[Federal Register Volume 63, Number 55 (Monday, March 23, 1998)]
[Rules and Regulations]
[Pages 13916-13968]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-7070]
[[Page 13915]]
_______________________________________________________________________
Part II
Securities and Exchange Commission
_______________________________________________________________________
17 CFR Parts 230, et al.
Registration Form Used by Open-End Management Investment Companies; New
Disclosure Option for Open-End Management Investment Companies; Final
Rules
Registration Form for Insurance Company Separate Accounts Registered as
Unit Investment Trusts That Offer Variable Life Insurance Policies;
Proposed Rule
Federal Register / Vol. 63, No. 55 / Monday, March 23, 1998 / Rules
and Regulations
[[Page 13916]]
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 230, 232, 239, 240, 270, and 274
[Release Nos. 33-7512; 34-39748; IC-23064; File No. S7-10-97]
RIN 3235-AE46
Registration Form Used by Open-End Management Investment
Companies
AGENCY: Securities and Exchange Commission.
ACTION: Final rules.
-----------------------------------------------------------------------
SUMMARY: The Securities and Exchange Commission is adopting amendments
to Form N-1A, the form used by mutual funds to register under the
Investment Company Act of 1940 and to offer their shares under the
Securities Act of 1933. The amendments are intended to improve fund
prospectus disclosure and to promote more effective communication of
information about funds to investors. The amendments focus the
disclosure in a fund's prospectus on essential information about the
fund that will assist investors in deciding whether to invest in the
fund. The amendments also minimize prospectus disclosure about
technical, legal, and operational matters that generally are common to
all funds.
DATES:
Effective Date: June 1, 1998.
Compliance Dates:
1. Initial Compliance Date: All new registration statements filed
on or after December 1, 1998 must comply with the amendments to Form N-
1A.
2. Final Compliance Date: All funds with effective registration
statements must comply with the amendments to Form N-1A for post-
effective amendments filed to update their registration statements on
or after December 1, 1998, and no later than December 1, 1999.
FOR FURTHER INFORMATION CONTACT: Kathleen K. Clarke, Assistant
Director, Markian M.W. Melnyk, Deputy Chief, George J. Zornada, Team
Leader, Jonathan F. Cayne, Senior Counsel, John M. Ganley, Senior
Counsel, Doretha M. VanSlyke, Attorney, (202) 942-0721, Office of
Disclosure Regulation, or Anthony A. Vertuno, Senior Special Counsel,
(202) 942-0591, Office of the Associate Director (Legal and
Disclosure), Division of Investment Management, Securities and Exchange
Commission, 450 5th Street, N.W., Mail Stop 5-6, Washington, D.C.
20549-6009. Contact the Office of Chief Counsel, Division of Investment
Management, Securities and Exchange Commission, at (202) 942-0659, 450
5th Street, N.W., Mail Stop 5-6, Washington, D.C. 20549-6009 for
additional information, including interpretive guidance, about this
release or Form N-1A, as amended, and related rules.
SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission
(``Commission'') is adopting amendments to Form N-1A [17 CFR 274.11A],
the registration form used by open-end management investment companies
(``funds'') to register under the Investment Company Act of 1940 [15
U.S.C. 80a-1, et seq.] (``Investment Company Act'') and to offer their
shares under the Securities Act of 1933 [15 U.S.C. 77a, et seq.]
(``Securities Act''). The Commission also is adopting technical
amendments to rules 483, 485, 495, and 497 under the Securities Act [17
CFR 230.483, 230.485, 230.495, and 230.497]. In a companion release,
the Commission is adopting new rule 498 [17 CFR 230.498] under the
Securities Act and the Investment Company Act that permits a fund to
provide investors with a new short-form document, called a ``profile,''
which summarizes key information about the fund. If a fund makes a
profile available, an investor would have the option of purchasing the
fund's shares after reviewing the information in the profile or after
requesting and reviewing the fund's prospectus (and other information
about the fund) before making a decision about investing in the fund.
An investor deciding to purchase a fund's shares based on a profile
will receive a copy of the fund's prospectus with the purchase
confirmation.\1\
---------------------------------------------------------------------------
\1\ Investment Company Act Release No. 23065 (Mar. 13, 1998)
(``Profile Adopting Release'').
---------------------------------------------------------------------------
Table of Contents
I. Introduction and Background
II. Discussion
A. Part A--Information in the Prospectus
1. Risk/Return Summary:Investments, Risks, and Performance (Item
2)
a. Investment Objectives and Principal Strategies
b. Risks
2. Risk/Return Summary: Fee Table (Item 3)
3. Investment Strategies and Risk Disclosure (Item 4)
a. Principal Investment Strategies, Investment Objectives, and
Implementation of Investment Objectives b. Risk Disclosure
4. Management's Discussion of Fund Performance (Item 5)
5. Management, Organization, and Capital Structure (Item 6)
a. Management and Organization
b. Capital Structure
6. Shareholder Information (Item 7)
a. General Purchase and Sale Information
b. Valuation of Fund Shares and Net Asset Value
c. Restrictions on Portability
d. Tax Consequences
7. Distribution Arrangements (Item 8)
8. Financial Highlights Information (Item 9)
9. Front and Back Cover Pages (Item 1)
B. Part B--Statement of Additional Information
C. Part C--Other Information
D. General Instructions
1. Reorganizing and Simplifying the Instructions
2. Plain English Disclosure
3. Disclosure Guidelines
4. Modified Prospectuses for Certain Funds
5. Incorporation By Reference
6. Form N-1A Guidelines and Related Staff Positions
E. Technical Rule Amendments
F. Administration of Form N-1A
G. Coordination with the NASD
H. Effective Dates and Transition Period
III. Cost/Benefit Analysis and Effects on Competition, Efficiency,
and Capital Formation
IV. Paperwork Reduction Act
V. Summary of Final Regulatory Flexibility Analysis
VI. Statutory Authority
Text of Rule and Form Amendments
I. Introduction and Background
Over the last decade, the mutual fund industry has grown enormously
both in total assets and in the number of funds.\2\ Today, fund assets
exceed the deposits of commercial banks.\3\ Coincident with the
explosive growth of fund investments, the business operations of many
funds have become increasingly complex as funds offer new investment
options and a wider variety of shareholder services. These factors,
combined with new and more sophisticated fund investments, have
resulted in fund prospectuses that often include long and complicated
disclosure, as funds explain their operations, investments, and
services to investors.
---------------------------------------------------------------------------
\2\ See Investment Company Institute (``ICI''), Mutual Fund Fact
Book 16-23 (37th ed. 1997) (``ICI Fact Book'') and ICI, Trends in
Mutual Fund Investing: September 1997, at 3 (Oct. 30, 1997) (ICI
News No. 97-93) (``ICI Trends'') (between 1990 and 1997, fund assets
increased from $1.1 trillion to $4.4 trillion and the number of
funds increased from 3,105 to 6,666).
\3\ Compare ICI Trends at 1 (fund net assets exceeded $4.4
trillion as of Sept. 1997) with Federal Reserve Bank Statistical
Release H.8: Assets and Liabilities of Commercial Banks in the
United States (Nov. 7, 1997) (commercial bank deposits were
approximately $3.0 trillion as of Oct. 1997).
---------------------------------------------------------------------------
Many have criticized fund prospectuses, finding them
unintelligible, tedious, and legalistic.\4\
[[Page 13917]]
Although the prospectus remains the most complete source of information
about a fund, technical and unnecessarily long prospectus disclosure
often obscures important information about a fund investment and does
not serve the informational needs of the majority of fund investors.\5\
The millions of investors who turn to funds as their investment vehicle
of choice \6\ need clear and comprehensible information to help them
evaluate and compare fund investments.
---------------------------------------------------------------------------
\4\ See, e.g., The Investment Company Act Amendments of 1995:
Hearings Before the Subcomm. on Telecommunications and Finance of
the House Comm. on Commerce, 104th Cong., 1st Sess. 56, 58 (1995)
(statement of Don Powell, President and CEO of Van Kampen American
Capital, Inc.) (noting the frequent complaint that prospectuses are
too long, cumbersome, and legalistic); J. Bogle, Bogle on Mutual
Funds 147 (1994); Rothchild, The War on Gobbledygook, Time, Oct. 31,
1994, at 51; Savage, SEC Doesn't Want 1987's Painful Lessons
Forgotten, Chicago Sun-Times, Oct. 26, 1997, at 53; Sloan, Selling
Attitude, Newsweek, June 17, 1996, at 52; Skrzycki, Prospectuses to
be in English, Donkeys to Fly Tomorrow, Wash. Post, Oct. 21, 1994,
at B1; ``Taking the Mystery Out of Mutual Funds,'' Remarks by Arthur
Levitt, Chairman, SEC, before the Boston Citizens Seminar, Boston,
MA (Feb. 25, 1997); ``Fulfilling the Promise of Disclosure,''
Remarks by Arthur Levitt, Chairman, SEC, before the American Savings
Education Council, New York, NY (July 23, 1997).
\5\ Levitt, Plain English in Prospectuses, N.Y. St. B. J., Nov.
1997, at 37 (``Levitt Article'') (``[D]isclosure is not disclosure
if it doesn't communicate.''). See also Report on the OCC/SEC Survey
of Mutual Fund Investors 12-13 (June 26, 1996) (although fund
investors surveyed consulted the prospectus more than any other
source of information about the fund they bought, they considered
the prospectus only the fifth-best source of information, behind
employer-provided written materials, financial publications, family
or friends, and brokers); ICI, The Profile Prospectus: An Assessment
by Mutual Fund Shareholders 4 (1996) (``ICI Profile Survey'') (about
half of fund shareholders surveyed had not consulted a prospectus
before making a fund investment).
\6\ U.S. households own 74.2% of the mutual fund industry's
assets. ICI Fact Book, supra note 2, at 35.
---------------------------------------------------------------------------
New Disclosure Initiatives
In seeking to improve the quality and usefulness of fund
disclosure, the Commission proposed two major disclosure initiatives on
February 27, 1997.\7\ First, the Commission issued for public comment a
release (the ``Form N-1A Proposing Release'') that proposed significant
amendments to the prospectus disclosure requirements for funds (the
``Proposed Amendments'').\8\ Second, the Commission proposed, in a
companion release, new rule 498 under the Securities Act and the
Investment Company Act that would allow a fund to offer investors the
option to purchase its shares after reviewing the information in the
fund's profile or after requesting and reviewing the fund's prospectus
(and other information about the fund) before making a decision about
investing in the fund.\9\ As proposed, the profile (the ``Proposed
Profile'') would summarize key information about a fund, including the
fund's investment objectives, strategies, risks, performance, and fees.
Under proposed rule 498, a fund would be required to send investors the
fund's prospectus and certain other information within 3 business days
of a request, and any investor purchasing the fund's shares on the
basis of a profile would receive the prospectus with the purchase
confirmation.
---------------------------------------------------------------------------
\7\ As part of these disclosure initiatives, the Securities and
Exchange Commission (the ``Commission'') also proposed a new rule
that would address investment company names that are likely to
mislead investors about the investments and risks of an investment
company. Investment Company Act Release No. 22530 (Feb. 27, 1997)
[62 FR 10955], correction [62 FR 24161]. This proposed rule would
require, among other things, funds and other registered investment
companies with names suggesting a specific investment emphasis to
invest at least 80% of their assets in the type of investment
suggested by their name. The Commission received a number of
substantive comments on the proposed rule, many of which asserted
that the proposal had flaws that the Commission should address. The
Commission's Division of Investment Management (the ``Division'') is
analyzing the comments and expects to recommend a final rule for
Commission consideration in the near future.
\8\ Investment Company Act Release No. 22528 (Feb. 27, 1997) [62
FR 10898], correction [62 FR 24160] (``Form N-1A Proposing
Release'').
\9\ See Investment Company Act Release No. 22529 (Feb. 27, 1997)
[62 FR 10943], correction [62 FR 24160] (``Profile Proposing
Release'').
---------------------------------------------------------------------------
The Commission's disclosure initiatives were intended to: improve
fund disclosure by requiring prospectuses to focus on information
central to investment decisions; provide new disclosure options for
investors; and enhance the comparability of information about funds.
Taken together, these initiatives are designed to promote more
effective communication of information about funds to investors without
reducing the amount of information provided to investors. The Proposed
Amendments reflected the Commission's strong belief that the primary
purpose of the disclosure in a fund's prospectus is to help an investor
make a decision about investing in the fund.\10\ Consistent with this
belief, the objective of the Proposed Amendments was to provide
investors with prospectus disclosure that presents clear, concise, and
understandable information about an investment in a fund.
---------------------------------------------------------------------------
\10\ The Commission is adopting the amendments to Form N-1A
under its authority in section 10(a) of the Securities Act [15
U.S.C. 77j(a)] based on its determination that certain disclosure
requirements result in information that, while useful to some
investors, is not necessary in the public interest or for the
protection of investors to be included in the prospectus.
---------------------------------------------------------------------------
Commenters expressed overwhelming support for the Commission's
disclosure initiatives.\11\ Commenters believed that the Commission's
disclosure initiatives would enhance the quality of disclosure that
funds provide to investors. Some commenters emphasized that improved
disclosure about funds was long overdue and would substantially benefit
investors. In particular, commenters strongly supported the Proposed
Amendments as effective steps toward improving fund prospectuses.
Commenters also provided numerous additional suggestions to improve
prospectus disclosure. The Commission is adopting the initiatives
substantially as proposed.
---------------------------------------------------------------------------
\11\ Eighty-seven percent of the commenters supported the
Proposed Amendments. The Commission received 78 comment letters on
the Proposed Amendments, over half of which were from individual
investors (44 letters or 57%). The Commission also received comment
letters from 8 professional and trade associations, 13 fund groups,
4 law firms, 2 broker-dealers/investment advisers, and 7 other
interested organizations. The comment letters, as well as a comment
summary prepared by the Commission's staff, are available for public
inspection and copying at the Commission's Public Reference Room in
File No. S7-10-97. The Commission received 256 comment letters on
the fund profile, a large number of which were from individual
investors (226 letters or 88%). See Profile Adopting Release, supra
note 1.
---------------------------------------------------------------------------
Prior Commission Disclosure Initiatives
The amendments to the prospectus disclosure requirements adopted
today are another important step in the Commission's ongoing efforts to
improve disclosure about funds. In 1983, the Commission introduced an
innovative approach to prospectus disclosure by adopting a two-part
disclosure format that permitted a fund to provide investors with a
simplified prospectus containing essential information about the fund
and to place more detailed information in a companion document called
the ``Statement of Additional Information'' (``SAI''), which investors
could obtain upon request.\12\ The Commission intended that, under this
format, a fund's prospectus would include essential information about
the fund that would be most useful to typical or average investors in
making an investment decision about the fund. The Commission
contemplated that more detailed discussions of matters geared to the
needs of more sophisticated investors would be available in the SAI,
which all fund investors could obtain upon request. In adopting this
new format, the Commission's goal was to provide investors with more
useful information in ``a prospectus that is substantially shorter and
simpler, so that the prospectus clearly discloses the
[[Page 13918]]
fundamental characteristics of the particular investment company
* * * .'' \13\
---------------------------------------------------------------------------
\12\ Investment Company Act Release No. 13436 (Aug. 12, 1983)
[48 FR 37928] (``1983 Form N-1A Adopting Release'').
\13\ Investment Company Act Release No. 12927 (Dec. 27, 1982)
[48 FR 813, 814] (``1982 Form N-1A Proposing Release'').
---------------------------------------------------------------------------
Since 1983, the Commission has implemented a number of other
initiatives to improve fund prospectus disclosure, including a uniform
fee table \14\ and a requirement that a fund's management discuss the
fund's performance over the past year in its prospectus or annual
report to shareholders (the management's discussion of fund performance
(``MDFP'')).\15\ While these changes have provided investors with clear
and helpful information about fund expenses and performance, they were
not intended to address the overall effectiveness of Form N-1A's
prospectus disclosure requirements. The Proposed Amendments and Form N-
1A, as amended, reflect the Commission's view that current prospectus
disclosure must be considered on a comprehensive basis to ensure that
the prospectus, as a whole, meets the information needs of investors.
---------------------------------------------------------------------------
\14\ See Item 3 of current Form N-1A; Investment Company Act
Release No. 16244 (Feb. 1, 1988) [53 FR 3192] (``Fee Table Adopting
Release'').
\15\ Item 5A of current Form N-1A; Investment Company Act
Release No. 19382 (Apr. 6, 1993) [58 FR 19050] (``MDFP Adopting
Release'').
---------------------------------------------------------------------------
Reassessment of Fund Disclosure
The Commission's recent efforts to improve disclosure began with an
evaluation of the use of a standardized, summary disclosure document
that highlights key information about a fund. The Commission, with the
cooperation of the Investment Company Institute (``ICI'') and several
large fund groups, conducted a pilot program permitting funds to use
profile-like summaries (``Pilot Profiles'') together with their
prospectuses.\16\ The program's purpose was to determine whether
investors found the Pilot Profiles, which summarize important
information about a fund, helpful in making investment decisions. Focus
groups conducted on the Commission's behalf, and fund investors
participating in a survey sponsored by the ICI, responded very
positively to the profile concept.\17\
---------------------------------------------------------------------------
\16\ See Investment Company Institute (pub. avail. July 31,
1995) (``1995 Profile Letter''); Investment Company Institute (pub.
avail. July 29, 1996) (``1996 Profile Letter''). The Division
permitted the pilot program to continue pending the adoption of
proposed rule 498. Investment Company Institute (pub. avail. July
16, 1997) (``1997 Profile Letter''). After the effective date of new
rule 498, a fund could continue to use a Pilot Profile as
supplemental sales literature. See Profile Adopting Release, supra
note 1.
\17\ See ICI Profile Survey, supra note 5, at 31-32.
---------------------------------------------------------------------------
In considering fund disclosure issues, the Commission also has
evaluated over 3,700 letters submitted in response to a release
requesting comment on ways to improve risk disclosure in fund
prospectuses, as well as the comparability of fund risk levels (``Risk
Concept Release'').\18\ The commenters, mostly individual investors,
confirmed the importance of risk disclosure in evaluating and comparing
funds and emphasized the need to improve prospectus disclosure of fund
risks. In particular, commenters indicated that current risk disclosure
is difficult to understand and does not fully convey to investors the
risks associated with an investment in a fund.
---------------------------------------------------------------------------
\18\ See Investment Company Act Release No. 20974 (Mar. 29,
1995) [60 FR 17172] (``Risk Concept Release'').
---------------------------------------------------------------------------
Plain English Initiatives
The fund disclosure initiatives being adopted today are part of the
Commission's broad undertaking to bring sweeping revisions to
prospectus disclosure for all public companies.\19\ As part of its
commitment to make all prospectuses simpler, clearer, and more useful,
and to eliminate jargon and boilerplate, the Commission recently
adopted rule amendments to require the use of plain English principles
in drafting prospectuses and to provide other guidance on improving the
readability of prospectuses.\20\ The Commission's plain English
principles reflect fundamentals of clear communication and contemplate
disclosure documents that:
\19\ See Levitt Article, supra note 5, at 36.
\20\ Rule 421 under the Securities Act [17 CFR 230.421]. See
Securities Act Release No. 7497 (Jan. 28, 1998) [63 FR 6370]
(``Plain English Release'') and discussion infra Section II.D.2. As
part of the plain English initiatives, the Commission plans to issue
A Handbook on Plain English: How to Create Clear SEC Disclosure
Documents, prepared by the Commission's Office of Investor Education
and Assistance.
---------------------------------------------------------------------------
--Present information in an easily readable format;
--Use everyday language that investors can easily understand; and
--Eliminate repetition of disclosure that lengthens a document and
overwhelms the investor.
Improved Fund Disclosure
As one commenter on the disclosure initiatives pointed out, the
Commission's proposals reflect an unprecedented number and variety of
public comments and expert views, the results of Commission and other
research, and broad investor input. The Commission agrees with the
commenter's further observation that the Commission has never had a
more detailed, comprehensive, and compelling basis for a rulemaking
than that developed for the fund disclosure initiatives. Through focus
groups and written comments on the initiatives, investors have
confirmed that they concur strongly with the Commission's view that
fund disclosure documents will be useful only if they communicate
information effectively. The Commission has designed both the fund
prospectus and profile initiatives to meet this goal. The amendments to
Form N-1A seek to make the prospectus, which will remain a fund's
primary disclosure document, a more effective tool by focusing its
contents on information that is essential to an investment in the fund.
The profile responds to investors' strongly expressed desire for a new,
concise disclosure document that summarizes key fund information and
helps investors evaluate and compare funds more easily.
To encourage the use of disclosure that communicates effectively,
the Commission's fund disclosure initiatives include a number of
important innovations:
--The initiatives provide for a standardized risk/return summary at the
beginning of every fund prospectus and in the profile that: \21\
---------------------------------------------------------------------------
\21\ These improvements are based in large part on comments
received in response to the Risk Concept Release. See Risk Concept
Release, supra note 18. The Commission also considered other
information about fund risk disclosure, including the results of an
investor survey sponsored by the ICI. See ICI, Shareholder
Assessment of Risk Disclosure Methods (1996) (``ICI Risk Survey'').
---------------------------------------------------------------------------
--Concisely summarizes information in a specific sequence about a
fund's investment objectives, strategies, risks and performance, and
fees;
--Discusses the risks of a fund's portfolio taken as a whole and
minimizes detailed and technical descriptions of the risks associated
with specific portfolio securities potentially held by the fund; and
--Provides a graphic presentation of a fund's annual returns over a 10-
year period in a bar chart that illustrates the variability of the
fund's returns and gives investors some idea of the risks of an
investment in the fund. To help investors evaluate a fund's risks and
returns relative to ``the market,'' a table accompanying the bar chart
compares the fund's average annual returns for 1, 5, and 10 years with
that of a broad-based securities market index.
--The initiatives require a fund to prepare disclosure documents using
plain English disclosure, which is designed to give investors
[[Page 13919]]
understandable disclosure documents.
--The initiatives eliminate prospectus clutter that obscures other
information helpful to investors when making a decision about an
investment in a fund. Specifically, the amendments to prospectus
disclosure requirements:
--Move certain disclosure about fund organization and legal
requirements from the prospectus to the SAI;
--Permit a fund that is offered as an investment alternative in a
participant-directed defined contribution plan (or certain other tax-
advantaged arrangements) to tailor its prospectus for the plan (or
other arrangement);
--Update and incorporate certain staff interpretive positions into Form
N-1A; \22\ and
---------------------------------------------------------------------------
\22\ The amendments contemplate further that the Division will
consolidate its interpretive positions under the Investment Company
Act relating to, among other things, fund operations in a new
``Investment Company Registration Guide'' (``Registration Guide'').
The Registration Guide is discussed infra Section II.D.6. Form N-1A,
as amended, incorporates certain staff disclosure requirements to
identify those requirements that would apply to all funds regardless
of their particular circumstances. Among other things, this approach
addresses disclosure requirements that have been developed in
connection with an issue presented by a specific fund, but applied
to all funds regardless of their particular circumstances.
---------------------------------------------------------------------------
--Simplify current disclosure instructions to provide clearer guidance
for preparing and filing fund registration statements.
Disclosure Principles
The Commission believes that, in revising Form N-1A and in
providing for the use of profiles, it has laid the foundation for the
development of fund disclosure documents of a significantly higher
quality than those often used today, which have drawn the consistent
criticism of fund investors and others. If the initiatives are to have
their intended effect, however, all those who participate in the
preparation and review of those documents--funds, their legal counsels
and other advisors, the Commission and its staff, and other regulators
and their staffs--should act consistently with the basic disclosure
principles that serve as the cornerstones of the initiatives. These
principles, which are referred to throughout this release, include the
following:
--Funds should design disclosure documents, particularly their
prospectuses, first and foremost, to communicate information to
investors effectively. Funds should present information in prospectuses
following the principles of plain English, using language that is
concise, straightforward, and easy to understand.
--A fund's prospectus principally should include essential information
about the fundamental characteristics of, and risks of investing in,
the fund. Whenever possible, a fund should present this information in
a manner that:
--Assists investors in comparing and contrasting the fund with other
funds;
--Avoids simply restating legal or regulatory requirements to which
funds generally are subject; and
--Avoids a disproportionate emphasis on possible investments or
activities of the fund that are not a significant part of the fund's
investment operations.
--Funds should limit disclosure in prospectuses generally to
information that is necessary for an average or typical investor to
make an investment decision. Detailed or highly technical discussions,
as well as information that may be helpful to more sophisticated
investors, dilute the effect of necessary prospectus disclosure and
should be placed in the SAI.
--Prospectus disclosure requirements should not lead to lengthy
disclosure that discourages investors from reading the prospectus or
obscures essential information about an investment in a fund.
The Commission has instructed its staff to use these principles
consistently in administering the requirements of both amended Form N-
1A and new rule 498 and strongly encourages all other participants in
the development of fund disclosure documents to apply these principles
in preparing their prospectuses and profiles.\23\
---------------------------------------------------------------------------
\23\ The Commission expects that these disclosure principles
also will provide useful guidance in resolving disclosure issues
relating to funds under the federal securities laws as these issues
arise from time to time. See discussion of administration of Form N-
1A, infra Section II.F.
