On December 8, 2005, the SEC proposed amendments to the proxy rules that would provide an alternative method for issuers to furnish proxy materials to shareholders by posting them on an internet website and providing shareholders with notice of the availability of the proxy materials. Copies would also be available to shareholders on request, at no cost. The SEC proposed such amendments in an attempt to lower costs of proxy solicitations that are ultimately borne by shareholders.

In a comment letter dated February 13, 2006, the ICI noted that nearly 90 percent of fund investors have access to the internet, and urged the SEC to pursue Chairman Christopher Cox’s goal of using technology to improve disclosure. In particular, the ICI recommended that:

In a comment letter also dated February 13, 2006, the SIA stated that the current system for delivering proxies to shareholders, including those held under a “street name,” has proven to be efficient and cost-effective. The SIA explained that the current system permits shareholders, not issuers, to provide brokers standing instructions for delivery of proxy materials for all securities held in each shareholder account. The SIA argued that as proposed, the internet proxy delivery rule defaults to a notice and electronic model access model, with shareholders receiving proxy information from both issuers and intermediaries, which risks confusing shareholders and reducing shareholder participation. Finally, the SIA stated that the proposed rule would add costs to the current proxy delivery system by requiring additional processes and requiring intermediaries to build and maintain additional platforms.

Comments on the proposed rule were due to the SEC by February 13, 2006.

Letters from the ICI and SIA to the SEC, each dated February 13, 2006, to the SEC Regarding Proposed Rule on Internet Availability of Proxy Materials; BNA Securities Regulation and Law Report; Volume 38 Number 9 (February 27, 2006).

On February 24, 2006, the SEC approved a rule proposed by the NASD relating to order entry and execution practices. Proposed Rule 3380 would prohibit NASD members and associated persons from splitting any order into multiple smaller orders for execution, or splitting any execution into multiple, smaller executions for the primary purpose of maximizing a monetary or in-kind payment to the member for executing or reporting of such orders (“trade shredding”). The SEC noted that among other things, concerns have been raised about market participants increasingly engaging in the practice of trade shredding as a means to increase their share of market data revenues under joint industry plans, which may occur when the plan participant shares its plan revenues with market participants who send it orders. Specifically, the SEC explained that because the current allocation formulas for distributing plan income heavily emphasize the number of trades, regardless of size, an incentive can exist for market participants to engage in trade shredding as a means to increase their share of market data revenues. In addition to Regulation NMS, which contains amendments to current plan formulas used to allocate plan income, the SEC noted that NASD Rule 3380 should further deter the practice of trade shredding, and promote just and equitable principles of trade.

SEC Release No. 34-53371; File No. SR-NASD-2005-144 (February 24, 2006).

Lori Richards, Director of OCIE, made a speech at the Eight Annual Investment Adviser Compliance Summit held in Washington, D.C. on February 27, 2006 that discussed the fiduciary duties of investment advisers. She stated that an adviser, as a trustworthy fiduciary, has the following five major responsibilities when it comes to clients:

1. to put client’s interests first;

2. to act with utmost good faith;

3. to provide full and fair disclosure of all material facts;

4. not to mislead clients; and

5. to expose all conflicts of interest to clients.

She explained that “in thinking about compliance with your fiduciary obligation as an adviser, start by thinking about the areas where there is a conflict of interest – between one’s own interests, the interest of the firm, and/or the interests of advisory clients. These are the areas on which compliance with fiduciary obligations are likely to be most challenging.” She elaborated that conflicts of interest change as an adviser’s business changes, and addressing and disclosing conflicts of interest is an ongoing process. She stated that “importantly, at this stage, the question is not whether the adviser acts appropriately in the conflicted situations, but merely whether the conflict itself exists” and disclosing material conflicts of interest in a “full and “fair” manner to the clients.

