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Section 9(a) of the bill would amend section 17(f) of the act to provide that if an investment company employs a bank as custodian for "securities and similar investments," then all of its cash assets, including proceeds from the sale of its own securities and income on its holdings shall likewise be held by a bank, subject to appropriate direction as to expenditure and disposition by proper company officials.
The proposed amendment would not require an investment company to employ a bank as custodian. If, however, a company chooses to use a bank as custodian, its shareholders would appear entitled to expect that the cash held by the company would be afforded a degree of protection similar to that given to securities. The proposed amendment would permit maintenance of a checking account or accounts in one or more banks in amounts not to exceed the amount of the fidelity bond covering persons authorized to draw on the accounts, as required under section 17(g) of the act. It also provides that more than one bank may act as custodian. The Commission would have authority to allow specified amounts of petty cash to be held apart from bank custody.
SECTION 14, AMENDING SECTION 25(c)-REORGANIZATION STANDARDS
Section 25(c) of the act now authorizes any district court of the United States, upon proceedings, instituted by the Commission, to enjoin the consummation of any plan of reorganization of a registered investment company only "'if such court shall determine any such plan to be grossly unfair or to constitute gross misconduct or gross abuse of trust on the part of the officers, directors, or investment advisers of such registered company or other sponsors of such plan.”
Section 14 would amend section 25(c) of the act to provide that a court may, upon proceedings instituted by the Commission, enjoin the consummation of any plan of reorganization of a registered investment company which the court finds not "fair and equitable” to all persons affected.
The proposed amendment would eliminate a standard which unduly restricts courts from passing upon plans of reorganization of registered investment companies. It would replace this standard with the "fair and equitable” standard which has had a long history of judicial interpretation in equity receiverships and reorganizations under section 77B and chapter X of the Bankruptcy Act and section 11(e) of the Public Utility Holding Company Act.
SECTION 15(a), AMENDING SECTION 26- -SUBSTITUTION OF UNDERLYING
INVESTMENTS OF UNIT INVESTMENT TRUST
Section 26(a)(4)(B) of the act now requires that the trust instrument of a unit investment trust provide that the sponsor or trustee will notify the shareholders of the unit investment trust within 5 days after a substitution of the underlying securities.
Section 15(a) of the bill would add a new subsection (b) to section 26 of the act to make it unlawful for any depositor or trustee of a registered unit investment trust holding the security of a single issuer to substitute underlying securities without Commission approval.
SECTION 19, AMENDING SECTION 33—TRANSMISSION TO THE COMMISSION
OF PAPERS FILED IN SHAREHOLDER ACTIONS
Section 33 of the act now requires registered investment companies and their affiliated persons who are defendants in derivative suits involving "an alleged breach of official duty" to transmit to the Commission copies of the pleadings and the record in such actions after a verdict or final judgment on the merits has been rendered or a settlement or compromise of the action has been approved by a court of competent jurisdiction.
Section 19 of the bill would amend section 33 of the act to require prompt filing with the Commission of copies of all pleadings, settlements, discontinuances, or judgments served or filed in suits by a registered investment company or a security holder thereof against an officer, director, investment adviser, trustee, or depositor of such company. In addition, the section would require that copies of motions and other documents be filed with the Commission if it requests them.
The proposed amendment would permit the Commission to be kept informed of the progress of the litigation from its outset at the trial court, and would make it possible for the Commission to promptly take such action as may be appropriate.
It is contemplated that the proposed amendment would be administered to eliminate, insofar as possible, duplicative filings in cases involving multiple defendants.
SECTION 2(a), AMENDING SECTION 2(a)(5)—CHANGE IN REFERENCE
TO ANOTHER STATUTE WHICH HAS BEEN AMENDED
Section 2(a) of the bill would substitute in section 2(a)(5) of the act the words "under the authority of the Comptroller of the Currency” for the words "section 11(k) of the Federal Reserve Act, as amended.” Section 11(k) of the Federal Reserve Act has been repealed. and as a result certain authority over banks formerly exercised by the Federal Reserve Board is now exercised by the Comptroller of the Currency. SECTIONS 3(b)(1) AND 3(b)(2), AMENDING SECTION 3(c)—DELETION OF
SUPERFLUOUS REFERENCE AND RENUMBERING
Section 3 (b)(1) of the bill would amend section 3(c) of the act by deleting reference to subsection 3(b) of the act. Section 3(c) excludes certain categories of companies from the definition of an investment company which is found in subsection (a) of section 3. Since only subsection (a) defines an investment company and subsection (b) merely contains exceptions from that definition, the reference to subsection (b) in subsection (c) is meaningless.