---------------------------------------------------------------------------
II. Discussion
A. Part A--Information in the Prospectus
Form N-1A, as amended, retains the overall structure of current
Form N-1A. The most significant changes to Form N-1A adopted today are
the new risk/return summary at the beginning of the prospectus and
improved disclosure about the risks of investing in a fund. This
release first addresses these changes and then discusses other changes
to substantive prospectus disclosure requirements in Part A of Form N-
1A.\24\ Following this discussion, the release describes revisions to
requirements for information on the front and back cover pages of the
prospectus, the General Instructions to Form N-1A, which have been
updated and revised to make them easier to use, and other technical
revisions to Form N-1A's requirements.\25\
---------------------------------------------------------------------------
\24\ A chart in Appendix A to this release compares the revised
Items in Form N-1A, as amended, to the current Items in Form N-1A.
\25\ Form N-1A, as amended, incorporates certain disclosure
requirements from the Guidelines to current Form N-1A (the
``Guides'') and the Generic Comment Letters (``GCLs'') that have
been issued over time by the Division. See Letters to Registrants
(Jan. 11, 1990) (``1990 GCL''); (Jan 3, 1991) (``1991 GCL''); (Jan.
17, 1992) (``1992 GCL''); (Feb. 22, 1993) (``1993 GCL''); (Feb. 25,
1994) (``1994 GCL''); (Feb. 3, 1995) (``1995 GCL''); (Feb. 16, 1996)
(``1996 GCL''). For a discussion of the Guides and the GCLs, see
infra notes 209-215 and accompanying text.
---------------------------------------------------------------------------
1. Risk/Return Summary: Investments, Risks, and Performance (Item 2)
The Commission proposed to require a risk/return summary at the
beginning of every prospectus that would provide key information about
a fund's investment objectives, principal strategies, risks,
performance, and fees. The risk/return summary, also included in the
Proposed Profile, was intended to respond to investors' strong
preference for summary information about the fund in a standardized
format.\26\ The proposed risk/return summary in a fund's prospectus
would provide investors with a type of ``executive summary'' of key
information about the fund in a standardized, easily accessible place
that investors could use to evaluate and compare the fund to others,
regardless of whether the fund uses a profile.
---------------------------------------------------------------------------
\26\ Participants in focus groups conducted on the Commission's
behalf (``Focus Groups''), for example, expressed strong support for
summary information in a standardized format. Many individuals in
commenting on the profile initiative have confirmed the need for
concise, summary information relating to a fund. See also Joe Six-
Pack: Public Favors Profile Plan, Fund Action, Oct. 1997, at 9;
Profile Prospectuses: An Idea Whose Time Has Come, Mutual Funds
Magazine, Aug. 1996, at 11.
---------------------------------------------------------------------------
While most commenters supported the proposed risk/return summary,
several questioned whether it was necessary in a prospectus. These
commenters argued that the summary could repeat other information in
the prospectus and that it would undermine the Commission's goal of
making prospectus disclosure clear and concise.
The Commission is of the view that the prospectus risk/return
summary will not undermine, but further, the goal of making
prospectuses more useful for investors. The Commission believes that
[[Page 13920]]
the disclosure in the risk/return summary need not generally repeat
other information in the prospectus; much of the summary consists of
information that Form N-1A would not require to be disclosed elsewhere
in the prospectus, such as the bar chart, performance table, and fee
table. The Commission has concluded that the possibility that the risk/
return summary could repeat some information appearing elsewhere in the
prospectus is outweighed by the benefits of providing investors with
standardized and comparable fund information at the beginning of every
prospectus and in the profile. Thus, the Commission is adopting the
requirement that every prospectus and profile contain a risk/return
summary.\27\
---------------------------------------------------------------------------
\27\ Items 2 and 3. Consistent with the goal of providing key
information in a standardized summary, General Instruction C.3(b) to
Form N-1A, as amended, precludes a fund from including information
in the prospectus risk/return summary that is not required or
otherwise permitted by Items 2 and 3. Form N-1A, as amended, does
not require a fund to include any risk disclosure elsewhere in the
prospectus if the requirements of Item 4 of Form N-1A are met by the
disclosure in the fund's risk/return summary (i.e., if a fund is
able to describe its risks, as required by Item 4, in its risk/
return summary, the fund would not need to describe those risks
elsewhere in its prospectus).
---------------------------------------------------------------------------
The Commission proposed to require that the risk/return information
in the prospectus, like that in the Proposed Profile, appear in a
specific sequence and in a question-and-answer format. Many commenters
objected to the question-and-answer format, stating, among other
things, that rigid adherence to the format would not necessarily result
in effective communication of information to investors.\28\ To allow
funds to design effective disclosure documents, the Commission has
determined not to require this format in the prospectus or the profile.
Any fund that chose to do so could use a question-and-answer format in
its prospectus, profile, or in both documents.
---------------------------------------------------------------------------
\28\ See Profile Adopting Release, supra note 1 (discussing
commenters' critiques of the question-and-answer format).
---------------------------------------------------------------------------
a. Investment Objectives and Principal Strategies. The Proposed
Amendments would require a fund to disclose its investment objectives
in the risk/return summary and to summarize, based on the information
provided in its prospectus, how the fund intends to achieve those
objectives. The purpose of the proposed disclosure was to provide a
summary of the fund's principal investment strategies, including the
specific types of securities in which the fund principally invests or
will invest, and any policy of the fund to concentrate its investments
in an industry or group of industries.\29\ The Commission is adopting
this requirement as proposed.\30\
---------------------------------------------------------------------------
\29\ See infra notes 91-101 and accompanying text (discussing
the criteria for determining whether a particular strategy is a
principal strategy and disclosure about concentration policies).
\30\ Items 2 (a) and (b).
---------------------------------------------------------------------------
The information contained in the risk/return summary about a fund's
investment objectives and principal strategies is intended to meet the
needs of an average or typical fund investor. Recognizing that
disclosure about a fund's specific portfolio holdings may be important
to some investors, the Proposed Amendments would require a fund to
inform investors in its prospectus risk/return summary that additional
information about the fund's investments is available in the fund's
shareholder reports.\31\ While supporting the proposed disclosure, most
commenters suggested placing statements about how investors can obtain
a fund's SAI, shareholder reports, and other information about the fund
on the back cover page of the prospectus. According to these
commenters, this disclosure would be easier for investors to find if it
were located in one place rather than in different places in the
prospectus. The Commission agrees with the commenters that typical fund
investors may find a single reference to the availability of additional
information helpful. Therefore, Form N-1A, as amended, requires all
disclosure about the availability of additional information to appear
on the back cover page of the prospectus.\32\ The Commission is
adopting the disclosure as proposed, with minor adjustments to the
language to ensure that the disclosure clearly explains the
availability of additional information about a fund to a typical
investor.\33\
---------------------------------------------------------------------------
\31\ The Commission proposed that the prospectus risk summary
refer to fund shareholder reports. A fund's reports to its
shareholders typically contain a discussion by the fund's management
of the fund's performance (``MDFP''). The Commission believes that
the information in a fund's MDFP, including the discussion of the
fund's performance during its most recent fiscal year, could be
useful to some investors considering an investment in the fund.
The Proposed Amendments would require the risk/return summary to
provide disclosure to the following effect:
Additional information about the fund's investments is available
in the fund's annual and semi-annual reports to shareholders. In
particular, the fund's annual report discusses the relevant market
conditions and investment strategies used by the fund's investment
adviser that materially affected the fund's performance during the
last fiscal year. You may obtain these reports at no cost by calling
____________________.
\32\ Item 1(b). Rule 498, as adopted, requires this disclosure
to appear in the profile risk/return summary. See Profile Adopting
Release, supra note 1.
\33\ The Commission has made a few revisions to the disclosure
about the availability of additional information to make it clearer
and more understandable for investors. Item 1(b)(1) of Form N-1A, as
amended, requires a fund (other than a new fund) to include
disclosure to the following effect on the back cover page of its
prospectus:
Additional information about the fund's investments is available
in the fund's annual and semi-annual reports to shareholders. In the
fund's annual report, you will find a discussion of the market
conditions and investment strategies that significantly affected the
fund's performance during its last fiscal year.
---------------------------------------------------------------------------
b. Risks. Summary Risk Disclosure. The Proposed Amendments would
require the risk/return summary to include a discussion of the
principal risks of investing in a fund that summarizes information
about those risks set out in the fund's prospectus. Reflecting the
Commission's proposed new approach to risk disclosure, this discussion
was intended to summarize the risks of a fund's anticipated portfolio
holdings as a whole, and the circumstances reasonably likely to affect
adversely the fund's net asset value, yield, and total return.
Commenters generally supported the summary risk disclosure contemplated
by the Proposed Amendments, agreeing that it would be specific and
brief and would assist investors in identifying the principal risks of
investing in a particular fund. The Commission is adopting this
disclosure requirement with modifications to reflect certain
commenters' suggestions.\34\
---------------------------------------------------------------------------
\34\ Item 2(c).
---------------------------------------------------------------------------
Several commenters asked the Commission to clarify the scope of the
proposed summary risk disclosure, arguing that the requirement would
not serve its purpose if the risk disclosure simply repeated
information from other sections of the prospectus. In the Commission's
view, the purpose of the summary risk disclosure in a fund's prospectus
is to identify briefly the principal risks of investing in the
particular fund and to emphasize those risks reasonably likely to
affect the fund's performance. In light of this purpose, the Commission
expects a fund, in meeting this requirement, to present only a succinct
summary of the principal risks of investing in the fund and not to
repeat the fuller discussion of these risks required elsewhere in the
prospectus.\35\ On the other hand, the Commission believes that it
generally would be inconsistent with the summary risk requirement for a
fund to include a ``laundry list'' of generic risk factors that may
apply to any fund and
[[Page 13921]]
that does not identify the risks of investing in the fund.
---------------------------------------------------------------------------
\35\ See discussion of risk disclosure, infra Section II.A.3.b.
---------------------------------------------------------------------------
The Commission proposed to require that the prospectus risk summary
identify the types of investors for whom the fund may be an appropriate
or inappropriate investment.\36\ Commenters either opposed or raised
significant concerns about this provision, arguing that it could be
viewed as requiring a fund to determine whether its shares, among other
things, are a suitable investment for a particular investor.\37\
Commenters also stated that the disclosure would tend to be generic and
not meaningful or useful for investors.
---------------------------------------------------------------------------
\36\ As discussed in the Form N-1A Proposing Release, supra note
8, at 10902, the purpose of this disclosure was to help investors
evaluate and compare funds based on their investment goals and
individual circumstances.
\37\ As several commenters pointed out, applicable regulatory
rules for brokers and other investment professionals require that
these determinations be made on the basis of a review of information
about the unique circumstances of an individual investor. See, e.g.,
rule 2310(a) of the National Association of Securities Dealers, Inc.
(``NASD'') Conduct Rules, NASD Manual (CCH) 4261 (suitability of
recommendations to customers) and rule 405 of the New York Stock
Exchange, 2 N.Y.S.E. Guide (CCH) para.2403 (the ``know your
customer'' rule).
---------------------------------------------------------------------------
The Commission is persuaded by commenters that disclosure about the
appropriateness of funds for particular investors should not be
required in all fund prospectuses and has deleted this requirement from
the prospectus risk summary. The Commission believes, however, that
disclosure indicating whether a fund is appropriate for specific types
of investors or is consistent with certain investment goals, even if
generic in nature, may be useful for some investors and may provide a
means for the fund to distinguish itself from other investment
alternatives.\38\ Therefore, Form N-1A, as amended, permits, but does
not require, a fund to include disclosure in the narrative risk summary
about the types of investors for whom the fund is intended or the types
of investment goals that may be consistent with an investment in the
fund.\39\
---------------------------------------------------------------------------
\38\ In a recent review of fund prospectuses, the Division found
many examples of this type of disclosure, which was usually included
in a fund's discussion of the risks associated with an investment in
the fund. For example, one fund disclosed that it was not an
appropriate investment for investors seeking either preservation of
capital or high current income or for those investors unable to
assume the increased risks of higher price volatility and currency
fluctuations associated with investments in international equities
traded in non-U.S. currencies. Another fund urged investors to
remember that the fund was an aggressive capital appreciation fund
designed for long-term investors for a portion of their investments
and was not designed for investors seeking income or conservation of
capital. Tax-exempt funds frequently stated that an investment in
the fund is not appropriate for Individual Retirement Accounts or
other tax-advantaged accounts.
\39\ Instruction to Item 2(c)(1)(i).
---------------------------------------------------------------------------
Under the Proposed Amendments, a fund could choose to discuss the
potential rewards of investing in the fund in the risk summary as long
as the discussion provided a balanced presentation of the fund's risks
and rewards. One commenter strongly questioned this provision of the
proposal, asserting that it would detract from a clear presentation of
risks in the risk summary. The Commission has reconsidered this
disclosure in light of the intended standardized and summary nature of
the risk summary and has concluded that the disclosure should focus
solely on the risks of investing in a fund. Thus, the Commission has
determined to eliminate the option to describe the rewards of investing
in a fund in the risk summary. A fund desiring to add this disclosure
elsewhere in its prospectus can do so subject to Form N-1A's general
rule with respect to information that is not required to be in a
prospectus. Under this general rule, a fund can disclose this
information, so long as it is not incomplete or misleading and would
not obscure or impede understanding of the information that is required
to be in the prospectus.\40\
---------------------------------------------------------------------------
\40\ See General Instruction C.3(b).
---------------------------------------------------------------------------
Special Risk Disclosure Requirements. The Proposed Amendments were
intended to simplify the prospectus cover page and to avoid repeating
information on the cover page and in the risk summary discussion. In
seeking to meet this goal, the Commission proposed to move certain
cover page disclosure requirements relating to the risks associated
with specific types of funds to the risk summary where, the Commission
believed, it would be more meaningful to investors.
Form N-1A currently requires that each money market fund \41\
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 of $1.00 per share. This required disclosure is
intended to alert investors that investing in a money market fund is
not without risk.\42\ In addition to moving this disclosure to the risk
summary, the Proposed Amendments would simplify the technical
disclosure that a money market fund may not be able to maintain a
stable net asset value.\43\ Commenters supported the proposed
disclosure for money market funds, and the Commission is adopting it as
proposed.\44\
---------------------------------------------------------------------------
\41\ For these purposes, a money market fund is defined as a
fund that holds itself out to investors as a money market fund and
meets the conditions of paragraphs (c)(2), (c)(3), and (c)(4) of
rule 2a-7 under the Investment Company Act [17 CFR 270.2a-7].
General Instruction A.
\42\ See Investment Company Act Release Nos. 17589 (July 17,
1990) [55 FR 30239, 30247] and 18005 (Feb. 20, 1991) [56 FR 8113,
8123] (proposing and adopting revisions to rule 2a-7 for money
market funds).
\43\ The Proposed Amendments would require the following
disclosure:
An investment in the Fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by
investing in the Fund.
\44\ Item 2(c)(1)(ii).
---------------------------------------------------------------------------
Form N-1A currently requires specific prospectus cover page
disclosure for a tax-exempt money market fund that concentrates its
investments in a particular state (a ``single state money market
fund''). Each such fund is required to disclose that it may invest a
significant percentage of its assets in a single issuer and that
investing in the fund may be riskier than investing in other types of
money market funds. This disclosure was intended to make investors
aware of special risks that could be associated with an investment in a
single state money market fund.\45\ In the Form N-1A Proposing Release,
the Commission asked whether it should continue to require this
disclosure in prospectuses. The Commission noted that this disclosure
may exaggerate the risk of investing in a single state money market
fund. As the Form N-1A Proposing Release pointed out, although these
funds are subject to less stringent issuer diversification provisions
under Commission rules than other money market funds, they are subject
to credit quality and maturity investment restrictions that are
comparable to other money market funds.\46\
---------------------------------------------------------------------------
\45\ Form N-1A currently does not require this disclosure if,
with respect to 100% of its assets, a fund limits its investments in
a single issuer to no more than 5% of its assets.
\46\ See Form N-1A Proposing Release, supra note 8, at 10904.
Under rule 2a-7, a ``national'' tax-exempt money market fund
generally is limited to investing no more than 5% of its assets in
the securities of a single issuer. For a single state money market
fund, the 5% single issuer limitation applies with respect to 75% of
the fund's assets. This limitation recognizes that single state
money market funds concentrate their investments in debt securities
issued by a single state (or issuers located within that state),
making diversification more difficult to achieve. See Investment
Company Act Release Nos. 21837 (Mar. 21, 1996) [61 FR 13956] and
22921 (Dec. 2, 1997) [62 FR 64968].
---------------------------------------------------------------------------
In response to the Commission's question regarding single state
money market funds, commenters indicated that the special disclosure
now required
[[Page 13922]]
on the cover page of fund prospectuses overstates the risks of
investing in single state money market funds, particularly in view of
the minimal risk that commenters asserted is associated with these
funds. The Commission is persuaded by these comments and has determined
not to require the disclosure in Form N-1A.
Form N-1A currently requires a fund that is advised by or sold
through a bank to disclose on the cover page of its prospectus that the
fund's shares are not deposits or obligations of, nor guaranteed or
endorsed by, the bank, and that the shares are not insured by the
Federal Deposit Insurance Corporation (``FDIC'') or any other
government agency.\47\ This disclosure is intended to alert investors
that funds advised by or sold through banks are not federally
insured.\48\ The Commission proposed to move this disclosure to the
prospectus risk summary and to simplify the wording of the current
disclosure required for funds advised by or sold through banks.\49\
Commenters supported the revised disclosure requirements for bank-sold
funds, and the Commission is adopting them substantially as
proposed.\50\
---------------------------------------------------------------------------
\47\ 1994 GCL, supra note 25; Letter to Registrants from Barbara
J. Green, Deputy Director, Division of Investment Management, SEC
(May 13, 1993) (``Division Bank Letter'').
\48\ See Division Bank Letter, supra note 47. See also Testimony
of Ricki Helfer, Chairman, Federal Deposit Insurance Corporation
(``FDIC''), on FDIC Survey of Nondeposit Investment Sales at FDIC-
Insured Institutions Before the Subcomm. on Capital Markets,
Securities, and Government Sponsored Enterprises of the House Comm.
on Banking and Financial Services, 104th Cong., 2d Sess. (June 26,
1996) (citing surveys in October 1995 and April 1996 indicating that
approximately one-third of bank customers either thought that, or
did not know whether, funds sold through banks were insured).
\49\ The Proposed Amendments would require a fund that is not a
money market fund but is advised by or sold through a bank to
disclose that its shares are not federally insured as follows:
An investment in the Fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government
agency.
\50\ Item 2(c)(1)(iii). Some commenters asserted that the
proposed disclosure was inconsistent with that required by bank
regulators in the Interagency Statement on Retail Sales of
Nondeposit Investment Products. See Board of Governors of the
Federal Reserve System, FDIC, Office of the Comptroller of the
Currency, and Office of Thrift Supervision, Interagency Statement on
Retail Sales of Nondeposit Products, 6 Fed. Banking L. Rep. (CCH)
para. 70-113, at 82,598 (Feb. 15, 1994) (``Interagency Statement'')
(requiring disclosure that the fund is not a deposit or other
obligation of the bank). The Commission has confirmed with these
bank regulators that no such inconsistency exists, because the
disclosure required by the Interagency Statement applies to sales
material and not to fund prospectuses. In response to suggestions
from the bank regulators, the Commission has revised the legend
required for funds that are advised by or sold through banks, to
read as follows:
An investment in the Fund is not a deposit of the bank and is
not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
The requirement, as amended in this way, is consistent with the
requirement now in effect.
---------------------------------------------------------------------------
Risk/Return Bar Chart and Table. The Proposed Amendments would
require a fund's risk/return summary to include a bar chart showing the
fund's annual returns for each of the last 10 calendar years and a
table comparing the fund's average annual returns for the last 1-,
5-, and 10-fiscal years to those of a broad-based securities market
index. Commenters generally supported the proposed bar chart and
performance table, but had a number of suggestions about the content
and presentation of the information in both. The Commission is adopting
the proposed bar chart and table requirements with modifications to
reflect suggestions of commenters.\51\
---------------------------------------------------------------------------
\51\ Item 2(c)(2). An example of the bar chart and performance
table is attached as Appendix B to this release.
---------------------------------------------------------------------------
The bar chart reflects the Commission's determination that
investors need improved disclosure about the risks of investing in a
fund. The bar chart is intended to illustrate graphically the
variability of a fund's returns (e.g., whether a fund's returns for a
10-year period have changed significantly from year to year or were
relatively even over the period) and thus provide investors with some
idea of the risk of an investment in the fund.\52\ The average annual
return information in the table should enable investors to evaluate a
fund's performance and risks relative to ``the market.''
---------------------------------------------------------------------------
\52\ In adopting the bar chart requirement, the Commission does
not mean to suggest that all, or even a significant portion of all,
fund investors equate variability in a fund's returns with the risks
of investing in the fund. As discussed below, the Commission
acknowledges that investors have a wide range of ideas of what
``risk'' means. See infra Section II.A.3. Nonetheless, the
Commission's bar chart proposal was supported by many investors who
expressed strong interest in seeing prospectuses include a version
of the bar chart. Focus group participants, for instance, found the
bar chart helpful in evaluating and comparing fund investments. Over
75% of individual investors responding to the Risk Concept Release
favored a bar chart presentation of fund volatility. Risk Concept
Release, supra note 18. See also ICI, Understanding Shareholders'
Use of Information and Advisers (1997) (``ICI Shareholder Use
Study'') at 20 and 30 (discussing investors' interest in receiving
and understanding fund risk information) and ICI Risk Survey, supra
note 21. In addition, all commenters responding to the Commission's
initiative to simplify money market fund prospectuses supported the
proposal to replace the financial highlights information in money
market fund prospectuses with a 10-year bar chart reflecting a money
market fund's yield. See Summary of Comment Letters on Proposed
Amendments to the Rules Regulating Money Market Fund Prospectuses
Made in Response to Investment Company Act Release No. 21216, at 2
(File No. S7-21-95).
---------------------------------------------------------------------------
In the Form N-1A Proposing Release, the Commission requested
comment about alternative presentations that could improve fund risk
disclosure.\53\ In particular, the Commission expressed interest in
disclosure that would show a fund's highest and lowest returns (or
``range'' of returns) for annual or other periods as an alternative, or
in addition, to the bar chart. The Commission suggested that a fund
could present the information in a separate table or could include it
in the performance table.
---------------------------------------------------------------------------
\53\ See Form N-1A Proposing Release, supra note 8, at 10907.
---------------------------------------------------------------------------
In response to the Commission's request, some commenters suggested
including in a fund's bar chart one or more indexes or other benchmarks
(such as 3-month Treasury returns or the rate of inflation) to help
investors evaluate the fund's returns by comparisons to other measures
of market performance or economic factors.\54\ Most commenters,
however, opposed requiring additional information in the bar chart,
asserting that it could complicate and reduce the effectiveness of the
bar chart.
---------------------------------------------------------------------------
\54\ Form N-1A, as amended, permits a fund to use other indexes
in the presentation of the average annual return information in the
table accompanying the bar chart. Instruction 2(b) to Item 2(c)(2).
---------------------------------------------------------------------------
Several commenters supported the inclusion of return information in
the bar chart on a quarterly or semi-annual rather than an annual
basis. They argued that this change to the bar chart would respond to
concerns that investors may not sufficiently appreciate that an
investment in a fund may be subject to the risk of a short-term decline
in value. This risk, commenters asserted, may not be apparent from the
annual returns proposed to be shown in the bar chart. One commenter
recommended that the Commission require quarterly returns in the bar
chart so that investors would have more information about returns over
shorter periods to use in assessing the variability reflected in a
fund's past returns. The commenter argued that including returns on an
annual basis in the bar chart may not show a significant amount of
shorter-term price fluctuation.
The Commission acknowledges that a fund's returns may vary
significantly and could decrease in value over short periods and that
the annual returns in the bar chart will not necessarily reflect this
pattern. On the other hand, the Commission is concerned that requiring
quarterly returns over a 10-year period would make the bar chart more
complex and less useful in communicating information to investors. In
balancing the desire to make typical fund investors aware that fund
shares may
[[Page 13923]]
experience fluctuations over shorter periods with its underlying goal
that fund documents communicate information in as straightforward and
uncomplicated a manner as possible, the Commission has determined to
require a fund to disclose, in addition to the bar chart, its best and
worst returns for a quarter during the 10-year (or other) period
reflected in the bar chart.\55\ The Commission believes that this
information will assist investors in understanding the variability of a
fund's returns and the risks of investing in the fund by illustrating,
without adding unwarranted complexity to the bar chart, that the fund's
shares may be subject to short-term price fluctuations.
---------------------------------------------------------------------------
\55\ Item 2(c)(2)(ii).
---------------------------------------------------------------------------
Presentation of Return Information. The Proposed Amendments would
require a fund to include the bar chart and table in the risk section
of the prospectus risk/return summary under a separate sub-heading that
referred to both risk and performance. Several commenters argued that
the separate sub-heading requirement was unnecessary and suggested that
a fund should be able to choose whether to include any sub-heading.
Consistent with the objective of encouraging funds to develop
disclosure formats that are most helpful to investors, Form N-1A, as
amended, does not require the sub-heading included in the Proposed
Amendments.\56\ To help investors use the information in the bar chart
and table, Form N-1A, as amended, however, does require a fund to
provide a brief narrative explanation of how the information
illustrates the variability of the fund's returns.\57\
---------------------------------------------------------------------------
\56\ General Instruction C.1(a) to Form N-1A, as amended,
encourages funds to use document design techniques that promote
effective communication.
