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Existing Collection; Comment Request

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Upon Written Request, Copies Available From: Securities and Exchange Commission, Office of Filings and Information Services, Washington, DC 20549.


Rule 10f-3, OMB Control No. 3235-0226, SEC File No. 270-237.

Notice is hereby given that, pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520), the Securities and Exchange Commission (“Commission”) is soliciting comments on the collection of information discussed below. The Commission plans to submit this existing collection of information to the Office of Management and Budget (“OMB”) for extension and approval.

Section 10(f) of the Investment Company Act of 1940 (15 U.S.C. 80a-10(f)) (the “Act” or “Investment Company Act”) prohibits a registered investment company (“fund”) from purchasing any security during an underwriting or selling syndicate if the fund has certain relationships with a principal underwriter [1] for the security (“affiliated underwriter”).[2] Congress enacted this provision in 1940 to protect funds and their investors by preventing underwriters from “dumping” unmarketable securities on affiliated funds.[3]

In 1958, under rulemaking authority in section 10(f), the Commission adopted rule 10f-3, which is entitled “Exemption for the Acquisition of Securities During the Existence of an Underwriting or Selling Syndicate.” The Commission last amended the rule in January 2001.[4] Rule 10f-3 currently permits a fund to purchase securities in a transaction that otherwise would Start Printed Page 6950violate section 10(f) if, among other things: [5]

(1) The securities either are registered under the Securities Act of 1933, are municipal securities with certain credit ratings, or are offered in certain private or foreign offerings;

(2) The securities purchases meet certain conditions with respect to timing and price;

(3) The issuer of the securities has been in continuous operation for at least three years prior to the issuance of the securities;

(4) The offering involves a “firm commitment” underwriting;

(5) The underwriters' commission is reasonable;

(6) The fund (together with other funds advised by the same investment adviser) purchases no more than twenty-five percent of the offering;

(7) The fund purchases the securities from a member of the syndicate other than the affiliated underwriter;

(8) Each transaction effected under the rule is reported on Form N-SAR;

(9) The fund's directors have approved procedures for purchases made in reliance on the rule, regularly review fund purchases to determine whether they comply with these procedures, and approve necessary changes to the procedures; and

(10) A written record of each transaction effected under the rule is maintained for six years, the first two of which in an easily accessible place.[6]

These limitations are designed to prevent purchases under the rule from raising the concerns that section 10(f) was enacted to address and to protect the interests of investors. These requirements provide a mechanism for fund boards to oversee compliance with the rule. The required recordkeeping facilitates the Commission staff's review of rule 10f-3 transactions during routine fund inspections and, when necessary, in connection with enforcement actions.

The staff estimates that approximately 410 funds engage in a total of approximately 2050 rule 10f-3 transactions each year. We estimate that each fund makes an average of fifteen responses per year and that the 410 funds that rely on rule 10f-3 make a total of 6150 annual responses.[7] Before making a purchase under rule 10f-3, the purchasing fund must document that the transaction complies with the conditions in the rule, a process which the staff estimates takes an average of approximately thirty minutes per transaction at a cost of $22.44 per transaction.[8] Thus, annually, in the aggregate, funds spend approximately 1025 hours [9] at a cost of $46,002 [10] on pre-transaction reporting. The staff estimates that, after the transaction is complete, an additional thirty minutes is spent completing the record of the transaction at a cost of $22.44 per transaction.[11] Thus, annually, in the aggregate, funds spend approximately 1025 hours [12] at a cost of $46,002 [13] on post-transaction reporting. The staff estimates further that preparation of a quarterly report of all rule 10f-3 transactions for the board of directors takes approximately 1.5 hours per quarter (in which there are 10f-3 transactions) at a cost of $43.78.[14] The staff estimates that, on average, each of the 410 funds engages in rule 10f-3 transactions during two quarters each year. Thus, annually in the aggregate, funds spend approximately 1230 hours [15] at a cost of $35,900 [16] on the preparation of quarterly transaction reports. The staff estimates that the board of directors spends fifteen minutes reviewing these reports each quarter (in which there are 10f-3 transactions) at a cost of $500.[17] Thus, annually, in the aggregate, funds spend approximately 205 hours [18] at a cost of $410,000 [19] for the quarterly review of rule 10f-3 transactions by boards. The staff further estimates that reviewing and revising as needed written procedures for rule 10f-3 transactions takes, on average, two hours of a compliance attorney's time at a cost of approximately $124.02 [20] per year and fifteen minutes of board time at a cost of $500 per year.[21] Thus, annually, in the aggregate, the staff estimates that funds spend a total of approximately 922.5 hours [22] at a cost of approximately $255,848 [23] on monitoring and revising rule 10f-3 procedures. The staff estimates, therefore, that rule 10f-3 imposes an information collection burden of 4407.5 hours [24] at a cost of $793,752.[25] This estimate does not include the time spent filing transaction reports on Form N-SAR, which is encompassed in the information collection burden estimate for that form. Commission staff estimates that there is no cost burden for rule 10f-3 other than the costs associated with the hour burden. These estimates are made solely for the purposes of the Paperwork Reduction Act and are not derived from a comprehensive or even a representative survey or study of Commission rules. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number.

