[Federal Register: August 6, 2008 (Volume 73, Number 152)]
[Proposed Rules]
[Page 45646-45656]
[DOCID:fr06au08-20]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 275

[Release Nos. 34-58264; IC-28345; IA-2763 File No. S7-22-08]
RIN 3235-AJ45

Commission Guidance Regarding the Duties and Responsibilities of
Investment Company Boards of Directors With Respect to Investment
Adviser Portfolio Trading Practices

AGENCY: Securities and Exchange Commission.

ACTION: Proposed guidance; request for comment.

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SUMMARY: The Securities and Exchange Commission is publishing for
comment this proposed guidance to boards of directors of registered
investment companies to assist them in fulfilling their fiduciary
responsibilities with

respect to overseeing the trading of investment company portfolio
securities. The guidance focuses on the role of an investment company
board in overseeing the best execution obligations of the investment
adviser hired to invest in securities and other instruments on the
investment company's behalf. In this respect, we address the conflicts
of interest that may exist when an investment adviser uses an
investment company's brokerage commissions to purchase services other
than execution, such as the purchase of brokerage and research services
through client commission arrangements. The Commission also is
requesting comment on whether to propose that advisers be subject to
new disclosure requirements concerning the use of client commission
arrangements to investment company shareholders and other investment
advisory clients.

DATES: Comments should be received on or before October 1, 2008.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/proposed.shtml); or
     Send an e-mail to<EMAIL_ADDRESS>Please include
File Number S7-22-08 on the subject line; or
     Use the Federal eRulemaking Portal (http://
www.regulations.gov). Please follow the instructions provided for
submitting comments.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-22-08. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for public inspection and copying in the
Commission's Public Reference Room, 100 F Street, NE., Washington, DC
20549 on official business days between the hours of 10 a.m. and 3 p.m.
All comments received will be posted without change; we do not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Matthew N. Goldin, Senior Counsel,
Karen L. Rossotto, Advisor to the Director, or Thomas R. Smith, Jr.,
Senior Advisor to the Director, Office of the Director, at 202-551-
6720, Division of Investment Management, Securities and Exchange
Commission, 100 F Street, NE., Washington, DC 20549-0506.

I. Introduction and Summary

    Many investment advisers, in connection with trades placed on
behalf of their registered investment company, or ``fund,'' clients,
receive brokerage and research services in reliance on the safe harbor
provided under section 28(e) \1\ of the Securities Exchange Act of 1934
(``Exchange Act'').\2\ In recent years, changes in client commission
practices, evolving technologies, and marketplace developments have
transformed the brokerage and investment management industries and
securities trading practices. In recognition of changing market
conditions and current industry practices, in July 2006, we issued an
interpretive release that provided guidance to investment advisers with
respect to, among other things, the scope of the safe harbor provided
under section 28(e) when advisers use brokerage commissions to purchase
brokerage and research services for their managed accounts.\3\ In
addition to providing guidance to investment advisers on their use of
soft dollars, we believe it is important to provide guidance to fund
boards of directors concerning their responsibilities to oversee the
adviser's satisfaction of its best execution obligations, including the
adviser's use of fund brokerage commissions and the overall transaction
costs that the fund incurs when the fund buys or sells portfolio
securities.\4\ As we have stated previously, transaction costs are a
concern for fund investors for two reasons.\5\ First, for many funds,
the amount of transaction costs incurred may be substantial.\6\ Second,
fund advisers are subject to a number of potential conflicts of
interest in conducting portfolio transactions on behalf of clients that
are funds.\7\ Fund brokerage commissions, which are paid out of fund
assets, may, for example, be used to obtain brokerage and research
services under section 28(e) of the Exchange Act that might otherwise
be paid for directly by the fund's investment adviser.
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    \1\ 15 U.S.C. 78bb(e). For a discussion of the section 28(e)
safe harbor, see infra section III.C. Whereas section 28(e) refers
to a money manager as a ``person * * * [who] exercise[s] * * *
investment discretion with respect to an account,'' we refer to
money managers to funds in this Release as ``investment advisers.''
    \2\ 15 U.S.C. 78a.
    \3\ Commission Guidance Regarding Client Commission Practices
Under section 28(e) of the Securities Exchange Act of 1934, Exchange
Act Release No. 54165 (July 18, 2006) [71 FR 41978 (July 24, 2006)]
(``2006 Release'').
    \4\ See infra section III (discussing fund directors'
obligations with respect to overseeing advisers' trading of fund
portfolio securities). Broadly defined, a fund's transaction costs
include all of its costs that are associated with trading portfolio
securities. Transaction costs may include, among other things,
commissions, spreads, market impact costs, and opportunity costs.
Concept Release: Request for Comments on Measures to Improve
Disclosure of Mutual Fund Transaction Costs, Investment Company Act
Release No. 26313 (Dec. 18, 2003) [68 FR 74820 (Dec. 24, 2003)]
(``Concept Release''), at section II.A. For purposes of this
Release, the use of the term ``securities'' includes all instruments
that an investment company may invest in under the Investment
Company Act of 1940 [15 U.S.C. 80a] (``Investment Company Act'').
    \5\ See Concept Release at section I. However, we are aware that
the interests of a fund's adviser and the fund's investors generally
are aligned when an adviser places fund trades because advisers
typically seek to minimize transaction costs due to the fact that
such costs may detract from the fund's performance.
    \6\ For example, one study estimates that the average annual
trading cost for a sample of 1706 U.S. equity funds during the
period 1995-2005 was almost 20 percent higher than the average
expense ratio for those funds. These estimates include the effect of
commissions, spreads, and market impact costs. Roger M. Edelen,
Richard Evans & Gregory Kadlec, Scale Effects in Mutual Fund
Performance: The Role of Trading Costs (working paper dated March
17, 2007), available at http://papers.ssrn.com/sol3/
papers.cfm?abstract_id=951367.
    \7\ See Concept Release at section I.
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    We recognize that conflicts of interest are inherent when an
investment adviser manages money on behalf of multiple clients. As
discussed in section II of this Release, conflicts are also inherent in
the external management structure of funds. Investment advisers are
required to disclose material conflicts of interest to their clients,
and those conflicts should be managed appropriately. Fund directors
play a pivotal role in overseeing conflicts of interest investment
advisers face when they have funds as clients. As explained in further
detail in section III of this Release, fund transaction costs may not
be readily apparent to investors. It is imperative that the fund's
directors both understand and scrutinize the payment of transaction
costs by the fund \8\ and determine that payment of transaction costs
is in the best interests of the fund and the fund's shareholders.\9\
Although

directors are not required or expected to monitor each trade, they
should monitor the adviser's trading practices and the manner in which
the adviser fulfills its obligation to seek best execution when trading
fund portfolio securities.\10\ In doing so, the fund's board should
demand, and the fund's adviser must provide, all information needed by
the fund's board to complete this review process.\11\ Without
sufficient oversight by the fund's board, transaction costs might
inappropriately include payment for services that benefit the fund's
adviser at the expense of the fund and that the board believes should
be paid directly by the adviser rather than with fund assets.
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    \8\ See id. See also infra section II at note 26 and
accompanying text (discussing the external management structure of
most funds).
    \9\ See Role of Independent Directors of Investment Companies,
Investment Company Act Release No. 24082 (Oct. 14, 1999) [64 FR
59826 (Nov. 3, 1999)], at nn.7 & 12 (``Mutual funds are formed as
corporations or business trusts under state law and, like other
corporations and trusts, must be operated for the benefit of their
shareholders. * * * Under state law, directors are generally
responsible for the oversight of all of the operations of a mutual
fund.'').
    \10\ The directors of an investment company have a continuing
fiduciary duty to oversee the company's brokerage practices. See
2006 Release at n.6 (citing Order Approving Proposed Rule Change and
Related Interpretation under section 36 of the Investment Company
Act, Investment Company Act Release No. 11662 (Mar. 4, 1981) [46 FR
16012 (Mar. 10, 1981)]). See also 2 Tamar Frankel, Regulation of
Money Managers 67 (1978) (``The directors should examine the
adviser's practices in placing portfolio transactions with broker
dealers and the use of the brokerage business for the benefit of the
adviser or its affiliates, and ensure that there are no violations [
] of the law. * * *'') (citing Lutz v. Boas, 39 Del. Ch. 585, 171
A.2d 381 (1961) and William J. Nutt, A Study of Mutual Fund
Independent Directors, 120 U. Pa. L. Rev. 179, 181 (1971)).
    \11\ See Concept Release at section I.
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    We have received requests from fund directors for guidance on our
view of their responsibilities in overseeing the activities of the
investment advisers that trade their funds' portfolio securities. These
requests include inquiries as to how directors may properly fulfill
their responsibilities with respect to overseeing an adviser's
satisfaction of its best execution obligations, including the adviser's
trade execution practices and the adviser's use of fund brokerage
commissions.\12\ Today we are proposing guidance with respect to
information a fund board should request that an investment adviser
provide to enable fund directors to determine that the adviser is
fulfilling its fiduciary obligations to the fund and using the fund's
assets in the best interest of the fund. Our proposed guidance also is
intended to assist the board in directing the adviser as to how fund
assets should be used.\13\
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    \12\ In connection with these requests for guidance, fund
directors have informed us that fund boards are spending increasing
amounts of time on trading practices in light of the growing
complexity in this area.
    \13\ At the July 12, 2006 open meeting at which the Commission
considered the 2006 Release, several of the Commissioners
specifically noted that guidance for fund boards was a critical
element in protecting investors against abuses in this area. An
electronic link to an archived webcast of the open meeting is
available at http://www.connectlive.com/events/secopenmeetings.
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    Our proposed guidance would not impose any new or additional
requirements. Rather, it is intended to assist fund directors in
approaching and fulfilling their responsibilities of overseeing and
monitoring the fund adviser's satisfaction of its best execution
obligations and the conflicts of interest that may exist when advisers
trade the securities of their clients that are funds.\14\ In developing
this proposed guidance, we have taken into account the wide variety of
funds and advisers in terms of size, asset classes, complexity, and
operations. We have also considered the changing market environment in
the brokerage and investment management industries.\15\ We feel that
with rapidly evolving market conditions and trading practices, it is
appropriate to give guidance at this time. For these reasons, we are
proposing guidance for fund directors to consider in performing their
responsibilities and in determining what is appropriate in light of
their fund's particular circumstances.
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    \14\ See infra section III. See also 2006 Release at section
II.A.
    \15\ In light of the advancements in the market and the
continuously evolving technology influencing industry practices, the
Commission staff talked with a variety of investment advisers and
industry representatives, including independent fund directors and
directors' counsel, to help ensure that our proposed guidance today
reflects actual market practices and is based on factual industry
experience.
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    Our intention in this proposed guidance is to assist boards. We
wish to provide guidance that is relevant, useful, and beneficial to
fund directors in fulfilling their responsibilities to act in the best
interest of investors in this area. We request comment on all aspects
of our proposed guidance to help us in achieving this goal. In
addition, as the evolving nature of brokerage practices greatly
influences how directors approach their oversight responsibilities in
this area, we specifically request comment on the current state of the
brokerage and investment management industries and its effect on
advisers' trading of fund portfolio securities.

