SEC Release 33-7106

Release No. 33-7106

Release No. 34-34923

Release No. IC-20670

Fed. Reg. Nov. 7, 1994

Disclosure Concerning Legal Proceedings Involving Management, Promoters, Control Persons and Others

ACTION: Proposed rulemaking.

SUMMARY: The Commission is publishing for comment amendments that would expand the types of legal proceedings required to be disclosed in Commission filings, add such disclosure to certain investment company filings, and increase to 10 years the reporting period for such legal proceedings disclosure.

DATES: Comments must be submitted on or before January 6, 1995.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-6009. Comment letters should refer to File No. S7-31-94. All comments received will be available for public inspection and copying in the Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549-6009.

FOR FURTHER INFORMATION CONTACT: James R. Budge, Office of Disclosure Policy, (202) 942-2910, Division of Corporation Finance (Mail Stop 3- 12); with regard to investment company issues, Kathleen K. Clarke, Office of Disclosure and Investment Adviser Regulation, (202) 942-0721, Division of Investment Management (Mail Stop 10-6), Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549- 6009.

SUPPLEMENTARY INFORMATION: The Commission today is publishing for comment proposed amendments to paragraphs (f) and (g) of Item 401¹ of Regulation S-K² and paragraph (d) of Item 401³ of Regulation S-B⁴ under the Securities Act of 1933 (''Securities Act'')⁵ and the Securities Exchange Act of 1934 (''Exchange Act'').⁶ The Commission also proposes to conform legal proceedings disclosure items in Form 1-A⁷ under the Securities Act, and Schedules 13D,⁸ E-3,⁹ 14A¹⁰ and 14D-1¹¹ under the Exchange Act. The Commission also is proposing to add legal proceedings disclosure requirements to various forms used by registered investment companies under the Securities Act or the Investment Company Act of 1940 (''Investment Company Act''),¹² including Forms N-1A,¹³ N-2,¹⁴ N-3,¹⁵ N-4,¹⁶ N-5,¹⁷ N-8B-2,¹⁸ N-8B- 3¹⁹ and N-8B-4.²⁰

Table of Contents

I. Executive Summary

The Commission's current regulations require disclosure of legal proceedings²¹ involving executive officers, directors, persons nominated to become directors, promoters, significant shareholders, participants in proxy contests, and other specified persons (''designated persons'').²² The principal provisions are found in Items 401 (f) and (g) of Regulation S-K and Item 401(d) of Regulation S-B,²³ but a number of forms and schedules require similar disclosure, as discussed below.²⁴ A review of current requirements has raised questions about the adequacy of the five-year period for reporting such proceedings. In light of these questions, as well as the enactment of the Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (''Remedies Act''),²⁵ the Commission proposes to expand the disclosure provisions and the time frame of the current requirements and to eliminate the differences in requirements among various forms.

The amendments proposed today would consolidate and clarify existing legal proceedings disclosure provisions, as well as add requirements to disclose the following:

Federal and state agency receivership appointments involving a designated person, any partnership in which such person was a general partner, and any corporation in which such person served as an executive officer;²⁶

All judicial and administrative findings, orders and sanctions based on alleged violations of federal or state securities, commodities, banking and insurance laws and regulations;²⁷

Civil and administrative proceedings resulting from a designated person's involvement in mail fraud, wire fraud, and fraud in connection with activities related to a business entity;²⁸

Civil and administrative actions relating to a designated person's breach of a fiduciary duty owed to a corporation, partnership, business trust or similar entity;²⁹

Administrative orders restricting a designated person's business practices;³⁰

Disciplinary sanctions imposed against a designated person by securities and commodities self-regulatory organizations (''SROs''); and

Comparable foreign legal proceedings.³¹

Disclosure would be required for 10 years following the specified event, expanding the current five-year provision.

The proposals would rescind the general provisions that currently permit disclosure to be omitted if the registrant believed that the information would be neither material to investors in evaluating the ability and integrity of management, nor to a voting or investment decision; provisions relating to bankruptcy or insolvency proceedings, however, would retain the materiality language. In addition, the provision limiting disclosure to administrative orders that restrict activities for periods of more than 60 days would be deleted.³²

The proposals also conform the requirements in various forms and schedules under the Securities Act and the Exchange Act. Finally, the Commission is proposing to add legal proceedings disclosure to investment company registration statement forms.

II. Background of Legal Proceedings Requirements

Disclosure of information regarding legal proceedings involving directors, executive officers, control persons, promoters and others has been required in various filings under the federal securities laws for many years. In 1956, the Commission adopted the current provisions requiring participants in proxy contests involving the election or removal of directors to disclose criminal convictions (other than traffic violations or similar misdemeanors) that occurred within the past 10 years.³³ Since their adoption in 1968, large shareholder beneficial ownership reports³⁴ also have required disclosure of criminal convictions with respect to the person or persons filing the report.³⁵

More than 20 years ago, the Commission began requiring disclosure of legal proceedings involving directors in registration statements and annual reports filed under the Exchange Act.³⁶ In 1970, Exchange Act registration statements³⁷ and annual reports³⁸ were amended to require disclosure of the initiation of bankruptcy or other insolvency proceedings, court appointments of receivers, criminal convictions and pending criminal actions if these actions involved a director of the registrant and were material to an evaluation of the director's ability and integrity. Disclosure also was required if a court restricted activities involving the purchase or sale of securities or certain activities in the securities, commodities, banking and insurance industries.³⁹ In the administrative context, disclosure of similar restrictions was required if a suspension or bar exceeded 60 days. Disclosure was required if the action was taken within the past 10 years.

In 1973, the legal proceedings disclosure provisions were expanded to include executive officers.⁴⁰ Comparable requirements were added at that time to the general form for registration under the Securities Act⁴¹ and the registration form used for certain development stage companies.⁴²

In July 1978, the legal proceedings disclosure requirements for Securities Act registration statements, as well as those in the Exchange Act registration statement and annual report, were consolidated into Regulation S-K, and the individual provisions were replaced with references to the Regulation S-K Item.⁴³ The disclosure requirements also were extended to real estate company registration statements and proxy and information statements.⁴⁴ The disclosure requirements were expanded at that time to include information relating to persons nominated to become directors and to require disclosure of court orders imposing restrictions on any business practice, as well as injunctions prohibiting future violations of federal or state securities laws.⁴⁵ Disclosure of findings of securities law violations by a court or by the Commission also was added. Finally, the time period for the disclosure was reduced from 10 to five years from the time the action was taken.⁴⁶

The amended proxy statement requirements also applied to information statements prepared in accordance with Schedule 14C [17 CFR 240.14c-101] of the Exchange Act, which incorporates many of the proxy statement requirements, and to proxy statements under Rule 20a-1 of the Investment Company Act [17 CFR 270.20a-1], which makes the Schedule 14A disclosure requirements applicable to investment companies.

In March 1982, Securities Act Industry Guides 4 and 5 were amended to require the information specified in Regulation S-K Item 401, replacing the reference to the requirements of Form S-1. Release No. 33-6384 (March 3, 1982) [47 FR 11476]. See n.41, above, and current Item 11 of Guide 4 and Item 9.A. of Guide 5.

At that time, the Commission also adopted current Form S-2 [17 CFR 239.12], for registration under the Securities Act of securities of certain issuers, and Form S-3 [17 CFR 239.13], for registration under the Securities Act of securities of certain issuers offered pursuant to certain types of transactions. Release No. 33-6383 (March 3, 1982) [47 FR 11380]. These forms incorporate by reference information required in the Form 10-K, including the legal proceedings disclosure.

In the same year, the Commission adopted Form S-18 [17 CFR 239.28] (optional registration form for small issuers) Release No. 33-6406 (June 4, 1982) [47 FR 25126] and Form S-20 [17 CFR 239.20] (optional registration form for standardized options), Release No. 33-6426 (September 16, 1982) [47 FR 41950]. Both forms required disclosure of the legal proceedings specified in Regulation S-K Item 401. Form S-18 was rescinded in connection with the small business initiatives in 1992. Release No. 33-6949 (July 30, 1992) [57 FR 36442]. For information relating to the adoption of Form S-4 [17 CFR 239.25], see n.49, below.

