any investment advisory fees charged to the Investing Fund under its investment advisory contract(s) are based on services provided that are in addition to, rather than duplicative of, services provided under the investment advisory contract(s) of any Same Group Fund and Other Group Fund, unless
(a)the Adviser to the Investing Fund waives the advisory fees payable by the Investing Fund in an amount that offsets the amount of advisory fees incurred by the Investing Fund as a result of investing in the Same Group Fund or Other Group Fund or
(b)advisory fees are charged only at the Investing Fund level, or at the Same Group Fund or Other Group Fund level. Applicants further state, with respect to investments in an Other Group Fund outside the limits of sections 12(d)(1)(A) and (B), the Adviser to an Investing Fund will waive fees otherwise payable to the Adviser by the Investing Fund in an amount at least equal to any compensation (including fees received pursuant to a plan adopted by the Other Group Fund under rule 12b-1 under the Act (“12b-1 Fees”)) received from the Other Group Fund by the Adviser, or an affiliated person of the Adviser, other than any advisory fees paid to the Adviser or its affiliated person, in connection with the investment by the Investing Fund in the Other Group Fund. Applicants also state that any Subadviser to an Investing Fund will waive fees otherwise payable to the Subadviser by the Investing Fund in an amount at least equal to any compensation received from the Other Group Fund by the Subadviser, or an affiliated person of the Subadviser, other than any advisory fees paid to the Subadviser or its affiliated person, in connection with the investment by the Investing Fund in the Other Group Fund made at the direction of the Subadviser. Applicants agree that the benefit of any such waiver by a Subadviser will be passed through to the Investing Fund. 8. Applicants represent that the aggregate sales charges and/or service fees (as defined in the Conduct Rules of the National Association of Securities Dealers (“NASD Conduct Rules”)) charged with respect to shares of any Investing Fund will not exceed the limits applicable to funds of funds set forth in rule 2830 of the NASD Conduct Rules (“Rule 2830”). Moreover, the prospectus and sales literature of an Investing Fund that operates in reliance on the relief requested from sections 12(d)(1)(A) and
(B)will contain concise, “plain English” disclosure tailored to the particular document designed to inform investors of the unique characteristics of the fund of funds structure, including but not limited to, its expense structure and the additional expenses of investing in Same Group Funds and Other Group Funds. 9. Applicants contend that the proposed arrangement will not create an overly complex fund structure. Applicants note that Same Group Funds and Other Group Funds will be prohibited from acquiring securities of any investment company or company relying on section 3(c)(1) or 3(c)(7) of the Act in excess of the limits contained in section 12(d)(1)(A), except to the extent that such Same Group Fund or Other Group Fund
(a)receives securities of another investment company as a dividend or as a result of a plan of reorganization of a company (other than a plan devised for the purpose of evading section 12(d)(1)) or
(b)acquires (or is deemed to have acquired) securities of another investment company pursuant to exemptive relief from the Commission permitting such Same Group Fund or Other Group Fund to
(i)acquire securities of one or more affiliated investment companies for short-term cash management purposes or
(ii)engage in interfund borrowing and lending transactions. B. Section 12(d)(1)(F) of the Act 1. Section 12(d)(1)(F) provides that section 12(d)(1) will not apply to the acquisition by a registered investment company of the securities of an investment company if, among other things, the acquiring company and its affiliates immediately after the purchase own no more than 3% of the acquired company's total outstanding stock and the acquiring company does not charge a sales load of more than 1 1/2 % on sales of its shares. Applicants state that the proposed arrangement would comply with the provisions of section 12(d)(1)(F), except for the sales load limit of 1 1/2 %. 2. Applicants seek an exemption under section 12(d)(1)(J) exempting them from section 12(d)(1)(F)(ii) to permit Investing Funds that invest in Other Group Funds pursuant to section 12(d)(1)(F) to impose a sales load in excess of 1 1/2 %. Applicants agree, as a condition to any order granting the relief, that any sales charges and/or service fees (as defined in Rule 2830) charged with respect to shares of an Investing Fund will not exceed the limits applicable to funds of funds set forth in Rule 2830. C. Section 12(d)(1)(G) of the Act 1. Section 12(d)(1)(G) provides that section 12(d)(1) will not apply to securities of a registered open-end investment company purchased by another registered open-end investment company, if
(a)the acquiring company and the acquired company are part of the same group of investment companies,
(b)the acquiring company holds only securities of acquired companies that are part of the same group of investment companies, government securities, and short-term paper,
(c)the aggregate sales loads and distribution-related fees of the acquiring company and the acquired company are limited in certain respects and
(d)the acquired company has a policy that generally prohibits it from acquiring securities of registered investment companies in reliance on section 12(d)(1)(F) or (G). Applicants state that the proposed arrangement would comply with the provisions of section 12(d)(1)(G), but for the fact that an Investing Fund will invest in Direct Investments in addition to Same Group Funds. 2. Applicants request an order under section 12(d)(1)(J) exempting them from section 12(d)(1)(G)(i)(II) to permit Investing Funds that invest pursuant to section 12(d)(1)(G) to make Direct Investments. Applicants assert that permitting Investing Funds to invest in Direct Investments, as described in the application, would not raise the concerns underlying section 12(d)(1)(G). D. Section 17(a) of the Act 1. Section 17(a) generally prohibits purchases and sales of securities, on a principal basis, between a registered investment company and any affiliated person or promoter of, or principal underwriter for, the company, and affiliated persons of such persons. Section 2(a)(3) of the Act defines an “affiliated person” of another person to include, among other things, any person directly or indirectly owning, controlling or holding with power to vote 5% or more of the other's outstanding voting securities; any person 5% or more of whose outstanding voting securities are directly or indirectly owned, controlled or held with power to vote by the other person; any person directly or indirectly controlling, controlled by or under common control with the other person; and any investment adviser to an investment company. 2. Section 17(b) authorizes the Commission to grant an order permitting a transaction otherwise prohibited by section 17(a) if it finds that
