A diversified fund that contemplates investing in derivatives must
consider how to value these instruments for purposes of calculating the
75% bucket based upon its ``total assets'' and for purposes of
calculating whether the fund has invested 5% of the value of its total
assets in the securities of any one ``issuer.'' In addition, the fund
must determine the identity of the issuer of each such derivative.
1. Valuation of Derivatives for Purposes of Determining a Fund's
Classification as Diversified or Non-Diversified
    When determining the value of a fund's total assets for purposes of
determining the fund's classification as diversified or non-
diversified, the fund must calculate the value of any derivative held
by the fund. Under the Act, ``unless the context otherwise requires,''
derivatives (and all other assets) held by a fund must be valued for
diversification purposes using market values and fair values, at the
end of the fund's last preceding fiscal quarter, or, if subsequently
acquired, their cost.\136\
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    \136\ See section 2(a)(41)(A) of the Act.
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    For purposes of calculating NAV under the Act's valuation
provisions, derivatives are generally valued using a ``market value''
measure for exchange-traded derivatives and a ``fair value'' measure
for OTC derivatives; under either measure, the value of a derivative
would appear to be the value at which the derivative could be sold or
otherwise transferred at the relevant time.\137\ Compliance with the
valuation provisions of the Act helps to ensure, among other things,
that the prices at which fund shares are purchased and redeemed are
fair and do not result in dilution of shareholder interests or other
harm to shareholders.\138\
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    \137\ For additional discussion of valuation requirements and
guidance, see infra Section VI. (Valuation of Derivatives).
    \138\ Compliance Programs of Investment Companies and Investment
Advisers, Investment Company Act Release No. 26299 (Dec. 17, 2003)
[68 FR 74714 (Dec. 24, 2003)] available at http://www.sec.gov/rules/final/ia-2204.pdf.
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    The diversification requirements are designed to prevent a fund
that holds itself out as diversified from having heightened exposure to
one or a few issuers and help to accurately inform investors about the
nature of the fund. Given that derivatives generally are designed to
convey a leveraged return based on a reference asset over a period of
time, their mark-to-market values at a given point do not reflect the
asset base on which future gains and losses will be based or otherwise
represent the potential future exposure of the fund under the
derivatives investment. Use of a mark-to-market value for derivatives
held by a fund could thus permit a fund to maintain an ongoing exposure
to a single issuer or group of issuers in excess of 5% of the fund's
assets on a notional basis, while continuing to classify itself as
diversified.\139\
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    \139\ For example, a fund that holds itself out as diversified
may have invested four percent of its assets in securities of an
issuer to which it has additional exposure through a total return
swap that creates exposure equal to another four percent of its
assets on a notional basis, yielding a combined exposure to the
issuer of eight percent of the fund's total assets. The current
mark-to-market value of the total return swap would likely be
sufficiently low to enable the fund to calculate its investments in
the issuer at less than five percent of its total assets, but, its
total exposure to that issuer is over five percent of its total
assets.
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    Should the Commission consider whether application of the
diversification requirements to derivatives is a ``context [that]
otherwise requires'' a different measure of value than the statutory
definition of ``value?'' The value at which the derivative can be sold
or otherwise transferred will reflect the gains or losses on that
investment at a point in time. Would the use of the notional amount of
the derivative, rather than its liquidation value, better achieve the
purposes of the diversification provisions of the Act? The Commission
requests comment on these issues and related questions set forth below.

2. Identification of the Issuer of a Derivative for Purposes of
Determining a Fund's Classification as Diversified or Non-Diversified
    The diversification requirements restrict a fund that is classified
as diversified from investing, with respect to its 75% bucket, more
than 5% of the value of its total assets in the securities of any one
issuer. The Act defines the term ``issuer'' as ``every person who
issues or proposes to issue any security, or has outstanding any
security which it has issued,'' \140\ unless the context otherwise
requires.\141\ In general, the ``issuer'' of an OTC derivative entered
into by a fund would appear to be the fund's counterparty, and the
``issuer'' of an exchange-traded derivative would appear to be the
clearinghouse due to the novation.\142\ However, a derivative may have
a reference asset that also has an issuer, e.g., a total return swap on
the common stock of a corporate issuer. In such a case, the potential
exposure of the fund created by the derivative is to both the
counterparty to the contract and the issuer of the reference security.
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    \140\ Section 2(a)(22) of the Act.
    \141\ Section 2(a) of the Act.
    \142\ See Exemptions for Security-Based Swaps Issued by Certain
Clearing Agencies, Securities Act Release No. 9222 (June 9, 2011)
[76 FR 34920 (June 15, 2011)] at n. 18 and accompanying text,
available at http://www.sec.gov/rules/proposed/2011/33-9222.pdf
(also describing ``novation'' as a process through which the
original obligation between a buyer and seller is discharged through
the substitution of the central counterparty as seller to buyer and
buyer to seller, creating two new contracts).
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C. Request for Comment