II. Summary of Law Regarding Fiduciary Responsibilities of Investment
Company Directors

    In fulfilling their responsibilities to a fund that they oversee,
fund directors should understand the nature and source of their legal
obligations to the fund and the fund's shareholders. Because funds are
generally formed as corporations, business trusts, or partnerships \16\
under state law, fund directors and trustees, like other corporate
directors, are subject to a ``duty of care'' and a ``duty of loyalty''
under state and common law fiduciary principles,\17\ as well as the
obligations imposed on them under the Investment Company Act.\18\
    A director's duty of care generally requires a fund director to
perform his or her oversight responsibilities with the care of an
ordinarily prudent person in a like position under similar
circumstances.\19\ The duty of care thus establishes the degree of
attention and consideration required of a director in matters related
to the fund he or she oversees. As such, a director's duty of care
incorporates a duty to be informed, requiring that a director be
reasonably informed about an issue before making a decision relating to
that issue.\20\ To be reasonably informed about an issue, a director
must inform him or herself of all material information regarding that
issue reasonably available to him or her.\21\ In fulfilling these
obligations, a fund director may rely on written and oral reports
provided by management, auditors, fund counsel, the fund's chief
compliance officer (``CCO''), and other experts and committees of the
board when making decisions, so long as the director reasonably
believes that the reports are reliable and competent with respect to
the relevant matters.\22\

    A director's duty of loyalty requires him or her to act in the best
interests of the fund and the fund's shareholders.\23\ The duty of
loyalty encompasses a director's obligations to avoid conflicts of
interest with the fund and the fund's shareholders, not to put his or
her personal interests before the interests of the fund and the fund's
shareholders, and not to profit from his or her position as a
fiduciary.\24\
    In addition to statutory and common law obligations, fund directors
are also subject to specific fiduciary obligations relating to the
special nature of funds under the Investment Company Act.\25\ Unlike
typical operating companies, funds ordinarily do not have any employees
that are truly their own, but rather are generally formed and managed
by a separately owned and operated sponsor, commonly an investment
adviser.\26\ This external management structure of most funds may at
times create conflicts of interest for investment advisers with clients
that are funds. When it enacted the Investment Company Act, Congress
recognized the potential for abuse created by the unique structure of
funds.\27\ To protect fund shareholders, the Act requires that each
registered fund be governed by a board of directors with the authority
to supervise the fund's operations.\28\ The Act further requires that
at least 40 percent of a fund's board be independent in order to serve
as ``independent watchdogs'' in monitoring the fund's managing
organization.\29\ A fund board has the responsibility, among other
duties, to monitor the conflicts of interest facing the fund's
investment adviser and determine how the conflicts should be managed to
help ensure that the fund is being operated in the best interest of the
fund's shareholders.\30\

III. Board Oversight of Investment Adviser Trading Practices

    In overseeing the use of fund assets and in monitoring the
conflicts of interest faced by a fund's investment adviser, a fund
board must consider the investment adviser's practices when it trades
the fund's portfolio securities.\31\ A fund's investment adviser is a
fiduciary with respect to the fund and therefore must act in the fund's
best interest.\32\ Lower transaction costs generally are in the mutual
interest of a fund's adviser and the fund's investors, and advisers
typically seek to minimize transaction costs when trading fund
securities so as not to detract from the fund's performance. At times,
however, there may be incentives for an investment adviser to
compromise its fiduciary obligations to the fund in its trading
activities in order to obtain certain benefits that serve its own
interests or the interests of other clients. These conflicts of
interest may exist, for example, when an adviser executes trades
through an affiliate, when it determines the allocation of trades among
its clients, and when it trades securities between clients. In
addition, the use of fund brokerage commissions to pay for research and
brokerage services may give incentives for advisers to disregard their
best execution obligations when directing orders to obtain brokerage
commission services. It also may give incentives for advisers to trade
the fund's securities in order to earn credits for fund brokerage
commission services. In accordance with its fiduciary obligations and
provisions of the Advisers Act, an adviser must make full and fair
disclosure of these conflicts to a client and disclose how the adviser
will manage each conflict before the adviser may engage in conduct that
constitutes a conflict.\33\
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    \16\ See, e.g., A. Joseph Warburton, Should Mutual Funds Be
Corporations: A Legal & Econometric Analysis, 33 Iowa J. Corp. L.
745, 748-49 (2008).
    \17\ See, e.g., Md. Code Ann., Corps. and Ass'ns Sec.  2-
405.1(a) (2008) (requiring a director to perform his duties: ``(1)
In good faith; (2) In a manner he reasonably believes to be in the
best interests of the corporation; and (3) With the care that an
ordinarily prudent person in a like position would use under similar
circumstances.'').
    \18\ 15 U.S.C. 80a. See supra note 4.
    \19\ See, e.g., Model Bus. Corp. Act Ann. Sec.  8.30(b) (3d ed.
2002); Md. Code Ann., Corps. and Ass'ns Sec.  2-405.1(a)(3) (2008).
    \20\ See, e.g., Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985)
(explaining that, although directors are assumed to have been
informed in making a business decision, when the burden of proving
that a board was insufficiently informed is met, the board will have
been found to have breached its duty of care).
    \21\ See id. at 872 (discussing the standard for determining
whether a director's business judgment is informed).
    \22\ See, e.g., Graham v. Allis-Chalmers Manufacturing Co., 188
A.2d 125, 130 (1963) (explaining that, under general principles of
the common law, a director is entitled to rely on corporate
summaries, reports, and records so long as he or she has not
``recklessly reposed confidence in an obviously untrustworthy
employee, [ ] refused or neglected cavalierly to perform his duty as
a director, or [ ] ignored either willfully or through inattention
obvious danger signs of employee wrongdoing.''). A director should
be satisfied not only that the person providing the report or
opinion is doing so about a matter within his or her knowledge or
expertise and has an appropriate basis for the opinion, but also
that the scope of the report bears on the matter being decided. See
Van Gorkom, 488 A.2d at 875. In addition, to fulfill the duty of
care, a director needs a well-informed decision-making process. This
process may include, among other things, asking for and reviewing
regular financial and other reports, questioning managers and
outside experts about the meaning and implications of reports, and
making inquiries when there are specific causes for concern. Id.
    \23\ See, e.g., Strougo v. Scudder, Stevens and Clark, Inc., 964
F. Supp. 783, 801 (S.D.N.Y. 1997) (citing Md. Code Ann., Corps. and
Assn's Sec.  2-405.1(a)(1) (requiring corporate directors to perform
their duties in ``good faith'') and James J. Hanks, Jr., Maryland
Corporation Law Sec.  6.6(b) (1995-1 Supp.) (explaining that a
director's duty to act in `good faith' is generally synonymous with
the duty of loyalty or the duty of fair dealing)). See also Pepper
v. Litton, 308 U.S. 295, 310-311 (1939) (stating that a fiduciary
``cannot serve himself first and his cestuis second'').
    \24\ See, e.g., Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. Ch.
1939) (``Corporate officers and directors are not permitted to use
their position of trust and confidence to further their private
interests''); see also Pepper, 308 U.S. at 310-311 (stating that a
fiduciary ``cannot use his power for his personal advantage and to
the detriment of the stockholders and creditors no matter how
absolute in terms that power may be and no matter how meticulous he
is to satisfy technical requirements.''). See also Fed. Regulation
of Sec. Comm., Am. Bar Ass'n, Fund Director's Guidebook 98 (3d ed.
2006) (``Simply put, directors should not use their position for
personal profit, gain, or other personal advantage.'').
    \25\ See, e.g., Strougo, 964 F. Supp. at 798 (holding that a
fund shareholder has a private right of action under section 36(a)
of the Investment Company Act against the independent directors of a
fund for breach of fiduciary duty involving personal misconduct).
See also Protecting Investors: A Half Century of Investment Company
Regulation, Division of Investment Management 251 (May 1992)
(``Protecting Investors'').
    \26\ See Protecting Investors 251 n.3.
    \27\ See Investment Company Act section 1(b)(2) [15 U.S.C. 80a-
1(b)(2)]; U.S. Sec. and Exch. Comm'n, Report on Investment Trusts
and Investment Companies, H.R. Doc No. 76-279, Part III (1939). See
also Joseph F. Krupsky, The Role of Investment Company Directors, 32
BUS. LAW. 1733, 1737-40 (1977); William J. Nutt, A Study of Mutual
Fund Independent Directors, 120 U. Pa. L. Rev. 179, 181 (1971).
    \28\ See S. Rep. No. 91-184, at 4902-03 (1969) (``The directors
of a mutual fund, like directors of any other corporation will
continue to have * * * overall fiduciary duties as directors for the
supervision of all of the affairs of the fund.'').
    \29\ 15 U.S.C. 80a-10(a). See also Burks v. Lasker, 441 U.S.
471, 484-485 (1979) (``Congress' purpose in structuring the Act as
it did is clear * * * it `was designed to place the unaffiliated
directors in the role of ``independent watchdogs.'' ' (quoting
Tannenbaum v. Zeller, 552 F.2d 402 (2d Cir. 1977)).
    \30\ See Tannenbaum, 552 F.2d at 406 (noting that the
independent director requirements under the Investment Company Act,
in particular, were designed to ensure that ``mutual funds would
operate in the interest of all classes of [funds'] securities
holders, rather than for the benefit of investment advisers,
directors or other special groups.'').
    \31\ See 2006 Release at n.6 (citing Order Approving Proposed
Rule Change and Related Interpretation under Section 36 of the
Investment Company Act, Investment Company Act Release No. 11662
(Mar. 4, 1981) [46 FR 16012 (Mar. 10, 1981)] (``The directors of an
investment company have a continuing fiduciary duty to oversee the
company's brokerage practices.'')). See also Compliance Programs of
Investment Companies and Investment Advisers, Advisers Act Release
No. 2204 (Dec. 17, 2003) [68 FR 74714 (Dec. 24, 2003)] (``Compliance
Release''), at Section II.A.2.b (requiring that a fund's board
approve the policies and procedures of the fund's service providers,
including its investment adviser; the approval must be based on a
finding by the board that the policies and procedures are reasonably
designed to prevent violation of the Federal securities laws by the
fund's service providers). We have stated that we expect that the
adviser's compliance policies and procedures will address, to the
extent that they are relevant, the adviser's trading practices. See
Compliance Release at II.A.1.
    \32\ Investment advisers are fiduciaries and have an obligation
under the Investment Advisers Act of 1940 [15 U.S.C. 80b]
(``Advisers Act'') and state law to act in the best interest of
their clients. See Restatement (Second) of Trusts Sec.  170(1)
(2008) (``The trustee is under a duty to the beneficiary to
administer the trust solely in the interest of the beneficiary'');
SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 191 (1963)
(``The Investment Advisers Act of 1940 thus reflects a congressional
recognition `of the delicate fiduciary nature of an investment
advisory relationship. * * * ' '' (quoting 2 LOSS, Securities
Regulation 1412 (2d ed. 1961))); Transamerica Mortgage Advisors,
Inc. v. Lewis, 444 U.S. 11, 17 (1979) (noting that the legislative
history of the Advisers Act ``leaves no doubt that Congress intended
to impose enforceable fiduciary obligations'' on investment
advisers).
    \33\ See Capital Gains, 375 U.S. at 191, 196-197 (``The
Investment Advisers Act of 1940 reflects * * * a congressional
intent to eliminate, or at least to expose, all conflicts of
interest which might incline an investment adviser, consciously or
unconsciously, to render advice which was not disinterested.'').
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    The fund's board, in providing its consent on the fund's behalf,
should be sufficiently familiar with the adviser's trading practices to
satisfy itself that the adviser is fulfilling its fiduciary obligations
and is acting in the best interest of the fund. In some cases where the
Commission has adopted

