President Clinton signed the omnibus appropriations bill on November 30, 1999 which decreases the fee rate on filings made pursuant to Section 6(b) of the Securities Act of 1933 (the "1933 Act") to $264 per $1,000,000. The amount of the fee can be determined by multiplying the aggregate offering amount by .000264. The SEC is currently examining how to make refunds for filings accepted on November 29 after the time of the signing. SEC Press Release 99-161 (November 30, 1999).

President Clinton signed the Financial Services Reform Bill (the Gramm-Leach-Bliley Act) into law on November 12, 1999. The bill repeals the Glass-Steagall Act's restrictions on affiliations between banks and securities firms and amends the Bank Holding Company Act to permit affiliations among financial services companies, including banks, registered investment companies, securities firms and insurance companies. The bill also imposes privacy requirements and disclosure obligations on all financial services firms even if they are not affiliated with a bank or thrift. (See the Industry News Summary for the Week of 11/1/99 - 11/8/99 for summary of the provisions of the bill.) Federal Banking Law Report No. 1833, November 12, 1999.

On November 17, 1999, the CFTC approved two actions aimed at advancing its ongoing program of regulatory reform. First, the CFTC approved final rules that would permit futures exchanges to list new contracts for trading and subsequently to amend those contracts pursuant to exchange certification without prior CFTC approval. This new listing procedure represents an alternative to the regular or fast-track procedures that are currently in place. Second, the CFTC will be seeking public comment on a proposal to revise CFTC Regulation 1.41 to allow futures exchanges to adopt new rules and rule amendments without prior CFTC approval. Commenting on the CFTC actions, CFTC Chairman William J. Rainer noted that the goal of the reforms is to allow the exchanges to operate in a market environment free from unnecessary government intervention. He further commented that he believes that the CFTC will continue to assure market integrity through its existing surveillance and enforcement authority. The final rules will be effective 60 days after they are published in the Federal Register. The CFTC has provided a 60-day comment period on the proposed revisions to Regulation 1.41. CFTC Release No. 4339-99 (November 17, 1999).

SEC Approves Amendments to NASD Sales Charge Rule: The SEC has approved amendments to NASD Conduct Rule 2830 concerning mutual fund sales charges. The rule amendments revise Rule 2830 to: (1) impose maximum aggregate sales charge limits on fund of funds; (2) permit mutual funds to charge installment loads; (3) prohibit loads on reinvested dividends; (4) impose redemption order requirements for shares subject to contingent deferred sales charges ("CDSC"); and (5) eliminate duplicative prospectus disclosure.

Sales Charge Limits for Fund of Funds: Under the amendment, the asset-based sales charges of an acquiring fund and an underlying fund could not, in the aggregate, exceed .75% of average net assets. In addition, any service fee charged by the acquiring fund and the underlying fund could not, in the aggregate, exceed .25% of average net assets. The acquiring and underlying funds in a fund-of-funds structure remain individually subject to the cumulative limits under Rule 2830. The amended rule modifies the definition of "fund-of-funds" to include only investment companies that acquire securities issued by other investment companies in greater amounts than permitted under Section 12(d)(1)(A) of the Investment Company Act of 1940, as amended (the "1940 Act").

Deferred Sales Charges: The amendments conform the definition of "deferred sales charge" in Rule 2830 to the definition in Rule 6c-10 under the 1940 Act. Accordingly, a fund with an installment load will be subject to the NASD sales charge limits and to the prohibition on describing a fund as "no load" if it has a deferred sales charge.

Loads on Reinvested Dividends: The amendments prohibit the imposition of front-end or deferred sales charges on reinvested dividends. NASD Regulation responded to numerous comments objecting to this prohibition, noting that it continues to believe that loads on reinvested dividends constitute excess compensation, regardless of the type of investment company that imposes them, including unit investment trusts ("UITs"). NASD Regulation also believes that the proposed rule is not inconsistent with exemptive relief granted to UITs under the 1940 Act because that relief does not refer to any dividend reinvestment program and the exemptive orders provide no relief from the application of the NASD Conduct Rules. The prohibition of sales charges on reinvested dividends will not apply until April 1, 2000.

Contingent Deferred Sales Load Calculations: The amendments reinstated the requirement previously imposed by Rule 6c-10 concerning the order in which fund shares subject to a contingent deferred sales load must be redeemed when an investor redeems some, but not all, of his or her fund shares. Under the amendment, a first-in and first-out redemption order requirement will apply to partial redemptions, unless another redemption order would result in a redeeming shareholder paying a lower CDSC.