She noted that the following areas were the most common deficiencies noted in examinations of advisers:

Inadequate Disclosure

Ms. Richards explained that approximately half the disclosure deficiencies found by OCIE relate to inaccurate, incomplete, and even misleading information in Forms ADV, and half of these included problematic disclosure of business practices and fees charged to clients. Ms. Richards explained that, regardless of whether an advisory firm uses Form ADV or other disclosure documents, advisory firms should ensure that they are in fact providing full, accurate and complete disclosure that is written in a manner that can understood by clients. Ms. Richards noted some examples of inadequate disclosure, including failure to disclose having a proprietary interest in securities recommended to clients, failure to disclose the risks of investing in private funds, failure to disclose to the directed brokerage arrangements may not achieve best execution, and failure to adequately describe soft dollar practices.

Deficiencies in Portfolio Management

Ms. Richards explained that portfolio management deficiencies include inadequate controls to ensure that investments for clients are consistent with their mandates, risk tolerance and goals, and failure to maintain required records. She noted that advisers have a duty to ensure that they are managing their clients’ money in a manner that is consistent with the clients’ directions.

Deficiencies with Respect to Advisory Employees’ Personal Trading

Ms. Richards explained that personal trading deficiencies include a lack of controls, a lack of required codes of ethics, and failure to implement stated procedures to monitor employees’ personal trades. This monitoring is necessary to prevent employees from placing their own interests above those of their clients, by for example, front-running clients’ trades, trading on non-public information, and taking investment opportunities for themselves over clients.

Deficiencies in Performance Calculations

Ms. Richards explained that performance calculation deficiencies include overstating performance results, comparing results to inappropriate indices, failing to disclose material information about the calculation of performance results, the use of prohibited testimonials, and advertising past performance in a misleading manner.

Deficiencies in Brokerage Arrangements and Execution

Ms. Richards explained that brokerage allocation problems include poor or lack of controls to ensure best execution and using clients’ money to pay for client referrals and other goods and services that benefit the adviser.

Speech by SEC Staff, Lori A. Richards: “Fiduciary Duty – Return to Principles” (February 27, 2006).

On February 28, 2006, the SEC published a proposal to amend Rule 22c-2 (the “redemption fee rule”) under the Investment Company Act of 1940 (the “1940 Act”). The redemption fee rule currently requires the boards of most open-end investment companies (“funds”) to either impose a redemption fee of up to 2% of the value of a fund’s shares redeemed within a time period (at least seven calendar days), or determine that the imposition of a redemption fee is not necessary or appropriate. Regardless of whether a board decides to impose a redemption fee, the redemption fee rule also requires a fund (or its principal underwriter) to enter into a written agreement ( a “shareholder information agreement.”) with “financial intermediaries” under which the intermediary agrees to:

• provide, promptly upon request by the fund, the taxpayer identification number of all shareholders that purchased, redeemed, transferred, or exchanged shares held through an account with the financial intermediary, and the amount and dates of these shareholder purchase, redemptions, transfers, and exchanges; and

• execute any instructions from a fund to restrict or prohibit further purchases or exchanges of fund shares by a shareholder who has been identified by the fund as having engaged in transactions in fund shares (directly or indirectly through the intermediary’s account) that violate any fund policy designed to eliminate or reduce any dilution of the value of the fund’s outstanding securities.

For purposes of the redemption fee rule, a “financial intermediary” is defined to include fund platforms, such as no transaction fee networks, retirement plan administrators, and other omnibus account providers. The SEC is proposing to amend the redemption fee rule to (1) limit the types of intermediaries with which funds must negotiate shareholder information agreements, (2) address the redemption fee rule’s application to chains of intermediaries, and (3) clarify the effect of a fund’s failure to obtain a shareholder information agreement with any of its intermediaries. The SEC noted, however, that it is not proposing uniform redemption fee standards at this time.