(a)the terms of the proposed transaction, including the consideration to be paid and received, are fair and reasonable and do not involve overreaching on the part of any person concerned;
(b)the proposed transaction is consistent with the policies of each registered investment company concerned; and
(c)the proposed transaction is consistent with the general purposes of the Act. Section 6(c) permits the Commission to exempt any person or transaction, or any class or classes of persons or transactions from any provisions of the Act, if such exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Act. 3. Applicants state that a Same Group Fund or an Other Group Fund might be deemed to be an affiliated person of an Investing Fund if the Investing Fund acquires 5% or more of the Same Group Fund's or Other Group Fund's outstanding voting securities. Applicants also state that since certain of the Investing Funds, Same Group Funds and Other Group Funds may be advised, subadvised, administered and/or distributed by Federated or an entity controlling, controlled by or under common control with Federated, or share common officers and/or directors, they may be deemed to be under common control and, therefore, affiliated persons of each other. Accordingly, section 17(a) could prevent a Same Group Fund or an Other Group Fund from selling shares to, and redeeming shares from, an Investing Fund. 4. Applicants seek an exemption under sections 6(c) and 17(b) to allow the proposed transactions. Applicants state that the transactions satisfy the standards for relief under sections 6(c) and 17(b). Specifically, applicants state that the terms of the transactions are fair and reasonable and do not involve overreaching. Applicants represent that the proposed transactions will be consistent with the policies of each Investing Fund, Same Group Fund and Other Group Fund, and with the general purposes of the Act. In addition, applicants note that the consideration paid in sales and redemptions permitted under the requested order of shares of Same Group Funds and Other Group Funds will be based on the net asset values of, respectively, the Same Group Funds and Other Group Funds. Applicants' Conditions Applicants agree that any order granting the requested relief will be subject to the following conditions: A. With respect to Investing Funds that purchase shares of Same Group Funds and Other Group Funds outside the limit set forth in sections 12(d)(1)(A) and
(B)and are not relying on section 12(d)(1)(F) or (G), or the exemptions therefrom requested in the application: 1. The members of the Adviser Group will not control (individually or in the aggregate) an Other Group Fund within the meaning of section 2(a)(9) of the Act. The members of the Subadviser Group will not control (individually or in the aggregate) an Other Group Fund within the meaning of section 2(a)(9) of the Act. If, as a result of a decrease in the outstanding voting securities of an Other Group Fund, the Adviser Group or the Subadviser Group, each in the aggregate, becomes a holder of more than 25% of the outstanding voting securities of an Other Group Fund, it will vote its shares of the Other Group Fund in the same proportion as the vote of all other holders of the Other Group Fund's shares. This condition shall not apply to the Subadviser Group with respect to an Other Group Fund for which the Subadviser or a person controlling, controlled by or under common control with the Subadviser acts as the investment adviser within the meaning of section 2(a)(20)(A) of the Act. 2. No Investing Fund or Investing Fund Affiliate will cause any existing or potential investment by the Investing Fund in shares of an Other Group Fund to influence the terms of any services or transactions between the Investing Fund or an Investing Fund Affiliate and the Other Group Fund or an Other Group Fund Affiliate. 3. The Board of the Investing Fund, including a majority of the Independent Trustees, will adopt procedures reasonably designed to assure that the Adviser and any Subadviser to the Investing Fund are conducting the investment program of the Investing Fund without taking into account any consideration received by the Investing Fund or an Investing Fund Affiliate from an Other Group Fund or an Other Group Fund Affiliate in connection with any services or transactions. 4. Once an investment by an Investing Fund in the securities of an Other Group Fund exceeds the limit of section 12(d)(1)(A)(i), the board of directors or trustees of the Other Group Fund, including a majority of the Independent Trustees, will determine that any consideration paid by the Other Group Fund to the Investing Fund or an Investing Fund Affiliate in connection with any services or transactions:
(a)Is fair and reasonable in relation to the nature and quality of the services and benefits received by the Other Group Fund;
(b)is within the range of consideration that the Other Group Fund would be required to pay to another unaffiliated entity in connection with the same services or transactions; and
(c)does not involve overreaching on the part of any person concerned. This condition does not apply with respect to any services or transactions between an Other Group Fund and its investment adviser(s), or any person controlling, controlled by or under common control with such investment adviser(s). 5. No Investing Fund or Investing Fund Affiliate (except to the extent it is acting in its capacity as an investment adviser to an Other Group Fund) will cause an Other Group Fund to purchase a security in any Affiliated Underwriting. 6. The board of directors or trustees of an Other Group Fund, including a majority of the Independent Trustees, will adopt procedures reasonably designed to monitor any purchases of securities by the Other Group Fund in Affiliated Underwritings once an investment by an Investing Fund in the securities of the Other Group Fund exceeds the limit of section 12(d)(1)(A)(i) of the Act, including any purchases made directly from an Underwriting Affiliate. The board will review these purchases periodically, but no less frequently than annually, to determine whether the purchases were influenced by the investment by an Investing Fund in shares of the Other Group Fund. The board should consider, among other things,
(a)whether the purchases were consistent with the investment objectives and policies of the Other Group Fund,
(b)how the performance of securities purchased in an Affiliated Underwriting compares to the performance of comparable securities purchased during a comparable period of time in underwritings other than Affiliated Underwritings or to a benchmark such as a comparable market index, and
