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Securities and Exchange Commission
Investment Company Act Release No. 19362
File No. S7-13-93
EXPEDITED PROCEDURE FOR EXEMPTIVE ORDERS AND
EXPANDED DELEGATED AUTHORITY
March 26, 1993
ACTION: Proposed rule amendments and requests for comment.
SUMMARY: The Commission is proposing for public comment an amendment to rule 0-5 under the Investment Company Act of 1940 that would establish an expedited review procedure for certain routine applications. The proposed rule amendment would permit applicants to obtain an exemptive order within 90 days if certain requirements are satisfied. The proposed rule amendment also would allow the Commission to declare certain inactive applications to be abandoned. The Commission also is proposing for public comment an amendment to rule 30-5 that would expand the delegated authority of the Director of the Division of Investment Management. The proposed rule amendments are intended to streamline the review procedure for exemptive applications and reduce delays in obtaining exemptive orders.
DATES: Comments must be received on or before (ninety days after date of publication in the Federal Register).
ADDRESSES: Comments should be submitted in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. All comment letters should refer to File No. S7-13- 93. All comments received will be available for public inspection and copying in the Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549.
FOR FURTHER INFORMATION CONTACT: Matthew M. O'Toole, Attorney, or Diane C. Blizzard, Assistant Director, both at (202) 272-2048, Office of Regulatory Policy, Division of Investment Management, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION: The Commission today is requesting public comment on proposed amendments to rule 0-5 [17 CFR 270.0-5] under the Investment Company Act of 1940 [15 U.S.C. § 80a-1, et seq.] (the "Act"). In addition, the Commission is requesting public comment on proposed amendments to rule 30- 5, Delegation of Authority to Director of Division of Investment Management ("Delegation of Authority Rule") [17 CFR 200.30-5]. These amendments would implement the recommendations made in the recently issued report by the Division of Investment Management, Protecting Investors: A Half Century of Investment Company Regulation, in Chapter 13, Procedures for Exemptive Orders. [FN1]
I. BACKGROUND
The Act delegates to the Commission considerable flexibility in its regulation of investment companies. In over thirty separate provisions, the Act authorizes the Commission to issue orders [FN2] providing relief from specific statutory requirements. [FN3] Most significantly, section 6(c) gives the Commission the broad power to exempt conditionally or unconditionally any person, security, or transaction from any provisions of the Act or any rule thereunder, provided that the exemption is "necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of [theAct]." [FN4] Congress enacted section 6(c) to give the Commission the flexibility to address unforeseen or changed circumstances in the investment company industry. [FN5]
Past applications for exemptive orders under the Act have addressed a wide variety of issues in a number of contexts. [FN6] For example, some applications have requested relief from provisions of the Act to permit registered investment companies to operate in a more efficient and less costly manner. [FN7] Other applications have been filed either to implement innovations or create new investment vehicles that do not fit within the regulatory confines of the Act. [FN8]
Filing requirements and specifications for applications are set forth in rules 0-2, [FN9] 0-4, [FN10] and 0-5(d). [FN11] Applicants also are expected to follow published Division guidelines for filing applications. [FN12] Specifically, applicants must state an adequate basis for the relief requested, including detailed justification for removal of any statutory protections, and identify any benefits expected for investors and any conditions imposed to protect investors. [FN13] Applicants also must cite and discuss prior applications for similar relief and, to the extent possible, bring their proposal within applicable precedent. [FN14]
Applications filed with the Commission are forwarded to the Division and generally are reviewed in the order received. During the review process, the Division may ask for clarification of, or modification to, an application so that the relief meets the Act's standards. An applicant that does not respond to such a request in a timely manner may have its application placed on inactive status at the Division's discretion. [FN15]
The Commission may issue an order on an application "only after appropriate notice and opportunity for hearing." [FN16] Accordingly, once review of an application is completed, and a determination is made that relief should be granted, a notice of the filing of the application generally must be published in the Federal Register. [FN17] The notice provides interested persons an opportunity to request a hearing on the matter within a specified period of time (typically twenty-five days from the date of the issuance of the notice), and indicates the earliest date upon which an order disposing of the matter may be entered. [FN18]
The vast majority of notices of applications and exemptive orders are issued by the Division under delegated authority. The Delegation of Authority Rule authorizes the Division Director to issue notices of applications under numerous sections of the Act [FN19] and underlying rules, where the matter either presents issues previously settled by the Commission or fails to raise questions of fact or policy requiring a hearing. [FN20] The rule similarly authorizes the Division Director to issue orders where a notice has been issued and no request for a hearing has been filed. [FN21] In essence, rule 30-5 relieves the Commission from performing functions "which experience has demonstrated to be of a routine or non-controversial nature." [FN22] Rule 30-5 nonetheless requires a number of applications to be presented to the Commission for consideration, including all applications under provisions of the Act for which rule 30-5 does not grant the Division Director delegated authority, [FN23] and other applications involving matters not previously settled by the Commission. [FN24]
Obtaining an exemptive order from the Commission typically takes from six to eight months from the date an application is received, depending on various factors including the novelty and complexity of the requested relief, the Division's workload, the time it takes for applicants to respond to comments, and whether the Division Director has delegated authority. The time period also depends upon whether the application contains the facts and legal analysis needed to justify granting the relief, and whether the application complies with the procedural rules and guidelines.
