[Federal Register Volume 78, Number 96 (Friday, May 17, 2013)]
[Proposed Rules]
[Pages 29094-29096]
[FR Doc No: 2013-11747]

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DEPARTMENT OF HOMELAND SECURITY

Coast Guard

33 CFR Part 165

[Docket No. USCG-2013-0301]
RIN 1625-AA00

Safety Zone; Coronado Fourth of July Fireworks, Glorietta Bay;
Coronado, CA

AGENCY: Coast Guard, DHS.

ACTION: Notice of Proposed Rulemaking.

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SUMMARY: The Coast Guard proposes a temporary safety zone for the
Coronado Fourth of July Fireworks from 8:45 p.m. to 10 p.m. on July 4,
2013. This regulated area encompasses the navigable waters of Glorietta
Bay in Coronado, CA in support of Coronado Fourth of July Fireworks
display. This action is necessary to provide for the safety of the
participants, crew, spectators, participating vessels, and other
vessels and users of the waterway. Persons and vessels will be
prohibited from entering into, transiting through, or anchoring within
this safety zone unless authorized by the Captain of the Port, or his
designated representative.

DATES: Comments and related material must be received by the Coast
Guard on or before June 17, 2013.
    Requests for public meetings must be received by the Coast Guard on
or before May 31, 2013.

ADDRESSES: You may submit comments identified by docket number using
any one of the following methods:
    (1) Federal eRulemaking Portal: http://www.regulations.gov.
    (2) Fax:<PHONE_NUMBER>.
    (3) Mail or Delivery: Docket Management Facility (M-30), U.S.
Department of Transportation, West Building Ground Floor, Room W12-140,
1200 New Jersey Avenue SE., Washington, DC 20590-0001. Deliveries
accepted between 9 a.m. and 5 p.m., Monday through Friday, except
federal holidays. The telephone number is<PHONE_NUMBER>. See the
``Public Participation and Request for Comments'' portion of the
SUPPLEMENTARY INFORMATION section below for further instructions on
submitting comments. To avoid duplication, please use only one of these
three methods.

FOR FURTHER INFORMATION CONTACT: If you have questions on this rule,
call or Lieutenant John Bannon, Chief of Waterways, Coast Guard;
telephone<PHONE_NUMBER>, email<EMAIL_ADDRESS>If you have
questions on viewing or submitting material to the docket, call Barbara
Hairston, Program Manager, Docket Operations, telephone<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION:

Table of Acronyms

DHS--Department of Homeland Security
FR--Federal Register
NPRM--Notice of Proposed Rulemaking

A. Public Participation and Request for Comments

    We encourage you to participate in this rulemaking by submitting
comments and related materials. All comments received will be posted
without change to http://www.regulations.gov and will include any
personal information you have provided.

1. Submitting Comments

    If you submit a comment, please include the docket number for this
rulemaking, indicate the specific section of this document to which
each comment applies, and provide a reason for each suggestion or
recommendation. You may submit your comments and material online at
http://www.regulations.gov, or by fax, mail, or hand delivery, but
please use only one of these means. If you submit a comment online, it
will be considered received by the Coast Guard when you successfully
transmit the comment. If you fax, hand deliver, or mail your comment,
it will be considered as having been received by the Coast Guard when
it is received at the Docket Management Facility. We recommend that you
include your name and a mailing address, an email address, or a
telephone number in the body of your document so that we can contact
you if we have questions regarding your submission.
    To submit your comment online, go to http://www.regulations.gov,
type the docket number [USCG-2013-0301] in the ``SEARCH'' box and click
``SEARCH.'' Click on ``Submit a Comment'' on the line associated with
this rulemaking.
    If you submit your comments by mail or hand delivery, submit them
in an unbound format, no larger than 8\1/2\ by 11 inches, suitable for
copying and electronic filing. If you submit comments by mail and would
like to know that they reached the Facility, please enclose a stamped,
self-addressed postcard or envelope. We will consider all comments and
material received during the comment period and may change the rule
based on your comments.

2. Viewing Comments and Documents

    To view comments, as well as documents mentioned in this preamble
as being available in the docket, go to http://www.regulations.gov,
type the docket number (USCG-2013-0301) in the ``SEARCH'' box and click
``SEARCH.'' Click on Open Docket Folder on the line associated with
this rulemaking. You may also visit the Docket Management Facility in
Room W12-140 on the ground floor of the Department of Transportation
West Building, 1200 New Jersey Avenue SE., Washington, DC 20590,
between 9 a.m. and 5 p.m., Monday through Friday, except Federal
holidays.

3. Privacy Act

    Anyone can search the electronic form of comments received into any
of our dockets by the name of the individual submitting the comment (or
signing the comment, if submitted on behalf of an association,
business, labor union, etc.). You may review a Privacy Act notice
regarding our public dockets in the January 17, 2008, issue of the
Federal Register (73 FR 3316).

4. Public Meeting

    We do not now plan to hold a public meeting. But you may submit a
request for one, using one of the methods specified under ADDRESSES.
Please explain why you believe a public meeting would be beneficial. If
we determine that one would aid this rulemaking, we will hold one at a
time and place announced by a later notice in the Federal Register.

B. Regulatory History and Information

    The Coast Guard has previously established a permanent safety zone
in the table to 33 CFR 165.1123 for this annual event. This proposal is
to notify the public that the regulated area has been moved 100 yards
northwest from the location noted in 33 CFR 165.1123. This change was
made to help mitigate environmental concerns. Therefore, a temporary
final rule will be published after the comment period of this NPRM. A
permanent final rule and update to the 33 CFR 165.1123 table for this
annual event is under review for proposed rulemaking.

C. Basis and Purpose

    The Ports and Waterways Safety Act gives the Coast Guard authority
to create and enforce safety zones. The Coast Guard proposes
establishing a temporary safety zone on the navigable waters of
Glorietta Bay in support of a fireworks show sponsored by the city of
Coronado. The safety zone will include all navigable waters within 800
feet of the fireworks barge located in approximate position:
32[deg]40'43.0'' N, 117[deg]10'14.3'' W
    The temporary safety zone is necessary to provide for the safety of
the show's crew, spectators, and participants of the event,
participating vessels, and other vessels and users of the waterway.
    This safety zone is necessary to provide for the safety of the
fireworks barge crew and participating safety vessels, recreational
boating spectators, and other users of the waterway from hazards
associated with fireworks. Fireworks launched in close proximity to
watercraft pose a significant risk to public safety and property. Such
displays draw large numbers of spectators on vessels. The combination
of a large number of spectators, congested waterways, darkness
punctuated by bright flashes of light and burning debris has the
potential to result in serious injuries or fatalities.
    The proposed safety zone will restrict vessels from operating
within a portion of the navigable waters around the fireworks launch
platforms during the enforcement period which will be immediately
before, during, and immediately after the fireworks displays.

D. Discussion of Proposed Rule

    The Coast Guard is proposing the establishment of a temporary
safety zone for the Coronado Fourth of July Fireworks from 8:45 p.m. to
10 p.m. on July 4, 2013. This regulated area encompasses the navigable
waters of Glorietta Bay in Coronado, CA in support of Coronado Fourth
of July Fireworks display. This action is necessary to provide for the
safety of the participants, crew, spectators, participating vessels,
and other vessels and users of the waterway. Persons and vessels will
be prohibited from entering into, transiting through, or anchoring
within this safety zone unless authorized by the Captain of the Port,
or his designated representative.
    The safety zone will include all navigable waters within 800 feet
of the fireworks barge located in approximate position:
32[deg]40'43.0'' N, 117[deg]10'14.3'' W.
    Vessels will be able to transit the surrounding area and may be
authorized to transit through the proposed safety zone with the
permission of the Captain of the Port or the designated representative.
Before activating the zones, the Coast Guard will notify mariners by
appropriate means including but not limited to Local Notice to Mariners
and Broadcast Notice to Mariners.

E. Regulatory Analyses

    We developed this proposed rule after considering numerous statutes
and executive orders related to rulemaking. Below we summarize our
analyses based on a number of these statutes or executive orders.

1. Regulatory Planning and Review

    This proposed rule is not a significant regulatory action under
section 3(f) of Executive Order 12866, Regulatory Planning and Review,
as supplemented by Executive Order 13563, Improving Regulation and
Regulatory Review, and does not require an assessment of potential
costs and benefits under section 6(a)(3) of Executive Order 12866 or
under section 1 of Executive Order 13563. The Office of Management and
Budget has not reviewed it under those Orders. This determination is
based on the small size, and limited duration of the safety zone.