Prospectus Disclosure: The amendments eliminate a formal requirement that a fund with an asset-based sales charge must disclose in its prospectus that long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charges permitted by Rule 2830. NASD Regulation noted that this disclosure is already required by Form N-1A. SEC Release No. 34-42043, October 20, 1999.

Charles Schwab & Co., Inc. obtained no-action relief from the staff of the SEC allowing it to offer internet road shows to customers who meet certain financial criteria and to independent investment advisers that have accounts with Schwab. In its letter to the SEC, Schwab argued that "it is no longer defensible to maintain an environment in which all potential purchasers in a public offering other than retail investors have the opportunity to see and hear officers of the issuer discuss the company." Instead, Schwab stated that it plans to make road shows more widely available to investors who are considering participating in a given offering, "regardless of their individual size or market power." Schwab would not be making the road shows generally available and may require passwords to restrict access to accounts for which participation would be deemed appropriate.
Schwab stated that it is considering offering the road shows through arrangements with third-party vendors who have already adopted procedural safeguards that have met with staff approval under existing no-action letters. Schwab noted that it would abide by those same safeguards except for the limits on persons entitled to view the presentation. Accordingly, Schwab concluded that its proposed manner of distribution is fully consistent with prior no-action requests, but available to more eligible investors.

The staff, in granting Schwab's no-action request, noted that Schwab is responsible as a 1933 Act seller for the content of each road show it transmits to eligible offerees regardless of whether another broker-dealer participates in the distribution of the securities or the issuers are primarily responsible for the content of the road show. The staff also limited its no-action position to registered initial public offerings underwritten on a firm-commitment basis in which Schwab is a member of the underwriting syndicate or selling group. The staff noted that any offers to buy that were solicited pursuant to a road show cannot be accepted until after pricing if Rule 430A procedures are used. Any indications of interest would not constitute offers to buy that are capable of acceptance.

The staff also commented that it is considering various issues relating to the use of electronic communications in capital raising transactions, including the appropriate regulatory treatment of electronic road shows. Accordingly, the staff noted that its no-action position is subject to change by the SEC. The staff did not address the issue of whether internet-based or other electronic communication should be treated as "written" or "oral" for purposes of regulation under the 1933 Act. The staff explained that its position rests on policy considerations alone, including the SEC's goal of reducing selective disclosure of offering-related information that is typically provided during road shows. Charles Schwab Co., Inc., SEC No-Action Letter (November 15, 1999).

The IRS has issued final regulations that contain revised tax return filing requirements for both domestic and foreign partnerships. These regulations change some of the rules that have applied to foreign partnerships, including certain offshore funds. In general, foreign partnerships are required under the regulations to file U.S. federal income tax returns if they earn either income that is effectively connected with a U.S. trade or business or income from U.S. sources. Certain exceptions are provided for foreign partnerships with no effectively connected income and either (1) no U.S. partners or (2) a less than one percent interest held by U.S. partners, along with $20,000 or less of U.S.-source income. The regulations also provide details regarding what must be reported by foreign partnerships that are required to file returns. The regulations are generally effective for partnership taxable years beginning after 1999, except that certain provisions affecting foreign partnerships will apply to taxable years beginning after 2000.

The NASD has submitted a proposal to the SEC seeking permission to implement a new trade reporting and transaction dissemination facility for corporate bonds. The system, created in response to SEC Chairman Levitt's call for increased bond market transparency, is designed to enhance the price transparency and surveillance of the U.S. corporate debt market.

If the system is implemented, NASD members will begin reporting in the spring of 2000 all over-the-counter transactions involving eligible corporate bonds. Initially, transaction information will be sent to a reporting system within one hour of execution. Six months after the facility is introduced, the time frame will be compressed and the NASD will commence dissemination of transaction information to the public. Trade data will be entered into the Trade Reporting and Comparison Entry Service ("TRACE"), a multi-functional service designed to facilitate the reporting and comparison of fixed-income trades. TRACE will operate from 8:00 a.m. to 6:30 p.m. eastern time, and will replace the existing Fixed Income Pricing System which collects trade reports on eligible high-yield securities.