Applicants and counsel have long complained that obtaining an exemptive order on both routine and complex applications takes too long. [FN25] They argue that lengthy review procedures delay the commencement of transactions, prevent applicants from responding quickly to changing market conditions, and slow the entry of new products to the market, all to the detriment of investors.
The Commission recognizes that these are legitimate concerns. On the other hand, applications can involve transactions on the forefront of investment company law. In those instances, substantial time and resources are expended to analyze thoroughly the legal and policy issues raised, and the recommendations the Division must make to the Commission often include significant policy choices. Even applications that generally are based on precedent often contain significant variations from previous applications that the Division must scrutinize carefully.
The Commission must balance the industry's legitimate concerns over delays in obtaining orders with the Commission's responsibility to analyze significant questions of fact or law underlying the requested relief. Accordingly, in order to streamline review procedures while continuing to scrutinize applications properly, the Commission is proposing to amend rule 0-5 to establish an expedited review procedure for applications that follow precedent, and to amend rule 30-5 to expand the Division Director's delegated authority to approve certain applications.
II. PROPOSED REVISIONS TO RULE 0-5 FOR EXPEDITED REVIEW
The proposed amendment to rule 0-5 would allow certain applicants to receive an exemptive order within 90 days of filing an application if the application is based on clear precedent. This approach balances the applicants' desire for a prompt response with the Commission's responsibility under the Act to protect investors. The Division each year receives numerous applications that are essentially identical, except for identifying information, to previously granted applications. The rule amendments would enable those applicants to obtain exemptive orders on a predictable and expedited basis. At the same time, the Commission must preserve its role in the review process. Thus, the rule amendments also provide a procedure for identifying applications submitted for expedited review on the basis of precedent that is inapposite, [FN26] and for discontinuing expedited review in cases where complete review is deemed appropriate. [FN27]
Under the amendments, present rule 0-5 would become paragraph (a), and a new paragraph (b) would be added that would provide for expedited review. Applications reviewed under paragraph (b) thus would be subject to the general procedures in paragraph (a), as well as any other applicable filing requirements of the Act and rules. [FN28] Subparagraph (b)(3) would establish certain time periods for the issuance of notices and orders on applications that conform to precedent, permitting eligible applications to receive an exemptive order within 90 days of filing. Subparagraphs (b)(1) and (b)(2) would impose eligibility and other requirements for expedited review. Subparagraph (b)(4) would establish procedures for discontinuing the expedited procedures, and subparagraph (a)(5) would be added to the rule to permit the Commission [FN29] to deem certain inactive applications to be abandoned.
A. Expedited Review of Applications Based on Precedent
1. Expedited Review Procedure
Under proposed subparagraph (b)(3),a notice of application would be issued by the Commission within 60 days from the filing of an application, as long as certain requirements were satisfied. In addition, unless either a request for a hearing were filed by an interested person in response to the notice of application published in the Federal Register, or the Commission ordered a hearing on its own motion, an order would be issued within 30 days from publication of the notice in the Federal Register. [FN30] Taking into consideration the Commission's limited resources, comment is requested on whether the 60-day and 30-day time periods proposed by the rule amendments are reasonable.
Under the proposed introductory language in paragraph (b), applications filed under sections 2(a)(9), 3(b)(2) or 9(c) would be ineligible for expedited review. The Commission believes these particular types of applications are too fact-specific to be appropriately reviewed under a procedure that relies on clear precedent. The Commission requests comment, however, whether applications filed under these sections or any other section of the Act should be excluded from the expedited review procedure.
The running of the 60-day review period would be subject to certain exceptions. In particular, the filing of an unsolicited amended and restated application automatically would toll the 60-day period. The issuance of a comment letter requesting clarification to, or modification of, the application also would automatically toll the 60-day period. [FN31] Although applications would be required to conform to precedent, and the Commission anticipates that few comment letters would be issued, there occasionally may be times when a comment letter is necessary either to resolve technical matters or because modifications to precedent are advisable. [FN32] The proposed rule further provides that the 60-day period would resume fifteen days after the applicant files an amended and restated application that responds to the comment letter, marked to show all changes from the original application or most recent amendment, [FN33] unless the Division determines that the amended and restated application does not respond adequately to the comment letter. In such case, the Division would notify the applicant that the 60-day period remains tolled. [FN34]
The Commission believes that the Division needs adequate time to review the amended and restated application both to ensure that it is responsive to the comment letter and to determine whether it still satisfies the requirements established in subparagraphs (b)(1) and (b)(2). The Commission requests comment, however, whether the proposed tolling mechanism is the most appropriate procedure for handling the review of amended and restated applications. [FN35]
Finally, if a comment letter goes unanswered for more than 30 days, a new 60- day review period would commence on the date an amended and restated application is filed. [FN36] The Commission requests comment, however, whether a new 60-day review period is appropriate, or whether, in the alternative, such applications should be removed from expedited review and considered thereafter under the general procedures provided in paragraph (a).