    The Commission requests comment concerning the application of the
Act's diversification requirements to derivatives held in fund
portfolios, including the following specific issues:
     Valuation of Derivatives for Purposes of the
Diversification Requirements. As discussed above, the diversification
requirements are designed to preclude a fund that has classified itself
as ``diversified'' from concentrating its portfolio investments in the
securities of any single issuer. In light of this purpose, how should a
derivative be valued for purposes of applying the diversification
tests? Could investors be misled by a fund's disclosure that it is
diversified when it has ongoing exposure to a single issuer or group of
issuers in excess of 5% of the fund's assets on a notional basis? In
what circumstances, if any, would mark-to-market value provide an
adequate measure of a fund's exposure to an issuer such that the
purposes of the diversification requirements would be fulfilled? If a
current market value measure is appropriate for this purpose, should
any additional safeguards be adopted to address circumstances in which
a derivative's potential future exposure may materially exceed its
current market value? For example, should the ``diversification''
classification be qualified or supplemented to reflect the impact on
the fund's diversification of the notional exposures created by
derivatives? The Commission also requests comment concerning the
potential for derivatives exposures to be understated. Further, if
derivatives exposures are potentially understated, how should the issue
be addressed? For example, should funds be required to provide
additional information to investors? Also, if mark-to-market values are
ascribed to derivatives for purposes of the diversification
requirements, how should negative values for derivatives be treated?
     Alternative Diversification Standards. Should different or
additional diversification standards be developed that would better
address the types of exposures attainable through derivatives?
     Treatment of Counterparty Issues under the Diversification
Requirements. In light of the statutory purpose of preventing a fund
from holding itself out as diversified even though it is dependent upon
the performance of a small number of issuers, should counterparties to
derivatives investments with funds be considered issuers of securities
for purposes of the diversification requirements? If counterparty
obligations under a derivative investment are considered securities of
an issuer for purposes of the diversification requirements, how should
such obligations be measured for this purpose? The 2010 ABA Derivatives
Report recommends that, for purposes of determining a fund's
classification as diversified or non-diversified, a fund should be able
to disregard its exposures to its derivative investment counterparties
and that counterparty exposures should be addressed separately under
section 12(d)(3) of the Act, in part to assure that counterparty
exposures would be addressed for non-diversified as well as diversified
funds.\143\ Would it be preferable to address counterparty exposures
under section 12(d)(3)? \144\ If so, should diversification issues
relating to counterparties that are not securities-related issuers
continue to be addressed under the Act's diversification provisions?
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    \143\ 2010 ABA Derivatives Report, supra note 8, at 27-28.
    \144\ Under section 12(d)(3) of the Investment Company Act,
funds generally may not purchase or otherwise acquire any security
issued by, or any other interest in, the business of a broker,
dealer, underwriter, or investment adviser (``securities-related
issuer''). See infra discussion in Section IV. (Exposure to
Securities-Related Issuers Through Derivatives).
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     Relevance of Reference Assets Under Derivatives to
Diversification Requirements. Under the 2010 ABA Derivatives Report's
suggested approach, a derivative's reference asset would be considered
a security issued by an issuer for purposes of the diversification
requirements, an approach that the 2010 ABA Derivatives Report
indicates is already followed by many funds when calculating ``long
exposures'' to the fund.\145\ Should the issuer of reference assets
underlying a derivative entered into by a fund be considered to be the
issuer of a security for purposes of the diversification requirements
in lieu of, or in addition to, the counterparty? If not, how, if at
all, should exposure to the issuer of a reference asset be disclosed to
investors and the potential inconsistency of such exposure with
diversification categorization be addressed?
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    \145\ 2010 ABA Derivatives Report, supra note 8, at 26.
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     Are there special considerations that need to be taken
into account for smaller funds? How might taking such considerations
into account impact investor protection?

IV. Exposure to Securities-Related Issuers Through Derivatives

    Funds engaging in derivatives investments may also confront issues
under the Act's restrictions upon acquisition of interests in
securities-related issuers. In this section of the release, the
Commission discusses the application of section 12(d)(3) and rule 12d3-
1, which address a fund's exposure to securities-related issuers, to
funds' use of derivatives. The Commission seeks comment on the manner
in which the Act's prohibition on such acquisitions and the
Commission's exemptive rule granting limited relief from that
prohibition should apply in the context of derivatives.

A. Investment Company Act Limitations on Investing in Securities-
Related Issuers

    Under section 12(d)(3) of the Investment Company Act, funds
generally may not purchase or otherwise acquire any security issued by,
or any other interest in, the business of a broker, dealer,
underwriter, or investment adviser (``securities-related