(c)whether the amount of securities purchased by the Other Group Fund in Affiliated Underwritings and the amount purchased directly from an Underwriting Affiliate have changed significantly from prior years. The board shall take any appropriate actions based on its review, including, if appropriate, the institution of procedures designed to assure that purchases of securities in Affiliated Underwritings are in the best interests of shareholders. 7. Each Other Group Fund shall maintain and preserve permanently in an easily accessible place a written copy of the procedures described in the preceding condition, and any modifications, and shall maintain and preserve for a period not less than six years from the end of the fiscal year in which any purchase in an Affiliated Underwriting occurred, the first two years in an easily accessible place, a written record of each purchase of securities in Affiliated Underwritings once an investment by an Investing Fund in the securities of the Other Group Fund exceeds the limit of section 12(d)(1)(A)(i) of the Act, setting forth from whom the securities were acquired, the identity of the underwriting syndicate's members, the terms of the purchase and the information or materials upon which the board's determinations were made. 8. Prior to its investment in shares of an Other Group Fund in excess of the limit set forth in section 12(d)(1)(A)(i), an Investing Fund and the Other Group Fund will execute an agreement stating, without limitation, that their boards of directors or trustees and their investment advisers understand the terms and conditions of the order and agree to fulfill their responsibilities under the order. At the time of its investment in shares of an Other Group Fund in excess of the limit set forth in section 12(d)(1)(A)(i), an Investing Fund will notify the Other Group Fund of the investment. At such time the Investing Fund will also transmit to the Other Group Fund a list of names of each Investing Fund Affiliate and Underwriting Affiliate. The Investing Fund will notify the Other Group Fund of any changes to the list of names as soon as reasonably practicable after a change occurs. The Other Group Fund and the Investing Fund will maintain and preserve a copy of the order, the agreement, and the list with any updated information for the duration of the investment and for a period of not less than six years thereafter, the first two years in an easily accessible place. 9. Prior to reliance on the requested order, the Board of each Investing Fund, including a majority of the Independent Trustees, shall find that the advisory fees, if any, charged under an Investing Fund's advisory contract(s) are based on services provided that are in addition to, rather than duplicative of, services provided pursuant to any Same Group Fund's and Other Group Fund's advisory contract(s). Such finding, and the basis upon which the finding was made, will be recorded fully in the minute books of the appropriate Investing Fund; provided, however, that no such determination shall be necessary where either
(a)the Adviser to the Investing Fund waives the advisory fees payable by the Investing Fund in an amount that offsets the amount of advisory fees incurred by the Investing Fund as a result of investing in the Same Group Fund or Other Group Fund or
(b)advisory fees are only charged at either the Investing Fund level, the Other Group Fund level or the Same Group Fund level. In addition, in connection with the approval of any investment advisory contract pursuant to section 15 of the Act subsequent to such initial determination, the Board of each Investing Fund, including a majority of the Independent Trustees, shall find that the advisory fees, if any, charged under the Investing Fund's advisory contract(s) are based on services provided that are in addition to, rather than duplicative of, services provided pursuant to any Same Group Fund's and Other Group Fund's advisory contract(s). Such finding, and the basis upon which the finding was made, will be recorded fully in the minute books of the appropriate Investing Fund; provided, however, that no such determination shall be necessary where either
(a)the Adviser to the Investing Fund waives the advisory fees payable by the Investing Fund in an amount that offsets the amount of advisory fees incurred by the Investing Fund as a result of investing in the Same Group Fund or Other Group Fund or
(b)advisory fees are only charged at either the Investing Fund level, the Other Group Fund level or the Same Group Fund level. 10. Each Adviser will waive fees otherwise payable to the Adviser by an Investing Fund in an amount at least equal to any compensation (including 12b-1 Fees) received from an Other Group Fund by the Adviser, or an affiliated person of the Adviser, other than any advisory fees paid to the Adviser or its affiliated person by the Other Group Fund, in connection with the investment by the Investing Fund in the Other Group Fund. Any Subadviser will waive fees otherwise payable to the Subadviser, directly or indirectly, by an Investing Fund in an amount at least equal to any compensation received from an Other Group Fund by the Subadviser, or an affiliated person of the Subadviser, other than any advisory fees paid to the Subadviser or its affiliated person by the Other Group Fund, in connection with the investment by the Investing Fund in the Other Group Fund made at the direction of the Subadviser. In the event that the Subadviser waives fees, the benefit of any waiver will be passed through to the Investing Fund. 11. Any sales charges and/or service fees (as defined in Rule 2830) charged with respect to shares of an Investing Fund will not exceed the limits applicable to funds of funds set forth in Rule 2830. 12. No Same Group Fund or Other Group Fund will acquire securities of any investment company or company relying on section 3(c)(1) or 3(c)(7) of the Act in excess of the limits contained in section 12(d)(1)(A), except to the extent that such Same Group Fund or Other Group Fund
(a)receives securities of another investment company as a dividend or as a result of a plan of reorganization of a company (other than a plan devised for the purpose of evading section 12(d)(1)), or
(b)acquires (or is deemed to have acquired) securities of another investment company pursuant to exemptive relief from the Commission permitting such Same Group Fund or Other Group Fund to
(i)acquire securities of one or more affiliated investment companies for short-term cash management purposes, or
(ii)engage in interfund borrowing and lending transactions. B. With respect to Investing Funds that purchase shares of Other Group Funds in compliance with section 12(d)(1)(F), except that the Investing Fund may charge a sales load in excess of the limitation in section 12(d)(1)(F)(ii): 1. The Investing Funds will comply with section 12(d)(1)(F) in all respects, except for the sales load limitation of section 12(d)(1)(F)(ii). 2. Any sales charges and/or service fees (as defined in Rule 2830) charged with respect to shares of an Investing Fund will not exceed the limits applicable to funds of funds set forth in Rule 2830. 3. Prior to reliance on the requested order, the Board of each Investing Fund, including a majority of the Independent Trustees, shall find that the advisory fees, if any, charged under an Investing Fund's advisory contract(s) are based on services provided that are in addition to, rather than duplicative of, services provided pursuant to any Other Group Fund's advisory contract(s). Such finding, and the basis upon which the finding was made, will be recorded fully in the minute books of the appropriate Investing Fund; provided, however, that no such determination shall be necessary where either
