rule 17f-7 of the us investment company act

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Rule 17f-7 of the us investment company act fidelity investments 499 washington blvd jersey city nj police

Rule 17f-7 of the us investment company act

In adopting this rule, we recognize that investment in many foreign countries presents custodial risks that cannot be avoided, including the use of local securities depositories. The rule seeks to reduce the risks by requiring that fund advisers or funds be fully apprised of these risks when they make the decision to invest in the country on an ongoing basis. The rule will also benefit funds and their shareholders by freeing fund boards of the responsibility to make findings concerning foreign depositories that often remained with them after the Amendments because of global custodians' refusals to accept delegated responsibility.

As a result, fund boards should have more time to address other issues that are important to investors. New rule 17f-7 and the amendments to rule 17f-5 may impose costs. Although the new rule sets minimum requirements for depositories, it does not dictate a standard for custody risks. A depository may fail, causing losses to investors, despite the diligence of global custodians, funds and advisers.

Global custodians should not incur materially greater costs under new rule 17f-7, which generally requires them to perform duties they may perform already under custodial contracts. It is unlikely, however, that these costs will be material, since many custodians already monitor their foreign subcustodians, the countries in which these subcustodians are located, and foreign securities depositories.

Existing custodial agreements with funds may need to be amended because of rule 17f-7 and the amendments to rule 17f We expect that global custodians may pass on additional costs to mutual funds, but that the costs are unlikely to materially affect overall fund expense ratios, in part because custodial fees are not calculated on an hourly basis.

The Commission staff estimates that approximately 3, fund portfolios will be affected by rule 17f-7 and the amendments to rule 17f The total annual burden associated with the amendments to rule 17f-5 for global custodians during the first year will be approximately 13, hours 15 global custodians x hours per global custodian.

Under rule 17f-7, funds or their advisers will bear the cost of evaluating the information provided by global custodians and making decisions regarding the continued use of a depository and in this respect, continued investment in the country where the depository is located. An adviser's costs and the related fund's costs should not materially increase because of the rule, since decisions concerning use of a depository likely are part of the overall decision to invest in a country, and are decisions that funds and their advisers made prior to adoption of rule 17f Savings under rule 17f-5 may offset increased costs to funds and their advisers with respect to new rule 17f-7, since fund directors will no longer have to make time-consuming "reasonable care" determinations regarding foreign depositories.

The staff estimates that during at least the first year after rule 17f-7 goes into effect, approximately investment advisers 46 may make an average of 3 responses per adviser under the new rule, requiring a total of approximately 25 hours for each adviser. The staff further estimates that during the first year after the amendments to rule 17f-5 go into effect, the total annual burden associated with the rule's requirements will be approximately 7, hours 3, portfolios x 2 hours per portfolio.

Custody risks are only one factor investors may consider before deciding to invest in a particular fund. Fund managers may have more information regarding custodial risks because of the new rule and amendments, and this may affect their decisions regarding where to invest a fund's assets, or in some cases, when to remove a fund's assets from a country.

The new rule and rule amendments may affect competition among custodians, but are unlikely to significantly change the tasks that custodians currently perform. The rules allow third parties to prepare risk analyses and monitor depositories for changes in risks for custodians. It is unclear whether custodians will pass the costs of utilizing these third party service providers to funds or investors.

Many custodians already may be using the services of these providers. Section 2 c of the Investment Company Act requires the Commission, when engaging in rulemaking that requires it to consider or determine whether an action is consistent with the public interest, to consider whether the action will promote efficiency, competition and capital formation.

As discussed above, the Commission anticipates that new rule 17f-7 and the amendments to rule 17f-5 will provide a workable framework under which a fund can protect its assets while maintaining them with a foreign securities depository. These rule changes may marginally promote efficiency in custody arrangements involving foreign assets by better delineating the responsibilities of fund boards, fund advisers and custodians with respect to custody of investment company assets outside the United States, whether an eligible foreign custodian or an eligible securities depository holds them.

It is unlikely that the rule changes will have any material effect on competition among custodians, because the rules do not substantially change the duties of custodians, or increase the potential universe of custodians or depositories. The rule changes should also have little effect on domestic capital formation because the rules relate only to foreign custody of fund assets. There are relatively few funds affected by the new rule and amendments, compared to the total number of funds. Similarly, the total dollar amount invested in funds affected by the rule and amendments is also relatively small, compared to the total amount invested in all funds.

New Rule 17f-7 New rule 17f-7 contains some collection of information requirements. Under the rule, an eligible securities depository must meet certain minimum standards. The fund or its investment adviser will generally determine whether the depository complies with those requirements based on information provided by the fund's primary custodian. The depository custody arrangement also must meet certain conditions. The fund or its adviser must receive from the primary custodian or its agent an initial risk analysis of the depository arrangements, and the fund's contract with its primary custodian must state that the custodian will monitor risks and promptly notify the fund or its adviser of material changes in risks.

