SEC Division of Investment Management staff letter: AmSouth Mutual Funds

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Our Ref. No. 97-145

RESPONSE" OF THE OFFICE OF CHIEF COUNSEL
Amouth Mutual Funds
DIVISION OF INVSTMNT MAAGEM File No. 811-5551

Your letter of March 13, 1997 requests our assurance that we

would not recommend that the Commission take any enforcement

action against Amouth Mutual Funds ("Trust") under the Investment Company Act of 1940 if, for the period from March 20,

1997 to July 31, 1997, the Trust's securities and similar

investments are verified twice by its independent public

accountants rather than three times, as required by Rule

17f-2(f). 11

The Trust has been in operation since 1988. In your letter,

you state that the Trust would become subj ect to the requirements

of Rule 1 7f -2 (f) on March 20, 1997, 21 when Amouth Bank of Alabam, the Trust's investment adviser, would begin to serve as the Trust's custodian. ~I Because the Trust's fiscal year

ends on July 31, there will be a "stub" fiscal period of four and

one-half months during which the Trust will be subject to the

verification requirements of the rule.

You believe that requiring three verifications within such a

short period of time does not further the policies underlying

il Under Rule 17f-2, which applies to registered investment

companies that maintain self - custody of their assets, an

investment company must have its securities and simlar

investments verified by actual examination by an independent

public accountant at least three times during each fiscal year.

At least two of these exainatlons must be at times chosen by the

accountants without prior notice to the fund.

él Subsequent to submitting your letter, you advised us that Amouth Bank of Alabam actuaiiy began serving as custodian for one of the funds iri the Trust on March 17, 1997, and for all

other funds in the Trust on April 17, 1997. Telephone

conversation between Daniel E. Burton and Francoise M. Haan on June 30, 1997. These revised facts do not affect our analysis or conclusion set forth in this letter.

11 The staff has taken the po~ition that the self-custody provisions of Rule 17f-2 apply when a fund's investment adviser

also serves as the fund's custodian. See The Mutual Fund Group

(pub. avail. Dec. 12, 1989); Pegasus Income & Capital Fund, Inc.

("Pegasus") (pub. avail. Dec. 31, 1977). .

• 2
  Rule 17f-2 41 and imposes an unnecessary cost on the Trust

with limited additional benefits. You propose to have one

"surprise" verification during the Trust's stub fiscal period, in addition to the Trust's regular fiscal year-end " verification. 51 You maintain that, in the case of the Trust,

the policy of subjeqting a fund's securities to adequate independent scrutiny would not be compromised by reducing the

numer of requi.red annual verifications from three to "two. You

believe that two verifications - - one surprise verification and

one at fiscal year-end - - over a four and one-half month period

would be adequate to protect the Trust's investors.

The staff previously has granted no-action relief under Rule

17f-2 (f) to fun~s with a stub fiscal period of less than six

"months during the. fund's first year of operations. QI Although the fiscal year ending July 31, 1997 is not the ,Trust's first year of operations, it will be the first fiscal year during which the Trust will be subj ect to the self - custody rule. Thus, granting the requested relief is consistent with the staff's prior letters. We would not recommend enforcement action to the Commission

under Section 17 (f) of the Investment Company Act or Rule 1 7f -2 (f) thereunder if, during the Trust's stub fiscal period ending July 31, 1997, the Trust's securities and similar

41 It is a principal policy of the Investment Company Act, as expressed generally in Section 1 (b) (5) and specifically in
Section 17 (f), to ensure that securities owned by investment

companies are maintained in such a manner that they will be

subj ect to adequate independent scrutiny. Pegasus, supra note 3.

21 You represent that," in all subsequent fiscal years in which

the Trust's adviser also acts as the Trust's custodian, three

verificationß will be made, in accordance with Rule 17f-2(f).