(a)the Adviser to the Investing Fund waives the advisory fees payable by the Investing Fund in an amount that offsets the amount of advisory fees incurred by the Investing Fund as a result of investing in the Other Group Fund or
(b)advisory fees are only charged at either the Investing Fund level or Other Group Fund level. In addition, in connection with the approval of any investment advisory contract pursuant to section 15 of the Act subsequent to such initial determination, the Board of each Investing Fund, including a majority of the Independent Trustees, shall find that the advisory fees, if any, charged under the Investing Fund's advisory contract(s) are based on services provided that are in addition to, rather than duplicative of, services provided pursuant to any Other Group Fund's advisory contract(s). Such finding, and the basis upon which the finding was made, will be recorded fully in the minute books of the appropriate Investing Fund; provided, however, that no such determination shall be necessary where either
(a)the Adviser to the Investing Fund waives the advisory fees payable by the Investing Fund in an amount that offsets the amount of advisory fees incurred by the Investing Fund as a result of investing in the Other Group Fund or
(b)advisory fees are only charged at either the Investing Fund level or Other Group Fund level. 4. No Other Group Fund will acquire securities of any investment company or company relying on section 3(c)(1) or 3(c)(7) of the Act in excess of the limits contained in Section 12(d)(1)(A), except to the extent that such Other Group Fund
(a)receives securities of another investment company as a dividend or as a result of a plan of reorganization of a company (other than a plan devised for the purpose of evading section 12(d)(1)), or
(b)acquires (or is deemed to have acquired) securities of another investment company pursuant to exemptive relief from the Commission permitting such Other Group Fund to
(i)acquire securities of one or more affiliated investment companies for short-term cash management purposes, or
(ii)engage in interfund borrowing and lending transactions. C. With respect to Investing Funds that purchase shares of Same Group Funds in compliance with section 12(d)(1)(G), except that the Investing Fund will also invest in Direct Investments: 1. The Investing Fund will comply with all provisions of section 12(d)(1)(G), except for section 12(d)(1)(G)(i)(II) to the extent that it restricts Investing Funds from investing in Direct Investments as described in the application. 2. Prior to reliance on the requested order, the Board of each Investing Fund, including a majority of the Independent Trustees, shall find that the advisory fees, if any, charged under an Investing Fund's advisory contract(s) are based on services provided that are in addition to, rather than duplicative of, services provided pursuant to any Same Group Fund's advisory contract(s). Such finding, and the basis upon which the finding was made, will be recorded fully in the minute books of the appropriate Investing Fund; provided, however, that no such determination shall be necessary where either
(a)the Adviser to the Investing Fund waives the advisory fees payable by the Investing Fund in an amount that offsets the amount of advisory fees incurred by the Investing Fund as a result of investing in the Same Group Fund or
(b)advisory fees are only charged at either the Investing Fund level or Same Group Fund level. In addition, in connection with the approval of any investment advisory contract pursuant to section 15 of the Act subsequent to such initial determination, the Board of each Investing Fund, including a majority of the Independent Trustees, shall find that the advisory fees, if any, charged under the Investing Fund's advisory contract(s) are based on services provided that are in addition to, rather than duplicative of, services provided pursuant to any Same Group Fund's advisory contract(s). Such finding, and the basis upon which the finding was made, will be recorded fully in the minute books of the appropriate Investing Fund; provided, however, that no such determination shall be necessary where either
(a)the Adviser to the Investing Fund waives the advisory fees payable by the Investing Fund in an amount that offsets the amount of advisory fees incurred by the Investing Fund as a result of investing in the Same Group Fund or
(b)advisory fees are only charged at either the Investing Fund level or Same Group Fund level. For the Commission, by the Division of Investment Management, pursuant to delegated authority. Margaret H. McFarland, Deputy Secretary. [FR Doc. E4-2347 Filed 9-22-04; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-50394; File No. SR-Amex-2004-63] Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change, and Amendment No. 1 Thereto, by the American Stock Exchange LLC Relating to the Handling of Linkage Orders September 16, 2004. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 1 and Rule 19b-4 thereunder, 2 notice is hereby given that on August 3, 2004, the American Stock Exchange LLC (“Amex” or “Exchange”) submitted to the Securities and Exchange Commission (“Commission”) the proposed rule change as described in items I, II, and III below, which items have been prepared by the Amex. On September 10, 2004, the Amex submitted Amendment No. 1 to the proposed rule change. 3 The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 *See* Letter from Jeffery P. Burns, Associate General Counsel, Amex, to Nancy Sanow, Assistant Director, Division of Market Regulation (“Division”), Commission, dated September 9, 2004 (“Amendment No. 1”). In Amendment No. 1, the Amex amended the proposed rule text to reflect a technical change. I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Amex proposes to amend its rules to conform to Joint Amendment No. 13 to the Plan for the Purpose of Creating and Operating an Intermarket Option Linkage (“Linkage Plan”). The text of the proposed rule change, as amended, is below. Proposed additions are in *italics* . Rule 940. Options Intermarket Linkage
(a)(No Change).
(b)Definitions—The following terms shall have the meaning specified in this Rule solely for the purpose of this Section 4:
(1)through
(6)(No Change).
(7)“Firm Customer Quote Size” with respect to a P/A Order means the lesser of:
(a)the number of option contracts that the Participant Exchange sending a P/A Order guarantees it will automatically execute at its disseminated quotation in a series of an Eligible Option Class for Public Customer orders entered directly for execution in that market; or
(b)the number of option contracts that the Participant Exchange receiving a P/A Order guarantees it will automatically execute at its disseminated quotation in a series of an Eligible Option Class for Public Customer orders entered directly for execution in that market. The number shall be at least 10 *unless the receiving Participant Exchange is disseminating a quotation of less than 10 contracts, in which case this number may equal such quotation size* .