Substantive revisions to the legal proceedings disclosure requirements were made most recently in 1984.⁴⁷ The amendments required disclosure of legal proceedings involving federal commodities laws⁴⁸ and applied the disclosure requirements to promoters and control persons of newly public companies.⁴⁹

In April 1985, the Commission adopted Form S-4 (for registration of securities issued in business combination transactions), which requires disclosure of the Item 401 information. Release No. 33-6578 (April 23, 1985) [50 FR 18990].

In 1992, the Commission adopted Regulation S-B as part of its small business initiatives, which included an Item 401(d), governing legal proceedings disclosure, patterned on the requirements of Item 401 (f) and (g) of Regulation S-K.⁵⁰ This disclosure is required in connection with Securities Act registration statements on Form SB- 2,⁵¹ Exchange Act registration statements on Form 10-SB,⁵² and Exchange Act annual reports filed by small businesses.⁵³

Other disclosure documents include legal proceedings disclosure requirements separate from those found in Regulation S-K or Regulation S-B. Schedule 14D-1,⁵⁴ the tender offer schedule adopted in 1977,⁵⁵ requires disclosure if during the last five years the person filing the schedule was convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors), or was the subject of a judicial or administrative order that enjoined future violations of, or prohibited activities subject to, federal or state securities laws, or that included findings of violations of those laws. In 1978, Schedule 13D was amended to include legal proceedings disclosure provisions comparable to those included in Schedule 14D- 1,⁵⁶ and when Schedule 13E-3, for going private transactions,⁵⁷ was adopted in 1979, the same disclosure was required.⁵⁸ Unlike the Regulation S-K Item 401(f) requirements, disclosure is required of the enumerated proceedings without regard to the filer's determination as to their materiality, and disclosure of administrative proceedings is not limited to suspensions or bars exceeding 60 days.

The offering circular furnished to investors at or prior to the offer or sale of securities made in reliance upon an exemption under Regulation A was amended in 1981 to require legal proceedings disclosure.⁵⁹ Issuers are required to disclose in the circular criminal convictions, the initiation of bankruptcy or other insolvency proceedings, and appointments of receivers if those actions involved any director, person nominated to become a director or executive officer, if the information is material to an evaluation of the person's ability or integrity, and if the action was taken within the past five years.⁶⁰

On April 28, 1993, the Commission adopted Form SB-1 [17 CFR 239.9], an optional registration form for use by certain small businesses. See Release No. 33-6996 (April 28, 1993) [58 FR 26509]. Form SB-1 affords filers the option of providing the disclosure required by the Model B offering circular found in Form 1-A, including its legal proceedings disclosure requirements.

III. Proposed Amendments

The amendments proposed today would retain and clarify current legal proceedings disclosure requirements, expand the scope of existing provisions, and lengthen the time period for which disclosure is required. With one exception,⁶¹ the proposals also would delete the provisions permitting a registrant to omit disclosure where it concludes that the information would not be material to investors in evaluating the ability and integrity of management,⁶² or would not be material to a voting or investment decision.⁶³ Consequently, under the proposals, like other line item disclosure requirements, information concerning legal proceedings would be required if specified by the item.⁶⁴

The proposed amendments would require disclosure of any identified legal proceeding unless it was subsequently reversed, suspended, vacated, annulled or otherwise rendered of no effect,⁶⁵ and would codify the current staff interpretation that disclosure is not required if a conviction is reversed. The proposals also would make it clear that disclosure is required while a legal proceeding is pending appeal.⁶⁶

Under current and proposed rules, an order or sanction need not be disclosed if it has been reversed or otherwise set aside on the basis of the underlying law or facts. However, a registrant must disclose a permanent injunction involving a designated person during the entire disclosure period even if equitable relief from the injunction has been granted before the close of such period.

Currently, it is the practice to disclose legal proceedings background information for each general partner of a partnership and each trustee of a real estate investment trust. A new instruction would be added to codify this practice and to expand the requirement to provide such disclosure with respect to trustees of any registrant that is a trust, as well as any other persons providing comparable services to such entities. Disclosure also would be required relating to any person who performs, either directly or indirectly, director or executive officer functions pursuant to a management contract, service contract, such as those used by asset-backed pools, or otherwise.⁶⁷

While specific requests for comment are made throughout with respect to the proposals discussed in detail below, commenters are requested to comment generally on the need for revision of the legal proceedings disclosure requirements. Is the approach proposed adequate to address investor concerns about the background of those who direct the affairs of public companies, or would some other method be more effective?

A. Disclosure of Judicial and Administrative Proceedings

1. Bankruptcy and Insolvency Proceedings

The current provision requiring disclosure of the court appointment of a receiver, fiscal agent or similar officer with respect to a business in which a designated person served as an executive officer would be expanded to include a similar appointment made by a federal or state agency.⁶⁸ For example, disclosure would be required where a state insurance commissioner appointed a conservator to take control of the business and assets of an insurance company for which a designated person had served as an executive officer within two years prior to such appointment.⁶⁹ Disclosure also would be required of the appointment by a bank regulatory authority of a receiver or conservator to operate, sell or liquidate a financial institution.⁷⁰

As used in this release, ''financial institution'' means any bank, bank holding company, savings association, or savings and loan holding company, as defined in Section 3 of the Federal Deposit Insurance Act [12 U.S.C. 1813], any federal or state credit union, as defined in Section 101 of the Federal Credit Union Act [12 U.S.C. 1752], or any system institution of the Farm Credit System, as defined in Section 5.35 of the Farm Credit Act of 1971 [12 U.S.C. 2271], or any substantially equivalent foreign institution. See proposed Instruction 3 of Item 401(f).

While in most instances the provisions allowing registrants to omit disclosure of legal actions based on their materiality would be eliminated under the proposals, as discussed elsewhere in this release,⁷¹ the Commission proposes to retain a provision permitting filers to weigh the materiality of bankruptcy and insolvency proceedings involving designated persons prior to disclosure.⁷² Unlike the other legal proceedings to be disclosed under Item 401, bankruptcy proceedings include proceedings as to which the designated person's responsibility could vary considerably. Comment is solicited as to whether this materiality provision should be retained with respect to bankruptcy and insolvency proceedings, as proposed, or whether such actions should be disclosed without exception.

The Commission also solicits commenters' views on whether the current provisions should be expanded to require disclosure where the designated person served as a director of a company within two years before the initiation of bankruptcy or insolvency proceedings or the appointment of a receiver or conservator with respect to that company. Currently, disclosure is required only if the person was an executive officer of the entity. Commenters should identify the reasons for or against such an expansion.

Further, comment is sought as to whether the current provision requiring disclosure where the designated person served as an executive officer within two years of the identified bankruptcy or insolvency actions should be retained, as proposed, or whether the two-year time period should be shortened or lengthened, for example, to one year, or three or five years. Commenters also should address whether disclosure should be required where a designated person was an executive officer of a financial institution whose operation or sale is supervised by an administrative authority in the absence of the formal appointment of a receiver or conservator.⁷³

2. Criminal Proceedings

Like the current Item, the proposals would require disclosure where a designated person was convicted in a criminal proceeding or was the named subject of a pending criminal action (excluding traffic violations and other minor offenses).⁷⁴ However, the proposal clarifies that the Item requires disclosure of a criminal conviction resulting from a designated person's entry of a plea of nolo contendere.

3. Civil and Administrative Proceedings

a. Money penalty consent decrees and other orders or sanctions. Disclosure concerning civil and administrative proceedings involving designated persons now is limited to judicial orders restricting specified business activities,⁷⁵ administrative orders restricting such activities for more than 60 days,⁷⁶ and judicial or administrative findings of securities or commodities law violations.⁷⁷ As proposed, any judicial or administrative finding, order or sanction relating to violations of federal and state securities and commodities laws and regulations, or laws and regulations respecting financial institutions or insurance companies, would trigger disclosure.⁷⁸ The exemption from disclosure of administrative proceedings that impose restrictions for periods of less than 60 days would be eliminated. Comment is solicited as to whether this exemption should be retained, but with a shorter time period, such as 20, 10 or five days.