Small Intermediaries

The proposed revised redemption fee rule would exclude from the definition of a “financial intermediary” any intermediary that the fund treats as an individual investor for purposes of the fund’s policies intended to eliminate or reduce dilution of the value of fund shares. The SEC explained that these policies include restrictions on frequent purchases and redemptions, as well as a fund’s redemption fee program. As a result, if a fund, for example, applies a redemption fee or exchange limits to transactions by a retirement plan (an intermediary) rather than to the purchases and redemptions of the employees in the plan, then the retirement plan would not be considered a “financial intermediary” under the redemption fee rule, and the fund would not be required to enter into a written agreement with that plan. The SEC noted that when a fund places restrictions on transactions at the intermediary level (rather than the individual shareholder level), the fund is unlikely to need data about frequent trading by individual shareholders because abusive short-term trading by the shareholders holding through the omnibus account would ordinarily trigger application of those policies to the intermediary’s trades. Therefore, transparency regarding underlying shareholder transactions executed through these accounts is unnecessary to achieve the goals of the redemption fee rule.

The SEC is requesting comments on whether additional entities should be excluded from or included in the definition of a “financial intermediary” and whether it is practical to have funds make the determination of which entities are “financial intermediaries.”

Intermediary Chains

The SEC proposed revised redemption fee rule would require a fund to enter into a shareholder information agreement only with those financial intermediaries that submit orders to purchase or redeem shares directly to the fund, its principal underwriter or transfer agent, or a registered clearing agency (“first-tier intermediaries”). As proposed, the shareholder information agreement must obligate the first-tier intermediary to provide, promptly upon the fund’s request, identification and transaction information for any shareholder accounts held directly with the first-tier intermediary. If the first-tier intermediary maintains a shareholder account for another financial intermediary, the shareholder information agreement must obligate the first-tier intermediary to use its best efforts to identify, upon request by the fund, those accountholders who are themselves intermediaries, and obtain and forward the underlying shareholder identity and transaction information from those intermediaries further down the chain (i.e., second- or third-tier intermediaries, or “indirect intermediaries”). If the intermediary that holds an account with a first-tier intermediary refuses to honor the request, the shareholder information agreement must obligate the first-tier intermediary to prohibit, upon the fund’s request, an indirect intermediary from purchasing additional shares of the fund through the first-tier intermediary.

The SEC noted that this proposal relies upon the initiative of the fund to determine whether to request that first-tier intermediaries identify and collect information from specific indirect intermediaries, and to request that an indirect intermediary be restricted from further trading in fund shares due to its failure to provide requested information about shareholder transactions. These proposed amendments, however, do not require first-tier intermediaries to enter into formalized shareholder information agreements with indirect intermediaries, although they would not prohibit any such agreements. The SEC noted that it expects first-tier intermediaries to use a variety of arrangements with indirect intermediaries to ensure that that requested information is provided to the fund, ranging from formalized contracts to informal communications in response to a specific fund inquiry.

The SEC is requesting comments on whether this proposal would result in funds receiving enough information from intermediaries to effectively address inappropriate short-term trading, whether the shareholder information agreement should be subject to any other requirements, whether first-tier intermediaries should be required to enter into explicit agreements with all of their indirect intermediaries, or whether there is another approach to address the chain of intermediaries issues.

Consequences of Failing to Enter an Agreement

The SEC is proposing to revise the redemption fee rule to provide that, if a fund does not have an agreement with a particular intermediary, the fund must thereafter prohibit the intermediary from purchasing, on behalf of itself or other persons, securities issued by the fund. The SEC noted that the purpose of this proposal is to focus the remedy (prohibition of future purchases) on the particular intermediary that fails to execute a shareholder information agreement with the fund.

The SEC is requesting comments on whether this proposal should preclude an intermediary without a shareholder information agreement from redeeming purchased shares within seven days rather than restricting further purchases.

Current Industry Efforts Regarding Shareholder Information

On February 3, 2006, ICI requested an interpretation from Treasury on the Correspondent Account Rule. The Correspondent Account Rule requires every mutual fund to establish a due diligence program reasonably designed to enable it to detect and report money laundering activity involving any correspondent account established, maintained, administered, or managed by the mutual fund for a foreign financial institution. The ICI asked for Treasury to concur with its view that, with respect to accounts opened by U.S. financial institutions with mutual funds for the purpose of effecting transactions in fund shares that are cleared and settled through the National Securities Clearing Corporation’s (“NSCC”) Fund/SERV system (“Fund/SERV accounts”), the Correspondent Account Rule does not apply to the Fund/SERV account established by the mutual fund, but rather applies to the underlying customer account held by the NSCC member firm, even if the firm’s underlying customer is a foreign financial institution. In other words, the ICI believes that each NSCC member firm should be the entity responsible for collecting information about its underlying customers to determine whether any of them is a foreign financial institution in order to fulfill the Correspondent Account Rule requirements, rather than requiring mutual funds to identify and verify the NSCC member firm’s customers. The ICI explained that the Fund/SERV accounts are established, maintained, administered, or managed by the mutual fund for the NSCC member firm, and not for the NSCC firm’s underlying customers.