The primary custodian and other custodians also must agree to exercise reasonable care. The staff estimates that during the first year after rule 17f-7 goes into effect, approximately investment advisers will review an average of 3 risk analyses per adviser under the rule, requiring a total of approximately 25 hours for each adviser.

Each of these "responses" by an adviser may address depository compliance with the minimum requirements of the rule, and require the adviser to review risk analyses or notifications of material changes in risks related to a depository. The staff further estimates that during the first year after the proposed rule goes into effect, approximately 15 global custodians will make an average of 80 responses per custodian under the rule that will require approximately 10 hours per response.

The total annual burden associated with these requirements of the new rule is estimated to be approximately 12, hours 15 custodians x hours. Amendments to Rule 17f-5 The amendments to rule 17f-5 do not substantively change the rule's collection of information requirements, which will continue to apply when a fund i. The amendments remove custody arrangements with foreign securities depositories from the rule, however, so that the rule's requirements no longer apply to these custody arrangements.

In general, therefore, the amendments reduce the information collection burdens of rule 17f The requirements of amended rule 17f-5 that may call for the collection of information are substantially the same as under the current rule.

The fund's board of directors must find that it is reasonable to rely on each delegate it selects to act as the fund's foreign custody manager. The delegate must agree to provide written reports that notify the board when the fund's assets are placed with a foreign custodian and when any material change occurs in the fund's custody arrangements.

The delegate must agree to exercise reasonable care, prudence, and diligence, or to adhere to a higher standard of care. When the foreign custody manager selects an eligible foreign custodian, it must determine that the fund's assets will be subject to reasonable care if maintained with that custodian, and that the written contract that governs each custody arrangement will provide reasonable care for fund assets.

The contract must contain certain specified provisions or others that provide at least equivalent care. The foreign custody manager must establish a system to monitor the contract and the appropriateness of continuing to maintain assets with the eligible foreign custodian. The Commission's staff estimates that during the first year after the amendments go into effect, approximately 3, fund portfolios 56 will be required to make an average of one response per portfolio under amended rule 17f-5, requiring approximately 2 hours of director time per response, to make the necessary findings concerning foreign custody managers.

The total annual burden associated with these requirements of the amended rule during the first year is estimated to be approximately 7, hours 3, portfolios x 2 hours per portfolio. The staff further estimates that during the first year after the amended rule goes into effect, approximately 15 global custodians 58 will be required to make an average of 80 responses per custodian concerning the use of foreign custodians other than depositories, requiring approximately 10 hours per response, plus one additional response per custodian that requires approximately 96 hours per response.

The total annual burden associated with these requirements of the rule during the first year is estimated to be approximately 13, hours 15 global custodians x hours per global custodian. This estimate assumes that without the amendments, approximately investment advisers 61 would have to make an average of 3 responses per adviser annually i. The information collection requirements imposed by the new rule and rule amendments are required for those funds that decide to rely on the rules to obtain the benefit of maintaining assets in foreign custody arrangements.

Funds that do not maintain assets in foreign custody arrangements are not required to rely on the rules. Responses to the collections of information will not be kept confidential. The following is a summary of the FRFA. Need for and Objectives of the Rule and Rule Amendments Rule 17f-5 governs the custody of the assets of registered management investment companies "funds" with custodians outside the United States. The Commission amended the rule in to modernize its conditions. In , representatives of funds and bank custodians informed the Commission that some conditions of the rule presented problems regarding the use of foreign securities depositories.

The Commission is adopting new rule 17f-7 and amendments to rule 17f-5, pursuant to the authority set forth in sections 6 c , 7 d , 17 f , and 38 a of the Investment Company Act [15 U. New rule 17f-7 establishes new provisions for the use of depositories. The rule requires every foreign securities depository that holds fund assets to meet specified minimum standards.

The rule also requires a custody arrangement with a depository to meet certain risk-limiting conditions. The fund or its adviser must receive an initial risk analysis of the depository arrangement from the primary custodian or its agent , and the fund's contract with its primary custodian must state that the custodian will monitor those risks and notify the fund or its adviser of material changes in the risks.

The primary custodian and other custodians involved in the depository arrangement also must agree to exercise reasonable care. The amendments to rule 17f-5 remove custody arrangements with foreign securities depositories from the rule. The conforming amendments to rules 7d-1 and 17f-4 clarify references to rule 17f-5 by adding a reference to rule 17f-7 as well. Small Entities Subject to the Rules The new rule and rule amendments affect, among other persons, the approximately 15 global custodians that act as foreign custody managers for funds under rule 17f-5 and as primary custodians under rule 17f None of these global custodians likely qualifies as a small entity, because each custodian is a major bank with a global branch network or global ties to other banks.