exemptive rules that permit funds to engage in transactions otherwise
prohibited by the Investment Company Act, the Commission has imposed
conditions designed to address certain conflicts of interest faced by
advisers by mandating that directors take particular action in
evaluating those conflicts.\34\ In other cases, the Commission has
determined that the conflicts relating to a particular practice are
unmanageable and has therefore prohibited advisers' activities in that
area altogether.\35\
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    \34\ See, e.g., Investment Company Act rule 10f-3(c)(10) [17 CFR
270.10f-3(c)(10)] (fund boards must adopt procedures for purchases
by the fund of securities from an affiliated underwriter and assess
compliance on a quarterly basis); Investment Company Act rule 17a-
7(e) [17 CFR 270.17a-7(e)] (fund boards must adopt procedures for
purchases from and sales to affiliated funds and assess compliance
on a quarterly basis); Investment Company Act rule 17a-8(a) [17 CFR
270.17a-8(a)] (fund boards must make certain determinations in
evaluating mergers with affiliated funds); and Investment Company
Act rule 17e-1(b) [17 CFR 270.17e-1(b)] (fund boards must adopt
procedures for brokerage transactions with affiliates and assess
compliance on a quarterly basis).
    \35\ See, e.g., Prohibition on the Use of Brokerage Commissions
to Finance Distribution, Investment Company Act Release No. 26591
(Sep. 2, 2004) [69 FR 54728 (Sep. 9, 2004)], at section VII.E
(explaining that the Commission's adoption in 2004 of Investment
Company Act rule 12b-1(h) [17 CFR 270.12b-1(h)], which, among other
things, prohibits a fund from using brokerage commissions to pay for
the distribution of the fund's shares, was based on a conclusion
that the practice of trading brokerage business for sales of fund
shares poses conflicts of interest that the Commission believed to
be ``largely unmanageable'').
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    Two specific areas where conflicts may arise when an adviser trades
a fund's portfolio securities concern the adviser's obligation to seek
best execution and to otherwise use fund assets, including brokerage
commissions, in the best interest of the fund. The following sections
provide guidance on the types of information a fund board should seek
in order to evaluate whether the adviser to its fund has fulfilled its
obligations to the fund with respect to these concerns.

A. Board Oversight of an Investment Adviser's Duty To Seek Best
Execution and Consideration of Transaction Costs

    As a fiduciary to a client that is a fund, an investment adviser
has the duty to seek best execution of securities transactions it
conducts on the fund's behalf.\36\ As we have stated previously, in
seeking best execution, an investment adviser must seek to ``execute
securities transactions for clients in such a manner that the client's
total cost or proceeds in each transaction is the most favorable under
the circumstances.'' \37\ In this regard, in seeking to maintain best
execution on behalf of a client that is a fund, an adviser should
consider factors beyond simply commission rates or spreads,\38\
including ``the full range and quality of a broker's services in
placing brokerage. * * *'' \39\ These might include, among other
things, the value of research provided, execution capability, financial
responsibility, and responsiveness to the adviser.\40\
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    \36\ See Interpretive Release Concerning the Scope of section
28(e) of the Securities Exchange Act of 1934 and Related Matters,
Exchange Act Release No. 23170 (Apr. 23, 1986) [51 FR 16004, 16011
(Apr. 30, 1986)] (``1986 Release''), at Section V (explaining that
an investment adviser has the obligation to seek ``best execution''
of a client's transaction); Delaware Management Company, Inc., 43
S.E.C. 392 (1967); Arleen W. Hughes, 27 S.E.C. 629 (1948), aff'd sub
nom. Hughes v. SEC, 174 F.2d 969 (D.C. Cir. 1949).
    \37\ 1986 Release at section V.
    \38\ A fund may incur spread costs rather than commissions when
a dealer trades with it on a principal basis. Spread costs are
incurred indirectly when a fund either buys a security from a dealer
at the ``asked'' price or higher or sells a security to a dealer at
the ``bid'' price or lower. The difference between the bid price and
the asked price is known as the ``spread.'' Spread costs include
both an imputed commission on the trade as well as any market impact
cost associated with the trade. Dealer spreads compensate broker-
dealers for, among other things, maintaining a market's trading
infrastructure (i.e., price discovery and execution services), the
broker-dealer's cost of capital, and its assumption of market risk.
Spreads may also reflect the impact of large orders on the price of
a security. The proportion of these two components varies among
different trades. Concept Release at section II.A.2.
    \39\ 1986 Release at section V.
    \40\ Id.
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    When trading portfolio securities of a client that is a fund, an
adviser should consider factors related to minimizing the overall
transaction costs incurred by the fund.\41\ Transaction costs consist
of explicit costs that can be measured directly, such as brokerage
commissions, fees paid to exchanges, and taxes paid, as well as
implicit costs that are more difficult to quantify. Implicit costs,
which may include, among other things, bid/ask spreads, the price
impact of placing an order for trading in a security, and missed trade
opportunity cost, may exceed greatly a transaction's explicit
costs.\42\ Price impact and opportunity cost can be influenced by a
variety of factors--each of which should be considered by an investment
adviser--such as the anonymity of the parties to the trade, the
willingness of the intermediary to commit capital to facilitate the
trade, and the speed and price of the execution. Investment advisers
also can take into account the quality and utility of any research
provided by the broker-dealer.\43\
---------------------------------------------------------------------------