The ICI noted the following characteristics that apply to all mutual fund accounts established through Fund/SERV:

(i) Access to the Fund/SERV system is restricted to NSCC member firms, which is limited to financial institutions domiciled or regulated in the US and other firms approved by the NSCC Board of Directors.

(ii) Mutual funds are not required to verify the identity of customers of an NSCC member firm that invests in mutual funds through the firm via Fund/SERV.

(iii) In August 2003, the staff of Treasury and the SEC issued a joint statement that if an intermediary opens an account with a mutual fund through the Fund/SERV system, the intermediary would be the person that opens the new account, and the intermediary’s customers would not be customers of the mutual fund. As such, the mutual fund has no knowledge of the source of the investor’s funds.

The ICI stated that an interpretation that the Correspondent Account Rule applies to mutual fund accounts, and not the NSCC member firm, in the Fund/SERV context will effectively reverse the staff’s position on the customer identification program rule (“CIP Rule”), because it would require mutual funds to treat certain persons as customers for correspondent account purposes that are not treated as customers for CIP purposes. The ICI argued that this will force mutual funds to collect identifying information that they do not currently have on all NSCC member firms’ customers to determine whether any of those customers are foreign financial institutions, which will result in unnecessary changes, expenses, and order processing delays.

The ICI’s letter requested a response from Treasury prior to the Correspondent Account Rule’s implementation deadline for new accounts of April 4, 2006.

ICI Letter dated February 3, 2006 to Mr. William Langford, Associate Director, Regulatory Policy and Programs Division, Financial Crimes Enforcement Network, U.S. Department of Treasury.

The U.S. District Court for the Central District of California imposed a preliminary injunction against three hedge funds and their managers (the defendants”) to prohibit violations of Section 17(a) of the Securities Act of 1933 (the “1933 Act”), Section 10(b) of the 1934 Act and Rule 10b-5 thereunder, and Sections 5(a) and 5(c) of the 1933 Act. In December 2005, the SEC filed suit against the defendants, alleging that they were engaged in a Ponzi scheme. The SEC asserted that the defendants misrepresented and concealed material facts to lure investors to the hedge funds, engaged in nationwide cold calling of potential investors which targeted the elderly, and used new investors’ money to pay earlier investors to pay the hedge funds’ promised 1-3% monthly returns.

While the Court disagreed with the SEC that the defendants were operating a traditional Ponzi scheme, the Court granted the SEC’s preliminary injunction based on the defendant’s allegedly misleading disclosures about the hedge funds’ profitability. In addition, the Court concluded that that the defendants’ sales activities for its hedge funds should not be classified as a private offering under Section 4(2) of the 1933 Act, noting that the defendants could not specify the number of potential investors that had been contacted. The Court explained that “without knowing the identity of the offerees, it is impossible to make individual assessments as to the offerees’ levels of sophistication and the manner in which they were contacted.”

The Court also rejected the defendants’ argument that their offering qualified for the safe harbor under Rule 506 of Regulation D. Noting that one of the conditions of a Rule 506 offering is that the issuer may not make a general solicitation, the Court explained that cold calling potential hedge fund investors to establish a relationship, and then waiting one week to follow up on the initial call does not constitute a pre-existing relationship and “is likely a form of general solicitation” which falls outside of the Rule 506 safe harbor. In addition, the Court noted that the defendants submitted no evidence of any completed questionnaires to support that there were no more than 35 non-accredited investors. The Court concluded that, absent any evidence to support their claims and to refute the evidence of general solicitations, the defendants likely were not exempt from the registration requirements under Sections 5(a) and 5(c) of the 1933 Act.