As a result of the proposed amendments, disclosure would be required of any order or sanction resulting from proceedings brought under the federal securities laws, including court-imposed civil money penalties and judicial orders temporarily barring an individual from serving as an officer or director of a public company, as authorized by the Remedies Act.⁷⁹ Disclosure of such orders or sanctions would be required, whether or not the court makes a finding that securities laws were violated.⁸⁰

Similarly, disclosure explicitly would be required of any judicial or administrative finding, order or sanction issued or imposed against the designated person under the enforcement provisions of the federal laws and regulations governing financial institutions, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (''FIRREA''),⁸¹ as well as under similar state statutes and regulations.⁸² For example, the proposed disclosure requirements would reach a civil money penalty imposed pursuant to a settlement agreement between a designated person and a bank regulator, where the final order neither included findings of violations of the law nor imposed any limitation on that person's acting in any capacity related to banks or savings and loan associations.

b. Fraud in connection with a financial institution, insurance company, or other business entity. The proposals would expand current provisions by requiring disclosure of legal proceedings involving alleged violations by a designated person of any law or regulation prohibiting fraud in connection with a financial institution, insurance company or other business entity. Disclosure of legal proceedings involving fraud currently is limited to criminal fraud proceedings, civil and administrative actions involving fraud in connection with violations of securities or commodities laws, and orders restricting the designated person from acting as a director, employee or affiliated person of a bank, savings and loan association or insurance company or from engaging in related activities based on that person's fraudulent conduct. Consequently, in addition to the actions for which disclosure is currently required, the proposals would require disclosure of a court order enjoining the designated person from knowingly defrauding a financial institution, whether or not the court imposed restrictions on the person's future business relationship with the institution.⁸³ Another example of required disclosure would be a court judgment against a designated person for violating consumer fraud statutes in connection with that person's business.⁸⁴

c. Civil mail and wire fraud. The proposals also would require disclosure of civil and administrative proceedings relating to mail and wire fraud.⁸⁵ Thus, for example, court orders enjoining violations of mail or wire fraud statutes,⁸⁶ as well as U.S. Postal Service orders requiring a designated person to cease and desist from conducting a scheme or device for obtaining money or property through the mail by false representations,⁸⁷ would be disclosed.

d. Fiduciary duties. The proposed amendments would extend disclosure to legal actions involving laws and regulations governing fiduciary obligations owed to corporations, partnerships, business trusts and similar business entities.⁸⁸ If, for example, a designated person was subject to a court order resulting from a breach of a fiduciary duty imposed by the Employee Retirement Income Security Act of 1974 (''ERISA''),⁸⁹ or had been found to have breached a fiduciary duty as a director of a corporation, in violation of state corporation or common law, disclosure would be required.

e. Restrictions on any business practice. The current provision requiring disclosure where a court enjoins or otherwise limits the designated person from engaging in any business practice⁹⁰ would be expanded to require disclosure of similar orders issued by administrative authorities.⁹¹ Under the proposals, for example, Federal Communications Commission orders requiring a designated person to cease and desist from engaging in activities that violate regulations governing telecommunications,⁹² International Trade Commission orders restricting such person from engaging in unfair practices in the importation of articles into the United States,⁹³ Federal Trade Commission orders requiring the person to cease and desist from engaging in unfair methods of competition,⁹⁴ and other similar federal or state administrative actions would be required to be disclosed.

f. Request for comment concerning civil and administrative proceedings. The proposed provisions discussed above relating to civil and administrative proceedings require disclosure if a finding, order or sanction relates to an alleged violation by a designated person of securities, commodities, banking and insurance laws and regulations and other designated laws and regulations, as well as orders restricting a designated person from engaging in any business practice. Comment is requested as to whether the requirement to disclose restrictions on any business practice is sufficient to apprise investors of the backgrounds of those who direct the affairs of public companies.

Comment also is sought as to whether disclosure relating to violations of laws governing corporations, partnerships or other entities should be restricted to violations of a fiduciary duty provision, as proposed, or restricted further to violations of a fiduciary duty involving fraud. Commenters also are requested to address whether those proposals should be expanded to require disclosure of findings, orders and sanctions entered in proceedings involving alleged violations of any laws respecting such business entities. Finally, comment is requested as to whether there is any category of civil or administrative proceeding that should be excluded from the disclosure requirements and the reason for the recommended exclusion.

B. Disclosure of Disciplinary Actions by Self-Regulatory Organizations

Under the proposals, a requirement would be added to describe disciplinary sanctions imposed by any securities or commodities industry self-regulatory organization (''SRO'') that oversees the business conduct and sales practices of its members.⁹⁵ The Commission requests comment as to whether there are any classes of SRO disciplinary proceedings that should be excluded, such as summary proceedings by an SRO wherein the designated person is fined not more than $2500 for minor or technical violations of the SRO's rules and procedures.⁹⁶

Regulations under the Commodity Exchange Act [7 U.S.C. 1 et seq.] define self-regulatory organization as contract markets registered under Section 5 of the Commodity Exchange Act [7 U.S.C. 7] (e.g., the Chicago Board of Trade) and futures associations registered under Section 17 [7 U.S.C. 21] of that Act (e.g., the National Futures Association). 17 CFR 1.3(ee). Clearing organizations, as defined in 17 CFR 1.3(d) (e.g., the Commodity Clearing Corporation), also are included in the definition of self- regulatory organization found in 17 CFR 1.59(a)(1).

C. Disclosure of Comparable Foreign Legal Proceedings

While current provisions relating to disclosure of a designated person's involvement in criminal and civil actions do not distinguish between foreign legal actions and those taken within the United States, the proposed amendments explicitly would require disclosure of foreign criminal convictions and civil proceedings before foreign courts. Moreover, provisions would be added requiring disclosure of actions by foreign administrative authorities. Thus, disclosure would be required of any foreign legal proceeding that is comparable to a domestic legal proceeding requiring disclosure.

These proposals reflect the ever-increasing international character of financial transactions and the important role played by foreign authorities in assuring safe and efficient financial markets world- wide.⁹⁷ Comment is requested as to whether there are any other types of legal proceedings before foreign authorities that should be specifically required, as well as whether any foreign legal proceedings should be excluded from the disclosure requirements.

D. Other Legal Proceedings

1. Arbitration Proceedings

While not specifically included in the amendments proposed today, the Commission requests comment on whether disclosure should be required concerning the results of arbitration proceedings arising out of allegations of violations of securities or commodities laws and regulations, or breaches of the laws and regulations relating to other commercial transactions. Given the widespread use of arbitration clauses, as well as statutes and court rules that require or permit claims to be submitted to arbitration rather than to courts, investors may consider information regarding a designated person's involvement in arbitration proceedings material to their investment decisions.

The Commission invites comment on whether disclosure should be required concerning arbitration awards where the action would have been disclosed had the claim been pursued before a court, administrative body or SRO. In addition, commenters should address whether there are other types of alternative dispute resolution that should trigger disclosure. Comment also is requested as to whether there are any arbitration proceedings that should be exempt from disclosure in light of the nature of the issues involved or the insignificant dollar amount of the award. Finally, comment is solicited as to whether there should be dollar amount thresholds that govern disclosure and whether such thresholds should be cumulative figures based on multiple arbitration awards.

2. Rule 2(e) Proceedings

The Commission also solicits comment as to whether filers should be required to disclose all administrative actions brought by the Commission against a designated person pursuant to Rule 2(e) of the Commission's Rules of Practice.⁹⁸ Rule 2(e) provides for the suspension or disbarment of certain professionals, usually attorneys and accountants, from practicing before the Commission.⁹⁹ Where Rule 2(e) orders relate to violations of the federal securities laws,¹⁰⁰ disclosure would be required under both the current and proposed rules. Should the requirements be expanded to encompass Rule 2(e) orders based on lack of professional qualifications,¹⁰¹ lack of character or integrity, or unethical or improper professional misconduct,¹⁰² the conviction of a felony or of a misdemeanor involving moral turpitude, or the disbarment or revocation of a license to practice as an attorney, accountant, engineer or other expert?¹⁰³ If not, commenters should provide specific reasons for any recommended exclusions. If it is determined that all Rule 2(e) orders should be disclosed, should disclosure of disciplinary sanctions imposed by other federal and state authorities or non-government professional associations, such as bar associations, for violations of standards of professional conduct also be required?

