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Section 28(c) of the bill would exempt from the registration requirements of section 12(g) of the act issuers of interests or participations with respect to corporate plans which meet the requirements for qualification under section 401 of the Code, but not of interests or participations with respect to “H.R. 10 plans.” Rather than subject these interests or participations with respect to “H.R. 10 plans” to the jurisdiction of the Commission, section 28(d) of the bill would subject them to the jurisdiction of the banking authorities. This amendment would transfer the Commission's functions with respect to such interests or participations under sections 13 and 15(d) of the act to the Federal banking authorities.
SECTION 29(c), AMENDING SECTION 3(a)(5) OF THE SECURITIES ACT
UPDATING EXEMPTIONS FOR SECURITIES ISSUED BY SAVINGS AND LOAN ASSOCIATIONS
Section 27 (c) of the bill would amend section 3(a) (5) of the Securities Act to conform the exemption from registration under the Securities Act for securities issued by savings and loan associations and similar institutions with the_exemptive language found in section 12(g) (2) (C) of the Securities Exchange Act. Initial issues or secondary distributions of securities by savings and loan associations have always been exempt from registration under the Securities Act by virtue of section 3(a) (5). The exemption now refers to savings and loans "substantially all the business of which is confined to the making of loans to members.” The quoted language amounts to an obsolete definition applicable to savings and loan associations under the "old" tax definition, which itself was changed by the Revenue Act of 1962. The amendment is designed to maintain this exemption, but to update it for all savings and loan associations which are "supervised and examined by State or Federal authority having supervision over any such institution.” The reference in section 3(a)(5) to the Revenue Act of 1932 has also been updated.
SECTION 27(b), AMENDING SECTION 3(a)(2) OF THE SECURITIES ACT
EXEMPTION FOR CERTAIN BANK COMMON AND COLLECTIVE TRUST FUNDS AND INSURANCE COMPANY SEPARATE ACCOUNTS
Section 27(b) of the bill would amend section 3(a) (2) of the Securities Act to exempt from the registration provisions of that act interests or participations in certain bank common trust funds, certain bank collective trust funds, and certain insurance company separate accounts. As with other securities exempted under section 3 of the act, the amendment would not exempt the securities from the antifraud provisions of section 17.
The proposed amendment would exempt from the registration provisions of the act interests and participations in the traditional common trust funds maintained by banks as investment vehicles for the assets held by the bank in a bona fide fiduciary capacity. This is identical to the exemption for a "common trust fund or similar fund” in section 3 (c)(3) of the Investment Company Act. This exemption is limited to interests or participations in common trust funds maintained by a bank for the collective investment of assets held by it in a bona fide fiduciary capacity and incident to a bank's traditional trust department activities; it would not exempt interests or participations in bank funds maintained as vehicles for direct investment by individual members of the public.
The amendment would also exempt from the registration provisions of the act interests or participations in collective trust funds maintained by banks for funding certain stock-bonus, pension, or profitsharing plans which meet the requirements for qualification under section 401(a) of the Internal Revenue Code. In effect, the amendment would exempt interests or participations in connection with corporate pension or profit-sharing plans which meet the requirements for qualification under section 401(a) of the Code, but not interests or participations in connection with such plans (known as “H.R. 10 plans”') which cover employees, some or all of whom are employees within the meaning of section 401(c)(1) of the Code. The exemption is limited to interests or participations in those bank collective trust funds maintained for the funding of employees' stock bonus, pension, or profitsharing plans and not as vehicle for direct investment by individual members of the public.
The amendment would further exempt from the registration provisions of the act interests or participations in separate accounts maintained by insurance companies for funding certain stock-bonus, pension, or profit-sharing plans which meet the requirements for qualification under section 401 of the Code. As in the case of bank collective trust funds, the amendment, in effect, would exempt interests or participations in connection with corporate plans which meet the requirements for qualification under section 401 of the Code, but not interests or participations in connection with such plans (known as “H.R. 10 plans”) which cover employees within the meaning of section 401(c)(1) of the Code and not interests or participations in connection with plans which meet the requirements for qualification under section 403(b) of the Code.