2. Impact on Small Entities

    The Regulatory Flexibility Act of 1980 (RFA), 5 U.S.C. 601-612, as
amended, requires federal agencies to consider the potential impact of
regulations on small entities during rulemaking. The term ``small
entities'' comprises small businesses, not-for-profit organizations
that are independently owned and operated and are not dominant in their
fields, and governmental jurisdictions with populations of less than
50,000. The Coast Guard certifies under 5 U.S.C. 605(b) that this
proposed rule will not have a significant economic impact on a
substantial number of small entities.
    (1) This proposed rule will affect the following entities, some of
which may be small entities: the owners or operators of vessels
intending to transit or anchor in specified portions of Glorietta Bay
from 8:45 p.m. to 10:00 p.m. on July 4, 2013.
    (2) This safety zone will not have a significant economic impact on
a substantial number of small entities for the following reasons: The
safety zone will only be in effect for one hour, late in the evening
when vessel traffic is low.
    If you think that your business, organization, or governmental
jurisdiction qualifies as a small entity and that this rule would have
a significant economic impact on it, please submit a comment (see
ADDRESSES) explaining why you think it qualifies and how and to what
degree this rule would economically affect it.

3. Assistance for Small Entities

    Under section 213(a) of the Small Business Regulatory Enforcement
Fairness Act of 1996 (Pub. L. 104-121), we want to assist small
entities in understanding this proposed rule. If the rule would affect
your small business, organization, or governmental jurisdiction and you
have questions concerning its provisions or options for compliance,
please contact the person listed in the FOR FURTHER INFORMATION
CONTACT, above. The Coast Guard will not retaliate against small
entities that question or complain about this proposed rule or any
policy or action of the Coast Guard.

4. Collection of Information

    This proposed rule will not call for a new collection of
information under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-
3520.).

5. Federalism

    A rule has implications for federalism under Executive Order 13132,
Federalism, if it has a substantial direct effect on the States, on the
relationship between the national government and the States, or on the
distribution of power and responsibilities among the various levels of
government. We have

analyzed this proposed rule under that Order and determined that this
rule does not have implications for federalism.

6. Protest Activities

    The Coast Guard respects the First Amendment rights of protesters.
Protesters are asked to contact the person listed in the FOR FURTHER
INFORMATION CONTACT section to coordinate protest activities so that
your message can be received without jeopardizing the safety or
security of people, places or vessels.

7. Unfunded Mandates Reform Act

    The Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538)
requires Federal agencies to assess the effects of their discretionary
regulatory actions. In particular, the Act addresses actions that may
result in the expenditure by a State, local, or tribal government, in
the aggregate, or by the private sector of $100,000,000 (adjusted for
inflation) or more in any one year. Though this proposed rule would not
result in such an expenditure, we do discuss the effects of this rule
elsewhere in this preamble.

8. Taking of Private Property

    This proposed rule would not cause a taking of private property or
otherwise have taking implications under Executive Order 12630,
Governmental Actions and Interference with Constitutionally Protected
Property Rights.

9. Civil Justice Reform

    This proposed rule meets applicable standards in sections 3(a) and
3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize
litigation, eliminate ambiguity, and reduce burden.

10. Protection of Children From Environmental Health Risks

    We have analyzed this proposed rule under Executive Order 13045,
Protection of Children from Environmental Health Risks and Safety
Risks. This rule is not an economically significant rule and would not
create an environmental risk to health or risk to safety that might
disproportionately affect children.

11. Indian Tribal Governments

    This proposed rule does not have tribal implications under
Executive Order 13175, Consultation and Coordination with Indian Tribal
Governments, because it would not have a substantial direct effect on
one or more Indian tribes, on the relationship between the Federal
Government and Indian tribes, or on the distribution of power and
responsibilities between the Federal Government and Indian tribes.

12. Energy Effects

    This proposed rule is not a ``significant energy action'' under
Executive Order 13211, Actions Concerning Regulations That
Significantly Affect Energy Supply, Distribution, or Use.

13. Technical Standards

    This proposed rule does not use technical standards. Therefore, we
did not consider the use of voluntary consensus standards.

14. Environment

    We have analyzed this proposed rule under Department of Homeland
Security Management Directive 023-01 and Commandant Instruction
M16475.lD, which guide the Coast Guard in complying with the National
Environmental Policy Act of 1969 (NEPA) (42 U.S.C. 4321-4370f), and
have made a preliminary determination that this action is one of a
category of actions that do not individually or cumulatively have a
significant effect on the human environment. This proposed rule
involves establishment of a temporary safety zone. This rule is
categorically excluded from further review under paragraph 34(g) of
Figure 2-1 of the Commandant Instruction. A preliminary environmental
analysis checklist supporting this determination and a Categorical
Exclusion Determination are available in the docket where indicated
under ADDRESSES. We seek any comments or information that may lead to
the discovery of a significant environmental impact from this proposed
rule.

List of Subjects in 33 CFR Part 165

    Harbors, Marine safety, Navigation (water), Reporting and
recordkeeping requirements, Security Measures, Waterways.

    For the reasons discussed in the preamble, the Coast Guard proposes
to amend 33 CFR part 165 as follows:

PART 165--REGULATED NAVIGATION AREAS AND LIMITED ACCESS AREAS

0
1. The authority citation for part 165 continues to read as follows:

    Authority:  33 U.S.C. 1226, 1231; 46 U.S.C. Chapter 701, 3306,
3703; 50 U.S.C. 191, 195; 33 CFR 1.05-1, 6.04-1, 6.04-6, and 160.5;
Pub. L. 107-295, 116 Stat. 2064; Department of Homeland Security
Delegation No. 0170.1.
0
2. Add Sec.  165.T11-564 to read as follows:

Sec.  165.T11-564   Safety Zone; Coronado Fourth Of July Fireworks,
Glorietta Bay; Coronado, CA

    (a) Location. The zone will include all navigable waters within 800
feet of the fireworks barge located in Glorietta Bay in approximate
position: 32[deg] 40'43.0'' N, 117[deg] 10'14.3'' W.
    (b) Enforcement Period. This section will be enforced from 8:45
p.m. to 10:00 p.m. on July 4, 2013. If the event concludes prior to the
scheduled termination time, the Captain of the Port will cease
enforcement of this safety zone and will announce that fact via
Broadcast Notice to Mariners.
    (c) Definitions. The following definition applies to this section:
Designated representative, means any commissioned, warrant, or petty
officer of the Coast Guard on board Coast Guard, Coast Guard Auxiliary,
and local, state, and federal law enforcement vessels who have been
authorized to act on the behalf of the Captain of the Port.
    (d) Regulations. (1) Entry into, transit through or anchoring
within this safety zone is prohibited unless authorized by the Captain
of the Port of San Diego or his designated representative.
    (2) All persons and vessels shall comply with the instructions of
the Coast Guard Captain of the Port or his designated representative.
    (3) Upon being hailed by U.S. Coast Guard patrol personnel by
siren, radio, flashing light, or other means, the operator of a vessel
shall proceed as directed.
    (4) The Coast Guard may be assisted by other federal, state, or
local agencies.