In addition to deleting section 3(c)(8) (see pt. G–Coverage), section 3(b)(2) would also renumber paragraphs (5) through (7) and (9) through (15) of subsection 3(c) to reflect the deletion of paragraph (4) thereof by Public Law 89-418, 89th Congress, second session (1966).
SECTION 5(c), AMENDING SECTION 10(c)—CORRECTING INCONSISTENCY
IN PROHIBITING PERSONS FROM SERVING AS DIRECTORS OF INVEST MENT COMPANY
Section 10(c) of the act prohibits a registered investment company from having a majority of its board of directors consist of officers or directors of any one bank. Section 5(c) of the bill would add the word "employee” to the first clause of section 10(c). The second clause of section 10(c) provides a limited exception from the prohibition for any registered investment company which on March 14, 1940, had as a majority of its board of directors, the officers, directors, or employees of any one bank. While the first clause does not include employees, the second clause does include them. The proposed amendment would correct this apparent inconsistency. SECTIONS 8(c) AND 8(d), AMENDING SECTIONS 15(c) AND 15(d)—ELIMI
NATION OF OUTDATED REFERENCE AND SECTION
In addition to the substantive changes described under the heading “Management-Shareholder Relationships”.
Section 8(c) of the bill would delete the words "except a written agreement which was in effect prior to March 15, 1940,” in section 15(c) of the act. Section 8(d) of the bill would delete section 15(d) from the act. (See "Costs of Mutual Fund Investments” for explanation of new section 15(d).) That section prohibits any person after March 15, 1945, from acting as investment adviser to, or principal underwriter for, any registered investment company pursuant to a written contract in effect prior to March 15, 1940, unless such contract was renewed prior to March 15, 1945, in such form as to make it comply with sections 15(a) or 15(b). The 1940–45 period mentioned in sections 15(c) and 15(d) passed long ago, and references to it are meaningless today. There are no persons who are or will hereafter be affected by section 15(d) or the above clause of section 15(c).
SECTION 12(d), AMENDING SECTION 24(d)-DELETION OF LANGUAGE
REQUIRED BY PROPOSED AMENDMENTS
Section 12(d) of the bill would amend section 22(d) of the act to conform that section to the proposed amendment to section 11(b) of the act by deleting reference to clause (2) of section 11(b) in section 22(d) of the act. Section 22(d) of the act provides, in relevant part, that it shall not prevent a sale made “pursuant to an offer of exchange permitted by section 11 hereof including any offer made pursuant to clause (1) or (2) of section 11(b)." Section 6 of the bill would delete clause (2) of section 11(b) from the act.
SECTION 13, AMENDING SECTION 24(d)—UPDATING OF A STATUTORY
Section 13 of the bill would amend section 24(d) to refer to section 4(3) of the Securities Act of 1933. Among other things, section 24(d) of the act states that the exemption provided by clause 3 of section 4(1) of the Securities Act of 1933 shall not be applicable to face amount certificate companies, open-end management companies, or unit investment trusts.
SECTIONS 21 AND 22, AMENDING SECTIONS 43(a) AND (44)—UPDATING
STATUTORY REFERENCES Sections 21 and 22 or the bill amends sections 43(a) and 44, respectively, to conform references to the Judicial Code with the present designation of the sections involved. Section 43(a) of the act provides for court review of Commission orders. It refers to sections 239 and 240 of the Judicial Code which have been redesignated section 1254 of title 28 of the United States Code, as amended. Similarly, section 44 of the act, which gives the district courts of the United States jurisdiction of violations of the act or rules and regulations thereunder, refers to sections 128 and 240 of the Judicial Code, as amended, which have been redesignated as sections 1254 and 1291-1294 of title 28 of the United States Code.
