(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

Proposals Target Fund Governance, Adviser Ethics, Point of Sale

The Securities and Exchange Commission voted five to zero to propose three regulatory initiatives intended to address what it said were "problems identified with the management and sale of mutual funds." The three proposals would require investment advisers to adopt codes of ethics for advisory personnel, compel investment companies to enhance the independence of their boards of directors, and would also increase the amount of information broker-dealers are required to disclose to customers.

Investment Company Governance

Saying proposed rule amendments are "designed to strengthen the hand of independent directors when dealing with fund management," the SEC proposed that independent directors be required to constitute at least 75 percent of a fund's board of directors. The commission opined that this would improve the ability of boards to obtain lower fees on behalf of funds. As proposed, the board would be required to appoint an independent director as chairman. The board would also be required to assess its own effectiveness annually, and conduct separate quarterly meetings of the independent directors. Funds would also be compelled to authorize the independent directors to hire their own staff.

Adviser Codes of Ethics

Proposed new rule 204A-1 under the Investment Advisers Act would require registered investment advisers to adopt and enforce codes of ethics that would set forth standards of conduct for advisory personnel, safeguard material nonpublic information about client transactions, and address conflicts arising from personal trading by employees. Referring to the fiduciary duty advisers owe their clients, the Commission said "recent enforcement proceedings suggest that some advisory personnel may have forgotten or ignored this duty." The codes of ethics would have to specifically address, at a minimum, standards of business conduct, compliance with federal securities laws, safeguarding of nonpublic information, reporting of personal securities transactions by supervised persons, and reporting of code violations. Additionally, the code of ethics would have to require pre-approval of personal investments in private and public offerings.

Point of Sale Disclosure

Lastly, the SEC proposed two new rules that would require broker-dealers to provide customers with information, at the point of sale and in transaction confirmations, regarding the costs and conflicts of interest that arise from the distribution of mutual fund shares, unit investment trust interests, and municipal fund securities used for education savings. The disclosure would need to reference the value of the purchase or a model investment of $10,000.

¨ Release No. IC-26323, the proposed rule on Investment Company Governance, is reported at ¶87,132 . The remaining two proposing releases will be published in a forthcoming REPORT