E. Disclosure Period Expansion to 10 Years

The Commission proposes to expand the time during which disclosure is required from five to 10 years,¹⁰⁴ and to delete in most instances the provisions allowing registrants to omit information they determine is neither material to an evaluation of the ability or integrity of the designated person¹⁰⁵ nor to a voting or investment decision.¹⁰⁶ Based on its experience since 1978, when the original disclosure period was reduced from 10 to the current five years,¹⁰⁷ the Commission believes that many legal proceedings remain material beyond five years.¹⁰⁸ Of course, the inclusion of the information would continue to be required beyond 10 years where necessary to render statements otherwise made in the registration statement, report or document not misleading.¹⁰⁹

Since some types of legal proceedings may have a greater impact on voting and investment decisions than others, the Commission requests comment as to whether there are specific actions that should be disclosed for periods less than 10 years. For example, should misdemeanors be described for a lesser period than felony convictions? Commenters favoring that approach should specify the types of proceedings to which the current five-year provision should continue to apply. On the other hand, disclosure may be appropriate for periods longer than 10 years with respect to certain types of legal proceedings--for example: criminal fraud convictions; civil, administrative and SRO actions based on fraud involving securities, commodities, financial institutions, insurance companies or other businesses; actions involving mail and wire fraud; and, proceedings resulting in the removal or bar from acting in a decision-making capacity in connection with a financial institution or other business. Should these types of legal proceedings be disclosed for longer periods, such as 15 or 20 years, or indefinitely? Should disclosure be required so long as the designated person is subject to the order? Commenters should provide an analysis in support of any specific time period recommended.

Many legal proceedings based on violations of federal, state or other laws or rules or SRO rules result in orders or sanctions that remain in place for indefinite periods. For example, many injunctions, cease-and-desist orders and industry bars are imposed permanently and remain in force until further judicial or administrative action is taken to vacate the order.¹¹⁰ Should the current five-year disclosure period be maintained, with the exception that any injunction, cease- and-desist order, industry bar or other continuing order or bar would be required to be disclosed for as long as the designated person is subject to the order or sanction, even when the order or sanction was imposed more than five years ago? Would that have the effect of providing sufficient disclosure of the conduct most relevant to investors' voting decisions? If such a provision were adopted, would it be appropriate to provide some outer limit (such as 10 or 15 years) after which disclosure could be discontinued?

F. Form and Schedule Amendments

As outlined above,¹¹¹ legal proceedings disclosure requirements vary among certain forms and schedules. The Commission proposes to amend the requirements found in Schedules 13D, 13E-3, 14A¹¹² and 14D- 1 and the Regulation A offering circular (Model B) to conform with those of Regulation S-K Item 401.¹¹³ The Commission solicits comment as to whether any schedule or form identified above should not be conformed with proposed legal proceedings requirements, and requests that commenters provide the specific rationale for any exclusion recommended.

As discussed above, the Item, forms and schedules identify persons for whom the legal proceedings disclosure is required;¹¹⁴ the proposed amendments would specify that disclosure is required where the function performed by a designated person is performed by others, directly or indirectly, pursuant to a management or service contract, or otherwise.¹¹⁵ Comment is requested as to whether there is any class of persons not currently subject to legal proceedings disclosure that should be. For example, should disclosure relating to promoters or control persons be required beyond the current 12 month period following an initial public offering, thus requiring disclosure in Exchange Act annual reports? Is there any class of persons currently identified as designated persons that should not be? Should the Regulation S-K Item 401 provisions be expanded to require disclosure relating to persons participating in the offering of a penny stock if the disclosure document is furnished in connection with such an offering?¹¹⁶

Finally, the Commission solicits comment as to whether legal proceedings disclosure provisions should be added to any forms, schedules or other documents where not required currently. For example, should legal proceedings involving persons issuing securities pursuant to an exemption under Regulation B,¹¹⁷ relating to fractional undivided interests in oil and gas rights, be required to be disclosed in the offering sheet delivered to investors?

IV. Investment Company Act Disclosure

The Commission is proposing to add legal proceedings disclosure, as proposed to be amended, to investment company registration statement forms and to expand the scope of legal proceedings disclosure in proxy statements. Currently, legal proceedings disclosure is specifically required only in investment company proxy statements related to the election of directors.¹¹⁸ Investment Company Act disclosure documents are intended, among other things, to inform investors and investment company shareholders about matters that concern the background and qualifications of those persons who oversee (such as directors) or manage (such as investment advisers) an investment company and its assets. The Commission believes that disclosure of information concerning legal proceedings may be material to investors and shareholders and is, therefore, proposing to require this disclosure in investment company disclosure documents.

The proposed amendments would require Item 401(f) disclosure in investment company prospectuses.¹¹⁹ Because most investment companies are externally managed by investment advisers, the Commission also is proposing to require disclosure concerning not only directors and officers of the investment company, but also ''managerial persons'' of the investment adviser.¹²⁰ For the purposes of the legal proceedings disclosure, ''managerial persons'' would mean ''affiliated persons'' of the investment adviser as that term is defined in section 2(a)(3) of the Investment Company Act¹²¹ who are engaged in the management, direction, supervision, or performance of any activities related to the investment company.¹²² This definition would include, for example, officers or employees of the investment adviser whose duties are related to the management of an investment company.¹²³ On the other hand, the definition is not intended to require disclosure with respect to persons affiliated with the investment adviser who have no managerial or similar responsibilities with respect to the investment company.¹²⁴ The Commission requests comment on whether the proposed definition of ''managerial persons'' will result in appropriate disclosure that will provide material information to investment company investors and shareholders.¹²⁵

The Commission also is proposing amendments to Schedules A and B of Regulation E [17 CFR 230.610a] under the Securities Act which would require offering circulars used by small business investment companies and business development companies relying on the Regulation E exemption to include the information specified in proposed Item 401(f) as to each director, executive officer and advisory board member of the issuer and as to managerial persons of the investment adviser of the issuer.

The Commission also is proposing to conform the legal proceedings disclosure in proxy statements to the registration statement forms, as proposed to be amended. The proposed disclosure in proxy statements for officers and directors of the investment company and managerial persons of the investment adviser would be required both in connection with the election of directors, as currently required, and in proxy statements seeking approval of an investment advisory contract.¹²⁶ Legal proceedings disclosure may be as relevant to a shareholder's assessment of an investment advisory contract as it is to the election of directors.

V. General Request for Comment

Any interested persons wishing to submit written comments on the proposed rule and form amendments or suggest additional changes or comment on other matters that might have an impact on the amendments set out in this release are invited to do so by submitting them in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-6009. Comment is requested on the impact of the proposals from the point of view of the public, the entities or persons making filings affected by the proposals, and the persons with respect to whom disclosure would be made. The Commission further requests comment on any competitive burdens that might result from adoption of the proposals. Comments on this inquiry will be considered by the Commission in complying with its responsibilities under Section 19(a) of the Securities Act,¹²⁷ Section 23(a) of the Exchange Act,¹²⁸ and Section 38(a) of the Investment Company Act.¹²⁹ Comment letters should refer to File No. S7-31-94. All comments received will be available for public inspection and copying in the Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549-6009.

VI. Cost-Benefit Analysis

To assist the Commission in its evaluation of the costs and benefits that may result from the proposed changes to disclosure requirements contained in this release, commenters are requested to provide views and data relating to any costs and benefits associated with these proposals. It is expected that the enhanced legal proceeding disclosure provisions will modestly increase most registrants' costs and compliance burdens. A requirement to provide additional information for longer periods of time than currently required in documents filed under the Securities Act, Exchange Act and Investment Company Act should not significantly increase the burden on company resources, since many registrants and others already are required to gather information regarding the backgrounds of directors, officers and others. It appears, however, that any additional expense may be justified in view of the material information that would be made available to investors.

VII. Summary of Initial Regulatory Flexibility Analysis

An initial regulatory flexibility analysis has been prepared in accordance with 5 U.S.C. 603 concerning the proposed amendments to Item 401 of Regulations S-K and S-B, the Regulation A offering circular (Model B), Schedules 13D, 13E-3, 14A and 14D-1, Forms N-1A, N-2, N-3, N-4, N-5, N-8B-2, N-8B-3 and N-8B-4, and Regulation E. The analysis notes that the proposed amendments are intended to provide investors with more information regarding the background of those who exercise control over the affairs of public companies.