The amendment does not exempt interests or participations issued by either bank collective trust funds or insurance company separate accounts in connection with “H.R. 10 plans,” because of their fairly complex nature as an equity investment and because of the likelihood that they cou'd be sold to self-employed persons, unsophisticated in the securities field. However, the amendment would grant the Commission authority, by rule, regulation, or order to exempt such interest or participations to the extent that the Commission shall determine this to be necessary or appropriate in the public interest.
Part C-Portfolio Transactions
SECTION 9(c), ADDING NEW SECTION 17(j)-INSIDER TRADING IN
INVESTMENT COMPANY PORTFOLIO SECURITIES
Section 9(c) of the bill would add a new subsection (j) to amend section 17 of the act which would prohibit insider trading in securities held or to be acquired by a registered investment company, in contravention of such rules and regulations as the Commission may adopt to define fraudulent, deceptive, and manipulative practices and to prescribe means reasonably necessary to prevent such practices. The section also would provide the Commission with specific authority to adopt rules with respect to minimum standards for codes of ethics
governing trading by insiders of investment companies and with the authority to prevent such practices.
SECTION 11, ADDING NEW SECTION 19(b)—DISTRIBUTIONS OF LONG
TERM CAPITAL GAINS
Section 11 of the bill would amend section 19 of the Investment Company Act by adding a new subsection (b), which would prohibit registered investment companies from distributing realized long-term capital gains more frequently than once every 12 months except as the Commission may permit by rule, regulation, or order in the public interest and for the protection of investors.
Part D-Fund Holding Companies
SECTION 7, AMENDING SECTION 12(d)(1)-PREVENTING THE CREATION
AND ENLARGEMENT OF FUNDHOLDING COMPANIES
Section 7 of the bill would amend section 12(d)(1) of the act to limit the creation and operation of new fundholding companies and the further enlargement of existing companies of this type.
The proposed amendment to section 12(d)(1) would permit investment company securities to be purchased by other investment companies but only within specified limits and subject to the detailed restrictions spelled out in the section.
Under the proposed amendment to section 12(d)(1) of the act, subparagraph (A) would make it unlawful for a registered investment company and any company or companies controlled by such registered investment company to purchase or otherwise acquire securities issued by another investment company if, as a result of such transaction, the limitations contained in that subparagraph would be exceeded. It also places similar limitations on acquisitions of securities of registered investment companies by unregistered companies.
Subparagraph (B) would make it unlawful for a registered open end company, its principal underwriter or any broker-dealer registered under the Securities Exchange Act of 1934 to sell or otherwise dispose of a security issued by a registered investment company to any other investment company if, as a result of such transaction and to the knowledge of the seller, the limitations contained in that subparagraph would be exceeded.
Subparagraph (C) would make it unlawful for an investment company to purchase or otherwise acquire the securities of a registered closed-end investment company if, as a result of such transaction, the limitations with respect to ownership of voting securities contained in that subparagraph would be exceeded. The stock of closed-end companies is usually bought and sold in the secondary trading markets rather than through the issuance of new shares as in the case of openend companies. Because of this fact, it would be much more difficult for a buyer or a seller to know how much of a closed-end company's stock was owned by investment companies generally. Therefore, in this case, it is appropriate to have the prohibition apply to the buyer (rather than the seller as in the case of open-end companies) and to apply the 10-percent test only to the holdings of the acquiring company, other investment companies with the same investment adviser, and companies controlled by such investment companies.
Subparagraph (D) would retain existing exceptions from the prohibitions against the transfer of investment company interests to other investment companies for securities received because of: (a) dividends: (6) exchange offers that have been approved by the Commission under section 11 of the act: and (c) plans of reorganization. None of these three items involve a new commitment by an investment company. The first item, the exception for dividends, covers only those which the issuer declares in terms of stock and not in terms of money. Dividends and capital gain distributions declared in terms of money, which the recipient may elect to apply to the purchase of additional shares, are not within this exception.
Subparagraph (E) would continue the present exception for acquisitions of interests in investment companies by unit trusts. This exception covers contractual plan companies which invest in a specific mutual fund. This subparagraph would also extend the exception to a security purchased by an investment company, the depositor of or principal underwriter for which is a broker-dealer registered under the Securities Exchange Act of 1934 or a controlled person of such a broker-dealer and the investment portfolio of which consists only of that security. In the case of a purchase or acquisition by a nonregistered investment company, the recommended changes also would condition the availability of the exemption upon the existence of an agreement with the registered investment company or its principal underwriter governing (a) the voting of proxies and (b) the substitution of other securities for the underlying securities.
