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SEC Adopts Rules on Foreign Securities Custody

Mutual funds and custodians have until next year to comply with new federal securities rules designed to insure that fund securities held abroad are properly safeguarded.

The two new rules added to the Investment Company Act provide that custodians must oversee and analyze risks associated with using foreign banks and other firms that safeguard securities or electronic records of who owns the securities.

The custodians must outline the risks and report them to funds' boards of directors. The directors then will assess the reports and decide whether to continue using a foreign depository.

The SEC added the new rules to the Investment Company Act April 27. The new rules go into effect June 12. The SEC, however, has given funds until July 2, 2001, to comply with the new rules.

The long lead time for compliance will allow funds and custodians to revise their current contracts governing supervision of foreign custodians, according to fund industry lawyers.