    Dated: May 2, 2013.
S.M. Mahoney,
Captain, U.S. Coast Guard, Captain of the Port San Diego.
[FR Doc. 2013-11747 Filed 5-16-13; 8:45 am]
BILLING CODE 9110-04-P


\126\ Commission staff estimates the cost would equal 0.5 hours
for an intermediate level accountant to include the expense item in
the calculation. The estimated cost is based on the following
calculation: 0.5 x $67.3 = $33.7. The estimated hourly cost for an
intermediate level accountant is $67 ($121,161.15 (annual cost) /
1,800 hours = $67.31/hour). See supra note 120.
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    Based on Commission filings, the staff estimates that half the
funds registered under Forms N-1A and N-2 (excluding funds of hedge
funds) invest in other funds, all funds of hedge funds registered on
Form N-2 invest in other funds, and 5 separate accounts (with 7
portfolios) registered under Form N-3 invest in other funds and will be
required to make the proposed disclosure on an annual basis. For
purposes of the PRA analysis, Commission staff has estimated that on an
annual basis, registrants file (i) initial registration statements
covering 483 portfolios and post effective amendments covering 6542
portfolios on Form N-1A, (ii) 234 initial

registration statements (of which 11 are funds of hedge funds) and 38
post-effective amendments on Form N-2, and (iii) initial registration
statements covering 3 portfolios and post-effective amendments covering
35 portfolios on Form N-3. In addition, Commission staff also estimates
that each year, 157 separate accounts file initial registrations and
1242 separate accounts file post-effective amendments on Form N-4, and
50 separate accounts file initial registrations and 500 separate
accounts file post-effective amendments on Form N-6.\127\ Of the
filings on Forms N-4 and N-6, Commission staff estimates that half the
separate accounts invest in portfolio companies that themselves invest
in other funds. Thus, Commission staff estimates that the cost of the
amendments to Forms N-1A, N-2, N-3, N-4, and N-6 to funds registering
under these forms will be $2.4 million.\128\
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    \127\ Changes in estimates from the Proposing Release are due to
updated PRA analyses for the relevant forms. Of the Form N-6 post-
effective amendments, 150 are annual updates and 350 are additional
post-effective amendments. As we said in the Proposing Release, we
assume that registered funds would include the disclosure only in a
post-effective amendment to the annual update. See Proposing
Release, supra note 4, at n.132.
    \128\ The estimate is based on the following calculation: (((483
+ 6542)) / 2) x $542) + (((223 + 38) / 2) x $542 + (11 x $16,500) +
(23 x $8,245) + (7 separate account portfolios x $542) + (((157 +
1,242) / 2) x $34) + (((50 + 150) / 2) x $34) = $2,376,618. The
increase in costs from the Proposing Release is due to adjustments
for salary and overhead costs during the intervening period and the
additional cost for funds of hedge funds to comply with the
disclosure requirement.
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V. Consideration of Promotion of Efficiency, Competition, and Capital
Formation

    Section 2(c) of the Investment Company Act requires the Commission,
when engaging in rulemaking that requires it to consider or determine
whether an action is necessary or appropriate in the public interest,
to consider whether the action will promote efficiency, competition,
and capital formation.\129\ We sought, but did not receive any comment
with respect to this section.
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    \129\ 15 U.S.C. 80a-2(c).
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A. Rules 12d1-1, 12d1-2 and 12d1-3

    Rules 12d1-1, 12d1-2 and 12d1-3 will expand the circumstances in
which funds can invest in other funds without first obtaining an
exemptive order from the Commission, which can be costly and time-
consuming. We anticipate that the rules will promote efficiency and
competition. Rule 12d1-1 permits funds to acquire shares of money
market funds in the same or in a different fund group in excess of the
limitations in section 12(d)(1) of the Act. This exemption allows
funds, particularly small funds without a money market fund in their
complex, to allocate their uninvested cash more efficiently and thereby
increase competition among funds. In addition, the final rule provides
additional section 17 relief for funds that execute transactions with
broker-dealers affiliated with money market funds in which the
acquiring funds invest. This additional relief, we believe, will allow
more funds to take full advantage of the exemption provided by the
rule.\130\ Rule 12d1-2 permits an affiliated fund of funds to acquire
limited amounts of securities issued by funds outside the same fund
group and securities not issued by a fund. The rule also permits a
traditional equity or bond fund to invest in funds within the same fund
complex. We believe that this expansion of investment opportunities
will permit funds to allocate their investments more efficiently. Rule
12d1-3 allows funds relying on section 12(d)(1)(F) of the Act to charge
sales loads greater than 1\1/2\ percent provided that the aggregate
sales load any investor pays does not exceed the limits established by
the NASD for funds of funds. We believe this will increase competition
among funds as it will provide funds with greater flexibility in
structuring their sales charges. We do not believe that these exemptive
rules, which provide funds with greater flexibility in their
investments and provide certain funds of funds greater flexibility in
structuring their sales charges, will have an adverse impact on capital
formation.
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    \130\ See supra notes 32-36 and accompanying text.
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B. Amendments to Forms N-1A, N-2, N-3, N-4, and N-6

    The form amendments are designed to provide better transparency for
fund shareholders with respect to the costs of investing in funds of
funds. The enhanced disclosure requirements will provide shareholders
with greater access to information regarding the indirect costs they
bear when a fund in which they invest purchases shares of other funds.
This information should promote more efficient allocation of
investments by investors and more efficient allocation of assets among
competing funds because investors may compare and choose funds based on
their preferences for cost more easily. The amendments may also improve
competition, as enhanced disclosure may prompt funds to provide
improved products and services that may have a greater appeal to
investors. Enhanced disclosure also may prompt acquiring funds to
invest in acquired funds with lower costs. Finally, we do not believe
that the amendments will have an adverse impact on capital formation.
As discussed above, we believe that the amendments will benefit
investors.

VI. Final Regulatory Flexibility Analysis

    We have prepared this Final Regulatory Flexibility Analysis
(``FRFA'') in accordance with 5 U.S.C. 604. It relates to new rules
12d1-1, 12d1-2 and 12d1-3 under the Investment Company Act, and
amendments to Forms N-1A, N-2, N-3, N-4, and N-6. The Commission
prepared an Initial Regulatory Flexibility Analysis (``IRFA'') in
accordance with 5 U.S.C. 603, a summary of which was published in the
Proposing Release.\131\
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    \131\ See Proposing Release, supra note 4, at Section VII.
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A. Need for the New Rules and Form Amendments

    As described more fully in Section II of this release, we are
adopting rules 12d1-1, 12d1-2 and 12d1-3 to address the ability of a
registered fund to invest in shares of another fund without first
having to seek Commission approval. The rules codify and expand upon a
number of exemptive orders we have issued that permit funds to invest
in other funds. The form amendments are a critical element of the
relief we are adopting today and are designed to improve the
transparency of the expenses of funds of funds by requiring that the
expenses of the acquired funds be aggregated and shown as an additional
expense in the fee table of the fund of funds.

B. Significant Issues Raised by Public Comment

    In the IRFA for the proposed rules and form amendments, we
requested comment on any aspect of the IRFA, including the number of
small entities that are likely to rely on the proposed rules and
amendments and the likely impact of the proposal on small entities. We
received no comments on the IRFA.

C. Small Entities Subject to the New Rules and Form Amendments

    For purposes of the Regulatory Flexibility Act, a fund is a small
entity if the fund, together with other funds in the same group of
related funds, has net assets of $50 million or less as of the end of
its most recent fiscal year.\132\ The staff estimates, based upon
recent Commission filings, that there are

approximately 4083 active registered funds and 88 business development
companies, of which approximately 175 and 65 are small entities,
respectively.\133\ The staff estimates that no separate account is a
small entity. A fund that is a small entity, like other funds, may rely
on any of the exemptive rules if the fund satisfies the rule's
conditions.
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    \132\ 17 CFR 270.0-10.
    \133\ Some or all of the funds may contain multiple series or
portfolios. If a registered investment company is a small entity,
the portfolios or series it contains are also small entities. The
estimated number of small entities in the IRFA was based on filings
with the Commission current at that time.
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    The Commission expects the new rules to have little impact on small
entities. Like other funds, small entities will be affected by new
rules 12d1-1, 12d1-2 and 12d1-3 only if they determine to use any of
the exemptions provided by the rules. Few small entities have applied
for relief to engage in the activities that will be permitted under the
rules. The staff anticipates that the number of funds, including small
funds, that will engage in the activities permitted under the rules,
will increase. Nevertheless, the staff believes that the proportion of
small entities compared to the total number of funds that engage in
these activities will remain small.
    The Commission expects that the amendments to Forms N-1A and N-2
will have a greater impact on small entities. The amendments require
each registered fund, including each fund that is a small entity, that
invests in any other fund to disclose the aggregate costs of investing
in acquired funds. The staff estimates, based upon Commission filings,
that 140 funds that file on Form N-1A, and 32 funds (of which 4 are
funds of hedge funds)\134\ that file on Form N-2 are small
entities.\135\ Commission staff also estimates that half of the funds
registered under Forms N-1A and N-2 (excluding funds of hedge funds)
invest in other funds, and all funds of hedge funds would be required
to make the new disclosure.\136\ Accordingly, we estimate that 70 funds
that are small entities file on Form N-1A and 18 funds (including the 4
funds of hedge funds) that are small entities file on Form N-2 and
would be required to make the new disclosure.
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    \134\ The 4 funds of hedge funds that are small entities do not
offer their shares continuously in reliance on rule 415 of the
Securities Act.
    \135\ Amendments to Forms N-3, N-4, and N-6 are not expected to
impact small entities because the staff estimates that no registered
separate account is a small entity.
    \136\ This estimate is based on information in the Commission's
database of Form N-SAR filings.
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D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements

    The new rules will not impose any mandatory reporting or
recordkeeping requirements on any person and will not materially
increase other compliance requirements. Rule 12d1-1 allows funds to
invest in money market funds in excess of section 12(d)(1)(A) limits.
The rule requires that either (i) the acquiring fund does not pay any
sales charge, distribution fee or service fee (as defined by NASD Sales
Charge Rule 2830(d)) on the purchase of money market fund shares, or
(ii) the fund's adviser waives its fee in an amount necessary to offset
any administrative fees of the money market fund.\137\ This condition
may reduce the cost of cash management (by reducing advisory or
custodial fees relating to money market instruments) for large and
small funds. In addition, under the rule, a fund that invests in an
unregistered money market fund will have to ``reasonably believe'' that
the unregistered fund (i) operates in compliance with rule 2a-7, and
(ii) complies with certain provisions of the Act. With respect to these
conditions, we believe that if the cost of investing in a money market
fund (registered or unregistered) exceeds the costs of other forms of
cash management, acquiring funds, including funds that are small
entities, will not take advantage of the exemption. Finally, we believe
the additional section 17 relief for acquiring funds that execute
transactions with broker-dealers that are affiliated solely as a result
of the acquiring fund's investment in a money market fund, will allow
more funds to take full advantage of the exemption provided by the
rule. We believe this additional relief will be important if a small
fund without a money market fund in its complex invests, in reliance
upon rule 12d1-1, in a money market fund in another complex and thereby
becomes affiliated with a broker-dealer affiliated with the money
market fund. Without the relief from certain recordkeeping and
monitoring requirements, small funds may find it potentially costly or
onerous to monitor transactions with affiliated broker-dealers.\138\
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    \137\ Rule 12d1-1(b)(1).
    \138\ See supra notes 32-36 and accompanying text.
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    Rule 12d1-2 also has no mandatory reporting, recordkeeping or other
compliance requirements.\139\ Rule 12d1-3 requires an unaffiliated fund
of funds relying on the rule to limit aggregate distribution-related
costs under the NASD Sales Charge Rule.\140\ The rule provides funds
greater flexibility in structuring sales loads, consistent with the
approach Congress took in section 12(d)(1)(G) to prevent excessive
sales loads in affiliated funds of funds, while providing shareholders
greater protection by requiring that funds relying on the rule limit
overall distribution fees (rather than only sales loads).
---------------------------------------------------------------------------

    \139\ Funds that invest in a money market fund in reliance on
rule 12d1-2, however, must comply with the conditions of rule 12d1-
1. See supra note 62 and accompanying text.
    \140\ See rule 12d1-3(a); See also supra note 64 and
accompanying text.
---------------------------------------------------------------------------

    Funds that intend to rely on the rules will no longer incur the
expense associated with filing applications for comparable exemptive
relief from sections 12(d)(1)(A), (B), (F), and (G), 17(a),
17(e)(2)(A), and 57, and rules 17d-1, 17e-1(b)(3) and 17e-1(d)(2) in
connection with the fund of funds arrangement permitted by the rules.
The exemptive rules may be of greater benefit to small funds for which
the benefits of obtaining an order for the relief described above may
not sufficiently offset the costs of filing an exemptive application.
    The amendments to Forms N-1A and N-2 require registered funds to
include a line item in the fee table disclosing the acquiring fund's
pro rata portion of the cumulative expenses charged by funds in which
the acquiring fund invests. The amendments include instructions for
calculating the line item''Acquired Fund Fees and Expenses.'' For
purposes of the PRA, Commission staff estimated that the disclosure
requirement for calculating the line item according to the instructions
will add up to 7 hours per portfolio to the burden of completing Forms
N-1A and N-2.\141\ Commission staff also estimated that the additional
cost of including the line item per portfolio would equal $542 for
Forms N-1A and Form N-2 (excluding funds of hedge funds).\142\ The
Commission staff has further estimated, based on comments received,
that a fund of hedge funds would incur $16,500 to calculate the new
line item.\143\ Assuming that half of all small funds and all small
funds of hedge funds invest in other funds and will be required to
include the additional disclosure, the Commission staff estimates that
the maximum total annual cost for small entities to comply with the
form amendments will be $176,026.\144\
---------------------------------------------------------------------------

    \141\ See supra notes 99-100 and accompanying text.
    \142\ See supra note 120 and accompanying text.
    \143\ See supra note 103 and accompanying text.
    \144\ Based on recent Commission filings, the staff estimates
that 140 funds that are small entities are registered under Form N-
1A, with an average of 2.7 portfolios per registrant. Commission
staff further estimates that 28 funds registered with an average of
1.0 portfolio per registrant and 4 funds of hedge funds registered
under Form N-2 are small entities. The staff's estimate assumes that
all funds of hedge funds and half of all other portfolios would
include the proposed disclosure. The maximum cost estimate is based
on the following calculation: ((140 x 2.7) + (28 x 1.00)) 2
portfolios x $542 = $110,026) + (4 x $16,500 = $66,000) = $176,026.
The increase from the Proposing Release is due to adjustments for
salary and overhead costs during the intervening period and the
additional cost for funds of hedge funds to comply with the
disclosure requirement. Amendments to Forms N-3, N-4 and N-6 are not
expected to impact small entities because the staff estimates that
no registered separate account is a small entity.

---------------------------------------------------------------------------

E. Commission Action To Minimize Effect on Small Entities

    The Regulatory Flexibility Act directs the Commission to consider
significant alternatives that would accomplish the stated objective,
while minimizing any significant adverse impact on small entities. In
connection with the new rules, the Commission considered the following
alternatives: (i) The establishment of differing compliance or
reporting requirements or timetables that take into account the
resources available to small entities; (ii) the clarification,
consolidation, or simplification of compliance and reporting
requirements under the rule for small entities; (iii) the use of
performance rather than design standards; and (iv) an exemption from
coverage of the rule, or any part thereof, for small entities.
    The new rules are exemptive, and compliance with them is voluntary.
We therefore do not believe that special compliance, timetable, or
reporting requirements or an exemption from coverage of the rules for
small entities would be appropriate.
    The rules do not require any reporting requirements that could be
further clarified, consolidated, or simplified. Rule 12d1-1 uses
performance rather than design standards to the extent it requires that
acquiring funds ``reasonably believe'' that underlying funds are
operating in compliance with rule 2a-7 and certain provisions of the
Act. This standard is designed to ensure that a violation on the part
of the acquired fund would not cause the acquiring fund to lose its
exemption under the rule if it can demonstrate that it reasonably
believed that the acquired fund was in compliance. In addition, rule
12d1-3 does not specify the sales load and distribution-related charges
an acquiring or acquired fund must impose, but permits funds to
determine the combined charges within the overall limit set by the NASD
Sales Charge Rule.
    With respect to the form amendments, we believe that any further
clarification, consolidation, or simplification of the requirements to
report expenses of acquired funds for small funds would not be
consistent with the protection of investors. A different requirement,
including differing compliance or reporting requirements or timetables,
could compromise the intent to provide investors with cost information
that will allow them to make direct comparisons to the costs of
alternative fund of funds arrangements and to the costs of a more
traditional fund. Performance standards also would not provide this
important benefit to investors. An exemption for small entities would
defeat the purposes of the amendments for the same reasons.

VII. Statutory Authority

    The Commission is adopting rules 12d1-1, 12d1-2 and 12d1-3 under
the authority set forth in sections 6(c), 12(d)(1)(J), and 38(a) of the
Act (15 U.S.C. 80a-6(c), 80a-12(d)(1)(J), 80a-37(a)). The Commission is
also adopting amendments to Forms N-1A, N-2, N-3, N-4, and N-6 under
the authority set forth in sections 6, 7(a), 10 and 19(a) of the
Securities Act (15 U.S.C. 77f, 77g(a), 77j, 77s(a)), and sections 8(b),
24(a), 30, and 38(a) of the Act (15 U.S.C. 80a-8(b), 80a-24(a), 80a-29,
and 80a-37(a)).

List of Subjects

17 CFR Part 239

    Reporting and recordkeeping requirements, Securities.

