FOR IMMEDIATE RELEASE
Washington, D.C., January 8, 2003 The Securities and Exchange Commission today voted to publish for comment a rule proposal that would direct national securities markets to prohibit the listing of any security of an issuer not complying with audit committee requirements set out in the Sarbanes-Oxley Act of 2002. It also took action to adopt provisions to exempt transactions between investment companies and affiliated persons.
The Commission voted to adopt a new rule and several rule amendments governing exemptions for transactions between investment companies and their affiliated persons. The Investment Company Act contains a number of provisions that prevent persons who may be in a position to take advantage of an investment company (fund) from entering into transactions or arrangements with the fund. These include prohibitions on "affiliated transactions" and "joint transactions" with affiliated persons.
The Act, however, gives the SEC authority to issue orders and adopt rules permitting these transactions when the SEC determines that an exemption is "necessary or appropriate in the public interest and consistent with the protection of investors." In a new rule and amendments to several rules, the Commission will codify a number of orders that have been issued to funds permitting affiliated and joint transactions with two types of affiliates described below. The rule and rule amendments will eliminate the need for funds to obtain individual exemptive orders in circumstances that are not likely to raise the concerns that the Act was intended to address.
Transactions with Portfolio Affiliates. Currently, SEC rules permit a fund to enter into transactions with companies 5% or more of whose voting securities are owned by the fund. This type of affiliated person is unlikely to be in a position to take advantage of the fund. The amendments will expand the rules to permit funds to enter into transactions and arrangements with companies 5% or more of whose securities are owned by other funds in the fund complex. This is a technical change necessitated because the current exemptive rule pre-dated the widespread organization of mutual funds into fund complexes.
Transactions with Subadviser Affiliates. Fund advisers are also "affiliated persons" of a fund. As a result, an adviser to a fund cannot engage in transactions with the fund (or any other fund in the fund complex) such as selling securities to the fund, which would be a form of self-dealing. The SEC has, however, issued a number of orders permitting subadvisers to enter into transactions and arrangements with other funds in the complex that other subadvisers advise. These transactions do not involve self-dealing because the subadviser participating in the transaction is not the subadviser making the decision on behalf of the fund to enter into the transaction. The SEC orders and the amendments will prohibit the subadvisers from discussing securities transactions with each other to prevent reciprocal arrangements. This relief is important because many advisers today are (or are affiliated with) broker-dealers and underwriters. Currently, once such an adviser becomes a subadviser of a fund, all of the other funds in the fund complex (even if they are advised by a different subadviser) are precluded from entering into a range of transactions with the adviser/broker-dealer unless they obtain an exemptive order from the SEC, or can rely on the SEC's exemptive rules.
The rule and rule amendments will go into effect 30 days after publication in the Federal Register.
The Commission voted to propose a rule that would direct the national securities exchanges and national securities associations to prohibit the listing of any security of an issuer that is not in compliance with the audit committee requirements established by the Sarbanes-Oxley Act of 2002. The proposals would implement the requirements of Section 10A(m)(1) of the Securities Exchange Act of 1934, as added by Section 301 of the Sarbanes-Oxley Act of 2002.
Under the proposed rule, national securities exchanges and national securities associations would be required to prohibit the listing of any security of an issuer that is not in compliance with the following.
The proposed rule would apply to both domestic and foreign listed issuers. It is important to note that, based on significant input from and dialogue with foreign regulators and foreign issuers and their advisers, several provisions have been included that seek to address the special circumstances of particular foreign jurisdictions. These provisions include, under conditions specified in the proposed rule:
The full text of detailed releases concerning each of these items will be posted to the SEC Web site as soon as possible.