Subparagraph (F) would exempt from the provisions of paragraph (1) securities purchased or otherwise acquired by a registered investment company where immediately after the purchase or acquisition the registered investment company and all of its affiliated persons own not more than 3 percent of the total outstanding stock of the acquired company and neither the acquiring company nor its principal underwriter or other distributors charge a sales load of more than 172 percent. In order to provide protection for open-end companies and their shareholders where such companies' securities are acquired within the limitations of subparagraph (F), the subparagraph also provides that no issuer of any security purchased or acquired by a registered investment company under the subparagraph shall be obligated to redeem such securities in an amount exceeding 1 percent of the issuer's total outstanding securities during any period of less than 30 days. In addition, the restrictions on voting rights prescribed by this section would be applicable to the acquiring company.
Subparagraph (G) specifies that for the purposes of paragraph (1) of the section, the value of an investment company's total assets shall be computed as of the time of purchase or acquisition or as close thereto as is reasonably possible. Under the act as presently written, the Commission has the authority to institute actions in the
proper U.S. district courts to seek injunctions against violations of the act and to enforce compliance with its provisions. It is contemplated that in a proper case the court would direct divestiture of securities acquired in a transaction which violated the act. Subparagraph (H) specifies that (a) the Commission may join as a party to an enforcement action under this section, the issuer of the security involved and (b) a court may issue such orders with respect to the issuer as may be necessary or appropriate for the enforcement of the statute. For example, if the court issues an order requiring divestiture, it might order, if appropriate, the issuer to withhold distribution of dividends and capital gains with respect to the securities acquired in the unlawful transaction pending compliance with the court's divestiture order. The amendment would not require any investment company to divest itself of any existing holding. Only in the case of an illegal acquisistion resulting in new holdings or additions to preexisting holdings would the court have the power to direct divestiture. It will be able to do so under the proposed amendment in a flexible fashion that takes into account the varying circumstances of particular cases.
Section 7 of the bill would also make technical changes in sections 12(d)(1) and 12(d)(2) of the act to take into account the changed format of that section.
Part E-Strengthening Independent Checks on Investment Company
SECTIONS 2(3), 5, 8(c), 8(d) AND 18, AMENDING SECTIONS 2(a), 10,
15 AND 32(a)—ADDING THE TERM "INTERESTED PERSON" Section 2(3) of the bill would add a new section 2(a)(19) to the Investment Company Act defining the term "interested person” to include persons who have close family or substantial financial or professional relationships with investment companies, their investment advisers, principal underwriters, officers, and employees.
Proposed section 2(3) of this bill adds a new section 2(a)(19) to the act which would define the term "interested person.” Other sections of the bill would substitute that new term for the present term “affiliated person" in the following sections of the act: (1) section 10, relating to the composition of boards of directors (amended by sec. 5 of the bill); 2) section 15, relating to the approval of advisory and underwriting contracts (amended by secs. 8(c) and 8(d) of the bill); and (3) section 32(a), relating to the selection of independent public accountants (amended by sec. 18 of the bill). The new "interested person" concept will not widen the scope of sections 10(f) and 17 of the act, which prohibits transactions between investment companies, on the one hand, and the companies' affiliated persons as well as the affiliated person of such affiliated persons on the other, absent prior Commission approval. These sections remain unchanged.
Under the bill the new term "interested person” would include affiliated persons of an investment company, its investment adviser and principal underwriter, as well as members of the immediate family of such affiliated persons and persons who have beneficial interests or legal interests as fiduciaries in securities issued by the investment adviser, principal underwriter, and their controlling persons. The term would also include any broker-dealer registered under the Securities Exchange Act of 1934, and affiliated persons of any such broker-dealer. In additon, the definition would classify as an interested person legal counsel for an investment company, its investment adviser and principal underwriter and partners and employees of such legal counsel.
Interested person would also include persons who have any material business or professional relationships with an investment company, or another investment company having the same investment adviser or