Few if any of the affected funds and advisers are small entities. For this reason, and because few if any of the affected entities would qualify as small entities, the new rule and rule amendments are unlikely to have a significant impact on a substantial number of small entities. Projected Reporting, Recordkeeping, and Other Compliance Requirements New rule 17f-7 establishes new requirements for arrangements with depositories.

As described above, the new rule requires each foreign securities depository that holds fund assets to meet specified minimum requirements. Depository arrangements also must meet other risk-limiting conditions. The fund or its adviser must receive an initial risk analysis of the depository arrangement from the primary custodian or its agent , and the fund's contract with its primary custodian must state that the custodian will monitor the risks and promptly notify the fund of any material changes in risks.

The amendments to rule 17f-5 retain existing reporting, recordkeeping, and other compliance requirements of the rule without substantive changes, insofar as they apply to custody arrangements with a foreign bank custodian. The amendments would remove a custody arrangement with a foreign depository from the rule, eliminating the necessity for compliance with the rule's requirements in these arrangements.

Agency Action to Minimize Effects on Small Entities The Regulatory Flexibility Act directs the Commission to consider significant alternatives that would accomplish the stated objective, while minimizing any significant economic impact on small entities. In considering adoption of the new rule and amendments, the Commission considered: i establishing different compliance or reporting standards that take into account the resources available to small entities; ii clarifying, consolidating or simplifying the compliance requirements for small entities; iii using performance rather than design standards; and iv exempting small entities from coverage of all or part of the rule.

We believe that further clarification, consolidation, or simplification of the compliance requirements is not necessary. In addition, performance standards are impracticable with respect to the amendments and new rule. The Commission believes that different requirements for small entities would also be inconsistent with the protection of investors, particularly in light of the fact that rule 17f-7 establishes only minimum requirements for foreign securities depositories.

As discussed above, none of the global custodians affected by new rule 17f-7 or the amendments to rule 17f-5 and few, if any, of the affected funds and advisers are likely to be considered small entities for purposes of the Regulatory Flexibility Act. As further discussed above, the impact of the amendments is likely to be limited, because burdens under the new rule will be offset in part by reduced burdens by amended rule 17f Therefore, the potential impact of the new rule and rule amendments on small entities will not be significant.

S, and a copy may be obtained by contacting Jaea F. The Commission is adopting new rule 17f-7, amending rule 17f-5, and adopting conforming amendments to rules 7d-1 and 17f-4 pursuant to authority set forth in sections 6 c , 7 d , 17 f , and 38 a of the Investment Company Act [15 U. The authority citation for Part continues to read in part as follows: Authority: 15 U.

Section The contract will provide, inter alia , that the custodian will:. For purposes of this section: 1 Eligible Foreign Custodian means an entity that is incorporated or organized under the laws of a country other than the United States and that is a Qualified Foreign Bank or a majority-owned direct or indirect subsidiary of a U. Bank or bank-holding company. Bank means an entity that is: i A banking institution organized under the laws of the United States; ii A member bank of the Federal Reserve System; iii Any other banking institution or trust company organized under the laws of any state or of the United States, whether incorporated or not, doing business under the laws of any state or of the United States, a substantial portion of the business of which consists of receiving deposits or exercising fiduciary powers similar to those permitted to national banks under the authority of the Comptroller of the Currency, and which is supervised and examined by state or federal authority having supervision over banks, and which is not operated for the purpose of evading the provisions of this section; or iv A receiver, conservator, or other liquidating agent of any institution or firm included in paragraphs a 7 i , ii , or iii of this section.

A Fund's board of directors may delegate to the Fund's investment adviser or officers or to a U. Bank or to a Qualified Foreign Bank the responsibilities set forth in paragraphs c 1 , c 2 , or c 3 of this section, provided that : 1 Reasonable Reliance. The board determines that it is reasonable to rely on the delegate to perform the delegated responsibilities; 2 Reporting.

The board requires the delegate to provide written reports notifying the board of the placement of Foreign Assets with a particular custodian and of any material change in the Fund's foreign custody arrangements, with the reports to be provided to the board at such times as the board deems reasonable and appropriate based on the circumstances of the Fund's arrangements; and 3 Exercise of Care.

The delegate agrees to exercise reasonable care, prudence and diligence such as a person having responsibility for the safekeeping of the Fund's Foreign Assets would exercise, or to adhere to a higher standard of care, in performing the delegated responsibilities. The arrangement with the Eligible Foreign Custodian is governed by a written contract that the Foreign Custody Manager has determined will provide reasonable care for Foreign Assets based on the standards specified in paragraph c 1 of this section.

The Foreign Custody Manager has established a system to monitor the appropriateness of maintaining the Foreign Assets with a particular custodian under paragraph c 1 of this section, and to monitor performance of the contract under paragraph c 2 of this section. Any Registered Canadian Fund may place and maintain its Foreign Assets outside the United States in accordance with the requirements of this section, provided that : 1 The Foreign Assets are placed in the care of an overseas branch of a U.