The securities subject to reporting on TRACE will be (i) U.S. dollar denominated debt securities issued by U.S. and private foreign corporations that are registered with the SEC and eligible for book-entry services at the Depository Trust Company and (ii) Rule 144A debt securities (information about which will not be disseminated). This includes both high-yield and convertible debt securities. Securities not subject to reporting include sovereign and development bank debt, mortgage-backed and asset-backed securities, collateralized mortgage obligations and money market instruments. NASD Press Release (November 3, 1999).

The SEC has extended a continuing resolution through Wednesday, November 17, 1999. Under the continuing resolution, the fee rate on filings made pursuant to Section 6(b) of the 1933 Act will remain at the current rate of $278 per $1,000,000. When an appropriations bill is enacted, the fee rate will decrease to $264 per $1,000,000. SEC Press Release (November 12, 1999).

A law firm asked the Division of Corporate Finance of the SEC to confirm its view that the mandatory exchange feature of certain securities would not prevent the securities from being eligible for an exemption under Rule 144A from the registration requirements of the Securities Act of 1993 (the "1933 Act"). The law firm described a scenario in which an issuer will issue preferred shares of unsecured debt (the "issuer securities") in reliance on Rule 144A that will be mandatorily exchanged for a number of common shares of another company that is not an affiliate of the issuer or, at the issuer's option, cash in an amount equal to the value of the common shares. The common shares to be received by the issuer will be freely transferable without 1933 Act registration at the time the issuer securities are sold. The common shares will either not constitute restricted securities as defined in Rule 144 or will be restricted securities that may be sold without registration pursuant to Rule 144(k).

Under these circumstances, the staff of the SEC stated that the securities received in the exchange may be resold by the issuer of the issuer securities in reliance on Section 4(1) of the 1933 Act either because the securities of the unrelated person are not restricted securities within the meaning of Rule 144(a)(3) or because the securities may be sold in reliance on Rule 144(k). Accordingly, the staff commented that the issuer securities would be eligible for resale under Rule 144A. The staff expressed no view on the application of the conversion premium test of Rule 144A(d)(3) to securities of this description. Cravath, Swaine & Moore, SEC No Action Letter (October 25, 1999)

Speaking to the Securities Industry Association's annual meeting on November 4, 1999, SEC Chairman Arthur Levitt commented that he is concerned that broker-dealers who fail to review carefully their order routing arrangements are neglecting their duty of best execution. Specifically, he noted that best execution may be compromised by payment for order flow, internalization (where the order is filled out of the broker's own inventory) and certain other practices that present conflicts between the interests of the brokers and their customers. Mr. Levitt also stated that the move to decimalization next year may create even more challenges in meeting the obligation to seek best execution.

Chairman Levitt acknowledged that payment for order flow is acceptable as long as the quality of execution is not sacrificed. He noted that some firms have told the SEC that execution speed is the most important factor in their routing decisions. Mr. Levitt commented that some of these firms have not conducted a regular and rigorous review of execution alternatives to determine whether other alternatives offer faster executions, or executions that are just as fast but with a greater likelihood for price improvement. Also, these firms offer no support for the belief that their customers prefer speedy execution above all else. He commented that the SEC review of broker-dealers' execution practices did find encouraging practices. For example, some firms ask the different market centers for execution quality statistics, including speed of execution and percentage of price improvement, and other firms route "test trades" to gather the same data.

The Chairman also commented on the SEC's decision in 1995 to require disclosure of payment for order flow rather than prohibit payment for order flow. Upon request, an investor has a right to know how his broker is typically paid for executing a trade, whether his broker receives a payment for sending an order to a certain exchange, and if his broker has a profit sharing arrangement with a market center. The Chairman stressed that he has not found today's payment for order flow disclosure to be helpful for investors. The typical disclosure does nothing more than list the variety of compensation arrangements that may result when a broker is paid for customer orders but does not give investors meaningful information.

Chairman Levitt also sounded a note of caution about troubling signals coming from the options market, commenting that some seem intent on introducing externalities such as payment for order flow and internalization into the options markets. He commented that increased competition in the options markets has made the duty of best execution even more important and that these exchanges must include linkages that facilitate best execution as their top priority. He also stated that swift and certain progress towards the establishment of trade rules preventing inferior executions and the prompt display of limit orders are immediate necessities. Chairman Levitt noted that market centers, including Electronic Communications Networks (ECNs), also have a responsibility to monitor their price setting functions. He commented that the NYSE has been and remains a standard setter in the area of price improvement and that Nasdaq is exploring promising ways to promote greater interaction among customer orders, but that there is continued room for improvement. He commented that a unified opening on Nasdaq is both possible and long overdue.