Several commenters on the Study Release suggested that the Commission adopt a rule that would allow exemptive applications to become effective automatically within a fixed period of time unless the Commission takes preventive action. [FN37] These commenters note that such a change would make the Division's procedures resemble provisions of the Securities Act governing the effectiveness of registration statements, [FN38] and provisions of the Exchange Act regarding the use of proxy materials. [FN39]
There are critical distinctions, however, between allowing a particular filing to become effective by the passage of time on the one hand, and granting exemptive applications on the other. Specifically, for a registration statement, a statutory obligation is imposed on the issuer to provide full and accurate disclosure of material information, even after the registration statement has become effective and review is completed. [FN40] In other words, the issuer remains fully liable under the registration statement. For exemptive applications, however, an applicant that has received a Commission order gains a measure of protection from liability, even if the applicant made misrepresentations in its application. [FN41] Moreover, while section 6(c) is broad, it is not without limitations and it specifically requires the Commission to grant exemptions only if the exemption is necessary or appropriate in the public interest and consistent with the protection of investors and other purposes intended by the Act. [FN42] The passive granting of exemptive relief could call into question whether the Commission was meeting its obligations under the Act.
2. Requirements for Expedited Review
In order for an applicant to use the expedited review procedure in subparagraph (b)(3), the application must meet certain requirements under subparagraphs (b)(1) and (b)(2). Subparagraph (b)(1) would require that the applicant seek relief that is consistent in all material respects with the most recent order issued on applications for the same relief. Thus, an applicant seeking relief from particular sections of the Act must use as precedent only those applications for which relief was granted under the same sections. In other words, there could be no "mixing and matching" of relief. The time period for determining the most recent order would be as of thirty days preceding the filing of the application seeking expedited review. [FN43] Furthermore, subparagraph (b)(1) would require the order to have been issued within two years preceding the filing of the application seeking expedited review.
The expedited procedure is intended to be used only in routine cases where the Commission already has had sufficient time to analyze and consider the requested relief. The Commission believes that applications seeking expedited review must be adequately supported. By requiring that applications seeking expedited review rely on precedent which must be less than two years old, the proposed rule amendments would ensure that the Division is familiar with applicable precedent.
The Commission requests comment, however, whether only applications that obtained relief identical to the application seeking expedited review should be recognized as precedential applications, or whether previous applications could serve as precedent even though the application for expedited review sought only a portion of the relief granted in the previous application.
Subparagraph (b)(1) also requires that an application submitted for expedited review contain certain information, including a statement on its facing sheet that the applicant requests expedited review under rule 0-5(b), [FN44] and, under a separate heading, a brief summary of the relief requested together with citations to the release numbers of the notices and orders issued on the applications submitted as precedent. These requirements are intended to clearly identify requests for expedited review and the precedents on which they rely. They also are intended to help the Commission verify the accuracy of applicants' representations.
Proposed subparagraph (b)(1)(iii) would require that an application seeking expedited review contain each condition, and each material representation, included in the final version of the most recent precedential application. [FN45] The Commission recognizes that certain representations made in precedential applications are not material to the relief granted, and thus should not be required in applications seeking expedited review. Since conditions embody the essential parts of a precedential application, each of them would be required.
Subparagraph (b)(2) of the proposed rule requires that certain items accompany an application for expedited review. These include a copy of the application marked to show all changes from the application that was granted by the most recent order submitted as precedent, and a draft notice marked to show all changes from the notice issued on such precedential application. [FN46] These exhibits would allow the Commission readily to discern any variations between the application seeking expedited review and the most recent precedential application.
Subparagraph (b)(2) also requires a statement signed by counsel [FN47] representing that the application meets each of the requirements of subparagraph (b)(1). Such statement also must represent that both the application marked to show changes and the draft notice marked to show changes were complete and accurate. This written representation would be similar to the representation required from counsel under rule 485 for post-effective amendments filed by certain registered investment companies, [FN48] and under rule 487 for certain unit investment trusts, [FN49] and should take the form of a letter signed by counsel. [FN50]
In essence, the Commission would be requesting counsel to represent that there are no provisions of the application that render it ineligible for filing under paragraph (b). Such a representation, in addition to any other document filed with the application for expedited review, would be subject to section 34(b) of the Act. [FN51] The Commission requests comment, however, whether there are other appropriate and effective means of ensuring the accuracy of applications and exhibits submitted for expedited review.
3. Discontinuance of Expedited Review
Proposed subparagraph (b)(4) would establish a procedure and bases by which the Commission could discontinue the expedited review of any application. Specifically, the Commission may discontinue expedited review to reconsider whether to grant the relief requested or to consider the need for modifications to an application. In addition, the Commission may determine not to expedite review of any or all applications due to constraints on Commission resources. The Commission would notify affected applicants in writing in cases where the Commission is reconsidering its policy or deciding whether an application needs modification, or by publication in the Federal Register in cases where Commission resources will not sustain expedited review.
Subparagraph (b)(4) does not address the situation where an application submitted for expedited review is incomplete or inaccurate. In that case, the Commission could discontinue expedited review because the application did not meet the requirements of paragraph (b). Depending on the degree of incompleteness or inaccuracy, the Commission alternatively could choose, in its discretion, to seek revisions to the application through comments. [FN52] Of course, the Commission would consider an application for which expedited review has been discontinued under the general procedures in paragraph (a).
B. Applications Deemed to be Abandoned
Under subparagraph (a)(5) of the proposed rule amendments, the Commission may declare an application abandoned if an applicant fails to file an amended application or otherwise respond in writing to a request for clarification of, or modification to, an application within 120 days of the mailing of such request. Furthermore, if the Division issues a letter stating that it will recommend that the Commission order a hearing on an application, the Commission may declare the application abandoned if the applicant, within 120 days, does not request that the Division recommend a hearing. [FN53] If the applicant subsequently decides to pursue an abandoned application, the applicant must file a request with the Division to have the application reactivated. The Commission requests comment whether the 120-day period, or a shorter or longer period, is appropriate.