Securities and Exchange Commission v. Credit First Fund LP, etc., et al., Case No. 05-8741 DSF (PJWx), (U.S. District Courts, C.D. Cal.) (February 13, 2006).

The SEC settled an action in U.S. District Court for the Southern District of New York which alleged that a portfolio manager violated the federal securities laws by fraudulently overstating to her employer, a bank, the value of its collateralized mortgage obligation (“CMO”) portfolio. The SEC’s complaint alleged that the portfolio manager conspired with sales representatives from registered brokerage firms with whom she had relationships with to inflate the internally recorded value of the CMO portfolio. The bank’s formal CMO valuation process involved seeking independent valuations of the securities in its CMO portfolio at the end of each month and averaging the pricing information of each security from at least three different sources. In connection with that process, and before the valuations were reported to the bank, the SEC complaint alleged that the portfolio manager would instruct the salesmen from these pricing sources to provide inflated prices for each security reported on by their respective firms to make the CMO portfolio appear more profitable. The SEC complaint further alleged that, on the strength of the purported profitability, the portfolio manager was allowed additional capital to make further securities purchases and would have increased her bonus if her misconduct had not been discovered before her annual performance review. To settle the SEC’s fraud charges, the portfolio manager agreed to pay a $15,000 civil penalty, and consented to the entry of a judgment enjoining her from violations of Section 10(b) of the Securities Exchange Act of 1934 (“1934 Act”) and Rule 10b-5 thereunder.

Securities and Exchange Commission v. Lori G. Addison, Civil Action No. 06 Civ. 1101 (PAC); Litigation Release No. 19564 (February 14, 2006).

The SEC staff recently provided guidance concerning the inclusion of third party ratings in investment advisers’ advertisements. The SEC has historically taken the position that a third-party rating that relies primarily on client evaluations of an investment adviser would be a testimonial for purposes of the prohibitions of Section 206(4) and Rule 206(4)-1(a)(1) under the Advisers Act. The staff noted, however, that third-party ratings that rely, in part, on client evaluations are not necessarily testimonials and the appropriate characterization of the third-party rating depends on all the facts and circumstances relating to the rating.

The “testimonial” is not defined in Rule 206(4)-1, but the SEC staff has consistently interpreted the term to include a statement of a client’s experience with, or endorsement of, an investment adviser. The staff explained that a third-party rating would be a testimonial if it is an implicit statement of a client’s experience with an investment adviser. The staff explained that if a third party consults an adviser’s clients about their evaluation of the adviser when formulating the rating, but client responses, relative to other criteria, are an insignificant factor in the rating’s formulation, the rating would not be a testimonial.

The staff stated that an investment adviser, in considering whether to use a third-party rating in an advertisement, should determine whether the third-party rating is a testimonial by evaluating, among other things, (1) the criteria used by the third party when formulating the rating, and (2) the significance to the rating’s formulation of the criteria relating to client evaluations of the investment adviser. The staff explained that the investment adviser might find it necessary to contact the third party to obtain the information necessary to make a proper determination. The staff noted also noted that, whether or not the third party rating constitutes a testimonial, a third party rating included in an advertisement would be subject to the anti-fraud provisions of the Advisers Act.

SEC staff Letter to Investment Adviser Association (December 2, 2005)

The staff of the SEC’s Division of Investment Management published a no-action letter to the Securities Industry Association in which it provides guidance on the implementation and operation of the portion of Rule 202(a)(11)-1 (the “Rule”) relating to the financial planning activities of broker-dealers. The Rule excepts from the definition of an “investment adviser” certain broker-dealers that provide non-discretionary advice, solely incidental to their brokerage services, regardless of the form of compensation they receive.

The Securities Industry Association’s questions involved the areas of: (1) advertisements; (2) financial planning and brokerage services; (3) dual capacities for dually registered firms; and (4) use of certain educational or specialized training credentials.