17 CFR Parts 270 and 274

    Investment companies, Reporting and recordkeeping requirements,
Securities.

Text of Rules and Form Amendments

0
For the reasons set out in the preamble, the Commission is amending
Title 17, Chapter II of the Code of Federal Regulations as follows:

PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

0
1. The authority citation for part 239 continues to read, in part, as
follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77x-3,
77sss, 78c, 78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d), 79e, 79f,
79g, 79j, 79l, 79m, 79n, 79q, 79t, 80a-9, 80a-10, 10a-13, 80a-8,
80a-24, 80a-26, 80a-29, 80a-30, and 80a-37, unless otherwise noted.
* * * * *

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

0
2. The authority citation for part 270 is amended by revising the
subauthority for Sec.  270.12d1-1 to read as follows:

    Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, and 80a-
39, unless otherwise noted;
* * * * *
    Sections 270.12d1-1, 270.12d1-2, and 270.12d1-3 are also issued
under 15 U.S.C. 80a-6(c), 80a-12(d)(1)(J), and 80a-37(a).
* * * * *

0
3. Sections 270.12d1-1, 270.12d1-2, and 270.12d1-3 are added to read as
follows:

Sec.  270.12d1-1  Exemptions for investments in money market funds.

    (a) Exemptions for acquisition of money market fund shares. If the
conditions of paragraph (b) of this section are satisfied,
notwithstanding sections 12(d)(1)(A), 12(d)(1)(B), 17(a), and 57 of the
Act (15 U.S.C. 80a-12(d)(1)(A), 80a-12(d)(1)(B), 80a-17(a), and 80a-
56), and Sec.  270.17d-1:
    (1) An investment company (``acquiring fund'') may purchase and
redeem shares issued by a money market fund; and
    (2) A money market fund, any principal underwriter thereof, and a
broker or a dealer may sell or otherwise dispose of shares issued by
the money market fund to an acquiring fund.
    (b) Conditions--(1) Fees. The acquiring fund pays no sales charge,
as defined in rule 2830(b)(8) of the Conduct Rules of the NASD (``sales
charge''), or service fee, as defined in rule 2830(b)(9) of the Conduct
Rules of the NASD, charged in connection with the purchase, sale, or
redemption of securities issued by a money market fund (``service
fee''); or the acquiring fund's investment adviser waives its advisory
fee in an amount necessary to offset any sales charge or service fee.
    (2) Unregistered money market funds. If the money market fund is
not an investment company registered under the Act:
    (i) The acquiring fund reasonably believes that the money market
fund satisfies the following conditions as if it were a registered
open-end investment company:
    (A) Operates in compliance with Sec.  270.2a-7;
    (B) Complies with sections 17(a), (d), (e), 18, and 22(e) of the
Act (15 U.S.C. 80a-17(a), (d), (e), 80a-18, and 80a-22(e));
    (C) Has adopted procedures designed to ensure that it complies with
sections 17(a), (d), (e), 18, and 22(e) of the Act (15 U.S.C. 80a-
17(a), (d), (e), 80a-18, and 80a-22(e)), periodically reviews and
updates those procedures, and maintains books and records describing
those procedures;
    (D) Maintains the records required by Sec. Sec.  270.31a-1(b)(1),
270.31a-1(b)(2)(ii),

270.31a-1(b)(2)(iv), and 270.31a-1(b)(9); and
    (E) Preserves permanently, the first two years in an easily
accessible place, all books and records required to be made under
paragraphs (b)(2)(i)(C) and (D) of this section, and makes those
records available for examination on request by the Commission or its
staff; and
    (ii) The adviser to the money market fund is registered with the
Commission as an investment adviser under section 203 of the Investment
Advisers Act of 1940 (15 U.S.C. 80b-3).
    (c) Exemption from certain monitoring and recordkeeping
requirements under Sec.  270.17e-1. Notwithstanding the requirements of
Sec. Sec.  270.17e-1(b)(3) and 270.17e-1(d)(2), the payment of a
commission, fee, or other remuneration to a broker shall be deemed as
not exceeding the usual and customary broker's commission for purposes
of section 17(e)(2)(A) of the Act if:
    (1) The commission, fee, or other remuneration is paid in
connection with the sale of securities to or by an acquiring fund;
    (2) The broker and the acquiring fund are affiliated persons
because each is an affiliated person of the same money market fund; and
    (3) The acquiring fund is an affiliated person of the money market
fund solely because the acquiring fund owns, controls, or holds with
power to vote five percent or more of the outstanding securities of the
money market fund.
    (d) Definitions. (1) Investment company includes a company that
would be an investment company under section 3(a) of the Act (15 U.S.C.
80a-3(a)) but for the exceptions to that definition provided for in
sections 3(c)(1) and 3(c)(7) of the Act (15 U.S.C. 80a-3(c)(1) and 80a-
3(c)(7)).
    (2) Money market fund means:
    (i) An open-end management investment company registered under the
Act that is regulated as a money market fund under Sec.  270.2a-7; or
    (ii) A company that would be an investment company under section
3(a) of the Act (15 U.S.C. 80a-3(a)) but for the exceptions to that
definition provided for in sections 3(c)(1) and 3(c)(7) of the Act (15
U.S.C. 80a-3(c)(1) and 80a-3(c)(7)) and that:
    (A) Is limited to investing in the types of securities and other
investments in which a money market fund may invest under Sec.  270.2a-
7; and
    (B) Undertakes to comply with all the other requirements of Sec.
270.2a-7, except that, if the company has no board of directors, the
company's investment adviser performs the duties of the board of
directors.

Sec.  270.12d1-2  Exemptions for investment companies relying on
section 12(d)(1)(G) of the Act.

    (a) Exemption to acquire other securities. Notwithstanding section
12(d)(1)(G)(i)(II) of the Act (15 U.S.C. 80a-12(d)(1)(G)(i)(II)), a
registered open-end investment company or a registered unit investment
trust that relies on section 12(d)(1)(G) of the Act (15 U.S.C. 80a-
12(d)(1)(G)) to acquire securities issued by another registered
investment company that is in the same group of investment companies
may acquire, in addition to Government securities and short-term paper:
    (1) Securities issued by an investment company, other than
securities issued by another registered investment company that is in
the same group of investment companies, when the acquisition is in
reliance on section 12(d)(1)(A) or 12(d)(1)(F) of the Act (15 U.S.C.
80a-12(d)(1)(A) or 80a-12(d)(1)(F));
    (2) Securities (other than securities issued by an investment
company); and
    (3) Securities issued by a money market fund, when the acquisition
is in reliance on Sec.  270.12d1-1.
    (b) Definitions. For purposes of this section, money market fund
has the same meaning as in Sec.  270.12d1-1(d)(2).

Sec.  270.12d1-3  Exemptions for investment companies relying on
section 12(d)(1)(F) of the Act.

    (a) Exemption from sales charge limits. A registered investment
company (``acquiring fund'') that relies on section 12(d)(1)(F) of the
Act (15 U.S.C. 80a-12(d)(1)(F)) to acquire securities issued by an
investment company (``acquired fund'') may offer or sell any security
it issues through a principal underwriter or otherwise at a public
offering price that includes a sales load of more than 1\1/2\ percent
if any sales charges and service fees charged with respect to the
acquiring fund's securities do not exceed the limits set forth in rule
2830 of the Conduct Rules of the NASD applicable to a fund of funds.
    (b) Definitions. For purposes of this section, the terms fund of
funds, sales charge, and service fee have the same meanings as in rule
2830(b) of the Conduct Rules of the NASD.

PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

0
4. The authority citation for part 274 continues to read in part as
follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m,
78n, 78o(d), 80a-8, 80a-24, 80a-26, and 80a-29, unless otherwise
noted.
* * * * *
    5. Form N-1A (referenced in Sec. Sec.  239.15A and 274.11A), Item
3, is amended by adding paragraph (f) to Instruction 3 to read as
follows:

    Note: The text of Form N-1A does not, and this amendment will
not, appear in the Code of Federal Regulations.