The Chairman concluded by commenting that the SEC is not preparing new rules to address these issues. He stated that he does not want the financial markets to enter the new millennium handcuffed by potentially cumbersome and perhaps even outdated restrictions. However, future uncertainties should not put the duty of best execution on hold. He urged marked participants to think creatively about ways to more fully realize the promise of best execution. SEC Press Release 99-146 (November 4, 1999).

Speaking at the Investment Company Institute's ("ICI") 1999 Investment Company Directors conference on October 28, 1999, Paul Roye, Director of the SEC's Division of Investment Management, discussed the SEC's recent rule proposals to enhance the effectiveness of independent fund directors. Mr. Roye applauded the effort of the ICI's Advisory Group on Best Practices for Fund Directors. He urged mutual fund boards to give serious consideration to implementing the best practices recommended by the Advisory Group. He added that while the best practices represent a high water mark for fund governance in many cases, they are only recommendations. Accordingly, the SEC proposed its own rules, which are intended to serve as a baseline standard which all fund boards should meet.

Independent Legal Counsel. Mr. Roye noted that the proposal that any person who acts as counsel to the fund's independent directors be an "independent legal counsel" was debated extensively. Because of the complex regulatory scheme governing funds, Mr. Roye commented that he believes that independent directors will be well-served by the assistance of legal counsel who is truly independent of fund management. He added that the independent directors will feel more secure in their actions if they have their own counsel whose advice is not influenced by the relationship of fund management. Mr. Roye stressed, however, that the SEC is not requiring that independent directors retain independent legal counsel. He noted that independent directors can determine for themselves whether the assistance of independent counsel would benefit them in performing their duties.

Qualifications as an Independent Director. Mr. Roye commented that the SEC's proposal also contains rules and rule amendments designed to prevent qualified individuals from being unnecessarily disqualified from serving as independent directors. The SEC proposes to amend a rule that permits directors to be considered independent directors even if they are affiliated with a broker-dealer. Roye noted that the Financial Services Reform legislation repealing the Glass-Steagall Act amends the definition of "interested person" to eliminate direct references to being affiliated with a broker-dealer. A person would only be "interested" if affiliated with an entity that effects portfolio transactions for, engages in principal transactions with, or distributes shares of, the funds in a fund complex. The Financial Services Reform legislation would also deem a person to be interested if the person is affiliated with an entity that has loaned money or other property to the funds in the complex.

Staff Interpretative Positions. Mr. Roye also reviewed the staff interpretative positions that were issued simultaneously with the rule proposals. He commented that the interpretative guidance is designed to enhance the position of independent directors. The staff clarified that actions taken by fund directors that are within the scope of their duties as directors do not constitute prohibited "joint transactions" under Section 17(d) of the Investment Company Act of 1940 (the "1940 Act"). The staff also addressed when a fund may advance legal fees to its directors in light of the 1940 Act's limits on indemnification for willful misdeeds, bad faith, gross negligence or reckless disregard of duties. He commented that these interpretations, along with the elimination of the "insured vs. insured" exclusions from joint D&O and E&O policies, will relieve independent directors of any concerns regarding their ability to act in shareholders' best interest without undue fear of personal liability.

Mr. Roye also stressed the importance of fund directors owning shares in the funds on whose boards they serve. He commented that a director's willingness to invest in the funds for which the director is responsible is a vote of confidence in those funds by that director. He commented that nothing energizes a director to monitor fund management and oversee fund operations like the knowledge that the director's own money is on the line. Remarks of Paul F. Roye before the Investment Company Institute's 1999 Investment Company Directors Conference, October 28, 1999.

The SEC has adopted new Rule 154 under the Securities Act of 1933 (the "1933 Act") which enables issuers and broker-dealers to satisfy prospectus delivery requirements for two or more investors sharing the same address by sending a single prospectus (i.e., "householding" the prospectus). The SEC also adopted similar amendments to the proxy rules governing the delivery of annual reports to shareholders and to the rules under the Investment Company Act of 1940 governing the delivery of semi-annual reports to mutual fund shareholders.

