[Federal Register Volume 60, Number 143 (Wednesday, July 26, 1995)]
[Proposed Rules]
[Pages 38454-38467]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-18243]



      

[[Page 38453]]

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Part IV





Securities and Exchange Commission





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17 CFR Part 230 et al.



Money Market Fund Prospectuses and Quarterly Reporting; Proposed Rules

  Federal Register / Vol. 60, No. 143 / Wednesday, July 26, 1995 / 
Proposed Rules   

[[Page 38454]]


SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230, 239, and 274

[Release Nos. 33-7196; IC-21216; S7-21-95]
RIN 3235-AG55


Money Market Fund Prospectuses

AGENCY: Securities and Exchange Commission.

ACTION: Proposed amendments to rules, forms, and staff Guides.

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SUMMARY: The Commission is proposing amendments to the registration 
forms for money market funds. The amendments would tailor the 
prospectus disclosure requirements to the unique characteristics of 
money market funds. These changes are intended to allow money market 
funds to prepare prospectuses that are shorter, simpler, more 
informative, and more readily understandable to investors.

DATES: Comments on the proposed rule and form amendments and on the 
proposed staff Guides must be received on or before September 27, 1995.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW., Washington, DC 20549. All comment letters should refer to File No. 
S7-21-95. All comments received will be available for public inspection 
and copying in the Commission's Public Reference Room, 450 Fifth 
Street, NW., Washington, DC 20549.

FOR FURTHER INFORMATION CONTACT: Martha H. Platt, Senior Attorney, or 
Robert E. Plaze, Assistant Director, (202) 942-0721, Office of 
Disclosure and Investment Adviser Regulation; for accounting questions, 
contact James F. Volk, Assistant Chief Accountant, (202) 942-0637, 
Division of Investment Management, 450 Fifth Street, NW., Washington, 
DC 20549.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission 
(``the Commission'') today is proposing for comment amendments to Form 
N-1A [17 CFR 239.15A and 274.11A] and Form N-3 [17 CFR 239.17a and 
274.11b], the registration forms used by open-end management investment 
companies (``mutual funds'') and separate accounts organized as 
management investment companies (``separate accounts'') to comply with 
the registration statement requirements of the Investment Company Act 
of 1940 [15 U.S.C. 80a-1 et seq.] (``1940 Act'') and to register their 
securities under the Securities Act of 1933 [15 U.S.C. 77a et seq.] 
(``1933 Act''). The proposed amendments would shorten and simplify 
money market fund prospectuses. The Commission is proposing additional 
amendments to Form N-1A that would: (1) modify the manner in which the 
yield of a tax exempt money market fund is calculated; (2) change the 
calculation of total return for partial years in the financial 
highlights table; (3) remove the requirement that funds file a schedule 
of performance quotation computations; and (4) amend the instructions 
regarding the fee table. Conforming amendments are being proposed to 
rule 482 under the 1933 Act [17 CFR 230.482] and Form N-2 [17 CFR 
239.14 and 274.11a-1], the registration form for closed-end management 
investment companies. The Commission also is publishing related changes 
to staff Guides to Forms N-1A and N-3.

Table of Contents

Executive Summary

I. Background and Summary of Proposed Amendments
II. Discussion of the Proposed Amendments
    A. Proposed Revisions Pertaining to Money Fund Prospectuses
    1. Replacement of Financial Highlights Table
    2. Descriptions of Investment Policies and Techniques
    3. Inclusion of Description of Advertised Performance Data in 
SAI
    4. Summary Description of Securities Valuation
    B. Other Amendments
    1. Calculation of Tax Exempt Money Fund Yield
    2. Total Return Calculation
    3. Amendments to Fee Table
    4. Exhibit 16 to Form N-1A
    C. Request for Comments Regarding Prospectus Simplification 
Generally
III. Amendments to Staff Guides
IV. Transition Period
V. General Request for Comments
VI. Cost/Benefit of Proposal
VII. Summary of Initial Regulatory Flexibility Analysis
Text of Proposed Rule and Form Amendments

Executive Summary

    The Commission is proposing to amend the prospectus disclosure 
requirements of Form N-1A to permit and encourage money market funds 
(``money funds'') to provide shorter prospectuses that are more 
relevant to the needs of typical money fund investors. The Commission 
believes that the proposed rule and form amendments will significantly 
shorten and simplify money fund prospectuses and provide valuable 
information to investors in more useable formats. The most significant 
of the proposed changes are summarized below.
    First, the multi-line financial highlights table would be replaced 
with a bar graph showing a fund's total returns for each of the last 
ten years. The bar graph is intended to provide investors with 
information regarding fund performance in a simple, graphic format that 
is easy to understand.
    Second, a money fund's description of its portfolio and investment 
techniques would be greatly abbreviated. Money fund prospectuses often 
contain detailed, technical descriptions of instruments and investment 
techniques that are unlikely to assist an investor in understanding a 
money fund's essential characteristics. The Commission is concerned 
that these complicated descriptions add substantial length and 
complexity to money fund prospectuses, which may discourage investors 
from reading important information in the prospectuses. The Commission 
proposes to address this concern by permitting all money funds to 
describe themselves in their prospectuses with very basic, general 
statements about their investment objectives and portfolio composition.
    The narrative disclosure that money funds would remove from their 
prospectuses in response to the proposals described above would be 
relocated to the Statement of Additional Information (``SAI''), which 
is available to investors upon request and without charge.

I. Background and Summary of Proposed Amendments

    Money funds are open-end management investment companies that 
invest in short-term debt instruments or instruments that have similar 
characteristics. Money funds currently hold over $692 billion in assets 
1 in approximately 25 million shareholder accounts.2 Through 
these funds, individual investors are able to participate in the money 
markets.

    \1\ Money Fund Report (July 7, 1995). $574 billion is invested 
in taxable funds and $118 billion is invested in tax exempt funds. 
Id. 
    \2\ Investment Company Institute Mutual Fund Fact Book 99 (35th 
ed. 1995). See Investment Company Act Rel. No. 17589 (July 17, 1990) 
[55 FR 30239 (July 25, 1990)] at nn. 3-7 and 15-18, and accompanying 
text, for a summary of the development of money funds.
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    Like other mutual funds, money funds offer investors a diversified 
and professionally managed portfolio of securities. Many investors 
select money funds as part of their investment plans because these 
funds have characteristics that allow them to be used as a cash 
management tool. These characteristics 

[[Page 38455]]
include relative safety of principal, a high degree of liquidity, a 
wide range of shareholder services (including check-writing), and 
maintenance of a stable net asset value, usually of $1.00. Money funds 
are not protected by federal deposit insurance, and there is no 
guarantee that a money fund will always be able to maintain a stable 
net asset value.3 Nevertheless, money funds' success at 
maintaining a stable $1.00 share price has encouraged investors to view 
these funds as alternatives to bank deposit and checking 
accounts.4

    \3\ Item 1(a)(vi) of Form N-1A requires a money fund to disclose 
this fact on the cover of its prospectus.
    \4\ An exception to this historical success occurred in 
September 1994 when the US Government Money Market Fund, a series of 
Community Bankers Mutual Fund, Inc. that had invested in certain 
adjustable rate notes, announced that it would liquidate and 
distribute less than $1.00 per share to its shareholders. See, e.g., 
Olaf de Senerpont Domis and Karen Talley, ``Collapse of Money Fund 
Seen Heightening Derivatives Scrutiny,'' American Banker, Sept. 29, 
1994 at 1, 3; Leslie Wayne, ``For Money Market Investors, New 
Cautions,'' N.Y. Times, Sept. 29, 1994 at D1, D8.
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    Form N-1A is the registration form that mutual funds, including 
money funds, use to satisfy the registration statement requirements of 
the 1940 Act and to register their shares under the 1933 Act. Form N-1A 
permits mutual funds to provide investors with a simplified prospectus 
covering matters of fundamental importance about the funds. Upon 
request, detailed information is available in an SAI. When the 
Commission proposed Form N-1A in the early 1980s, money funds were 
relatively new, tax exempt money funds had just been introduced, and 
money funds invested in only a few types of relatively simple 
instruments.5 Accordingly, few provisions of the form reflect the 
unique characteristics of money funds or specify the level of 
disclosure appropriate for describing the many different types of 
instruments that now comprise money fund portfolios. As a result, 
although money funds are acknowledged as being the most stable and 
conservative mutual funds, their prospectus disclosure is often more 
detailed and technical than that of other mutual funds.

    \5\ In the 1980s, these funds generally restricted their 
investments to short-term U.S. government securities, bank 
instruments, and commercial paper. See, e.g., In the Matter of 
Intercapital Liquid Asset Fund, Inc., et al., Investment Company Act 
Rel. No. 10201 (Apr. 12, 1978) [43 FR 16830 (Apr. 20, 1978)] (notice 
of applications for exemption from section 2(a)(41) of 1940 Act and 
rules promulgated thereunder and order for hearing on ten related 
applications). By contrast, money funds today invest in a vast array 
of instruments, many of which have complex structures. The types of 
instruments available are constantly expanding in response to demand 
from money funds. See infra, Section II.A.2 of this Release. This 
trend is especially marked in the case of tax exempt money funds, 
where the demand for securities that are eligible for money fund 
investment has resulted in the investment banking community 
developing many types of new instruments. See Investment Company Act 
Rel. No. 19959 (Dec. 15, 1993) [58 FR 68585 (Dec. 28, 1993)] 
(``Release 19959'') (proposing further amendments to tighten the 
risk-limiting conditions of rule 2a-7, 17 CFR 270.2a-7) at nn. 24-25 
and accompanying text. All references to rule 2a-7 or any paragraph 
of the rule will be to 17 CFR 270.2a-7.
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    While detailed disclosure about investment policies and portfolio 
securities may be material to investors choosing among other types of 
funds, it may not be material to a money fund investor. Money fund 
investment policies and the composition of money fund portfolios are 
subject to much more detailed regulation under the 1940 Act and, as a 
result, are very similar.6 While the differences among taxable 
money funds, tax exempt money funds, and money funds that invest only 
in U.S. government securities may be material to money fund investors, 
small differences in types of portfolio holdings that differentiate 
money funds within each of these groups may not be particularly 
important to investors, who typically select money funds on the basis 
of convenience, shareholder services, or yield.