\57\ Item 2(c)(2)(i).
---------------------------------------------------------------------------
Bar Chart Return Information. The Proposed Amendments would require
that a fund's prospectus bar chart show the fund's annual returns for
the last 10 calendar years of the fund's existence. The purpose of the
calendar year requirement was to facilitate the comparison of annual
returns among funds, which typically have fiscal periods that do not
correspond to the calendar year.\58\ Unlike the proposed bar chart, the
proposed performance table required disclosure of a fund's returns for
fiscal year periods. In requiring this disclosure to be made for fiscal
year periods, the proposal was consistent with existing disclosure
requirements for the presentation of other financial information
included in a fund's prospectus.
---------------------------------------------------------------------------
\58\ The Commission understands that funds increasingly organize
themselves as series companies and tend to stagger the financial
periods of their series so that audits and financial reporting
periods are spread over an entire calendar year.
---------------------------------------------------------------------------
Several commenters argued that using different time periods for the
proposed bar chart and performance table would confuse investors and
urged the Commission to minimize potential investor confusion by
adopting consistent time periods for this information. The Commission
is persuaded by these comments and believes that requiring both the bar
chart and the performance table to be based on calendar year periods
will promote understandable information in fund prospectuses.
Therefore, Form N-1A, as amended, requires calendar year periods for
both the bar chart and table.\59\ Rule 498, as adopted, also requires
the bar chart and table in the profile to show calendar year data so
that both the profile and the prospectus of a fund will have virtually
the same risk/return information.\60\
---------------------------------------------------------------------------
\59\ Item 2(c)(2). Form N-1A, as amended, requires a fund to
have at least one calendar year of returns before including the bar
chart and requires a fund to modify the narrative explanation
accompanying the bar chart and table if the fund does not include
the bar chart (e.g., by stating that the information gives some
indication of the risks of an investment in the fund by comparing
the fund's performance with a broad measure of market performance).
Form N-1A, as amended, also requires the bar chart of a fund in
operation for fewer than 10 years to include calendar year returns
for the life of the fund.
\60\ Rule 498(c)(2)(iii). Unlike Form N-1A, as amended, rule
498, as adopted, requires average annual return information in the
performance table in the profile to be as of the most recent
calendar quarter and updated as soon as practicable after each
quarter of a calendar year. See Profile Adopting Release, supra note
1. A fund would update the average annual return information
included in its prospectus when filing the annual update of its
registration statement required by section 10(a)(3) of the
Securities Act.
---------------------------------------------------------------------------
The Commission is adopting, as proposed, the requirement that a
fund calculate the annual returns in the bar chart using the same
method required for calculating annual returns in the financial
highlights information included in fund prospectuses.\61\ The bar chart
does not reflect sales loads assessed upon the sale of a fund's shares,
although the average annual return information for the fund in the
table would reflect the payment of any sales loads.\62\ Commenters
generally supported this presentation of annual return information. The
Commission believes that, in light of the different types of sales
loads that may be charged on funds shares, it would be difficult for
funds to compute annual returns for the purposes of the bar chart and
to communicate the information effectively to investors.\63\ In
addition, the Commission has concluded that more precise return
information is not necessary for the bar chart to serve the purpose of
graphically showing fund annual returns and illustrating the
variability of an investment in a fund over a 10-year period.
---------------------------------------------------------------------------
\61\ Instruction 1(a) to Item 2(c)(2). Form N-1A, as amended,
requires a fund to present the corresponding numerical return
adjacent to each bar. Item 2(c)(2)(ii).
\62\ Instruction 2(a) to Item 2(c)(2). Form N-1A, as amended,
requires a fund whose shares are sold subject to a sales load to
disclose that the load is not reflected in the bar chart and that,
if it were included, returns would be less than those shown.
Instruction 1(a) to Item 2(c)(2).
\63\ In contrast, sales loads can be accurately and fairly
reflected in annual return information of the type contained in the
table by deducting sales loads at the beginning (or end) of
particular periods from a hypothetical initial fund investment.
---------------------------------------------------------------------------
Bar Chart Presentation. The Proposed Amendments would allow a
single bar chart to include return information for more than one fund.
Most commenters supported the proposal, agreeing that it would give
funds the appropriate amount of flexibility to present the information
in the bar chart in a manner designed to assist investors in making
investment decisions. Under Form N-1A, as amended, the bar chart may
include returns for more than one fund, subject to the general
requirement that the information presented in the bar chart appear in a
clear and understandable manner.\64\
---------------------------------------------------------------------------
\64\ See General Instruction C.3(c).
---------------------------------------------------------------------------
Multiple Class Funds. Although the Commission proposed to permit
return information for more than one fund to be included in a single
bar chart, the Proposed Amendments would require a fund offering more
than one class of its shares in a prospectus to limit the information
in the fund's bar chart to one class. Commenters uniformly supported
this approach, and the Commission is adopting it as proposed.\65\
Unlike individual funds, classes of a fund represent interests in the
same portfolio of securities, and the returns of each class differ only
to the extent the classes do not have the same expenses. The Commission
believes that including return information for all classes offered
through a fund's prospectus is not necessary to provide some indication
of the risks of investing in the fund. In addition, the table
accompanying such a fund's bar chart would provide return information
for each class offered in the prospectus so that investors would be
able to identify and compare the performance of each class.\66\
---------------------------------------------------------------------------
\65\ Instruction 3(a) to Item 2(c)(2).
\66\ Instruction 3(c) to Item 2(c)(2).
---------------------------------------------------------------------------
The Proposed Amendments would require the bar chart of a fund
offering more than one class of shares through a prospectus to reflect
annual return
[[Page 13924]]
information for the class offered in the prospectus that had the
longest performance history over the last 10 years. When two or more
classes have returns for at least 10 years, or returns for the same
period but fewer than 10 years, the Proposed Amendments would require
annual returns for the class with the greatest net assets as of the end
of the most recent calendar year. Most commenters addressing the issue
opposed this approach. They argued that, if all classes had existed for
the same amount of time, the largest class could change from year to
year, thus requiring a fund to change the class reflected in the bar
chart. According to the commenters, changes in the information each
year could be confusing for investors and result in unwarranted
administrative burdens for funds. Commenters suggested that the
Commission permit a fund having classes with performance histories
extending over the same period of time to include the performance of
any existing class in the bar chart, maintaining that the effect of
expenses on the returns for different classes of shares is not
significant.\67\ The Commission is persuaded that allowing a multiple
class fund in such a case to choose the class reflected in the fund's
bar chart will simplify compliance with Form N-1A's requirements and
provide investors with sufficient information to evaluate the
variability of returns for any class of the fund. Therefore, Form N-1A,
as amended, permits a fund to choose the class to be reflected in the
bar chart, subject to certain limitations.\68\ Under Form N-1A, as
amended, the bar chart must reflect the performance of any class that
has returns for at least 10 years (e.g., a fund could not present a
class in the bar chart with 2 years of returns when another class has
returns for at least 10 years). In addition, if two or more classes
offered in the prospectus have returns for different periods shorter
than 10 years, the bar chart must reflect returns for the class that
has returns for the longest period.
---------------------------------------------------------------------------
\67\ In making this argument, commenters cited rule 18f-3 under
the Investment Company Act [17 CFR 270.18f-3], which provides that a
class of shares may have different expenses for shareholder service
fees, distribution fees, or other expenses actually incurred in a
different amount by the class. The rule does not permit expenses for
advisory or custodial fees, or other management fees, to vary among
classes.
\68\ Instruction 3(a) to Item 2(c)(2).
---------------------------------------------------------------------------
Tabular Presentation of Fund and Index Returns. The Proposed
Amendments would require a table accompanying a fund's bar chart to
present the fund's average annual returns for the last 1-, 5-, and 10-
fiscal years (or for the life of the fund, if shorter) and to compare
that information to the returns of a broad-based securities market
index for the same periods. The purpose of including return information
for a broad-based securities market index was to provide investors with
a basis for evaluating a fund's performance and risks relative to the
market. The proposed approach also was consistent with the line graph
presentation of fund performance required in MDFP disclosure.\69\
---------------------------------------------------------------------------
\69\ See MDFP Adopting Release, supra note 15, at 19054.
---------------------------------------------------------------------------
Commenters generally supported the proposed performance table, but
had several technical suggestions. The Commission is adopting the
performance table with revisions to clarify the disclosure requirements
for the table.\70\
---------------------------------------------------------------------------
\70\ Item 2(c)(2)(ii). Consistent with the Proposed Amendments,
Form N-1A, as amended, requires a fund to calculate average annual
returns using the same method required to calculate fund performance
included in advertisements, which reflects the payment of sales
loads and recurring shareholder account fees. Instruction 2(a) to
Item 2(c)(2) (incorporating the requirements of Item 21).
---------------------------------------------------------------------------
One commenter suggested that the Commission allow funds that have
existed for more than 10 years to include average annual returns for
the life of the fund in the performance table. The Commission agrees
that this information could be helpful for typical investors in such a
fund. Form N-1A, as amended, permits, but does not require, a fund to
include performance information in the table for the life of the fund
if it exceeds 10 years.\71\
---------------------------------------------------------------------------
\71\ Item 2(c)(2)(iii). Form N-1A, as amended, permits a fund
that has not had the same adviser for the last 10 years to begin the
bar chart and performance information in the table on the date the
new adviser began to provide advisory services to the fund, so long
as certain conditions are met. Instruction 4 to Item 2(c)(2). Form
N-1A, as amended, also requires a fund that changes the index shown
in the table to explain the reasons for the change and provide
information for both the newly selected and the former index.
Instruction 2(c) to Item 2(c)(2). Each of these provisions is
consistent with the requirement applicable to the MDFP line graph.
Instructions 7 and 11 to Item 5(b).
---------------------------------------------------------------------------
The Proposed Amendments would require a money market fund, in
meeting the proposed performance table requirement, to provide its 7-
day yield as of the end of its most recent fiscal year. One commenter
questioned this requirement, arguing that it would result in money
market funds giving outdated information to investors and suggested
that disclosure describing how an investor can obtain the fund's
current 7-day yield would be preferable. As amended, Form N-1A gives a
money market fund the option of providing in its performance table its
7-day yield ending on the date of its most recent calendar year or
disclosing a toll-free (or collect) telephone number that an investor
can use to contact the fund to obtain its current 7-day yield.\72\
---------------------------------------------------------------------------
\72\ Item 2(c)(2)(iii).
---------------------------------------------------------------------------
2. Risk/Return Summary: Fee Table (Item 3)
The Proposed Amendments would continue to require a fee table in
the prospectus that summarizes the sales charges and fund operating
expenses associated with an investment in a fund. Proposed rule 498
also incorporates the fee table requirement in the risk/return summary
included in the profile. Including the fee table in both the prospectus
and the profile reflects the Commission's strongly held belief in the
importance of fees and expenses in a typical investor's decision to
invest in a fund. The fee table is designed to help investors
understand the costs of investing in a fund and to compare those costs
with the costs of other funds. Commenters generally supported the fee
table disclosure, and the Commission is adopting it substantially as
proposed.
The Commission proposed certain amendments designed to improve
communication of the information in the fee table. The Commission
proposed to require a narrative explanation of the purpose of the
``Example'' that accompanies the fee table.\73\ Recognizing the trend
that the typical fund investment is increasing in size,\74\ the
Proposed Amendments would increase the initial hypothetical investment
included in the Example from $1,000 to $10,000.
---------------------------------------------------------------------------
\73\ The Example currently discloses the cumulative amount of
fund expenses over 1, 3, 5, and 10 years based on a hypothetical
investment of $1,000 and an annual 5% return. The Commission
proposed to require funds to include a narrative explanation to the
following effect:
This Example is intended to help you compare the cost of
investing in the fund to the cost of investing in other mutual
funds.
\74\ See Letter from John C. Bogle, Chairman of the Board, The
Vanguard Group, to Barry P. Barbash, Director, Division of
Investment Management, SEC (Sept. 16, 1996) (suggesting that few
investors have as little as $1,000 invested in a given fund, and
that the average fund investment typically amounts to $10,000 to
25,000, with the median investment probably in the range of $6,000
to 7,000).
---------------------------------------------------------------------------
Several commenters criticized the Example, arguing that, because it
is an arbitrary approximation of a fund's actual expenses, the Example
is not helpful to investors. These commenters recommended that the
Commission eliminate the Example from the fee table disclosure.
The Commission recognizes that any example necessarily has
limitations. On balance, however, the Commission believes that the
Example provides
[[Page 13925]]
useful information that helps a typical investor understand and compare
the expenses of different funds.\75\ The Example is a relatively
straightforward means of illustrating the effect of costs in investing
in a fund over time. Expressing expense amounts solely as a percentage
amount, as is done in the fee table, may not give the average investor
enough information to assess the likely effect of a fund's expenses on
a dollar amount of an investment in the fund. The addition of a clear
narrative explanation of the purpose of the Example should increase its
effectiveness in assisting investors' understanding of the Example, and
the Commission is adopting this disclosure requirement as proposed.\76\
---------------------------------------------------------------------------
\75\ See Fee Table Adopting Release, supra note 14, at 3194.
\76\ Item 3.
---------------------------------------------------------------------------
To ensure that all account fees (e.g., administrative fees charged
to maintain an account) paid directly by shareholders are disclosed,
the Proposed Amendments would require a new line item in the
shareholder transaction section of the fee table describing account
fees charged by a fund. The Commission is adopting this requirement as
proposed.\77\ In response to comments on the Proposed Amendments, Form
N-1A, as amended, clarifies that the table should include account fees
that affect a typical investor in a fund and not miscellaneous fees
that apply to only a limited number of shareholders based on their
particular circumstances.\78\
---------------------------------------------------------------------------
\77\ Form N-1A, as amended, clarifies that a fund should
disclose only fees charged by or on behalf of the fund, not fees
charged by unrelated third parties. Instruction 1(c) to Item 3.
\78\ Instruction 2(d) to Item 3. For example, Form N-1A would
not require a fund to include in the fee table a fee charged to
accounts with small balances (e.g., $10 annual fee on accounts less
than $2,500).
---------------------------------------------------------------------------
The Commission proposed to modify some of the captions in the fee
table relating to fees and expenses. The revisions were intended to
result in fee tables referring consistently to different types of
expenses as ``fees.'' In particular, the Proposed Amendments would
change the captions for ``sales loads'' to ``sales fees (loads).'' The
Proposed Amendments also would revise the caption ``12b-1 Fees'' to
read ``Marketing (12b-1) Fees.'' Commenters generally criticized these
changes. They maintained that the caption sales fees (loads) was not
typically used by the industry or industry commentators and could be
confusing to investors. The commenters recommended that the caption in
the fee table refer to ``sales charges.'' Commenters also recommended
that the caption ``Distribution [and/or Service] (12b-1) Fees'' would
better describe these fees than the term ``Marketing (12b-1) Fees.''
Commenters said that the types of fees that can be paid in accordance
with rule 12b-1 under the Investment Company Act extend beyond
marketing fees so that referring to rule 12b-1 fees as marketing fees
would be inaccurate.
The Commission believes that the terms suggested by commenters are
commonly used by the industry and by the press in covering the industry
and may be more easily understood by investors than those proposed.
Form N-1A, as amended, modifies the caption for sales fees (loads) to
refer to sales charges (loads).\79\ The Commission is retaining the
reference to loads because many investors are familiar with this term.
Form N-1A, as amended, also requires funds to use the captions
suggested by the commenters in referring to distribution fees in the
fee table.
---------------------------------------------------------------------------
\79\ Item 3.
---------------------------------------------------------------------------
The Commission proposed to continue to require a fund to reflect in
the fee table its operating expenses for the most recent fiscal year,
taking into account expense reimbursements and fee waiver
arrangements.\80\ As required by current Form N-1A, a footnote to the
fee table would disclose the amount of expenses that would have been
incurred had there been no waiver or reimbursement. One commenter
expressed strong opposition to showing expenses in the fee table that
are reduced by reimbursements or fee waivers. The commenter asserted
that investors would interpret the disclosure to mean that the net fee
disclosed in the table is what they can expect for the life of their
investment in the fund, which may not be the case.
---------------------------------------------------------------------------
\80\ In an expense reimbursement arrangement, the adviser
reimburses the fund for any expenses that exceed a predetermined
amount. Under a fee waiver arrangement, the adviser agrees to waive
a portion of its fees in order to limit fund expenses to a
predetermined amount.
---------------------------------------------------------------------------
The Commission believes that typical investors need clear
disclosure of information about fees charged by funds.\81\ Reflecting
its continuing concern about the quality of disclosure about fees, the
Commission has reconsidered the disclosure of expense reimbursement and
fee waiver arrangements. The Commission believes that typical investors
may tend to overlook or disregard information about a fund's fee
structure if it is included in a footnote. Moreover, requiring the fee
table to show fees that a fund will charge under its contractual
arrangement with its investment adviser, without regard to temporary
arrangements that may decrease these fees, is consistent with other
Form N-1A requirements.\82\
---------------------------------------------------------------------------
\81\ See, e.g., Testimony of Arthur Levitt, Chairman, SEC,
before the Subcomm. on Finance and Hazardous Materials of the House
Comm. on Commerce (Mar. 6, 1997) (explaining the Commission's
concern about investor confusion with fund fees); Remarks by Steven
M.H. Wallman, Commissioner, SEC, before the ICI's 1995 Investment
Company Directors Conference and New Directors Workshop, Washington,
D.C. (Sept. 22, 1995) (noting investors' confusion about the
assessment of advisory fees).
\82\ See, e.g., Instruction 2(a)(i) to Item 3 (requiring funds
to disclose deferred sales charges even though they apply only to
investors leaving the fund). See also ``From Security to Self-
Reliance: American Investors in the 1990s,'' Remarks by Arthur
Levitt, Chairman, SEC, before the ICI's General Membership Meeting
at the Washington Hilton Hotel, Washington, D.C. (May 22, 1996)
(citing a survey by the Investor Protection Trust that found that 2
out of 3 investors believed that no-load mutual funds involve no
sales charges or fees, as an example of why the Commission should be
concerned about the quality of disclosure of fees charged by funds);
Testimony of Barry P. Barbash, Director, Division of Investment
Management, SEC, Before the Subcomm. on Capital Markets, Securities,
and Government Sponsored Enterprises of the House Comm. on Banking
and Financial Services, 104th Cong., 2d Sess. (June 26, 1996)
(citing a 1994 survey by the American Association of Retired
Persons, the Consumer Federation of America, and the North American
Securities Administrators, Inc. that found that the vast majority of
American bank customers who hold shares of mutual funds are unaware
of the risks and fees involved in the sale of mutual funds).
---------------------------------------------------------------------------
In view of its desire to improve the quality of fee disclosure, the
Commission has revised Form N-1A to require a fund to disclose in the
fee table its operating expenses, not taking into account expense
reimbursements and fee waiver arrangements.\83\ To ensure that
investors have current information about a fund's expenses, however,
Form N-1A, as amended, permits a fund to disclose its operating
expenses net of reimbursements and waivers in a footnote to the fee
table.\84\ The Commission believes that the fee table disclosure of
fund expenses, as amended, will give an investor clearer information
about the long-term costs of an investment in a fund, while at the same
time allowing the fund to provide current information about its
operating expenses.
---------------------------------------------------------------------------
\83\ Instructions 3(d)(i) and 5(a) to Item 3.
\84\ Instructions 3(e) and 5(b) to Item 3. A fund also must
disclose the period for which the expense reimbursement or fee
waiver is expected to continue, or whether it can be terminated at
any time at the option of the fund. The Commission expects that, in
the latter case, a fund would provide adequate notice to investors
and fund shareholders in advance of the termination of the
arrangement.
---------------------------------------------------------------------------
3. Investment Strategies and Risk Disclosure (Item 4)
In the Form N-1A Proposing Release, the Commission discussed its
concerns about disclosure of fund investments
[[Page 13926]]
and risks typically found in many fund prospectuses.\85\ This
disclosure generally consists of descriptions of the types of
securities in which a fund may invest and the risks associated with
each of those securities.\86\ In the Commission's view, disclosing
information about all of the securities in which a fund might invest
does not help a typical fund investor evaluate how the fund's portfolio
will be managed or the overall risks of investing in the fund. The
disclosure also adds substantial length and complexity to fund
prospectuses, which discourages investors from reading them.
---------------------------------------------------------------------------
\85\ See Form N-1A Proposing Release, supra note 8, at 10909.
\86\ The investments described often include instruments, such
as illiquid securities, repurchase agreements, and options and
futures contracts, that do not have a significant role in achieving
a fund's investment objectives.
---------------------------------------------------------------------------
The Commission has concluded that prospectus disclosure would be
more useful to a typical fund investor if it emphasized the principal
investment strategies of a fund and the principal risks of investing in
the fund, rather than the characteristics and risks of each type of
instrument in which the fund may invest.\87\ The Commission believes
that funds are appropriately viewed as a means through which a
professional money manager provides its services to investors \88\ and
that, for that reason, the focus of disclosure about a fund's
prospective investments should center on the fund's investment
objectives and the principal means used by the fund's adviser to
achieve those objectives. Consistent with this view, the Proposed
Amendments would require prospectus disclosure that is designed to help
investors understand how a particular fund's portfolio will be managed.
The purpose of the Proposed Amendments was to implement more
effectively the Commission's original goal in adopting Form N-1A that
the prospectus should describe a fund's ``fundamental
characteristics.'' \89\ Commenters generally supported the proposed
approach to disclosure of the fund's investment operations and
attendant risks, and the Commission is adopting it substantially as
proposed.
---------------------------------------------------------------------------
\87\ The ICI has supported prospectus disclosure that focuses
primarily on a fund's broad investment objectives, practices, and
associated risks, and not on particular types of securities in which
the fund may invest. See, e.g., Letter from Paul Schott Stevens,
General Counsel, ICI, to Jonathan G. Katz, Secretary, SEC, at 5
(Apr. 8, 1996); Letter from Paul Schott Stevens, General Counsel,
ICI, to Jonathan G. Katz, Secretary, SEC, at 4-6 (July 28, 1995)
(``1995 ICI Risk Comment Letter''); Letter from Amy B.R.
Lancellotta, Associate Counsel, ICI, to C. Gladwyn Goins, Associate
Director, Division of Investment Management, SEC, at 7 (Mar. 7,
1995).
\88\ See ``Can We Make Donkeys Fly?,'' Remarks by Barry P.
Barbash, Director, Division of Investment Management, SEC, before
the Business Law Section of the ABA, Washington, D.C., at 13 (Nov.
11, 1994); see also 1 T. Lemke, G. Lins & A.T. Smith III, Regulation
of Investment Companies Sec. 1.01, at 1-1 (1997).
\89\ See 1982 Form N-1A Proposing Release, supra note 13, at
815; 1983 Form N-1A Adopting Release, supra note 12, at 39729.
---------------------------------------------------------------------------
a. Principal Investment Strategies, Investment Objectives, and
Implementation of Investment Objectives. To assist investors in
determining whether a fund meets their investment needs, Form N-1A, as
amended, continues to require prospectus disclosure of a fund's
investment objectives.\90\ The Commission proposed to shift the focus
of disclosure about how a fund intends to achieve its investment
objectives away from the current practice of listing all types of
securities in which a fund may invest to a discussion of the fund's
overall portfolio management.\91\ The Commission proposed to require a
fund to disclose in its prospectus the principal strategies that it
used to achieve its investment objectives, which would include the
particular type or types of securities in which the fund will invest
principally. This approach was designed to focus disclosure on a fund's
anticipated investment operations rather than on investments that the
fund might make.
---------------------------------------------------------------------------
\90\ Item 4(a). A fund may refer to its investment objectives as
investment goals or any other term that clearly communicates the
principal investment design of the fund. Form N-1A, as amended,
continues to require a fund to disclose in its prospectus when it
may change its investment objectives without a shareholder vote. Id.
Under current practice, some funds disclose in their prospectuses
when a shareholder vote is required to change its investment
objectives. The Commission believes that disclosure of this sort is
of limited significance to the typical fund investor. In the
Commission's view, most investors typically would not expect the
investment objectives of their funds to change without their
approval. Consistent with this view, Form N-1A, as amended, requires
a fund to disclose in its SAI, and not in its prospectus, when a
shareholder vote is required to change its investment objectives.
Item 12(c)(1)(vii).
\91\ Form N-1A currently requires a fund to disclose the types
of securities in which it invests or will invest principally, as
well as any ``special investment practices and techniques'' that the
fund will use in connection with investing in those securities. Form
N-1A also requires disclosure, subject to certain limitations, about
``significant investment policies or techniques'' that a fund
intends to use. One of those limitations directs a fund to limit
prospectus disclosure about practices that place no more than 5% of
the fund's assets at risk. Many funds disclose in their prospectuses
information about securities and investment practices that do not,
and may not ever, place more than 5% of the fund's assets at risk,
often to retain the flexibility to exceed the 5% threshold in the
future. The Commission proposed to eliminate the 5% standard. Form
N-1A Proposing Release, supra note 8, at 10909. The standard has
been deleted in Form N-1A, as amended.
---------------------------------------------------------------------------
The Commission continues to believe that a clear, concise, and
straightforward discussion of investment objectives and strategies is
central to effective prospectus disclosure. Therefore, the Commission
is adopting the requirement for a fund to disclose how it intends to
achieve its investment goals as proposed.\92\
---------------------------------------------------------------------------
\92\ Item 4(b). Instruction 1 to Item 4(b)(1) defines a strategy
to include any policy, practice, or technique used to achieve a
fund's investment objectives.