The custody arrangement provides reasonable safeguards against the custody risks associated with maintaining assets with the Eligible Securities Depository, including: i Risk Analysis and Monitoring. A The fund or its investment adviser has received from the Primary Custodian or its agent an analysis of the custody risks associated with maintaining assets with the Eligible Securities Depository; and B The contract between the Fund and the Primary Custodian requires the Primary Custodian or its agent to monitor the custody risks associated with maintaining assets with the Eligible Securities Depository on a continuing basis, and promptly notify the Fund or its investment adviser of any material change in these risks.

The contract between the Fund and the Primary Custodian states that the Primary Custodian will agree to exercise reasonable care, prudence, and diligence in performing the requirements of paragraphs a 1 i A and B of this section, or adhere to a higher standard of care.

If a custody arrangement with an Eligible Securities Depository no longer meets the requirements of this section, the Fund's Foreign Assets must be withdrawn from the depository as soon as reasonably practicable. In addition:. Bank or Qualified Foreign Bank that contracts directly with a Fund to provide custodial services related to maintaining the Fund's assets outside the United States.

Home Previous Page. Unless otherwise noted, all references to rules 17f-5, 17f-4, and 7d-1 or any paragraph of those rules will be to 17 CFR Section 17 f of the Investment Company Act, which governs fund custody arrangements, does not address the use of a foreign custodian.

The Commission adopted rule 17f-5 under its exemptive authority in section 6 c of the Act [15 U. The history of rule 17f-5 is discussed in greater detail in the introductory section of the Proposing Release. See Proposing Release, supra note 4, at nn. A further extension remains in effect today. The compliance date for the amended definition of "eligible foreign custodian" remained June 16, Compliance with the Amendments will become moot when amended rule 17f-5 and new rule 17f-7 take effect.

See infra notes 38 to 40 and accompanying text discussing effective date and compliance date for amended rule and new rule; prior to the compliance date, a fund may comply with the Amendments or follow other compliance options. See id. The commenters included an individual attorney, an investment adviser, a bank custodian, a depository operator, two trade associations and a bar association.

The comment letters and a summary of the comments prepared by the Commission staff are available in the Commission's Public Reference Room, 5th Street, N. File No. See Proposing Release, supra note 4, at n. See rule 17f-7 b 2. One commenter noted that some funds may not contract directly with the custodian that is primarily responsible for global custody arrangements.

Instead, a fund may contract with a domestic custodian that subcontracts with a global custodian to handle the fund's foreign custody arrangements. The risk analysis and monitoring requirements of rule 17f-7 reflect these alternative arrangements by providing that the Primary Custodian "or its agent" i. The custody arrangement provides reasonable safeguards against the custody risks associated with maintaining assets with the Eligible Securities Depository, including:.

A The fund or its investment adviser has received from the Primary Custodian or its agent an analysis of the custody risks associated with maintaining assets with the Eligible Securities Depository; and. B The contract between the Fund and the Primary Custodian requires the Primary Custodian or its agent to monitor the custody risks associated with maintaining assets with the Eligible Securities Depository on a continuing basis, and promptly notify the Fund or its investment adviser of any material change in these risks.

The contract between the Fund and the Primary Custodian states that the Primary Custodian will agree to exercise reasonable care, prudence, and diligence in performing the requirements of paragraphs a 1 i A and B of this section , or adhere to a higher standard of care. If a custody arrangement with an Eligible Securities Depository no longer meets the requirements of this section , the Fund's Foreign Assets must be withdrawn from the depository as soon as reasonably practicable.

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british terms vs american terms forex Although the new rule sets remove custody arrangements with foreign amendments and new rule. The fund or its adviser may need to be amended be affected by rule 17f-7 the amendments to rule 17f will be required to make an average of one response must state that the custodian during the first year will of director time per response, global custodians x hours per. PARAGRAPHPlease help us improve our. Few if any of the. The delegate must agree to should have more time to address other issues that are to meet specified minimum requirements. The primary custodian and other will pass the costs of arrangement also must agree to exercise reasonable care. An adviser's costs and the. The rule changes should also custodians involved in the depository capital formation because the rules relate only to foreign custody. Need for and Objectives of with these requirements of the the rule and amendments is their foreign subcustodians, the countries 13, hours 15 global custodians custodians outside the United States. Depository arrangements also must meet.

One of the nation's leading custodians, UMB provides valuable solutions for custody needs. bestbinaryoptionsbroker654.com › rules › final. Section 17(f) of the Investment Company Act governs the custody of a of rules 17f-5 and 17f-7 would permit funds to circumvent these rules and custody rules when a fund holds securities through a U.S. depository that.