    \6\ Rule 2a-7 [17 CFR 270.2a-7] allows money funds to use the 
amortized cost method of valuation and the penny-rounding method of 
share pricing to assist in maintaining a stable share price. In 
addition, any investment company that holds itself out as a money 
fund may only invest in U.S. dollar-denominated instruments and must 
meet the risk-limiting conditions of rule 2a-7 regarding portfolio 
quality, maturity, and diversification. Paragraphs (b), (c)(2), 
(c)(3) and (c)(4) of rule 2a-7. These conditions limit a fund's 
exposure to credit, interest rate, and currency risk. All references 
to rule 2a-7 or any paragraph of the rule will be to 17 CFR 270.2a-
7.
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    Based upon these considerations, the Commission is proposing to 
revise the prospectus disclosure requirements for money funds to 
account for the unique characteristics of money funds and the 
regulatory structure to which they are subject. The revisions would 
result in shorter and more comprehensible prospectuses that are more 
relevant to the needs of typical money fund investors.7

    \7\ In addition, shorter prospectuses would result in reduced 
printing and mailing costs. Those costs usually are borne by the 
fund and, indirectly, by fund shareholders.
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II. Discussion of the Proposed Amemdments

A. Proposed Revisions Pertaining to Money Fund Prospectuses

1. Replacement of Financial Highlights Table
    The financial highlights table currently required by Item 3(a) of 
Form N-1A 8 provides summary financial information about a fund, 
including the fund's total return for each of the previous ten fiscal 
years.9 Although the table provides useful information for 
investors in stock and bond funds generally, some of the table's items 
are generally not relevant to money fund investors because money funds 
rarely experience changes in per share net asset value or realize 
capital gains.

    \8\ Most of the form amendments are being proposed for both Form 
N-1A and Form N-3. For ease of reference, citations to proposed and 
current form items and instructions refer to Form N-1A unless the 
context otherwise requires.
    \9\ The financial highlights table contains the following 
fourteen items: beginning net asset value; net investment income; 
net gains (losses); total income from investment operations; 
dividends from net investment income; distributions from capital 
gains; returns of capital; total distributions; ending net asset 
value; total return; total net assets; ratio of expenses to average 
net assets; ratio of net income to average net assets; and portfolio 
turnover rate. The table is required to contain information for the 
fund's last ten fiscal years. Item 23 of Form N-1A requires that the 
financial highlights information for each of the previous five 
fiscal years be provided in fund annual reports to shareholders.
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    The Commission proposes to replace the financial highlights table 
in money fund prospectuses with a bar graph showing the fund's total 
return for each of its last ten fiscal years.10 Because most of a 
money fund's return consists of dividends, the bar graph would 
primarily reflect the fund's annual yield. Money funds occasionally 
recognize capital gains as a result of the disposition of a portfolio 
security, which would be reflected in the bar graph as part of the 
fund's total return. If a fund makes capital gains distributions during 
the period, a footnote to the graph would state the amount of the 
distribution per share and indicate that the amount of the distribution 
is indicated in the bar graph by a shaded or otherwise distinctively 
marked area of the bar for each year for which such a distribution was 
made.11 The bar graph would be accompanied by statements that: (1) 
Past performance is not predictive of future performance; (2) 
performance is primarily affected by short-term interest rates and fund 
expenses; and (3) more detailed information regarding performance is 
contained in the financial statements in the SAI.

    \10\ Proposed Item 3(b). The financial statements for the fund's 
previous fiscal year would continue to be required in the SAI. See 
Item 23 of Form N-1A. While other mutual funds currently are 
required to provide a performance graph and discussion of 
performance in their prospectuses or annual reports, money funds are 
exempt from those requirements of Form N-1A. See Investment Company 
Act Rel. No. 19382 (Apr. 6, 1993), [58 FR 19050 (Apr. 12, 1993)] 
(``Release 19382'').
    \11\ Proposed Item 3(b) of Form N-1A.
    The bar graph is intended to provide investors with a depiction of 
historical 

[[Page 38456]]
fund returns in a format that is simple and understandable. The 
Commission is particularly concerned that investors with long-term 
financial goals, such as those using mutual funds to fund a retirement 
plan, understand that money funds provide them with substantially less 
of an opportunity for long-term growth than other types of mutual 
funds.
    Comment is requested whether funds should be required to compare 
their performance during each of the ten years with that of an index, 
and, if so, what type of index should be required for the comparison. 
Such a comparison would permit investors to compare how the fund 
performed relative to alternative investments or industry averages. For 
example, should money funds be required to compare their total returns 
to changes in the Consumer Price Index, or to a securities index? In 
order to foster comparability among funds, should the Commission 
prescribe the scale of the vertical and horizontal axes of the graph 
and other formatting specifications?
    The Commission requests comment whether money fund investors are 
likely to use historical performance information when selecting a money 
fund. Alternatively, or supplementally, should the Commission require a 
short-term depiction of fund yield, such as a line graph comparing the 
fund's yield during the last twelve months with that of an index of 
short-term or money funds securities. Would investors find a line graph 
showing recent yields useful in money fund annual and semi-annual 
reports to shareholders, documents that focus on the more recent 
financial history of the fund? Should such a graph be substituted for 
the current financial highlights tables in those reports?
2. Descriptions of Investment Policies and Techniques
    Item 4(a) of Form N-1A requires a fund to describe how it proposes 
to achieve its investment objectives. The Commission is proposing to 
amend this item to reduce substantially the amount of detailed, 
technical information regarding investment policies, techniques, and 
instruments now found in money fund prospectuses. In addition, this 
item would be reorganized to clarify its requirements.
    Item 4(a)(ii) of Form N-1A currently requires ``a short description 
of the types of securities'' in which a fund invests, as well as any 
``special investment practices or techniques'' used by the fund in 
connection with those securities and ``significant investment policies 
or techniques (such as risk arbitrage, repurchase agreements, forward 
delivery contracts, investing for control or management)'' that the 
fund uses or intends to use in the foreseeable future.12 The 
responses to paragraphs (a) and (b) of Item 4 have become the longest 
and most complex section of many money fund prospectuses.13 The 
responses often include detailed descriptions of numerous types of 
instruments, including U.S. Treasury bills and notes, government agency 
securities, short-term tranches of collateralized mortgage obligations 
and other types of asset-backed securities, certificates of deposit, 
bankers' acceptances, floating and variable rate securities, commercial 
paper, and repurchase and reverse repurchase agreements. The list is 
even longer for tax exempt money fund prospectuses, which may contain 
descriptions of variable rate demand notes; put bonds; general 
obligation bonds; bond, revenue, and tax anticipation notes; industrial 
development bonds; lease obligations; tax exempt commercial paper; and 
``synthetic'' instruments, such as tender option bonds and custodial 
receipts. Descriptions of particular securities are often accompanied 
by lengthy descriptions of investment techniques, such as purchasing 
securities on a ``when-issued'' basis and acquisition of stand-by 
commitments.14

    \12\ Item 4(b)(ii) (proposed instruction 3(ii) to item 4(a)) 
permits a fund simply to identify a practice if five percent or less 
of the fund's net assets are placed ``at risk'' by the practice. 
Money funds generally are not able to take advantage of this 
opportunity to simplify their disclosure because they require the 
flexibility to employ, above the five percent ``at risk'' level, 
many or all of the investment practices they describe.
    \13\ Some money funds, however, already limit those descriptions 
to general, basic statements about the securities in which they 
invest.
    \14\ Descriptions of particular types of securities (Item 
4(a)(ii)(B)(1)) and various investment techniques (Item 
4(a)(ii)(B)(1) and (D)) used by a fund often appear together in the 
same section of money market fund prospectuses.
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    The following is a typical description of a portfolio security for 
a tax exempt money fund currently provided in response to Item 4(a):

    The Fund may purchase participation interests in municipal 
securities that have fixed, floating or variable rates of interest. 
These participation interests will be purchased from financial 
institutions that sell undivided interests in the securities that 
underlie the instrument. The Fund will only purchase such an 
interest if: (i) the underlying securities mature in twelve months 
or less or the instrument includes a right to demand payment (a 
``demand feature''), usually exercisable within no more than seven 
days; (ii) the security meets certain quality standards set forth by 
the Fund and federal regulation; and (iii) the security is 
accompanied by an opinion of counsel or is the subject of a ruling 
from the Internal Revenue Service stating that the interest earned 
is exempt from federal income tax.

    Another tax exempt money fund describes the investment technique of 
purchasing municipal bonds on a ``when-issued'' basis, also in response 
to Item 4(a), as follows:

    The Fund may purchase Municipal Obligations on a ``when-issued'' 
basis--the purchase of securities which are paid for and delivered 
beyond the normal settlement date. The Fund will generally not pay 
for such securities or start earning interest on them until they are 
received. Securities purchased on a when-issued basis are recorded 
as an asset and subject to changes in value based upon changes in 
the general level of interest rates. The Fund expects that its 
commitments to purchase when-issued securities will not exceed 25% 
of total assets, absent unusual market conditions, and that it will 
not commit to purchase when-issued securities beyond 45 days. The 
Fund does not intend to purchase when-issued securities for 
speculative purposes but only to further its investment objective.

    To be eligible for money fund investment under rule 2a-7, the 
instruments described above all must be high quality and, although they 
may have different mechanisms for determining interest rates or 
maturity, all are designed to have the stability of principal and yield 
of short-term debt instruments. The riskiness of any particular 
investment technique is further limited by rule 2a-7's maturity and 
currency denomination conditions,15 as well as the requirement 
that the board of directors adopt procedures designed to maintain a 
stable share price or net asset value.16

    \15\ Rule 2a-7 limits the amount of currency risk to which money 
funds can be exposed by restricting their investments to U.S. 
dollar-denominated instruments. Paragraph (c)(3) of rule 2a-7. The 
rule limits the interest rate and credit risks to which money funds 
can be exposed by requiring that they maintain a dollar-weighted 
average portfolio maturity of no more than ninety days and generally 
invest in individual securities that have remaining maturities of no 
more than 397 days. Paragraph (c)(2) of rule 2a-7.
    \16\ See paragraph (c) of rule 2a-7.
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    Because of the limitations on securities in which a money fund is 
permitted to invest, the particular types of securities in which a fund 
invests are unlikely to be an important factor for most investors when 
selecting a money fund.17 Moreover, detailed, technical 

[[Page 38457]]
descriptions of instruments and investment techniques are unlikely to 
contribute to investor understanding of a money fund's essential 
characteristics. Finally, these complicated descriptions often add 
substantial length to money fund prospectuses, contributing to 
investors' perceptions that prospectuses are too complicated and 
discouraging them from reading the important information that is in the 
prospectuses.