---------------------------------------------------------------------------
Under Form N-1A, as amended, whether a particular investment
strategy (including a strategy to invest in a particular type of
security) is a principal investment strategy depends upon the
strategy's anticipated importance in achieving the fund's investment
objectives and how the strategy affects the fund's potential risks and
returns.\93\ The Commission believes that a fund should disclose those
strategies that are expected to be the most important means of
achieving the fund's objectives and that the fund anticipates will have
a significant effect on its performance. Form N-1A, as amended,
requires a fund, when determining whether a strategy is a principal
investment strategy, to consider, among other things, the portion of
assets that it expects to commit to the strategy, the portion of assets
that it expects to place at risk by the strategy, and the likelihood
that it will lose some or all of those assets in implementing the
strategy.\94\
---------------------------------------------------------------------------
\93\ Instruction 2 to Item 4(b)(1). Form N-1A currently directs
a fund not to disclose so-called ``negative'' practices (i.e.,
practices in which a fund may not or does not intend to engage).
Instruction 3 to Item 4(b)(1) retains this limitation by providing
that a negative strategy is not a principal investment strategy.
Avoiding disclosure about negative strategies is intended to ensure
that prospectus disclosure states what the fund will do to achieve
its investment objectives, rather than what the fund will not do.
\94\ Instruction 2 to Item 4(b)(1). As amended, Form N-1A
requires a fund to disclose strategies that are not principal
strategies in the SAI. Item 12(b).
---------------------------------------------------------------------------
The Commission intends that focusing disclosure on a fund's
principal investment strategies \95\ will improve the fund's prospectus
by eliminating discussions of securities and strategies that do not
have a significant role in achieving the fund's investment objectives.
Under Form N-1A, as amended, for example, it generally will be
unnecessary for a fund (other than, for example, a money market fund)
to disclose in its prospectus its cash management practices (e.g.,
entering into overnight repurchase agreements), because these
[[Page 13927]]
practices are not typically among the principal investment strategies
that a fund uses to achieve its investment objectives.\96\
---------------------------------------------------------------------------
\95\ A bond fund, for example, typically would discuss generally
the maturities, durations, ratings, and types of issuers of the
bonds in which the fund invests principally.
\96\ Under the disclosure principles incorporated into Item 4 of
Form N-1A, as amended, a fund that has a principal investment
strategy of allocating its assets among stocks, bonds, and money
market instruments also would need to disclose its use of cash
equivalents. Whether a fund needs to include disclosure in its
prospectus about matters such as holding or trading stock futures
and option contracts, engaging in securities lending, purchasing
securities on a ``when-issued'' basis, or investing in illiquid or
restricted securities will depend on the extent to which these
instruments or practices have a significant role in achieving the
fund's investment objectives. A fund generally would not need to
include disclosure about restricted securities in its prospectus
because investments in this type of security usually would not be so
significant as to constitute a principal investment strategy of the
fund. Whether a fund's use of stock futures, option contracts, or
other derivatives would need to be disclosed in the fund's
prospectus would depend in large part on whether the strategy poses
the risk of substantial gains or losses for the fund.
---------------------------------------------------------------------------
The Proposed Amendments would require a fund, in discussing its
principal investment strategies in its prospectus, to explain in
general terms how the fund's adviser decides what securities to buy and
sell. This requirement sought to provide investors with essential
information about the fund's investment approach and how the fund's
portfolio would be managed. One commenter questioned this requirement,
arguing that it could place undue emphasis on a fund's decisions to
invest in or sell particular securities and result in boilerplate
disclosure. The Commission continues to believe that a general
discussion of the methods of analysis and investment strategies that a
fund's adviser will use in managing the fund will provide typical
investors with information that will help them in deciding whether to
invest in a fund. Therefore, the Commission is adopting the proposed
disclosure requirement regarding the manner in which the investment
adviser determines to buy and sell securities.\97\
---------------------------------------------------------------------------
\97\ Item 4(b)(2). In meeting this requirement, an equity fund
could describe, for example, whether it emphasizes value or growth,
or blends the two approaches. A value-oriented fund might state that
the fund's adviser selects stocks that it considers to be
undervalued by recognized measures of economic value such as
earnings, cash flow, and book value. Other types of disclosure about
a fund's investment philosophy might include whether the fund
invests in stocks based on a ``top-down'' analysis of economic
trends or a ``bottom-up'' analysis based on the financial condition
and competitiveness of individual companies.
---------------------------------------------------------------------------
Concentration. The Commission proposed to continue to require a
fund to disclose in its prospectus any policy to concentrate its
investments in any industry or group of industries. This requirement
reflects the view that such a policy is likely to be central to a
fund's ability to achieve its investment objectives,\98\ and that a
fund that concentrates its investments will be subject to greater risks
than funds that do not follow the policy. The Commission's staff has
taken the position for purposes of the concentration disclosure
requirement that a fund investing more than 25% of its assets in an
industry is concentrating in that industry.\99\ The Proposed Amendments
incorporated this percentage test into Form N-1A.
---------------------------------------------------------------------------
\98\ That such a policy can be central to a fund's meeting its
investment objective is suggested by section 8(b)(1) of the
Investment Company Act [15 U.S.C. 80a-8(b)(1)], which requires a
fund to disclose in its registration statement any policy to
concentrate its investments in a particular industry or group of
industries. Under section 13(a)(3) [15 U.S.C. 80a-13(a)(3)], a fund
must obtain shareholder approval to change a policy to concentrate
its investments.
\99\ Guide 19 to Form N-1A.
---------------------------------------------------------------------------
Commenters supported requiring a fund to disclose in its prospectus
its policies on industry concentration,\100\ and the Commission
continues to believe that 25% is an appropriate benchmark to gauge the
level of investment concentration that could expose investors to
additional risk. Therefore, the Commission is adopting this disclosure
requirement as proposed.\101\
---------------------------------------------------------------------------
\100\ Some commenters questioned an existing position of the
Commission's staff regarding the ability of a fund to adopt a policy
of shifting between concentrated and non-concentrated status. One
commenter requested reconsideration of the staff's long-standing
position that a fund cannot, consistent with the provisions of
sections 8(b)(1) and 13(a)(3), have an investment policy permitting
the fund to concentrate or not concentrate its investments as
determined by the fund's board in its discretion. The commenter
argued that this position was too rigid and that a fund's board of
directors should have the flexibility to shift the fund's
concentration policy, subject to making appropriate disclosure to
fund shareholders. The Commission recognizes that fund investment
practices have changed as a result of the growth of securities
markets and assets invested in funds. The Commission believes that
it may be appropriate to reconsider the issue raised by the
commenter, but has concluded that the issue should not be
reconsidered in the context of the revisions of Form N-1A being
adopted today. The Commission has requested that the Division review
its positions on concentration, consulting with industry
representatives as appropriate, with a view toward allowing funds a
greater degree of flexibility in establishing concentration
policies.
\101\ Instruction 4 to Item 4(b)(1).
---------------------------------------------------------------------------
Temporary Defensive Positions. The Proposed Amendments would
require disclosure about a fund's policy that permits the fund to take
``temporary defensive positions'' to respond to adverse market,
economic, political, or other conditions. The purpose of the
requirement was to make investors aware of potential changes in a
fund's investments that are not generally contemplated by, or are
otherwise inconsistent with, a fund's principal investment objectives
and policies. In particular, the Proposed Amendments would require a
fund to disclose the percentage of its assets that may be committed to
temporary defensive positions (e.g., up to 100% of the fund's assets),
the risks, if any, associated with the positions, and the likely effect
of these positions on the fund's performance. Although commenters
generally supported disclosure that a fund may take temporary defensive
positions, they found problematic disclosure of the percentage of
assets that may be committed to temporary defensive positions and the
likely effect of these positions on the fund's performance. Commenters
argued that, to maintain flexibility, a fund typically would disclose
that all of its assets could be committed to temporary positions. The
commenters maintained that such disclosure was boilerplate and would
not be meaningful to investors. In addition, commenters asserted that
funds would find it difficult to predict the likely effect of temporary
defensive positions on their performance.
The Commission believes that a typical fund investor would want to
know about investment positions that a fund can take from time to time
that are inconsistent with the fund's central investment focus. On the
other hand, the Commission is aware that, in practice, the disclosure
about temporary investment positions currently appearing in some fund
prospectuses is so lengthy and detailed as to suggest incorrectly that
a fund's temporary investment policies are more important than the
fund's investment objectives and the principal investment strategies
used to achieve them. The Commission believes that disclosure of this
sort, which discusses possible but not probable investments of funds,
is inconsistent with the fundamental disclosure principles underlying
Form N-1A. In the Commission's view, however, disclosure that a fund
may take temporary defensive positions to respond to market conditions
will alert investors to the possibility that a fund may vary its
investments on a temporary basis. Therefore, Form N-1A, as amended,
requires a fund to disclose, if applicable, that in response to
unfavorable market conditions it may make temporary investments that
are not consistent with its principal investment objectives and
policies.\102\
---------------------------------------------------------------------------
\102\ Instruction 6 to Item 4(b)(1).
---------------------------------------------------------------------------
Portfolio Turnover. Form N-1A currently requires all funds to state
their portfolio turnover rates in their financial highlights tables
included in their
[[Page 13928]]
prospectuses.\103\ Under the Proposed Amendments, a fund would be
required to supplement the information in its financial highlights
table by disclosing certain information about its portfolio turnover
rate if it anticipated having a turnover rate of 100% or more in the
coming year.\104\ The disclosure would be required to include an
explanation of the tax consequences and effect of increased trading
costs on the fund's performance.\105\ Most commenters questioned or
opposed the proposed disclosure about portfolio turnover rate. Some
commenters suggested that the Commission move this disclosure to the
SAI or require it in the MDFP in fund shareholder reports. Other
commenters argued that a fund's portfolio turnover rate may reflect the
fund's response to particular market events, or special circumstances
affecting the fund's investments, that are difficult to predict. These
commenters argued further that the unpredictable nature of fund
portfolio turnover rates would lead to generic or boilerplate
disclosure that would not be meaningful to investors in assessing
various funds. The commenters suggested that Form N-1A should instead
require disclosure about portfolio turnover rates as part of a
discussion of a fund's principal investment strategies when a fund's
investment approach is expected to include active and frequent trading
(as opposed to, e.g., a ``buy and hold'' strategy).
---------------------------------------------------------------------------
\103\ Item 3 of Form N-1A. Form N-1A, as amended, retains this
requirement. Item 9.
\104\ See Form N-1A Proposing Release, supra note 8, at 10910.
\105\ The Proposed Amendments would require a fund to disclose
its anticipated portfolio turnover rate and what that rate means
(e.g., that a portfolio turnover rate of 200% is equivalent to the
fund buying and selling all of the securities in its portfolio twice
in the course of a year). The Proposed Amendments also would require
a fund to explain the tax consequences to shareholders of the fund's
high portfolio turnover rate. In addition, the Proposed Amendments
would require a fund to explain how trading costs associated with
the fund's high portfolio turnover may affect the fund's
performance.
---------------------------------------------------------------------------
The Commission continues to believe that a discussion about a
fund's portfolio turnover in some cases is relevant to typical fund
investors. The Commission notes, for instance, that increased portfolio
turnover can on some occasions result in tax consequences that can be
significant to investors and that can be viewed as a cost to an
investor of holding fund shares. Moreover, investors may find
information about portfolio turnover particularly relevant in light of
recent changes to the tax laws that reduce the tax rate on capital
gains.\106\ The Commission agrees with commenters, however, that
disclosure about portfolio turnover and its consequences should be made
only if an increased portfolio turnover rate is likely to result from
the fund's investment objectives and principal investment strategies
and would have a significant effect on a fund's returns. Therefore,
Form N-1A, as amended, requires a fund to discuss the consequences of
its portfolio turnover rate if the fund anticipates that active and
frequent trading of portfolio securities will be a likely result of
implementing its principal investment strategies.\107\
---------------------------------------------------------------------------
\106\ See infra note 164.
\107\ Instruction 7 to Item 4(b)(1).
---------------------------------------------------------------------------
Classification and Policies. The Commission proposed to move to the
SAI disclosure about a fund's legal status as an open-end management
company,\108\ as well as disclosure relating to certain policies
identified under the Investment Company Act, such as borrowing money,
issuing senior securities, underwriting securities issued by other
persons, investing in real estate or commodities, and making
loans.\109\ Commenters supported moving this disclosure, agreeing that
it is not likely to be significant to a typical fund investor. Form N-
1A, as amended, requires the disclosure to appear in the SAI.\110\
---------------------------------------------------------------------------
\108\ As explained in the Form N-1A Proposing Release, this
information is technical in nature and repetitive of other
information required to be disclosed elsewhere in a fund's
prospectus. All funds that register on Form N-1A must be classified
as management companies under section 4 of the Investment Company
Act and subclassified as open-end companies under section 5. 15
U.S.C. 80a-4, -5. Funds may be further subclassified as diversified
or non-diversified under section 5.
\109\ Section 8 of the Investment Company Act requires a fund to
disclose these policies in its registration statement. Section 8
also requires a fund to disclose in its registration statement its
policies on concentration and portfolio turnover, see supra notes
100 and 105 and accompanying text, and any other policies that the
fund deems fundamental or that may not be changed without
shareholder approval. Although they are not required to do so, some
funds disclose in their prospectuses their policies with respect to
the practices identified in section 8. As noted in the Form N-1A
Proposing Release, supra note 8, at 10911, the Proposed Amendments
sought to provide a clearer directive to disclose these policies in
the SAI. To the extent it is a principal investment strategy of a
fund within the meaning of Item 4(b)(1) of Form N-1A, as amended,
however, a practice identified in section 8 would be required to be
disclosed in the fund's prospectus.
\110\ Items 12(a) and (c). Form N-1A, as amended, continues to
require a non-diversified fund to disclose its non-diversified
status in the prospectus. See Item 2(c)(iv). In particular, the Form
requires a non-diversified fund to describe the effects of non-
diversification (e.g., by indicating that, compared to diversified
funds, the fund may invest a greater percentage of its assets in a
particular issuer) and to disclose the risks of investing in the
fund.
---------------------------------------------------------------------------
b. Risk Disclosure. Risk disclosure in fund prospectuses typically
consists of detailed, and often technical, descriptions of the risks
associated with particular securities in which a fund may invest. Just
as disclosure about each type of security in which a fund may invest
does not appear to communicate effectively to investors how the fund's
portfolio will be managed, disclosure about the risks associated with
each type of security in which the fund may invest does not effectively
communicate to them the overall risks of investing in the fund. In the
Commission's view, disclosing the risks of each possible portfolio
investment, rather than the overall risks of investing in a fund, does
not help investors evaluate a particular fund or compare the risks of
the fund with those of other funds.
The Commission proposed, consistent with its conclusion that mere
inventories of potential portfolio securities do not assist typical
investors in selecting among funds, to modify prospectus disclosure
requirements in Form N-1A about the risks associated with specific
securities. The Proposed Amendments would require a fund to disclose
the risks to which the fund's particular portfolio as a whole is
expected to be subject and to discuss the circumstances that are
reasonably likely to affect adversely the fund's net asset value,
yield, or total return. Commenters generally supported the proposed
approach to the disclosure of risk, and the Commission is adopting it
as proposed.\111\
---------------------------------------------------------------------------
\111\ Item 4(c). The requirement that a fund disclose the risks
to which its particular portfolio as a whole is subject is intended
to elicit risk disclosure specific to that fund. In meeting this
requirement, a growth fund, for example, would be required to
disclose the risks of the types of growth stocks in which the fund
invests or expects to invest, as opposed to describing the general
risks of equity securities.
---------------------------------------------------------------------------
The Commission notes that a fund could meet the risk disclosure
requirements of Form N-1A, as amended, by including in its prospectus a
discussion of the risks of the asset class or classes that the fund
expects to hold principally, together with a discussion of the risks to
the fund of holding specific types of securities within the asset class
or classes. Under such an approach, a fund investing in the equity
securities of companies with small market capitalizations, for example,
would discuss market risk as a general risk of holding equity
securities, as well as the specific risks associated with investing in
small capitalization companies (e.g., that these stocks may be more
volatile and have returns that vary, sometimes
[[Page 13929]]
significantly, from the overall stock market).\112\
---------------------------------------------------------------------------
\112\ The Commission emphasizes that this approach is one way,
but not the only way, that a fund can seek to use in meeting the
risk disclosure requirements of Form N-1A, as amended.
---------------------------------------------------------------------------
The Commission did not propose to require a fund to disclose
information designed to quantify its expected risk levels, citing,
among other things, the lack of a broad consensus as to what measure of
risk would best serve fund investors.\113\ Comments submitted in
response to the Commission's Risk Concept Release asserted that
investors have too wide a range of investment goals and ideas of what
``risk'' means to be well served by a single quantitative risk measure.
In addition, commenters argued that, if the Commission mandated a risk
measure, investors might rely on it as a definitive standard despite
the lack of general agreement on how to measure risk.
---------------------------------------------------------------------------
\113\ See Form N-1A Proposing Release, supra note 8, at 10911.
The Risk Concept Release requested comment whether quantitative risk
measures, such as standard deviation, beta, and duration, would help
investors evaluate and compare fund risks. Risk Concept Release,
supra note 18, at 17176. While more than half of the individual
commenters and some industry members expressed a desire for some
form of quantitative risk information, commenters did not broadly
support any one risk measure. In addition, a number of commenters
strongly criticized requiring disclosure of quantitative risk
information. See, e.g., 1995 ICI Risk Comment Letter, supra note 87,
at 10-16 (questioning, among other things, the feasibility of
developing a single, all-encompassing measure of fund risk and
whether quantitative information would be understood and accurately
used by fund investors).
---------------------------------------------------------------------------
As adopted, the prospectus risk/return summary and amendments to
the general risk disclosure requirements of Form N-1A are designed to
improve fund risk disclosure without raising the concerns associated
with Commission-mandated quantitative information. While it is not
adopting specific quantitative risk disclosure requirements, the
Commission believes that new approaches to measuring risk are emerging
and that quantitative risk information may be useful to some
investors.\114\ The Commission notes that a fund may include
quantitative risk disclosure in its prospectus if the information is
presented in a manner consistent with the guidelines on the inclusion
of information not required by Form N-1A.\115\
---------------------------------------------------------------------------
\114\ See, e.g., Walbert, What's the Risk?, Institutional
Investor, June 1997, at 188; Whitford, Why Risk Matters, Fortune,
Dec. 29, 1997, at 147.
\115\ See General Instruction C.3(b).
---------------------------------------------------------------------------
4. Management's Discussion of Fund Performance (Item 5)
The Proposed Amendments would continue to require a fund to provide
its MDFP and the related line graph comparing the fund's returns to a
broad-based securities market index in either its prospectus or its
annual report. The Commission is adopting the MDFP as proposed with
minor changes.\116\ The Commission notes in support of this decision
that a review of MDFP disclosure by the Commission's Division of
Investment Management (``Division'') indicates that the discussion of
fund performance and the line graph have generally provided fund
shareholders with useful, comparative information about a fund's
performance.
---------------------------------------------------------------------------
\116\ Item 5.
---------------------------------------------------------------------------
As discussed in the Proposed Amendments, funds typically choose to
include the MDFP in their annual reports, rather than in their
prospectuses. This choice may be explained, in part, by the relevance
of the MDFP to other current financial information appearing in annual
reports.\117\ As a result of recent amendments to the Investment
Company Act, the Commission has the authority to require additional
disclosure in annual and semi-annual reports as necessary or
appropriate in the public interest or for the protection of
investors.\118\ Several commenters recommended that the Commission
exercise this authority and require the MDFP to appear in fund annual
reports, asserting, among other things, that shareholders read these
reports more frequently than prospectuses. Commenters also suggested
that, like other information contained in an annual report, the MDFP
analyzes a fund's past performance rather than the fund's anticipated
future course of action, which is the central focus of a fund's
prospectus.
---------------------------------------------------------------------------
\117\ See Form N-1A Proposing Release, supra note 8, at 10912.
\118\ National Securities Markets Improvement Act of 1996, Pub.
L. 104-290 (1996) (``Improvements Act''), section 206(f) (amending
section 30 of the Investment Company Act [15 U.S.C. 80a-29] to add
new paragraph (f)).
---------------------------------------------------------------------------
Although it acknowledges that a fund's annual report may be the
preferred location for the MDFP disclosure, the Commission is deferring
consideration of its requirements as to the placement of the MDFP
discussion. The Commission has concluded that MDFP disclosure should be
considered as part of a comprehensive reassessment of the Commission's
existing rules specifying the disclosure to be included in fund reports
to shareholders. The Commission believes that such an initiative would
be an important future step in improving the quality of fund disclosure
documents and has directed the Division to begin work on proposed
amendments to fund periodic reporting requirements. The Commission has
asked that, in connection with such a proposal, the Division consider
whether certain disclosure required by Form N-1A would be more useful
to investors in shareholder reports. In this regard, the Commission
notes its preliminary view that an ``integrated'' approach to
registration and reporting requirements could improve the overall
information about a fund available to investors.\119\
---------------------------------------------------------------------------
\119\ In the past, the concept of ``integrated'' disclosure for
funds has addressed eliminating duplicative registration
requirements under the Investment Company Act and the Securities
Act. See Investment Company Act Release No. 10378 (Aug. 28, 1978)
[43 FR 39548] (adopting integrated registration statements for funds
and closed-end investment companies by replacing separate
registration statement forms under the Investment Company Act and
Securities Act). New disclosure initiatives for funds could expand
the concept of integrated disclosure to include an approach similar
to that adopted for corporate issuers, which integrates registration
statement disclosure requirements with periodic reports. See
Securities Act Release Nos. 6235 (Sept. 2, 1980) [45 FR 63693] and
6383 (Mar. 3, 1982) [47 FR 11386] (proposing and adopting new forms
for the offering of securities under the Securities Act). At least
one commenter has cited potential benefits to fund shareholders of
an integrated approach to fund disclosure. T. Lemke, Mutual Fund
Disclosure Revisited, Investment Companies 1989 (Practising Law
Institute's Corporate Law and Practice Course Handbook Series No.
605).
---------------------------------------------------------------------------
5. Management, Organization, and Capital Structure (Item 6)
a. Management and Organization. The Commission proposed to
abbreviate disclosure in the prospectus about a fund's management and
organization and move certain of this information to the SAI.
Commenters generally supported the Proposed Amendments, and the
Commission is adopting them as proposed with modifications to reflect
suggestions of commenters.
Management Disclosure. Under existing Form N-1A, all funds must
disclose the rate of fees that they pay their investment advisers in
their fee tables. As stated above, the Commission has retained this
requirement, which the Commission believes is among the core
requirements of the Form. The Proposed Amendments would continue to
require, in addition to the disclosure contained in the fee table,
prospectus disclosure about investment advisory services provided to,
and investment advisory fees paid by, a fund. Some commenters
recommended eliminating disclosure about the investment advisory fees,
which they argued is merely duplicative of the information in the fee
table. The Commission disagrees with this argument. The Commission
believes that a concise and straightforward description of the services
that an investment adviser provides to a fund along with disclosure
[[Page 13930]]
of the investment advisory fee rate for a recent fiscal year, as well
as providing this information in a single place in a prospectus, can
help a typical investor understand the management of the fund.
Therefore, the Commission is adopting the disclosure requirements as
proposed.\120\
---------------------------------------------------------------------------
\120\ Item 6(a).
---------------------------------------------------------------------------
In the Form N-1A Proposing Release, the Commission requested
comment whether information about the amount of fees paid to a sub-
adviser or sub-advisers of a fund helps investors evaluate and compare
the fund to other funds. The Commission also asked whether this type of
disclosure obscures the aggregate investment advisory fee paid by a
particular fund.\121\ Most commenters supported disclosure of the
aggregate fee only, maintaining that information about individual sub-
advisory fees is not relevant to investors because it does not help
them compare the fees charged by different funds. The Commission is
persuaded that information about sub-advisory fees is not necessary for
a typical fund investor, but may be of interest to some investors.
Therefore, Form N-1A, as amended, requires prospectus disclosure of the
aggregate advisory fees paid by a fund and disclosure in the SAI of the
amount of sub-advisory fees paid by the fund.\122\
---------------------------------------------------------------------------
\121\ See Form N-1A Proposing Release, supra note 8, at 10912.
\122\ Instruction 3 to Item 6(a)(1) and Item 15(a)(3).
---------------------------------------------------------------------------
Portfolio Manager. The Proposed Amendments would continue to
require prospectus disclosure indicating the person or persons
responsible for the day-to-day management of a fund's portfolio. Under
the Proposed Amendments, and as currently permitted by instructions to
Form N-1A, a fund could, in meeting this requirement, indicate that a
committee was responsible for a fund's portfolio management if, under
the organizational arrangements of the fund (or its investment
adviser), no one person was responsible for making recommendations to
the committee.
One commenter criticized the proposed portfolio manager disclosure
requirement, arguing that it may have the effect of creating the false
impression that the identity of the individual portfolio manager of a
fund is paramount to the fund's performance. According to the
commenter, the collective experience, resources, personnel, and
reputation of a fund's investment adviser often are of greater
importance to the fund's performance than the fund's portfolio manager.