    \41\ See id.
    \42\ For a more detailed discussion of explicit and implicit
transaction costs, see Concept Release at section II.A.
    \43\ See 1986 Release at section V (``A money manager should
consider the full range and quality of a broker's services in
placing brokerage including, among other things, the value of
research provided. * * *''). For further discussion regarding
evaluation of broker-dealer research services, see infra section
III.D.
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    An aspect of an adviser's best execution process that directors
should also consider is the adviser's decision whether to use an
alternative trading system. Newer trading venues, such as ``dark
pools,'' \44\ and the use of advanced mathematical models or
algorithmic trading systems, crossing networks, and other alternative
trading systems, are increasingly prevalent.\45\ Although the use of
such trading venues may provide funds certain benefits (such as
potentially lower execution costs),\46\ they can also raise challenges
to funds in certain situations.\47\
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    \44\ For purposes of this release, our references to the term
``dark pools'' refer to markets that do not display quotes, but
rather execute trades internally without displaying liquidity to
other participants. A number of markets combine non-displayed
liquidity with display of quotes. A substantial portion of the
trading volume of these markets may result from interaction of
orders with their non-displayed liquidity. See, e.g., Elizabeth
Cripps, Shedding Light on the Dark Liquidity Pools, FTMandate, May
2007, available at http://www.ftmandate.com/news/printpage.php/aid/
1442/Shedding_light_on_the_dark_liquidity_pools.html.
    \45\ One recent report noted that although dark pools currently
make up seven to ten percent of equities' share volume in the U.S.,
that percentage is steadily increasing. Celent, LLC, Dark Liquidity
Pools in Europe, Canada, and Japan: A U.S. Phenomenon Goes Abroad
(2007). See also David Bogoslaw, Big Traders Dive Into Dark Pools,
Business Week, Oct. 3, 2007, available at http://
www.businessweek.com/investor/content/oct2007/pi2007102_394204.htm
(noting that the Aite Group predicted in September 2007 that
exchanges' market share of U.S. equity trading would continue to
decline from the current 75 percent, before stabilizing at around 62
percent by 2011, with alternative trading systems, including dark
pools, intensifying fragmentation of the marketplace).
    \46\ Execution costs may be lower on alternative trading
systems. See, e.g., Jennifer Conrad, Kevin Johnson & Sunil Wahal,
Insitutional Trading and Alternative Trading Systems, 70 J. of Fin.
Econ. 99 (2003).
    \47\ For example, we understand that an adviser managing a fund
that invests in companies with smaller capitalizations and more
illiquid securities may need an executing broker-dealer to have
experience and access to a particular market or one with expertise
in a certain geographical area or industry. Advisers to these types
of funds have indicated that they must rely on a relatively large
number of brokers--especially where markets in niche securities have
not developed on newer trading venues--to provide the execution and
research they need with respect to a particular asset class.
---------------------------------------------------------------------------

    We ask for comment on how changes in the brokerage industry should
affect a fund board's oversight of the trading practices of the fund's
adviser. Is our discussion of the brokerage industry (as relevant to
funds and their advisers) accurate? Are there other considerations with
respect to the brokerage industry we should take into account?
    We understand that investment advisers with clients that are funds
employ a wide range of procedures

when selecting broker-dealers for fund securities transactions.\48\ In
consideration of the wide variety of advisers in terms of size and
operations, each adviser should determine what trading intermediary
selection process is most appropriate for its circumstances.\49\
However, as the Commission has stated previously, in its process for
choosing trading intermediaries, an adviser should periodically and
systematically evaluate the performance of broker-dealers handling its
transactions.\50\ In addition, the Commission has stated that an
investment adviser should address its best execution obligations in the
compliance policies and procedures that advisers are required to adopt
and implement under rule 206(4)-7 under the Advisers Act.\51\ Rule 38a-
1 under the Investment Company Act requires that the policies and
procedures of a fund adviser be approved by the fund board based on the
board's finding that the policies and procedures are reasonably
designed to prevent the adviser's violation of the Federal securities
laws.\52\
---------------------------------------------------------------------------

    \48\ See infra note 77 and accompanying text (discussing the
``broker vote'' process employed by many advisers to evaluate
broker-dealers' brokerage and research services).
    \49\ See Compliance Release at section I.A.1 (explaining that,
in mandating investment adviser compliance policies and procedures,
we elected not to impose a single set of universally applicable
required elements because advisers are too varied in their
operations).
    \50\ See 1986 Release at section V.
    \51\ See Compliance Release at section II.A.1. Rule 206(4)-7
under the Advisers Act [17 CFR 275.206(4)-7] requires an investment
adviser to have written compliance policies and procedures in place
that are reasonably designed to prevent it from violating the
Advisers Act and rules the Commission has adopted under the Act. The
rule does not enumerate specific elements that an adviser must
include in its policies and procedures. However, the Commission has
stated that it expects an adviser, in designing its policies and
procedures, to identify conflicts and other compliance factors
creating risk exposure for the firm and its clients in light of the
firm's particular obligations, and then design policies and
procedures that address those risks. See id.
    \52\ 17 CFR 270.38a-1. See also Compliance Release at section
II.A.2.
---------------------------------------------------------------------------

    Fund directors should seek relevant data from the fund's investment
adviser to assist them in evaluating the adviser's procedures regarding
its best execution obligations. These data should typically include,
but not be limited to: (i) The identification of broker-dealers to
which the adviser has allocated fund trading and brokerage; (ii) the
commission rates or spreads paid; (iii) the total brokerage commissions
and value of securities executed that are allocated to each broker-
dealer during a particular period; and (iv) the fund's portfolio
turnover rates. Fund boards may also discuss related matters with the
adviser, which may include the following, where applicable:
     The process for making trading decisions and the factors
involved in the selection of execution venues and the selection of
broker-dealers;
     The means by which the investment adviser determines best
execution and evaluates execution quality as well as how best execution
is affected by the use of alternative trading systems;
     Who negotiates commission rates, how that negotiation is
carried out, whether the amount of commissions agreed to depends on
comparative data with respect to commission rates, and generally how
transactions costs are measured; \53\
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    \53\ Although we are not suggesting that firms need to do so, we
understand that some firms have employed third-party vendors to
assist them in measuring best execution through a transaction cost
analysis using comparative data from across the industry. We also
have been informed that not all companies use the same methodology
to measure trading costs and that there are no commonly accepted
standards as to how to measure price impact.
---------------------------------------------------------------------------

     How the quality of ``execution-only'' trades--trades that
do not include payment for any additional research or services beyond
execution--is evaluated compared to that of other trades (for example,
whether trades that are executed through channels that include an
additional soft dollar component are reviewed in comparison with
execution-only trades to discern any discrepancies in the quality of
execution);
     How the performance of the adviser's traders is evaluated,
as well as the aggregate performance of the firm's traders as a whole,
how the performance of each broker-dealer the adviser uses for fund
portfolio transactions is evaluated, and how problems or concerns that
are identified with a trader or a broker-dealer are addressed;
     If sub-advisers are used, how the adviser provides
oversight and monitors each sub-adviser's activities, including the
trading intermediary selection process; \54\
---------------------------------------------------------------------------

    \54\ Because sub-advisory arrangements take various forms,
directors should have an understanding of the structure of these
arrangements and whether the adviser is appropriately overseeing the
trading activities of the sub-advisers.
---------------------------------------------------------------------------

     To what extent and under what conditions the adviser
conducts portfolio transactions with affiliates;
     The process for trading fixed-income securities and
determining the costs of fixed income transactions;
     How the quality of trade execution is evaluated with
respect to fixed-income and other instruments traded on a principal
basis; and
     If there are international trading activities, how these
trades are conducted and monitored.
    We acknowledge that not all funds would require an evaluation of
each of these factors by their boards. Different factors may be
appropriate for different funds, depending on a fund's investment
objective, trading practices, and personnel.
    We also request comment regarding how boards should approach their
obligations to oversee and evaluate the fund adviser's trading
practices and procedures. Is there further information fund boards
should request that the adviser provide to assist directors in their
review?
    Once the board receives from the adviser information with respect
to the issues outlined above, fund directors should determine whether
the adviser's trading practices are being conducted in the best
interests of the fund and the fund's shareholders. If these interests
are not being best served, the board should direct the adviser
accordingly.
    In addition, when an investment adviser seeks the fund board's
approval of the adviser's compliance policies and procedures, directors
should satisfy themselves that the adviser's policies and procedures
are reasonably designed, adequate, and being effectively implemented to
prevent violations of the Federal securities laws.\55\ Directors may
evaluate the adviser's compliance policies and procedures through
updates from different sources, which may include the fund's or the
adviser's CCO or other appropriate sources.\56\
---------------------------------------------------------------------------

    \55\ 17 CFR 270.38a-1(a)(2)-(3) (requiring that each fund
``[o]btain the approval of the fund's board of directors * * * of
the fund's policies and procedures and those of each investment
adviser * * * which approval must be based on a finding by the board
that the policies and procedures are reasonably designed to prevent
violation of the Federal Securities Laws by the fund, and by each
investment adviser * * *'' and that each fund ``review, no less
frequently than annually, the adequacy of the policies and
procedures of the fund and of each investment adviser. * * *''). See
also Compliance Release at section II.A.2. & II.B.2.
    \56\ 17 CFR 270.38a-1(a)(4)(iii) (requiring that the fund
designate a CCO who must, ``no less than annually, provide a written
report to the board that, at a minimum, addresses,'' among other
things, ``[t]he operation of the policies and procedures of the fund
and each investment adviser. * * *''). See also Compliance Release
at section II.C.2.
---------------------------------------------------------------------------