(8)“Firm Principal Quote Size” means the number of options contracts that a Participant Exchange guarantees it will execute at its disseminated quotation for incoming Principal Orders in an Eligible Option Class. This number shall be at least 10, *however if the Participant Exchange is disseminating a quotation size of less than 10 contracts, this number may equal such quotation size.*
(9)through
(20)(No Change). II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Amex included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it had received on the proposed rule change. The text of these statements may be examined at the places specified in item IV below. The Amex has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The purpose of this filing is to conform Amex's Linkage rules to proposed Joint Amendment No. 13 to the Linkage Plan, which would accommodate “natural size” of quotations. 4 Specifically, the Linkage Plan and Amex rules currently require that the Exchange be firm for both Principal Acting as Agent (“P/A”) and Principal Orders for at least 10 contracts (the “10-up” requirement). The proposed rule change would permit Amex members to be firm for the actual size of their quotation, even if this amount is less than 10 contracts. 4 The participants in the Linkage Plan (“Participants”) have filed an amendment to the Linkage Plan to change the definitions of “Firm Customer Quote Size” (“FCQS”) and “Firm Principal Quote Size” (“FPQS”) (Joint Amendment No. 13). *See* Securities Exchange Act Release No. 50211 (August 18, 2004), 69 FR 52050 (August 26, 2004) (File No. 4-429). The Participants adopted the 10-up requirement for the Linkage Plan at a time when all the exchanges had rules requiring that their quotations be firm for customer orders for at least 10 contracts. 5 The Amex recently amended Exchange Rule 958A to permit the dissemination of customer limit orders representing the best bid or offer in sizes of less than ten
(10)contracts. 6 Accordingly, the Amex now seeks to conform its quotation requirements for incoming Principal and P/A Orders with the quotation requirements for non-Linkage orders. 5 *See* Securities Exchange Act Release No. 44383 (June 1, 2001), 66 FR 30959 (June 8, 2001) (SR-Amex-2001-18; SR-CBOE-2001-15; SR-ISE-2001-07; SR-PCX-2001-18; and SR-Phlx-2001-37). 6 *See* Securities Exchange Act Release No. 48957 (December 18, 2003), 68 FR 75294 (December 30, 2003) (SR-Amex-2003-24). The proposed rule change would amend the definitions of both FCQS and FPQS. While Amex's Linkage rules would maintain a general requirement that the FCQS and FPQS be at least 10 contracts, that minimum would not apply if the Amex were disseminating a quotation of fewer than 10 contracts. In that case, the Exchange may establish a FQCS or FPQS equal to its disseminated size. As with Principal and P/A Orders today, if the order is of a size eligible for automatic execution (“auto-ex”), 7 the receiving exchange must provide for auto-ex of the order. If this is not the case (for example, the receiving exchange's auto-ex system is not engaged), the receiving exchange still must provide a manual execution for at least the FCQS or FPQS, as appropriate (in this case, the size of its disseminated quotation of less than 10 contracts). 7 At the request of the Amex, Commission staff removed an extraneous reference provided in the original filing regarding the automatic execution size at exchanges sending and receiving Principal Orders. Telephone conversation between Jeff Burns, Associate General Counsel, Amex, and Tim Fox, Attorney, Division, Commission, on August 31, 2004. 2. Statutory Basis The Amex believes that the proposed rule is consistent with section 6(b) of the Act, 8 in general, and furthers the objectives of section 6(b)(5) 9 in particular in that it should promote just and equitable principles of trade, serve to remove impediments to and perfect the mechanism of a free and open market and a national market system, and protect investors and the public interest. 8 15 U.S.C. 78f(b). 9 15 U.S.C. 78f(b)(5). B. Self-Regulatory Organization's Statement on Burden on Competition The Amex does not believe that the proposed rule change will impose any burden on competition. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were solicited or received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 35 days of the date of publication of this notice in the **Federal Register** or within such longer period
(i)as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding, or
(ii)as to which the Amex consents, the Commission will:
(A)By order approve such proposed rule change, as amended; or
(B)Institute proceedings to determine whether the proposed rule change, as amended, should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change, as amended, is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission's Internet comment form ( *http://www.sec.gov/rules/sro.shtml* ); or • Send an e-mail to *rule-comments@sec.gov* . Please include File Number SR-Amex-2004-63 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. All submissions should refer to File Number SR-Amex-2004-63. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( *http://www.sec.gov/rules/sro.shtml* ). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Section, 450 Fifth Street, NW., Washington, DC 20549. Copies of such filing also will be available for inspection and copying at the principal office of the Amex. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-Amex-2004-63 and should be submitted on or before October 14, 2004. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 10 10 17 CFR 200.30-3(a)(12). Margaret H. McFarland, Deputy Secretary. [FR Doc. E4-2352 Filed 9-22-04; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-50402; File No. SR-FICC-2004-01] Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Amend the Government Securities Division and the Mortgage-Backed Securities Division Membership Rules September 16, 2004. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), 1 notice is hereby given that on January 9, 2004, the Fixed Income Clearing Corporation (“FICC”) filed with the Securities and Exchange Commission (“Commission”) and on April 28, 2004, amended the proposed rule change described in items I, II, and III below, which items have been prepared primarily by FICC. The Commission is publishing this notice to solicit comments on the proposed rule change from interested parties. 1 15 U.S.C. 78s(b)(1). I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change FICC is seeking to amend the membership rules of its Government Securities Division (“GSD”) and its Mortgage-Backed Securities Division (“MBSD”) to
(1)eliminate the requirement that the conversion to U.S. dollars be made by the applicant or member prior to submitting financial information to FICC unless such conversion is specifically requested by FICC,
(2)eliminate the requirement that FICC make a determination as to the adequacy of an applicant's personnel, physical facilities, books and records, accounting systems, or internal procedures,
(3)require that a non-U.S. applicant represent to FICC in writing that it is regulated in a way that is generally comparable to the way in which domestic FICC members are regulated,
(4)add a requirement to the GSD's rules that a non-U.S. netting applicant represent in writing that it is in compliance with the financial reporting and responsibility standards of its home country, and
(5)eliminate the requirement that GSD comparison-only applicants submit financial information to FICC. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, FICC included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in item IV below. FICC has prepared summaries, set forth in sections (A), (B), and
(C)below, of the most significant aspects of these statements. 2 2 The Commission has modified the text of the summaries prepared by FICC.