Advertisements In response to a question on whether broker-dealers must register as investment advisers if they use advertisements that reference the availability of a broad range of investment advisory and financial planning services, the staff stated “holding itself out” as providing advisory services does not by itself require a broker-dealer to register under the Advisers Act. The staff elaborated that under the Rule, a broker-dealer is an investment adviser subject to the Advisers Act if it portrays itself, in advertisements or otherwise, to the public (i.e., holds itself out) as a financial planner and also provides investment advice as part of a financial plan or in connection with providing financial planning services. Whether a broker-dealer acts as an investment adviser to any given customer under the Rule depends in part on the nature of the services actually provided to the customer. Under the Rule, unless a broker-dealer provides advice to that customer as part of a financial plan or in connection with providing financial planning services, the broker-dealer will not be deemed to be engaging in advisory activities with respect to that customer that are subject to the Advisers Act.

Financial Planning and Brokerage Activities In response to a question on what determines when a broker-dealer is providing a “financial plan” or “financial planning services” to a customer within the Advisers Act, as opposed to services provided as part of a brokerage relationship subject to the 1934 Act and self-regulatory organization rules, the staff stated that whether a particular document or financial tool is a “financial plan” would turn on whether the document or tool is used in the context of delivering advice that bears the characteristics of a financial plan. The staff elaborated that a “financial plan” generally seeks to address a wide spectrum of a client’s long-term financial needs, and can include recommendations about insurance, savings, tax and estate planning, and investments. The staff contrasted these items with a financial tool that is used to provide guidance to a customer with respect to a particular transaction or allocation of customer funds and securities based upon the long-term needs of a client, but that is not applied in the context of the more comprehensive plan described above, would be viewed as part of a broker-dealer’s brokerage relationship with its customer. The staff noted that the fact that a broker-dealer discloses to the customer that the financial tool is a brokerage service and not a financial plan could be helpful in determining whether the broker-dealer is providing brokerage services. The staff also noted that how a reasonable investor would perceive the services would also be an important consideration.

Dual Capacities for Dually Registered Firms In response to a question on whether a firm that is dually registered as a broker-dealer and an investment adviser under the Advisers Act may act as an investment adviser in providing financial planning services to a customer, as well as a broker-dealer in providing brokerage services to the same customer, the staff stated that advisers have a fiduciary duty to its clients and prospective clients under Section 206 of the Advisers Act. The staff stated that whether a client relationship exists will turn on the terms of the contract the client has entered into with the broker-dealer/investment adviser, as well as the course of dealing between the parties and the reasonable expectations of the customer/client that arise from the course of dealing.

The staff noted that the Advisers Act carves out an exception specifically designed to accommodate dually registered broker-dealers. Under Section 206(3), the limitations on principal transactions do not apply if the broker-dealer/investment adviser is not acting in an advisory capacity with respect to a transaction. The staff also noted that when a client initiates a transaction with its broker-dealer/investment adviser from whom the client has not received advice to buy or sell the security, the limitations of Section 206(3) do not apply. The staff elaborated that when a broker-dealer provides generalized, non-specific investment advice to a customer (e.g., “invest a portion of your account in equity securities”), the same broker-dealer subsequently effecting the transactions in specific equity securities at the customer’s direction would not be acting in an advisory capacity with respect to the subsequent transactions. Finally, the staff noted that, as a general matter, a broker-dealer/investment adviser may discontinue its advisory relationship with its client and then assume a brokerage relationship. However, the staff emphasized that a mere statement of a change in the capacity in which the firm is acting would be inadequate ordinarily to effectively alter the fundamental nature of the relationship.

Use of Certain Educational or Specialized Training Credentials In response to a question on whether a broker-dealer’s use of an educational or specialized training credential or degree, such as “Certified Financial Planner” on his business card or letterhead constitute “holding out” for the purposes of the Rule, the staff stated yes; however, the staff indicated that a broker-dealer would not lose the availability of the “broker-dealer exception” of Section 202(a)(11)(C), and therefore would not be required to register as an investment adviser, unless one or more of its representatives both (i) provides advice as part of a financial plan or in connection with financial planning services, and (ii) includes such credential on his business card or letterhead. The staff noted that if the broker-dealer is dually registered, the use of these business cards of letterhead alone would not, however, require the broker-dealer/adviser to treat as advisory clients each customer to whom a card or letterhead is delivered unless the broker-dealer/adviser also provides investment advice to that customer as part of a financial plan or in connection with financial planning services.