The commenter recommended that, to enable funds to describe their
management structures more accurately than they can under Form N-1A's
existing provisions, the Commission require disclosure of the identity
of a fund's portfolio manager only when a change in the identity of the
manager would be material to investors (e.g., when a fund group
promotes the identity of individual portfolio managers). The commenter
suggested that the Commission, in the alternative, clarify the
disclosure obligations of a fund for which the day-to-day
responsibilities for the fund's portfolio investments are shared by a
committee and certain individuals.
The Commission is not persuaded that it should adopt the
commenter's recommendation that the Commission tie portfolio manager
disclosure to a fund group's marketing efforts. Such a recommendation
is substantially similar to proposals considered and rejected by the
Commission when it adopted Form N-1A's existing portfolio manager
disclosure requirement.\123\ The Commission believes that typical
investors in a fund should have clear and succinct information about
the individuals who significantly affect the fund's investment
operations. In the Commission's experience, Form N-1A's existing
requirement appropriately serves this purpose and should not be changed
significantly. To the Commission's knowledge, the requirement has not
generally resulted in funds inaccurately describing the individuals
responsible for their management.
---------------------------------------------------------------------------
\123\ See MDFP Adopting Release, supra note 15, at 19051-52.
---------------------------------------------------------------------------
Although the Commission believes that Form N-1A's portfolio manager
disclosure requirements should not be changed significantly, the
Commission has concluded that it is appropriate to provide additional
guidance in Form N-1A as to the disclosure obligations of a fund for
which day-to-day management responsibilities are shared. New
instructions to Form N-1A's portfolio manager disclosure requirements
have been added for this purpose.\124\
---------------------------------------------------------------------------
\124\ Instructions to Item 6(a)(2).
---------------------------------------------------------------------------
Legal Proceedings. The Proposed Amendments would continue to
require prospectus disclosure of any material pending legal proceedings
involving a fund, its investment adviser, or principal underwriter. The
Commission also proposed to expand Form N-1A's legal proceedings
disclosure requirement to cover those proceedings contemplated by a
governmental authority. In proposing this change, the Commission sought
to conform Form N-1A's requirements to those included in other
Commission forms applying to other types of issuers.\125\
---------------------------------------------------------------------------
\125\ See Item 12 of Form N-2 [17 CFR 274.11a-1] for closed-end
investment companies; Item 103 of Regulation S-K [17 CFR 229.103]
for non-investment company issuers. See also Investment Company Act
Release No. 19155 (Nov. 30, 1992) [57 FR 56862] (modifying Form N-2
to conform to Item 103).
---------------------------------------------------------------------------
Some commenters questioned the requirement that a fund disclose
contemplated proceedings, arguing that a fund would find it difficult
to assess whether proceedings of a governmental entity are in fact
contemplated. The Commission is not persuaded by this argument and has
adopted the legal proceedings requirement as proposed.\126\ In support
of its decision, the Commission notes that issuers that have been
subject to the requirement appear not to have experienced significant
difficulty in complying with it.
---------------------------------------------------------------------------
\126\ Item 6(a)(3).
---------------------------------------------------------------------------
Board of Directors. Form N-1A currently requires a fund to include
in its prospectus a brief description of the responsibilities of the
fund's board of directors under the applicable laws of the jurisdiction
in which the fund is organized. Recognizing that the disclosure
provided by a fund in response to this item typically recites the
substance of specific legal requirements, the Commission proposed to
move this disclosure to the SAI. Commenters supported disclosing the
director information in the SAI, arguing that the information does not
help a typical investor make a decision to invest in a fund. Form N-1A,
as amended, requires a fund to disclose this information in the
SAI.\127\
---------------------------------------------------------------------------
\127\ Item 13(a).
---------------------------------------------------------------------------
The Commission requested comment in the Form N-1A Proposing Release
whether a fund's prospectus should include the names, experience, and
compensation of a fund's directors, as well as information, such as
addresses and telephone numbers, indicating how a shareholder could
contact the directors.\128\ The Commission also requested comment
whether this information, if required, should be given only for a
fund's independent directors, accompanied by disclosure of the number
of independent directors in comparison to the number of directors on
the fund's board.\129\
---------------------------------------------------------------------------
\128\ Form N-1A Proposing Release, supra note 8, at 10912.
\129\ The Investment Company Act contains a number of
requirements relating to the composition of a fund's board. See,
e.g., sections 10(a) and 15(f) of the Investment Company Act [15
U.S.C. 80a-10(a), -15(f)].
---------------------------------------------------------------------------
Most commenters strongly opposed additional disclosure about
directors in
[[Page 13931]]
the prospectus. While a few commenters supported identifying the
directors in the prospectus, most argued that this information is not
essential to a typical investor in making a decision about investing in
a fund and would only serve to lengthen the prospectus. The commenters
recommended that the SAI or annual report to shareholders would be a
better place for disclosing the identity of directors.
Commenters addressing the issue uniformly opposed requiring a fund
to disclose directors' compensation in the prospectus, arguing that
these fees are only a small part of total fund expenses and are not
relevant to a typical investor in a making a decision to invest in a
fund. The commenters also noted that director compensation is disclosed
in a fund's SAI, where it can be used by those investors interested in
the information, and in a fund's proxy statement, where it can be
assessed by all shareholders of the fund in the context of an election
of directors.\130\
---------------------------------------------------------------------------
\130\ Item 13(d); Item 22(b)(6) of Schedule 14A [17 CFR 240.14a-
101].
---------------------------------------------------------------------------
All commenters addressing the issue emphatically opposed the
disclosure of information in either the prospectus or the SAI
indicating how shareholders can contact directors. Commenters,
particularly independent directors of funds, argued that this
information would result in an unwarranted loss of privacy for board
members and numerous calls to directors to which they would be ill-
equipped to respond. Commenters also argued that disclosure of this
information would serve as a disincentive for qualified individuals to
serve as directors and that all investor comments regarding a fund
should be directed to representatives of the fund's management, and not
to its directors.
The Commission believes that mandating more information about fund
directors than is available under its existing disclosure rules may be
appropriate in light of independent directors' role as ``watchdogs'' of
fund shareholders as contemplated by the Investment Company Act.\131\
The Commission, however, is not convinced, particularly in light of the
overwhelmingly negative comment on this issue, that the prospectus is
the appropriate document for this disclosure. Therefore, Form N-1A, as
amended, does not require additional information of the sort described
in the Proposed Amendments to be provided about a fund's directors. The
Commission, however, has directed the Division to consider director
disclosure issues as part of an initiative to improve shareholder
reports.\132\
---------------------------------------------------------------------------
\131\ These responsibilities of directors include, among other
things: (i) Evaluating and approving the fund's investment advisory
and principal underwriting contracts (sections 15(a), (c) [15 U.S.C.
80a-15(a), (c)]) and the use of fund assets to pay for the
distribution of fund shares (rule 12b-1); (ii) selecting the fund's
independent public accountants (section 32(a)(1) [15 U.S.C. 80a-
31(a)(1)]); and (iii) reviewing and approving transactions with
affiliates under various rules (e.g., rule 10f-3 [17 CFR 270.10f-3];
rule 17a-7 [17 CFR 270.17a-7]; rule 17e-1 [17 CFR 270.17e-1]).
Directors have fiduciary duties to the fund and its shareholders
under section 36(a) of the Investment Company Act [15 U.S.C. 80a-
35(a)] and under state law. See 3 W. Fletcher, Cyclopedia of the Law
of Private Corporations section 838 (rev. perm. ed. 1994); Hanson
Trust PLC v. ML SCM Acquisition, Inc., 781 F.2d 264, 275 (2d Cir.
1986). See also Burks v. Lasker, 441 U.S. 471 (1979) (upholding the
authority of independent directors to take actions under state law
to the extent not inconsistent with the policies of the Investment
Company Act and the Investment Advisers Act of 1940 [15 U.S.C. 80b-
1, et seq.] (the ``Advisers Act'')).
\132\ See supra note 119 and accompanying text.
---------------------------------------------------------------------------
Management and Organization. The Commission proposed to move to the
SAI two items of disclosure about a fund's management and organization
that the Commission believes are only of minimal importance to typical
fund investors. The Proposed Amendments would no longer require a fund
to disclose in its prospectus the name of any person that controls the
fund's investment adviser and the name of any person that controls the
fund.\133\ The Proposed Amendments also would no longer require a fund
to state in its prospectus, if applicable, that the fund engages in
brokerage transactions with affiliated persons and allocates brokerage
transactions based on the sale of fund shares.\134\ The information
called for in response to these two items typically results in generic
disclosure that restates applicable legal requirements and does not
appear to assist investors in deciding whether to invest in a
particular fund. Commenters generally supported placing this
information in the SAI. Form N-1A, as amended, requires a fund to
disclose information in the SAI regarding controlling persons of the
investment adviser and brokerage transactions with affiliated
persons.\135\
---------------------------------------------------------------------------
\133\ Transactions between controlling persons and a fund are
subject to restrictions under the Investment Company Act. See, e.g.,
section 17 [15 U.S.C. 80a-17] and rules 17a-6 and 17d-1 [17 CFR
270.17a-6, .17d-1].
\134\ Payment of commissions to affiliated brokers is governed
by section 17(e) of the Investment Company Act [15 U.S.C. 80a-17(e)]
and rule 17e-1 [17 CFR 270.17e-1].
\135\ Items 15(a) and 16(b)(1).
---------------------------------------------------------------------------
The Commission proposed to move to the SAI disclosure about a
fund's form of organization along with the date and state of the fund's
incorporation. Because most funds are organized in one of a few states
as corporations or business trusts, disclosure about a fund's
organization does not appear to help investors evaluate a particular
fund or compare the fund to other funds. For that reason, the
Commission is adopting its proposal to move information about a fund's
organization to the SAI.\136\
---------------------------------------------------------------------------
\136\ Item 11(a). The Commission proposed to continue to require
a fund to disclose its form of organization and place of
incorporation in the prospectus if a fund is organized outside the
United States and registered under section 7(d) of the Investment
Company Act [15 U.S.C. 80a-7(d)]. Although this type of organization
is permitted by the Investment Company Act, only a limited number of
funds that are organized and incorporated outside of the United
States have registered under the Act. A fund organized in this
manner would be subject to certain legal requirements under the
Investment Company Act, regardless of whether those requirements
were described in the fund's prospectus. Following one of Form N-
1A's underlying principles to avoid prospectus disclosure that
simply restates applicable legal provisions, the Commission has
determined to incorporate this disclosure requirement in Item 11(a)
of the SAI.
---------------------------------------------------------------------------
The Proposed Amendments would not include the disclosure about a
fund's expenses currently required by Form N-1A in the discussion of
the fund's management. This information is included in the fee table
and the financial highlights table. Additional information about fund
expenses also is available in a fund's SAI. Eliminating repetitive
information is one of the basic objectives of the Commission's efforts
to improve fund disclosure documents. Consistent with this goal, Form
N-1A, as amended, does not require this additional information about
fund expenses in disclosure about a fund's management.
b. Capital Structure. The Proposed Amendments would continue to
require prospectus disclosure about any limits on the transferability
of, and material obligations or potential liabilities associated with,
a fund's shares. One commenter suggested that disclosure should appear
in the SAI rather than in the prospectus, asserting that the
information is technical and generally does not vary among funds. The
commenter recommended that the Commission instead limit disclosure in a
fund's prospectus to unusual provisions that may pose special risks to
the fund's shareholders. The Commission agrees that descriptions of all
potential restrictions and possible consequences of holding fund shares
are of only marginal significance to typical investors in selecting
among funds. Form N-1A, as amended, thus requires prospectus disclosure
of only unique or unusual restrictions or potential liabilities
associated with holding a fund's shares (other than investment risks)
that may expose an investor in the
[[Page 13932]]
fund to significant risks.\137\ Under Form N-1A, as amended, a fund
would be required to discuss in its SAI generally applicable legal
provisions relating to holding fund shares.\138\
---------------------------------------------------------------------------
\137\ Item 6(b). The prospectuses of funds organized as business
trusts under Massachusetts law sometimes include disclosure that,
under Massachusetts law, fund shareholders may be held personally
liable as partners for the fund's obligations under certain limited
circumstances. In adopting Form N-1A in 1983, the Commission stated
that disclosure of possible contingent shareholder liability under
this form of organization should not be required if a fund believes
that, because of arrangements to protect shareholders, the
likelihood of loss or expense to shareholders is remote. 1983 Form
N-1A Adopting Release, supra note 12, at 37933-34. See 3 T. Frankel,
The Regulation of Money Managers 79 (1980) (for funds organized as
Massachusetts business trusts, personal liability generally is
considered remote). In connection with the Proposed Amendments, the
staff undertook a review of fund prospectus disclosure. The review
indicated, among other things, that certain funds continue to
include disclosure about Massachusetts business trusts and state
that shareholder liability is remote. In the Commission's view, this
disclosure appears to be unwarranted, and the Commission encourages
funds to re-evaluate whether this disclosure is necessary in light
of the Commission's goal to minimize the disclosure of events that
have only a remote possibility of affecting an investor's investment
in a fund. See Form N-1A Proposing Release, supra note 8, at 10913.
\138\ Item 17(a).
---------------------------------------------------------------------------
The Proposed Amendments would move disclosure about shareholder
voting rights to the SAI. In explaining this decision, the Commission
stated that the Investment Company Act sets out specific rights of fund
shareholders,\139\ which typically results in this disclosure being
generic in nature and of little consequence to investors in evaluating
and comparing funds. Commenters generally supported including this
information in the SAI, agreeing that it is not essential to an
investment decision. Form N-1A, as amended, requires this disclosure in
the SAI.\140\
---------------------------------------------------------------------------
\139\ The Investment Company Act requires all fund shares to
have equal voting rights and prescribes the vote required for
certain significant matters. See, e.g., section 18(i) [15 U.S.C.
80a-18(i)] (equal voting rights); section 15(a) [15 U.S.C. 80a-
15(a)] (approval of investment advisory contract); section 16(a) [15
U.S.C. 80a-16(a)] (election of directors); section 13(a) [15 U.S.C.
80a-13(a)] (changes in fundamental investment policies). See also
section 2(a)(42) [15 U.S.C. 80a-2(a)(42)] (defining ``voting
security'' and a ``vote of a majority of the outstanding voting
securities'' for purposes of the Investment Company Act); rules 18f-
2, 18f-3 [17 CFR 270.18f-2, -3] (specifying certain voting rights
with respect to series funds and multiple class funds,
respectively).
\140\ Item 17(a).
---------------------------------------------------------------------------
Form N-1A currently requires a fund to describe in its prospectus
any class of senior securities issued by the fund, and any ``other
class'' of its shares that is outstanding. In the Commission's
experience, disclosure in fund prospectuses made in response to this
requirement merely restates legal requirements in the Investment
Company Act and its rules, which limit a fund's ability to issue
certain classes of shares or senior securities.\141\ The Commission
concluded that disclosure of this sort is only of minimal significance
to a typical investor in deciding whether to invest in a fund, and
proposed to delete it from fund prospectuses.\142\ Commenters agreed
with the Commission's conclusion, and Form N-1A, as amended, does not
require prospectus disclosure of information about other classes of
fund shares (including senior securities).\143\ The SAI would continue
to require a fund to disclose the rights of any authorized securities
of the fund other than capital stock.\144\
---------------------------------------------------------------------------
\141\ Under section 18(f) of the Investment Company Act, a fund
generally is prohibited from issuing senior securities. By its
terms, however, this prohibition does not preclude a fund from
borrowing from any bank, so long as the borrowing is undertaken in
accordance with the requirements of the Investment Company Act. See
section 18(f)(1) (a fund must have asset coverage of at least 300
percent of all borrowings). In addition, the Commission has taken
the position that certain types of portfolio transactions that
involve leverage engaged in by a fund would not be deemed senior
securities if the fund establishes a segregated account with liquid
assets that collateralize 100% of the market value of the
obligations under these transactions. See Investment Company Act
Release No. 10666 (Apr. 18, 1979) [44 FR 25128]; see also Merrill
Lynch Asset Management, L.P. (pub. avail. July 2, 1996) (staff no-
action letter). Series funds and multiple class funds, each of which
may raise issues under section 18(f), are expressly contemplated by
section 18(f)(2) of the Investment Company Act and related rules
18f-2 and 18f-3.
\142\ Under the proposal, a fund, however, would be required to
disclose information in its prospectus about any series or class of
the fund offered in the prospectus. Form N-1A, as amended, adopts
this requirement. See, e.g., Item 8(c).
\143\ Form N-1A, as amended, does not require disclosure in the
prospectus of any measures taken by a fund (e.g., formation and
maintenance of segregated accounts) to ensure that certain
instruments that it holds are not deemed senior securities for
purposes of the Investment Company Act's limitations. Form N-1A, as
amended, would continue to require a fund that has a fundamental
policy to borrow monies or that employs leverage to include
disclosure about these practices in its prospectus. See supra
Section II.A.3.a (discussing required disclosure of principal
investment strategies).
\144\ Item 17(b).
---------------------------------------------------------------------------
6. Shareholder Information (Item 7)
a. General Purchase and Sale Information. The Proposed Amendments
would retain most of the disclosure requirements concerning a fund's
purchase and redemption procedures, dividends, and distributions
currently required by Form N-1A. The Commission believes that the
required information is relevant to a typical investor contemplating an
investment in a fund. In the Form N-1A Proposing Release, the
Commission acknowledged that disclosure about purchase and redemption
procedures is often quite lengthy and may contribute to the perception
that prospectuses are too long and complicated and not worth
reading.\145\ The Commission also observed, however, that much of the
purchase and redemption disclosure typically contained in fund
prospectuses is not required by Form N-1A, but is included by funds for
marketing or other business purposes. The Commission believes that it
is appropriate for a fund to have the option to add disclosure to its
prospectus for these purposes, and thus the Commission did not propose
to limit prospectus disclosure of funds' purchase and sale procedures
to that expressly required by Form N-1A. The Commission is adopting the
requirements to disclose purchase, redemption, and other shareholder
information substantially as proposed with modifications to reflect
commenters' suggestions.\146\
---------------------------------------------------------------------------
\145\ See Form N-1A Proposing Release, supra note 8, at 10914.
\146\ Item 7. The Commission also is adopting, as proposed, the
requirement that a fund disclose in its SAI, and not in its
prospectus, information about the fund's principal underwriter and
service providers. Item 15. Requiring the information in the SAI
does not preclude a fund from including it in the prospectus (e.g.,
for marketing and other business purposes).
---------------------------------------------------------------------------
Several commenters on the Form N-1A Proposing Release suggested
that the Commission specifically acknowledge as consistent with its
rules the ability of a fund at its option to place certain information
about purchase and redemption procedures in a separate document that
would be delivered to an investor no later than with the confirmation
of the investor's purchase of the fund's shares. According to the
commenters, this separate document, or ``owner's manual,'' can help
streamline prospectus disclosure and provide an efficient means for a
fund group to provide disclosure about purchase and redemption
procedures that is common to all funds in the group. The Commission
believes that this sort of disclosure document is consistent with the
disclosure principles underlying the revisions to Form N-1A and that
investors may find it easier and less confusing to consult and retain a
separate document describing certain procedures relating to purchasing
and redeeming fund shares, which are typically mechanical in nature. In
the Commission's view, as long as the purchase and sale information in
a fund's prospectus is not reduced below the minimum required by Form
N-1A, the fund would be able to create and use
[[Page 13933]]
a separate purchase and sale disclosure document as supplemental sales
literature.
A second way in which a fund could create a separate purchase and
sale disclosure document would be for the fund to include in its SAI
the information to be contained in the document. A fund could set out
this information in a separate section of the SAI and make it
available, as a separate document, to investors upon request. To
accommodate this option, the Commission is revising Form N-1A to
include an instruction in the SAI that permits a fund to provide a
separate document with additional purchase and sale information that
can be made available to fund investors, along with the SAI or as a
stand-alone document, in response to investor requests.\147\
---------------------------------------------------------------------------
\147\ Instruction to Item 18(a).
---------------------------------------------------------------------------
Form N-1A, as amended, provides a third means for developing a
purchase and sale manual. As amended, the Form permits a fund to remove
all information regarding its purchase and sale procedures from its
prospectus and place the information in a separate document. The use of
the separate document in this manner, however, would mean that required
prospectus disclosure would appear only in the owner's manual.
Therefore, the use of this kind of separate document is conditioned on
incorporating it by reference into the fund's prospectus and providing
it to investors with the prospectus.\148\
---------------------------------------------------------------------------
\148\ Item 7(f).
---------------------------------------------------------------------------
b. Valuation of Fund Shares and Net Asset Value. Valuation. The
Commission proposed to eliminate an existing requirement of Form N-1A
that a fund disclose in its prospectus that the price at which
investors' purchase and redemption requests are effected is calculated
on the basis of the fund's current net asset value and that the fund
identify the methods used to value its portfolio securities (e.g.,
market price or fair value).\149\ The Commission proposed to take this
action principally because, in meeting the requirement, funds typically
go beyond the required identification of the methods used and repeat
the substance of rules under the Investment Company Act specifying the
way in which the net asset value of a fund must be calculated. In
addition, the information presented by a fund usually repeats
information required to be included in the SAI. This disclosure has
tended to be lengthy and technical and, as discussed below, appears not
to have been very informative for investors.
---------------------------------------------------------------------------
\149\ Under the Investment Company Act and its rules, funds
generally are required to use market quotations to value portfolio
securities. If market quotations are not readily available, the fund
must value the securities at ``fair value as determined in good
faith by the board of directors.'' Section 2(a)(41) [15 U.S.C. 80a-
2(a)(41)]; rule 2a-4 [17 CFR 270.2a-4].
---------------------------------------------------------------------------
The Commission has re-evaluated the disclosure of information in
fund prospectuses about the calculation of net asset value in light of
numerous complaints from investors that the Commission received
recently regarding the manner in which some funds determined their net
asset value. In response to volatility in various markets, some funds
recently valued certain of their securities on the basis of fair value
rather than on the basis of the last market quotations for the
securities.\150\ In taking this action, the funds appear to have relied
on a long-standing position of the Commission's staff that a fund may
(but is not required to) value portfolio securities traded on a foreign
exchange using fair value, rather than the closing price of the
securities on the exchange, when an event occurs after the close of the
exchange that is likely to have changed the value of the
securities.\151\ Many investors complained that they were unaware that
their funds could use fair value pricing in such a situation. In
response to these complaints, the Division undertook a review of the
disclosure documents of funds using such fair value pricing and found
that, although the funds disclosed the practice in their prospectuses,
the funds' discussions of their pricing procedures would have been
enhanced if they had followed the principles of plain English.\152\
Investors' recent questions about fund pricing procedures confirm the
general importance of this information to at least some investors.
Thus, the Commission has determined to continue to require that funds
identify the methods used to value their assets in their
prospectuses.\153\ The Commission is, however, adding an instruction in
Form N-1A that will encourage funds to discontinue the use of
boilerplate disclosure of the technical aspects of valuation and
require them to include a statement about the effect of the fund's use
of fair value net asset calculation.
---------------------------------------------------------------------------
\150\ These funds took this action under circumstances in which
stock markets in Asia had closed 13 to 14 hours before the pricing
of fund shares in the United States. In that time, several funds
identified events that indicated a significant change in the price
of securities traded on these markets since the last market
quotations. On the basis of this assessment, the funds valued their
securities using fair value rather than the market price of the
securities. See Barnhart, Asia Aficionados Found Profit in Times of
Turmoil, Chicago Tribune, Nov. 23, 1997 at C3; Smith, Funds: A
Hidden Trick Investors Should Know About, Business Week, Nov. 17,
1997 at 41; Authers, Now The Funds Are Coming Under Fire, Financial
Times, Nov. 8, 1997 at 2; Wyatt, The Market Turmoil: Funds; Fidelity
Invokes Fine Print and Angers Some Customers, The New York Times,
Oct. 31, 1997 at D6; Gasparino, Pricing System Trips Fidelity,
Angers Clients, Wall Street Journal, Oct. 30, 1997 at C1.
\151\ See Putnam Growth Fund (pub. avail. Feb. 23, 1981). Fair
value pricing in this context is designed to protect the long-term
value of fund shares from the actions of short-term investors who
might buy or redeem fund shares in an attempt to profit from short-
term market movements.
\152\ See ``Remembering the Past: Mutual Funds and the Lessons
of the Wonder Years,'' Barry P. Barbash, Director, Division of
Investment Management, SEC, at the 1997 ICI Securities Law
Procedures Conference, Washington, D.C. (Dec. 4, 1997).
\153\ Item 7(a). An instruction to this Item, as adopted,
requires a fund to provide a brief explanation of specific policies
of the fund concerning use of the fair value method of pricing fund
shares. Form N-1A, as amended, requires a fuller explanation of fair
value pricing policies in the SAI. Item 18(c).
---------------------------------------------------------------------------
Time and Frequency of Calculation of Net Asset Value. As proposed,
Form N-1A would continue to require a fund to state in its prospectus
when calculations of its net asset value are made and to indicate that
the fund uses a forward pricing procedure contemplating that the price
at which a purchase or redemption order is effected is based on the
next calculation of net asset value after the order is placed.\154\ In
addition, the Proposed Amendments would continue to require a fund to
disclose those days on which the fund prices its shares and the
holidays on which shares would not be priced. Commenters supported
these disclosure requirements, and the Commission is adopting them as
proposed.\155\
---------------------------------------------------------------------------
\154\ Rule 22c-1 under the Investment Company Act [17 CFR
270.22c-1] requires a fund to adopt ``forward pricing'' procedures.