(A)Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Amend the Rules of the GSD and MBSD That Require Financial Information Submitted by an Applicant To Be in Dollar Equivalents When FICC receives financial information from non-U.S. members and applicants, FICC's credit risk staff will perform the conversion to U.S. dollars whenever it is necessary and is comfortable doing so. The credit risk staff performs the conversion as of the date of the financial statements. Therefore, FICC is proposing to eliminate the current requirement that the conversion to U.S. dollars be made by the applicant or member prior to submitting financial information to FICC unless such conversion is specifically requested by FICC. 2. Amend the Operational Capability Requirement Contained in the Rules of the GSD and the MBSD FICC's current operational capability rules are too broad and impose upon FICC an obligation to make determinations with respect to the operational capability of an applicant or member that FICC staff is not equipped or trained to make. 3 Such determinations are more appropriately left to the applicant or member's designated examining authority. The operational capability aspect that is relevant to FICC and upon which FICC must make a determination is the ability of an applicant or member to send input to FICC and to receive output from FICC on a timely and accurate basis. Therefore, FICC is seeking to eliminate the requirement that it make a determination as to the adequacy of an applicant's personnel, physical facilities, books and records, accounting systems, or internal procedures. 3 For example, the GSD rules currently require that a determination be made with respect to whether the membership applicant has adequate personnel, physical facilities, and accounting systems, among other things, to satisfactorily handle transactions. 3. Amend the Comparability Requirement of the GSD's Rules for Non-U.S. Members The GSD rules currently provide that a non-U.S. entity shall be eligible to become a netting member if FICC has determined that the entity is regulated in its home country in a way that is generally comparable to the way in which similar domestic members are regulated. The comparability determination has been difficult to make because there is no objective set of guidelines that FICC can use to confirm the comparability requirement. As a result, comparability determinations have necessarily become judgment calls made by FICC staff using information provided by the applicant. Because the netting service is a guaranteed service and FICC only accepts regulated entities as members, FICC should focus on making sure that its non-U.S. members (as is the case with its domestic members) are regulated by a financial regulatory authority in their home country in certain key areas as opposed to being concerned with “comparability” of regulation. These key areas are maintenance of relevant books and records, regular inspections and examinations, and minimum financial standards. Therefore, FICC is proposing to amend the comparability requirement to require that the applicant represent to FICC in writing that it is regulated in these key areas. 4 In conjunction with this change, FICC is also proposing to add a requirement to the GSD's rules that a non-U.S. netting applicant represent in writing that it is in compliance with the financial reporting and responsibility standards of its home country. 5 4 This approach is currently used by the Emerging Markets Clearing Corporation (“EMCC”). 5 *Id.* 4. Amend the GSD's Rules That Require Comparison-Only Applicants and Members to Submit the Same Financial Information as Netting Applicants and Members The GSD's comparison-only service is not a guaranteed service. Comparison-only members do not have minimum financial requirements and are not required to make clearing fund deposits. While the GSD's rules give FICC the ability to require comparison-only members to submit financial information, FICC has not been obtaining this information from comparison-only applicants or members, and FICC believes that the rules should be amended to reflect actual practice. Therefore, FICC is seeking to eliminate the requirement that GSD comparison-only applicants submit financial information to FICC. In addition to these proposed rule changes, FICC is proposing a technical change to the rules of the MBSD to move language relating to cross-guaranty agreements to a more appropriate place in the rules. FICC believes that the proposed rule change is consistent with the requirements of section 17A of the Act 6 and the rules and regulations thereunder applicable to FICC because it will remove impediments to the perfection of a national system for the prompt and accurate clearance and settlement of securities transactions and is not designed to permit unfair discrimination in the admission of participants or among participants in the use of FICC by refining FICC's rules and procedures with regard to applicants and members, and in general will protect investors and the public interest. 6 15 U.S.C. 78q-1.
(B)Self-Regulatory Organization's Statement on Burden on Competition FICC does not believe that the proposed rule change will have any impact, or impose any burden, on competition.
(C)Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others Written comments relating to the proposed rule change have not yet been solicited or received. FICC will notify the Commission of any written comments received by FICC. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within thirty-five days of the date of publication of this notice in the **Federal Register** or within such longer period
(i)as the Commission may designate up to ninety days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or
(ii)as to which the self-regulatory organization consents, the Commission will:
(A)By order approve such proposed rule change or
(B)Institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission's Internet comment form ( *http://www.sec.gov/rules/sro.shtml* ); or • Send an e-mail to *rule-comments@sec.gov* . Please include File Number SR-FICC-2004-01 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. All submissions should refer to File Number SR-FICC-2004-01. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( *http://www.sec.gov/rules/sro.shtml* ). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Section, 450 Fifth Street, NW., Washington, DC 20549. Copies of such filing also will be available for inspection and copying at the principal office of FICC and on FICC's Web site at *http://www.ficc.com* . All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-FICC-2004-01 and should be submitted on or before October 14, 2004. For the Commission by the Division of Market Regulation, pursuant to delegated authority. 7 7 17 CFR 200.30-3(a)(12). Margaret H. McFarland, Deputy Secretary. [FR Doc. E4-2351 Filed 9-22-04; 8:45 am] BILLING CODE 8010-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-50409; File No. SR-NASD-2004-137] Self-Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change by National Association of Securities Dealers, Inc. Relating to Amendments to the OATS Rules To Require That ECNs Capture Routed Order Identifier Information September 17, 2004. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 1 and Rule 19b-4 thereunder, 2 notice is hereby given that on September 13, 2004, the National Association of Securities Dealers, Inc. (“NASD”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) the proposed rule change as described in Items I and II below, which Items have been prepared by NASD. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. For the reasons discussed below, the Commission is granting accelerated approval of the proposed rule change. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change NASD is proposing to amend NASD Rule 6954 to require that electronic communications networks (“ECNs”) that electronically receive routed orders capture and report the transmitting member's unique identifier (routed order identifier) to NASD's Order Audit Trail System (“OATS”). Below is the text of the proposed rule change. Proposed new language is in italics; proposed deletions are in brackets. NASD Systems and Programs 6950. Order Audit Trail System 6951 through 6953 No. Change. 6954. Recording of Order Information
(a)and
(b)No Change.
(c)Order Transmittal. Order information required to be recorded under this Rule when an order is transmitted included the following.
(1)and
(2)No Change.
(3)When a member electronically transmits an order for execution on an Electronic Communications Network:
(A)No Change.
(B)the receiving Reporting Member operating the Electronic Communications Network shall record:
(i)the fact that the order was received by an Electronic Communications Network, *(ii) the order identifier assigned to the order by the member that transmits the order,* *(iii)* [(ii)] the market participant symbol assigned by the Association to the transmitting Reporting Member, and *(iv)* [(iii)] other information items in Rule 6954(b) that apply with respect to such order, which must include information items (1), (2), (3), (6), (7), (8), (10), (11), (12), (13), (15), and (16).
(4)through
(6)No Change.