    \17\ The Commission has considered whether disclosure of each 
type of security may provide investors with information they can use 
to avoid investment in money market funds investing in securities 
whose characteristics may threaten the fund's stable net asset 
value. In 1994 a number of fund advisers took steps to maintain the 
share values of money funds that had invested in adjustable rate 
securities that had interest rate adjustment formulas that did not 
result in the value of the security returning to par on the interest 
rate reset date as required by rule 2a-7; the adviser of one fund 
holding these instruments was not in a position to take steps to 
maintain the fund's share price. See supra, note 4. Under the 
current requirements of Form N-1A, these funds disclosed that they 
invest in adjustable rate instruments, but generally did not 
describe the terms of the interest rate adjustment formula of each 
instrument. Thus, even under the current rules, investors are not 
able to ascertain whether to avoid funds investing in inappropriate 
securities. Because the interest rate adjustment formulas are 
complicated, if the Commission were to require disclosure of the 
formulas, money market fund prospectuses would be considerably 
longer and more complex, even though most investors could not be 
expected to draw any conclusions as to the appropriateness of a 
particular adjustable rate security.
    To address these concerns, the Commission is proposing to add an 
instruction to Item 4 stating that it is sufficient for a money fund to 
describe the characteristics of the fund and its portfolio in very 
general and basic terms (e.g., that it seeks to maintain a stable net 
asset value of $1.00 by investing in a portfolio of high-quality, 
short-term debt obligations issued by corporations, banks and other 
financial institutions), and that a listing or description of the 
particular instruments that the fund may purchase is not 
necessary.18 If the fund limits investment to a group of 
securities or a type of issuer (e.g., to U.S. government securities), 
the fund would also be required to identify any other group of 
securities or type of issuer in which it has reserved the right to 
invest more than five percent of assets, unless the fund has not 
invested more than five percent of its assets in those securities 
within the past year and has no current intention of doing so in the 
foreseeable future.19 For example, if the ``XYZ U.S. Government 
Money Market Fund'' reserves the right to invest twenty percent of its 
assets in corporate obligations and has invested in such securities 
within the past year, the fund would state that in its prospectus.

    \18\ Proposed Instruction 1 to Item 4(a).
    \19\ Proposed Instruction 1(b) to Item 4(a).
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    The proposed instruction is intended to encourage funds to avoid 
lengthy descriptions of the areas currently covered by Item 4(a) that 
have resulted in technical, multi-page descriptions of types of 
securities and investment policies and techniques. Instead, the 
detailed descriptions of instruments and techniques would be placed in 
the SAI, where they would be available upon request to interested 
investors, including those who restrict their investments in mutual 
funds to funds that invest only in particular types of 
instruments.20 The proposed instruction makes clear that the 
Commission is not proposing to eliminate from money fund prospectuses 
discussion of those material investment policies that distinguish one 
group of money funds from another.21 For example, a fund would be 
expected to state, as appropriate, that it proposes to achieve its 
investment objective by investing only in Government securities, 
securities exempt from the income taxes of a particular state, or 
securities exempt from federal income taxation. The proposed 
instruction also makes explicit that a money fund is not required to 
describe the detailed investment policies that it has adopted in order 
to comply with rule 2a-7.22

    \20\ Proposed Instruction 3 to Item 13. Requiring more detailed 
disclosure in the SAI also enables Commission staff to review 
whether the fund's stated policies and techniques comply with 
regulatory requirements.
    \21\ Proposed Instruction 1(b) to Item 4(a).
    \22\ The Commission also proposes to reorganize the current 
structure of sub-item 4(a). Several paragraphs would be redesignated 
as instructions to reflect their modifying the more general 
requirements of Item 4.
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    The proposed changes should not be interpreted to suggest that the 
Commission believes that investment in a money fund is riskless. No 
substantive changes are being proposed to existing Item 4(c) (Item 
4(b), as proposed to be amended), which requires a money fund to 
discuss ``briefly the principal risk factors associated with 
investment'' in the fund, including risk factors peculiar to the fund 
and those of the same fund type generally. Money funds would continue 
to respond to this sub-item and to Item 1(a) of Form N-1A, which 
requires a money fund to disclose on the cover page of its prospectus 
that an investment in the fund is neither insured nor guaranteed by the 
U.S. government and that there can be no assurance that the fund will 
be able to maintain a stable net asset value.23 A money fund that 
is sold by or through a bank, or whose name is the same as, or similar 
to, the name of a bank that advises or sells the fund's shares, would 
also continue to be required to prominently disclose on the cover page 
of its prospectus that shares in the fund are not deposits or 
obligations of, or guaranteed or endorsed by, the bank, and that the 
shares are not federally insured.24

    \23\ In addition, other amendments that were proposed to Form N-
1A in 1993 would require a money fund to disclose the fund's 
reliance on credit and liquidity enhancements from third parties 
when more than forty percent of the fund's portfolio consists of 
securities subject to such features and, for single state tax exempt 
money market funds, the risks associated with reduced issuer 
diversification and greater geographic concentration. See Release 
19959, supra note 5 at nn. 196-197.
    \24\ See Letter to Registrants from Barbara J. Green, Deputy 
Director, Division of Investment Management (May 13, 1993).
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3. Inclusion of Description of Advertised Performance Data in SAI
    Item 3(c) currently requires a brief explanation in the prospectus 
of how the fund calculates performance data that it advertises.25 
Because money fund yields are calculated in a uniform manner prescribed 
by the Commission, an investor is unlikely to use these descriptions 
when evaluating advertisements by the fund. The Commission therefore 
proposes to permit a money fund to place its response to this item in 
the SAI if the response is incorporated by reference into the 
prospectus.26 The Commission requests comment on whether this 
option should be made available to other mutual funds.27

    \25\ This disclosure provides a basis for inclusion of 
performance information in advertisements. Rule 482 advertisements 
may only include information the ``substance of which'' is included 
in the fund's statutory prospectus. For performance quotations, this 
requirement is met if the methodology for calculating performance is 
set forth in the prospectus. See Dechert, Price & Rhoads (pub. 
avail. Nov. 12, 1979). The Division has recommended eliminating the 
``substance of which'' requirement (see Protecting Investors: A Half 
Century of Investment Company Regulation 349, Division of Investment 
Management, United States Securities and Exchange Commission (May 
1992)), and legislation has been introduced that would eliminate the 
requirement (see H.R. 1495, 104th Cong., 1st Sess. Sec. 3 (1995)).
    \26\ Proposed Instruction to Item 3(d). Because information 
incorporated by reference from the SAI is deemed to be included in 
the prospectus, the legal requirement that the substance of the 
information in an advertisement be contained in the statutory 
prospectus would be met. If adopted, the response to this item would 
be the only response to a prospectus item that could be incorporated 
by reference from the SAI.
    \27\ The Division is considering deleting the guide regarding 
explanations of performance data from Form N-1A (Guide 32).
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4. Summary Description of Securities Valuation
    Item 7(b) of Form N-1A requires funds to describe, among other 
things, the way in which the public offering price of fund shares is 
determined and the timing of the determination. The methodologies money 
funds use to calculate their net asset values are prescribed by the 
1940 Act and Commission rules and are designed so that the value of 
each share represents the pro rata value of the assets of the fund, 
typically at a stabilized share 

[[Page 38458]]
value of $1.00.28 The descriptions of these methodologies, which 
tend to be complicated, may be less important to money fund investors 
than the fact that the share price represents a pro rata share of the 
fund's net assets. Therefore, the Commission is proposing to permit 
money funds simply to state in the prospectus that the share price 
represents a pro rata share of the net assets of the fund, and to 
describe in the SAI the pricing method employed by the fund.29

    \28\ The methodologies include amortized cost (acquisition cost 
as adjusted for amortization of premium or accretion of discount), 
market value (marking to market daily), and fair value (good faith 
estimate by the board of directors) and combinations of these 
methods.
    \29\ See Item 19, Instruction 1 (valuation procedure). Money 
market funds would continue to state in the prospectus when the fund 
will not process requests to purchase or sell shares. See Guide 28 
to Form N-1A (interpreting Item 7 regarding days on which fund will 
not price shares).
---------------------------------------------------------------------------

    In the case of a money fund that seeks to maintain a stable net 
asset value, the timing of the determination of the share price each 
day may not be material to an investor who will ordinarily receive the 
same price per share regardless of the time a payment is made or a 
redemption tendered.30 Therefore, the Commission is proposing to 
relieve money funds that seek to maintain a stable net asset value from 
the requirement to disclose in the prospectus the timing of the 
determination of the offering price. This information would continue to 
appear in the SAI.31

    \30\ Perhaps more important to a money market fund investor is 
the relationship of the timing of a share purchase to the accrual of 
dividends on the investment (for example, whether dividends on 
shares begin to accrue on the day the fund receives the investment, 
or on the next business day). This information would continue to be 
required in the prospectus in response to Item 6(f) (Capital Stock 
and Other Securities). Funds also would be required to disclose the 
date on which dividends cease accruing as the result of a 
redemption. Proposed Instruction to Item 8(a) (Redemption and 
Repurchase).
    \31\ See Item 19, Instruction 3 (timing of calculation of net 
asset value). A money market fund that does not maintain a stable 
net asset value would continue to describe the timing of its share 
price calculation in the prospectus.
---------------------------------------------------------------------------

B. Other Amendments

1. Calculation of Tax Exempt Money Fund Yield
    Tax exempt funds typically advertise a ``tax free'' yield. Under 
staff guides, a money fund that holds itself out as distributing income 
that is exempt from income taxation may invest up to twenty percent of 
its net assets in taxable securities or invest its assets so as much as 
twenty percent of its income is taxable.32 In addition, most tax 
exempt money funds reserve the authority to temporarily invest any or 
all of the fund's assets in taxable securities if no suitable tax-
exempt securities are available. Because taxable instruments generally 
have higher yields than tax exempt instruments, a prospective investor 
may be unaware that a tax exempt fund's relatively higher yield may be 
the result of the inclusion of some taxable securities in its 
portfolio. Therefore, the Commission is proposing to revise the money 
fund yield formula set forth in Item 22(a) of Form N-1A to require a 
tax exempt fund to reduce any taxable income by a percentage equal to 
the highest marginal income tax rate in effect at the time the yield is 
quoted.33 The tax-adjusted yield would represent a more accurate 
tax-free yield.34

    \32\ See Guide 1 to Form N-1A.
    \33\ If a fund represents itself as being free from state and/or 
local income taxation as well as federal income taxation, the fund 
would also be required to reduce the yield of those securities that 
are not exempt from state and/or local income taxation by the 
highest marginal state and/or local income tax rates for 
individuals.
    \34\ The Commission is also proposing technical amendments to 
rule 482 and Form N-1A to clarify that money market funds may 
advertise tax equivalent and tax equivalent effective yields and how 
those yields should be calculated.
2. Total Return Calculation
    The Commission is proposing a technical amendment to the 
instructions regarding calculation of the total return in the financial 
highlights table that would apply to all management investment 
companies using Forms N-1A and N-2.35 Instruction 11(e) to Item 3 
of Form N-1A currently requires a fund to annualize total return for 
partial year periods. The Commission is concerned that annualization of 
performance based on a short period may result in a distorted 
performance figure that may mislead investors.36 The Commission 
proposes to amend the instruction in Form N-1A and add an instruction 
to Form N-2 to require that performance for a period of less than 
twelve months be stated without annualization.