QI See Morgan Stanley Emerging Markets Fund, Inc. ("Morgan

Stanley") (pub. avail. Dec. 30, 1991) (two verifications, one

without prior notice on a date chosen by the fund's accountant

and the other as of the fUnd's fiscal year-end, during a stub period of slightly more than two months); The Sessions Group

(pub. avail. Mar. 26, 1990) (two verifications, timed as in

Morqan Stanley, during a fiscal period of five months); The

Seven Seas Series Fund (" Seven Seas n ) (pub. avail. May 26, 1988) (two verifications, timed as in Morqan Stanley, during a stub

period of approximately four months). In Seven Seas, the staff

noted that, as a general matter, it will not grant no-action

relief under Rule 17f-2 (f) in situations involving either a

change in a fund's fiscal year-end during any year of operations,

or a stub fiscal period of six months or more for a fund's first

fiscal year of operations.

• 3
  investments are verified two times by its independent public

accountants, rather than the three times required by Rule

17f-2 (f), provided that the timing of one verification is chosen

by the accountants without prior notice to the Trust and the

other is the Trust's regular fiscal year- end verification. 21

This response expresses the Division's position on

enforcement only, and does not purport to express any legal

conclusions on the questions presented. Because this position is

based on the facts and representations made in your letter, you

should note that any different facts or circumstances might

require a different conclusion.

~~Jt.ß~
Daniel E. Burton

At torney
21 We previously informed you of this position in a telephone conversation between Daniel E. Burton and Francoise M. Haan on

March 20, 1997.

ROPES & GRAY
ONE FRANKLIN SQUARE
1301 K STREET, N. W.
SU ITE 800 EAST
ONE INTERNATIONAL PLACE
BOSTON, MA 02110-2624
(617) 951-7000
FAX: (617) 951 -7050
WASHINGTON, DC 20005-3333
(202) 626-3900
FAX: (202) 626-3961
30 KENNEOY PLAZA
PROVIDENCE, RI 02903-2328
(401) 455 '4400
FAX: (401) 455-4401
WRITER'S DIRECT DIAL NUMBER: (202) 626-39 I 3
WRITER'S E-MAIL ADDRESS:FHAAN(gROPESGRAY.COM
March 13, 1997
VIA MESSENGER
Offce of the Chief Counsel
Division of Investment Management
Securities and Exchange Commssion
450 Fift Street, N. W.

Judiciary Plaza
Washington, D. C. 20549
Re: AMSOUTH MUTUAL FUNDS (the "Trust")
Securities Act of 1933 Registration No.
Investment Com,pany Act of 1940 File No. 811-5551 Dear Sir or Madam:
We hereby request that you advise us that the Division of Investment Mangement (the "Division") willnot recommend that the Securities and Exchange Commssion (the "Commssion") tae action againt the Trust if, for the period from March 20, 1997 to July "31, 1997, the Trust's securities and simar investments are verified twice by its independent public accountats rather than the thee times required under Rule 17f-2(f) of the Investment Company Act of 1940, as amended (the "1940 Act"), for full fiscal years. The two verifications would include the Trust's regular year-end verification and one chosen by the Trust's independent public accountants without prior notice.

"
ROPES & GRAY

Offce of the Chief Counsel -2 March 13, 1997
BACKGROUND
AmSouth Mutual Funds is a Massachusett Business Trust registered as an open-end management investment company. Beging on March 20, 1997, AmSouth Bank of Alabama, which serves as the Trust's Investment Advisor, wil begin serving as Custodian to the Trust as well.