Part J-Amendments to the Investment Advisers Act of 1940
SECTIONS 24, 25, AND 26, AMENDING SECTIONS 203 AND 205 AND ADDING
NEW SECTION 206A-EXEMPTIONS FROM PROVISIONS OF THE ACT
Amending section 203— removal of exemptions for investment advisers to
investment companies Section 25(a) of the bill would amend paragraphs (2) and (3) of section 203(b) of the Investment Advisers Act to make inapplicable to investment advisers to investment companies the exemptions from registration under the Advisers Act now available to most of them. Section 203(b)(2) of the Advisers Act now exempts any investment advisor whose only clients are investment companies from the registration requirements of that statute, while section 203(b)(3) of that act provides a similar exemption for any investment adviser who during the course of the preceding 12 months has had fewer than 15 clients and who does not hold himself out generally to the public as an investment adviser. Some mutual fund advisers are registered under the Advisers Act, but most of them, particularly those that serve the large funds and fund complexes, fall within these two exemptions from registration. Amending section 205—Removal of exemption for advisory contracts
with investment companies Section 25 of the bill would amend section 205 of the Investment Advisers Act to delete the exemption for advisory contracts with investment companies from the prohibition against contracts that provide for compensation to the investment adviser on the basis of à share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client.
This proposed extension of section 205(1) to investment company advisory contracts would prohibit a contract which provides that any part of the adviser's fee shall be a specified amount of the company's capital appreciation. The section also provides for an exemption from this restriction for an advisory contract with an investment company which provides for proportionate increases and decreases in compensation on the basis of the investment performance of the company as measured against an appropriate index of securities prices or such other measure of investment performance as the Commission may specify. For purposes of this section, an index of securities prices
would be deemed appropriate unless the Commission determines otherwise by order after notice and opportunity for hearing.
Section 205(1) of the Advisers Act forbids only those sharing arrangements which involve a sharing of capital appreciation. The proposed amendment will not invalidate contracts under which the adviser's fee consists of a percentage of the investment company's ordinary investment income, provided that the adviser's compensation meets the reasonableness test of proposed section 8 of this bill. Proposed section 206A-Commission exemptive authority
Section 26 of the bill would add a new section 206A to the Investment Advisers Act. It would empower the Commission by rule, regulation, or order to exempt conditionally or unconditionally any person or transaction from any or all provisions of the act if and to the extent such action is necessary or appropriate in the public interest and consistent with the purposes fairly intended by the policy and provisions of the Act.
The proposed amendment would be the counterpart of section 6(c) of the Învestment Company Act, which gives the Commission broad power to exempt any person, transaction, or security from any provision of that statute. The flexibility which this amendment would introduce into the administration of the Advisers Act is appropriate in view of the broader coverage provided for by this bill. Under section 206A, the Commission would in appropriate cases be able to exempt persons from the registration requirements of proposed section 203 and from the ban on performance-based advisory compensation in proposed section 205(1) of the Advisers Act if and to the extent such action is appropriate in the public interest and consistent with the protection of investors and the policy of the act.
SECTIONS 23 AND 24 AMENDING THE ACT BY STRENGTHENING DISCIPLI
NARY CONTROLS OVER INVESTMENT ADVISERS
Amending section 202(a)-Definition of person associated with investment
adviser; amending section 203(1) - Administrative action against such associated persons; and amending section 203(e)-Disciplinary
proceedings Section 23 of the bill would amend section 202(a) of the Investment Advisers Act to add a new paragraph (17) thereto, which would define the term “person associated with an investment adviser.” (Pars. (17) through (20) of existing sec. 202(a) would be redesignated paragraphs (18) through (21), respectively.)
This amendment would be a counterpart to section 3(a)(18) of the Securities Exchange Act and would add a purely definitional section to the classes of persons now referred to in clause (F) of existing section 203(c)(1) and pargraphs (2) and (3) of existing section 203(d) of the Advisers Act. In addition, the new term would be used in proposed section 203(f) of the Advisers Act (see sec. 25(c) of the bill), which would give the Commission, after making the required findings, authority to bar or suspend individuals from associating with an investment adviser. This express reference to employee would make no change in present law, since an employee is considered a controlled person.