Form N-1A

* * * * *
Item 3. Risk/Return Summary: Fee Table
* * * * *

Instructions

* * * * *
    3. Annual Fund Operating Expenses.
* * * * *
    (f)(i) If the Fund (unless it is a Feeder Fund) invests in shares
of one or more Acquired Funds, add a subcaption to the ``Annual Fund
Operating Expenses'' portion of the table directly above the subcaption
titled ``Total Annual Fund Operating Expenses.'' Title the additional
subcaption: ``Acquired Fund Fees and Expenses.'' Disclose in the
subcaption fees and expenses incurred indirectly by the Fund as a
result of investment in shares of one or more Acquired Funds. For
purposes of this item, an ``Acquired Fund'' means any company in which
the Fund invests or has invested during the relevant fiscal period that
(A) is an investment company or (B) would be an investment company
under section 3(a) of the Investment Company Act (15 U.S.C. 80a-3(a))
but for the exceptions to that definition provided for in sections
3(c)(1) and 3(c)(7) of the Investment Company Act (15 U.S.C. 80a-
3(c)(1) and 80a-3(c)(7)). If a Fund uses another term in response to
other requirements of this Form to refer to Acquired Funds, it may
include that term in parentheses following the subcaption title. In the
event the fees and expenses incurred indirectly by the Fund as a result
of investment in shares of one or more Acquired Funds do not exceed
0.01 percent (one basis point) of average net assets of the Fund, the
Fund may include these fees and expenses under the subcaption ``Other
Expenses'' in lieu of this disclosure requirement.
    (ii) Determine the ``Acquired Fund Fees and Expenses'' according to
the following formula:

[GRAPHIC] [TIFF OMITTED] TR27JN06.000

Where:

AFFE = Acquired Fund fees and expenses;
F1, F2, F3, . . . = Total annual
operating expense ratio for each Acquired Fund;
FY = Number of days in the relevant fiscal year.
AI1, AI2, AI3, . . = Average invested
balance in each Acquired Fund;
D1, D2, D3, . . . = Number of days
invested in each Acquired Fund; and
``Transaction Fees'' = The total amount of sales loads, redemption
fees, or other transaction fees paid by the Fund in connection with
acquiring or disposing of shares in any Acquired Funds during the most
recent fiscal year.
``Incentive Allocations'' = Any allocation of capital from the
Acquiring Fund to the adviser of the Acquired Fund (or its affiliate)
based on a percentage of the Acquiring Fund's income, capital gains
and/or appreciation in the Acquired Fund.

    (iii) Calculate the average net assets of the Fund for the most
recent fiscal year, as provided in Item 8(a) (see Instruction 4 to Item
8(a)).
    (iv) The total annual operating expense ratio used for purposes of
this calculation (F1) is the annualized ratio of operating expenses to
average net assets for the Acquired Fund's most recent fiscal period as
disclosed in the Acquired Fund's most recent shareholder report. If the
ratio of expenses to average net assets is not included in the most
recent shareholder report or the Acquired Fund is a newly formed fund
that has not provided a shareholder report, then the ratio of expenses
to average net assets of the Acquired Fund is the ratio of total annual
operating expenses to average annual net assets of the Acquired Fund
for its most recent fiscal period as disclosed in the most recent
communication from the Acquired Fund to the Fund. For purposes of this
instruction: (i) Acquired Fund expenses include increases resulting
from brokerage service and expense offset arrangements and reductions
resulting from fee waivers or reimbursements by the Acquired Funds'
investment advisers or sponsors; and (ii) Acquired Fund expenses do not
include expenses (i.e., performance fees) that are incurred solely upon
the realization and/or distribution of a gain. If an Acquired Fund has
no operating history, include in the Acquired Funds' expenses any fees
payable to the Acquired Fund's investment adviser or its affiliates
stated in the Acquired Fund's registration statement, offering
memorandum or other similar communication without giving effect to any
performance.
    (v) To determine the average invested balance (AI1), the numerator
is the sum of the amount initially invested in an Acquired Fund during
the most recent fiscal year (if the investment was held at the end of
the previous fiscal year, use the amount invested as of the end of the
previous fiscal year) and the amounts invested in the Acquired Fund no
less frequently than monthly during the period the investment is held
by the Fund (if the investment was held through the end of the fiscal
year, use each month-end through and including the fiscal year-end).
Divide the numerator by the number of measurement points included in
the calculation of the numerator (i.e., if an investment is made during
the fiscal year and held for 3 succeeding months, the denominator would
be 4).
    (vi) A New Fund should base the Acquired Fund fees and expenses on
assumptions as to the specific Acquired Funds in which the New Fund
expects to invest. Disclose in a footnote to the table that Acquired
Fund fees and expenses are based on estimated amounts for the current
fiscal year.
    (vii) The Fund may clarify in a footnote to the fee table that the
total annual fund operating expenses under Item 3 do not correlate to
the ratio of expenses to average net assets given in response to Item
8, which reflects the operating expenses of the Fund and does not
include Acquired Fund fees and expenses.
* * * * *
    6. Form N-2 (referenced in Sec. Sec.  239.14 and 274.11a-1), Item
3, paragraph 1, is amended by:
    a. Redesignating Instruction 10 titled ``Example'' as Instruction
11; and
    b. Adding new Instruction 10. The addition reads as follows:

    Note: The text of Form N-2 does not, and this amendment will
not, appear in the Code of Federal Regulations.

FORM N-2

* * * * *
Item 3. Fee Table and Synopsis
    1. * * *
    Instructions:
* * * * *
    10. a. If the Registrant invests, or intends to invest based upon
the anticipated net proceeds of the present offering, in shares of one
or more ``Acquired Funds,'' add a subcaption to the ``Annual Expenses''
portion of the table directly above the subcaption titled ``Total
Annual Expenses.'' Title the additional subcaption: ``Acquired Fund
Fees and Expenses.'' Disclose in the subcaption fees and expenses
incurred indirectly by the Registrant as a result of investment in
shares of one or more Acquired Funds. For purposes of this item, an
``Acquired Fund'' means any company in which the Registrant invests or
intends to invest (A) that is an investment company or (B) that would
be an investment company under section 3(a) of the 1940 Act (15 U.S.C.
80a-3(a)) but for the exceptions to that definition provided for in
sections 3(c)(1) and 3(c)(7) of the 1940 Act (15 U.S.C. 80a-3(c)(1) and
80a-3(c)(7)). If a Registrant uses another term in response to other
requirements of this Form to refer to Acquired Funds, it may include
that term in parentheses following the subcaption title. In the event
the fees and expenses incurred indirectly by the Registrant as a result
of investment in shares of one or more Acquired Funds do not exceed
0.01 percent (one basis point) of average net assets of the Registrant,
the Registrant may include these fees and expenses under the subcaption
``Other Expenses'' in lieu of this disclosure requirement.
    b. Determine the ``Acquired Fund Fees and Expenses'' according to
the following formula:
[GRAPHIC] [TIFF OMITTED] TR27JN06.001

Where:

AFFE = Acquired Fund fees and expenses;
F1, F2, F3, . . . = Total annual operating expense ratio for each
Acquired Fund;
FY = Number of days in the relevant fiscal year.
AI1, AI2, AI3, . . . =Average invested
balance in each Acquired Fund;
D1, D2, D3, . . . = Number of days invested in each Acquired Fund;
``Transaction Fees''= The total amount of sales loads, redemption fees,
or other transaction fees paid by the Registrant in connection with
acquiring or disposing of shares in any Acquired Funds during the most
recent fiscal year; and
``Incentive Allocations''= Any allocation of capital from the Acquiring
Fund to the adviser of the Acquired Fund (or its affiliate) based on a
percentage of the Acquiring Fund's income, capital gains and/or
appreciation in the Acquired Fund.