SEC No-Action Letter, Securities Industry Association (December 16, 2005).

The SEC recently proposed rule and form amendments that would, among other things, amend disclosure requirements for (1) executive and director compensation, and (2) related party transactions, director independence and other corporate governance matters. The proposed amendments would affect disclosure in proxy statements, annual reports and registration statements. The amendments would require, among other things, reporting of certain perquisites and other personal benefits that were not previously required to be reported. The proposal would also require most of the required disclosure to be provided in plain English.

Registered Investment Companies

Certain elements of the proposed amendments that relate specifically to registered investment companies, including the following:

• Relocation plans would no longer be excluded from “portfolio manager compensation” required to be disclosed on registration statements of open end and closed end investment companies. In addition, the SEC is seeking comment on whether the amendments should require reporting of other personal benefits, such as group life, health, hospitalization, medical reimbursement, and pension and retirement plans and arrangements should also be included in compensation that is disclosed for portfolio managers of investment companies.
• Information that is currently required to be provided by registered investment companies under Item 7 of Schedule 14A would instead be required by Item 22(b). The requirements of Item 7 that are currently applicable to registered investment companies regarding the nominating and audit committees, board meetings, the nominating process, and shareholder communications generally would be incorporated in Item 22(b) by cross-references to the appropriate paragraphs of proposed Item 407 of Regulation S-K. The substances of these requirements would not be altered. In addition, the proposed revisions to Item 22(b) would directly incorporate disclosure relating to the independence of members of the nominating and audit committees that are similar to those contained in proposed Item 407(a) of Regulation S-K and currently contained in Item 7.
• The threshold for disclosure of certain interests, transactions, and relationships of each director or nominee for election as director who is not or would not be an “interested person” of an investment company within the meaning of Section 2(a)(19) of the Investment Company Act of 1940 (the “1940 Act”) would be raised from $60,000 to $120,000. This disclosure is required in investment company proxy statements, information statements and registration statements. The increase in the disclosure threshold would correspond to the proposal to increase the disclosure threshold for operating companies in Item 404 of Regulation S-K.
• The same executive compensation disclosure requirements that are being proposing for operating companies would also apply to business development companies. Currently, business development companies are required to provide executive compensation disclosure based, in part, on the requirements that apply to operating companies and, in part, on the requirements that apply to investment companies registered under the Investment Company Act of 1940. Moreover, the executive compensation disclosure requirements for business development companies are not uniform in Securities Act registration statements, proxy and information statements, and Form 10-K.

Timing of Proposed Amendments

The SEC published a final rule release to adopt revisions to the EDGAR Filer Manual. The revisions are being made to primarily to support the amended rules and forms adopted by the SEC that require certain open-end management investment companies and insurance company separate accounts to identify in their EDGAR submissions information relating to their investment company type, series and classes (or contracts, in the case of separate accounts), and ticker symbols. Beginning February 6, 2006, EDGAR filers need to include information on existing and new series and classes (or contracts) on behalf of which a filing is made. They also need to include information on series and classes (contracts) involved in fund mergers. EDGAR filers were required to enter information on existing series and classes (contracts) in existence prior to February 6, 2006 via the www.edgarfiling.sec.gov website to obtain identifier prior to that date. All investment company EDGAR filers should download and use the new EDGARLink software and submission templates to ensure that submissions will be processed successfully. Previous versions of the software and templates will not work properly for submissions that require series and class (contract) data. Electronic copies of the updated EDGAR Filer Manual are available on the SEC’s website: www.sec.gove/info/edgar.shtml.

SEC Final Rule Release Nos. 33-8656; 34-53186; 35-28081; 39-2441; IC-27219 (January 27, 2006).