Insights January 2002

The January 2002 issue of Fund Democracy Insights considers the SEC's proposed amendments to rule 17a-8, which exempts certain affiliated fund mergers from the affiliated transaction prohibitions in the Investment Company Act. It also analyzes, through the lens of the proposed amendments, the SEC's view of the appropriate relationship between state and federal law, the question of when shareholders should vote on fund mergers, and the what the key determinants of fund mergers mean for regulators.

Table of Contents - January 2002

The Logic and Limits of Exemptive Rulemaking . . . . 1

The Role of State Law in the Exemptive

Rulemaking Process. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

When Shareholders Should Vote . . . . . . . . . . . . . . . . 10

Conflicts and Determinants in Fund Mergers . . . . . . 13

Worth Reading on the Internet . . . . . . . . . . . . . . . . . . 16

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Links to resource materials (.pdf files require Adobe Acrobat for viewing):

The Logic and Limits of Exemptive Rulemaking

Investment Company Mergers, Investment Company Act Release No. 25259 (Nov. 8, 2001) (proposing amendments to rule 17a-8)

Investment Company Act Rule 17a-8

Investment Company Act Rule 12b-1

Investment Company Act Section 17

The Role of State Law in the Exemptive Rulemaking Process

Investment Company Act Amendments of 1995, sec. 2(a) 1st Sess. 104th Cong. (1995) (introduced by Rep. Jack Fields on Apr. 7, 1995)

Tamar Frankel, The Different Design of Corporate Governance under State Law and Federal Law and the Aftermath of the Strougo Case, 7 Investment Lawyer 3 (Feb. 2000) (arguing that federal law may need to be interpreted in light of change in state law that deems federally independent directors to be independent for purposes of state law, even if such directors have a personal in the transaction at issue, such as by courts and/or the SEC treating federally independent, personally conflicted directors' rejection of derivative suits as affiliated transactions prohibited under sections 17(a) or 17(e), or rule 17d-1) (electronic version not available)

When Shareholders Should Vote

Tom Lauricella and Dean Starkman, Longleaf Partners Liquidates Its Real-Estate Mutual Fund, Wall Street Journal (Oct. 29, 2001) (discussing liquidation of $500 million fund) (available online to wallstreetjournal.com subscribers)

Travelers Equities Fund, Inc., Investment Company Act Release Nos. 13840 (Mar. 22, 1984) (adjusting price at which merger would take place to compensate shareholders of acquired fund for capital gains taxes that might be incurred as a result of unrealized appreciation on pre-merger assets of the acquiring fund).

Greg Wolper, An Awkward Fund Merger Raises a Red Flag, morningstar.com (Dec. 4, 2001) (discussing merger of the $403 million-in-assets Credit Suisse Warburg Pincus International Equity into the $32 million-in-assets Credit Suisse Warburg Pincus Major Foreign Markets, and superior performance of smaller fund) (available free online to registered morningstar.com subscribers)

Conflicts and Determinants in Fund Mergers

Narayanan Jayaraman, et al., An Analysis of the Determinants and Shareholder Wealth Effects of Mutual Fund Mergers, J.Fin. (forthcoming) (click on Download Document button)

Worth Reading on the Internet

Paul F. Roye, Keynote Address, at the PLI Understanding Securities Products of Insurance Companies Conference (Jan. 10, 2002) (discussing all electronic variable annuity, private remedies regarding contract fees, section 11 exchanges, substitutions, redemption fees, and enforcement matters)

Paul F. Roye, Regulatory Issues Involving Exchange-Traded Funds, at the American Stock Exchange Symposium on Exchange-Traded Funds (Jan. 14, 2002) (discussing evolution of regulatory treatment of ETFs and pending exemptive applications for managed ETFs)

Harvey L. Pitt, Regulation of the Accounting Profession (Jan. 17, 2002) (outlining proposal to reform system of accounting regulation)

Mike Lange, Using the Web to Enforce Your Shareholder Rights, classaction.com (undated) (plaintiffs' lawyer's description of strategies for using the Internet to build a case if "your investment tanks")

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