    c. Calculate the average net assets of the Registrant for the most
recent fiscal year, as provided in Item 4.1 (see Instruction 15 to Item
4.1) and include the anticipated net proceeds of the present offering.
    d. The total annual operating expense ratio used for purposes of
this calculation (F1) is the annualized ratio of operating expenses to
average net assets for the Acquired Fund's most recent fiscal period as
disclosed in the Acquired Fund's most recent shareholder report. If the
ratio of expenses to average net assets is not included in the most
recent shareholder report or the Acquired Fund is a newly formed fund
that has not provided a shareholder report, then the ratio of expenses
to average net assets of the Acquired Fund is the ratio of total annual
operating expenses to average annual net assets of the Acquired Fund
for its most recent fiscal period as disclosed in the most recent
communication from the Acquired Fund to the Registrant. If the
Registrant has a written fee agreement with the Acquired Fund that
would affect the ratio of expenses to average net assets as disclosed
in the Acquired Fund's most recent shareholder report, the Registrant
should determine the ratio of expenses to average net assets for the
Acquired Fund's most recent fiscal period using the written fee
agreement. For purposes of this instruction: (i) Acquired Fund expenses
include increases resulting from brokerage service and expense offset
arrangements and reductions resulting from fee waivers or
reimbursements by the Acquired Funds' investment advisers or sponsors;
and (ii) Acquired Fund expenses do not include any expenses (i.e.,
performance fees) that are calculated solely upon the realization and/
or distribution of gains, or the sum of the realization and/or
distribution of gains and unrealized appreciation of assets distributed
in-kind. If an Acquired Fund has no operating history, include in the
Acquired Funds' expenses any fees payable to the Acquired Fund's
investment adviser or its affiliates stated in the Acquired Fund's
registration statement, offering memorandum or other similar
communication without giving effect to any performance.
    e. If a Registrant has made investments in the most recent fiscal
year, to determine the average invested balance (AI1), the
numerator is the sum of the amount initially invested in an Acquired
Fund during the most recent fiscal year (if the investment was held at
the end of the previous fiscal year, use the amount invested as of the
end of the previous fiscal year) and the amounts invested in the
Acquired Fund no less frequently than monthly during the period the
investment is held by the Registrant (if the investment was held
through the end of the fiscal year, use each month-end through and
including the fiscal year-end). Divide the numerator by the number of
measurement points included in the calculation of the numerator (i.e.,
if an investment is made during the fiscal year and held for 3
succeeding months, the denominator would be 4).
    f. For investments based upon the anticipated net proceeds from the
present offering, base the ``Acquired Fund Fees and Expenses'' on: (i)
Assumptions about specific funds in which the Registrant expects to
invest, (ii) estimates of the amount of assets the Registrant expects
to invest in each of those Acquired Funds, and (iii) an assumption that
the investment was held for all of the Registrant's most recent fiscal
year and was subject to the Acquired Funds' fees and expenses for that
year. Disclose in a footnote to the table that Acquired Fund fees and
expenses are based on estimated amounts for the current fiscal year.
    g. If an Acquired Fund charges an Incentive Allocation or any other
fee based on income, capital gains and/or appreciation (i.e.,
performance fee), the Registrant must include a footnote to the
``Acquired Fund Fees and Expenses'' subcaption that: (i) Discloses the
typical Incentive Allocation or such other fee (expressed as a
percentage) to be paid to the investment advisers of the Acquired Funds
(or an affiliate); (ii) discloses that Acquired Funds' fees and
expenses are based on historic fees and expenses; and (iii) states that
future Acquired Funds' fees and expenses may be substantially higher or
lower because certain fees are based on the performance of the Acquired
Funds, which may fluctuate over time.
    h. If the Registrant is a Feeder Fund, reflect the aggregate
expenses of the Feeder Fund and the Master Fund in the ``Acquired Fund
Fees and Expenses.'' The aggregate expenses of the Master-Feeder Fund
must include the fees and expenses incurred indirectly by the Feeder
Fund as a result of the Master Fund's investment in shares of one or
more companies (A) that are investment companies or (B) that would be
investment companies under section 3(a) of the 1940 Act (15 U.S.C. 80a-
3(a)) but for the exceptions to that definition provided for in
sections 3(c)(1) and 3(c)(7) of the 1940 Act (15 U.S.C. 80a-3(c)(1) and
80a-3(c)(7)). For purposes of this instruction, a ``Master-Feeder
Fund'' means a two-tiered arrangement in which one or more investment
companies registered under the 1940 Act (each a ``Feeder Fund'') holds
shares of a single management investment company registered under the
1940 Act (the ``Master Fund'') in accordance with section 12(d)(1)(E)
of the 1940 Act [15 U.S.C. 80a-12(d)(1)(E)].
    i. The Registrant may clarify in a footnote to the fee table that
the total annual expenses item under Item 3.1 is different from the
ratio of expenses to average net assets given in response to Item 4.1,
which reflects the operating expenses of the Registrant and does not
include Acquired Fund fees and expenses.
* * * * *
    7. Form N-3 (referenced in Sec. Sec.  239.17a and 274.11b), Item
3(a), is amended by:
    a. In Instruction 16(a), revising the phrase in the third sentence
``Instructions 18(b), 19(e) and 19(f)'' to read ``Instructions 18(b),
19(f), 20(e), and 20(f)''';
    b. Redesignating Instruction 19 titled ``Example'' as Instruction
20; and
    c. Adding new Instruction 19.
    The addition reads as follows:

    Note: The text of Form N-3 does not, and this amendment will
not, appear in the Code of Federal Regulations.

FORM N-3

* * * * *
Item 3. Synopsis or Highlights
    (a) * * *
    Instructions:
* * * * *
    19. (a) If the Registrant invests in shares of one or more Acquired
Funds,

add a subcaption to the ``Annual Expenses'' portion of the table
directly above the subcaption titled ``Total Annual Expenses.'' Title
the additional subcaption: ``Acquired Fund Fees and Expenses.''
Disclose in the subcaption fees and expenses incurred indirectly by the
Registrant as a result of investment in shares of one or more Acquired
Funds. For purposes of this Item, an ``Acquired Fund'' means any
company in which the Fund invests that (i) is an investment company or
(ii) would be an investment company under section 3(a) of the 1940 Act
(15 U.S.C. 80a-3(a)) but for the exceptions to that definition provided
for in sections 3(c)(1) and 3(c)(7) of the 1940 Act (15 U.S.C. 80a-
3(c)(1) and 80a-3(c)(7)). If a Registrant uses another term in response
to other requirements of this Form to refer to Acquired Funds, it may
include that term in parentheses following the subcaption title. In the
event the fees and expenses incurred indirectly by the Registrant as a
result of investment in shares of one or more Acquired Funds do not
exceed 0.01 percent (one basis point) of average net assets of the
Registrant, the Registrant may include these fees and expenses under
the subcaption ``Other Expenses'' in lieu of this disclosure
requirement.
    (b) Determine the ``Acquired Fund Fees and Expenses'' according to
the following formula:
[GRAPHIC] [TIFF OMITTED] TR27JN06.002

Where:

AFFE = Acquired Fund fees and expenses;
F1, F2, F3, ... = Total annual
operating expense ratio for each Acquired Fund;

FY = Number of days in the relevant fiscal year.
AI1, AI2, AI3, ... = Average invested
balance in each Acquired Fund;
D1, D2, D3, ... = Number of days
invested in each Acquired Fund; and
``Transaction Fees'' = The total amount of sales loads, redemption
fees, or other transaction fees paid by the Registrant in connection
with acquiring or disposing of shares in any Acquired Funds during the
most recent fiscal year.

    (c) Calculate the average net assets of the Registrant for the most
recent fiscal year, as provided in Item 4(a) (see Instruction 10 to
Item 4(a)).
    (d) The total annual operating expense ratio used for purposes of
this calculation (F1) is the annualized ratio of operating expenses to
average net assets for the Acquired Fund's most recent fiscal period as
disclosed in the Acquired Fund's most recent shareholder report. If the
ratio of expenses to average net assets is not included in the most
recent shareholder report or the Acquired Fund is a newly formed fund
that has not provided a shareholder report, then the ratio of expenses
to average net assets of the Acquired Fund is the ratio of total annual
operating expenses to average annual net assets of the Acquired Fund
for its most recent fiscal period as disclosed in the most recent
communication from the Acquired Fund to the Registrant. For purposes of
this instruction, Acquired Fund expenses include increases resulting
from brokerage service and expense offset arrangements and reductions
resulting from fee waivers or reimbursements by the Acquired Funds'
investment advisers or sponsors.
    (e) To determine the average invested balance (AI1), the
numerator is the sum of the amount initially invested in an Acquired
Fund during the most recent fiscal year (if the investment was held at
the end of the previous fiscal year, use the amount invested as of the
end of the previous fiscal year) and the amounts invested in the
Acquired Fund no less frequently than monthly during the period the
investment is held by the Registrant (if the investment was held
through the end of the fiscal year, use each month-end through and
including the fiscal year-end). Divide the numerator by the number of
measurement points included in the calculation of the numerator (i.e.,
if an investment is made during the fiscal year and held for 3
succeeding months, the denominator would be 4).
    (f) A New Registrant should base the ``Acquired Fund Fees and
Expenses'' on assumptions as to the specific Acquired Funds in which
the New Registrant expects to invest. Disclose in a footnote to the
table that Acquired Fund fees and expenses are based on estimated
amounts for the current fiscal year.
    (g) The Registrant may clarify in a footnote to the fee table that
the total annual expenses under Item 3 are different from the ratio of
expenses to average net assets given in response to Item 4, which
reflects the operating expenses of the Registrant and does not include
Acquired Fund fees and expenses.
* * * * *
    8. Form N-4 (referenced in Sec. Sec.  239.17b and 274.11c), Item 3,
is amended by adding a sentence at the end of Instruction 17(a) to read
as follows:

    Note: The text of Form N-4 does not, and this amendment will
not, appear in the Code of Federal Regulations.