issuer'').\146\ There are two reasons for this prohibition. First, it
limits a fund's exposure to the entrepreneurial risks of securities-
related issuers, including the fund's potential inability to extricate
itself from an illiquid investment in a securities-related issuer.\147\
Second, it is one of several Investment Company Act provisions which,
taken together, prohibit fund sponsors, which include broker-dealers,
underwriters, and investment advisers, from taking advantage of the
funds that they sponsor.\148\ Specifically, the prohibition has the
effect of limiting the possibility of abusive reciprocal practices
\149\ between funds and securities-related issuers.
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    \146\ Section 12(d)(3) of the Act. See also Statement of the
Commission Advising All Registered Investment Companies to Divest
Themselves of Interest and Securities Acquired in Contravention of
the Provisions of Section 12(d)(3) of the Investment Company Act of
1940 within a Reasonable Period of Time, Investment Company Act
Release No. 3542 (Sept. 21, 1962) [27 FR 9652 (Sept. 29, 1962)]
(``1962 Statement'') (stating that ``prohibited purchases or
acquisitions occur not only when a security or interest is
originally purchased or acquired, but also when investment companies
* * * hold an interest in a portfolio company which thereafter by
merger, consolidation, reorganization * * * or otherwise, acquires
an interest in a dealer, broker, underwriter or investment
adviser''); Exemption for Acquisition by Registered Investment
Companies of Securities Issued by Persons Engaged Directly or
Indirectly in Securities Related Businesses, Investment Company Act
Release No. 13725 (Jan. 17, 1984) [49 FR 2912 (Jan. 24, 1984)]
(``1984 Proposing Release'') at n.2 and accompanying text
(discussing the 1962 Statement).
    \147\ See 1984 Proposing Release, supra note 146, at n. 7 and
accompanying text (discussing that ``[i]n 1940, securities related
businesses, for the most part, were organized as private
partnerships. By investing in such businesses, investment companies
would expose their shareholders to potential losses which were not
present in other types of investments; if the business failed, the
investment company as a general partner would be held accountable
for the partnership's liabilities; if the business floundered, the
investment company would be locked into its investment.''). Rule
12d3-1 under the Act has, since 1984, provided a limited exemption
from section 12(d)(3) for acquisitions of certain securities and,
until 1993, addressed the liquidity concern underlying section
12(d)(3) by limiting the equity securities of a securities-related
issuer that a fund may acquire to ``margin securities,'' as defined
in Regulation T of the Board of Governors of the Federal Reserve
System, and generally limiting the permissible debt securities to
``investment grade securities,'' as determined by at least one
nationally recognized statistical rating organization. See, e.g.,
1984 Proposing Release, supra note 146, at nn. 24-25 and
accompanying text. The rule has never permitted a fund to acquire a
general partnership interest in a securities-related business.
    \148\ See id. at n. 8 and accompanying text.
    \149\  See, e.g., id. at n. 9 and accompanying text (``Such
reciprocal practices include the possibility that an investment
company might purchase securities or other interests in a broker-
dealer to reward that broker-dealer for selling fund shares, rather
than solely on investment merit. Similarly, the staff has expressed
concern that an investment company might direct brokerage to a
broker-dealer in which the company has invested to enhance the
broker-dealer's profitability or to assist it during financial
difficulty, even though that broker-dealer may not offer the best
price and execution.'')
---------------------------------------------------------------------------

    Rule 12d3-1 under the Act provides funds with a limited exception
from this prohibition. Under the rule, a fund may acquire securities of
any person that (a) derives 15 percent or less of its gross revenues
from ``securities related activities,'' \150\ as long as the fund does
not control such person after the acquisition, or (b) derives more than
15 percent of its gross revenues from ``securities related
activities,'' subject to limits on the percentage of the issuer's
securities that may be acquired by a fund.\151\ The rule does not
permit a fund to acquire a general partnership interest in a
securities-related issuer.\152\
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    \150\ The rule defines ``securities related activities'' as
``activities as a broker, a dealer, an underwriter, an investment
adviser registered under the Investment Advisers Act of 1940, as
amended, or as an investment adviser to a registered investment
company.''
    \151\ Under these limits, a fund may not acquire more than 5% of
that class of the issuer's outstanding equity securities or more
than 10% of the outstanding principal amount of the issuer's debt
securities, and may not have more than 5% of the value of the fund's
total assets invested in the securities of the issuer. Rule 12d3-1
defines ``equity security'' in accordance with rule 3a11-1 under the
Exchange Act, which in turn includes ``any stock or similar
security, certificate of interest or participation in any profit
sharing agreement, preorganization certificate or subscription,
transferable share, voting trust certificate or certificate of
deposit for an equity security, limited partnership interest,
interest in a joint venture, or certificate of interest in a
business trust; any security future on any such security; or any
security convertible, with or without consideration into such a
security, or carrying any warrant or right to subscribe to or
purchase such a security; or any such warrant or right; or any put,
call, straddle, or other option or privilege of buying such a
security from or selling such a security to another without being
bound to do so.'' Rule 12d3-1 under the Act defines ``debt
security'' as ``all securities other than equity securities.''
    \152\ Rule 12d3-1 also does not permit the acquisition of a
security issued by the fund's promoter, principal underwriter, or
investment adviser, or an affiliated person of the promoter,
principal underwriter, or investment adviser, subject to an
exception for certain subadvisory relationships.
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B. Counterparty to a Derivatives Investment

    When a fund invests in an OTC derivative, the fund receives the
obligation of its counterparty to perform under the contract. If the
counterparty is a securities-related issuer, a fund's acquisition of
that obligation may constitute an acquisition of a security or another
interest in a securities-related issuer within the scope of section
12(d)(3) of the Investment Company Act.\153\ As noted above, in the
case of exchange-traded derivatives that are cleared, the issuer of the
derivative typically is the clearinghouse. In a no-action letter, the
staff did not object to the assertion that, in acquiring an exchange-
traded option, a fund generally would not appear to be acquiring
securities issued by, or an interest in, a securities-related
issuer.\154\ In the case of OTC derivatives, if a fund's counterparty
is a securities-related issuer, the fund's transaction with the
counterparty may represent the acquisition of a security issued by, or
an interest in, that issuer.\155\
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    \153\ If the counterparty is not a securities-related issuer,
the fund may enter into the transaction without being limited by
section 12(d)(3). The fund will need to monitor the status of its
counterparty during the term of the transaction to ensure that the
counterparty remains a non-securities-related issuer. See 1962
Statement, supra note 146.
    \154\ See, e.g., Institutional Equity Fund, SEC Staff No-Action
Letter (Feb. 27, 1984).
    \155\ The Commission has stated, for example, that in entering
into a repurchase agreement, a fund may be acquiring an interest in
the counterparty that is prohibited by section 12(d)(3). See, e.g.,
Treatment of Repurchase Agreements and Refunded Securities as an
Acquisition of the Underlying Securities, Investment Company Act
Release No. 25058 (July 5, 2001) at n. 5 and accompanying text [66
FR 36156 at note 5 (July 11, 2001)].
---------------------------------------------------------------------------