Rule 17f-2(f) of the 1940 Act applies to registered .investment companies which maintain in their own custody their securities and simlar investments, and generally provides that during any fiscal year an independent public accountat must verify such company's securities and similar investments at least thee times a year, at least two of which shall be at the selection of the accountant without prior notice to the company. The Commssion's staff has interpreted Rule 17f-2(f) as also applying to a registered investment company whose investment advisor also serves as its custodian. Pegasus Income & Capital Fund, Inc. (available December 31, 1977); Carnegie-Cappiello Growth Trust (available August 8, 1985). The Rule is clear as to its application to full fiscal years. Whether the Rule requires thee audits during the Trust's first partial fiscal period with self-custody, however, is unclear. DISCUSSION AND ANALYSIS Although the Trust has been in operation since 1988, it wil only begin self-custody, by vire of AmSouth Bank of Alabama assuming the function of custodian, on March 20,1997. Because the Trust's fiscal year ends on July 31, 1997, ths wil result in a partial fiscal year of only four and one half months with AmSouth Bank of Alabama as custodian. If the requirements of Rule 17f-2(f) are interpreted as being applicable to a partial fiscal year, then .the Trust's securities and similar investments must be verified thee times during these four and one half months of operation. The Commssion's staff has previously stated tht it would not recommend enforcement action againt a registered investment company under circumtaces very simlar to those of the Trust. The Riverfront Funds, Inc. (available November 8, 1995), Morgan Stanley Emerging Markets Fund, Inc. (available December 30, 1991), The Sessions Group (available March 26, 1990), and The Seven Seas Series Fund (available May 26, 1988). Each of the registered investment companies which received these no-action letters had a short initial fiscal year period; thee months in the case of the Riverfront Funds, two months for Morgan Stanley Emerging Markets Fund, Inc., five months for the Sessions Group and four months for the Seven Seas Series Fund. In the case of the Riverfront Funds, the Commssion's staff granted no-action relief where the Riverfront Funds, like the Trust, had had previous operations but had not previously been subject to the self-custody provisions of Rule 17f-2.

"
ROPES & GRAY

Offce of the Chief Counsel -3 March 13, 1997
While the Commssion's staff in The Seven Seas Series Fund letter did not give any specific advice with respect to initial fiscal periods in the Trust's particular circumstances, in footnote no.2 the staff did provide tht "as a general matter, the staff wil not grant no-action relief in situations involving either a change in a fund's fiscal year-end during any year of operations or a stub fiscal year of six month or more for a fund's first fiscal year of operation." Therefore, while the staff's position is clear that it generally wil not grant such relief for stub fiscal periods of six month or more, it is not clear whether the staff would grant such relief in a situation such as th~ Trust's. We believe, however, that requiring thee verifications within such a short period of time as four and one half months does not furter the policies underlying Rule 17f-2(f) and, thus, imposes an unnecessary cost on Trust shareholders with limited additional benefits. The staff has stated that it is a principal policy of the 1940 Act, as expressed generally in Section 1(b)(5) and specifically in Section 17(f), to ensure that securities owned by investment companies are subject to adequate independent scrutiny. Pegasus Income & Capital Fund, supra. This policy is accomplished by requiring verification of the holdings of investment companies by independent accountants and, in the case of self-custody, an additional two surprise inpections by those accountants to reduce the likelihood of

embezzlement and. larceny.
In the case of the Trust, the policy of independent scrutiny would not be compromised by reducing the number of required verifications from thee to two. Two verifications, one a surprise and one at the end of the Trust's first fiscal period, are adequate in a four and one half month period to protect the Trust's investors. A thd verification increases the cost to shareholders with only nominal, if any, additional benefits. CONCLUSION Based on the discussion and anlysis set fort above, we respectflly request that the

Division not recommend that the Commssion tae action againt the Trust if, for the Trust's first fiscal period with self-custody beging on March 20, 1997 and ending July 31, 1997, the Trust's securities and similar investments are verified two times by its accountants, one being a surprise verification, and the other being the Trust's regular year-end verification. In all subsequent fiscal years of the Trust, thee verifications wil be made in accordance with the requirements of Rule 17f-2(f).

.'
ROPES & GRAY

Offce of the Chief Counsel -4 March 13, 1997
In order to avoid the costs associated with a third verification, we would appreciate your prompt attention to ths matter. If we may be of any assistance in expediting your review

or may anwer any questions you may have, please do not hesitate to contact me at 202-626 3913. Sincerely, 1~ 9J- ~ Francoise M. Haan cc: John F. Calvano

Alan G.. Priest
FMH/rme:7035811.01