In a companion release, the SEC proposed amendments to the proxy rules which would permit companies and other persons to satisfy the proxy and information statement delivery requirements with respect to two or more shareholders sharing the same address by sending a single proxy or information statement to the shareholders. The SEC did not originally propose to permit householding of proxy and information statements when it proposed householding of prospectuses in November 1997. However, several commentors to the 1997 proposal suggested that the SEC consider further revisions to permit the householding of proxy materials, noting that householding would facilitate a company's practice of mailing the annual report together with a proxy or information statement. Because Rule 154 as adopted does not permit the householding of combined proxy statement/prospectuses delivered for business combinations, exchange offers or reclassifications of securities registered on forms N-14, S-4 and F-4, the SEC is now proposing to amend Rule 154 to permit the householding of combined proxy statements/prospectuses.

Written Consent: New Rule 154 and the proposed rules permit delivery, respectively, of one prospectus or one proxy or information statement to two or more investors with a shared address if the investors have given their written consent to householding. The investors need not be related, and the shared address can be a residential, commercial or electronic address.

Implied Consent: Rule 154 and the proposed rules permit delivery, respectively, of one prospectus or one proxy or information statement to two or more investors with a shared address without written consent if the following conditions are met.

• Each shareholder at the shared address has the same last name as the other shareholders (or the company reasonably believes that they are all members of the same family);
• At least sixty (60) days (in the case of prospectuses and annual reports under Rule 154) and ninety (90) days (in the case of proxy and information statements under the proposed rules) before beginning delivery by householding, the company sends each record shareholder at the shared address a separate written notice in plain English of its intention to household proxy and information statements;
• The notice (or envelope containing the notice) includes the following prominent statement, or similar clear and understandable statement, in bold-face type: "Important Notice Regarding Delivery of Shareholder Documents";
• The written notice provides record shareholders who object to householding with a reply form or toll-free number to express their objections;
• The written notice states the duration of the consent and explains how a shareholder can revoke consent to the householding;
• The company does not receive notice that the shareholders object to householding within either the sixty or ninety-day notice periods, as applicable; and
• The company delivers the householded document only to a residential street address or post office box.

Duration of consent: Companies can solicit from record shareholders a consent to householding of perpetual duration that is valid until revoked, or a consent of limited duration for a specified number of years. If the company relies on implied consent, the required sixty or ninety-day notice to shareholders should make it clear whether the company intends to household indefinitely or for a fixed period.

Intermediaries: Proposed amendments would also revise rules 14b-1 and 14b-2 under the Securities Exchange Act of 1934 (the "1934 Act") to state that broker and bank intermediaries may, on their own initiative, or at the request of a company, household the annual report, proxy statement or information statement to beneficial owners residing at a shared address according to the requirements set forth in proposed Rule 14a-3(e)(1) with respect to annual reports and proxy statements and Rule 14c-3(c) with respect to information statements.

Under the proposed rules, companies would need to continue sending a separate proxy card with the proxy statement for each separate shareholder account for which a proxy is being solicited. The proposed rules would require companies to undertake in the proxy or information statement to deliver, upon written or oral request, a separate copy of the annual report, proxy statement or information statement to a shareholder residing at a shared address to which a householded copy of the documents was delivered. The company would have to deliver the separate copy promptly after a shareholder request.

The SEC commented in the proposing release that it is unsure whether a householded proxy statement that includes the meeting notice would satisfy state law requirements that companies deliver notice to each record shareholder. The SEC cautions that companies choosing to household the proxy statement therefore would have to consider the possible need to deliver separately the notice of meeting to each shareholder in the household to satisfy state law requirements.

The SEC is soliciting comments on the proposed release on or before sixty days after publication in the Federal Register). SEC Release No. 33-7766 (adopting release) (November 5, 1999) and SEC Release No. 33-7767 (proposing release) (November 5, 1999).

The SEC has proposed new Rule 202(a)(11)-1 under the Investment Advisers Act of 1940 (the "Advisers Act"). The proposed rule would exclude from the application of the Advisers Act those broker-dealers who (i) re-price their full-service brokerage services or (ii) provide execution-only services in addition to full service brokerage. The rule also codifies the SEC's long-standing view that, for broker-dealers who are dual registrants, the Advisers Act applies only to those customers to whom the broker-dealer provides advice that is not incidental to brokerage services or for which the firm receives special compensation.