As discussed more fully in the analysis, the proposed changes would affect persons that are small entities, as defined by the Commission's rules. It is expected that increased reporting, recordkeeping and compliance burdens would result from the changes. The analysis also indicates that there are no current federal rules that duplicate, overlap or conflict with the revised legal proceedings disclosure provisions.

As stated in the analysis, several possible significant alternatives to the proposals were considered, including, among others, establishing different compliance or reporting requirements for small entities or exempting them from all or part of the proposed requirements. As more fully discussed in the analysis, the alternatives were either addressed in the proposals, inconsistent with the purposes of the federal securities laws, or otherwise without justification.

Written comments are encouraged with respect to any aspect of the analysis. Such comments will be considered in the preparation of the Final Regulatory Flexibility Analysis if the proposed revisions are adopted. A copy of the analysis may be obtained by contacting James R. Budge, Office of Disclosure Policy, Division of Corporation Finance, at (202) 942-2910, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-6009.

VIII. Statutory Basis for Rules and Forms

The Commission is proposing amendments to Item 401 of Regulations S-K and S-B, Regulation A and Regulation E pursuant to Sections 3(b), 6, 7, 8, 10, and 19 of the Securities Act. Other amendments to Item 401 and amendments to Schedules 13D, 13E-3, 14A and 14D-1 are proposed pursuant to Sections 12, 13, 14, 15(d) and 23 of the Exchange Act. The Commission also is proposing amendments to the proxy rules applicable to investment companies and to investment company registration statement forms pursuant to Sections 8(b), 20(a) and 38(a) of the Investment Company Act.

List of Subjects in 17 CFR Part 228, 229, 230, 239, 240, and 274

Investment companies, Registration requirements, Reporting and recordkeeping requirements, Securities.

Text of the Proposed Amendments

In accordance with the foregoing, Title 17, Chapter II of the Code of Federal Regulations is proposed to be amended as follows:

PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS

1. The authority citation for Part 228 continues to read as follows:

Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 77sss, 78l, 78m, 78n, 78o, 78w, 78ll, 80a-8, 80a-29, 80a-30, 80a-37, 80b- 11, unless otherwise noted.

2. Section 228.401 (Item 401) is amended by revising paragraph (d) to read as follows:

Sec. 228.401 (Item 401) Directors, executive officers, promoters and control persons.

* * * * *

(d) Involvement in certain legal proceedings.

(1) Describe any of the actions listed below, not subsequently reversed, suspended, vacated, annulled or otherwise rendered of no effect, taken during the past 10 years that involved any executive officer, director or person nominated to become a director of the small business issuer:

(i) Bankruptcy or other insolvency proceedings. The initiation of any federal, state or foreign bankruptcy or insolvency proceeding by or against, or the appointment of a receiver, conservator, fiscal agent or similar officer for the business or assets of any such person, any partnership in which such person was a general partner at or within two years before the time of such initiation or appointment, or any corporation or business association of which such person was an executive officer at or within two years before the time of such initiation or appointment. The foregoing shall be described if material to an investment or voting decision.

(ii) Criminal proceedings. The conviction of such person in a federal, state or foreign criminal proceeding (including convictions entered on a plea of nolo contendere), or the naming of any such person as the subject of a pending criminal proceeding (excluding traffic violations and other minor offenses).

(iii) Civil and administrative proceedings. The issuance in a federal, state or foreign civil or administrative proceeding of:

(A) A finding, order, judgment, decree or sanction to which such person was subject, relating to an alleged violation of:

(1) Any securities or commodities law or regulation, or

(2) Any law or regulation respecting financial institutions, insurance companies, or fiduciary duties owed to a partnership, corporation, business trust or similar business entity, including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or

(3) Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity;

(B) An order enjoining or otherwise limiting such person from engaging in any type of business practice.

(iv) Self-regulatory organization proceedings. The imposition of a sanction against such person by:

(A) A self-regulatory organization, as defined in Section 3(a)(26) of the Exchange Act [15 U.S.C. 78c(a)(26)];

(B) A contract market designated pursuant to section 5 of the Commodity Exchange Act [7 U.S.C. 7];

(D) Any substantially equivalent foreign authority or organization.

(2) Control persons and promoters. Any small business issuer that has not been subject to the reporting requirements of Sections 13(a) or 15(d) of the Exchange Act (15 U.S.C. 78m(a) or 78o(d)) for the 12 months immediately prior to the filing of the registration statement, report, or statement to which this Item is applicable also shall describe any action enumerated in this paragraph (d), for the time period specified herein, that involved a control person of the small business issuer. If any such issuer was organized within the past five years, comparable disclosure is required with regard to any promoter of the small business issuer.

Instructions to Paragraph (d) of Item 401

1. For purposes of computing the 10 year period referred to in this paragraph, the disclosure period applicable to a final conviction, order, judgment, decree or sanction shall begin with its date of entry. The disclosure period applicable to a preliminary order shall commence when the rights of appeal from such order have lapsed. Any conviction, order, judgment, decree or sanction that is appealed shall continue to be disclosed until ultimately reversed, suspended, vacated, annulled or otherwise rendered of no effect, at which time disclosure shall no longer be required. With respect to bankruptcy and insolvency proceedings, the computation date shall be the date of filing for uncontested petitions or the date upon which approval of a contested petition became final. In the case of receiverships and conservatorships, the computation date shall be the date the receiver or conservator was appointed.

2. The small business issuer is permitted to explain any mitigating circumstances associated with actions reported pursuant to this paragraph.

3. For purposes of this paragraph, the term financial institution includes any bank, bank holding company, savings association, or savings and loan holding company, as defined in Section 3 of the Federal Deposit Insurance Act [12 U.S.C. 1813], any federal or state credit union, as defined in Section 101 of the Federal Credit Union Act [12 U.S.C. 1752], or any system institution of the Farm Credit System, as defined in Section 5.35 of the Farm Credit Act of 1971 [12 U.S.C. 2271], or any substantially equivalent foreign institution.

4. If the information called for by this paragraph is being presented in a proxy or information statement, no information need be given respecting any director whose term of office as a director will not continue after the meeting to which the statement relates.

5. If the small business issuer is a partnership or a trust, the information required by this paragraph shall be provided with respect to each general partner of the partnership, each trustee of the trust, and any other person providing services to such entities that are comparable to those provided by the persons identified in this paragraph. Where management services are provided the small business issuer by outside parties pursuant to a management or service contract or otherwise, the information called for by this paragraph shall be disclosed with respect to the persons identified in this paragraph, as well as any other person providing comparable services on behalf of the small business issuer.

6. Paragraph (d)(2) shall not apply to any subsidiary of a small business issuer that has been reporting pursuant to Section 13(a) or 15(d) of the Exchange Act (15 U.S.C. 78m(a) or 78o(d)) for the 12 months immediately prior to the filing of the registration statement, report or statement.

PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND CONSERVATION ACT OF 1975--REGULATION S-K

3. The general authority citation for Part 229 continues to read in part as follows:

Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79e, 79n, 79t, 80a-8, 80a-29, 80a-30, 80a-37 and 80b-11, unless otherwise noted. * * * * *

4. The authority citation following Sec. 229.401 is removed.

5. Section 229.401 (Item 401) is amended by revising paragraph (f) and by removing paragraph (g) to read as follows:

Sec. 229.401 (Item 401) Directors, executive officers, promoters and control persons.

* * * * *

(f) Involvement in certain legal proceedings.

(iii) Civil and administrative proceedings. The issuance in a federal, state or foreign civil or administrative proceeding of:

(A) A finding, order, judgment, decree or sanction to which such person was subject, relating to an alleged violation of:

(1) Any securities or commodities law or regulation, or

(3) Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity;

(B) An order enjoining or otherwise limiting such person from engaging in any type of business practice.

(iv) Self-Regulatory Organization proceedings. The imposition of a sanction against such person by:

(A) A self-regulatory organization, as defined in Section 3(a)(26) of the Exchange Act [15 U.S.C. 78c(a)(26)];

(B) A contract market designated pursuant to section 5 of the Commodity Exchange Act [7 U.S.C. 7];

(D) Any substantially equivalent foreign authority or organization.