III. PROPOSED REVISIONS TO RULE 30-5 TO PROVIDE FOR EXPANDED DELEGATED AUTHORITY
The Commission believes that some of the delays on applications may be caused by an unnecessarily narrow delegation of authority from the Commission to the Division Director. Accordingly, the Commission also is proposing to amend paragraphs (a)(1), (a)(2), (e)(3) and (e)(4) of the Delegation of Authority Rule. These amendments would broaden the Division Director's delegated authority by granting delegated authority with respect to all sections of the Act, and Investment Advisers Act, except as specifically limited. [FN54] Most importantly, the amendments also would incorporate a new concept of discretion into the Division Director's decision to present applications to the Commission. Thus, the Division Director generally could issue notices and orders under all provisions of the Act and Investment Advisers Act if the matter did not appear to her to present significant issues not previously settled by the Commission, or to raise questions of fact or policy indicating that the public interest or the interest of investors warranted consideration of the matter by the Commission.
The proposed amendment to rule 30-5 also would add a new provision to the rule to delegate authority to the Division Director to declare certain applications to be abandoned under proposed subparagraph (a)(5) of rule 0-5. Finally, the proposed amendment would delegate authority to the Division Director to suspend use of the expedited review procedure under subparagraph (b)(4) of rule 0-5.
IV. COST/BENEFIT OF PROPOSED ACTIONS
Proposed amendments to rules 0-5 and 30-5 would not impose any significant burdens on investment companies. These proposed amendments would benefit investment companies by streamlining the review procedure for exemptive applications and reducing delays in obtaining exemptive orders. Comment is requested, however, on these matters and on the costs or benefits of any other aspect of the proposed actions. Commenters should submit estimates of any costs and benefits perceived, together with any supporting empirical evidence available.
V. SUMMARY OF INITIAL REGULATORY FLEXIBILITY ANALYSIS
The Commission has prepared an Initial Regulatory Flexibility Analysis in accordance with 5 U.S.C. 603 regarding amendments to rules 0-5 and 30- 5. The Analysis explains that the proposed amendments would establish an expedited review procedure for certain exemptive applications and expand the delegated authority of the Director of the Division of Investment Management. The Analysis states that the proposed amendments are intended to reduce delays in obtaining exemptive orders. It also states that while amendments to rule 30-5 would have no new reporting or recordkeeping requirements, the proposed amendment to rule 0-5 would require applicants to file with the Commission an application marked to show changes from the application relied on as precedent; a draft notice marked to show changes from the notice relied on as precedent; and a representation of counsel that the application at issue conforms to the requirements of rule 0-5(b). The Analysis states, however, that any added burden from these requirements would be minimal because many applications already include exhibits that are marked to show changes. The Commission considered a number of significant alternatives to the proposed amendments, but prefers the proposed approach because it provides investment companies with a procedure to receive exemptive orders in an expedited manner, while still permitting the Commission to discharge its responsibility to protect investors. A copy of the Initial Regulatory Flexibility Analysis may be obtained by contacting Matthew M. O'Toole, Esq. or Diane C. Blizzard, Esq., both at Mail Stop 10-4, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
VI. STATUTORY AUTHORITY
The Commission is proposing amendments to rule 0-5 pursuant to sections 6(c) and 38(a) [15 U.S.C. §§ 80a-6(c), 37(a) ] of the Act. The Commission is proposing amendments to rule 30-5, the Delegation of Authority Rule, pursuant to section 4A [15 U.S.C. § 78d-1] of the Securities Exchange Act of 1934.
List of subjects in 17 CFR Parts 200 and 270
Authority delegations (government agencies), Investment companies, Reporting and recordkeeping requirements.
TEXT OF PROPOSED RULE AMENDMENTS
For the reasons set out in the preamble, Title 17, Chapter II of the Code of Federal Regulations is proposed to be amended as follows:
Part 200--Organization; Conduct and Ethics; and Information and Requests
1. The authority citation for Part 200, Subpart A continues to read in part as follows:
Authority: 15 U.S.C. 77s, 78d-1, 78d-2, 78w, 7811(d), 79t, 77sss, 80a-37, 80b-11, unless otherwise noted.
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2. Section 200.30-5 is amended by revising paragraphs (a)(1) and (a)(2), adding paragraphs (a)(9) and (a)(10), and revising paragraphs (e)(3) and (e)(4) to read as follows:
§ 200.30-5 Delegation of Authority to Director of Division of Investment Management.
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(a) With respect to the Investment Company Act of 1940 (15 U.S.C. 80a-1, et seq.):
(1) Except as otherwise provided in this section, to issue notices, pursuant to § 270.05 of this Chapter, with respect to applications for orders under the Act and the rules and regulations promulgated thereunder, and, with respect to Section 8(f) of the Act, in cases where no application has been filed, where, upon examination, the matter does not appear to him to present significant issues not previously settled by the Commission or to raise questions of fact or policy indicating that the public interest or the interest of investors warrants consideration of the matter by the Commission.
(2) Except as otherwise provided in this section, to authorize the issuance of orders where a notice, pursuant to § 270.0-5 of this Chapter, has been issued and no request for a hearing has been received from any interested person within the period specified in the notice and it appears to him that the matter involved presents no significant issue that he believes has not previously been settled by the Commission and it does not appear to him to be necessary in the public interest or the interest of investors that the Commission consider the matter.