Section 202(a)(11) of the Advisers Act defines "investment advisers" as persons who receive compensation for providing advice about securities as part of their regular business. Section 202(a)(11)(C) of the Advisers Act excepts from that definition broker-dealers whose performance of advisory services is solely incidental to the conduct of their business as broker or dealer and who receive no special compensation for those services. The SEC acknowledged in the proposing release that the broker-dealer exception reflects that brokers and dealers commonly give a certain amount of advice to their customers in the course of their regular brokerage business, which is subject to extensive regulation under the Securities Exchange Act of 1934 (the "1934 Act"), and that it would be inappropriate to regulate them under the Advisers Act also solely because of this aspect of their business.
Recently, several full service brokerage firms have introduced or announced new types of brokerage fee programs that could be regarded as special compensation for the provision of advice. These new types of brokerage programs offer customers a package of brokerage services, including execution, investment advice, custodial and recordkeeping services, for a fixed fee or a fee based on the amount of assets that are on account with the broker-dealer. In some programs, broker-dealers also assess a fixed charge for each transaction.

The SEC commented that it generally favors these fee-based programs because they better align the interests of the broker-dealers with the interests of their customers since the broker's compensation does not depend on the number of transactions or the size of the mark-up or mark-down charged. Some full service brokerage firms are also unbundling brokerage services by giving customers the option of purchasing execution-only services at a reduced commission rate. The introduction of execution-only services at a lower commission rate may trigger application of the Advisers Act to the full service account for which the broker provides some investment advice and charges a higher commission rate.

Because the SEC does not believe that Congress intended the Advisers Act to cover broker-dealers who have instituted these new brokerage programs, the SEC is proposing Rule 202(a)(11)-1. This rule would deem a broker-dealer which is registered under the 1934 Act not to be an adviser solely as a result of receiving special compensation, if the following conditions are met:

• The broker-dealer does not exercise investment discretion over the account from which it receives special compensation;
• Any investment advice is incidental to the brokerage service provided to each account;
• Advertisements for and contracts or agreements governing the account contain a prominent statement that it is a brokerage account.

The Rule would also clarify that the advice rendered by the broker-dealer must be incidental to brokerage services provided by the broker-dealer to each account, as opposed to the overall operations of the broker-dealer. The proposed rule would keep a full service broker-dealer from being subject to the Advisers Act solely because it also offers execution-only brokerage. Under the rule, a broker-dealer would not be considered to have received adviser compensation solely because the broker-dealer charges a commission, mark-up, mark-down or similar fee for brokerage services that is greater than or less than one it charges another customer. The SEC is requesting comments on this proposed rule on or before January 14, 2000 . SEC Release No. 34-42099 (November 4, 1999).

On November 4, 1999, the Senate approved the conference report on S.900 (the "Gramm-Leach-Bliley Financial Modernization Act") by a 90-8 vote. The House of Representatives then passed the conference report by a 362-57 vote. S.900 repeals the Glass-Steagall Act's restrictions on bank and securities firm affiliation and amends the Bank Holding Company Act to permit affiliations among financial services companies, including banks, registered investment companies, securities firms and insurance companies. S.900 also imposes privacy requirements and disclosure obligations on all financial services even if they are not affiliated with a bank or thrift.

S.900 establishes functional regulation to govern the subsidiaries of the newly created bank holding company structure. The legislation designates the Federal Reserve Board ("FRB") as the umbrella regulator of the bank holding company and requires the FRB and other bank regulators to defer to the SEC as the appropriate functional regulator of investment companies, investment advisers and securities companies. Bank regulators are permitted to address concerns involving an investment company or other entity only if they represent a material risk to an affiliated bank, the deposit insurance funds, or the payment system. The bill would also amend the 1940 Act and Advisers Act so that banks offering investment advice to mutual funds would be required to register as investment advisers and comply with the requirements of the Advisers Act.

The bill prohibits bank holding companies from engaging in commercial activities, but would provide the FRB flexibility to authorize permissible complimentary activities to supplement the permissible financial activities undertaken by a bank holding company. It also allows a bank holding company to make significant investments in commercial companies for capital appreciation purposes, provided the bank holding company does not control or operate the acquired company.

The bill requires the financial firms to adopt a privacy policy and disclose the details of the policy to customers. For mutual funds, the SEC will regulate the content of the privacy policy and its format for disclosure. The bill requires financial firms to give customers an opportunity to "opt out" or prevent the sharing or sale of their personal information to unaffiliated third parties. Financial firms, however, are not required to provide an opt out if the sharing of customer information with an unaffiliated third party is part of the ordinary course of providing a financial service or product. The privacy provisions in S.900 function as a floor, allowing states to enact more stringent standards.

Under the bill, unitary thrift holding companies are barred from selling their thrift subsidiaries to commercial companies. The bill sets May 4, 1999 as the deadline for applications to create new unitary thrifts. FRB will have primary oversight of the diversified financial holding companies created by the new law. President Clinton is expected to sign the bill into law.