    If an OTC derivative with a securities-related issuer as the
counterparty is a security issued by that counterparty, then the fund
may be able to rely on rule 12d3-1 to engage in the transaction.\156\
If such a derivative is not a security issued by the counterparty, but
the transaction may be deemed to be the fund's acquisition of ``an
interest in'' a securities-related issuer (the counterparty), then rule
12d3-1 would not be available because it exempts only acquisitions of
securities, and the transaction would be prohibited under the
Investment Company Act. There is no bright-line test distinguishing
transactions that may or may not

constitute a fund's acquisition of an ``interest in'' a securities-
related issuer. However, a fund's acquisition of a general partnership
interest in a securities-related issuer, whether or not the interest is
a security, is not permitted by rule 12d3-1.\157\
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    \156\ A derivative is likely to be categorized as a debt
security subject to the 10% limitation of rule 12d3-1. Rule 12d3-1
defines ``debt security'' as ``all securities other than equity
securities.'' The Commission also by order has exempted certain
transactions from section 12(d)(3) that may have involved a fund's
acquisition of a security from a securities-related issuer. See,
e.g., the following orders issued by the Commission involving
principal-protected funds: AIG SunAmerica Asset Management Corp., et
al., Investment Company Act Release Nos. 26725 (notice) (Jan. 21,
2005) [70 FR 3946 (Jan. 27, 2005)] and 26760 (Feb. 16, 2005) (order)
(by virtue of entering into a protection arrangement with an AIG
affiliate that is a broker, dealer, underwriter, investment adviser
to a registered investment company, or an investment adviser
registered under the Investment Advisers Act, a fund may be deemed
to have acquired a security from the AGI affiliate); Merrill Lynch
Principal Protected Trust, et al., Investment Company Act Release
Nos. 26164 (Aug. 20, 2003) (notice) [68 FR 51602 (Aug. 27, 2003)]
and 26180 (Sept. 16, 2003) (order) (by virtue of entering into a
protection arrangement with a Merrill Lynch affiliate that is a
broker, dealer, underwriter, investment adviser to a registered
investment company, or an investment adviser registered under the
Investment Advisers Act of 1940, a fund may be deemed to have
acquired a security from the Merrill Lynch affiliate).
    \157\ In addition, section 12(d)(3) of the Act prohibits a
fund's acquisition of any security issued by ``or any other interest
in'' a securities-related issuer. The Commission has noted that, in
enacting section 12(d)(3), Congress was particularly concerned with
funds investing as general partners in securities-related issuers.
See Exemption of Acquisitions of Securities Issued by Persons
Engaged in Securities-Related Business, Investment Company Act
Release No. 19204 (Jan. 4, 1993) [58 FR 3243 (Jan. 8, 1993)] at n.
10 and accompanying text. Rule 12d3-1(c) provides that ``this
section does not exempt the acquisition of: (1) a general
partnership interest[.]''
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C. Exposure to Other Securities-Related Issuers Through Derivatives

    The issue of whether an OTC derivative transaction is prohibited
under the Investment Company Act as an impermissible acquisition of a
security issued by, or an interest in, a securities-related issuer,
also may require analysis of a fund's exposure to a reference asset
underlying the derivative. If the derivative transaction is based upon
the price or value of securities issued by, or interests in, a
securities-related issuer, the fund's relationship to the issuer of the
reference asset may raise both of the concerns underlying section
12(d)(3)--the fund's exposure to the risks of that securities-related
issuer and the potential for reciprocal practices. For example, if the
issuer of the reference asset is a broker-dealer, and the fund's
position in the derivative transaction benefits from increases in the
market price of the reference asset, the fund might direct brokerage or
other business to that broker-dealer to enhance the broker-dealer's
profitability. Consequently, the fund could be considered to have
assumed an exposure to a securities-related issuer that is in violation
of section 12(d)(3). In that event, the fund would need to consider the
availability and conditions of rule 12d3-1 with respect to that entity
before determining whether the fund may, and if so, to what extent,
enter into the derivative transaction.
    Certain OTC derivative transactions involve credit support
providers or entities performing similar roles. These entities also may
be securities-related issuers. In that case, the fund would need to
determine whether the provision of credit support or similar protection
for the fund's benefit in the derivative transaction constitutes the
fund's acquisition of a security issued by, or an interest in, the
credit support provider that is a securities-related issuer.\158\ If it
does, then the fund would need to analyze the derivative transaction
under section 12(d)(3) with respect to the credit support provider as
well.
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    \158\ See rule 12d3-1(d)(7)(v) under the Act, deeming an
acquisition of demand features or guarantees as not being the
acquisition of securities of a securities-related issuer provided
certain conditions are met.
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D. Valuation of Derivatives for Purposes of Rule 12d3-1 Under the
Investment Company Act

