On November 28, 2012, the SEC announced a list of rules under the Investment Company Act, the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”) to be reviewed by the SEC pursuant to Section 610 of the Regulatory Flexibility Act (the “RFA”) during the next twelve months. The RFA requires the SEC to review its rules that have a significant economic impact upon a substantial number of small entities within ten years of the publication of such rules as final rules. The purpose of the review is to determine whether the rules should be continued without change, amended or rescinded. The RFA directs the SEC to consider (i) the continued need for the rule, (ii) the nature of public complaints and comments relating to the rule, (iii) the complexity of the rule, (iv) the extent to which the rule overlaps, duplicates or conflicts with other federal, state and local government rules and (v) changes in technological, economic and other conditions since the rule’s release. Comments must be submitted to the SEC by January 3, 2013.
The Investment Company Act rules to be reviewed include:
- Rule 2a19-3, which exempts an individual from being disqualified as an independent director of a registered investment company (the “fund”) solely because he or she owns shares of a registered, broad-based index fund that invests in the investment adviser or underwriter of the fund or their controlling persons.
- Rule 5b-3, which allows a registered investment company (a) to treat the acquisition of a repurchase agreement as an acquisition of the underlying securities, subject to certain conditions, when determining whether it is in compliance with the diversification requirements set forth in Section 5(b)(1) of the Investment Company Act and the prohibition on acquiring an interest in a broker-dealer in Section 12(d)(3) of the Investment Company Act and (b) to treat the acquisition of a refunded security as an acquisition of escrowed government securities, subject to certain conditions, for purposes of the Section 5(b)(1) diversification requirements.
- Rule 10e-1, which gives a registered investment company a grace period from the board composition requirements under the Investment Company Act if the company is unable to comply with these requirements due to the death, disqualification or bona fide resignation of a director. In such event, Rule 10e-1 gives the company a 90-day grace period if the board can fill the director vacancy and a 150-day grace period if a shareholder vote is required to fill the vacancy.
- Rule 32a-4, which exempts a registered investment company from the requirement under Section 32(a)(2) of the Investment Company Act that shareholders vote on the selection of the company’s independent public accountant if the company (a) establishes an audit committee, composed solely of directors who are not interested persons of the company, that oversees the company’s accounting and auditing processes, (b) adopts a charter for the audit committee setting forth the committee's structure, duties, powers and methods of operation or sets out similar provisions in the company’s charter or bylaws and (c) maintains and preserves permanently in an easily accessible place a copy of the audit committee's charter (and any modifications thereto).
- Rule 35d-1, which requires (a) a registered investment company named in a manner suggesting that it focuses on a particular type of investment or industry to adopt a policy to invest at least 80% of its assets in the investment or industry suggested by its name, (b) a registered investment company named in a manner suggesting that it focuses its investments in a particular country or geographic region to adopt a policy to invest at least 80% of its assets in investments that are tied economically to the particular country or geographic region suggested by its name, (c) a registered investment company named in a manner suggesting that its distributions are exempt from federal income tax or from both federal and state income tax to adopt a fundamental policy to (i) invest at least 80% of its assets in investments the income from which is exempt, as applicable, from federal income tax or from both federal and state income tax or (ii) invest its assets so that at least 80% of the income that it distributes will be exempt, as applicable, from federal income tax or from both federal and state income tax and (d) a registered investment company not to use a name that suggests that the company or its shares are guaranteed or approved by the U.S. government.