    Furthermore, with the rapid development of increased options for
trading venues, fund boards need to remain up to date in their
familiarity with the evolving market in this area. We understand that
fund directors approach educating themselves on

industry developments in various ways.\57\
---------------------------------------------------------------------------

    \57\ Some ways we have observed that directors educate
themselves on developments in this area include: (i) Establishing a
committee of the board to specialize in portfolio trading practices;
(ii) requiring that the adviser form special committees to consider
best execution and the use of client commissions and to provide
reports to the board on the adviser's trading activities; (iii)
requesting periodic summaries and analyses from officers of the
adviser to explain the adviser's portfolio trading practices; (iv)
attending trade association events, seminars and/or other education
events relating to brokerage practices; (v) subscribing to third-
party information providers or retaining experts to ensure that
board members remain knowledgeable with respect to market
developments; and (vi) periodically meeting with portfolio managers,
business unit staff, trading personnel and other employees of the
adviser.
---------------------------------------------------------------------------

B. Board Oversight of an Investment Adviser's Use of Fund Brokerage
Commissions

    When trading portfolio securities on behalf of clients that are
funds, there are a number of ways in which an investment adviser may
use a portion of fund brokerage commissions to benefit the fund beyond
execution of the securities transaction. First, a fund adviser may use
a portion of fund brokerage commissions to purchase research and/or
research-related services in accordance with section 28(e) of the
Exchange Act. The research may be ``proprietary'' research, produced by
the broker-dealer executing the securities transaction or its
affiliates,\58\ or it may be ``third-party research,'' produced or
provided by someone other than the executing broker-dealer.\59\
Investment advisers also may purchase third-party research themselves
using cash payments from their own account, or ``hard dollars.''
Furthermore, investment advisers may obtain proprietary and third-party
research through a ``client commission arrangement.'' In a client
commission arrangement, an investment adviser agrees with a broker-
dealer effecting trades for the adviser's client accounts that a
portion of the commissions paid by the accounts will be credited to
purchase research either from the executing broker or another broker,
as directed by the adviser.\60\
---------------------------------------------------------------------------

    \58\ See Thomas P. Lemke & Gerald T. Lins, Soft Dollars and
Other Brokerage Arrangements Sec.  1.04[A] (2005). Proprietary
research is often provided to an investment adviser partly as a quid
pro quo for brokerage business given by the adviser to the broker
producing the research. Alternatively, proprietary research may be
provided without being expressly requested and considered part of
the services obtained in exchange for ``full service,'' or
``bundled,'' commissions that include a sufficient amount of
compensation to cover the cost of research. Id.
    \59\ See id.
    \60\ See 2006 Release at section III (interpreting section 28(e)
to permit the industry flexibility to structure arrangements that
are consistent with the statute and best serve investors).
---------------------------------------------------------------------------

    In addition to obtaining research and research-related services
with fund brokerage commissions,\61\ an adviser may use fund brokerage
commissions in other ways. For example, an adviser may utilize a
commission recapture arrangement, whereby the fund receives a portion,
or rebate, of the brokerage commission (or spread) charged by the
broker-dealer handling the trade. Additionally, an investment adviser
may use fund brokerage to pay certain providers for services utilized
by the fund through an expense reimbursement arrangement with a broker-
dealer and/or its affiliates.\62\
---------------------------------------------------------------------------

    \61\ See infra note 70 (explaining that only commission-based
trades (as opposed to mark-ups or mark-downs or spreads) are covered
under the safe harbor in section 28(e) of the Exchange Act).
    \62\ In expense reimbursement arrangements, also referred to as
``brokerage/service arrangements,'' a broker-dealer typically agrees
to pay a fund's service provider fees (such as custodian fees or
transfer agency fees) and, in exchange, the fund agrees to direct a
minimum amount of brokerage business to the reimbursing broker. The
fund adviser usually negotiates the terms of the contract with the
service provider, and the fees charged under the contract are paid
directly by the broker-dealer. Brokerage/service arrangements may be
structurally similar to client commission arrangements. However,
unlike client commission arrangements, where the receipt of a
benefit by the investment adviser through the use of fund brokerage
commissions gives rise to conflicts of interest, brokerage/service
arrangements generally do not raise these concerns because they
typically involve the use of fund brokerage commissions to obtain
services that directly and exclusively benefit the fund. See Payment
for Investment Company Services with Brokerage Commissions,
Securities Act Release No. 7197 (July 21, 1995) [60 FR 38918 (July
28, 1995)] (``1995 Release''), at nn. 1-2 and accompanying text; see
also 2006 Release at section II.A, n.27.
---------------------------------------------------------------------------

    We specifically request comment on our discussion of the various
uses of fund brokerage. Have we described the use of fund brokerage
commissions and client commissions by advisers correctly? Are fund
brokerage commissions used in ways that we have not addressed but
should address in this proposed guidance?
    Because fund brokerage commissions are fund assets, investment
advisers have a conflict of interest when they use commissions to
obtain research and related services that they would otherwise have to
pay for themselves. Advisers therefore are subject to certain
requirements when using fund brokerage in this manner. First, section
17(e)(1) of the Investment Company Act prohibits investment advisers to
registered investment companies from using soft dollars to obtain
research or services outside the confines of the safe harbor provided
by section 28(e) of the Exchange Act.\63\ Second, investment advisers,
as fiduciaries, generally are prohibited from receiving any benefit
from the use of fund assets,\64\ although an investment adviser's use
of soft dollars creates opportunities for the adviser to benefit in
ways that may not be in the best interest of the fund. These conflicts
of interest arise in a number of ways when investment advisers use fund
assets in soft dollar programs. For example:
---------------------------------------------------------------------------

    \63\ 15 U.S.C. 80a-17(e)(1). Section 17(e)(1) of the Investment
Company Act generally makes it unlawful for any affiliated person of
a registered investment company to receive any compensation (other
than a regular salary or wages from the company) for the purchase or
sale of any property to or for the investment company when that
person is acting as an agent other than in the course of that
person's business as a broker-dealer. Essentially, section 17(e)(1)
may be violated if an affiliated person of a registered investment
company, such as an adviser, receives compensation (other than a
regular salary or wages from the company) for the purchase or sale
of property to or from the investment company. Absent the protection
of section 28(e), which provides a safe harbor from liability under
other federal and state law, an investment adviser's receipt of
compensation--including in the form of brokerage or research
services--under a client commission arrangement for the purchase or
sale of any property, including securities, for or to the investment
company, may constitute a violation of section 17(e)(1). See U.S. v.
Deutsch, 451 F.2d 98, 110-11 (2d Cir. 1971), cert. denied, 404 U.S.
1019 (1972). If a fund adviser's client commission arrangement is
not consistent with section 28(e), disclosure of the arrangement
would not cure any section 17(e)(1) violation. See 2006 Release at
n.31; 1986 Release at n.55.
    \64\ An adviser's obligation to act in the best interest of its
client imposes a duty on the adviser not to profit at the expense of
the client without the client's consent. See, e.g., Restatement
(Second) of Trusts Sec.  170 cmt. a, Sec.  216 (1959). Also, section
206 of the Advisers Act establishes federal fiduciary standards
governing the conduct of investment advisers. Under sections 206(1)
and (2), in particular, an adviser must discharge its duties in the
best interest of its clients, and must fully disclose a conflict of
interest with a client, before engaging in conduct that constitutes
a conflict. See Transamerica, 444 U.S. at 17.
---------------------------------------------------------------------------

     The use of fund brokerage commissions to buy research may
relieve an adviser of having to produce the research itself or having
to pay for the research with ``hard dollars'' from its own resources;
     The use of soft dollars may give an adviser an incentive
to compromise its fiduciary obligations and to trade the fund's
portfolio in order to earn soft dollar credits;
     The availability of soft dollar benefits that an adviser
may receive from fund brokerage commissions creates an incentive for an
adviser to use broker-dealers on the basis of their research services
provided to the adviser rather than the quality of execution provided
in connection with fund transactions;
     An adviser may seek to use fund brokerage commissions to
obtain

research that benefits the adviser's other clients, including clients
that do not generate brokerage commissions (such as fixed-income
funds), those that are not otherwise paying more than the lowest
available commission rate in exchange for soft dollar products or
services (i.e., ``paying up'' in commission costs), or those from which
the adviser receives the greatest amount of compensation for its
advisory services;
     The use of soft dollars may disguise an adviser's true
costs and enable an adviser to charge advisory fees that do not fully
reflect the costs for providing the portfolio management services; \65\
---------------------------------------------------------------------------

    \65\ See infra section III.E (discussing the obligations of fund
advisers and fund boards under section 15(c) of the Investment
Company Act).
---------------------------------------------------------------------------

     The use of fund brokerage commissions to obtain research
and other services may cause an adviser to avoid other uses of fund
brokerage commissions that may be in the fund's best interest, such as
establishing a commission recapture program or fund expense
reimbursement arrangement to offset expenses that are paid for with
fund assets; \66\ and
---------------------------------------------------------------------------