    As noted above, if a derivative transaction involves an acquisition
by the fund of a security issued by a securities-related issuer, the
fund may be able to rely on rule 12d3-1 under the Investment Company
Act, which provides a conditional exemption to the prohibition in
section 12(d)(3). For purposes of the conditions of rule 12d3-1, if the
securities-related issuer, in its most recent fiscal year, derived more
than 15% of its gross revenues from securities-related activities, as
defined in the rule, the fund would need to determine whether such
derivative is an equity or debt security and apply the percentage
limitations in the rule accordingly.\159\ Among other things, the fund
would need to determine whether, immediately after the acquisition of
such derivative, the fund has invested not more than five percent of
the value of its total assets in the securities of the issuer. For
purposes of this calculation, the exposure of the fund to its
counterparty or its exposure to the issuer of a reference security may
be understated were the current market or fair value of the derivative
the appropriate measure. The potential future exposure of the fund to
the securities-related issuer is, in each case, likely to be
unaccounted for by a current mark-to-market standard. Neither the
Commission nor the staff has addressed this point. The Commission
understands that many funds perform the calculation under rule 12d3-1
based upon the notional amounts of derivatives transactions, although
this practice is not uniform.
---------------------------------------------------------------------------

    \159\ See supra discussion at note 151.
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E. Request for Comment

    The Commission asks for comment on all aspects of the application
of section 12(d)(3) and rule 12d3-1 to funds' derivative transactions.
     Do commenters believe that OTC derivative transactions
between funds and securities-related issuers implicate the purposes of
section 12(d)(3), i.e., protection against the entrepreneurial risks of
securities-related issuers and the potential for reciprocal practices
that disadvantage fund investors? If so, in what respects? If not, on
what basis should a fund's exposure to a securities-related issuer in a
derivatives transaction be distinguished from other types of
investments to which section 12(d)(3) applies?
     Do commenters believe that a fund's exposure to price
movements or performance of a reference security issued by a
securities-related issuer implicates the purposes of section 12(d)(3)?
If not, on what basis would such exposure be distinguished from other
types of investments subject to section 12(d)(3)?
     Should the extent to which the securities-related issuer's
obligations are secured by collateral provided by the issuer affect
this analysis? If so, what specific effect should collateral
arrangements be accorded and by what criteria should qualifying
collateral arrangements be defined?
     The 2010 ABA Derivatives Report suggests that section
12(d)(3) ``provides an appropriate framework for dealing with fund
counterparty exposures.'' \160\ The 2010 ABA Derivatives Report states
that the counterparties to fund derivative transactions generally fall
within the categories of securities-related issuers addressed by
section 12(d)(3) and that, unlike the diversification requirements
discussed above, section 12(d)(3) applies to all registered investment
companies, regardless of diversification status. The 2010 ABA
Derivatives Report also suggests that the Commission or the staff issue
guidance concerning the manner in which the various provisions of rule
12d3-1 under the Act should apply to derivatives.\161\ Is rule 12d3-1
the appropriate framework for exempting certain derivatives
transactions from section 12(d)(3)? Are the existing percentage
limitations in rule 12d3-1 appropriate in the context of derivatives?
Should there be additional limitations or conditions to an exemption
from section 12(d)(3) for derivative transactions? If so, what types of
conditions or limitations? The Commission also asks commenters to
identify and discuss the interpretive issues that may arise when rule
12d3-1 is applied to funds' use of derivatives.
---------------------------------------------------------------------------

    \160\ 2010 ABA Derivatives Report, supra note 8, at 33. The
Report states that ``counterparty exposure'' presents ``the concern
that a counterparty cannot pay a fund the amount that the fund is
due under the derivative instrument * * *.'' Id.
    \161\ Id. at 34-35.

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V. Portfolio Concentration

    In this section, the Commission discusses the Investment Company
Act's provisions regarding portfolio ``concentration'' and the
application of these provisions to a fund's use of derivatives.