Form N-4

* * * * *
Item 3. Synopsis
* * * * *
    Instructions:
* * * * *
    17. (a) * * * If any Portfolio Company invests in shares of one or
more Acquired Funds, ``Total Annual [Portfolio Company] Operating
Expenses'' for the Portfolio Company must also include fees and
expenses incurred indirectly by the Portfolio Company as a result of
investment in shares of one or more Acquired Funds, calculated in
accordance with Instruction 3(f) to Item 3 of Form N-1A (17 CFR
239.15A; 17 CFR 274.11A). For purposes of this paragraph, an Acquired
Fund means any company in which the Portfolio Company invests that (i)
is an investment company or (ii) would be an investment company under
section 3(a) of the 1940 Act (15 U.S.C. 80a-3(a)) but for the
exceptions to that definition provided for in sections 3(c)(1) and
3(c)(7) of the 1940 Act (15 U.S.C. 80a-3(c)(1) and 80a-3(c)(7)).
* * * * *
    9. Form N-6 (referenced in Sec. Sec.  239.17c and 274.11d), Item 3,
is amended by adding a sentence at the end of Instruction 4(b) to read
as follows:

    Note: The text of Form N-6 does not, and this amendment will
not, appear in the Code of Federal Regulations.

Form N-6

* * * * *
Item 3. Risk/Benefit Summary: Fee Table
* * * * *
    Instructions:
* * * * *

    4. Total Annual [Portfolio Company] Operating Expenses.
* * * * *
    (b) * * * If any Portfolio Company invests in shares of one or more
Acquired Funds, ``Total Annual [Portfolio Company] Operating Expenses''
for the Portfolio Company must also include fees and expenses incurred
indirectly by the Portfolio Company as a result of investment in shares
of one or more Acquired Funds, calculated in accordance with
Instruction 3(f) to Item 3 of Form N-1A (17 CFR 239.15A; 17 CFR
274.11A). For purposes of this paragraph, an Acquired Fund means any
company in which the Portfolio Company invests that (i) is an
investment company or (ii) would be an investment company under section
3(a) of the Investment Company Act (15 U.S.C. 80a-3(a)) but for the
exceptions to that definition provided for in sections 3(c)(1) and
3(c)(7) of the Investment Company Act (15 U.S.C. 80a-3(c)(1) and 80a-
3(c)(7)).
* * * * *

    By the Commission.

    Dated: June 20, 2006.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 06-5650 Filed 6-26-06; 8:45 am]

BILLING CODE 8010-01-P


[Federal Register: January 18, 2011 (Volume 76, Number 11)]
[Notices]
[Page 2940-2941]
[DOCID:fr18ja11-103]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63692; File No. SR-Phlx-2010-163]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order
Granting Approval of Proposed Rule Change Relating to Obvious Errors
Respecting Complex Trades

January 11, 2011.
    On November 17, 2010, NASDAQ OMX PHLX LLC (``Phlx'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend Rule 1092, Obvious Errors and
Catastrophic Errors, to address obvious and catastrophic errors
involving complex orders. The proposed rule change was published for
comment in the Federal Register on December 1, 2010.\3\ The Commission
received no comment letters on the proposal. This order approves the
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 63367 (November 23,
2010), 75 FR 74755 (``Notice'').
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    The proposed rule change would amend Rule 1092, Obvious Errors and
Catastrophic Errors, to address obvious and catastrophic errors
involving trades of one complex order against another complex order.
Specifically, the proposal is designed to address a situation in which
one component (or leg) of a complex order is deemed an obvious (or
catastrophic) error, but the other component(s) are not. In such
situation, the proposed rule change would permit all legs of a complex
order execution to be nullified when one leg of such complex order can
be nullified as an obvious or catastrophic error under Rule 1092,\4\
provided that the execution involved a complex order executing against
another complex order (such that all of the same parties are involved
in the trade).\5\ The proposed rule does not address complex orders
that do not trade against other complex orders.
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    \4\ Rule 1092 provides a framework for reviewing the price of a
transaction to determine whether that price was an ``obvious error''
pursuant to objective standards. When a participant believes he/she
received one or more executions at an erroneous price, a participant
may notify the Options Exchange Officials (``OEOs'') and request the
review of a trade as a possible obvious error. An obvious error will
be deemed to have occurred when the execution price of a transaction
is higher or lower than the theoretical price for a series by a
certain amount depending on the type of option. OEOs use one of
three criteria when determining the theoretical price of an options
execution, which are enumerated in Rule 1092(b). The theoretical
price is then compared to an obvious/catastrophic error chart within
Rule 1092(a). If the transaction price meets this threshold, the
transaction may be adjusted or nullified.
    \5\ See proposed Rule 1092(c)(v)(A). This would occur when a
complex order executes against another complex order, with each
piece executing through the System against each other. The Notice
provides the following example of such a trade. Assume a customer
trades a call spread at a net price of $0.50 by buying the January
50 calls at $3.00 and selling the January 55 calls at $2.50. If the
January 50 calls should have been trading at $7.00 and thus met the
obvious error threshold in Rule 1092, then the entire complex trade
would be nullified only if the January 50 and 55 calls traded as a
complex order against another complex order, rather than as two
separate trades. Currently, the trade involving the January 50 calls
is nullified and the January 55 Calls trade would stand, which,
according to the Exchange, likely was not intended by either party.
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    In addition, the proposal would make three minor corrections: (i) A
reference in Rule 1092(b)(ii) to Rule 1014(c)(1)(A)(i)(a) is inverted
and should instead say Rule 1014(c)(i)(A)(1)(a); (ii) the words
``obvious error'' in Rule 1092(e)(i)(B) are being capitalized to match
the rest of the rule; and (iii) a reference to ``AUTOM'' in Rule
1092(e)(ii) is outdated and will be deleted, leaving reference to the
``Help Desk.''
    The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange \6\ and, in
particular, the

requirements of Section 6(b) of the Act \7\ and the rules and
regulations thereunder. Specifically, the Commission finds that the
proposal is consistent with Section 6(b)(5) of the Act,\8\ in that the
proposal is designed to promote just and equitable principles of trade,
to prevent fraudulent and manipulative acts, to remove impediments to
and to perfect the mechanism for a free and open market and a national
market system, and, in general, to protect investors and the public
interest.
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    \6\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that, in approving proposals relating to
adjustment or nullification of trades involving obvious errors, it has
stated that the determination of whether an obvious error has occurred
and the process for reviewing such a determination should be based on
specific and objective criteria and subject to specific and objective
procedures.\9\ The Commission notes that the proposed change to Rule
1092 provides specific and objective procedures for determining whether
a trade should be nullified. The purpose of the new provision is to
provide that obvious and catastrophic errors related to complex orders
that trade against other complex orders will be nullified. The
Commission also notes that the proposed rule change, by providing that
obvious and catastrophic errors related to complex orders that trade
against other complex orders will be nullified, is designed to mitigate
the risk to both parties to a complex order trade involving two complex
orders, neither or whom, according to the Exchange, intended to end up
with just one piece of the complex order.\10\ Therefore, the Commission
believes that the proposed rule change is consistent with the Act.
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    \9\ See, e.g., Securities Exchange Release Nos. 58778 (October
14, 2008), 73 FR 62577 (October 21, 2008) and 54228 (July 27, 2006),
71 FR 44066 (August 3, 2006) (SR-CBOE-2006-14) (approving revisions
to CBOE's Obvious Error Rules).
    \10\ See Notice, supra note 3.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\11\ that the proposed rule change (SR-Phlx-2010-163) is hereby
approved.
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    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-891 Filed 1-14-11; 8:45 am]
BILLING CODE 8011-01-P