    \66\ Although these types of arrangements do not involve the
conflicts posed by soft dollars, they do raise issues related to how
a fund's assets are being expended and other issues, such as
disclosure. See Concept Release at section VI.
---------------------------------------------------------------------------

     In the case of ``mixed-use'' products--for example,
research products or services obtained using soft dollars that may
serve functions that are not related to the investment decision-making
process, such as accounting or marketing--an adviser has a conflict
when making an allocation determination between the research and non-
research uses of the product as required to fulfill the requirements
under section 28(e) of the Exchange Act.\67\
---------------------------------------------------------------------------

    \67\ For a discussion of ``mixed-use'' items, see 1986 Release
at section II.B and 2006 Release at section III.F. These releases
stated, as an example of a product that may have a mixed use,
management information services (which may integrate trading,
execution, accounting, recordkeeping, and other administrative
matters such as measuring the performance of accounts). In the 1986
Release, the Commission indicated that where a product has a mixed
use, an investment adviser should make a reasonable allocation of
the cost of the product according to its use, and should keep
adequate books and records concerning the allocations. The
Commission also stated: (i) That the allocation decision itself
poses a conflict of interest for the investment adviser that should
be disclosed to the client; and (ii) that an investment adviser may
use client commissions pursuant to section 28(e) of the Exchange Act
to pay for the portion of a service or specific component that
assists the adviser in the investment decision-making process, but
cannot use soft dollars to pay for that portion of a service that
provides the adviser with administrative assistance. 1986 Release at
Section II.B. The 2006 Release made clear that ``brokerage''
products and services, as defined in the release, may also require a
mixed-use allocation. 2006 Release at nn.72-73. For a discussion of
section 28(e) of the Exchange Act, see infra section III.C.
---------------------------------------------------------------------------

    When evaluating an adviser's use of fund brokerage commissions in
light of these conflicts, a fund board may determine that such use is
in the best interests of the fund.\68\
---------------------------------------------------------------------------

    \68\ Fund boards are not required to approve brokerage and
research services simply because they fall within the section 28(e)
safe harbor. Rather, board determinations regarding the purchase of
brokerage and research services with fund brokerage commissions
should be made in accordance with the fund's best interest. In this
regard, section 28(e) contemplates that funds could enter into
contracts to reduce or eliminate an adviser's ability to rely on the
safe harbor. See Thomas P. Lemke & Gerald T. Lins, Soft Dollars and
Other Brokerage Arrangements Sec.  4.09 (2005) (``[T]he language of
the safe harbor itself recognizes that the parties to an investment
management relationship may by contract opt out of Section
28(e).''); see also Section 28(e) of the Exchange Act [15 U.S.C.
78bb(e)(1)] (stating that the safe harbor does not apply where
``expressly provided by contract'').
---------------------------------------------------------------------------

C. Section 28(e) Under the Securities Exchange Act of 1934

    Section 28(e) of the Exchange Act provides a safe harbor that
protects investment advisers from liability for a breach of fiduciary
duty solely on the basis that the adviser caused an account over which
it exercises investment discretion to pay more than the lowest
commission rate in order to receive brokerage and research services
provided by a broker-dealer, if the adviser determined in good faith
that the amount of the commission was reasonable in relation to the
value of the brokerage and research services received.\69\ As we have
stated, section 17(e)(1) of the Investment Company Act prohibits
investment advisers to registered investment companies from obtaining
brokerage and research services with fund brokerage commissions outside
the section 28(e) safe harbor.\70\
---------------------------------------------------------------------------

    \69\ 15 U.S.C. 78bb(e)(1). When fixed commission rates were
abolished in 1975, investment advisers and broker-dealers expressed
concern that, if an investment adviser were to cause a client
account to pay more than the lowest commission rate available for a
particular transaction, then the adviser would be exposed to charges
that it had breached its fiduciary duty owed to its client. Congress
addressed this concern by enacting section 28(e). See 2006 Release
at section II.A.
    \70\ See supra note 63. It should be noted that section 28(e) of
the Exchange Act does not encompass trades that are not executed on
an agency basis, principal trades (with the exception of certain
riskless principal transactions as described below), or other
instruments traded net with no explicit commissions. See 2006
Release at n.27. However, the Commission has interpreted the term
``commission'' in section 28(e) as encompassing fees on certain
riskless principal transactions that are reported under the trade
reporting rules of the Financial Industry Regulatory Authority, or
FINRA (as successor to the National Association of Securities
Dealers, or NASD). See Commission Guidance on the Scope of section
28(e) of the Exchange Act, Exchange Act Release No. 45194 (Dec. 27,
2001) [67 FR 6 (Jan. 2, 2002)], at Section II.
---------------------------------------------------------------------------

    The 2006 Release provides guidance with respect to the appropriate
framework for analyzing whether a particular service falls within the
``brokerage and research services'' safe harbor of section 28(e).\71\ A
fund board should request that the fund adviser inform directors of the
policies and procedures the adviser uses to ensure that the types of
brokerage and research services the adviser obtains using fund
brokerage commissions fall within the safe harbor and that the adviser
has not engaged in excessive trading in light of the fund's investment
objectives. In turn, in approving the policies and procedures, a board
should consider whether they are reasonably designed to ensure that the
adviser's use of fund brokerage commissions complies with the section
28(e) safe harbor, as well as all the federal securities laws.\72\
---------------------------------------------------------------------------

    \71\ See 2006 Release at section III.
    \72\ See supra note 52 and accompanying text (discussing a fund
board's obligation to approve an adviser's compliance policies and
procedures).
---------------------------------------------------------------------------

    In addition, as we stated in the 2006 Release, to rely on the
section 28(e) safe harbor, an adviser must: (i) Determine whether the
product or service obtained is eligible research or brokerage under
section 28(e); (ii) determine whether the eligible product actually
provides lawful and appropriate assistance in the performance of his
investment decision-making responsibilities; and (iii) make a good
faith determination that the amount of client commissions paid is
reasonable in light of the value of products or services provided by
the broker-dealer.\73\ We also reaffirmed an investment adviser's
essential obligation under section 28(e) to make this good faith
determination and that the burden in demonstrating this determination
rests on the investment adviser.\74\ An adviser should demonstrate to
the board that it has met this burden.\75\ We specifically request
comment on our proposed guidance in this regard. We also request
examples of effective practices fund boards employ when evaluating
whether an adviser has made

the good faith determination required under section 28(e).
---------------------------------------------------------------------------

    \73\ See 2006 Release at Section III.B.
    \74\ See id.
    \75\ See 2006 Release at n.150 and accompanying text (citing
House Comm. on Interstate and Foreign Commerce, Securities Reform
Act of 1975 (H.R. 4111), H.R. Rep. No. 94-123, at 95 (1975) (``It
is, of course, expected that money managers paying brokers an amount
[of commissions] which is based upon the quality and reliability of
the broker's services including the availability and value of
research, would stand ready and be required to demonstrate that such
expenditures were bona fide.'')); see also 1986 Release at Section
IV.B.3 (explaining that, among the responsibilities of the
disinterested directors of a fund may be to monitor the adviser's
soft dollar arrangements).
---------------------------------------------------------------------------

D. An Investment Adviser's General Fiduciary Obligations to Clients
that Are Funds When Using Soft Dollars

    As we have stated, although a fund adviser may satisfy the
requirements for using client commissions to pay for brokerage and
research services under the section 28(e) safe harbor, a fund's
directors still should evaluate the adviser's use of fund brokerage
commissions to purchase research and services in order to determine
whether the adviser is acting in the best interest of the fund. If a
fund board determines that the adviser's use of brokerage commissions
is not in the best interest of the fund, the board should prohibit or
limit the use of fund brokerage commissions and direct the adviser
accordingly.\76\
---------------------------------------------------------------------------

    \76\ See supra note 68 and accompanying text.
---------------------------------------------------------------------------

    In this regard, directors need to understand the procedures that
the fund's investment adviser employs to address any potential
conflicts of interest and ensure that fund commissions are being used
appropriately. For example, to try to address concerns that a broker-
dealer may be chosen by an adviser for reasons other than the quality
of the broker-dealer's execution (including the brokerage and research
services it provides), some advisers, particularly larger ones, may use
an internal process referred to as a ``broker vote'' or ``broker
tolls,'' whereby the adviser's investment professionals, typically the
portfolio managers and investment analysts, assess the value of the
research and services different broker-dealers provide to determine
which broker-dealer's research and other services the adviser should
purchase.\77\
---------------------------------------------------------------------------