Written comments are invited on: (a) Whether the collections of information are necessary for the proper performance of the functions of the Commission, including whether the information has practical utility; (b) the accuracy of the Commission's estimate of the burdens of the collections of information; (c) ways to enhance the quality, utility, and clarity of the information collected; and (d) ways to minimize the burdens of the collections Start Printed Page 6951of information on respondents, including through the use of automated collection techniques or other forms of information technology. Consideration will be given to comments and suggestions submitted in writing within 60 days of this publication.

Please direct your written comments to Michael E. Bartell, Associate Executive Director, Office of Information Technology, Securities and Exchange Commission, Mail Stop 0-4, 450 5th Street, NW, Washington, DC 20549.

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Dated: February 7, 2002.

Margaret H. McFarland,

Deputy Secretary.

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1.  “Principal underwriter” is defined to mean (in relevant part) an underwriter that, in connection with a primary distribution of securities, (A) is in privity of contract with the issuer or an affiliated person of the issuer, (B) acting alone or in concert with one or more other persons, initiates or directs the formation of an underwriting syndicate, or (C) is allowed a rate of gross commission, spread, or other profit greater than the rate allowed another underwriter participating in the distribution. 15 U.S.C. 80a-2(a)(29).

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2.  Section 10(f) prohibits the purchase if a principal underwriter of the security is an officer, director, member of an advisory board, investment adviser, or employee of the fund, or if any officer, director, member of an advisory board, investment adviser, or employee of the fund is affiliated with the principal underwriter. 15 U.S.C. 80a-10(f).

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3.  See Investment Trusts and Investment Companies: Hearings on S. 3580 Before a Subcomm. of the Senate Comm. on Banking and Currency, 76th Cong., 3d Sess. 35 (1940) (statement of Commissioner Healy).

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4.  Additional amendments to rule 10f-3 were proposed on November 29, 2000. Exemption for the Acquisition of Securities During the Existence of an Underwriting or Selling Syndicate, Investment Company Act Release No. 24775 (Nov. 29, 2000). These proposals, if adopted, would expand the exemption provided by the rule to permit a fund to purchase government securities in a syndicated offering and modify the rule's percentage limit on purchases.

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5.  See Rule 10f-3(b).

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6.  The written record must state (i) from whom the securities were acquired, (ii) the identity of the underwriting syndicate's members, (iii) the terms of the transactions, and (iv) the information or materials on which the fund's board of directors has determined that the purchases were made in compliance with procedures established by the board. See Rule 10f-3(b)(12).

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7.  2050 instances of pre-transaction reporting + 2050 instances of post-transaction reporting + 820 quarterly reports + 820 quarterly reviews by fund boards + 410 instances of monitoring and revision of rule 10f-3 procedures = 6150 responses.

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8.  Typically, personnel from several departments, including portfolio management and compliance, share this task. The staff estimates that the average hourly rate for these personnel is $44.87.

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9.  2050 transactions per year × 30 minutes per transaction = 1025 hours.

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10.  2050 transactions × $22.44/transaction = $46,002.

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11.  As with the reporting at the time of the transaction, the task of completing the record of the transaction is shared among personnel for whom the staff estimates the average hourly rate to be $44.87.

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12.  2050 transactions per year × 30 minutes per transaction = 1025 hours.

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13.  2050 transactions per year × $22.44/transaction = $46,002.

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14.  The staff estimates that a compliance clerk spends one hour of time, at $12.77/hour, preparing the report and a compliance attorney spends half an hour of time, at $62.01/hour, reviewing the report.

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15.  410 funds × 2 quarters/year × 1.5 hours/quarter = 1230 hours.

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16.  410 funds × 2 quarters/year × $43.78/quarter = $35,900.

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17.  The staff estimates that each hour of a fund board's meeting costs $2000.

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18.  410 funds × 2 quarters/year × 15 minutes/quarter = 205 hours

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19.  410 funds × 2 quarters/year x $500/quarter = $410,000

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20.  2 hours × $62.01/hour = $124.02

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21.  These averages take into account the fact that in most years, fund attorneys and boards spend little or no time modifying procedures and in other years, they spend a significant amount of time doing so.

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22.  410 funds × (2 hours by compliance attorney + 15 minutes by board/year) = 922.5 hours.

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23.  410 funds × ($124.02 for compliance attorney time + $500 for board time) = $255,848.

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24.  1025 for pre-transaction reporting + 1025 for post-transaction reporting + 1230 hours for preparing the board report + 205 hours for board review of rule 10f-3 transactions + 922.5 hours for monitoring and revising rule 10f-3 procedures = 4407.5 hours.

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25.  $46,002 for pre-transaction reporting + $46,002 for post-transaction reporting + $35,900 for preparing the board report + $410,000 for board review of rule 10f-3 transactions + $255,848 for monitoring and revising rule 10f-3 procedures = $793,752.

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[FR Doc. 02-3628 Filed 2-13-02; 8:45 am]