A. Investment Company Act Provisions Regarding Portfolio Concentration

    Funds are required to disclose in their registration statements
their policy concerning ``concentrating investments in a particular
industry or group of industries.'' \162\ This requirement reflects the
view that such a policy is likely to be central to a fund's ability to
achieve its investment objectives, and that a fund that concentrates
its investments will be subject to greater risks than funds that do not
follow the policy.\163\ The concentration requirements also are
intended to prevent funds from substantially changing the nature and
character of their businesses without shareholder approval.\164\ Funds
are prohibited from deviating from their policy concerning
``concentration of investments in any particular industry or groups of
industries'' as recited in their registration statements without
obtaining shareholder approval.\165\ The Investment Company Act does
not include definitions of the terms ``concentration'' and ``industry
or groups of industries.'' The Commission has stated generally that a
fund is concentrated in a particular industry or group of industries if
the fund invests or proposes to invest more than 25% of the value of
its net assets in a particular industry or group of industries.\166\
The Commission also has stated that, in determining industry
classifications, a fund may select its own industry classifications,
but such classifications must be reasonable and should not be so broad
that the primary economic characteristics of the companies in a single
class are materially different.\167\
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    \162\ See Section 8(b)(1)(E) of the Act; Form N-1A, Items 4, 9
(instruction 4) and 16(c)(1)(iv); and Form N-2, Items 8.2.b(2) and
17.2.e.
    \163\ Registration Form Used by Open-End Management Investment
Companies, Investment Company Act Release No. 23064 (Mar. 13, 1998)
(``Release 23064'') [63 FR 13916 (Mar. 23, 1998)] at nn. 98-99 and
accompanying text.
    \164\ See Jaretzki, supra note 131, at 317. The concentration
requirements focus on all of the funds' investments, and not solely
on their investments in securities.
    \165\ Section 13(a)(3) of the Act. See also Securities and
Exchange Commission's Brief Amicus Curiae dated March 25, 2010, In
re: Charles Schwab Corp. Securities Litigation, Master File No. C-
08-01510-WHA (N.D. Cal.) (``SEC Schwab Amicus Brief'') at 2-3; In
re: Charles Schwab Corp. Securities Litigation, No. C 08-01510 WHA,
2010 U.S. Dist. LEXIS 32113 (N.D. Cal. Mar. 30, 2010) (``Schwab
Opinion'') at *3-*4.
    \166\ See also Form N-1A, Item 9, instruction 4 (defining
industry concentration for Form N-1A disclosure purposes as
``investing more than 25% of a Fund's net assets in a particular
industry or group of industries''); but compare Form N-2, Item 8.2.b
(instruction) (defining industry concentration for Form N-2 purposes
as ``25 percent or more of the value of Registrant's total assets
invested or proposed to be invested in a particular industry or
group of industries''). See also, e.g., Release No. 23064, supra
note 163, (``The Commission's staff has taken the position for
purposes of the concentration disclosure requirement that a fund
investing more than 25% of its assets in an industry is
concentrating in that industry.'').
    \167\ See SEC Schwab Amicus Brief, supra note 165, at 8 and 9.
See also Schwab Opinion, supra note 165, at *20 (``This order agrees
* * * that a promoter is free to define an industry in any
reasonable way when it establishes a fund and assumes for sake of
argument that the promoter may unilaterally, even after the fund is
up and running, clarify in a reasonable way a definitional line that
may otherwise be vague. But once the promoter has drawn a clear line
and thereafter gathers in the savings of investors, the promoter
must adhere to the stated limitation unless and until changed by a
stockholder vote.'')
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B. Issues Relating to the Application of the Act's Concentration
Provisions to a Fund's Use of Derivatives

    When a fund enters into a derivatives transaction, the fund may
gain exposure to more than one industry or group of industries. For
example, if a fund and a bank enter into a total return swap on stock
issued by a corporation in the pharmaceuticals industry, the fund will
have gained exposure to the banking industry (i.e., the industry
associated with the fund's counterparty) as well as exposure to the
pharmaceuticals industry (i.e., the industry associated with the issuer
of the reference asset). As noted above, the Commission has stated that
generally a fund is concentrated in a particular industry or group of
industries if the fund invests or proposes to invest more than 25% of
the value of its net assets in a particular industry or group of
industries. This standard does not, by its terms, address derivative
transactions by which a fund obtains exposure to a particular industry
or group of industries, whether through exposure to the counterparty to
the transaction or through its contractual exposure to a reference
asset.
    Another issue relevant to determining industry concentration is
whether a fund values its derivatives using notional amount or market
value. The 2010 ABA Derivatives Report states that ``using the notional
value, rather than the market value, of a derivative instrument may
inflate an industry position relative to the fund's current economic
exposure.'' \168\ The 2010 ABA Derivatives Report further states that
``funds typically comply with their concentration policies by looking
to the reference asset and not any counterparty to the derivative
instrument. Funds typically use market values for these calculations *
* *.'' \169\
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    \168\ 2010 ABA Derivatives Report, supra note 8, at n. 57.
    \169\ Id. at 29.
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C. Request for Comment

    The Commission requests comment on the application of concentration
requirements to funds' investments in derivatives, including the
following questions.
     How do funds apply the concentration requirements to their
investments in derivatives? Do they consider current market value or
the notional amount of a derivative (or some other measure) for
purposes of determining whether they have invested 25% or more of the
value of their net assets in a particular industry or group of
industries? Do funds focus solely upon the exposures to the industries
with which their derivatives counterparties are associated, or do they
also take into account their exposures to the industry or industries
(if any) of the reference assets underlying those derivatives?
     Is it consistent with the policies and purposes underlying
the concentration requirements for funds to focus on the industry of
the issuer of the reference asset and disregard the exposure to the
industry or industries with which the derivatives counterparty is
associated? Should this depend on the level of collateral (if any)
posted by the counterparty?
     Should the Commission provide guidance to funds on how
they should comply with the concentration requirements when they use
derivatives? If so, what should that guidance entail?
     Are there special considerations that need to be taken
into consideration for smaller funds? How might taking such
considerations into account impact investor protection?

VI. Valuation of Derivatives

    In this section, the Commission discusses, and requests comment on,
the valuation of derivatives used by funds for purposes of applying the
various provisions of the Investment Company Act.

A. Investment Company Act Valuation Requirements

    When calculating their NAVs, funds must determine the value of
their assets, including the value of the derivatives that they hold.
The Investment Company Act specifies how funds must determine the value
of their assets.