(2) Control persons and promoters. Any registrant that has not been subject to the reporting requirements of Sections 13(a) or 15(d) of the Exchange Act (15 U.S.C. 78m(a) or 78o(d)) for the 12 months immediately prior to the filing of the registration statement, report, or statement to which this Item is applicable also shall describe any action enumerated in this paragraph (f), for the time period specified herein, that involved a control person of the registrant. If any such registrant was organized within the past five years, comparable disclosure is required with regard to any promoter of the registrant.

Instructions to Paragraph (f) of Item 401

2. The registrant is permitted to explain any mitigating circumstances associated with actions reported pursuant to this paragraph.

5. If the registrant is a partnership or a trust, the information required by this paragraph shall be provided with respect to each general partner of the partnership, each trustee of the trust, and any other person providing services to such entities that are comparable to those provided by the persons identified in this paragraph. Where management services are provided the registrant by outside parties pursuant to a management or service contract or otherwise, the information called for by this paragraph shall be disclosed with respect to the persons identified in this paragraph, as well as any other person providing comparable services on behalf of the registrant.

6. Paragraph (f)(2) shall not apply to any subsidiary of a registrant that has been reporting pursuant to Section 13(a) or 15(d) of the Exchange Act (15 U.S.C. 78m(a) or 78o(d)) for the 12 months immediately prior to the filing of the registration statement, report or statement.

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

6. The general authority citation for Part 230 continues to read in part as follows:

Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77s, 77sss, 78c, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79t, 80a-8, 80a-29, 80a-30 and 80a-37, unless otherwise noted. * * * * *

7. By amending Sec. 230.610a by adding paragraph (g) to Item 4 of Schedule A of Regulation E, to read as follows:

Sec. 230.610a Schedule A: Contents of offering circular for small business investment companies; Schedule B: Contents of offering circular for business development companies.

Schedule A--Contents of Offering Circular for Small Business Investment Companies

* * * * * Item 4. Management and Certain Security Holders of the Issuer * * * * *

(g) Provide the information required by Item 401(f)(1) of Regulation S-K [17 CFR 229.401(f)(1)] as to each director, officer, and advisory board member of the issuer, and each managerial person of the investment adviser of the issuer.

Instruction. For the purposes of this Item 4(g), managerial person means any affiliated person (as defined in Section 2(a)(3) of the Investment Company Act of 1940 [15 U.S.C. 80a-2(a)(3)]) of the investment adviser who is engaged in the management, direction, supervision, or performance of any activities related to the issuer. * * * * *

PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

8. The general authority citation for Part 239 continues to read in part as follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77sss, 78c, 78l, 78m, 78n, 78o(d), 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 79l, 79m, 79n, 79q, 79t, 80a-8, 80a-29, 80a-30, and 80a-37 unless otherwise noted. * * * * *

9. By revising Part II, Model B, Item 8, paragraph (d) of Form 1-A (referenced in Sec. 239.90) to read as follows:

Note.--The text of Form 1-A does not and the amendment will not appear in the Code of Federal Regulations. Form 1-A.--Regulation A Offering Statement Under the Securities Act of 1933 * * * * * PART II--OFFERING CIRCULAR * * * * * OFFERING CIRCULAR MODEL B * * * * * Item 8. Directors, Executive Officers and Significant Employees * * * * *

(d) Involvement in certain legal proceedings.

(iii) Civil and administrative proceedings. The issuance in a federal, state or foreign civil or administrative proceeding of:

(A) A finding, order, judgment, decree or sanction to which such person was subject, relating to an alleged violation of:

(1) Any securities or commodities law or regulation, or

(3) Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity;

(B) An order enjoining or otherwise limiting such person from engaging in any type of business practice.

(iv) Self-Regulatory Organization proceedings. The imposition of a sanction against such person by:

(A) A self-regulatory organization, as defined in Section 3(a)(26) of the Exchange Act [15 U.S.C. 78c(a)(26)];

(B) A contract market designated pursuant to section 5 of the Commodity Exchange Act [7 U.S.C. 7];

(D) Any substantially equivalent foreign authority or organization.

Instructions to Paragraph (d)

2. The issuer is permitted to explain any mitigating circumstances associated with events reported pursuant to this paragraph.

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934

10. The general authority citation for Part 240 continues to read in part as follows:

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, and 80b-11, unless otherwise noted. * * * * *

11. Sec. 240.13d-101 (Schedule 13D) is amended by: revising row 5 of the cover page and instruction 5 for the cover page; revising the introductory text of Item 2; revising paragraph (d) of Item 2; removing paragraph (e) of Item 2; and redesignating paragraph (f) of Item 2 as paragraph (e), to read as follows:

Sec. 240.13d-101 Schedule 13D--Information to be included in statements filed pursuant to Sec. 240.13d-1(a) and amendments thereto filed pursuant to Sec. 240.13d-2(a).

Schedule 13D * * * * *

(5) Check if disclosure of legal proceedings is required pursuant to Item 2(d). * * * * *

Instructions for Cover Page

* * * * *

(5) If disclosure of legal proceedings is required pursuant to Item 2(d), row 5 should be checked. * * * * *

Item 2. Identity and Background.

If the person filing this statement or any person enumerated in Instruction C of this statement is a corporation, general partnership, limited partnership, syndicate or other group of persons, state its name, the state or other place of its organization, its principal business, the address of its principal business, the address of its principal office and the information required by (d) of this Item. If the person filing this statement or any person enumerated in Instruction C is a natural person, provide the information specified in (a) through (e) of this Item with respect to such person(s). * * * * *

(d) Involvement in certain legal proceedings.

(iii) Civil and administrative proceedings. The issuance in a federal, state or foreign civil or administrative proceeding of:

(A) A finding, order, judgment, decree or sanction to which such person was subject, relating to an alleged violation of:

(1) Any securities or commodities law or regulation, or

(3) Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity;

(B) An order enjoining or otherwise limiting such person from engaging in any type of business practice.

(iv) Self-Regulatory Organization proceedings. The imposition of a sanction against such person by:

(A) A self-regulatory organization, as defined in Section 3(a)(26) of the Exchange Act [15 U.S.C. 78c(a)(26)];

(B) A contract market designated pursuant to section 5 of the Commodity Exchange Act [7 U.S.C. 7];

(D) Any substantially equivalent foreign authority or organization.

Instructions to Paragraph (d).

2. The person filing this schedule is permitted to explain any mitigating circumstances associated with events reported pursuant to this paragraph.

3. For purposes of this paragraph, the term financial institution includes any bank, bank holding company, savings association, or savings and loan holding company, as defined in Section 3 of the Federal Deposit Insurance Act [12 U.S.C. 1813], any Federal or State credit union, as defined in Section 101 of the Federal Credit Union Act [12 U.S.C. 1752], or any system institution of the Farm Credit System, as defined in Section 5.35 of the Farm Credit Act of 1971 [12 U.S.C. 2271], or any substantially equivalent foreign institution. * * * * *

12. Sec. 240.13e-100 (Schedule 13E-3) is amended by: revising the section heading; revising the introductory paragraph of Item 2; revising paragraph (e) of Item 2; removing paragraph (f) of Item 2; and redesignating paragraph (g) of Item 2 as paragraph (f), to read as follows:

Sec. 240.13e-100 Schedule 13E-3, Rule 13e-3 transaction statement pursuant to section 13(e) of the Securities Exchange Act of 1934 and rule 13e-3 [Sec. 240.13e-3] thereunder.

Rule 13e-3 Transaction statement * * * * *

Item 2. Identity and Background. If the person filing this statement is the issuer of the class of equity securities which is the subject of the Rule 13e-3 transaction, make a statement to that effect. If this statement is being filed by an affiliate of the issuer which is other than a natural person or if any person enumerated in Instruction C to this statement is a corporation, general partnership, limited partnership, syndicate or other group of persons, state its name, the state or other place of its organization, its principal business, the address of its principal executive offices and provide the information required by paragraph (e) of this Item. If this statement is being filed by an affiliate of the issuer who is a natural person or if any person enumerated in Instruction C of this statement is a natural person, provide the information required by paragraphs (a) through (f) of this Item with respect to such person(s). * * * * *

(e) Involvement in certain legal proceedings.