    \35\ If the proposed amendments to Item 3 are adopted, money 
market funds would be exempt from the Financial Highlights table 
requirement.
    \36\ Notwithstanding the current instruction, the Commission 
urges funds not to annualize the total return for a partial year.
---------------------------------------------------------------------------

3. Amendments to Fee Table
    The Commission is proposing several technical amendments to Item 2 
of Form N-1A, which requires a fund to provide in its prospectus a 
table summarizing the transaction and operating expenses associated 
with an investment in the fund. In addition, the fee table provides 
examples of what expenses a shareholder would pay if shares were 
redeemed at the end of several time periods.
    Instruction 13(a) to Item 2(a) of Form N-1A instructs funds that 
have expense reimbursement or fee waiver arrangements that reduce fund 
operating expenses to reflect these arrangements in their fee table if 
the reimbursement or waiver ``will continue.'' The Commission is 
proposing to amend the instruction to clarify that the phrase ``will 
continue'' applies regardless of whether a guarantee that the 
arrangement will continue is in place. A fund is required to update its 
prospectus by means of a prospectus supplement or ``sticker'' to 
reflect a material change in the reimbursement or waiver 
arrangement.37 As a result, fund shareholders will be informed of 
decreases in amounts reimbursed or fees waived that would have a 
material affect on fund expenses.

    \37\ The Commission acknowledges that a material change 
requiring a stickering of a fund's prospectus would ordinarily not 
occur where a fee waiver or reimbursement is increased, thereby 
reducing fund expenses.
---------------------------------------------------------------------------

    Two amendments are being proposed to conform Form N-1A to Forms N-3 
and N-4. The instructions to the example in the table would be amended 
to permit a new fund to adjust the data in the example to reflect the 
completion of amortization of expenses associated with organizing the 
fund 38 and to prescribe a method for allocating account fees 
charged to shareholders in an investment company complex or a series 
company.39

    \38\ Instruction 14(a) to Form N-1A.
    \39\ Proposed Instruction 14(i) to Item 2(a) of Form N-1A.
---------------------------------------------------------------------------

    Funds are currently required to provide a brief explanation of the 
table immediately after the table. The proposed amended instruction 
would permit funds to provide the explanation ``contiguous to'' the 
table, giving funds additional discretion to determine how the table's 
purposes can be made clear to investors.40

    \40\ See General Instruction 1 to Item 2, as proposed to be 
amended.
---------------------------------------------------------------------------

4. Exhibit 16 to Form N-1A
    Funds are currently required by Item 24 of Form N-1A to include as 
an exhibit to their financial statements a schedule showing how the 
fund computes performance quotations. The Commission is proposing to 
remove this requirement. Funds' calculations of their performance data 
instead will be reviewed during fund examinations. 

[[Page 38459]]


C. Request for Comments Regarding Prospectus Simplification Generally

    The Commission is currently reviewing the prospectus disclosure 
requirements for all management investment companies to determine what 
changes might improve further the quality of prospectus disclosure, 
particularly in light of regulatory developments and changes in the 
investment company industry.41 The Commission would consider 
proposing further amendments to Form N-1A to simplify and generally 
improve the quality of prospectus disclosure to investors in other 
types of mutual funds. The Commission requests comments and suggestions 
about ways in which the Form may be amended to further shorten and 
simplify prospectus disclosure for other mutual funds. Specifically, 
the Commission seeks comment on: (i) whether some information currently 
required to be presented in narrative form could be presented more 
effectively in a graphic, pictorial, or tabular format; and (ii) 
whether the appropriate allocation of required disclosure between the 
prospectus and the SAI should be clarified.

    \41\ The Commission recently issued a concept release regarding 
mutual fund risk disclosure and requested comment regarding a broad 
range of issues related to this topic. See Investment Company Act 
Rel. No. 20974 (Mar. 29, 1995) [60 FR 17172 (Apr. 4, 1995)].
---------------------------------------------------------------------------

    The Commission also requests comment on the utility to investors of 
money fund portfolio schedules, which are provided in semi-annual 
reports to shareholders.42 Do these schedules provide useful 
information for investors? Should other information be provided instead 
or in a different format from that currently required?

    \42\ Rule 30d-1 [17 CFR 270.30d-1] requires that shareholder 
reports contain the financial statements specified in the 
appropriate investment company registration statement form. 
Instructions for preparing financial statements are contained in the 
registration statement forms, which refer to the requirements of 
Regulation S-X. See, e.g., instructions to Item 23 of Form N-1A.
---------------------------------------------------------------------------

III. Amendments to Staff Guides

    Form N-1A is accompanied by a series of staff guides designed, 
among other things, to clarify the disclosure requirements in the form. 
The Appendix to this release contains draft revisions to the current 
guides.
    The Division of Investment Management (the ``Division'') intends to 
revise Guides 3, 4, 8 and 22 to Form N-1A to reflect the amendments 
proposed today. Guide 3 (Investment Objectives and Policies) would be 
revised to urge money funds to be concise in describing the manner in 
which they propose to achieve their investment objectives and would 
state that a general description of the types of instruments in which 
the fund may invest and the issuers of those instruments generally 
should be sufficient; that listing or describing each type of 
instrument in which the fund may invest is not required; and that 
detailed descriptions of rule 2a-7's requirements and the various 
nationally recognized statistical rating organizations (``NRSROs'') and 
the ratings they assign should be omitted. The Division staff intends 
to revise Guide 4 (Types of Securities) to state that money funds are 
not required to list or describe the particular instruments in which 
the fund may invest. Guide 8 (Senior Securities, Reverse Repurchase 
Agreements, Firm Commitment Agreements and Standby Commitment 
Agreements) would be revised to state that money funds should discuss 
the use of certain trading practices in the SAI in response to Item 13 
rather than in the prospectus. Finally, Guide 22 (Government 
Securities) would be amended to shift some of the disclosure money 
funds place in their prospectuses about U.S. Government securities to 
the SAI.
    The Division also intends to revise Guides 4 and 5 to clarify 
certain other matters applicable to money funds. Guide 4 (Types of 
Securities) would be revised to clarify the Commission's policy that 
money funds may not invest more than ten percent of their assets in 
illiquid securities.43 Guide 5 (Portfolio Turnover) would be 
amended to indicate that money funds need not discuss the effects of 
portfolio turnover, as an investment technique, in the prospectus. 
Money funds would still be required to discuss the effects of portfolio 
turnover in the SAI.44

    \43\ See Investment Company Act Rel. No. 13380 (July 11, 1983) 
[48 FR 32555 (July 18, 1983)]. See also Investment Company Institute 
(pub. avail. Dec. 9, 1992). The limit on illiquid holdings by other 
types of mutual funds is fifteen percent of net assets. See 
Investment Company Act Rel. No. 18612 (Mar. 12, 1992). See also 
Merrill Lynch Money Markets, Inc. (pub. avail. Jan. 14, 1994) 
(subject to certain conditions, limit on illiquid securities does 
not apply to commercial paper issued in reliance on Section 4(2) of 
the 1933 Act).
    \44\ In the 1993 amendments to Form N-1A, money funds were 
explicitly exempted from the requirement to state their portfolio 
turnover rates in the Financial Highlights table. See Release 19382, 
supra note 10 at n.3.
---------------------------------------------------------------------------

    The Division requests comment on the proposed changes to the guides 
and the deletion of the guides regarding performance data,45 as 
well as any suggestions for amendment of existing guides that would 
result in improved disclosure by money funds and other types of mutual 
funds.

    \45\ See supra note 31.
---------------------------------------------------------------------------

IV. Transition Period

    If adopted, the proposed amendments would become effective sixty 
days after publication in the Federal Register. Funds would be required 
to conform their prospectuses and SAIs to the amendments in their next 
post-effective amendment filed after the conclusion of the sixty day 
period that updates financial statements pursuant to the requirements 
of section 10(a)(3) of the 1933 Act [15 U.S.C. 77j(a)(3)]. New funds 
would be required to implement the new requirements in registration 
statements filed after the conclusion of the sixty day period.

V. General Request for Comments

    All interested persons who wish to submit written comments on the 
proposed form, rule, and Guide amendments discussed in this release, to 
suggest other amendments to Forms N-1A and N-3, or to comment on 
related matters that might have a significant impact upon the proposals 
discussed in this release, are requested to do so. Commenters 
suggesting alternative approaches are encouraged to submit proposed 
text to amend the Form or related rules or staff guides.
VI. Cost/Benefit of Proposal

    The changes to Forms N-1A and N-3 and related rules proposed today 
are intended to shorten and simplify the prospectuses provided to 
investors and potential investors in money funds and to improve the 
quality of prospectus disclosure by these funds. The proposed revisions 
should benefit investors by providing them with a shorter, clearer and, 
therefore, more useful document and better enable investors to make an 
informed investment decision. Because the proposed revisions would 
shorten the prospectuses provided by most money funds, the revisions 
should reduce the burdens of preparing and the cost of mailing the 
prospectus for funds. That information which is transferred from the 
prospectus to the SAI will lengthen the SAIs of some funds; however, 
the number of investors typically requesting the SAI is much lower than 
the number of investors to whom the prospectus will be provided. The 
Commission is interested in any public comment concerning the cost 
savings or cost burdens to money funds of all sizes affected by these 
proposals.

