Letter in Response to Petition for Rulemaking
from Investment Company Institute
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON. D C. 20549
August 23, 2001
Craig S. Tyle
Investment Company Institute
1401 H. Street, N.W.
Washington, D.C. 20005-2148
Re: Petition for Rulemaking, File No. 4-442
Dear Mr. Tyle:
This letter responds to your Petition for Rulemaking, dated March 28, 2001 ("Petition"). The Petition requests that the Securities and Exchange Commission ("Commission") adopt a rule that would deem portfolio investment programs described in your Petition to be investment companies for purposes of the Investment Company Act of 1940 ("Investment Company Act").
The Commission has carefully considered your Petition. In the Commission's view, the programs described in the Petition do not at this time appear to raise interpretive issues that warrant the Commission undertaking a rulemaking.
The Petition requests that the Commission adopt a rule to clarify the statutory definition of investment company. The Investment Company Act, in part, defines as an investment company any issuer that is (or holds itself out as being) engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities. An investment company, or typically an external investment adviser, invests and manages the investment company's securities portfolio; investors have no ability to direct the specific investment decisions made with respect to the investment company's portfolio. Investment company investors hold shares that represent an undivided interest in the pool of securities in which the investment company invests, and they have no beneficial ownership interest in the individual securities comprising the pool.
The portfolio investment programs described in the Petition provide investors with the opportunity to make their own investment decisions and to create and manage portfolios of securities based on each investor's individual needs and objectives. Moreover, each investor in the programs described is the beneficial owner of the securities in his or her portfolio. In other words, the investor does not hold an undivided interest in a pool of securities; rather the investor is the direct beneficial owner of each of the securities included in the portfolio. Each investor has all of the rights of ownership with respect to such securities, including the right to vote, receive dividends and receive confirmations, proxy statements and other documents required by law to be provided to security holders. Each investor also has the right to withdraw or pledge his or her securities and to receive the cash value of the securities at any time.
The Petition states that portfolio investment programs raise investor protection issues that should be addressed by the Investment Company Act and the Securities Act of 1933. The Commission is of course attentive to issues of investor protection. The Commission notes, in any event, that sponsors of portfolio investment programs generally are subject to regulation and oversight under other federal securities laws. For example, sponsors of portfolio investment programs generally have registered as broker-dealers under the Securities Exchange Act of 1934 ("Exchange Act"), in part because of the execution services that they provide. The Exchange Act and our rules thereunder, together with the rules and regulations of the self-regulatory organizations (such as the National Association of Securities Dealers), prohibit certain types of sales practices that may be harmful to investors and include requirements that address whether broker-dealers have sufficient net capital to operate without posing financial risks to investors. As another example, in some cases, sponsors of portfolio investment programs may be required to register as investment advisers under the Investment Advisers Act of 1940 ("Advisers Act"). The Advisers Act and our rules thereunder, among other things, require investment advisers to disclose any conflicts of interest that the advisers have that may affect their clients.
In considering how to respond to your Petition, the Commission was mindful of the fact that there are few such programs in existence and that they have not been in operation for a significant period of time. The Commission is interested in the concerns raised in your Petition and intends to monitor the development of these programs for compliance with all of the federal securities laws. As they develop, the Commission will, of course, consider what action, if any, may be necessary.
As you are aware, the Commission is charged with administering all of the U.S. federal securities laws. The Commission has limited resources to address a great number of competing demands. In considering whether to engage in rulemaking, the Commission must balance competing priorities. In light of the considerations mentioned above, proceeding now with rulemaking to address portfolio investment programs would not be the best use of Commission resources.
Accordingly, the Commission has decided to deny the Petition.
By the Commission,
Jonathan G. Katz