(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.)

SEC to Consider Fund Rulemaking on Compliance, Late Trading

The SEC will consider whether to adopt new rules under the Investment Company Act and the Investment Advisers Act to require funds and investment advisers to adopt and implement compliance policies and procedures. The required policies and procedures would be designed to prevent violation of the federal securities laws. Registered entities would also be required to review those policies and procedures periodically for adequacy and effectiveness. The rules would also require the designation of a chief compliance officer. With regard to investment companies, this compliance officer would report directly to the board.

When the rules were proposed in February 2003, the SEC staff cited a number of examples for the Commission of instances when SEC enforcement actions were needed to address abuses in the mutual fund industry due to inadequate compliance programs. Such abuses included cross-trading, unauthorized trading of a customer account, fraud related to the pricing of private placements and the misrepresentation of losses.

According to the SEC, most commenters, including the Investment Company Institute and the Securities Industry Association, supported the proposal to require written compliance policies and procedures. The SEC noted, however, that some comments questioned whether the proposed rules would be suitable for the wide range of funds and advisers. Large funds and advisers with complex operations often rely on outside entities to perform business functions including compliance, noted some commenters, while others questioned whether the rules would be feasible for small advisers who would have to transition from informal compliance programs to more formal compliance procedures.

Late Trading Proposals

The SEC will also consider whether to propose amendments to Rule 22c-1 under the Investment Company Act concerning late trading of redeemable securities issued by a registered investment company. The proposed amendments would require that an order to purchase or redeem fund shares be received by the fund, its primary transfer agent, or a registered securities clearing agency, by the time that the fund establishes for calculating its net asset value in order to receive that day's price.

Disclosure Form Proposals

Finally, the SEC will consider whether to propose amendments to Forms N-1A, N-3, N 4 and N-6 under the Securities Act and the Investment Company Act. The proposals would 1) require open-end management investment companies and variable insurance products to disclose in their prospectuses information about the risks of, and policies and procedures with respect to, the frequent purchase and redemption of investment company shares, 2) clarify that open-end management investment companies and insurance company managed separate accounts that offer variable annuities are required to explain both the circumstances under which they will use fair value pricing and the effects of using fair value pricing and 3) require open-end management investment companies and insurance company managed separate accounts that offer variable annuities to disclose their policies with respect to disclosure of portfolio holdings information.