VII. Summary of Initial Regulatory Flexibility Analysis

    The Commission has prepared an Initial Regulatory Flexibility 
Analysis in 

[[Page 38460]]
accordance with 5 U.S.C. 603 regarding the proposed amendments. The 
Analysis notes that the proposed amendments are intended to simplify 
money fund prospectus disclosure. Pertinent information contained in 
the preceding section of this release (``Cost/Benefit of Proposal'') is 
also reflected in the Analysis. A copy of the Initial Regulatory 
Flexibility Analysis may be obtained by contacting Martha H. Platt, 
Mail Stop 10-6, Securities and Exchange Commission, 450 Fifth Street, 
N.W., Washington, D.C. 20549.

Text of Proposed Rule and Form Amendments

List of Subjects in 17 CFR Parts 230, 239, and 274

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

    For the reasons set out in the preamble, the Commission is 
proposing to amend Chapter II, Title 17 of the Code of Federal 
Regulations as follows:

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

    1. The 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, 79ll(d), 79t, 80a-8, 80a-29, 80a-30, and 
80a-37, unless otherwise noted.
* * * * *
    2. Section 230.482 is amended by removing the word ``or'' at the 
end of paragraph (d)(1); removing the period and adding ``; or'' at the 
end of paragraph (d)(2); and adding paragraph (d)(3) to read as 
follows:


Sec. 230.482  Advertising by an investment company as satisfying 
requirements of section 10.

* * * * *
    (d) * * *
    (3) In the case of a money market fund holding itself out as 
distributing income exempt from regular federal income tax, in addition 
to the quotation of yields described in paragraphs (d)(1) and (d)(2) of 
this section:
    (i) A quotation of current yield described in paragraph (d)(1) of 
this section and a corresponding quotation of tax equivalent yield 
based on the method of computation prescribed in Form N-1A, relating to 
the same base period and of equal prominence; or
    (ii) A quotation of current yield and effective yield and 
corresponding quotations of tax equivalent current yield and tax 
equivalent effective yield based on methods of computation prescribed 
in Form N-1A, relating to the same base period and of equal prominence.
* * * * *

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

    3. The 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.
* * * * *

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

    4. 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.

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

    5. Form N-2 (referenced in Secs. 239.14 and 274.11a-1) is amended 
by removing ``and'' at the end of paragraph (b), removing the period at 
the end of paragraph (c), adding ``; and'' at the end of paragraph (c), 
and adding instruction 13.d. to Item 4.1, to read as follows:

Form N-2

* * * * *

Item 4. Financial Highlights

    1. General * * *

Instructions

General Instructions

* * * * *

Total Investment Return

    13. * * *
    d. for a period of less than a full fiscal year, state the total 
investment return for the period and disclose in a note to the table 
that the figure is not annualized.
* * * * *
    Note: Form N-1A does not and the amendments will not appear in 
the Code of Federal Regulations.

    6. General Instruction A of Form N-1A (referenced in Secs. 239.15A 
and 274.11A) is amended by adding a second paragraph (unnumbered) to 
read as follows:

Form N-1A

* * * * *

General Instructions

A. Rule as to Use of Form N-1A

* * * * *
    Several Items of Form N-1A contain specific provisions or 
instructions for money market fund Registrants. See General Instruction 
E and Items 1, 3, 4, 7, and 8 of Part A, Items 13, 22 and 23 of Part B, 
and Item 32 of Part C. In addition, money market fund registrants need 
not respond to Items 5(c) and 5A.
* * * * *
    7. General Instruction E of Form N-1A (referenced in Secs. 239.15A 
and 274.11A) is amended by removing the second sentence of the second 
paragraph (unnumbered) and adding two sentences to the end of that 
paragraph, to read as follows:

Form N-1A

* * * * *

General Instructions

* * * * *

E. Incorporation by Reference

* * * * *
    * * * In general, a Registrant may incorporate by reference, in 
answer to any item in a registration statement filed on Form N-1A not 
required to be included in a prospectus, any information contained 
elsewhere in the registration statement or any information contained in 
other statements, applications or reports filed with the Commission, 
except that a money market fund Registrant's response to Item 3(d) may 
be incorporated into the prospectus by reference from the Statement. A 
money market fund Registrant that elects to incorporate its response to 
Item 3(d) from the Statement of Additional Information is not required 
as a result of that incorporation to physically deliver the Statement 
with the prospectus if the Statement is available as described in the 
first paragraph of this instruction.
* * * * *
    8. Item 1, Part A of Form N-1A (referenced in Secs. 239.15A and 
274.11A) is amended by adding an instruction immediately following 
paragraph (a)(iii), to read as follows:

Form N-1A

* * * * *

Part A

Information Required in a Prospectus

Item 1. Cover Page

    (a) * * *
    (iii) * * *

Instruction

    A money market fund Registrant incorporating by reference from the 
Statement of Additional Information only its response to Item 3(d) must 


[[Page 38461]]
include within the prospectus a statement that information has been 
incorporated into the prospectus by reference from the Statement of 
Additional Information, but may omit the statement from its cover page.
    9. Item 2, General Instruction 1 of Form N-1A (referenced in 
Secs. 239.15A and 274.11A) is revised by removing ``Immediately after'' 
and adding in its place ``Contiguous to''.
    10. Item 2, Part A of Form N-1A (referenced in Secs. 239.15A and 
274.11A is amended by adding paragraph (c) instruction 13 to read as 
follows:

Form N-1A

* * * * *

Part A

Information Required in a Prospectus

Item 2. Synopsis

    (a)(i) * * *

Instructions

    General Instructions * * *
    Annual Fund Operating Expenses * * *
    13. (a) * * *
    (c) The registrant should reflect any expense reimbursement or fee 
waiver arrangement that reduced any fund operating expense that is 
expected to continue, regardless of whether the reimbursement or waiver 
arrangement has been guaranteed.
    11. Item 2, Part A of Form N-1A (referenced in Secs. 239.15A and 
274.11A is amended by adding ``, except that an appropriate adjustment 
to reflect reduced annual expenses from completion of organization 
expense amortization may be made'' before the semi-colon at the end of 
instruction 14(a).
    12. Item 2, Part A of Form N-1A (referenced in Secs. 239.15A and 
274.11A is amended by adding paragraph (i) to instruction 14 to read as 
follows:

Form N-1A

* * * * *

Part A

Information Required in a Prospectus

Item 2. Synopsis

    (a)(i) * * *

Instructions

    General Instructions * * *

Example

    14. * * *
    (i) Reflect any administrative fee collected by dividing the total 
amount of the fee collected during the year by all funds or series 
whose shareholders are subject to the administrative fee by the total 
average net assets of all the funds or series. Add the resulting 
percentage to ``Annual Fund Operating Expenses'' and assume that it 
remains the same in each of the one, three, five, and ten-year periods. 
New Registrants should estimate administrative fees collected.
    13. Item 3 of Form N-1A (Secs. 239.15A and 274.11A) is amended by 
revising the introductory text of paragraph (a) and revising 
instruction 11(e) to paragraph (a), redesignating paragraphs (b), (c), 
and (d) as paragraphs (c), (d), and (e), and adding paragraph (b) and 
an instruction to newly designated paragraph (d) to read as follows:

Form N-1A

* * * * *

Item 3. Condensed Financial Information

    (a) For a Registrant other than a money market fund, furnish the 
following information for the Registrant, or for the Registrant and its 
subsidiaries, consolidated as prescribed in Rule 6-03 [17 CFR 210.6-03] 
of Regulation S-X.
* * * * *

Instructions

General Instructions

* * * * *

Total Return

    11. * * *
    (e) for a period of less than a full fiscal year, state the total 
return for the period and disclose in a note to the table that the 
figure is not annualized.
* * * * *
    (b) For a money market fund Registrant, provide a bar graph showing 
the annual total returns of the fund for each of the last ten fiscal 
years, or the life of the fund if less than ten years. The graph should 
also show the return for each year in numerical form. Accompany the 
graph with a statement or statements that: (1) Past performance is not 
predictive of future performance; (2) money market fund performance is 
primarily affected by short-term interest rates and fund expenses (and 
provide a cross-reference to the Registrant's tabular responses to Item 
2(a), unless the bar graph and tabular responses to Item 2(a) appear on 
the same page of the prospectus); and (3) financial statements 
providing more detailed information regarding the fund's performance 
are contained in the Statement of Additional Information.

Instructions

General

    Briefly explain the nature of the information contained in the bar 
graph and that the information is derived from the financial statements 
in the Statement of Additional Information. The auditor's report as to 
the financial statements need not be included in the prospectus. Note 
that the auditor's report as to the fund's financial data reflected in 
the bar graph is included elsewhere in the registration statement, 
specify its location, and state that it can be obtained by 
shareholders.

Bar Graph Presentation

    1. Partial Years/New Registrants. Do not reflect partial fiscal 
years in the bar graph. The first year shown in the graph will be the 
first full fiscal year for which: (i) the Registrant's registration 
statement was effective (or, in the case of a series, the Registrant 
offered shares of the series); or (ii) the Registrant (or series) 
invested its assets in accordance with its investment objectives.
    2. Total Return. Calculate total return as prescribed in 
Instruction 11 to Item 3(a) of this form.
    3. Distribution of Capital Gains. If the fund made capital gains 
distributions during the period, state in a footnote to the graph what 
the amount of the distribution per share was and state that such 
distribution is reflected in the bar graph by means of a shaded or 
otherwise distinctively marked area within the bar for each year in 
which capital gains distributions were made.
    4. Format. Measure return on the vertical axis of the bar graph and 
measure time in yearly increments on the horizontal axis.
    5. Series Companies. Treat each series as a separate Registrant for 
purposes of this item.
* * * * *
    (d) * * *

Instruction

    A money market fund Registrant may incorporate its response to this 
sub-item from the Statement of Additional Information. See General 
Instruction E.
* * * * *
    14. Form N-1A (referenced in Secs. 239.15A and 274.11A) is amended 
by revising Item 4 to read as follows:

Form N-1A

* * * * *

Item 4. General Description of Registrant

    (a) Concisely discuss the organization and operation or proposed 
operation of the Registrant. Include the following: 

[[Page 38462]]

    (i) basic identifying information, including:
    (A) the date and form of organization of the Registrant and the 
name of the state or other sovereign power under the laws of which it 
is organized; and
    (B) the classification and subclassification of the Registrant 
pursuant to Sections 4 and 5 of the 1940 Act [15 U.S.C. 80a-4, 80a-5];
    (ii) a concise description of the investment objectives and 
policies of the Registrant, including, if those objectives may be 
changed without a vote of the holders of the majority of the voting 
securities, a brief statement to that effect; and
    (iii) a concise discussion of how the Registrant proposes to 
achieve such objectives, including:
    (A) a short description of the types of securities in which the 
Registrant invests or will invest principally and, if applicable, any 
special investment practices or techniques that will be employed in 
connection with investing in such securities;
    (B) if the Registrant proposes to have a policy of concentrating in 
a particular industry or group of industries, identification of such 
industry or industries;
    (C) identification of any other policies of the Registrant that may 
not be changed without the vote of the majority of the outstanding 
voting securities, including those policies which the Registrant deems 
to be fundamental within the meaning of Section 8(b) of the 1940 Act; 
and
    (D) a concise description of those significant investment policies 
or techniques (such as risk arbitrage, repurchase agreements, forward 
delivery contracts, investing for control or management) that are not 
described pursuant to subparagraphs (a)(iii) (A)-(C) above that the 
Registrant employs or has the current intention of employing in the 
foreseeable future.

