February 5, 2004

Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609

Re: File No. S7-03-03

Dear Mr. Katz:

PFPC Inc. ("PFPC") appreciates the opportunity to comment on the Adopting Release of new Rule 38a-1 (12 C.F.R. §270.38a-1) that the Securities and Exchange Commission (the "Commission") recently issued under the Investment Company Act of 1940 (68 Fed. Reg. 74,714)(December 24, 2003). Rule 38a-1 requires the board of directors or trustees of each registered investment company (a "fund") to elect a chief compliance officer ("CCO") of the fund and to approve compliance policies designed to ensure the fund's compliance with securities laws (the "Rule"). PFPC supports the Rule's fundamental goals of ensuring funds' compliance with securities laws and regulations.

PFPC is an indirect subsidiary of The PNC Financial Services Group, Inc. ("PNC"), Pittsburgh, Pennsylvania, which is one of the largest diversified financial services organizations in the United States. PNC's major businesses include regional community banking, corporate banking, real estate finance, asset-based lending, wealth management, asset management, and global fund processing services. As PNC's primary global fund processing services affiliate, PFPC provides a full range of services to investment companies, including transfer agency, fund administration, and shareholder support services. PFPC is the largest full-service mutual fund transfer agent in the United States.

In response to the Commission's request for comments in section II.F of the Adopting Release, PFPC does have specific suggestions for modification of certain aspects of the Rule, to enhance its effectiveness in practical application. Our comments address specifically the role of the proposed CCO.

1. Issue

The Adopting Release indicates that a fund's CCO may be an employee of the fund's adviser, administrator or other service provider. PFPC suggests that a CCO employed by a fund administrator or other service provider, other than an adviser, could adversely affect fair competition, notwithstanding the safeguards that the Commission has added to the rule.1

2. Analysis

As the Adopting Release provides, each CCO "will oversee the fund's service providers" and "be familiar with each service provider's operations and understand those aspects of their operations that expose the fund to compliance risks."

A fund CCO, therefore, would be required to have a sufficiently comprehensive knowledge of other service providers' "operations" in order to identify and quantify risk to the fund. In this context, "operations" would likely be interpreted to include whatever aspects of the service providers' controls, contingency plans, systems and business methods that a CCO may deem germane to her responsibilities. A service provider would be reluctant to refuse in any regard to share such information with the CCO, in case the provider might appear to be obstructive and uncooperative in not facilitating the CCO's legitimate inquiries on behalf of the fund.

The requested information, however, may well comprise proprietary information and other sensitive competitive information that such service provider regards as confidential. The service provider thus may be placed in a dilemma between wishing to disclose information fully and frankly to the CCO, while desiring at the same time to protect its proprietary and competitively sensitive information.

This situation would be particularly acute if the CCO were an employee of the service provider's competitors. It is common in the industry for a fund to have different providers for transfer agency, administration and custody services, for example. The situation may arise, therefore, where an administrator supplies an employee to be CCO to fund A to have "oversight" over fund A's transfer agent, but the transfer agent arm of the administrator actually competes with fund A's transfer agent in servicing other funds.

Sensitive information that is confidential and proprietary to fund A's transfer agent thus could be in the hands of an employee of one of fund A's transfer agent's competitors. While the CCO would presumably be subject to a duty of non-disclosure, PFPC suggests that the latent conflict of interest related to such potential mandatory sharing of information among service provider competitors raises severe concerns, including the possible exposure of proprietary information and other competitive disadvantages.

Although some of the same issues would be present if a fund's adviser were to furnish an employee to be the fund's CCO, PFPC believes that the concerns raised above would be less severe.

3. Proposed resolution

PFPC respectfully requests that the Commission revise Rule 38a-1, or issue revised guidance, to preclude a fund board from retaining as the fund's chief compliance officer an employee of any service provider other than the fund's adviser or a person primarily engaged in the business of recommending individuals to serve as funds' chief compliance officers.

Additionally, we suggest that the Commission expressly permit funds to use CCOs employed by firms that specialize in regulatory compliance consulting and do not offer any fund administration or processing services. PFPC believes that CCOs employed by such third parties would be sufficiently independent, and that their expertise and objectivity would more than offset any lack of familiarity with the detailed workings of funds' service providers. Further, we believe that fund management would be more likely to consult with such an "outside" CCO than with a CCO employed by the fund's administrator, because the "outsider" would have no vested interest other than providing insightful, accurate information.

PFPC appreciates the opportunity to provide these comments in response to the Commission's Adopting Release. If you have any questions concerning these comments or would like additional information, please contact me at (302) 791-4490.


Christopher S. Conner
Senior Director, Corporate Compliance

1 As noted in the Adopting Release, the fund board (i) must approve the designation of the chief compliance officer; (ii) must approve her compensation; (iii) can remove her from her responsibilities at any time; (iv) can prevent the adviser or another service provider from removing her; and (v) is the body to which the CCO directly reports.