(iii) Civil and administrative proceedings. The issuance in a federal, state or foreign civil or administrative proceeding of:

(A) A finding, order, judgment, decree or sanction to which such person was subject, relating to an alleged violation of:

(1) Any securities or commodities law or regulation, or

(3) Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity;

(B) An order enjoining or otherwise limiting such person from engaging in any type of business practice.

(iv) Self-regulatory organization proceedings. The imposition of a sanction against such person by:

(A) A self-regulatory organization, as defined in Section 3(a)(26) of the Exchange Act [15 U.S.C. 78c(a)(26)];

(B) A contract market designated pursuant to section 5 of the Commodity Exchange Act [7 U.S.C. 7];

(D) Any substantially equivalent foreign authority or organization.

Instructions to Paragraph (e)

2. The person filing this schedule is permitted to explain any mitigating circumstances associated with events reported pursuant to this paragraph.

4. While negative answers to Item 2(e) are required in this schedule, they need not be furnished to security holders. * * * * *

13. Sec. 240.14a-101 (Schedule 14A) is amended by revising paragraph (b)(1)(iii) of Item 5 and by amending Item 22 by adding a new paragraph (a)(3)(vi) and revising paragraph (b)(4) to read as follows:

Sec. 240.14a-101 Schedule 14A. Information required in proxy statement.

* * * * *

Item 5. Interest of certain Persons in Matters to be Acted Upon

* * * * *

(b) Solicitation subject to Rule 14a-11 (Sec. 240.14a-11 of this chapter). * * *

(1) * * *

(iii) State the information required by Item 401(f) of Regulation S-K (Sec. 229.401(f) of this chapter). * * * * *

Item 22. Information required in investment company proxy statement.

* * * * *

(a) * * *

(3) * * *

(vi) If action is to be taken with respect to the election of directors or the approval of an advisory contract, provide the information required by Item 401(f)(1) of Regulation S-K (Sec. 229.401(f)(1)) as to each director, officer, and advisory board member of the Fund, and each managerial person of the investment adviser of the Fund.

Instruction. For the purposes of this Item 22(a)(3)(vi), ''managerial person'' means any affiliated person (as defined in Section 2(a)(3) of the Investment Company Act of 1940) of the investment adviser who is engaged in the management, direction, supervision, or performance of any activities related to the issuer. * * * * *

(b) * * *

(4) Provide in tabular form, to the extent practicable, the information required by Items 401 (except the information required by paragraph (f) of Item 401, which is required pursuant to paragraph (a)(3)(vi) of this Item 22), 404 (a) and (c), and 405 of Regulation S-K (Secs. 229.401, 229.404, and 229.405 of this chapter. * * * * *

14. Sec. 240.14d-100 (Schedule 14D-1) is amended by: revising row 5 of the cover page and instruction 5 for the cover page; revising the introductory paragraph of Item 2, revising paragraph (e) of Item 2, removing paragraph (f) of Item 2; and redesignating paragraph (g) of Item 2 as paragraph (f), to read as follows:

Sec. 240.14d-100 Schedule 14D-1. Tender offer statement pursuant to section 14(d)(1) of the Securities Exchange Act of 1934.

Schedule 14D-1 * * * * *

(5) Check if disclosure of legal proceedings is required pursuant to Item 2(e). * * * * *

Instructions for Cover Page * * * * *

(5) If disclosure of legal proceedings is required pursuant to Item 2(e) of Schedule 14D-1, row 5 should be checked. * * * * *

Item 2. Identity and Background. If the person filing this statement or any person enumerated in Instruction C of this statement is a corporation, general partnership, limited partnership, syndicate or other group of persons, state its name, the state or other place of its organization, its principal business, the address of its principal business, the address of its principal office and the information required by paragraph (e) of this Item. If the person filing this statement or any person enumerated in Instruction C is a natural person, provide the information specified in paragraphs (a) through (f) of this Item with respect to such person(s). * * * * *

(e) Involvement in certain legal proceedings.

(iii) Civil and administrative proceedings. The issuance in a federal, state or foreign civil or administrative proceeding of:

(A) A finding, order, judgment, decree or sanction to which such person was subject, relating to an alleged violation of:

(1) Any securities or commodities law or regulation, or

(3) Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity;

(B) An order enjoining or otherwise limiting such person from engaging in any type of business practice.

(iv) Self-Regulatory Organization proceedings. The imposition of a sanction against such person by:

(A) A self-regulatory organization, as defined in Section 3(a)(26) of the Exchange Act [15 U.S.C. 78c(a)(26)];

(B) A contract market designated pursuant to section 5 of the Commodity Exchange Act [7 U.S.C. 7];

(D) Any substantially equivalent foreign authority or organization.

Instructions to Paragraph (e).

2. The person filing this schedule is permitted to explain any mitigating circumstances associated with events reported pursuant to this paragraph.

4. While negative answers to Item 2(e) are required in this schedule, they need not be furnished to security holders. * * * * *

PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

15. The authority citation for Part 274 continues to read as follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m, 78n, 78o(d), 80a-8, 80a-24, and 80a-29, unless otherwise noted.

16. By amending Item 5 of Form N-1A (referenced in Secs. 239.15A and 274.11A) to revise the introductory text, to redesignate paragraphs (d), (e), (f), and (g) as (e), (f), (g), and (h) and to add paragraph (d) to read as follows:

Note: The text of Form N-1A does not and the amendments will not appear in the Code of Federal Regulations.

Form N-1A

* * * * *

Item 5. Management of the Fund

Describe concisely the management and business of the Registrant, including:

(a) * * *

(b) * * *

d. Provide the information required by Item 401(f)(1) of Regulation S-K [Sec. 229.401(f)(1)] as to each director, executive officer and advisory board member of the Registrant, and each managerial person of the investment adviser.

Instruction. For the purposes of this Item 5(d), ''managerial person'' means any affiliated person (as defined in Section 2(a)(3) of the Investment Company Act of 1940) of the investment adviser who is engaged in the management, direction, supervision, or performance of any activities related to the Registrant. * * * * *

17. By amending Item 9 of Form N-2 (referenced in Secs. 239.14 and 274.11a-1) to revise the introductory text of paragraph 1, to redesignate paragraphs 1.d, 1.e, 1.f, and 1.g as paragraphs 1.e, 1.f, 1.g, and 1.h, to add a paragraph 1.d, and to add ''9.3'' after the word ''item'' in the first clause of the Instruction to paragraph 3 to read as follows:

Note: The text of Form N-2 does not and the amendments will not appear in the Code of Federal Regulations.

Form N-2

* * * * *

Item 9. Management

1. General: Describe concisely the management and business of the Registrant, including:

(a) * * *

(b) * * *

Instruction. For the purposes of this Item 1.d, ''managerial person'' means any affiliated person (as defined in Section 2(a)(3) of the Investment Company Act of 1940) of the investment adviser who is engaged in the management, direction, supervision, or performance of any activities related to the Registrant.

18. By amending Item 6 of Form N-3 (referenced in Secs. 239.17a and Sec. 274.11b) to revise the introductory text, to redesignate paragraphs (c) and (d) as (d) and (e), and to add paragraph (c) to read as follows:

Note: The text of Form N-3 does not and the amendments will not appear in the Code of Federal Regulations.

Form N-3

* * * * *

Item 6. Management

Describe concisely the management and business of the Registrant, including:

(a) * * *

(b) * * *

(c) Provide the information required by Item 401(f)(1) of Regulation S-K [Sec. 229.401(f)(1)] as to each director, executive officer and advisory board member of the Registrant, and each managerial person of the investment adviser.

Instruction. For the purposes of this Item 6(c), ''managerial person'' means any affiliated person (as defined in Section 2(a)(3) of the Investment Company Act of 1940) of the investment adviser who is engaged in the management, direction, supervision, or performance of any activities related to the Registrant. * * * * *

19. By amending Item 5 of Form N-4 (referenced in Secs. 239.17b and 274.11c) to redesignate paragraph (f) as (g) and to add paragraph (f) to read as follows:

Note: The text of Form N-4 does not and the amendments will not appear in the Code of Federal Regulations.