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(9) To declare applications to be abandoned under the Act.
(10) To suspend the operation of § 270.0-5(b) of this Chapter, and to issue written notices to applicants of such suspensions.
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(e) With respect to the Investment Advisers Act of 1940 (15 U.S.C. 80b-1, et seq.):
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(3) To issue notices, pursuant to § 275.0-5(a) of this Chapter, with respect to applications for orders under the Act and the rules and regulations promulgated thereunder, where, upon examination, the matter does not appear to him to present significant issues not previously settled by the Commission or to raise questions of fact or policy indicating that the public interest or the interest of investors warrants consideration of the matter by the Commission.
(4) To authorize the issuance of orders where a notice, pursuant to § 275.0- 5(a) of this Chapter, has been issued and no request for a hearing has been received from any interested person within the period specified by the notice and it appears to him that the matter involved presents no significant issue that he believes has not previously been settled by the Commission and it does not appear to him to be necessary in the public interest or the interest of investors that the Commission consider the matter.
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Part 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940
1. The authority citation for Part 270 continues to read, in part, as follows:
Authority: 15 U.S.C. 80a-1 et seq., 80a-37, 80a-39, unless otherwise noted;
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2. Section 270.0-5 is revised to read as follows:
§ 270.0-5 Procedure with Respect to Applications and Other Matters.
(a) General Procedures. The procedure set forth in this paragraph (a) will be followed with respect to any proceeding initiated by the filing of an application, or upon the Commission's own motion, pursuant to any section of the Act or any rule or regulation thereunder, unless in the particular case a different procedure is provided:
(1) Notice of the initiation of the proceeding will be published in the Federal Register and will indicate the earliest date upon which an order disposing of the matter may be entered. The notice will also provide that any interested party may, within the period of time specified therein, submit to the Commission in writing any facts bearing upon the desirability of a hearing on the matter and may request that a hearing be held, stating his or her reasons therefor and the nature of his or her interest in the matter.
(2) An order disposing of the matter will be issued as of course, following the expiration of the period of time referred to in paragraph (a)(1) of this section, unless the Commission thereafter orders a hearing on the matter.
(3) The Commission will order a hearing on the matter, if it appears that a hearing is necessary or appropriate in the public interest or for the protection of investors:
(i) upon the request of any interested person; or
(ii) upon its own motion.
(4) At the time of filing an application under the Act, the applicant or applicants shall pay to the Commission a total fee of $500, no part of which shall be refunded; however, this fee shall not be applicable to:
(i) any application for deregistration of an investment company pursuant to Section 8(f) of the Investment Company Act if such company has assets of less than $100,000; or
(ii) any application pursuant to Section 9(c) of such Act.
(5) The Commission may declare an application to be abandoned if the applicant does not file an amended application or otherwise respond in writing to any letter requesting clarification to or modification of the application, or request that the Division of Investment Management recommend a hearing in response to any letter stating that the Division will oppose the relief requested by the applicant, within 120 days of the mailing of such letter.
(b) Procedures for Expedited Review of Applications. Subject to the general procedures described in paragraph (a) of this section, an applicant may request expedited review of an application, other than an application filed under Section 2(a)(9), Section 3(b)(2) or Section 9(c) of the Act, provided that the application meets the requirements of paragraphs (b)(1) and (b)(2) of this section.
(1) Any application for which expedited review is requested shall seek relief that is consistent in all material respects with relief granted by the most recent order (as of thirty days preceding the filing of the application) issued on applications for such relief, and must have been issued within two years preceding the filing of the application, and must contain:
(i) a statement on the facing sheet of such application that applicant requests expedited review under the procedures set forth in this paragraph (b);
(ii) under a separate heading, a brief summary of the relief requested, together with citations to the captions and Act release number of the notice and order issued on the application submitted as precedent under this paragraph (b)(1); and
(iii) each of the conditions and material representations contained in the most recent order issued on the final version of the application submitted as precedent under this paragraph (b)(1).
(2) Any application for which expedited review is requested shall be accompanied by the following, attached as exhibits:
(i) a copy of such application marked to show all changes from the final version of the application that was granted by the most recent order submitted as precedent under paragraph (b)(1) of this section;
(ii) a draft notice marked to show all changes from the notice issued on the application that was granted by the most recent order submitted as precedent under paragraph (b)(1) of this section; and
(iii) a statement signed by counsel or, if applicant is not represented by counsel, the person executing the application, representing that such application meets each of the requirements of paragraph (b)(1) of this section and that the markings required by this paragraph (b)(2) are accurate and complete.
(3)(i) A notice as described in paragraph (a)(1) of this section will be issued by the Commission within 60 days from the filing of the application, except that:
(A) the mailing of a letter requesting clarification to or modification of the application to the applicant, or any person authorized to receive communications on behalf of the applicant, or the filing of an amended and restated application by the applicant, shall toll such 60-day period, and such 60-day period shall resume either:
(1) 15 days after the filing of an amended and restated application, marked to show all changes from the original application or most recent amendment thereto and accompanied by a statement signed by counsel or, if applicant is not represented by counsel, the person executing the amended application, representing that such markings are accurate and complete; or
(2) upon the mailing of a letter to the applicant announcing that such period has resumed; and
(B) if an amended and restated application is not filed within 30 days of the mailing of any letter requesting clarification to or modification of the application, and no letter has been mailed to the applicant announcing that the 60-day period has resumed, a new 60-day period shall commence on thedate such amended and restated application is filed, subject to paragraph (a)(5) of this section.