Instructions
    1. In responding to paragraph (a)(iii) of this item (other than 
paragraph (a)(iii)(B), regarding concentration), it is sufficient for a 
money market fund Registrant to: (a) describe the characteristics of 
the Registrant in general terms (e.g., that it seeks to maintain a 
stable net asset value of $1.00 by investing in a portfolio of high 
quality short-term debt obligations issued by corporations, banks, and 
other financial institutions, etc.) without listing or describing the 
particular instruments in which the fund may invest or explaining 
detailed investment policies designed to comply with rule 2a-7 of the 
1940 Act; and (b) if the fund limits investment to a group of 
securities or a type of issuer (e.g., to U.S. government securities, or 
securities the distributions from which are exempt from federal income 
taxes), identify: (i) the group of securities or type of issuer and 
(ii) any other group of securities or type of issuer in which the fund 
reserves the right to invest more than 5% of its assets and state the 
maximum percentage of the fund's assets that may be so invested, unless 
the Registrant has not invested more than 5% of its assets in those 
securities within the past year and has no current intention of doing 
so in the foreseeable future.
    2. ``Concentration,'' for purposes of paragraph (a)(iii)(2), is 
deemed to be 25% or more of the value of the Registrant's total assets 
invested or proposed to be invested in a particular industry or group 
of industries. A fund's policy on concentration should not be 
inconsistent with the Registrant's name.
    3. Discussion of types of investments that will not constitute the 
Registrant's principal portfolio emphasis, and of related policies or 
practices, should generally receive less emphasis in the prospectus, 
and under the circumstances set forth below may be omitted or limited 
to information necessary to identify the type of investment, policy, or 
practice. Specifically, and notwithstanding paragraph (a) above:
    (i) If the effect of a policy is to prohibit a particular practice, 
or, if the policy permits a particular practice but the Registrant has 
not employed that practice within the past year and has no current 
intention of doing so in the foreseeable future, do not include 
disclosure as to that policy; and
    (ii) If such a policy has the effect of limiting a particular 
practice in such a way that no more than 5% of the Registrant's net 
assets are at risk, or, if the Registrant has not followed that 
practice within the last year in such a manner that more than 5% of the 
Registrant's net assets were at risk, and does not have a current 
intention of following such practice in the foreseeable future in such 
a manner that more than 5% of the Registrant's net assets will be at 
risk, disclosure of information in the prospectus about such practice 
should be limited to that which is necessary to identify the practice.
    (b) Discuss briefly the principal risk factors associated with 
investment in the Registrant, including factors peculiar to the 
Registrant as well as those generally attendant to investment in an 
investment company with investment policies and objectives similar to 
the Registrant's.
* * * * *
    15. Form N-1A (referenced in Secs. 239.15A and 274.11A) is amended 
by adding an instruction following paragraph (b) of Item 7 to read as 
follows:

Form N-1A

* * * * *

Item 7. Purchase of Securities Being Offered

* * * * *
    (b) * * *

Instruction

    In responding to sub-item (b)(i), a money market fund Registrant 
need only state that the public offering price per share represents a 
proportionate interest in the net assets of the fund. In responding to 
sub-item (b)(ii), a money market fund Registrant that seeks to maintain 
a stabilized net asset value need not state the time of day at which 
net asset value is calculated.
* * * * *
    16. Form N-1A (referenced in Secs. 239.15A and 274.11A) is amended 
by adding an instruction following paragraph (a) of Item 8 to read as 
follows:

Form N-1A

* * * * *

Item 8. Redemption or Repurchase

    (a) * * *

Instruction

    In responding to paragraph (a), a money market fund Registrant need 
not discuss the timing of share pricing but should state how the timing 
of a redemption request will affect the accrual or payment of 
dividends.
* * * * *
    17. Form N-1A (referenced in Secs. 239.15A and 274.11A) is amended 
by adding an instruction 3 following paragraph (b) of Item 13 to read 
as follows:

Form N-1A

* * * * *

Item 13. Investment Objectives and Policies

* * * * *
    (b) * * *

Instructions

* * * * *
    3. In responding to this item, a money market fund Registrant 
should include descriptions of: 

[[Page 38463]]

    (i) The types of instruments which it purchases or intends to 
purchase;
    (ii) The types of issuers that issue the instruments in which it 
intends to invest;
    (iii) Significant investment policies or techniques (e.g., forward 
delivery contracts, repurchase agreements, and standby commitments) 
that the Registrant employs or has the current intention of employing 
in the foreseeable future; and
    (iv) The quality, maturity, and diversity restrictions which 
pertain to money market fund investments, to the extent such 
descriptions are not included in the prospectus in response to 
Instruction 1 to Item 4.
* * * * *
    18. Form N-1A (referenced in Secs. 239.15A and 274.11A) is amended 
by revising the introductory text of paragraph (a), redesignating 
paragraphs (a)(iii) and (a)(iv) as paragraphs (a)(v) and (a)(vi); 
adding paragraphs (a)(iii), (a)(iv), and (a)(vii); revising Instruction 
4 to paragraph (a); adding Instruction 5 to paragraph (a); and revising 
the introductory text of paragraph (b)(iii) of Item 22 to read as 
follows:

Form N-1A

* * * * *

Item 22. Calculation of Performance Data

    (a) Money Market Funds. If a money market fund Registrant 
advertises a yield quotation, an effective yield quotation, a tax 
equivalent yield quotation, or a tax equivalent effective yield 
quotation, furnish:
* * * * *
    (iii) A tax equivalent current yield quotation computed by dividing 
that portion of the yield of the Registrant (as computed pursuant to 
Item 22(a)(i)) which is tax-exempt by one minus a stated income tax 
rate and adding the product to that portion, if any, of the yield of 
the Registrant that is not tax-exempt;
    (iv) A tax equivalent effective yield quotation computed by 
dividing that portion of the effective yield of the Registrant (as 
computed pursuant to Item 22(a)(ii)) which is tax-exempt by one minus a 
stated income tax rate and adding the product to that portion, if any, 
of the yield of the Registrant that is not tax-exempt;
* * * * *
    (vii) The income tax rate used in the computation.

Instructions

* * * * *
    4. If the Registrant does not advertise any of the four types of 
yield, it need not disclose or discuss the computation of that yield.
    5. If the Registrant holds itself out as distributing income that 
is exempt from federal and/or state and/or local income taxation, in 
calculating yield and effective yield (but not tax equivalent yield or 
tax equivalent effective yield), the Registrant must reduce the yield 
quoted by the effect of any income taxes on the shareholder receiving 
dividends, employing the maximum rate for individual income taxation. 
For example, if the Registrant holds itself out as distributing income 
exempt from federal taxation and the income taxes of State A, but 
invests in some securities of State B, it must reduce its yield by the 
effect of state income taxes that must be paid by the residents of 
State A on that portion of the income attributable to the securities of 
State B.
    (b) Other Registrants. 
* * * * *
    (iii) Tax Equivalent Yield. If the Registrant advertises a tax 
equivalent yield, furnish,
* * * * *
    19. Form N-1A (referenced in Secs. 239.15A and 274.11A), paragraph 
(b) of Item 24, is amended by removing paragraph (16) and redesignating 
paragraphs (17) and (18) as paragraphs (16) and (17).
    20. Guide 3 to Form N-1A is revised to read as follows:

Guide 3. Investment Objective and Policies

    In the response to Item 4, the registrant's investment objective 
and policies (including the types of securities in which it will 
invest) should be clearly and concisely stated in the prospectus so 
that they may be readily understood by the investor. Because the 
circumstances of each registrant will vary, it is not possible to 
define precisely what level of investment would make a particular type 
of investment one in which the registrant invests ``principally,'' as 
that term is used in Item 4. As a general matter, however, the level of 
disclosure as to a particular type of investment should be consistent 
with the prominence of that type of investment in the registrant's 
portfolio. The prospectus should emphasize the main types of 
investments the registrant proposes to make and the principal risks 
inherent in such investments. Accordingly, discussions of types of 
investments that will not constitute the registrant's principal 
portfolio emphasis should be as brief as possible and, in many cases, 
may be limited to identifying the particular type of investments. (As 
discussed below, the instructions delineate certain circumstances in 
which disclosure may be so limited.) Similar treatment should be 
accorded to other types of practices, such as borrowing money. In order 
to achieve the objective of clear and concise disclosure, registrants 
should avoid extensive legal and technical detail and need not discuss 
every possible contingency, such as remote risks.\3\

    \3\ See individual subject headings of these Guidelines 
concerning disclosure for specific investment techniques or 
policies.
---------------------------------------------------------------------------