Form N-4

* * * * *

Item 5. General Description of Registrant, Depositor, and Portfolio Companies

* * * * *

(f) Provide the information required by Item 401(f)(1) of Regulation S-K [Sec. 229.401(f)(1)] as to each director, officer and employee of the depositor, or its affiliates, who participates directly in the management or administration of the separate account. * * * * *

20. By amending Form N-5 (referenced in Secs. 239.24 and 274.5) to designate the text of Item 11 as paragraph (a) and to add paragraph (b), to designate the text of Item 12 as paragraph (a) and to add paragraph (b), and to add paragraph (d) to Item 16 to read as follows:

Note: The text of Form N-5 does not and the amendments will not appear in the Code of Federal Regulations.

Form N-5

* * * * *

Item 11. Directors and Executive Officers

(a) * * *

(b) Provide the information required by Item 401(f)(1) of Regulation S-K [Sec. 229.401(f)(1)] as to each director and executive officer of the Registrant.

Item 12. Members of Advisory Board of Registrant

(a) * * *

(b) Provide the information required by Item 401(f)(1) of Regulation S-K [229.401(f)(1)] as to each member of the registrant's advisory board. * * * * *

Item 16. Investment Advisers.

* * * * *

(d) Provide the information required by Item 401(f)(1) of Regulation S-K [229.401(f)(1)] as to each managerial person of each investment adviser.

Instruction: For the purposes of this Item 16(d), ''managerial person'' means any affiliated person (as defined in Section 2(a)(3) of the Investment Company Act of 1940) of the investment adviser who is engaged in the management, direction, supervision, or performance of any activities related to the registrant.

PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

21. By amending Item 28 of Form N-8B-2 (referenced in Sec. 274.12) to add paragraph (c) to read as follows:

Note: The text of Form N-8B-2 does not and the amendments will not appear in the Code of Federal Regulations.

Form N-8B-2

* * * * *

Officials and Affiliated Persons of Depositor

28. (a) * * *

(c) Provide the information required by Item 401(f)(1) of Regulation S-K [Sec. 229.401(f)(1)] as to each managerial person of the depositor.

Instruction: For the purposes of this Item 28(c), ''managerial person'' means any affiliated person (as defined in Section 2(a)(3) of the Investment Company Act of 1940) of the investment adviser who is engaged in the management, direction, supervision, or performance of any activities related to the registrant. * * * * *

22. By amending Item 27 of Form N-8B-3 (referenced in Sec. 274.13) to add paragraph (c) to read as follows:

Note: The text of Form N-8B-3 does not and the amendments will not appear in the Code of Federal Regulations.

Form N-8B-3

* * * * *

Officials and Affiliated Persons of Depositor

26. (a) * * *

(c) Provide the information required by Item 401(f)(1) of Regulation S-K [Sec. 229.401(f)(1)] as to each managerial person of the depositor.

Instruction: For the purposes of this Item 26(c), ''managerial person'' means any affiliated person (as defined in Section 2(a)(3) of the Investment Company Act of 1940) of the investment adviser who is engaged in the management, direction, supervision, or performance of any activities related to the registrant. * * * * *

23. By amending Form N-8B-4 (referenced in Sec. 274.14) to add paragraph (d) to Item 29 and to add paragraph (c) to Item 34 to read as follows:

Note: The text Form N-8B-4 does not and the amendments will not appear in the Code of Federal Regulations.

Form N-8B-4

* * * * *

Item 29. Investment Advisers and Agreements Therewith

* * * * *

(d) Provide the information required by Item 401(f)(f) of Regulation S-K [Sec. 229.401(f)(1)] as to each managerial person of each investment adviser of the registrant.

Instruction: For the purposes of this Item 29(d), ''managerial person'' means any affiliated person (as defined in Section 2(a)(3) of the Investment Company Act of 1940) of the investment adviser who is engaged in the management, direction, supervision, or performance of any activities related to the registrant. * * * * *

Item 34. Directors, Officers and Advisory Board Members

* * * * *

(c) Provide the information required by Item 401(f)(1) of Regulation S-K [Sec. 229.401(f)(1)] as to each person named pursuant to paragraph (a). * * * * *

By the Commission.

Dated: November 1, 1994.

¹ 17 CFR 229.401(f) and (g).

² 17 CFR Part 229.

³ 17 CFR 228.401(d).

⁴ 17 CFR Part 228.

⁵ 15 U.S.C. 77a et seq.

⁶ 15 U.S.C. 78a et seq.

⁷ 17 CFR 239.90.

⁸ 17 CFR 240.13d-101.

⁹ 17 CFR 240.13e-100.

¹⁰ 17 CFR 240.14a-101.

¹¹ 17 CFR 240.14d-100.

¹² 15 U.S.C. 80a-1 et seq. As discussed in Section IV, below, investment companies currently are specifically required to disclose legal proceedings only in proxy statements related to the election of directors and not in registration statements or other disclosure documents.

¹³ 17 CFR 274.11A.

¹⁴ 17 CFR 274.11a-1.

¹⁵ 17 CFR 274.11b.

¹⁶ 17 CFR 274.11c.

¹⁷ 17 CFR 274.5.

¹⁸ 17 CFR 274.12.

¹⁹ 17 CFR 274.13.

²⁰ 17 CFR 274.14.

²¹ The term ''legal proceeding,'' as used in this release and in current Item 401, includes criminal convictions, as well as findings, orders or sanctions in civil and administrative actions, that have not been reversed, suspended or vacated. It also includes criminal actions pending at the time a disclosure document is filed, and the initiation of bankruptcy or similar proceedings. With respect to proposed Item 401, the term also encompasses sanctions issued by securities and commodities self-regulatory organizations that have not been reversed or otherwise rendered of no effect.

²² As used in this release, ''designated person'' includes the persons identified in the following disclosure provisions, forms and schedules: S-K Item 401 (f) and (g) and S-B Item 401(d)--executive officers, directors, persons nominated to become directors, as well as promoters and control persons of newly public companies; Schedules 13D, 13E-3, and 14D-1--the person filing the schedule. In addition, if the filer is a general or limited partnership, syndicate or other group--the individual general partners of general or limited partnerships, each member of such syndicate or group and each person controlling such partner or member; if such general partner, member or person controlling such partner or member is a corporation, or if the filer is a corporation--the corporation's directors and executive officers, persons controlling such corporation, and directors and executive officers of any corporation ultimately in control of such corporation; Proxy statements relating to election contests--any participant in an election contest, as defined by Instruction 3 to Item 4 of Schedule 14A (in addition to the Item 401 disclosure generally required in a proxy statement involving an election of directors, contested or otherwise); Regulation A Offering Circular (Model B)--executive officers, directors and persons nominated to become directors; Prospectuses Relating to Oil and Gas Programs (Securities Act Industry Guide 4)-- management and operating companies (in addition to the disclosure required by the appropriate registration form); Registration Statements Relating to Interests in Real Estate Limited Partnerships (Securities Act Industry Guide 5)--the persons making investment decisions (in addition to the disclosure required by the appropriate registration form).

²³ In order to simplify references to the legal proceedings disclosure requirements, references to Item 401(f) or 401(g) hereafter should be read to include the comparable provisions in Regulation S-B Item 401(d).

²⁴ In addition to provisions

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Disclosure Concerning Legal Proceedings Involving Management, Promoters, Control Persons and Others

ACTION: Proposed rulemaking.

I. Executive Summary

II. Background of Legal Proceedings Requirements

III. Proposed Amendments

A. Disclosure of Judicial and Administrative Proceedings

1. Bankruptcy and Insolvency Proceedings

2. Criminal Proceedings

3. Civil and Administrative Proceedings

B. Disclosure of Disciplinary Actions by Self-Regulatory Organizations

C. Disclosure of Comparable Foreign Legal Proceedings

D. Other Legal Proceedings

1. Arbitration Proceedings

2. Rule 2(e) Proceedings

E. Disclosure Period Expansion to 10 Years

F. Form and Schedule Amendments

IV. Investment Company Act Disclosure

V. General Request for Comment

VI. Cost-Benefit Analysis

VII. Summary of Initial Regulatory Flexibility Analysis

VIII. Statutory Basis for Rules and Forms