(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 Adopts Breakpoint Disclosure, Adviser Code of Ethics Requirement

The SEC voted to adopt new mutual fund disclosure about breakpoint discounts and to require registered investment advisers to adopt codes of ethics for their advisory personnel. The SEC also approved a proposal for comment that would prohibit registered transfer agents from transferring any equity securities registered under Exchange Act Section 12 or those of an issuer subject to Section 15(d) if the issuer has imposed a restriction on the transfer of the securities to or from a securities intermediary. The proposal reflects a recent trend by which issuers prevent their shares from being transferred to intermediaries to prevent so-called "naked short selling" of the securities.

The disclosure on breakpoint discounts reflects the recommendations of a joint task force including the NASD, the Securities Industry Association and the Investment Company Institute. Beginning September 1, 2004, funds must include a description in their prospectuses of any arrangements, including eligibility requirements, for sales load breakpoint discounts. More detailed information must also be provided in the fund's statement of additional information.

Funds must also disclose in their prospectus the methods used to value accounts when determining whether a shareholder qualifies for a breakpoint discount. The disclosure must include a notice to shareholders that they may have to provide information about their various accounts to the mutual fund or to their financial intermediary, such as accounts held by different family members which cumulatively would qualify for the discount. Funds must also disclose whether they provide breakpoint information on their Web sites.

The SEC proposed the investment adviser codes in January 2004 (2003-04 CCH Dec. ¶87,133). As adopted, registered investment advisers must adopt codes of ethics that set standards of conduct for their advisory personnel and that address conflicts of interest related to personal trading. Supervised persons will be required to acknowledge in writing that they have received a copy of the code of ethics, along with any amendments. The code of ethics must include the requirement that supervised personnel comply with all of the applicable federal securities laws.

So-called "access persons," those with access to non-public information about the firm's securities recommendations and clients' securities activities, must report their personal securities holdings and transactions, including transactions in mutual funds that are advised by the investment adviser or an affiliate. Access persons must preclear any personal investments in initial public offerings and limited offerings. Any violations to the code of ethics must be reported to the chief compliance officer or to anyone else designated to fill that role.

The compliance date for the new rule and related amendments relating to the investment adviser codes of ethics is January 7, 2005. The rules were adopted with certain modifications to the original proposal.

The proposed restriction on transfer agents reflects the SEC's concern that recent actions may have an adverse impact on the national clearance and settlement system. Annette Nazareth, the director of the Division of Market Regulation, explained that the SEC proposed the prohibition for transfer agents, rather than for issuers, because its authority is less clear for issuers than it is with respect to the clearance and settlement system.

Chairman Donaldson said that the SEC is concerned about abusive short selling practices but the right way to fix the problem is not by obstructing the ownership and transferability of publicly-traded securities. He noted that in October 2003, the SEC proposed Regulation SHO (2003-04 CCH Dec. ¶87,105) to address abusive short selling and has undertaken additional initiatives with the NASD. The comment period on the transfer agent rule proposal will be open for 30 days.

The proposing and adopting releases will be published in a forthcoming REPORT .