Under such procedures, a fund must fill an order to buy or redeem
its shares based on the net asset value of the shares next
calculated after receipt of the order.
\155\ Item 7(a) (2) and (3). Form N-1A, as amended, allows a
fund to identify the days on which the fund will not price its
shares through the use of a list of specific days or any other means
that effectively communicates the information (e.g., explaining that
shares will not be priced on the days on which the New York Stock
Exchange is closed for trading).
---------------------------------------------------------------------------
Meaning of Net Asset Value. In the Form N-1A Proposing Release, the
Commission noted that many funds now define the term ``net asset
value'' in their prospectuses (e.g., net asset value means fund assets
minus liabilities divided by the number of outstanding shares).\156\
The Commission requested comment whether this disclosure should be
required in all fund prospectuses. Commenters on this issue were evenly
divided between those who
[[Page 13934]]
believed that the information would be helpful to investors and those
who believed the definition of net asset value would not assist
investors in making a decision about investing in a fund. While some
investors may find information about the meaning of the term net asset
value helpful, the Commission is not persuaded that the information is
necessary for most investors. Therefore, the Commission is not adopting
a requirement that a fund explain the meaning of net asset value in its
prospectus. A fund would continue to have the option of including this
information in its prospectus or SAI if the fund concluded that such
information would be useful to potential investors in the fund.
---------------------------------------------------------------------------
\156\ See Form N-1A Proposing Release, supra note 8, at 10914.
---------------------------------------------------------------------------
c. Restrictions on Portability. At the time that the Commission
issued the Form N-1A Proposing Release, the Commission's staff was
considering a number of complaints received from fund investors about
restrictions on the ``portability'' of their fund shares. To better
understand the issues raised by these investors, the staff consulted
with, among others, a number of industry trade groups and other
industry participants.\157\ On the basis of the information compiled by
the staff, the Commission understands that, in certain cases, an
investor who purchases shares of a fund through a broker-dealer or
other financial intermediary may be unable to transfer fund shares held
in a brokerage account to an account established at another broker-
dealer.\158\ In their responses to the staff, industry representatives
indicated that the lack of portability of an investor's shares in a
fund may be attributed to several factors, including limitations on the
transfer of shares sold by broker-dealers affiliated with the
investment adviser of the fund, the lack of participation by the fund
in a computerized transfer system, and the absence of reciprocal
agreements between the fund and broker-dealers. The industry
participants, however, supported efforts to increase the portability of
fund shares.
---------------------------------------------------------------------------
\157\ See Letter from Jack W. Murphy, Associate Director,
Division of Investment Management, SEC, to Stuart J. Kaswell, Senior
Vice President and General Counsel, Securities Industry Association,
Thomas M. Selman, Director, Advertising/Investment Companies
Regulation, NASD Regulation, Inc., and Paul Schott Stevens, Senior
Vice President and General Counsel, ICI (Dec. 18, 1996).
\158\ An investor may seek to transfer such an account, for
example, when the registered representative or account executive
through which the investor purchased the shares becomes affiliated
with a new firm.
---------------------------------------------------------------------------
The Commission understands that some progress has occurred in
eliminating portability restrictions. To the extent that restrictions
continue to exist, however, the Commission believes that disclosure of
the limits on portability of a fund's shares may be of importance to a
typical investor. The Commission notes that this type of disclosure
would seem to address the relationship between a broker-dealer or other
intermediary and a fund shareholder, rather than the relationship
between the fund and the shareholder. For that reason, the Commission
is not convinced that the disclosure should be required in fund
prospectuses.\159\ The Commission has asked its staff to continue
discussions with the staff of the National Association of Securities
Dealers, Inc. (``NASD'') to consider means other than the prospectus to
alert investors who purchase shares of funds through broker-dealers of
restrictions on portability.\160\
---------------------------------------------------------------------------
\159\ Such disclosure would appear to be inconsistent with the
fundamental principle underlying Form N-1A that a fund's prospectus
should focus on information about the fund.
\160\ See discussion infra Section II.G about other disclosure
issues that the Commission is addressing with the NASD.
---------------------------------------------------------------------------
d. Tax Consequences. The Proposed Amendments would revise the tax
disclosure required in a fund's prospectus to focus that disclosure on
the likely tax consequences to the fund and its shareholders if the
fund operates as described in the prospectus. In general, the Proposed
Amendments were designed to elicit tax disclosure that is far less
complicated than that typically included in fund prospectuses
today.\161\ Commenters strongly agreed with the goal of the proposed
provisions relating to prospectus tax disclosure, which the Commission
has determined to adopt substantially as proposed. The Commission notes
its strong desire that, in revising their documents to comply with Form
N-1A, as amended, all funds pay particular attention to simplifying
their existing tax disclosures, which the Commission believes are too
complicated and discourage the use of fund prospectuses.
---------------------------------------------------------------------------
\161\ Existing tax-related prospectus disclosure typically
includes lengthy and overly technical information about the tax
treatment of a fund, and, in some cases, the treatment of specific
securities held by a fund. Many prospectuses, for example, include
information about the conditions that a fund must meet to qualify
for pass-through tax treatment under Subchapter M of the Internal
Revenue Code, as well as information about the tax treatment of
private activity bonds, foreign currency contracts, and other fund
investments. In addition, tax disclosure frequently includes
technical jargon in referring, for example, to a fund's status as a
``regulated investment company'' and the fund's payment of
``spillback distributions'' and ``net investment income.'' Use of
these terms in fund prospectuses would continue to be discouraged.
See General Instruction C.1(c), which would continue to instruct a
fund not to use technical or legal terminology in its prospectus.
---------------------------------------------------------------------------
The Commission proposed to move disclosure about a fund's
qualification under Subchapter M of the Internal Revenue Code \162\ to
the SAI, unless the fund does not expect to qualify for Subchapter M
treatment. Commenters supported moving this disclosure to the SAI,
agreeing that it does not help investors decide whether to invest in a
fund. The Commission is adopting this disclosure requirement as
proposed.\163\
---------------------------------------------------------------------------
\162\ I.R.C. 851, et seq.
\163\ Item 19(a). Item 7(e)(3) of Form N-1A, as amended,
requires a fund that does not expect to qualify for pass-through tax
treatment under Subchapter M to explain in its prospectus the tax
consequences of not qualifying (e.g., by disclosing that income and
gains realized by the fund would be subject to double taxation--that
is, both the fund and shareholders could be subject to tax
liability). This disclosure would distinguish the fund from other
funds and help investors appreciate the tax consequences of
investing in the fund. Similarly, a fund that expects to pay an
excise tax under the Internal Revenue Code with respect to its
distributions is required to disclose in its prospectus the
consequences of paying the tax. See I.R.C. 4982.
---------------------------------------------------------------------------
The Commission proposed to require a description of the tax
consequences to shareholders of buying, holding, exchanging, and
selling a fund's shares designed to highlight the tax consequences of
investing in the fund. The Proposed Amendments would require a fund to
state, as applicable, that the fund intends to make distributions to
shareholders that may be taxed as ordinary income or capital gains.
Under the Proposed Amendments, a fund that expects that its investment
objectives or strategies will result in its distributions primarily
consisting of ordinary income (or certain short-term capital gains) or
long-term capital gains would be required to provide disclosure to that
effect.
Commenters generally supported the proposed tax disclosure, and the
Commission is adopting it as proposed with one modification to reflect
recent changes to the tax laws.\164\ In light of these changes, Form N-
1A, as amended, requires a fund to disclose that capital gains may be
taxable at different rates depending upon the length of time that the
fund holds its assets.\165\
---------------------------------------------------------------------------
\164\ Item 7(e). Funds subject to this requirement would
include, for example, those often described as ``tax-managed,''
``tax-sensitive,'' or ``tax-advantaged,'' which have investment
strategies to maximize long-term capital gains and minimize ordinary
income. A fund that has a principal investment objective or strategy
to achieve tax-managed results (e.g., to maximize long-term capital
gains and minimize ordinary income) would need to provide disclosure
to that effect in its prospectus risk/return summary. Item 4.
\165\ Recent changes to the tax laws reduce the maximum rate on
the long-term net capital gains on the sale of securities from 28%
to 20%, but increase the asset holding period from 12 months to 18
months (except for sales made after May 6, 1997 and before July 29,
1997, which retain long-term gain status). Taxpayer Relief Act of
1997, Pub. L. 105-34 (1997). The new laws also classify capital
assets held for a period of one year, but less than 18 months, as
``mid-term'' gains, which are subject to a maximum rate of 28%.
---------------------------------------------------------------------------
[[Page 13935]]
The Proposed Amendments would require a fund to state that it will
provide each shareholder by a specified date (typically, January 31 of
each year) with information about the amount of ordinary income and
capital gains, if any, distributed to the shareholder during the prior
calendar year. One commenter questioned the need for this requirement,
citing that a fund must send this information to investors by a
particular date under Internal Revenue Service regulations.\166\ The
Commission agrees that, in light of these regulations, indicating in a
prospectus the date by which a fund will deliver certain tax
information is unnecessary. Therefore, Form N-1A, as amended, does not
adopt this provision of the Proposed Amendments.
---------------------------------------------------------------------------
\166\ The requirement is set forth in I.R.C. 852(b)(3)(c).
---------------------------------------------------------------------------
The Proposed Amendments would require a tax-exempt fund to inform
investors of the special tax consequences associated with the fund.
Commenters supported the proposed disclosure, and the Commission is
adopting it substantially as proposed.\167\
---------------------------------------------------------------------------
\167\Item 7(e)(2). Form N-1A, as amended, requires a fund to
disclose, if applicable, that: (i) The fund may invest a portion of
its assets in securities that generate income that is not exempt
from federal or state income tax; (ii) income exempt from federal
income tax may be subject to state and local income tax; and (iii)
any capital gains distributed by the fund may be taxable. The
Commission also proposed that a fund disclose that a portion of the
tax-exempt income that it distributes may be treated as tax
preference items for purposes of determining whether the shareholder
is subject to the federal alternative minimum tax. Form N-1A, as
amended, does not require disclosure about the preference items in
the prospectus. This disclosure is technical in nature and applies
only in limited circumstances, and would not appear to help a
typical investor make a decision about investing in a fund.
---------------------------------------------------------------------------
7. Distribution Arrangements (Item 8)
The Commission proposed changes to Form N-1A to require that all
information about a fund's distribution arrangements appear in one
section of the fund's prospectus. The Proposed Amendments would require
that section to discuss, among other things, sales loads, fees paid
under rule 12b-1 plans, and the details of multiple class and master-
feeder fund arrangements. The Commission also proposed changes designed
to make fund discussions of distribution arrangements less legalistic
and more helpful to investors in evaluating and comparing funds.\168\
Commenters generally supported the Commission's conclusion that
information about distribution arrangements is particularly important
to fund investors, and the Commission is adopting the disclosure
requirements relating to those arrangements substantially as proposed.
---------------------------------------------------------------------------
\168\ Typical fund shareholders appear to regard information
about fees paid by funds under various distribution arrangements as
important information in making investment decisions. See ICI
Shareholder Use Study, supra note 52, at 21 (1997) (over 70% of
survey respondents considered sales charge and fee information
before making their most recent purchase).
---------------------------------------------------------------------------
Rule 12b-1 Plans. The Commission proposed to modify Form N-1A's
requirements pertaining to plans designed to meet the requirements of
rule 12b-1 under the Investment Company Act to focus prospectus
disclosure on the amount of fees paid under the plans and to move
detailed, technical disclosure about these plans to the SAI. The
Commission proposed to require a fund with a rule 12b-1 plan to state
the amount of the fee and to disclose that the plan allows the fund to
pay fees for the sale and distribution of its shares. The Commission
also proposed an additional requirement designed to result in
prospectuses that explain more effectively to shareholders that
distribution fees are continuous in nature and that these fees, over
time, cumulatively may exceed other types of sales loads.\169\ The
Proposed Amendments would require a fund to add to its prospectus
disclosure to the effect that, because distribution fees are paid out
of the fund's assets on an ongoing basis, the fees may, over time,
increase the cost of an investment in a fund and cost investors more
than other types of sales loads.
---------------------------------------------------------------------------
\169\ The Commission's proposed disclosure would replace similar
disclosure required by the rules of the NASD. Rule 2830(d)(4) of the
NASD Conduct Rules, supra note 37, at 4624 (requiring a fund with a
rule 12b-1 plan to disclose adjacent to the fee table that long-term
shareholders may pay more than the maximum front-end sales charge
allowed by the NASD). In light of the revisions to Form N-1A
contemplated by the Proposed Amendments, the NASD has proposed to
eliminate its similar disclosure. NASD Notice to Members 97-48, at
393 (Aug. 1997).
---------------------------------------------------------------------------
Most commenters supported the proposed disclosure concerning rule
12b-1 plans, although some commenters maintained that disclosure of the
amount of rule 12b-1 fees merely duplicated information appearing in
the prospectus fee table. The Commission believes that disclosing the
amount of the rule 12b-1 fee in connection with other disclosure about
the nature of the fees will provide a typical investor with a complete
and useful picture of the amounts paid by the fund for distribution.
Therefore, the Commission is adopting the disclosure concerning rule
12b-1 fees as proposed.\170\
---------------------------------------------------------------------------
\170\ Item 8(b); Item 15(g). The Proposed Amendments also would
require a fund that pays a service fee outside of a rule 12b-1 plan
to disclose the amount and purpose of the fee in the section of its
prospectus describing sales loads and rule 12b-1 fees charged by the
fund. One commenter questioned the need for this disclosure,
asserting that this type of service fee is not appropriately
characterized as a distribution fee and would be disclosed in the
fee table. The Commission is persuaded that additional disclosure of
these fees is unnecessary, and Form N-1A, as amended, does not
require prospectus disclosure of them. A fund would disclose service
fees paid outside a rule 12b-1 plan in the fee table and in the SAI.
Instruction 3(b) to Item 3; Item 20(c).
---------------------------------------------------------------------------
Sales Loads. The Proposed Amendments would continue to require
disclosure of the amount of any sales load charged on an investment in
a fund and disclosure indicating when a sales load may be reduced or
eliminated (e.g., for larger investments). The Commission proposed to
move other technical disclosure about sales loads to the SAI, including
disclosure about dealer reallowances, sales load waivers, and
breakpoints applicable to the sale of a fund's shares. The Commission
believes that this detailed and technical information tends to obscure
information about the amount of sales loads charged by a fund and does
not help investors evaluate and compare funds. The Commission also
proposed to eliminate disclosure about fees charged by third parties
(i.e., banks, broker-dealers, or other persons) in connection with the
purchase of a fund's shares.\171\ Commenters generally supported the
proposed approach to disclosure about sales loads, and the Commission
is adopting the amendments as proposed.\172\
---------------------------------------------------------------------------
\171\ See also Interagency Statement, supra note 50; rule 2230
of the NASD Conduct Rules, supra note 37, at 4213-14; rule 204-3(a)
under the Advisers Act [17 CFR 275.204-3(a)]; Item 1 of Form ADV,
Part II [17 CFR 279.1] for fee disclosure requirements applicable to
banks, broker-dealers and investment advisers, respectively.
\172\ Item 8(a); Item 13(e) (sales load arrangements for
affiliated persons); and Item 15(f) (dealer reallowances).
---------------------------------------------------------------------------
Multiple Class and Master-Feeder Fund Arrangements. The Commission
proposed to combine, in one place in the prospectus, disclosure about
the distribution and service arrangements of multiple class and master-
feeder funds. Commenters generally supported this treatment of these
arrangements, which the Commission is adopting substantially as
proposed, with modifications to reflect commenters' suggestions.
The Commission proposed to eliminate the requirement that a feeder
fund discuss the possibility and
[[Page 13936]]
consequences of its no longer investing in the master fund. It is the
Commission's understanding that distribution arrangements currently
used by many funds contemplate feeder funds having the authority to
change the master funds in which they are invested. In recognition of
this development, the Commission is modifying Form N-1A to require such
a feeder fund to describe briefly the circumstances under which it may
change its investment in a master fund.\173\
---------------------------------------------------------------------------
\173\ Item 8(c)(4). A feeder fund that does not have the
authority to change its master fund would not need to discuss in its
prospectus the possibility and consequences of its no longer
investing in the master fund. Instruction to Item 8(c)(4).
---------------------------------------------------------------------------
One commenter suggested additional changes to streamline prospectus
disclosure about multiple class funds and master-feeder funds. The
commenter recommended that the Commission eliminate existing
requirements for a fund to disclose information in its prospectus about
additional classes or feeders that are not offered in the same
prospectus. The commenter also recommended that the Commission modify
the proposed disclosure about conversions or exchanges from one class
to another to require disclosure only if the conversion or exchange is
mandatory or automatic. The Commission agrees that the disclosure about
multiple class funds or master-feeder funds in a prospectus should
focus on the class or fund offered in that prospectus. Form N-1A, as
amended, reflects this position.\174\
---------------------------------------------------------------------------
\174\ Item 8(c).
---------------------------------------------------------------------------
8. Financial Highlights Information (Item 9)
Condensed Financial Information. The Proposed Amendments would
continue to require a fund to include in its prospectus a summary of
certain financial information. To provide funds with greater ability to
present prospectus disclosure in a format that conveys information
effectively to investors, the Proposed Amendments would permit this
information to be disclosed anywhere in the prospectus, rather than on
a particular page of the prospectus, as currently required. The
Commission also proposed changes to the financial highlights table to
assist investors in understanding the information contained in it.
Commenters supported the Proposed Amendments and endorsed in particular
the proposal to permit a fund to choose the location in its prospectus
for the financial highlights table. The Commission is adopting
revisions to the financial highlights table requirement substantially
as proposed.
In the Form N-1A Proposing Release, the Commission acknowledged
that additional changes could improve the financial highlights
information and stated that it intended to revisit fund financial
disclosure in a separate future rulemaking initiative addressing
financial statement requirements generally.\175\ For the purposes of
its evaluation of the financial highlights information, the Commission
requested comment on simplifying and updating this information. This
request elicited a number of suggestions ranging from support for the
table to recommendations that it be moved to the SAI or eliminated. The
Commission will consider these comments as part of its financial
statement initiative.
---------------------------------------------------------------------------
\175\ See Form N-1A Proposing Release, supra note 8, at 10918.
---------------------------------------------------------------------------
The Commission is, however, adopting some of the commenters'
recommendations that would simplify the financial highlights table. One
commenter recommended that the Commission change the period covered by
the financial highlights table from 10 to 5 years to parallel the
period covered by financial information currently required to be in
fund annual reports. The Commission has adopted this recommendation
\176\ because it believes that financial information for a 5-year
period will help investors evaluate a fund and, at the same time,
respond to concerns that the current table complicates the prospectus
and is confusing to investors. Investors interested in historical
return information about a fund beyond that contained in the amended
financial highlights table can look to the bar chart that the
Commission is requiring to be included in prospectuses, which shows the
fund's returns over a 10-year period.\177\
---------------------------------------------------------------------------
\176\ Instruction 1(a) to Item 9(a).
\177\ Item 2(c)(2). Form N-1A permits a fund to incorporate by
reference the financial highlights information into its annual
report if it is delivered with the prospectus. Item 9(b). One
commenter recommended that the Commission eliminate total return
information from the financial highlights table because the bar
chart shows a fund's returns. The Commission has not followed this
recommendation because returns in the financial highlights table
will be reflected for a fund's fiscal year periods, which may not be
the same as the calendar year periods reflected in the bar chart.
The Commission also notes that including returns in the financial
highlights table will enable a fund to satisfy the updating
requirements of section 10(a)(3) under the Securities Act.
---------------------------------------------------------------------------
One commenter urged the Commission to eliminate the requirement
that a fund disclose its average commission rates in the financial
highlights table, arguing that these rates are technical information
that typical investors are unable to understand. Industry analysts
support this view and have informed the Commission staff of their
conclusion that the average commission rate information in the table is
only of marginal benefit to them and typical fund investors.
At this time, the Commission believes that there continues to be
some merit in ensuring that information about the average commission
rates paid by funds is publicly available. The Commission believes,
however, that a fund prospectus appears not to be the most appropriate
document through which to make this information public. Therefore, Form
N-1A, as amended, does not require disclosure of average commission
rates in the financial highlights table. The Commission will consider
adding such a requirement to Form N-SAR, which funds file with the
Commission semi-annually to report information on their current
operations.\178\
---------------------------------------------------------------------------
\178\ 17 CFR 274.101. The Division expects to submit
recommendations to the Commission on revising Form N-SAR in the near
future.
---------------------------------------------------------------------------
Calculation of Performance Data. The Commission proposed to
eliminate the Form N-1A requirement that a fund that includes
performance information in certain of its advertisements include a
brief explanation in its prospectus of how it calculates its
performance. This disclosure requirement is intended to facilitate
funds using advertisements in accordance with rule 482 under the
Securities Act; such an advertisement is an omitting prospectus under
section 10(b) of the Securities Act and, as an omitting prospectus, is
required to contain information ``the substance of which'' is contained
in the prospectus. Recent legislation added section 24(g) to the
Investment Company Act, which authorizes the Commission to adopt rules
permitting a fund to use a summary or omitting prospectus that includes
information the substance of which is not required to be included in
the prospectus.\179\ With this new authority, the Commission intends to
re-evaluate fund advertising rules with the goal of, among other
things, proposing to amend rule 482 to eliminate the ``substance of
which'' requirement.
---------------------------------------------------------------------------
\179\ See Improvements Act, supra note 118, at section 204.
---------------------------------------------------------------------------
Consistent with the Proposed Amendments, Form N-1A, as amended,
does not require a fund to duplicate in its prospectus the explanation
of how it calculates its performance required to appear in the fund's
SAI.\180\ So long as the SAI is incorporated by reference in
[[Page 13937]]
the prospectus, the rule 482 ``substance of which'' requirement will be
satisfied for this information or any other information that a fund may
wish to include in a rule 482 advertisement.
---------------------------------------------------------------------------
\180\ Item 21.
---------------------------------------------------------------------------
9. Front and Back Cover Pages (Item 1)
The Commission proposed to simplify the disclosure currently
required on the front cover page of the prospectus. The Proposed
Amendments would require only three items of cover-page disclosure: a
fund's name; the date of the prospectus; and the standard Commission
disclaimer about the securities offered in the prospectus.\181\ To
unclutter the front cover page and avoid repeating information
contained in the proposed risk/return summary at the beginning of the
prospectus, the Proposed Amendments would no longer continue to require
a fund to include on the front cover a brief statement of the fund's
investment objectives, a statement that the prospectus sets forth
concise information that the investor should know before investing, and
a statement that the prospectus should be retained for future
reference.\182\ Commenters generally supported the proposed front cover
page disclosure requirements, and the Commission is adopting them with
revisions reflecting the suggestions of commenters.
---------------------------------------------------------------------------
\181\ This disclaimer is required by rule 481(b)(1) under the
Securities Act [17 CFR 230.481(b)(1)].
\182\ See Form N-1A Proposing Release, supra note 8. See also
SEC, Report of the Task Force on Disclosure Simplification (1996)
(recommending that many legal warnings be eliminated to make the
cover page more inviting and that any necessary legal warnings be
set out in a more readable style and format); Plain English Release,
supra note 20, at 6372.
---------------------------------------------------------------------------
Several commenters maintained that the Commission should allow a
fund to include certain information on the front cover page of its
prospectus, such as its investment objectives or a brief (e.g., one
sentence) description of its operations. The Commission agrees, and
Form N-1A, as amended, permits, but does not require, a fund to include
additional information on the front cover page, subject to the Form's
general rule covering the presentation of information not otherwise
required to be included in the prospectus.\183\
---------------------------------------------------------------------------
\183\ Instruction to Item 1(a); see also General Instruction
C.3(b). Form N-1A currently requires special disclosure on the front
cover page of a feeder fund prospectus describing the master-feeder
fund structure and explaining how it differs from a traditional
mutual fund. 1993 GCL, supra note 25, at II.H(a). Consistent with
simplifying cover page disclosure, Form N-1A, as amended, does not
require this disclosure on the front cover page, but does require
disclosure about a fund's master-feeder structure in the body of the
fund's prospectus in response to Item 8(c).
---------------------------------------------------------------------------
Several commenters criticized the Commission's standard disclaimer
regarding the securities offered by a prospectus and questioned other
disclosure that is required on the front cover page of a fund
prospectus.\184\ The commenters recommended that the Commission
eliminate the legend, maintaining that it is not meaningful to a
typical investor and is not essential to such an investor's decision to
invest in a fund.
---------------------------------------------------------------------------
\184\ Rule 481(b)(1) (requiring disclosure that indicates that
neither the Commission nor any state securities commission has
approved the securities or passed on the adequacy of disclosure in
the prospectus).
---------------------------------------------------------------------------
The Commission has not adopted this recommendation because it
believes that every prospectus should clearly alert investors that a
registration statement filed with and made effective by the Commission
does not represent approval by the Commission of the securities
described in the prospectus. This view is reflected in the requirement
that all issuers filing registration statements under the Securities
Act include the disclaimer legend on their prospectuses.\185\ The
Commission recognizes that the disclaimer used to date is technical in
nature and may be difficult to understand. In its recent plain English
initiatives, the Commission adopted amendments to simplify the legend,
which apply to fund prospectuses.\186\
---------------------------------------------------------------------------
\185\ Item 501 of Regulation S-K [17 CFR 229.501].