    \77\ Advisers have informed us that, although many employ a
broker vote, the actual process of determining which brokers to use
varies among firms, as do the factors upon which each firm's voting
system is based. Often a system of rating or allocating points is
used to set targets for each broker, with the better-rated brokers
receiving additional orders. Other firms have substantially less
formal broker-selection processes.
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    To assist the board in understanding the adviser's policies and
procedures regarding the use of fund brokerage commissions to obtain
brokerage and research services, the board should request that the
adviser inform the directors as to such matters as the following:
     How does the adviser determine the total amount of
research to be obtained and how will the research actually be obtained?
In particular:
     How does the adviser determine the amount to be spent
using hard versus soft dollars?
     How does the adviser determine amounts to be spent on
proprietary versus third-party research arrangements?
     What types of research products and services will the
adviser seek to obtain and how will this research be beneficial to the
fund?
     How does the adviser determine amounts to be used in
commission recapture programs and expense reimbursement programs?
     What is the process for establishing a soft dollar
research budget and determining brokerage allocations in the soft
dollar program? Is a broker vote process or some other mechanism used?
     Do any alternative trading venues that are used produce
soft dollar credits? If so, how much?
     How does the adviser determine that the use of soft
dollars is within the section 28(e) safe harbor? In particular:
     Is the product or service obtained eligible brokerage or
research, as defined under section 28(e)?
     Does the product or service provide lawful and appropriate
assistance to the adviser in carrying out its investment decision-
making responsibilities?
     Is the amount of commissions paid reasonable (based upon a
good faith determination) in light of the value of brokerage and
research services provided by the broker-dealer?
     How does soft dollar usage compare to the adviser's total
commission budget?
     How are soft dollar products and services allocated among
the adviser's clients? Are the commissions paid for certain trades in
fund portfolio securities similar to commissions paid for transactions
in similar securities, or of similar sizes, by the fund and the
adviser's other clients (including clients that are not funds)? Are
other clients paying lower commissions that do not include a soft
dollar component? If so, does the adviser adequately explain the
discrepancy in commission rates and provide the board data sufficient
to satisfy the board that the fund is not subsidizing the research
needs of the adviser's other client? To what extent are the products
and services purchased through soft dollar arrangements used for the
benefit of fixed-income or other funds that generally do not pay
brokerage commissions?
     What is the process for assessing the value of the
products or services purchased with soft dollars?
     What is the process used to evaluate the portion of a
mixed use product or service that can be paid for under section 28(e)?
\78\
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    \78\ As we stated in the 2006 Release, in allocating costs for a
particular product or service, a money manager should make a good
faith, fact-based analysis of how it and its employees use the
product or service. It may be reasonable for an investment adviser
to infer relative costs from relative benefits to the firm or its
clients. Relevant factors might include, for example, the amount of
time the product or service is used for eligible purposes versus
non-eligible purposes, the relative utility (measured by objective
metrics) to the firm of the eligible versus non-eligible uses, and
the extent to which the product is redundant with other products
employed by the firm for the same purpose. See 2006 Release at
section III.F, n.148.
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     To what extent does the adviser use client commission
arrangements? What effect do these arrangements have on how the adviser
selects a broker-dealer to complete a particular transaction? How does
the adviser explain that the use of client commission arrangements
benefits the fund? \79\
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    \79\ We believe that the availability of electronic methods to
order, track, and analyze securities trading may make it easier to
determine whether client commission arrangements benefit a fund.
With electronic trading, advisers and fund boards may be able to
determine the costs associated with trade execution, as well as the
expense of research paid for with fund brokerage commissions, with
greater certainty. Also, to the extent that they incorporate
transparency mechanisms such as the invoicing of costs for
particular research products and services, the use of certain client
commission arrangements may enable fund boards to more clearly
determine the actual amount of commission dollars used to pay for
research and those used to pay for execution.
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    We request comment on the information boards should receive to
facilitate their review of an adviser's use of soft dollars.\80\ Should
boards request any further information from advisers in this regard?
Should boards employ any specific alternative approaches or analyses
when reviewing an adviser's soft dollar usage? Is further guidance
needed with respect to how a board should approach reviewing an
adviser's soft dollar usage?
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    \80\ The staff has outlined some of the specific information
fund boards have reviewed with respect to soft dollar arrangements.
See Inspection Report on the Soft Dollar Practices of Broker-
Dealers, Investment Advisers and Mutual Funds, Office of Compliance,
Inspections and Examinations (Sept. 1998), available at http://
www.sec.gov/news/studies/softdolr.htm (``1998 Staff Report''), at
Appendix G.
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    As with the adviser's trading practices, after receiving
appropriate input and information from the adviser, if the board
believes that the fund's brokerage commissions could be used
differently so as to provide greater benefits to the fund, the board
should direct the adviser accordingly. For example, the adviser should
explain to the board that the value the fund receives from the
brokerage and research services purchased with fund brokerage
commissions is appropriate,

and whether the services are inappropriately benefiting another of the
adviser's clients at the fund's expense. In directing the adviser, the
board also should consider such matters as: (i) Whether it is
appropriate for the adviser to refrain from purchasing research
services in connection with certain types of trades, depending on
market conditions; (ii) whether it is appropriate for the adviser to
use fund brokerage commissions to receive brokerage and research
services on some or all trades; (iii) whether fund brokerage
commissions should be used only in connection with a commission
recapture or expense reimbursement program; and (iv) whether some
combination of these alternatives may be in the best interest of the
fund.
    In addition, fund boards should inquire as to how the adviser's
compliance policies and procedures with respect to soft dollars are
determined and monitored.\81\ In deciding whether to approve these
policies and procedures, directors should consider, and the investment
adviser should explain, how the policies and procedures eliminate or
otherwise mitigate the conflicts of interest that exist when an adviser
trades portfolio securities on the fund's behalf.\82\ Furthermore, the
value of research obtained through the use of soft dollars is a factor
a fund board should consider when determining whether an investment
adviser has fulfilled its best execution obligations.\83\ The conflicts
of interest inherent in soft dollar arrangements require boards to pay
particular attention to investment advisers' activities in this regard
to ensure that fund assets are being used appropriately on behalf of
the fund.\84\
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    \81\ The Commission has stated that, in addition to an adviser's
general best execution obligations, the compliance policies and
procedures advisers are required to adopt and implement under rule
206(4)-7 of the Advisers Act should address the adviser's uses of
client brokerage to obtain research and other services. See
Compliance Release at Section II.
    \82\ In this regard, fund boards may look to, among other
sources, the fund's CCO to provide assistance with evaluating any
potential conflicts of interest with respect to the adviser's
brokerage practices and determining how those conflicts should be
addressed. See Compliance Release at section II.A.2.b.
    \83\ See 1986 Release at section V. An adviser should consider
the full range and quality of the broker's services, including the
value of research provided, in assessing whether a broker will
provide best execution.
    \84\ As suggested above, failure by an investment adviser to
disclose material conflicts of interest to its clients may
constitute fraud within the meaning of sections 206(1) and (2) of
the Advisers Act. See supra note 64. See also Capital Gains, 375
U.S. at 191-193, 200-01 (noting that ``suppression of information
material to an evaluation of the disinterestedness of an investment
adviser'' may operate ``as a deceit on purchasers.'').
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    We request comment on our proposed guidance in regard to how a fund
board should approach its review of an adviser's use of soft dollars
and the adviser's applicable policies and procedures to ensure that the
conflicts of interest inherent in these transactions are being managed.

E. Section 15(c) Under the Investment Company Act

    In addition to their oversight and monitoring responsibilities with
respect to portfolio trading and the conflicts of interest associated
with soft dollar programs, fund directors have an obligation to review
the adviser's compensation. This requirement stems from the requirement
in section 15(c) of the Investment Company Act that the independent
members of the board review the fund's investment advisory contract on
an annual basis.\85\ A fund board's review of the adviser's
compensation under section 15(c) should incorporate consideration of
soft dollar benefits that the adviser receives from fund brokerage.\86\
In considering the advisory contract for approval, fund boards are
required under section 15(c) to request and evaluate such information
as may reasonably be necessary to evaluate the terms of the contract,
and the adviser to the fund has the obligation to furnish to the board
the information necessary to review the contract.\87\
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    \85\ 15 U.S.C. 80a-15(c). Section 15(c) makes it unlawful for an
investment company to enter into or renew an investment advisory
contract unless it is approved by a majority of the company's
disinterested directors.
    \86\ See 2006 Release; 1986 Release. In connection with the
board's section 15(c) review of the advisory contract, section 36(b)
of the Investment Company Act imposes a fiduciary duty on fund
advisers with respect to their receipt of compensation for services
or payments of a material nature from the fund or its shareholders.
15 U.S.C. 80a-36(b). In determining whether an adviser has breached
its obligations under section 36(b), the seminal case of Gartenberg
v. Merrill Lynch Asset Mgmt., Inc., 694 F.2d 923 (2d Cir. 1982),
suggests that all of the facts and circumstances surrounding the
adviser's relationship with the fund are appropriate for director
consideration in approving the advisory contract. To the extent an
adviser receives benefits from the use of soft dollars that are of
``sufficient substance,'' these benefits should be disclosed and
considered by the fund's board of directors. Id. at 932-933 (stating
that ``estimates of * * * `fall-out' and `float benefits' which,
while not precise, could be a factor of sufficient substance to give
the Funds' trustees a sound basis for negotiating a lower Manager's
fee.'').
    \87\ Section 15(a)(1) of the Investment Company Act, which makes
it unlawful for any person to serve as an investment adviser of a
registered investment company except pursuant to a written contract
which has been approved by a majority vote of shareholders and which
``precisely describes all compensation'' to be paid under that
contract, also should be considered with regard to soft dollar
arrangements. 15 U.S.C. 80a-15(a)(1). See 1986 Release at n.40.
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    Although fund boards typically review the use of fund brokerage by
the adviser (including the adviser's use of soft dollars) during the
contract review process, Commission examinations show wide variations
in board practices in this area.\88\ In many cases, fund boards are
provided with Part II of the adviser's Form ADV. While Form ADV
provides important information regarding the investment adviser, the
Form ADV disclosure requirement was not designed for the purpose of
providing fund directors with all of the information needed to help
them satisfy board obligations under section 15(c) of the Investment
Company Act. In order to fulfill their obligations in connection with
the section 15(c) review process, fund boards often seek additional
information on soft dollars. However, the types of additional
information a board may require may vary depending on factors such as:
(i) The scope and nature of the soft dollar program; (ii) the level of
clarity and utility of the materials provided; (iii) the board's
confidence in the adviser's relevant policies and procedures; and (iv)
the adviser's compliance record. For example, information directors
seek may range from simple reports on the cost of third-party soft
dollar services to detailed reports on all fund portfolio securities
transactions, including transaction volumes, soft dollar credits,
services provided, and broker reviews.
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    \88\ See 1998 Staff Report at 36. Examinations conducted since
the 1998 Staff Report continue to document wide variations in the
fund board review process. For example, our inspection staff has
observed that, in certain cases, a fund board has not obtained the
information necessary to evaluate soft dollar arrangements in the
context of the board's section 15(c) review.
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    To assist fund boards in carrying out their responsibilities under
section 15(c), we believe it is appropriate for fund boards to request
certain information regarding the adviser's use of fund brokerage,
including soft dollar arrangements. Specifically, fund directors should
require investment advisers, at a minimum, to provide them with
information regarding the adviser's brokerage policies, and how a
fund's brokerage commissions, and, in particular, the adviser's use of
soft dollar commissions, were allocated, at least on an annual basis.
Fund directors, in turn, should consider this information when they
evaluate the terms of the advisory contract for the fund. Fund
directors should, for example, consider whether the adviser properly
accounts for use of fund brokerage commissions to purchase