(ii) Unless the Commission receives a written request for a hearing, or otherwise determines to order a hearing on the matter, an order will be issued as provided by paragraph (a)(2) of this section within 30 days of the publication of the notice in the Federal Register.
(4) Notwithstanding any other provision of this section, the Commission may discontinue expedited review:
(i) of any application in order to reconsider whether to grant the relief requested or to consider the need for modifications to such application; or
(ii) of any or all applications due to constraints on the Commission's resources. The Commission shall notify affected applicants in writing or by publication in the Federal Register.
By the Commission.
Jonathan G. Katz Secretary
FN1 Division of Investment Management, SEC, Procedures for Exemptive Orders, Protecting Investors: A Half Century of Investment Company Regulation 503-525 (1992) [hereinafter the Protecting Investors report]. This report concluded a two-year examination of the regulation of investment companies and certain other pooled investment vehicles. The Exemptive Procedures chapter discusses the Division's findings and recommendations in greater detail. The Division's recommendations were based, in part, on suggestions made by commenters responding to a Commission release requesting comment on the regulation of investment companies. Request for Comment on Reform of the Regulation of Investment Companies, Investment Company Act Release No. 17534 (June 15, 1990), 55 FR 25322 [hereinafter Study Release].
FN2 Although this release generally refers to exemptive orders, the proposed rule amendments would cover all types of applications for orders under rule 0-5. 17 CFR 230.0-5. In contrast, an application for an order under § 8(f) would not receive expedited review under this proposed rule amendment because the application is not covered by rule 0-5. Applications for orders under sections 2(a)(9), 3(b)(2), and 9(c) also would not receive expedited review because these applications are inherently fact-specific. See paragraph (b) of the proposed rule.
FN3 See, e.g., § 3(b)(2) (Commission may find that issuer is "primarily engaged" in a non-investment company business even though issuer may technically meet definition of investment company); § 9(c) (Commission may permit otherwise disqualified person to serve in various capacities with respect to investment companies); § 17(b) (Commission may exempt proposed transactions from the Act's affiliated transaction prohibitions); codified at 15 U.S.C. §§ 80a-3(b)(2), -(9c), -17(b).
FN4 15 U.S.C. § 80a-6(c).
FN5 See, e.g., Investment Trusts and Investment Companies: Hearings on S. 3580 Before a Subcomm. of the Senate Comm. on Banking and Currency, 76th Cong., 3d Sess. 872 (1940) [hereinafter 1940 Senate Hearings] (Commissioner Healy, a principal author of the Act, stated that "it seemed possible and even quite probable that there might be companies--which none of us have been able to think of--that ought to be exempted."); id. at 197 (David Schenker, Chief Counsel of the Investment Trust Study, and also a principal author of the Act, stated that "the difficulty of making provision for regulating an industry which has so many variants and so many different types of activities ... is precisely [the reason that section 6(c) ] is inserted.").
FN6 The extent to which the financial services industry depends on the exemptive process is demonstrated by the number of applications filed with the Commission. For example, in fiscal year 1991, 331 applications (almost one a day) were filed under the Act.
FN7 For instance, the Commission has issued numerous orders permitting several open-end investment companies ("mutual funds") to deposit overnight cash balances into a joint trading account, the daily balance of which would be used to enter into repurchase agreements. By depositing such balances into a joint trading account, the funds are able to reduce costs and thereby increase the return they otherwise would have achieved had each fund separately made these investments. See, e.g., Short-Term Investments Co., Investment Company Act Release Nos. 18550 (Feb. 13, 1992), 57 FR 6156 (Feb. 20, 1992) (Notice of Application) and 18614 (Mar. 12, 1992), 50 SEC Docket 2196 (Mar. 24, 1992) (Order).
FN8 The Commission issued numerous orders beginning in the 1980s permitting mutual funds to impose contingent deferred sales loads ("CDSLs") and offer multiple classes of shares with different sales charges and expenses. See, e.g., Freedom Investment Trust, Investment Company Act Release Nos. 16487 (July 20, 1988), 56 FR 56260 (Notice of Application) and 16526 (Aug. 16, 1988), 41 SEC Docket 904 (Order) (CDSLs); Comstock Partners Strategy Fund, Investment Company Act Release Nos. 26672 (June 5, 1992), 57 FR 26672 (Notice of Application) and 18828 (July 1, 1992), 51 SEC Docket 1853 (Order) (multi-class fund). Money market funds could not have been offered without exemptive relief from section 2(a)(41), which requires registered investment companies to value their securities based on market values, if available, or if not, as determined in good faith by the board of directors. In a series of orders beginning in the 1970s, the Commission permitted money market funds to use alternative valuation methods, such as amortized cost or penny rounding. These orders were later codified in rule 2a-7. 17 CFR 270.2a-7. In addition, the Commission has issued over 125 orders under section 6(c) exempting structured financings backed by mortgage-related assets. See, e.g., Shearson Lehman CMO, Inc., Investment Company Act Release Nos. 15796 (June 11, 1987), 52 FR 23246 (Notice of Application) and 15852 (July 2, 1987), 38 SEC Docket 1403 (Order) (collateralized mortgage obligations). The Commission later adopted a rule excluding certain structured financings from the definition of "investment company." 17 CFR 270.3a-7.