\186\ See Plain English Release, supra note 20, at 6372
(revising Item 501(b) of Regulation S-K and making conforming
changes to rule 481(b)(1)).
---------------------------------------------------------------------------
The Commission proposed to consolidate disclosure regarding the
availability of additional information about a fund on the back cover
page of its prospectus.\187\ The Proposed Amendments would require the
back cover page to state that the SAI includes additional information
about the fund that is available without charge upon request, and to
explain how shareholder inquiries regarding the fund can be made. Under
the proposal, the back cover page would also include a statement
whether and from where information is incorporated by reference into
the prospectus. Commenters generally supported these amendments, and
the Commission is adopting the back cover page requirements as
proposed, with modifications to reflect commenters' suggestions.\188\
---------------------------------------------------------------------------
\187\ The Proposed Amendments also would require a fund to
include on the back cover page of its prospectus a statement that
information about the fund is available at the Commission's Public
Reference Room and on the Commission's Internet site. Some
commenters questioned this proposal, asserting that the information
is not essential to making a decision to invest in a fund and would
clutter the back page of prospectuses. The Commission is not
persuaded by these arguments and has adopted this requirement as
proposed. Item 1(b)(3). The Commission notes that the requirement is
consistent with those imposed on all registrants filing registration
statements under the Securities Act and reflects recent changes
adopted in the Plain English Release, supra note 20, at 6381
(amending Item 101(e)(2) of Regulation S-K under the Securities Act
[17 CFR 229.101(e)(2)]).
\188\ Item 1(b). The Commission proposed to require disclosure
in a fund's discussion of risk in the prospectus risk/return summary
that additional information about a fund's investments is available
in the fund's shareholder reports. In response to commenters'
suggestions, the Commission is requiring that this disclosure be
made on the back cover page of a fund's prospectus together with
other references to the availability of additional information about
the fund. Item 1(b)(1). See supra Section II.A.1.
---------------------------------------------------------------------------
To ensure prompt delivery of a requested SAI, the Proposed
Amendments would require a fund to send its SAI to requesting investors
within 3 business days of a request. Those commenters addressing this
requirement generally supported it, although one commenter argued that,
to provide funds some leeway in responding to unforeseen circumstances,
funds should be subject to a ``reasonably prompt'' mailing standard,
which would be deemed normally to be within 3 days of request. The
Commission believes that prompt mailing of the SAI is essential to the
disclosure format contemplated by Form N-1A and is adopting the 3-
business day mailing requirement as proposed.\189\
---------------------------------------------------------------------------
\189\ Instruction 3 to Item 1(b)(1). The Commission's Office of
Compliance Inspections and Examinations will, as a part of its
routine periodic inspections of a fund's operations, examine the
fund's compliance with the 3-business day mailing requirement.
Failure to comply with the requirement could result in action by the
Commission to ensure compliance, including an enforcement action in
an appropriate case.
---------------------------------------------------------------------------
Several commenters raised concerns about requests for additional
information about a fund when the fund's shares are sold through
financial intermediaries, such as broker-dealers or banks. Commenters
recommended that Form N-1A permit funds to indicate in their
prospectuses that investors may contact an intermediary to obtain the
SAI and other additional information. The Commission acknowledges that
many funds use intermediaries in distributing or servicing their shares
and that investors may look to these intermediaries for information
about the funds. Thus, the Commission has revised Form N-1A to permit a
fund to state on the back cover of its prospectus that additional
information about the fund is available from a financial
intermediary.\190\ The Commission notes, however, that such a fund
retains the obligation to ensure that information is sent to investors
within 3 business days of an investor request. The Commission expects
that funds will fulfill this obligation through contractual
[[Page 13938]]
arrangements with broker-dealers, banks, or other financial
intermediaries.
---------------------------------------------------------------------------
\190\ Instruction 2 to Item 1(b)(1).
---------------------------------------------------------------------------
Some commenters had suggestions about certain technical disclosure
information that the Commission proposed to include on the back cover
page of the prospectus. The Proposed Amendments, for example, would
move the requirement to disclose the date of the SAI to the back cover
page of the prospectus. Several commenters criticized this requirement,
asserting that the date of the SAI is not essential to an investor's
decision to invest in a fund and that requiring the SAI date on the
back cover of a prospectus would necessitate the reprinting of
prospectuses of funds that share a common SAI whenever a new fund is
added to the group covered by the SAI. In light of these comments and
the obligation imposed on funds to send investors who request an SAI
the most current version of the document, the Commission has deleted
from Form N-1A, as amended, the requirement to show the date of a
fund's SAI on the back cover of the fund's prospectus.\191\
---------------------------------------------------------------------------
\191\ To enable the Commission's staff to respond efficiently to
investor inquiries, the Proposed Amendments would require a fund to
disclose the fund's name, Commission file number and, if the fund is
a series of a registrant, the registrant's name on the back cover
page. Some commenters maintained that the information presented in
meeting this requirement could be confusing to investors and is not
relevant to a typical investor in considering whether to invest in a
fund. The Commission is modifying the requirement so that a fund
will only need to disclose its Commission file number in small print
(e.g., 8-point modern type) at the bottom of the back cover page of
its prospectus. Item 1(b)(4).
---------------------------------------------------------------------------
B. Part B--Statement of Additional Information
The Commission proposed a number of technical and conforming
revisions to the SAI disclosure requirements to reflect the proposed
changes in the prospectus disclosure requirements. The Commission is
adopting these revisions as proposed. As discussed in the Form N-1A
Proposing Release, the Commission intends to consider the SAI
requirements as part of a future initiative and propose amendments to
simplify and update SAI disclosure following the same disclosure
principles underlying the revisions to Form N-1A being adopted today.
C. Part C--Other Information
The Commission proposed amendments to Part C of Form N-1A to
eliminate certain filing requirements no longer deemed necessary.
Commenters supported the proposed amendments, and the Commission is
adopting them as proposed with certain modifications to reflect the
suggestions of commenters.\192\
---------------------------------------------------------------------------
\192\ Form N-1A, as amended, does not require the filing of (i)
model retirement plans that are used to offer fund shares; (ii)
schedules showing the calculation of performance information; and
(iii) voting trust agreements. One commenter suggested additional
changes to the Part C requirements, asserting that much of the
information in this part of the registration statement does not
serve any important purpose and imposes administrative burdens on
funds. The commenter recommended, among other things, that the
Commission no longer require a fund to include a table showing the
number of holders of each class of a fund's shares in its
registration statement. In support of its recommendation, the
commenter pointed out that this information is required to be filed
by funds on their Forms N-SAR. The Commission is persuaded by this
argument and has amended Form N-1A to delete the requirement that a
fund's registration statement include a table of holders of fund
shares.
---------------------------------------------------------------------------
The Proposed Amendments would continue to require newly organized
funds to file updated financial statements within 4 to 6 months of the
effective date of the registration statement. The Commission asked for
comment whether the requirement should be retained. All commenters
responding to the request said that the Commission should eliminate
this requirement. Commenters argued that the information is of little
value to investors in a new fund because it covers a fund's operations
for a short start-up period that does not usually reflect the fund's
expected operations. Commenters also argued that the cost of providing
this information places a heavy burden on new funds, which typically
have smaller amounts of assets under management than larger funds.
According to the commenters, these costs can have a significant and
disproportionate effect on a small fund's expense ratio.
The Commission believes that financial statements for the initial
operations of a fund may not provide information that is significant to
a typical fund investor. In addition, an investor interested in
financial information about a fund's initial operations can obtain the
information by requesting the fund's most recent shareholder report,
which is generally available 6 to 8 months after the fund commences
operations and begins selling shares to investors. For these reasons,
the Commission has concluded that the costs associated with the 4 to 6
month update are not outweighed by the benefits that the information
may provide to some investors. Therefore, Form N-1A, as amended, does
not require the filing of updated financial statements for a newly
organized fund.
D. General Instructions
1. Reorganizing and Simplifying the Instructions
The General Instructions to Form N-1A currently provide guidance on
the use and content of the Form. The Proposed Amendments were intended
to update and reorganize the General Instructions to make the
Instructions easier to use. Commenters generally supported these
revisions, which the Commission is adopting substantially as proposed.
As adopted, the General Instructions consist of the following topics:
(A) Definitions; (B) Filing and Use of Form N-1A; (C) Preparation of
the Registration Statement; and (D) Incorporation by Reference.
The Proposed Amendments added several definitions to standardize
certain terms as used in Form N-1A. Under the proposal, the term
``Fund'' would be defined as a registrant or a series of the
registrant. The Proposed Amendments also included definitions of the
terms ``Registrant'' and ``Series'' as used in Form N-1A. The
Commission is adopting all three definitions as proposed.\193\
---------------------------------------------------------------------------
\193\ See General Instruction A.
---------------------------------------------------------------------------
Proposed General Instruction B incorporated a more user-friendly,
question-and-answer format regarding the filing and use of Form N-1A
and replaced current Instructions A through D and F. The Commission is
adopting General Instruction B as proposed.
General Instruction C to Form N-1A, as proposed, would set out the
requirements for preparing the registration statement in an
understandable format and would replace existing Instruction G to the
Form. As proposed, the new Instruction emphasized the need to provide
clear and concise prospectus disclosure and permitted a fund to include
in its prospectus or SAI information not otherwise required by Form N-
1A, so long as the information is not misleading and does not, because
of its nature, quantity, or manner of presentation, obscure the
information required to be included.\194\ The Commission is adopting
Instruction C substantially as proposed.\195\
---------------------------------------------------------------------------
\194\ See Form N-1A Proposing Release, supra note 8, at 10918.
\195\ The Commission is deleting other instructions to the
current Form N-1A, which permit information to be added to the
prospectus and SAI. See, e.g., Item 1(b) of the current Form N-1A
(permitting other information to be included on the cover page of
the prospectus). Instruction C of Form N-1A, as amended, provides
this guidance for purposes of all fund disclosure. The Commission
also is deleting specific Instructions in current Part A that call
for brief and concise prospectus disclosure, because Instruction C
includes this requirement for purposes of all prospectus disclosure.
---------------------------------------------------------------------------
[[Page 13939]]
2. Plain English Disclosure
The Commission is adopting amendments to General Instruction C
clarifying that funds must comply with rule 421 under the Securities
Act, which sets out the Commission's recently adopted plain English
requirements.\196\ Rule 421(b) sets out general requirements that the
entire prospectus be clear, concise, and understandable and provides
guidance on how to draft prospectuses that meet this standard.
---------------------------------------------------------------------------
\196\ General Instruction C.1(e).
---------------------------------------------------------------------------
Under Form N-1A, as amended, a fund would need to draft the front
and back cover pages and the risk/return summary of a fund prospectus
in accordance with the provisions of rule 421(d).\197\ In meeting these
requirements, a fund will need to use plain English principles in the
organization, language, and design of these sections of their
prospectuses. Funds also will comply substantially with the following
six principles of clear writing:
\197\ Items 1(a) (Front Cover Page), 1(b) (Back Cover Page), 2
(Risk/Return Summary: Investments, Risks, and Performance), and 3
(Risk/Return Summary: Fee Table).
---------------------------------------------------------------------------
--Short sentences;
--Definite, concrete, everyday language;
--Active voice;
--Tabular presentation or bullet lists for complex material, wherever
possible;
--No legal jargon or highly technical business terms; and
--No multiple negatives.
The compliance dates for rule 421(d) and Form N-1A, as amended, will be
the same. Therefore, when a fund files a new or amended registration
statement in order to comply with Form N-1A, as amended, it must also
comply with the plain English rule.\198\
---------------------------------------------------------------------------
\198\ See infra Section II.H for a discussion of the effective
and compliance dates for Form N-1A, as amended. The compliance date
for investment companies other than funds is October 1, 1998. See
Plain English Release, supra note 20, at 6370. Unit investment
trusts and closed-end investment companies must comply with the
plain English rule only for new registration statements. Variable
annuity issuers filing on Forms N-3 and N-4, and variable life
insurance issuers filing on Forms N-8B-2 and S-6 must comply with
rule 421(d) for new and updated registration statements. The
Commission also has proposed new Form N-6 for variable life
insurance issuers that incorporates the Commission's plain English
requirements. Investment Company Act Release No. 23066 (Mar. 13,
1998).
---------------------------------------------------------------------------
3. Disclosure Guidelines
The Commission has revised General Instruction C to reflect clearly
the basic disclosure principles underlying the Commission's initiatives
being adopted today. The Commission believes that applying these
principles consistently in developing fund disclosure documents will
result in high quality documents that effectively communicate
information to investors.
General Instruction C, as amended, includes a set of drafting
guidelines that are designed to improve prospectus disclosure. The
Instruction encourages funds to avoid cross-references in their
prospectuses to their SAIs or shareholder reports. Repeated cross-
references to the SAI and shareholder reports can add unnecessary
length and complexity to fund prospectuses and often preclude
prospectuses from disclosing information effectively to investors.
General Instruction C provides guidance on the use of Form N-1A by
more than one fund and by a multiple class fund. Fund prospectuses
frequently contain information for multiple series and classes that
offer investors different investment alternatives and distribution
arrangements. When information in them is presented clearly,
prospectuses offering more than one fund may make it easier for
investors to compare funds and may be more efficient for funds and
investors by eliminating the need to provide investors with multiple
prospectuses containing repetitive information. Instruction C generally
enables a fund to organize information about multiple funds and classes
in a format of its choice that is consistent with the goal of
communicating information to investors effectively.\199\
---------------------------------------------------------------------------
\199\ General Instruction C.3(c). A fund, for example, may
decide that using a horizontal rather than vertical presentation for
the fee table would present the required fee information most
effectively. A fund may find that using different formats in its
prospectus risk/return summary would communicate the required
information effectively. Depending on the number and type of funds
offered in the prospectus, for example, a fund may find it useful to
group the required information for all funds together under each
caption or to present the information sequentially for each fund.
See John Hancock Funds, Inc. (pub. avail. June 28, 1996) (using a
two-page disclosure format for each of 7 funds offered in a single
prospectus).
---------------------------------------------------------------------------
4. Modified Prospectuses for Certain Funds
Proposed Instruction C would permit a fund that is offered as an
investment alternative in a participant-directed defined contribution
plan to modify its prospectus for use by participants in the plan.
Under the Proposed Amendments, a prospectus used to offer fund shares
to plan participants could omit certain information required by
proposed Items 7 (shareholder information) and 8 (distribution
arrangements). This prospectus disclosure would largely be irrelevant
to plan participants; investments that can be made by participants, and
the distributions participants receive (including the tax consequences
of distributions), are governed by statutory requirements and by the
terms of individual plans.\200\ Commenters generally supported
permitting prospectuses to be modified for plan participants, asserting
that it would allow funds to provide meaningful disclosure specifically
designed for plan participants who invest in funds. The Commission is
adopting the provisions in Instruction C relating to prospectuses for
plan participants with modifications to reflect suggestions of
commenters.
---------------------------------------------------------------------------
\200\ In addition to plans under rule 401(k) of the Internal
Revenue Code [26 U.S.C. 401(k)], these plans include those under
section 403(b) [26 U.S.C. 403(b)] (available to employees of certain
tax-exempt organizations and public educational systems) and section
457 [26 U.S.C. 457] (available to employees of state and local
governments and other tax-exempt employers).
---------------------------------------------------------------------------
Instruction C, as proposed, would permit funds to tailor disclosure
for prospectuses to be used for investments in defined contribution
plans qualified under the Internal Revenue Code. One commenter
suggested that the Commission permit funds that serve as investment
options for variable insurance contracts to use modified prospectuses
that set out purchase and sale procedures, distributions, and tax
consequences applicable to these funds. In response to the commenter's
suggestions, the Commission is permitting prospectuses to be tailored
for funds offered through variable insurance contracts in furthering
its goal of providing investors with more useful disclosure
documents.\201\
---------------------------------------------------------------------------
\201\ General Instruction C.3(d).
---------------------------------------------------------------------------
5. Incorporation By Reference
Proposed General Instruction D would replace an existing
instruction to Form N-1A that addresses incorporation by reference in a
fund's prospectus of information in the fund's SAI. When the Commission
adopted the two-part disclosure format for Form N-1A, the Commission
intended that Part A of the registration statement provide investors
with a simplified prospectus that, standing alone, would meet the
requirements of section 10(a) of the Securities Act.\202\ Part B, the
SAI (which is available to investors upon request), includes additional
information that the Commission has determined may be useful to some
investors and should be available to all investors, but is not
necessary in the public interest or for the protection of investors to
be in the
[[Page 13940]]
prospectus.\203\ Form N-1A currently permits, but does not require, a
fund to incorporate the SAI by reference into the prospectus. The two-
part disclosure format has been widely used by funds, and the
Commission has found that the current approach to incorporation by
reference is consistent with the intended purpose of Form N-1A and
should be retained.\204\
---------------------------------------------------------------------------
\202\ 1983 Form N-1A Adopting Release, supra note 12, at 37930.
\203\ Id. See White v. Melton, 757 F. Supp. 267 (S.D.N.Y. 1991)
(citing the 1983 Form N-1A Adopting Release, supra note 12, as
authority for the principle that certain matters are required to
appear in the prospectus and that others may be appropriately
disclosed in the SAI, which may be incorporated by reference into
the prospectus).
\204\ See Form N-1A Proposing Release, supra note 8, at 10920
(citing the 1982 Form N-1A Proposing Release as suggesting that
prohibiting incorporation by reference of the SAI into the
prospectus or, alternatively, requiring delivery of the SAI with the
prospectus, would ``vitiate the Commission's attempt to provide
shorter, simpler prospectuses'').
---------------------------------------------------------------------------
Proposed Instruction D would continue to permit, but not require, a
fund to incorporate the SAI by reference into the prospectus.
Commenters supported this approach to incorporation by reference, and
the Commission is adopting Instruction D substantially as
proposed.\205\ The revised Instruction clarifies that incorporating
information by reference from the SAI is not permitted as a response to
an item of Form N-1A requiring information to be included in the
prospectus. Permitting the SAI to be incorporated by reference into the
prospectus was meant to allow funds to add material that the Commission
determined not to require in the prospectus, not to permit funds to
delete required information from the prospectus and place it in the
SAI. Form N-1A, as amended, provides funds with clearer directions for
allocating disclosure between the prospectus and the SAI. Funds can
discuss items of information required to appear in the prospectus in
greater detail in the SAI, which may be incorporated by reference into
the prospectus.
---------------------------------------------------------------------------
\205\ General Instruction D, as adopted, includes technical
revisions to simplify its requirements. The specific instruction
regarding incorporation by reference of condensed financial
information from reports to shareholders in existing General
Instruction E has been incorporated in Item 9 of Form N-1A, as
amended (financial highlights table). The existing instruction
allowing incorporation of financial information in response to Item
23 of Form N-1A from reports to shareholders has been deleted as
unnecessary because the Form does not limit incorporation of
information into the SAI. The requirement that a shareholder report
incorporated by reference into the SAI be delivered with the SAI has
been added in Item 10(a)(iv).
---------------------------------------------------------------------------
The Commission notes that section 19(a) of the Securities Act \206\
and section 38(c) of the Investment Company Act \207\ protect a fund
from liability under these Acts for actions taken in good faith in
conformity with any rule of the Commission. The amendments to Form N-1A
are designed to provide better guidance to funds as to what information
should be in the prospectus and the SAI to assist funds seeking to act
in good faith in conformity with Form N-1A.\208\
---------------------------------------------------------------------------
\206\ 15 U.S.C. 77q(a).
\207\ 15 U.S.C. 80a-38(c).
\208\ See 1983 Form N-1A Adopting Release, supra note 12, at
37930.
---------------------------------------------------------------------------
6. Form N-1A Guidelines and Related Staff Positions
The Guidelines to current Form N-1A (the ``Guides'') were prepared
by the Division and published by the Commission when it adopted the
Form in 1983.\209\ The Guides, which generally restate Division
positions that may affect fund disclosure, were intended to assist
funds in preparing and filing their registration statements. Additional
Division positions on disclosure matters have been included from time
to time in Generic Comment Letters prepared by the Division
(``GCLs'').\210\
---------------------------------------------------------------------------
\209\ 1983 Form N-1A Adopting Release, supra note 12, at 37938
(stating that publication of the Guides was not intended to elevate
their status beyond that of staff guidance). The Commission
initially adopted guidelines in 1972 to assist funds in preparing
and filing registration statements. Investment Company Act Release
Nos. 7220, 7221 (June 9, 1972) [37 FR 12790] (``Guides Releases'').
\210\ See 1993 GCL and 1994 GCL, supra note 25.
---------------------------------------------------------------------------
Although certain Guides have been revised and new ones added in
connection with the adoption of various rules, the Guides collectively
have not been reviewed since 1983. Certain Division positions in the
Guides and GCLs have become outdated.\211\ Other Guides and GCLs
explain or restate legal requirements and may encourage generic
disclosure about fund operations that does not appear to help investors
evaluate and compare funds.\212\ In addition, the presentation of
information in 35 Guides and 7 GCLs is not organized in the most useful
or effective manner.
---------------------------------------------------------------------------
\211\ See, e.g., Guide 9 (Short Sales) (a new interpretive
position of the Commission's staff as to limits under the Investment
Company Act on short sales entered into by funds was set out in
Robertson Stephens Investment Trust (pub. avail. Aug. 24, 1995));
Guide 30 (Tax Consequences) (each series is now treated as a
separate entity for tax purposes and may not, as suggested by the
Guide, offset gains of one series against losses of another); 1990
GCL, supra note 25, at I.B (undertakings); 1991 GCL, supra note 25,
at II.A.2 (country, international, and global funds); and 1992 GCL,
supra note 25, at II.F (segregated accounts).
\212\ See, e.g., Guides 8 (Senior Securities, Reverse Repurchase
Agreements, Firm Commitment Agreements and Standby Commitment
Agreements), 9 (Short Sales), 15 (Qualification for Treatment Under
Subchapter M of the Internal Revenue Code), and 28 (Valuation of
Securities Being Offered); 1994 GCL, supra note 25, at III.C
(redemption fees); and 1995 GCL, supra note 25, at II.A (MDFP
disclosure).
---------------------------------------------------------------------------
To address these issues, Form N-1A, as amended, incorporates
certain disclosure requirements from the Guides and GCLs. Other
disclosure requirements in the Guides and the GCLs have not been
incorporated in Form N-1A because, among other things, they are
outdated or result in disclosure about technical, legal, and
operational matters generally common to all funds. In addition, Form N-
1A does not incorporate certain requirements calling for specific
disclosure about certain types of fund investments because these
requirements have tended to standardize disclosure about certain
securities without regard to how a particular fund intends to use the
securities in achieving its investment objectives. Generalized
disclosure of this sort is inconsistent with the goal of the amendments
to prospectus disclosure being adopted today to provide investors with
information about how a particular fund's portfolio will be managed and
elicit disclosure tailored to a fund's particular investment objectives
and strategies.\213\
---------------------------------------------------------------------------
\213\ See supra Section II.A.3.
---------------------------------------------------------------------------
Information in the Guides and GCLs about legal requirements
(including information about fund organization and operations),
interpretive positions, and descriptions of filing procedures will be
updated and reorganized in a new Investment Company Registration Guide
(``Registration Guide'').\214\ The Commission has instructed the
Division to make the Registration Guide available as soon as
practicable. While the Commission believes that the Registration Guide
will be a useful tool for funds in preparing their filings, Form N-1A,
as amended, includes all of the requirements necessary for funds to
prepare new or amend existing registration statements.\215\
---------------------------------------------------------------------------
\214\ The Guides have not been republished with Form N-1A, as
amended. Neither the Guides nor the GCLs will apply to registration
statements prepared on the amended Form. The Commission also is
rescinding the Guides Releases, supra note 209.
\215\ The Registration Guide will address topics discussed in
the GCLs relating to closed-end investment companies and unit
investment trusts, and other matters not relevant to Form N-1A
(e.g., proxy disclosure). Information traditionally addressed in the
GCLs will be considered when the Registration Guide is updated,
unless the nature of the information warrants immediate
dissemination. The Registration Guide will serve as a ``small entity
compliance guide,'' which the Commission is required to publish
under the Small Business Regulatory Enforcement Fairness Act (5
U.S.C.S. 601 note (Supp. July 1996)).
---------------------------------------------------------------------------
[[Page 13941]]
E. Technical Rule Amendments
When it proposed to amend Form N-1A, the Commission proposed
several technical rule amendments. These rule amendments generally were
intended to implement the recommendations of the Commission's Task
Force on Disclosure Simplification that apply to funds.\216\ The
Commission is adopting these amendments substantially as proposed.\217\
The Commission also is adopting conforming amendments to several rules
and a form to correct references to items in Form N-1A that have been
redesignated or reorganized in Form N-1A, as amended.\218\
---------------------------------------------------------------------------
\216\ SEC, Report of the Task Force on Disclosure Simplification
(1996).
\217\ The Commission is amending rules 495 and 497 [17 CFR
230.495 and .497] to eliminate their cross-reference sheet
requirements. The Commission also is amending rule 8b-11 [17 CFR
270. 8b-11] to modify signature requirements to provide more
flexibility for issuers filing on paper. The Commission adopted
amendments to rule 481, which is applicable to funds, in the Plain
English Release, supra note 20.