Under the Act, all funds (other than money market funds),\170\ whether
open-end or closed-end, must calculate their NAVs by using the market
values of their portfolio securities when market quotations for those
securities are ``readily available.'' \171\ When market quotations for
a fund's portfolio securities or other assets are not readily
available, the fund must calculate its NAV by using the fair value of
those securities or assets, as determined in good faith by the fund's
board of directors.\172\
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    \170\ Money market funds that comply with the provisions of rule
2a-7 under the Act [17 CFR 270.2a-7], however, may value their
portfolio securities on the basis of amortized cost. In addition,
under certain circumstances, open-end funds may value certain of
their portfolio securities on the basis of amortized cost. See
Valuation of Debt Instruments by Money Market Funds and Certain
Other Open-End Investment Companies, Investment Company Act Release
No. 9786 (May 31, 1977) [42 FR 28999 (June 7, 1977)], available at
http://www.sec.gov/rules/interp/1977/ic-9786.pdf.
    \171\ Section 2(a)(41)(B) of the Act. See also ASR 118 and ASR
113, supra note 14. ``Readily available'' refers to public market
quotations that are current, i.e., ``[r]eadily available market
quotations refers to reports of current public quotations for
securities similar in all respects to the securities in question.''
ASR 113, supra note 14, at 2.
    \172\ ASR 113, supra note 14.
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    There is no single methodology for determining the fair value of a
security or other asset because fair value depends upon the facts and
circumstances of each situation.\173\ As a general principle, however,
the fair value of a security or other asset held by a fund would be the
amount that the fund might reasonably expect to receive for the
security or other asset upon its current sale.\174\ When determining
the fair value of a security or other asset held by a fund, all
indications of value that are available must be taken into
account.\175\
---------------------------------------------------------------------------

    \173\ ASR 118, supra note 14.
    \174\ ASR 113 and ASR 118, supra note 14.
    \175\ ASR 118, supra note 14.
---------------------------------------------------------------------------

B. Application of the Valuation Requirements to a Fund's Use of
Derivatives

    For many derivatives that are securities, such as exchange-traded
options, market quotations typically are readily available. As a
result, a fund generally must use market values to value such
derivatives. For many other derivatives, however, market quotations are
not readily available, and a fund that holds such derivatives is
required to value those derivatives at their fair values as determined
by the fund's board of directors.
    Valuation of some derivatives may present special challenges for
funds. Some derivatives may have customized terms, including
contractual restrictions on their transferability. Some derivatives
also may restrict a fund's ability to close out the contract or to
enter into an offsetting transaction. For some derivatives, there may
be no quotations available from independent sources, and for some
derivatives the fund's counterparty may be the only available source of
pricing information.

C. Request for Comment

    The Commission requests comment on funds' valuation of derivatives,
including the following questions:
     How do funds determine the fair values of derivatives that
they hold? To what extent do valuation determinations depend upon the
type of derivative, reference asset, trading venue, and other factors?
     How do funds, when fair valuing derivatives, assess the
accuracy and reliability of pricing information that is obtained from
their counterparties or from other sources?
     How do funds take into account, when valuing derivatives,
contractual restrictions on transferability, and restrictions on their
ability to close out the transactions or to enter into offsetting
transactions?
     Some derivatives held by funds may have negative values
due to, among other things, changes in the value of the reference
assets underlying the derivatives. Do funds calculate the values of
such derivatives in the same manner as they value derivatives that have
positive values? If not, why not?
     Should the Commission issue guidance on the fair valuation
of derivatives under the Investment Company Act? If so, what issues
should be addressed by that guidance?
     Are there special considerations that need to be taken
into consideration for smaller funds? How might taking such
considerations into account impact investor protection?

VII. General Request for Comment

    In addition to the specific issues highlighted for comment, the
Commission invites members of the public to address any other matters
that they believe are relevant to the use of derivatives by funds.

    Dated: August 31, 2011.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-22724 Filed 9-6-11; 8:45 am]
BILLING CODE 8011-01-P


[Federal Register Volume 78, Number 31 (Thursday, February 14, 2013)]
[Notices]
[Pages 10685-10686]
[FR Doc No: 2013-03427]

=======================================================================
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DEPARTMENT OF TRANSPORTATION

National Highway Traffic Safety Administration

[U.S. DOT Docket No. NHTSA-2012-0169]

Reports, Forms, and Recordkeeping Requirements: Agency
Information Collection Activity Under OMB Review

AGENCY: National Highway Traffic Safety Administration (NHTSA), DOT.

ACTION: Notice; Correction.

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SUMMARY: In compliance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3501 et seq.), this notice announces that the Information
Collection Request (ICR) abstracted below has been forwarded to the
Office of Management and Budget (OMB) for review and comment. The ICR
describes the nature of the information collections and their expected
burden. The Federal Register Notice with a 60-day comment period was
published on December 11, 2012 [FR Doc. 2012-29844, Vol. 77, No. 238,
Pages 73736-73737].

DATES: Comments must be submitted on or before March 18, 2013.

FOR FURTHER INFORMATION CONTACT: Jonathan Walker, contract task order
manager, Office of Regulatory Analysis and Evaluation, National Highway
Traffic Safety Administration, 1200 New Jersey Ave. SE., NVS-432,
Washington, DC 20590. Mr. Walker's phone number is<PHONE_NUMBER> and his
email address is<EMAIL_ADDRESS>
SUPPLEMENTARY INFORMATION:

National Highway Traffic Safety Administration

    Title: Tire Pressure Monitoring Systems Special Studies.
    OMB Number: 2174 Renewal.
    Type of Request: Request for public comment on proposed collection
of information.
    Abstract: Improperly inflated tires pose a safety risk, increasing
the chance of skidding, hydroplaning, longer stopping distances, and
crashes due to flat tires and blowouts. In an effort to decrease the
number of vehicles with improperly inflated tires, Tire Pressure
Monitoring Systems (TPMS) were

mandated in Federal Motor Vehicle Safety Standard (FMVSS) No. 138, so
that drivers are warned when the pressure in one or more of the
vehicle's tires has fallen to 25 percent or more below the placard
pressure, or a minimum level specified in the standard, whichever
pressure is higher. Executive Order 12866 requires Federal agencies to
evaluate their existing regulations and programs and measure their
effectiveness in achieving their objectives. This survey (Tire Pressure
Monitoring Systems Special Study) was conducted in order to evaluate
whether the frequency of underinflated tires has decreased in vehicles
with TPMS in comparison to vehicles of the same age without TPMS.
Survey results led the agency to the determination that additional
study is needed in regards to analogous aspects of medium- and heavy-
duty (MD/HD) trucks. The supplementary study of MD/HD trucks is not
expected to begin until 2014; therefore, NHTSA seeks an extension of
Tire Pressure Monitoring Systems Special Studies in preparation for
this additional work.
    Affected Public: Individuals.
    Estimated Total Annual Burden: 1,925 hours.

ADDRESSES: Send comments, within 30 days, to the Office of Information
and Regulatory Affairs, Office of Management and Budget, 725-17th
Street NW., Washington, DC 20503, Attention NHTSA Desk Officer.
    Comments are invited on: Whether the proposed collection of
information is necessary for the proper performance of the functions of
the Department, including whether the information will have practical
utility; the accuracy of the Department's estimate of the burden of the
proposed information collection; ways to enhance the quality, utility
and clarity of the information to be collected; and ways to minimize
the burden of the collection of information on respondents, including
the use of automated collection techniques or other forms of
information technology. A comment to OMB is most effective if OMB
receives it within 30 days of publication.

    Authority:  44 U.S.C. 3506(c)(2)(A).

James F. Simons,
Director, Office of Regulatory Analysis and Evaluation.
[FR Doc. 2013-03427 Filed 2-13-13; 8:45 am]
BILLING CODE 4910-59-P


[Federal Register Volume 88, Number 104 (Wednesday, May 31, 2023)]
[Notices]
[Page 34887]
[FR Doc No: 2023-11535]

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DEPARTMENT OF HOMELAND SECURITY

Federal Emergency Management Agency

[Internal Agency Docket No. FEMA-4703-DR; Docket ID FEMA-2023-0001]

Navajo Nation; Major Disaster and Related Determinations

AGENCY: Federal Emergency Management Agency, DHS.

ACTION: Notice.

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SUMMARY: This is a notice of the Presidential declaration of a major
disaster for the Navajo Nation (FEMA-4703-DR), dated April 11, 2023,
and related determinations.

DATES: The declaration was issued April 11, 2023.

FOR FURTHER INFORMATION CONTACT: Dean Webster, Office of Response and
Recovery, Federal Emergency Management Agency, 500 C Street SW,
Washington, DC 20472,<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION: Notice is hereby given that, in a letter
dated April 11, 2023, the President issued a major disaster declaration
under the authority of the Robert T. Stafford Disaster Relief and
Emergency Assistance Act, 42 U.S.C. 5121 et seq. (the ``Stafford
Act''), as follows:

    I have determined that the damage to the lands associated with
the Navajo Nation resulting from severe winter storms and flooding
during the period of January 14 to January 17, 2023, is of
sufficient severity and magnitude to warrant a major disaster
declaration under the Robert T. Stafford Disaster Relief and
Emergency Assistance Act, 42 U.S.C. 5121 et seq. (the ``Stafford
Act''). Therefore, I declare that such a major disaster exists for
the Navajo Nation.
    In order to provide federal assistance, you are hereby
authorized to allocate from funds available for these purposes such
amounts as you find necessary for federal disaster assistance and
administrative expenses.
    You are authorized to provide Public Assistance and Hazard
Mitigation for the Navajo Nation. Consistent with the requirement
that federal assistance be supplemental, any federal funds provided
under the Stafford Act for Public Assistance and Hazard Mitigation
will be limited to 75 percent of the total eligible costs.
    Further, you are authorized to make changes to this declaration
for the approved assistance to the extent allowable under the
Stafford Act.

    The Federal Emergency Management Agency (FEMA) hereby gives notice
that pursuant to the authority vested in the Administrator, under
Executive Order 12148, as amended, Benigno B. Ruiz, of FEMA is
appointed to act as the Federal Coordinating Officer for this major
disaster.
    The following areas have been designated as adversely affected by
this major disaster:

    Navajo Nation for Public Assistance.
    The Navajo Nation is eligible to apply for assistance under the
Hazard Mitigation Grant Program.

    The following Catalog of Federal Domestic Assistance Numbers
(CFDA) are to be used for reporting and drawing funds: 97.030,
Community Disaster Loans; 97.031, Cora Brown Fund; 97.032, Crisis
Counseling; 97.033, Disaster Legal Services; 97.034, Disaster
Unemployment Assistance (DUA); 97.046, Fire Management Assistance
Grant; 97.048, Disaster Housing Assistance to Individuals and
Households In Presidentially Declared Disaster Areas; 97.049,
Presidentially Declared Disaster Assistance--Disaster Housing
Operations for Individuals and Households; 97.050, Presidentially
Declared Disaster Assistance to Individuals and Households--Other
Needs; 97.036, Disaster Grants--Public Assistance (Presidentially
Declared Disasters); 97.039, Hazard Mitigation Grant.

Deanne Criswell,
Administrator, Federal Emergency Management Agency.
[FR Doc. 2023-11535 Filed 5-30-23; 8:45 am]
BILLING CODE 9111-23-P