(d)No Change. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, NASD included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item III below. NASD has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Background On March 6, 1998, the SEC approved NASD Rules 6950 through 6957 (“OATS Rules”). 3 OATS provides a substantially enhanced body of information regarding orders and transactions that the NASD believes improves its ability to conduct surveillance and investigations of member firms for potential violations of NASD rules and the federal securities laws. In addition, OATS is intended to fulfill one of the undertakings contained in the order issued by the SEC relating to the settlement of an enforcement action against the NASD for failure to adequately enforce its rules. 4 Pursuant to the SEC Order, OATS is required, at a minimum, to:
(1)Provide an accurate, time-sequenced record of orders and transactions, beginning with the receipt of an order at the first point of contact between the broker/dealer and the customer or counterparty and further documenting the life of the order through the process of execution; and
(2)provide for market-wide synchronization of clocks used in connection with the recording of market events. 5 3 *See* Securities Exchange Act Release No. 39729 (March 6, 1998), 63 FR 12559 (March 13, 1998). 4 *See* In the Matter of National Association of Securities Dealers, Inc., Exchange Act Release No. 37538 (August 8, 1996); Administrative Proceeding File No. 3-9056 (“SEC Order”). 5 *Id.* Since the implementation of OATS, NASD represents that its staff has been closely reviewing OATS activities with the goal of identifying ways in which to improve OATS and enhance the effectiveness of OATS as a regulatory tool. In this regard, NASD identified several changes to OATS that it believed would enhance NASD's automated surveillance for compliance with trading and market making rules such as the NASD's Limit Order Protection Interpretation, the SEC's Order Handling Rules and a member firm's best execution obligations. NASD proposed these changes in SR-NASD-00-23, which remains pending at the SEC. 6 6 *See* Securities Exchange Act Release No. 43344 (September 26, 2000), 65 FR 59038 (October 3, 2000). As currently proposed, SR-NASD-00-23 generally would:
(1)Provide that the time of order origination and receipt for an electronic order is the time the order is captured by a member's electronic order-routing or execution system; for a manual order that is fewer than 10,000 shares, the time of order origination and receipt is the time the order is received by the member's trading desk or trading department for execution or routing purposes; and for a manual order that is 10,000 shares or greater, the time of order origination and receipt is the time the order is received by the member from the customer;
(2)exclude certain members from the definition of “Reporting Member” for those orders that meet specified conditions and are recorded and reported to the OATS by another member;
(3)require any receiving reporting member, including ECNs, that receive, electronically or manually, routed orders, to capture and report a routed order identifier; and
(4)permit NASD to grant exemptive relief from the OATS reporting requirements for manual orders to members that meet specified criteria. Pursuant to discussions with SEC staff, NASD now is proposing separately a portion of one of the proposed changes in SR-NASD-00-23, specifically the proposed change to require ECNs that electronically receive routed orders to capture and report a routed order identifier. SR-NASD-00-23, in part, proposes to require that any receiving reporting member, including ECNs, that receive routed orders, electronically or manually, capture and report a routed order identifier. 7 This rule filing is intended to withdraw the portion of that proposal in SR-NASD-00-23 that would require ECNs to capture and report a routed order identifier for electronic orders and is proposing it herein. SR-NASD-00-23 would continue to propose that any receiving reporting member, including ECNs, capture and report a routed order identifier for manual orders that it receives. 7 Currently, a routed order identifier is only required to be captured for routed orders received electronically by Reporting Members that are not ECNs. Description of Proposal The use of a routed order identifier reported through OATS permits NASD to track the history of orders routed between firms on an automated basis. If the order does not contain a routed order identifier, the order cannot be linked on an automated basis to subsequent actions, such as further routing or execution by other firms or Nasdaq systems. Given the current level of participation of ECNs in the trading of Nasdaq securities, NASD represents that the lack of a routed order identifier for these electronic orders results in NASD staff having to recreate manually the lifecycle history for a substantial number of orders. Accordingly, NASD is proposing that ECNs that electronically receive routed orders capture and report a routed order identifier. To provide members adequate time for any technological or system changes required by the proposed rule change, NASD is proposing an implementation date for this proposed requirement of 90 days following publication of a Notice to Members, which will be published no later than 60 days from the date of this approval order. 2. Statutory Basis NASD believes that the proposed rule change is consistent with the provisions of section 15A(b)(6) of the Act, which requires, among other things, that NASD's rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. 8 NASD believes that the proposed rule change will enhance NASD's ability to conduct surveillance and investigations of member firms for violations of NASD's and other applicable rules. 8 15 U.S.C. 78o-3(b)(6). B. Self-Regulatory Organization's Statement on Burden on Competition NASD does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act, as amended. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments on the proposed rule change were solicited by the Commission in response to SR-NASD-00-23, which proposed several changes relating to OATS requirements. 9 The Commission received 13 comment letters from 12 commenters in response to the **Federal Register** publication of SR-NASD-00-23. 10 The proposed rule change described in this filing relates to only a portion of one of the four proposals in SR-NASD-00-23, specifically, the proposal that would require that ECNs that electronically receive routed orders capture and report a routed order identifier. The comments on that proposal are summarized below. 9 *See supra* note 6. 