FN9 17 CFR 270.0-2. Rule 0-2 contains various requirements for filing papers and applications with the Commission, including how filings are received and dated, what signatures and authorizations must appear, and what applications should contain.
FN10 17 CFR 270.0-4 (regarding incorporation by reference of documents filed with the Commission).
FN11 17 CFR 270.0-5(d) (filing fee requirement). Rule 0-5(a)-(c) sets forth Commission procedures for considering and disposing of applications. 17 CFR 270.0-5(a)-(c).
FN12 Commission Policy and Guidelines for Filing of Applications for Exemption, Investment Company Act Release No. 14492 (Apr. 30, 1985), 50 FR 19339 [hereinafter Release No. 14492]. The release was issued in response to increases in the early 1980s in both the number and complexity of exemptive applications.
FN13 Id. § 3. See also 17 CFR 270.0-2(e) (requiring that each application contain a brief statement of the reasons why the applicant should be entitled to the action requested). Section 34(b) makes it unlawful for any person to make any untrue or misleading statement in connection with an application or other document filed with the Commission. 15 U.S.C. § 80a-33(b).
FN14 Release No. 14492, supra note 12, § 1. An order issued for the same relief sometimes is referred to as a "precedent." Applicants are further expected to review all relevant provisions of the Act and rules thereunder, and all pertinent Commission releases, before filing an application. Id.
FN15 Initial comments on an exemptive application generally are given at one time and within 45 days of receipt, although novel or complex applications may take longer. Id. at n. 1. Generally, applicants are required to file an amendment within 60 days of receipt of comments. Id. § 8. An applicant may reactivate an inactive application at any time, however, by filing a request with the Division or by filing the required amendment. Action on a reactivated application commences from the date of receipt of the request or the amendment by the Division and does not date back to the filing of the original application. This allows a reviewer to become reacquainted with the facts and issues involved in the application. Id.
FN16 Section 40(a), codified at 15 U.S.C. § 80a-39(a). In certain circumstances, however, emergency or temporary orders may be appropriate without prior notice.
FN17 CFR 270.0-5(a). The notice briefly describes the proposal, states why the applicant believes the proposal qualifies for an exemption, summarizes the critical representations and states the conditions contained in the application. Rule 0-2(g) requires that a proposed notice be submitted as an exhibit to the application and be modified to reflect any subsequent amendments. 17 CFR 270.02(g). Division guidelines anticipate that notices of routine applications that require no amendment be published within 60 days of receipt of the application. Release No. 14492, supra note 12, at n. 1. Due to the increasing number and complexity of applications, however, these guidelines may not be followed at times.
FN18 See 17 CFR 270.0-5(a). Under the Federal Register Act, the notice period generally must last for at least 15 days after publication. 44 U.S.C. § 1508. Due to this 15 day requirement, and because notices generally are not published in the Federal Register for at least six days after the notice is issued, the notice period typically runs approximately 25 days from the date of issuance. Orders granting the requested relief generally are issued within two days of the expiration of the notice period, unless a hearing is requested by an interested party or is ordered by the Commission on its own motion. See Release No. 14492, supra note 12, at n. 1; see also rule 0-5(b)-(c).
FN19 The Delegation of Authority Rule also authorizes the Division Director to issue notices of applications (and orders) under the Investment Advisers Act of 1940 [15 U.S.C. § 80b-1, et seq.] [hereinafter Investment Advisers Act]. 17 CFR 200.30-5(e).
FN20 17 CFR 200.30-5(a)(1), (e)(3).
FN21 17 CFR 200.30-5(a)(2), (e)(4).
FN22 Investment Company Act Release No. 3645 (Mar. 8, 1963) (adopting rules delegating functions to division directors).
FN23 See, e.g., § 2(a)(9) (Commission may determine whether a person controls a company); codified at 15 U.S.C. § 80a-2(a)(9).
FN24 Rule 30-5 does not delegate to the Division Director the authority to order hearings or deny applications. If the Division, for whatever reason, decides that it is not willing to recommend that the Commission issue an order, the Division may ask that the application be withdrawn. If the applicant does not do so, the Division may recommend that the application be set down for a hearing. Release No. 14492, supra note 12, at n. 3; see Counsellors Tandem Securities Fund, Inc. and Sequoia Partners L.P., Investment Company Act Release No. 18940 (Sept. 10, 1992).
FN25 See, e.g., Letter from the Subcomm. on Investment Companies and Investment Advisers of the Committee on Federal Regulation of Securities, Section of Business Law, American Bar Association, to Jonathan G. Katz, Secretary, SEC, 7-9 (Oct. 18, 1990), File No. S7-11-90.
FN26 Precedent would be inapposite if, for example, an applicant were to use as precedent an application that has been superseded or does not correspond to the requested relief.
FN27 The Commission believes that while some Commission resources will be devoted to meeting the time periods imposed by the proposed amendments, such resources would be minimal because, among other reasons, its staff will be reviewing applications and draft notices that have been marked to show changes from previous applications and notices.
FN28 See, e.g., 17 CFR 270.0-2 (general filing requirements).
FN29 The Commission would delegate this authority to the Division. See subparagraph (a)(9) of the proposed amendment to rule 30-5.
FN30 Once a notice is issued by the Commission, the notice will be published in the Federal Register in approximately six days. The proposal merely establishes a maximum number of days in which the Commission shall act if an applicant correctly follows the established procedures. Thus, if the notice were issued in less than 60 days, the order could be issued in less than 90 days.