In a private letter ruling, the IRS held that the acquisition by a mutual fund of substantially of all of the assets of a target mutual fund solely in exchange for the acquiring fund's stock and the assumption by the acquiring fund of certain liabilities of the target, followed by the distribution by the target fund of the acquiring fund's stock and any retained assets to its shareholders in complete liquidation, constituted a "reorganization" within the meaning of Section 368(a)(1)(C) of the Code.

A few days before to the transaction, a shareholder holding greater than 30% (but less than 50%) of the stock of the target fund redeemed all of its shares in the target. The IRS noted that the target fund was legally obligated to meet the redemption request by the shareholder under Section 22(e) of the Investment Company Act of 1940 and concluded without any discussion of the issues presented by the redemption that the Code’s reorganization requirements were satisfied notwithstanding the significant redemption of target fund shares before the transaction. This appears to be the first ruling involving a substantial redemption of RIC shares in the context of a purported reorganization. The effect of such a redemption on the continuity of interest requirement for tax-free reorganizations is expected to be addressed in forthcoming revisions to the applicable tax regulations. IRS Private Letter Rule 102724-99.

The IRS has issued Revenue Procedure 99-40, effective October 28, 1999, in order to amplify and restate its position on the allocation by a RIC among its share classes of various fund expenses and class-specific expenses. Revenue Procedure 99-40 supersedes Revenue Procedure 96-47, issued in 1996, which set forth the prior position of the IRS.

Revenue Procedure 99-40, unlike Revenue Procedure 96-47, permits advisory fees to differ by class if the difference results from applying the same performance fee provisions in an advisory contract to the different investment performance of each class of shares.

Revenue Procedure 99-40, also unlike Revenue Procedure 96-47, expressly addresses and permits certain types of fee waivers and expense reimbursements. Waivers and reimbursements of advisory fees and other fees and expenses related to the management of a RIC = s assets are permitted under Revenue Procedure 99-40, provided that the benefit of such a waiver or reimbursement is allocated to all shares by net asset value, regardless of class (with an adjustment for advisory fee waivers or reimbursements to take into account any performance fees). Revenue Procedure 99-40 also permits waivers and reimbursements of other types of expenses, provided that (1) if such an expense is charged on a class-specific basis, the benefit of the waiver or reimbursement applicable to a particular class is allocated only to the class on behalf of which the fee or expense was incurred and (2) if such an expense is not charged on a class-specific basis, the benefit of the waiver or reimbursement is also not class-specific, i . e ., it is allocated on the basis of net asset value.

Differences in a RIC = s distributions among classes that result from expense allocations and waivers or reimbursements satisfying the requirements of Revenue Procedure 99-40 will not result in A preferential dividends. @ RICs that have been complying with Revenue Procedure 96-47 and have been effecting waivers and reimbursements in accordance with the IRS positions that have been consistently expressed in its private letter rulings for the past several years should not be required to change their practices in order to satisfy the requirements of Revenue Procedure 99-40. RICs that wish to implement class-specific performance fees or effect additional fee waivers or reimbursements may now have the opportunity to do so in compliance with Revenue Procedure 99-40.

The Nasdaq stock market ("Nasdaq") extended the availability of the Nasdaq trade reporting and quotation systems to 6:30 p.m. EST on Monday, October 25, 1999. Initially, broker-dealers are being called upon to voluntarily input trade reports on a real-time basis for trades occurring between 5:15 p.m. and 6:30 p.m. Effective November 15, 1999, real-time reporting will become mandatory for all of these trades.

In addition, the application of SEC and Nasdaq rules and the handling of protection of limit orders will be temporarily deferred until December 6, 1999 to comport with the scheduled initiation of the inside bid and offer calculation, which is used by many firms to handle and protect orders on an automated basis. The NASD had sought and received no-action relief temporarily exempting the NASD and member firms from Rules 11A(c) (1)-1(c)(5), 11A(c)1-4 and Regulation ATS 301(b)(3) under the Securities Exchange Act of 1934 in order to allow the firms time to make system changes to ensure compliance with the rules during the period from 4:00 p.m. to 6:30 p.m.

Several alternative trading systems already offer after-hours trading sessions for trading after 4:00 p.m. Because there is no consolidated information regarding activity in the various markets after 4:00 p.m., it is difficult for market participants to ascertain the best prices available. In addition, market participants face difficulties obtaining complete information on which to base their trading decisions since information regarding transactions executed on these different markets is not widely available to investors until after 5:15 p.m.