    Money market fund registrants in particular are urged to be concise 
in describing the manner in which they propose to achieve their 
investment objectives (item 4(a)(iii)). A general description of the 
types of instruments in which the registrant may invest (i.e., short-
term, high quality instruments) and the types of issuers that issue the 
securities in which the registrant may invest (e.g., corporations, 
banks, etc.) should generally be sufficient. As stated in Instruction 1 
to Item 4, listing or describing each type of instrument in which the 
registrant may invest is not required; however, the registrant should 
identify those groups of securities or types of issuers in which it has 
reserved the right to invest more than 5% of its assets, unless it has 
not invested more than 5% of its assets in those securities or issuers 
within the past year and has no current intention of doing so in the 
foreseeable future. Registrants should omit detailed descriptions of 
rule 2a-7's requirements and the various NRSROs and the ratings they 
assign to securities in which the fund may or does invest. More 
detailed responses regarding investment policies and techniques should 
be provided in the Statement of Additional Information in response to 
Item 13.
    Pursuant to Instruction 3(i) to Item 4(a), the registrant should 
omit from the prospectus disclosure about so-called negative investment 
policies, that is, policies that prohibit a particular type of 
investment or practice. Item 4(a) may have particular applicability to 
those types of activities for which section 8(b) of the 1940 Act 
specifically requires that there be information in the registration 
statement. Although Item 4(a) generally does not attempt to define what 
or how much disclosure should be made about particular practices, 
Instruction 3(ii) calls for minimal disclosure of policies registrant 
will not follow to a significant extent. Specifically, if not more than 
5 percent of the registrant's net assets will be at risk, the 
prospectus should merely identify the policy or practice. For example, 
if a registrant planned to 

[[Page 38464]]
invest no more than 5 percent of its net assets in speculative growth 
stocks, it would be sufficient to state that policy in the prospectus 
without elaboration.
    The response to Item 13 should include a fuller discussion in the 
Statement of Additional Information of those investment policies of the 
registrant with respect to which an abbreviated or no narrative 
description is included in the prospectus. Fuller descriptions of the 
registrant's principal types of investment may also be appropriate, 
depending on the circumstances. If the registrant has not used a policy 
in the past, the registrant should disclose that fact, as well as its 
intention with respect to that policy in the coming year in the 
Statement of Additional Information in responding to Item 13.
    21. Guide 4 to Form N-1A is amended by adding a footnote at the end 
of the first sentence to read as follows:

Guide 4. Types of Securities

* * * * *
    \4\ As set forth in instruction 1 to Item 4, money market fund 
Registrants are not required to list or describe the particular 
instruments in which the fund may invest.
* * * * *
    22. Guide 4 to Form N-1A is amended by adding a sentence and a 
footnote in the last paragraph (unnumbered) after the phrase ``fifteen 
percent of its net assets.'' to read as follows:

Guide 4. Types of Securities

* * * * *
    * * * A money market fund is limited to investing less than ten 
percent of its assets in illiquid securities.\5\ * * *

    \5\ See Investment Company Act Rel. No. 13380 (July 11, 1983), 
48 FR 32555 (July 18, 1983). See also Investment Company Institute 
(pub. avail. Dec. 9, 1992).
---------------------------------------------------------------------------

* * * * *
    23. Guide 5 to Form N-1A is amended by adding a footnote at the end 
of the first sentence to read as follows, and sequentially renumbering 
all subsequent footnotes in the guides to Form N-1A:

Guide 5. Portfolio Turnover

* * * * *
    \6\ Money market funds are not required to discuss the effects 
of portfolio turnover in their prospectuses.
* * * * *
    24. Guide 8 to Form N-1A is amended by adding a sentence to the 
second paragraph (unnumbered) following the third sentence to read as 
follows:

Guide 8. Senior Securities, Reverse Repurchase Agreements, Firm 
Commitment Agreements and Standby Commitment Agreements

* * * * *
    * * * Money market funds should discuss their use of these trading 
practices in the Statement of Additional Information in response to 
Item 13 (see Instruction 1 to Item 4(a)(iii) and Instruction 3 to Item 
13). * * *
    25. Guide 22 to Form N-1A is amended to read as follows:

Guide 22. Government Securities

    If the registrant is investing in United States Government 
securities, the prospectus should reflect under what conditions, and to 
what extent the registrant intends to invest its assets in United 
States Government securities.
    If a registrant other than a money market fund is investing to a 
significant extent in United States Government securities on a routine 
basis, the prospectus should include the following information: (i) The 
types of Government securities in which the fund will invest; (ii) 
examples of Government agencies and instrumentalities in whose 
securities the fund will invest; and (iii) whether the securities of 
such agency or instrumentality are: (a) Supported by full faith and 
credit of the United States, (b) supported by the ability to borrow 
from the Treasury, (c) supported only by the credit of the agency or 
instrumentality, or (d) supported by the United States in some other 
way. If the registrant is a money market fund, the disclosure described 
in (i)-(iii) above should be placed in the Statement of Additional 
Information.
    If the registrant is a money market fund holding itself out as 
investing in United States Government securities, and the registrant 
does not invest all of its assets in securities backed by the full 
faith and credit of the United States Government, the fund should not 
suggest in its prospectus or sales material that there is no credit 
risk associated with the fund's investments.
    26. Guide 28 to Form N-1A is amended by removing the following 
phrase in the first sentence of the tenth paragraph (unnumbered): 
``with portfolio securities that mature in one year or less''.
    27. General Instruction A of Form N-3 (referenced in Secs. 239.17a 
and 274.11b) is amended by adding a paragraph between the first and 
second (unnumbered) paragraphs to read as follows:

Form N-3

* * * * *

General Instructions

A. Rule as to Use of Form N-3

* * * * *
    Several Items of Form N-3 contain specific provisions or 
instructions for money market accounts. See General Instruction G and 
Items 1, 4, 5, 11, 12, of Part A, Items 19 and 27 of Part B, and Item 
37 of Part C.
* * * * *
    Note: Form N-3 does not and the amendments will not appear in 
the Code of Federal Regulations.

    28. General Instruction G of Form N-3 (referenced in Secs. 239.17a 
and 274.11b) is amended by removing the period and adding a comma at 
the end of the second paragraph (unnumbered) and adding the following 
to read as follows:

Form N-3

* * * * *

General Instructions

* * * * *

G. Incorporation by Reference

* * * * *
    * * *, except that a Registrant's response to Item 4(d) may be 
incorporated into the prospectus by reference from the Statement of 
Additional Information. A money market account electing to incorporate 
its response to Item 4(d) from the Statement of Additional Information 
will not be required as a result of that incorporation to physically 
deliver the Statement with the prospectus if the Statement is available 
as described in the first paragraph of this instruction.
* * * * *
    29. Item 1 of Form N-3 (referenced in Secs. 239.17a and 274.11b) is 
amended by adding an instruction at the end of paragraph (a)(vi) to 
read as follows:

Form N-3

* * * * *

Item 1. Cover Page

    (a) * * *
    (vi) * * *

Instruction

    A money market account incorporating by reference from the 
Statement of Additional Information only its response to Item 4(c) must 
include within the prospectus a statement that information has been 
incorporated into the prospectus by reference from the Statement of 
Additional Information, but may omit the statement from its cover page.
* * * * *
    30. Item 3 of Form N-3 (referenced in Secs. 239.17a and 274.11b) is 
amended by 

[[Page 38465]]
revising General Instruction 1 by removing ``Immediately after'' and 
substituting in its place ``Contiguous to''.
    31. Item 3 of Form N-3 (referenced in Secs. 239.17a and 274.11b) is 
amended by adding paragraph (c) to instruction 18 to read as follows:

Form N-3
* * * * *

Item 3. Synopsis

    (a) * * *
    Annual Expenses * * *
    18. (a) * * *
    (b) * * *
    (c) The registrant should reflect any expense reimbursement or fee 
waiver arrangement that reduced any operating expense that is expected 
to continue, regardless of whether the reimbursement or waiver 
arrangement has been guaranteed.
    32. Item 4 of Form N-3 (referenced in Secs. 239.17a and 274.11b) is 
amended by revising the introductory text of paragraph (a), 
redesignating paragraphs (b), (c), and (d) as paragraphs (c), (d), and 
(e), adding paragraph (b), and adding an instruction to newly 
designated paragraph (d) to read as follows:

Form N-3

* * * * *

Item 4. Condensed Financial Information

    (a) For all registrants other than money market accounts, furnish 
the following information for each class of accumulation units of the 
Registrant, or for such classes of the Registrant and its subsidiaries 
consolidated as prescribed in Rule 6-03 of Regulation S-X [17 CFR 
210.6-03].
* * * * *
    (b) For each money market account, provide a bar graph showing the 
annual total returns of the account for each of the last ten fiscal 
years, or the life of the account if less than ten years. The graph 
should also show the return for each year in numerical form. Accompany 
the graph with a statement or statements that: (1) Past performance is 
not predictive of future performance; (2) money market account 
performance is primarily affected by short-term interest rates and 
expenses (and provide a cross-reference to the Registrant's tabular 
responses to Item 3(a), unless the bar graph and tabular responses to 
Item 3(a) appear on the same page of the prospectus); and (3) financial 
statements providing more detailed information regarding the account's 
performance are contained in the Statement of Additional Information.

Instructions

General

    Briefly explain the nature of the information contained in the bar 
graph and that the information is derived from the financial statements 
in the Statement of Additional Information. The auditor's report as to 
the financial statements need not be included in the prospectus. Note 
that the auditor's report as to the fund's financial data reflected in 
the bar graph is included elsewhere in the registration statement, 
specify its location, and state that it can be obtained by 
shareholders.

Bar Graph Presentation

    1. Partial Years/New Registrants. Do not reflect partial fiscal 
years in the bar graph. The first year shown in the graph will be the 
first full fiscal year for which: (i) The Registrant's registration 
statement was effective (or, in the case of a series, the Registrant 
offered shares of the account); or (ii) the Registrant (or account) 
invested its assets in accordance with its investment objectives.
    2. Total Return. Calculate total return as prescribed in 
Instruction 11 to Item 3(a) of Form N-1A.
    3. Distribution of Capital Gains. If the account made capital gains 
distributions during the period, state in a footnote to the graph what 
the amount of the distribution per share was and state that such 
distribution is reflected in the bar graph by means of a shaded or 
otherwise distinctively marked area within the bar for each year in 
which capital gains distributions were made.
    4. Format. Measure return on the vertical axis of the bar graph and 
measure time in yearly increments on the horizontal axis.
    5. Series Companies. Treat each sub-account as a separate 
Registrant for purposes of this item.
* * * * *
    (d) * * *

Instruction

    A money market account may incorporate its response to this item 
from the Statement of Additional Information. See General Instruction 
G.
* * * * *
    33. Item 5 of Form N-3 (referenced in Secs. 239.17a and 274.11b) is 
amended by revising paragraph (c)(ii), removing paragraph (d), and 
redesignating paragraph (e) as paragraph (d) to read as follows:

Form N-3

* * * * *

Item 5. General Description of Registrant and Insurance Company

* * * * *
    (c) * * *
    (ii) how the Registrant proposes to achieve its objectives, 
including:
    (A) a short description of the types of securities in which the 
Registrant invests or will invest principally and, if applicable, any 
special investment practices or techniques that will be employed in 
connection with investing in such securities;
    (B) if the Registrant proposes to have a policy of concentrating in 
a particular industry or group of industries, identification of such 
industry or industries;
    (C) the identity of other policies of the Registrant that may be 
changed only with the approval of a majority of votes, including those 
policies which the Registrant deems to be fundamental within the 
meaning of Section 8(b) of the 1940 Act; and
    (D) those significant investment policies or techniques (such as 
risk arbitrage, repurchase agreements, forward delivery contracts, 
investing for control or management) that are not described pursuant to 
subparagraphs (A), (B) or (C) above that Registrant employs or intends 
to employ in the foreseeable future.