10 Comment letters were submitted by the following: Krys Boyle Freedman & Sawyer, P.C. on behalf of Rocky Mountain Securities & Investments, Inc.; Mitchell Securities Corporation of Oregon; Storch & Brenner, LLP; A.G. Edwards & Sons, Inc.; Instinet Corporation; First Options of Chicago; Morgan Stanley Dean Witter; Securities Industry Association, Ad Hoc Committee; Weeden & Co., L.P.; Financial Information Forum; Pershing Division of Donaldson, Lufkin & Jenrette Securities Corporation; and two letters submitted by Wachtel & Co., Inc. While a number of commenters opposed the proposed requirement in SR-NASD-00-23 that members be required to capture and report a routed order identifier for orders routed manually, only one commenter, Instinet Corporation (“Instinet”), specifically opposed the proposed requirement to capture and report a routed order identifier for orders routed electronically to ECNs. Among other things, Instinet noted that the original OATS proposal expressly excluded ECNs from the routed order identifier requirements in acknowledgment of the unique characteristics of ECNs and the significant unmerited operation burdens such requirements would impose on ECNs. Instinet indicated that to add a routed order identifier field would require reconfigurement of thousands of customer interfaces and redesign of the framework of the existing brokerage mechanisms. Further, requiring ECN customers to input a routed order identifier would impede speed, efficiency and innovation and is not counterbalanced by any regulatory benefit. The use of a routed order identifier reported through OATS permits NASD to track the history of orders routed between firms on an automated basis. If the order does not contain a routed order identifier, the order cannot be linked on an automated basis to subsequent actions, such as further routing or execution by other firms or Nasdaq systems. As noted in the Purpose section of this filing, given the current level of participation of ECNs in the trading of Nasdaq securities, the lack of a routed order identifier for these electronic orders results in NASD staff having to recreate manually the lifecycle history for a substantial number of orders. Subsequent to the submission of its comment letter, Instinet changed its business model and is no longer operating as an ECN. 11 Accordingly, as a non-ECN broker/dealer, Instinet is required under current OATS rules to capture routed order identifier information for electronic orders. On July 13, 2004, NASD staff spoke with a representative from Instinet, who indicated that the concerns raised in its October 25, 2000 letter are no longer an issue for Instinet, given its change in business model. In addition, on August 30, 2004, NASD staff discussed the proposal with a representative from Inet who indicated that the proposed requirement to capture a routed order identifier for electronic orders would required technological changes to Inet's current systems but would not be overly burdensome if adequate time is provided for implementation. Accordingly, NASD believes that any burdens that do exist are outweighed by the regulatory benefits of capturing the lifecycle of these orders on an automated basis and is therefore proposing the rule change described herein. 11 In September 2002, Instinet merged with The Island ECN, Inc. (Island ECN). As part of the merger, Instinet's ECN business migrated to Inet ATS, Inc. (Inet), which formerly was Island ECN. III. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission's Internet comment form ( *http://www.sec.gov/rules/sro.shtml* ); or • Send an e-mail to *rule-comments@sec.gov.* Please include File Number SR-NASD-2004-137 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. All submissions should refer to File Number SR-NASD-2004-137. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( *http://www.sec.gov/rules/sro.shtml* ). Copies of the submission, all subsequent amendments, all written statements with respects to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Section, 450 Fifth Street, NW., Washington, DC 20549. Copies of such filing also will be available for inspection and copying at the principal offices of the NASD. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-NASD-2004-137 and should be submitted on or before October 14, 2004. IV. Commission's Findings and Order Granting Accelerated Approval of Proposed Rule Change The Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities association. 12 In particular, the Commission finds that proposed rule change is consistent with section 15A(b)(6) of Act, which requires, among other things, that NASD's rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. 13 Specifically, the Commission believes that the proposed rule change should enhance OATS information and improve NASD's ability to conduct effective surveillance and timely investigations relating to compliance with NASD and other applicable rule in an efficient manner. 12 In approving this proposed rule change, the Commission has considered its impact on efficiency, competition and capital formation. 15 U.S.C. 78c(f). 13 15 US.C. 78o-3(b)(6). The Commission notes that Instinet commented on this proposed change in response to the notice of SR-NASD-00-23. 14 At that time, Instinet argued that the proposal to require ECNs to capture and report a routed order identifier for orders routed electronically to ECNs would cause significant unmerited operational burdens to be placed on ECNs and that requiring ECN customers to input a routed order identifier would impede speed, efficiency, and innovation. 14 *See* note 6, *supra.* Since that time, given recent changes in the Nasdaq market, NASD represents that its inability, without a routed order identifier, to link an order to an automated basis to subsequent action requires NASD staff to recreate manually the lifecycle history for the significant number of ECN orders. Consequently, NASD contacted Instinet to discuss Instinet's concerns raised by the proposed rule change. According to NASD, Instinet explained that as it was no longer operating as an ECN, the concerns it expressed previously no longer applied it. NASD next spoke with representatives of Inet, 15 about the issues originally raised by Instinet. Again according to NASD, while Inet explained that the proposed requirements to capture a routed order identifier for electronic orders would require the ECN to make technological changes, it did not believe these changes would be overly burdensome as long as NASD allowed an adequate implementation period. Accordingly, the Commission believes that the regulatory benefits to be derived from the greater automation provided by the proposed rule change should outweigh the burden imposed on ECNs. 15 *See* note, 11, *supra.* Because this proposal was previously noticed for public comment as part of NASD-00-23, 16 and, as described above, NASD has adequately responded to comments received on the proposal, the Commission finds good cause, pursuant to section 19(b)(2) of the Act, 17 for approving the proposed rule change prior to the thirtieth day after the date of publication of notice thereof in the **Federal Register** . The proposed rule change will be become effective 90 days following publication of a Notice to Members, which will be published no later than 60 days from the date of this approval order. 16 *See* note 6, *supra.* 17 15 U.S.C. 78s(b)(2). V. Conclusion *It is therefore ordered,* pursuant to section 19(b)(2) of the Act, 18 that the proposed rule change (SR-NASD-2004-137) is hereby approved on an accelerated basis. 18 15 U.S.C. 78s(b)(2). For the Commission, by the Division of Market Regulation, pursuant to delegated authority. 19 19 17 CFR 200.30-3(a)(12). Margaret H. McFarland, Deputy Secretary. [FR Doc. 04-21371 Filed 9-22-04; 8:45 am]
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U.S. Code
- Registration, responsibilities, and oversight of self-regulatory organizations§ 78s
- National securities exchanges§ 78f
- Public information; agency rules, opinions, orders, records, and proceedings§ 552
- National system for clearance and settlement of securities transactions§ 78q–1
- Registered securities associations§ 78o–3
- Definitions and application§ 78c
1 reference not yet in our index
- 17 CFR 240.19
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Notices
Notice of application for an order under section 12(d)(1)(J) of the Investment Company Act of 1940 (“Act”) for exemptions from, alternatively, sections 12(d)(1)(A) and (B) of the Act, section 12(d)(1)(F)(ii) of the Act, and section 12(d)(1)(G)(i)(II) of the Act, and under sections 6(c) and 17(b) of the Act for an exemption from section 17(a) of the Act
Cite17 CFR 240.19
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