FN31 See paragraph (b)(3)(i)(A) of the proposed rule.
FN32 As the Division reviews the application and makes the necessary findings as required by law, the Division must consider how new facts and circumstances might dictate a modification to precedent.
FN33 In addition, counsel, or if applicant is not represented by counsel, the person executing the amended and restated application, must provide a written representation that such markings are accurate and complete. See subparagraph (b)(3)(i)(A)(1) of the proposed amendment to rule 0-5.
FN34 Such notification would be made in a comment letter addressing the amended and restated application.
FN35 In certain instances, the Division may determine that a responsive filing is unnecessary after the comment letter is sent. To address this circumstance, under paragraph (b)(3)(i)(A)(2), the Division simply could send a letter to the applicant announcing that the 60-day period has resumed.
FN36 See paragraph (b)(3)(i)(B) of the proposed rule amendments. Of course, if more than 120 days has elapsed since the mailing of the comment letter, the application already may have been declared abandoned under proposed paragraph (a)(5) of the rule. See infra section II.B.
FN37 See Letter from Federated Investors to Jonathan G. Katz, Secretary, SEC, 1-2 (Oct. 10, 1990), File No. S7-11-90; Letter from Investment Company Institute to Jonathan G. Katz, Secretary, SEC, 45-46 (Oct. 5, 1990), File No. S7-11-90; Letter from Prudential Mutual Fund Management, Inc. to Jonathan G. Katz, Secretary, SEC, 9 (Oct. 9, 1990), File No. S7-11-90.
FN38 Section 8(a) of the Securities Act provides that registration statements become effective in 20 days unless the Commission issues a stop order under either section 8(b) or 8(d). Securities Act of 1933, 15 U.S.C. § 77h(a), (b), (d). In practice, however, most registration statements contain "delaying amendment" language prescribed in rule 473, 17 CFR 230.473, and become effective only when the staff completes its review.
FN39 17 CFR 240.14a-6 (Commission must make comments within 10 days of filing proxy materials).
FN40 Securities Act of 1933 §§ 11(a), 12, 17(a); 15 U.S.C. §§ 77k(a), 771, 77q(a).
FN41 Under section 38(c) of the Act, no liability attaches "to any act done or omitted in good faith in conformity with any rule, regulation, or order of the Commission, notwithstanding that such rule, regulation, or order may, after such act or omission, be amended or rescinded or be determined by judicial or other authority to be invalid for any reason." 15 U.S.C. § 80a-37(c).
FN42 15 U.S.C. § 80a-6(c).
FN43 This 30-day period prior to filing is intended to recognize that applicants may not be able to include as precedent applications that recently have received orders. Of course, at the end of this 30-day period, relevant notices already would be approximately 60 days old.
FN44 A statement could be in the form of a checkmarked box next to a request for expedited review under rule 0-5(b) on the facing sheet of the application, similar to rule 487. 17 CFR 230.487.
FN45 The Commission recognizes that certain applications have many versions due to the filing of amendments. The Commission would require that applications seeking expedited review contain each condition and material representation of the final version of the application submitted as the most recent precedent.
FN46 This would serve as the draft notice required under rule 0-2(g). 17 CFR 270.0-2(g).
FN47 If the applicant is not represented by counsel, such statement must be signed by the person executing the application. The term "counsel" includes either outside or in-house counsel.
FN48 17 CFR 230.485(e). See Revised Procedures for Processing Post- Effective Amendments Filed by Separate Accounts of Insurance Companies, Investment Company Act Release No. 12434 (May 14, 1982), 47 FR 22356. Such post-effective amendments filed by open-end management investment companies or unit investment trusts become effective immediately under rule 485(b).
FN49 17 CFR 230.487(b)(6). See Automatic Effectiveness of Registration Statements Filed by Certain Unit Investment Trusts, Investment Company Act Release No. 12423 (May 7, 1982), 47 FR 20290. Under rule 487, which provides for expedited effectiveness of registration statements for certain series of unit investment trusts, the Commission indefinitely may suspend a registrant's eligibility for expedited treatment. The Commission has delegated that authority to the Division Director. 17 CFR 200.30-5(b-3).
FN50 Except for the requirements of rule 2(e), 17 CFR 201.2(e), counsel would not be held responsible for the accuracy or completeness of the facts in the application, nor would a legal opinion from counsel be required. This is the standard established under rule 487. See Investment Company Act Release No. 12423 (May 7, 1982), 47 FR 20290, 20293. As noted, any amendments to the application also must be accompanied by a written representation from counsel under subparagraph (b)(3)(i)(A)(1) of the proposed rule amendments.
FN51 Section 34(b) of the Act states that it shall be unlawful to make any untrue statement of a material fact in "any registration statement, application, report, account, record, or other document filed ... pursuant to this title...." 15 U.S.C. § 80a-33(b).
FN52 See supra notes 30-33 and accompanying text; paragraph (b)(3)(i)(A) of the proposed rule.
FN53 Subparagraph (a)(5) is based upon a procedure for abandoned offering
statements established under rule 264 of Regulation A. 17 CFR 230.264. FN54
See, e.g., 17 CFR 200.30-5(a)(8) (delegating authority to the Division to
issue notices with respect to applications for orders under § 9(c)).
This page was last updated on April 11, 2002.