Instructions

    1. In responding to paragraph (c)(ii) of this item (other than 
paragraph (c)(ii)(B), regarding concentration), it is sufficient for a 
money market account to:
    (a) Describe the characteristics of the account in general terms 
(e.g., that it seeks to maintain a stable net asset value of $1.00 by 
investing in a portfolio of high quality short-term debt obligations, 
issued by corporations, banks, and other financial institutions, etc.) 
without listing or describing the particular instruments in which the 
account may invest or explaining detailed investment policies designed 
to comply with rule 2a-7 of the 1940 Act; and
    (b) If the account limits investment to a group of securities or a 
type of issuer (e.g., to U.S. government securities), identify: (i) the 
group of securities or type of issuer and (ii) any other group of 
securities of type of issuer in which the fund reserves the right to 
invest more than 5% of its assets and state the maximum percentage of 
the fund's assets that may be so invested, unless the account has not 
invested more than 5% of its assets in those securities within the past 
year and has no current intention of doing so in the foreseeable 
future. 

[[Page 38466]]

    2. ``Concentration'', for purposes of paragraph (c)(ii)(B), is 
deemed to be 25% or more of the value of Registrant's total assets 
invested or proposed to be invested in a particular industry or group 
of industries. Registrant's policy on concentration should not be 
inconsistent with Registrant's name.
    3. Discussion of types of investments that will not constitute 
Registrant's principal portfolio emphasis, and of related policies or 
practices, should generally receive less emphasis in the prospectus, 
and under the circumstances set forth below may be omitted or limited 
to information necessary to identify the type of investment, policy, or 
practice. Specifically, and notwithstanding paragraph (c) above:
    (a) If the effect of a policy is to prohibit a particular practice, 
or, if the policy permits a particular practice but the Registrant has 
not employed that practice within the past year and has no current 
intention of doing so in the foreseeable future, do not include 
disclosure as to that policy; and
    (b) If such a policy has the effect of limiting a particular 
practice in such a way that no more than 5% of Registrant's net assets 
are at risk, or, if Registrant has not followed that practice within 
the last year in such a manner that more than 5% of Registrant's net 
assets were at risk, and does not have a current intention of following 
such practice in the foreseeable future in such a manner that more than 
5% of Registrant's net assets will be at risk, disclosure of 
information in the prospectus about such practice should be limited to 
that which is necessary to identify the practice.
* * * * *
    34. Form N-3 (referenced in Secs. 239.17a and 274.11b) is amended 
by adding an instruction following Item 11(c) to read as follows:

Form N-3

* * * * *

Item 11. Purchases and Contract Value

* * * * *
    (c) * * *

Instruction

    In responding to sub-item 11(c), a money market account need only 
state that the accumulation unit value represents a proportionate 
interest in the net assets of the account.
* * * * *
    35. Form N-3 (referenced in Secs. 239.17a and 274.11b) is amended 
by adding an instruction following Item 11(d) to read as follows:

Form N-3

* * * * *

Item 11. Purchases and Contract Value

* * * * *
    (d) * * *

Instruction

    In responding to sub-item 11(d), a money market account that seeks 
to maintain a stabilized accumulation unit value need not state the 
time of day at which the calculation is made. * * *
    36. Form N-3 (referenced in Secs. 239.17a and 274.11b) is amended 
by adding an instruction following Item 12(a) to read as follows:

Form N-3

* * * * *

Item 12. Redemptions

    (a) * * *

Instruction

    In responding to paragraph (a), a money market account Registrant 
need not discuss the timing of unit value pricing but should state how 
the timing of a redemption request will affect the accrual of 
dividends.
* * * * *
    37. Form N-3 (referenced in CFR Secs. 239.17a and 274.11b) is 
amended by adding instruction 3 following Item 19(b) to read as 
follows:

Form N-3

* * * * *

Item 19. Investment Objectives and Policies

* * * * *
    (b) * * *

Instructions:

* * * * *
    3. In responding to this item, money market accounts should include 
descriptions of:
    (a) The types of instruments which it purchases or intends to 
purchase;
    (b) The types of issuers that issue the instruments in which it 
intends to invest;
    (c) Significant investment policies or techniques (e.g., forward 
delivery contracts, repurchase agreements, and standby commitments) 
that the Registrant employs or has the current intention of employing 
in the foreseeable future; and
    (d) The quality, maturity, and diversity restrictions which pertain 
to money market account investments, to the extent such descriptions 
have not been included in the prospectus in response to Instruction 1 
to Item 5(c).
* * * * *
    38. Form N-3 (referenced in Secs. 239.17a and 274.11b), paragraph 
(b) of Item 28, is amended by removing paragraph (16) and redesignating 
paragraph (17) as paragraph (16).
    39. Guide 3 to Form N-3 is amended by removing the word ``basic'' 
in the first paragraph and substituting in its place ``principal''.
    40. Guide 3 to Form N-3 is amended by adding a paragraph 
(unnumbered) after the first (unnumbered) paragraph to read as follows:
Guide 3. Investment Objectives and Policies

* * * * *
    In particular, Registrants with money market accounts are urged to 
be concise in describing the manner in which such accounts propose to 
achieve their investment objectives (item 5(c)). A general description 
of the types of instruments in which a money market account may invest 
(i.e., short-term, high quality instruments) and the types of issuers 
that issue the securities in which it may invest (e.g., corporations, 
banks, etc.) should generally be sufficient. As stated in Instruction 1 
to Item 5, listing or describing each type of instrument in which the 
money market account may invest is not required; however, the 
registrant should identify those groups of securities or types of 
issuers in which the account has reserved the right to invest more than 
5% of its assets, unless it has not invested more than 5% of its assets 
in those securities or issuers within the past year and has no current 
intention of doing so in the foreseeable future. Registrants should 
omit detailed descriptions of rule 2a-7's requirements and the various 
NRSROs and the ratings they assign. More detailed responses regarding 
investment policies and techniques should be provided in the SAI in 
response to Item 13.
* * * * *
    41. Guide 4 to Form N-3 is amended by adding a footnote at the end 
of the first sentence to read as follows:

Guide 4. Types of Securities

* * * * *
    \3\ As set forth in instruction 1 to Item 5, money market funds 
are not required to list or describe the particular instruments in 
which the fund may invest.
* * * * *
    42. Guide 4 to Form N-3 is amended by adding a final paragraph to 
read as follows:

Guide 4. Types of Securities

* * * * *
    If an account holds a material percentage of its assets in 
securities or 

[[Page 38467]]
other assets for which there is no established market, there may be a 
question concerning the ability of the account to make payment within 
seven days of the date its shares are tendered for redemption. The 
usual limit on aggregate holdings of illiquid assets by separate 
accounts is 15 percent of net assets. A money market account is limited 
to investing less than ten percent of its assets in illiquid 
securities.5 An illiquid asset is any asset which may not be sold 
or disposed of in the ordinary course of business within seven days at 
approximately the value at which the mutual fund has valued the 
instrument.6

    \5\ See Investment Company Act Rel. No. 13380 (July 11, 1983), 
48 FR 32555 (July 18, 1983). See also Investment Company Institute 
(pub. avail. Dec. 9, 1992).
    \6\ See Investment Company Act Release No. 14983 (Mar. 12, 1986) 
[51 FR 9773 (Mar. 20, 1986)].
---------------------------------------------------------------------------

* * * * *
    43. Guide 5 to Form N-3 is amended by adding a footnote at the end 
of the first sentence to read as follows:

Guide 5. Portfolio Turnover

* * * * *
    \7\ Money market accounts are not required to discuss the 
effects of portfolio turnover in their prospectuses.

    44. Guide 8 to Form N-3 is amended by adding a sentence in the 
second paragraph (unnumbered) following ``and standby commitment 
agreements.*, to read as follows, and renumbering sequentially all 
subsequent footnotes in the guides to Form N-3:

Guide 8. Senior Securities, Reverse Repurchase Agreements, and Standby 
Commitment Agreements

* * * * *
    * * * Money market accounts should discuss their use of these 
trading practices in the Statement of Additional Information in 
response to Item 19 (see Instruction 1 to Item 5(c)(ii) and Instruction 
3 to Item 19(b)). * * *
    45. Guide 21 to Form N-3 is amended to read as follows:

Guide 21. Government Securities

    If the registrant is investing in United States Government 
securities, the prospectus should explain when and to what extent the 
registrant intends to do so.
    If a registrant other than a money market account is investing 
significantly in United States Government securities on a routine 
basis, the prospectus should include the following information: (1) The 
types of Government securities in which the separate account will 
invest; (2) examples of Government agencies and instrumentalities in 
whose securities the separate account will invest; and (3) whether the 
securities of such agency or instrumentality are (a) supported by the 
full faith and credit of the United States, (b) supported by the 
ability to borrow from the Treasury, (c) supported only by the credit 
of the agency or instrumentality, or (d) supported by the United States 
in some other way. If the registrant is a money market account, the 
disclosure described in (1) through (3) above should be placed in the 
Statement of Additional Information.
    If the registrant is a money market account holding itself out as 
investing in United States Government securities, and the registrant 
does not invest all of its assets in securities backed by the full 
faith and credit of the United States Government, the account should 
not suggest in its prospectus or in its sales material that there is no 
credit risk associated with the account's investments.
    46. Guide 27 to Form N-3 is amended by removing the phrase in the 
first sentence of the tenth paragraph (unnumbered): ``with portfolio 
securities that mature in one year or less''.
* * * * *
    Dated: July 19, 1995.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-18243 Filed 7-25-95; 8:45 am]
BILLING CODE 8010-01-P