ICI Recommends Clarifications in SEC Short Selling Proposal

Washington, DC, February 21, 2007 - ICI supports efforts to improve the safeguarding of price integrity in the securities offering process and protect issuers from manipulative activity, but expressed concerned that a recent proposal could result in inadvertent violations by investment companies, in a comment letter filed with the U.S. Securities and Exchange Commission.

Background
The SEC proposed amendments to Rule 105 of Regulation M on December 6, 2006. Rule 105, in its present form, prohibits a person from covering a short sale with securities sold in an offering if the person sold short, either within five days prior to the pricing of the offering or the period beginning with the filing of the registration statement and ending with pricing (whichever of the two periods is shorter). The SEC's proposed amendments -- to address efforts by individuals seeking to evade Rule 105 prohibition -- would make it unlawful for a person to execute a short sale during the five-day period and then purchase the security in an offering.

ICI Position
In a comment letter to the SEC, ICI recommended that the agency clarify the scope of the term "person" under Rule 105, expressing concern that the current proposal could result in inadvertent violations of Rule 105 by funds. The amendments make unclear whether a "person," for purposes of Rule 105, would include each fund within a complex (or each series of a fund) or each subadvised portion of a single fund. As a result, the proposal could create difficulties for funds executing transactions involving securities that are the subject of an offering.

To prevent unintended consequences for funds, the Institute recommended that the Commission clarify that each individual fund within a fund complex (and each series of a fund) -- and each subadvised portion of a particular fund -- is treated as a separate "person" for purposes of Rule 105. ICI believes its suggested clarification would prove consistent with exemptive rules under the Investment Company Act, prevent inadvertent violations of Rule 105 by funds, and preserve the protections and goals of the regulation amendments.

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