SEC: Exemption for the Acquisition of Securities During the Existence of An Underwriting or Selling Syndicate

Published by the Government Accountability Office on 1997-08-20.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Office of the General Counsel


      August 20, 1997

      The Honorable Alfonse M. D'Amato
      The Honorable Paul S. Sarbanes
      Ranking Minority Member
      Committee on Banking, Housing, and Urban Affairs
      United States Senate

      The Honorable Thomas J. Bliley, Jr.
      The Honorable John D. Dingell
      Ranking Minority Member
      Committee on Commerce
      House of Representatives

      Subject:   Securities and Exchange Commission: Exemption for the Acquisition of
                 Securities During the Existence of An Underwriting or Selling Syndicate

      Pursuant to section 801(a)(2)(A) of title 5, United States Code, this is our report on
      a major rule promulgated by the Securities and Exchange Commission (SEC),
      entitled "Exemption for the Acquisition of Securities During the Existence of An
      Underwriting or Selling Syndicate" (RIN: 3235-AG61). We received the rule on
      August 1, 1997. It was published in the Federal Register as a final rule on August 7,
      1997. 62 Fed. Reg. 42401.

      The final rule amends rule 10f-3 and permits registered investment companies that
      have certain affiliated relationships with an underwriter to purchase a greater
      percentage of an offering of securities during the existence of an underwriting or
      selling syndicate. The amendments also permit these investment companies to
      purchase securities in certain foreign offerings and offerings of unregistered

      Enclosed is our assessment of the SEC's compliance with the procedural steps
      required by section 801(a)(1)(B)(i) through (iv) of title 5 with respect to the rule.
      Our review indicates that the SEC complied with the applicable requirements.

If you have any questions about this report, please contact James Vickers, Assistant
General Counsel, at (202) 512-8210. The official responsible for GAO evaluation
work relating to the Securities and Exchange Commission is Thomas McCool,
Director, Financial Institutions and Markets Issues. Mr. McCool can be reached at
(202) 512-8678.

Robert P. Murphy
General Counsel


cc: The Honorable Jonathan G. Katz
    Securities and Exchange Commission

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       ANALYSIS UNDER 5 U.S.C. § 801(a)(1)(B)(i)-(iv) OF A MAJOR RULE
                                ISSUED BY
                            (RIN: 3235-AG61)

(i) Cost-benefit analysis

The SEC performed a cost-benefit analysis of the final rule; however, due to the
lack of empirical data, the costs and benefits have not been quantified by the SEC.

The SEC expects the costs of the rule to be minimal to funds and investors
because, while it is required that determinations be made whether purchase of
securities in foreign offerings and rule 144A offerings comply with the final rule,
rule 10f-3 currently has standards that must be met for purchases permitted under
the rule. Therefore, the additional cost of complying with the standards relating to
foreign and rule 144A offerings will be minimal. Also, in view of the probability of
an increased number of purchased securities, the average cost of reporting
transactions under rule 10f-3 will probably diminish.

The benefits of the rule include the ability to purchase foreign and rule 144A
offerings without having to seek an exemptive order from the SEC and to purchase
more desirable quantities of securities at advantageous prices.

(ii) Agency actions relevant to the Regulatory Flexibility Act, 5 U.S.C. §§ 603-605,
607 and 609

The SEC prepared an Initial Regulatory Flexibility Analysis in connection with the
proposed rule, which was summarized in the notice of proposed rulemaking (61
Fed. Reg. 13637), and was available to the public in its entirety. No comments were
received in response to the analysis.

The preamble to the final rule contains a summary of the Final Regulatory
Flexibility Analysis, a complete copy of which was submitted to our Office and was
available to the public. The analysis describes the reason for the rule and the legal
basis for it; descriptions and estimates of the number of small entities affected by
the rule; a discussion of the recordkeeping, reporting, and other compliance
requirements; and the steps taken to minimize the burdens on small entities.

The SEC estimates that of the approximately 3,850 active investment companies
registered with the SEC, a total of approximately 800 would be considered small
entities. Of these 800, the amendments to rule 10f-3 would apply to approximately
40 small entities.

Regarding the steps taken to minimize the burden, the SEC states it concluded that
different requirements for small entities were not necessary and would be
inconsistent with investor protection and that the final rule uses performance
standards to the extent practicable rather than design standards.

(iii) Agency actions relevant to sections 202-205 of the Unfunded Mandates Reform
Act of 1995, 2 U.S.C. §§ 1532-1535

As an independent regulatory agency, the SEC is not subject to title II of the
Unfunded Mandates Reform Act of 1995.

(iv) Other relevant information or requirements under acts and executive orders

Administrative Procedure Act, 5 U.S.C. §§ 551 et seq.

The final rule was promulgated using the notice and comment procedures of
5 U.S.C. § 553. A notice of proposed rulemaking was published on March 27, 1996,
61 Fed. Reg. 13640, and requested comments on the proposed rule. The SEC
received 18 comments in response to the notice of proposed rulemaking. The SEC
responds to the comments in the preamble to the final rule and discusses the
changes it has made in the proposed rule as a result of the comments. These
changes include raising the percentage of an offering that may be purchased by
affiliated funds from 10 percent to 25 percent of the principal amount of the

Paperwork Reduction Act, 44 U.S.C. §§ 3501-3520

The final rule requires the collection of information which is subject to review by
the Office of Management and Budget (OMB) under the Paperwork Reduction Act.
OMB has approved the information collection and assigned OMB No. 3235-0226 with
an expiration date of May 31, 1999. The SEC estimates that the rule will impose an
additional burden of .50 hours on 140 firms for a total burden addition of 70 hours.

Statutory authorization for the rule

The SEC states that it is adopting the amendments pursuant to sections 10(f), 31(a),
and 38(a) of the Investment Company Act (15 U.S.C. §§ 80a-10(f), 80a-30(a), and

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Executive Order No. 12866

The rule, promulgated by an independent regulatory agency, is not subject to the
review requirements of Executive Order No. 12866.

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