research that primarily or solely benefits another client of the
adviser. We specifically ask for comment on the information that boards
should request and that the adviser should provide in connection with
the board's review of the advisory contract under section 15(c).

IV. Disclosure to Other Advisory Clients and Fund Investors

    Our proposed guidance is designed to provide fund directors with
information that will help them fulfill their oversight obligations
with respect to the trading practices of the fund's investment adviser,
including the adviser's use of soft dollars. The fact that the guidance
is focused on fund boards should not be interpreted as an indication
that the current level of soft dollar disclosure that is provided to
other advisory clients and fund investors cannot be improved.\89\
Accordingly, we solicit comment on whether we should propose additional
disclosure requirements.
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    \89\ We have considered enhancing soft dollar disclosure
requirements in the past. For example, the Commission proposed a
rule in 1995 that would have required an adviser to provide its
clients with an annual report setting forth certain information
about the adviser's use of client brokerage and the soft dollar
services received by the adviser. The report would have included
certain quantitative information about brokerage allocation and
commissions paid. See Disclosure by Investment Advisers Regarding
Soft Dollar Practices, Investment Advisers Act Release No. 1469
(Feb. 14, 1995) [60 FR 9750 (Feb. 21, 1995)].
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    Currently, Part II of Form ADV, the adviser's firm brochure, must
address the adviser's soft dollar practices. However, a 1998 report
from our Office of Compliance Inspections and Examinations (``OCIE'')
observed that advisers' disclosure often failed to provide sufficient
information for clients or prospective clients to understand the
advisers' soft dollar practices and the conflicts those practices
present.\90\ In its report, OCIE stated that most advisers'
descriptions of soft dollar practices were boilerplate, and urged that
we consider amending Form ADV to require better disclosure.\91\ We
sought to address this concern in our proposed amendments to Part 2 of
Form ADV.\92\ As currently proposed, Form ADV would require advisers to
discuss the conflicts of interest inherent in an adviser's soft dollar
practices and to describe the products and services acquired with soft
dollars with enough specificity to permit clients to evaluate the
conflicts of interest involved.\93\
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    \90\ See 1998 Staff Report.
    \91\ Id.
    \92\ See Amendments to Form ADV, Investment Advisers Act Release
No. 2711 (March 3, 2008) [73 FR 13958 (March 14, 2008)]. As
proposed, Item 12 of Part 2 would require an adviser that receives
soft dollar products and services to disclose its practices and to
discuss the conflicts of interest they create. Specifically, Part 2
would require an adviser to disclose to clients: (i) That it
receives a benefit because it does not have to produce or pay for
the products and services; (ii) that it has an incentive to select
broker-dealers based on its interests instead of clients' interests
in receiving best execution; (iii) whether or not it pays-up for
soft dollar benefits; (iv) whether soft dollar benefits are used to
service all of its accounts or just the accounts that paid for the
benefits; and (v) the products and services it receives, describing
them with enough specificity for clients to understand and evaluate
possible conflicts of interest.
    \93\ Id.
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    The guidance we are proposing today reflects the Commission's view
of the critical role fund boards play in managing the adviser's
conflicts of interest. We request general comment on our proposed
guidance. In addition, we specifically request comment on whether: (i)
Further disclosure to fund investors of the information we suggest fund
boards should consider would be helpful; (ii) any specific disclosure
should be mandated to better assist investors in making informed
investment decisions; and (iii) the public dissemination of particular
information regarding a fund adviser's portfolio trading practices
would have an adverse impact on the fund adviser's relationships with
the broker-dealers that execute fund portfolio transactions.
    We also request comment on whether we should again consider
proposing to require investment advisers to provide their clients with
customized information about how their individual brokerage is being
used. If so, what types of information would be useful and in what
detail? Should the information provided be different for institutional
and non-institutional clients? Do institutional clients already require
their advisers to provide information to them about soft dollars on a
regular basis, and if so, what kind of information do they receive?
What are the cost implications of requiring individual client reports?

V. Solicitation of Additional Comments

    In addition to the areas for comment identified above, we are
interested in any other issues that commenters may wish to address
relating to fund board oversight of advisers' portfolio trading
practices. Please be as specific as possible in your discussion and
analysis of any additional issues.

    By the Commission.

    Dated: July 30, 2008.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-18035 Filed 8-5-08; 8:45 am]

BILLING CODE 8010-01-P


[Federal Register Volume 83, Number 126 (Friday, June 29, 2018)]
[Notices]
[Page 30812]
[FR Doc No: 2018-13954]

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

Federal Aviation Administration

[Summary Notice No. PE-2018-52]

Petition for Exemption; Summary of Petition Received; Gulfstream
Aerospace Corporation

AGENCY: Federal Aviation Administration (FAA), DOT.

ACTION: Notice of petition for exemption received.

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SUMMARY: This notice contains a summary of a petition seeking relief
from specified requirements of Federal Aviation Regulations. The
purpose of this notice is to improve the public's awareness of, and
participation in, the FAA's exemption process. Neither publication of
this notice nor the inclusion or omission of information in the summary
is intended to affect the legal status of the petition or its final
disposition.

DATES: Comments on this petition must identify the petition docket
number and must be received on or before July 13, 2018.

ADDRESSES: Send comments identified by docket number FAA-2018-0592
using any of the following methods:
     Federal eRulemaking Portal: Go to http://www.regulations.gov and follow the online instructions for sending your
comments electronically.
     Mail: Send comments to Docket Operations, M-30; U.S.
Department of Transportation (DOT), 1200 New Jersey Avenue SE, Room
W12-140, West Building Ground Floor, Washington, DC 20590-0001.
     Hand Delivery or Courier: Take comments to Docket
Operations in Room W12-140 of the West Building Ground Floor at 1200
New Jersey Avenue SE, Washington, DC, between 9 a.m. and 5 p.m., Monday
through Friday, except Federal holidays.
     Fax: Fax comments to Docket Operations at<PHONE_NUMBER>.
    Privacy: In accordance with 5 U.S.C. 553(c), DOT solicits comments
from the public to better inform its rulemaking process. DOT posts
these comments, without edit, including any personal information the
commenter provides, to http://www.regulations.gov, as described in the
system of records notice (DOT/ALL-14 FDMS), which can be reviewed at
http://www.dot.gov/privacy.
    Docket: Background documents or comments received may be read at
http://www.regulations.gov at any time. Follow the online instructions
for accessing the docket or go to the Docket Operations in Room W12-140
of the West Building Ground Floor at 1200 New Jersey Avenue SE,
Washington, DC, between 9 a.m. and 5 p.m., Monday through Friday,
except Federal holidays.

FOR FURTHER INFORMATION CONTACT: Michael Harrison, AIR-673, Federal
Aviation Administration, 2200 S. 216th Street, Des Moines, WA 98198,
phone<PHONE_NUMBER>, email [email protected]; or Alphonso
Pendergrass, ARM-200, Office of Rulemaking, Federal Aviation
Administration, 800 Independence Avenue SW, Washington, DC 20591, phone
202-267-4713, email [email protected].
    This notice is published pursuant to 14 CFR 11.85.

    Issued in Des Moines, Washington, on June 25, 2018.
Victor Wicklund,
Transport Standards Branch.

Petition For Exemption

    Docket No.: FAA-2018-0592.
    Petitioner: Gulfstream Aerospace Corporation.
    Section(s) of 14 CFR Affected: Sec.  25.1191(b)(1).
    Description of Relief Sought: The Petitioner is seeking partial
relief from the requirements of 14 CFR 25.1191(b)(1) at amendment 25-0
for a period of 2 years in order to conduct further testing of the
engine inlet and thrust reverser flange fastener cap sealant on the
Model GVII-G500/-G600 airplanes.

[FR Doc. 2018-13954 Filed 6-28-18; 8:45 am]
 BILLING CODE 4910-13-P