In response to this lack of transparency, the Nasdaq has extended the operating hours of its quotation dissemination facilities until 6:30 p.m. as well. In addition, any Nasdaq market maker who posts quotations and trades during the extended hours will be obligated to post two-sided quotations when opening and making its markets. However, the market maker also may enter or leave the market on the hour or half hour up to 6:30 p.m. Regardless of a NASD member's quotation activity, the SEC requires that all transactions in the Nasdaq national market, small cap, convertible debt and over-the-counter equity securities executed between 8:00 a.m. and 6:30 p.m. be reported to the automated confirmation transaction services within 90 seconds.

The following facilities involved in the extension include:

• Automated Confirmation Transaction Service SM (ACT SM ) will extend its closing time from 5:15 p.m. to 6:30 p.m. for transactions;
• SelectNet ®, an automated market service that enables securities firms to route orders, negotiate terms, and execute trades in Nasdaq securities, will extend its closing time from 5:15 p.m. to 6:30 p.m.;
• Nasdaq Quotation Dissemination Service SM (NQDS SM ), or Level 2 which carries real-time quotation information for Market Makers and electronic communication networks (ECNs)/alternative trading systems (ATSs) in each issue will add a new closing spin for market participants at 6:30 p.m., and will shut down the line at approximately 6:40 p.m.;
• Nasdaq Trade Dissemination Service SM (NTDS SM) which carries real-time trade price and volume data for all trade reports that are submitted through ACT to market data vendors and other data feed recipients will disseminate trade prices from 5:15 p.m. until 6:30 p.m. The Final Closing Report will be disseminated at approximately 6:40 p.m. and will include all after hours volume, as well as the high, low and closing prices. The high, low, and closing price of a Nasdaq security will still be based on the 4 p.m. close; and
• Nasdaq Level 1 Service SM, which disseminates real-time inside quote updates, will move its Closing Report from 4:45 p.m. to 4:15 p.m. In addition, the dissemination of "Today’s U.S. Volume" will be moved from 5:20 p.m. to 6:35 p.m.

NASD Press Release October 22, 1999.

The SEC has extended a continuing resolution through Friday, November 5, 1999. Under the continuing resolution, the fee rate on filings made pursuant to Section 6(b) of the Securities Act of 1933 (the "1933 Act") will remain at the current rate of $278 per $1,000,000. When an appropriation bill is enacted, the fee rate will decrease to $264 per $1,000,000. SEC Press Release 99-144 (November 1, 1999).

Speaking at the Securities Industry Association's Compliance and Legal Division, Lori Richards, Director of the SEC's Office of Compliance, Inspections and Examinations ("OCIE"), highlighted the priority areas for SEC examiners in the Year 2000. First, noting that best execution continues to be a priority for the OCIE, she stated that the staff is reviewing selected broker-dealers' order routing practices against the general guidance provided in the order handling rules and staff interpretations. She commented that the staff has found that firms are not conducting a regular and vigorous review of the execution quality likely to be obtained in various markets. She emphasized that price improvement opportunities for customer orders should be a key factor in order routing decisions.

Second, she noted that the staff continues to examine branch offices of broker-dealers for supervisory weaknesses and sales practice problems and is looking at the suitability of fund sales given various fee structures to check the adequacy of supervisory procedures for switching and suitability compliance. She commented that she expects there will be more SEC enforcement actions in this area. She also noted that the staff frequently encounters deviations from broker-dealer firms' written policies. To protect against this, she advised that the written policies must make sense and must be subject to regular oversight. She also recommended some type of sanction for deviations.

Third, she noted that the OCIE continues to examine firms that offer customers the "on-line option," and that the staff will soon complete an examination sweep in this area and provide a report to the SEC. The examinations include reviews of operational capacity, disclosure about system slow-downs or shut-downs, allocation procedures and suitability issues. She noted that the staff is conducting a separate examination of day trading firms.

Finally, she noted that the staff is also increasing its focus on net capital and customer reserve requirements. Ms. Richards commented that there has been an increase in books and records problems caused by the integration of accounting systems and the introduction of new bookkeeping systems. She further noted that some firms have failed to properly report significant reconciliation problems to regulators. She stated that the staff continues to focus on the firm's internal controls and risk management systems. The SEC Today, Volume 99-208 (October 28, 1999).