(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.)

Director Roye Details Impact of Sarbanes-Oxley on Investment Companies

The enactment of the Sarbanes-Oxley Act and the attendant SEC rulemaking mandated by the act will significantly impact investment company regulation, according to Paul F. Roye, director of the Division of Investment Management. From the certification of financial reports, to codes of ethics to the presence of financial experts on audit committees, the act will have far-reaching ramifications for investment companies and their managements. As ordered by the act, the SEC has adopted rules requiring CEOs and financial officers to certify the accuracy of periodic corporate reports. Regarding investment companies, the proposals apply to a fund's annual and semi-annual reports on Form N-SAR, as well as the financial statements on which information in the form is based.

The certification requirement was intended to improve the quality of the disclosure that a company provides about its financial condition in its periodic reports to investors. Since shareholder reports are the primary means by which mutual funds provide financial statements to investors, noted Mr. Roye, the Commission has also proposed a new form N-CSR designed to better implement the intent of the act. On the proposed form, funds would file copies of required shareholder reports, information about the fund's internal controls and disclosure controls and procedures, and required CEO and CFO certifications. As it moves towards a final rule, said the director, the SEC will consider whether certification of both forms N-SAR and N-CSR are necessary to fulfill the Sarbanes-Oxley Act mandate.

Similarly, as ordered by the Sarbanes-Oxley Act, the SEC proposed new rules requiring investment companies to disclose whether the companies, their investment advisers and principal underwriters have each adopted a code of ethics for their senior executive and financial officers. The rules would not require companies to adopt codes of ethics, but only to disclose whether they have them. While acknowledging that Investment Company Act Rule 17j-1 already requires mutual funds to have codes of ethics designed to deter conflicts of interest by advisory personnel when they buy or sell securities for their own accounts, Mr. Roye pointed out that the proposals address a broader range of ethical conduct issues. These issue include the handling of conflicts of interest between personal and professional relationships; fair and accurate filings with the Commission; and compliance with applicable laws and regulations. Noting that many fund codes of ethics already go beyond the requirements of Rule 17j-1, Mr. Roye said that funds could integrate any Sarbanes-Oxley Act-driven code of ethics with their pre-existing Rule 17j-1 code of ethics.

The proposals would also require investment companies to disclose whether their audit committee includes at least one member who is a financial expert. Specifically, proposed Form N-CSR would require mutual funds to disclose annually the names and numbers of the financial experts and whether they are independent. If the fund does not have a financial expert serving on its audit committee, it would have to disclose this fact and explain why it does not.

The Commission also proposed rules under the Sarbanes-Oxley Act prohibiting officers and directors of an issuer, and anyone acting under their direction, from taking action to fraudulently influence the auditor of the issuer's financial statements. The proposals would cover officers and directors of investment companies, emphasized Mr. Roye, as well as those of other entities, such as advisers, that may be in a position to fraudulently influence an auditor of an investment company.