\218\ See amendments to rules 483, 485, 304, 14a-101 [17 CFR
230.483, .485, 232.304, 240.14a-101] and Form N-14 [referenced in 17
CFR 239.23].
---------------------------------------------------------------------------
F. Administration of Form N-1A
While generally praising the Proposed Amendments and their goals,
some commenters voiced concern that, unless administered appropriately,
Form N-1A, as amended, would not lead to more useful and understandable
disclosure documents for fund investors. Some commenters argued that,
over time, the Commission's staff has interpreted Form N-1A's existing
requirements so narrowly as to prevent funds from adopting formats in
which information could be effectively communicated to investors. Other
commenters asserted that the Commission's staff, in interpreting the
provisions of existing Form N-1A, has consistently required lengthy and
complex disclosure that may discourage investors from reading fund
prospectuses.\219\
---------------------------------------------------------------------------
\219\ Several commenters referred to this aspect of staff
disclosure interpretations as resulting in ``disclosure creep.''
According to these commenters, the disclosure that proved
problematic typically related to complex instruments in which some
funds invested such as options, futures, and junk bonds. The
commenters said that, in response to difficulties experienced by
funds investing in these instruments, the staff often required all
funds holding these instruments to amend their prospectuses to add
lengthy and overly technical discussions of the instruments.
---------------------------------------------------------------------------
The Commission acknowledges that some interpretations relating to
Form N-1A disclosure taken by the staff in the past have contributed to
fund prospectuses becoming dense and less inviting to read by
shareholders.\220\ The Commission believes, however, that funds, their
counsels and other advisors also have contributed to this result. In
seeking to minimize potential liabilities under the federal securities
laws, many funds appear to have made the use of clear formats and
concise and understandable language in fund prospectuses only a
secondary concern, at best. Funds also appear to have added material to
their prospectuses not otherwise required by Form N-1A to facilitate
marketing or other business objectives.
---------------------------------------------------------------------------
\220\ See Levitt Article, supra note 5, at 37 (``We recognize
that we share responsibility for the state of the modern prospectus.
Our passion for full disclosure has resulted in fact-bloated
reports, and prospectuses that are more redundant than
revealing.'').
---------------------------------------------------------------------------
The Commission firmly believes that achieving the goals underlying
the amendments to Form N-1A being adopted today necessitates discipline
on the part of the Commission and its staff, as well as on the part of
funds and their advisors. In exercising discipline, all parties
involved in the disclosure process should look not only to the Form N-
1A disclosure requirements, as amended, but also to the disclosure
principles reflected in the Form. The Commission has instructed its
staff to adhere to those principles closely when providing comments on
registration statements filed on Form N-1A and in interpreting
provisions of the Form.\221\ The Commission strongly encourages funds
and their advisors to follow closely the principles in drafting
language and designing formats for use in fund prospectuses.
---------------------------------------------------------------------------
\221\ The Commission has also generally instructed the staff to
avoid as much as possible using disclosure requirements as a means
of regulating the conduct of funds, which are subject to extensive
substantive regulation under the Investment Company Act.
---------------------------------------------------------------------------
Throughout the period during which the Form N-1A and profile
initiatives were developed, the Commission staff worked with numerous
fund groups to create innovative disclosure materials and new and
improved prospectuses.\222\ The results of these efforts have been
commended by many as achieving a significant improvement over existing
disclosure documents.\223\ Many of the efforts were furthered by the
willingness of the staff to interpret Commission disclosure
requirements in a manner consistent with the goal of enabling funds to
communicate more effectively to investors information essential in
considering an investment in a fund.\224\ The Commission's staff will
continue to exercise this approach in interpreting the provisions of
Form N-1A, as amended, and in reviewing fund filings under the revised
disclosure requirements.\225\
---------------------------------------------------------------------------
\222\ See, e.g., Levitt Article, supra note 5 (discussing
various Commission initiatives to work with mutual funds and other
corporate issuers to improve prospectus disclosure); Connors, Mutual
Fund Prospectus Simplification: The Time Has Come, The Investment
Lawyer, Vol. 3, No. 8, Aug. 1997, at 14 (describing the Commission's
role in the development of the simplified John Hancock prospectus).
\223\ See, e.g., Dow Jones Newswires, State Street Rewrites
Prospectuses to Help Ease Investors' Task, The Wall Street Journal,
Nov. 14, 1997, at 1B (commenting on State Street's new plain English
prospectus); Kelley, John Hancock Builds a Better Mousetrap,
Morningstar Mutual Funds, Sept. 13, 1996, at 52 (commenting on the
improvements in John Hancock's new prospectus); McTague, Simply
Beautiful: Shorn of Legalese, Even Prospectuses Make Sense,
Barron's, Oct. 7, 1996, at F10 (concerning the recent efforts of the
John Hancock funds and other fund groups to simplify their
prospectuses); Morcau, Prospectuses are Getting Easier to Read,
Investor's Business Daily, Dec. 15, 1997, at B1 (noting improvements
in the prospectuses from Vanguard, State Street, Dreyfus, and other
fund groups); Williamson, State Street Launches Redesigned
Prospectus, Pensions & Investments, Dec. 8, 1997, at 36 (commenting
on State Street's simplified and redesigned prospectus); Zweig, Our
1997 Mutual Fund Awards: Picks, Pans and Some Tips Too, Money, Vol.
26, No. 13, 1997, at 35 (commending USAA and State Street for
producing prospectuses in clear, simple English).
\224\ See John Hancock Funds, Inc., supra note 199; see also
1997 Profile Letter, 1996 Profile Letter, and 1995 Profile Letter,
supra note 16; National Association for Variable Annuities (pub.
avail. June 4, 1996); Fidelity Institutional Retirement Services
Company, Inc. (pub. avail. Apr. 5, 1995).
\225\ The Commission recognizes that, in interpreting these
provisions, the staff will have to balance the goal of furthering
the effective communication of information to investors with the
goal of presenting prospectuses in formats designed to permit
investors to compare the operations of one fund to those of other
funds.
---------------------------------------------------------------------------
G. Coordination With the NASD
As discussed in the Form N-1A Proposing Release, some rules of the
NASD restrict the ability of NASD members to engage in various
activities relating to funds unless certain disclosures are made in
fund prospectuses.\226\ NASD Conduct Rule 2830, for example, generally
does not allow underwriters to pay compensation to broker-dealers for
selling shares of a fund, unless the compensation arrangements are
disclosed in the fund's prospectus.\227\ Certain commenters
[[Page 13942]]
expressed concern that these and other NASD prospectus disclosure
requirements appear to be inconsistent with the Commission's broad
initiatives to improve fund disclosure, and encouraged the Commission
to coordinate its regulatory efforts with the NASD.
---------------------------------------------------------------------------
\226\ See Form N-1A Proposing Release, supra note 8, at 10916-
17.
\227\ See, e.g., rule 2830(l)(1)(C) of the NASD Conduct Rules,
supra note 37, at 4627 (prohibiting the offer, payment, or
arrangement of ``concessions'' in connection with retail sales of
investment company securities unless the arrangement is disclosed in
the investment company's prospectus). The NASD has proposed to
eliminate the provision in Conduct Rule 2830 that necessitates
prospectus disclosure concerning these non-cash arrangements. See
Securities Exchange Act Release No. 38993 (Sept. 5, 1997) [62 FR
47080]. Moreover, the NASD staff has assured the Commission's staff
that the NASD staff will reconsider the appropriateness of requiring
prospectus disclosure concerning cash compensation, in light of the
Commission's Form N-1A initiatives. Id. at 47086. In addition, the
NASD has proposed to eliminate certain prospectus disclosure
concerning the effects of asset-based sales charges. See supra note
169.
---------------------------------------------------------------------------
The Commission believes that it is of the utmost importance that
all disclosure contained in fund prospectuses conforms to the
principles of effective communication reflected in Form N-1A, as
amended. The Commission has discussed these principles with the NASD
staff, which has agreed to evaluate all of the NASD's existing
requirements for consistency with these principles and to propose to
the Commission that those rules be changed as necessary to achieve
greater consistency. In addition, to the extent that it imposes
prospectus disclosure requirements in the future, the NASD will seek to
do so in accordance with the Commission's disclosure principles.\228\
---------------------------------------------------------------------------
\228\ The Commission also encourages the NASD to follow as much
as possible the disclosure principles underlying the Form N-1A in
considering and proposing disclosure requirements under NASD rules
that apply to fund advertisements.
---------------------------------------------------------------------------
H. Effective Dates and Transition Period
As discussed in the Form N-1A Proposing Release,\229\ the
Commission is providing for a transition period after the effective
date of the amendments to Form N-1A that gives funds sufficient time to
update their prospectuses or to prepare new registration statements
under the revised Form N-1A requirements. All new registration
statements or post-effective amendments that are annual updates to
effective registration statements filed on or after December 1, 1998
must comply with the amendments to Form N-1A.\230\ The final compliance
date for filing amendments to effective registration statements to
conform with the new Form N-1A requirements is December 1, 1999. The
same compliance dates apply to the new plain English disclosure
requirements for fund prospectuses. A fund may, at its option, prepare
documents in accordance with the requirements of Form N-1A, as amended,
at any time after the effective date of the amendments.
---------------------------------------------------------------------------
\229\ See Form N-1A Proposing Release, supra note 8, at 10921.
\230\ To simplify compliance with the revised prospectus
disclosure requirements, the Commission is specifying the effective
date as June 1, 1998.
---------------------------------------------------------------------------
III. Cost/Benefit Analysis and Effects on Competition, Efficiency,
and Capital Formation
Section 2(c) of the Investment Company Act provides that whenever
the Commission engages in rulemaking requiring the Commission to
consider whether its action is in the public interest, the Commission
also must consider whether the action will promote efficiency,
competition, and capital formation.\231\ For the reasons stated in the
cost/benefit analysis below, as well as the reasons discussed elsewhere
in this release, the Commission has concluded that the amendments to
Form N-1A protect investors and promote efficiency, competition, and
capital formation.
---------------------------------------------------------------------------
\231\ 15 U.S.C. 80a-2(c). See also section 2(b) of the
Investment Company Act. 15 U.S.C. 77b(b).
---------------------------------------------------------------------------
The central goal of the amendments to Form N-1A is to promote fund
disclosure documents that effectively communicate essential information
to investors. The amendments seek to meet this goal by focusing
prospectus disclosure on information that will help investors decide
whether to invest in a fund. The amendments seek to organize the
prospectus in a more efficient manner, which increases the
effectiveness of the information in the prospectus. For example, the
amendments minimize required disclosure in a fund's prospectus about
matters that generally are common to all funds and focus the disclosure
on matters about the fund. Changes such as the addition to Form N-1A of
a standardized risk/return summary also allow investors to use
prospectus information efficiently to compare one fund to others before
investing. Well-informed investors may invest more of their resources
and allocate their investments carefully, which in turn would tend to
promote competition among funds.
The Commission did not receive any comments addressing the costs
associated with the amendments to Form N-1A. While it is difficult to
quantify costs and benefits related to Form N-1A, the Commission notes
that commenters strongly favored the amendments. As discussed in the
Commission's Paperwork Reduction Act submission in conjunction with the
Form N-1A Proposing Release, the Commission estimated that there are
approximately 7,500 registrants on Form N-1A. The total annual cost to
the industry of preparing, filing, and updating current Form N-1A is
approximately $175 million.\232\ The Commission does not believe that
these amendments will result in a significant cost increase over time
because the amendments do not require that funds disclose a significant
amount of new information. Rather than increase the reporting burden,
the amendments primarily clarify instructions, reorganize the
prospectus, and require new formats for certain information.
---------------------------------------------------------------------------
\232\ Form N-1A Proposing Release, supra note 8.
---------------------------------------------------------------------------
The Commission's estimate of the total annual cost to the industry
identified above reflects the burden of initial Form N-1A filings,
which the Commission has sought to minimize. It is likely that an
initial expense from the revisions would be offset by future savings
such as lower printing and distribution costs from a shorter
prospectus. For example, the amendments eliminate the requirement that
newly organized funds file updated financial statements within 4 to 6
months after the effective date of the registration statement. The
costs of filing these updated financial statements may have a
disproportionate effect on small funds and the Commission estimates
that the elimination of the requirement will produce an approximate
savings of $1.8 million annually based on an estimate of 180 filings of
Form N-1A per year by newly organized funds. The elimination of this
requirement also promotes competition and capital formation by
decreasing cost-related barriers to entry. On balance, the Commission
believes that the amendments to Form N-1A benefit investors, foster
efficiency, and tend to promote competition and capital formation.
IV. Paperwork Reduction Act
As explained in the Form N-1A Proposing Release, the amendments to
Form N-1A contain ``collection of information'' requirements within the
meaning of the Paperwork Reduction Act of 1995 (``PRA'').\233\ The
collection of information requirements in this release were submitted
to the Office of Management and Budget (``OMB'') for review under
section 3507(d) of the PRA. OMB approved the collection of information
under the title ``Form N-1A Under the Investment Company Act of 1940
and the Securities Act of 1933, Registration Statement of Open-End
Management Investment Companies'' and assigned it a control number of
3235-0307. The collection of information contained in the release is in
accordance with the clearance requirements of 44 U.S.C. 3507. An
[[Page 13943]]
agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information, unless the agency displays a
valid OMB control number.
---------------------------------------------------------------------------
\233\ 44 U.S.C. 3501, et seq.
---------------------------------------------------------------------------
Funds use Form N-1A to register under the Investment Company Act
and to register the offer for sale of their shares under the Securities
Act. The amendments to Form N-1A seek to minimize prospectus disclosure
about technical, legal, and operational matters that generally are
common to all funds and focus disclosure on essential information about
a particular fund that would assist an investor in deciding whether to
invest in that fund. The filing of Form N-1A is mandatory. Responses to
the disclosure requirements of Form N-1A will not be kept confidential.
The Commission solicited public comment on the collection of
information requirements contained in the Form N-1A Proposing Release
and received no comments on the PRA portion of the release. The
estimated total burden, purpose, use and necessity of the collection of
information will be the same as detailed in the Form N-1A Proposing
Release.
V. Summary of Final Regulatory Flexibility Analysis
The Commission has prepared a Final Regulatory Flexibility Analysis
(``FRFA'') in accordance with 5 U.S.C. 604 regarding the amendments to
Form N-1A. The FRFA explains that the amendments will revise disclosure
requirements for fund prospectuses to minimize prospectus disclosure
about technical, legal, and operational matters that generally are
common to all funds and focus prospectus disclosure on essential
information about a particular fund that will assist investors in
deciding whether to invest in that fund. The FRFA also explains that
the amendments are intended to improve fund prospectuses and to promote
more effective communication of information about funds.
The Commission requested comment with respect to the Initial
Regulatory Flexibility Analysis (``IRFA'') contained in Form N-1A
Proposing Release. The Commission did not receive any comments with
respect to the IRFA.
The Commission estimates that approximately 2,700 registered open-
end management investment companies are subject to the requirements of
Form N-1A. Of these, approximately 620 (23%) are funds that meet the
Commission's definition of small entity for the purposes of the
Securities Act and the Investment Company Act--an investment company
with net assets of $50 million or less as of the end of its most recent
fiscal year [17 CFR 230.157(b) and 270.0-10].
The FRFA explains that Form N-1A, as amended, will not impose any
substantial additional burdens for small entities because most of the
changes do not require the development of new information. Initially,
however, the changes will require funds to amend the format in which
they present information in their prospectuses. The amendments
primarily will clarify and simplify the instructions for completing
Form N-1A, shift information from the prospectus to the SAI, and
require new formats for certain information. A fund's initial update
under Form N-1A, as amended, may take longer than preparing a current
prospectus due to a lack of familiarity with the new format. On
balance, however, the Commission believes that preparing and updating
the revised Form should take the same amount of time (or possibly less
time) as preparing and updating the current Form.
As stated in the FRFA, the Commission considered several
alternatives to the amendments, including, among others, establishing
different compliance or reporting requirements for small entities or
exempting them from all or part of the rule. Because the amendments to
Form N-1A are intended to improve prospectus disclosure for all
investors, whether they invest in funds that are small entities or
others, the Commission believes that separate treatment for small
entities is inconsistent with the protection of investors. A copy of
the FRFA may be obtained by contacting Markian M.W. Melnyk, Deputy
Chief, Office of Disclosure Regulation, Securities and Exchange
Commission, 450 5th Street, N.W., Mail Stop 5-6, Washington, D.C.
20549-6009.
VI. Statutory Authority
The Commission is amending rules and forms pursuant to sections 5,
7, 8, 10 and 19(a) of the Securities Act [15 U.S.C. 77e, 77g, 77h, 77j,
and 77s(a)], and sections 8, 22, 24(g), 30 and 38 of the Investment
Company Act [15 U.S.C. 80a-8, 80a-22, 80a-24(g), 80a-29, and 80a-37].
The authority citations for the amendments to the rules and forms
precede the text of the amendments.
Text of Rule and Form Amendments
List of Subjects in 17 CFR Parts 230, 232, 239, 240, 270 and 274
Investment companies, Reporting and recordkeeping requirements,
Securities.
For the reasons set out in the preamble, the Commission amends
Chapter II, Title 17 of the Code of Federal Regulations as follows:
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
1. The general authority citation for Part 230 is revised to read
as follows:
Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77r, 77s, 77sss,
78c, 78d, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79t, 80a-8, 80a-24, 80a-
29, 80a-30, and 80a-37, unless otherwise noted.
* * * * *
2. Revise the note immediately preceding Sec. 230.480 to read as
follows:
Note: The rules in this section of Regulation C (Secs. 230.480
to 230.488 and Secs. 230.495 to 230.498) apply only to investment
companies and business development companies. Section 230.489
applies to certain entities excepted from the definition of
investment company by rules under the Investment Company Act of
1940. The rules in the rest of Regulation C (Secs. 230.400 to
230.479 and Secs. 230.490 to 230.494), unless the context
specifically indicates otherwise, also apply to investment companies
and business development companies. See Sec. 230.400.
Sec. 230.483 [Amended]
3. Amend Sec. 230.483 to remove all references to ``3(a)'' under
the heading ``Form N-1A'' in the table following paragraph (e)(4) and
add, in their place, ``9'', and to remove the references to ``3(b)''
and the corresponding item descriptions under the heading ``Form N-1A''
in the table following paragraph (e)(4).
Sec. 230.485 [Amended]
4. Amend Sec. 230.485 to correct the reference ``paragraph
(b)(1)(v)'' in the introductory text of paragraph (b) to read
``paragraph (b)(1)(iii)'', and to revise the reference ``Items 5(c) or
5A'' in paragraph (b)(1)(iv) to read ``Items 5 or 6(a)(2)''.
Sec. 230.495 [Amended]
5. Amend Sec. 230.495 to remove the words ``cross-reference
sheet;'' from paragraph (a).
Sec. 230.497 [Amended]
6. Amend Sec. 230.497 to remove the words ``, together with 5
copies of a cross reference sheet similar to that previously filed, if
changed'' from paragraph (d) and ``, together with five copies of a
cross-reference sheet similar to that previously filed, if changed''
from paragraph (e).
PART 232--REGULATION S-T--GENERAL RULES AND REGULATIONS FOR
ELECTRONIC FILINGS
7. The authority citation for Part 232 continues to read as
follows:
[[Page 13944]]
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s(a), 77sss(a),
78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll(d), 79t(a), 80a-8, 80a-
29, 80a-30 and 80a-37.
8. Amend Sec. 232.304 to revise the reference to ``Item 5A'' in
paragraph (d) to read ``Item 5''.
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
9. The general authority citation for Part 239 is revised to read
as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77sss, 78c,
78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d), 79e, 79f, 79g, 79j,
79l, 79m, 79n, 79q, 79t, 80a-8, 80a-24, 80a-29, 80a-30 and 80a-37,
unless otherwise noted.
* * * * *
10. Amend Form N-14 (referenced in Sec. 239.23) to revise the
reference ``Item 2 of Form N-1A'' in Item 3(a) to read ``Item 3 of Form
N-1A'', to revise the reference ``Items 10 through 23 of Form N-1A'' in
Item 12(a) to read ``Items 10 through 22 of Form N-1A'', and to revise
the reference ``Items 10 through 14 and 16 through 23 of Form N-1A'' in
Item 13(a) to read ``Items 10 through 13 and 15 through 22 of Form N-
1A,'' and revise paragraph (a) of Item 5 to read as follows:
Note: Form N-14 does not and these amendments will not appear in
the Code of Federal Regulations.
Form N-14
* * * * *
Item 5.
* * * * *
(a) If the registrant is an open-end management investment company,
furnish the information required by Items 2, 3, 4(a) and (b), and 5-9
of Form N-1A under the 1940 Act; provided, however, that the
information required by Item 5 may be omitted if the prospectus is
accompanied by an annual report to shareholders containing the
information otherwise required by Item 5;
* * * * *
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
11. The general authority citation for Part 240 is revised to read,
in part, as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee,
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k,
78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d),
78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and
80b-11, unless otherwise noted.
* * * * *
Sec. 240.14a-101 [Amended]
12. Amend Sec. 240.14a-101 to revise the reference ``Item 5'' in
paragraph (a)(1)(i) of Item 22 to read ``Item 15(h)'', the reference
``Item 2'' in paragraph (a)(3)(iv) of Item 22 to read ``Item 3'', and
the reference ``Item 2(a)(ii)'' in Instruction 4 to paragraph
(a)(3)(iv) of Item 22 to read ``Item 3''.
PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940
13. The authority citation for part 270 continues to read as
follows:
Authority: 15 U.S.C. 80a-1, et seq., 80a-34(b)(1), 80a-37, 80a-
39 unless otherwise noted;
* * * * *
14. Amend Sec. 270.8b-11 to remove the word ``manually'' from
paragraph (c) and to revise paragraph (e) to read as follows:
Sec. 270.8b-11 Number of copies; signatures; binding.
* * * * *
(e) Signatures. Where the Act or the rules thereunder, including
paragraph (c) of this section, require a document filed with or
furnished to the Commission to be signed, the document should be
manually signed, or signed using either typed signatures or duplicated
or facsimile versions of manual signatures. When typed, duplicated or
facsimile signatures are used, each signatory to the filing shall
manually sign a signature page or other document authenticating,
acknowledging, or otherwise adopting his or her signature that appears
in the filing. Execute each such document before or at the time the
filing is made and retain for a period of five years. Upon request, the
registrant shall furnish to the Commission or its staff a copy of any
or all documents retained pursuant to this section.
PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940
15. The authority citation for Part 274 continues to read as
follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m,
78n, 78o(d), 80a-8, 80a-24, and 80a-29, unless otherwise noted.
16. Revise Form N-1A (referenced in Secs. 239.15A and 274.11A)
(including the Guidelines to the Form) to read as follows:
Note: The text of Form N-1A does not and this amendment will not
appear in the Code of Federal Regulations.
OMB Approval
OMB Number:
Expires:
Estimated average burden hours per response
Securities and Exchange Commission
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. ____________ [ ]
Post-Effective Amendment No. ____________ [ ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. ____________ [ ]
(Check appropriate box or boxes.)
----------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
----------------------------------------------------------------------
(Address of Principal Executive Offices)
----------------------------------------------------------------------
(Zip Code)
Registrant's Telephone Number, including Area Code---------------------
----------------------------------------------------------------------
(Name and Address of Agent for Service)
[[Page 13945]]
Approximate Date of Proposed Public Offering---------------------------
It is proposed that this filing will become effective (check
appropriate box)
[ ] Immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] On (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] On (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
Omit from the facing sheet reference to the other Act if the
Registration Statement or amendment is filed under only one of the
Acts. Include the ``Approximate Date of Proposed Public Offering''
only when shares are being registered under the Securities Act of
1933.
Form N-1A is to be used by open-end management investment
companies, except insurance company separate accounts and small
business investment companies licensed under the United States Small
Business Administration, to register under the Investment Company
Act of 1940 and to offer their shares under the Securities Act of
1933. The Commission has designed Form N-1A to provide investors
with information that will assist them in making a decision about
investing in an investment company eligible to use the Form. The
Commission also may use the information provided on Form N-1A in its
regulatory, disclosure review, inspection, and policy making roles.
A Registrant is required to disclose the information specified
by Form N-1A, and the Commission will make this information public.
A Registrant is not required to respond to the collection of
information contained in Form N-1A unless the Form displays a
currently valid Office of Management and Budget (``OMB'') control
number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for
reducing the burden to Secretary, Securities and Exchange
Commission, 450 5th Street, N.W., Washington, D.C. 20549-6009. The
OMB has reviewed this collection of information under the clearance
requirements of 44 U.S.C. Sec. 3507.
Contents of Form N-1A
General Instructions
A. Definitions
B. Filing and Use of Form N-1A
C. Preparation of the Registration Statement
D. Incorporation by Reference
Part A: Information Required in a Prospectus
Item 1. Front and Back Cover Pages
Item 2. Risk/Return Summary: Investments, Risks, and Performance
Item 3. Risk/Return Summary: Fee Table
Item 4. Investment Objectives, Principal Investment Strategies, and
Related Risks
Item 5. Management's Discussion of Fund Performance
Item 6. Management, Organization, and Capital Structure
Item 7. Shareholder Information
Item 8. Distribution Arrangements
Item 9. Financial Highlights Information
Part B: Information Required in a Statement of Additional Information
Item 10. Cover Page and Table of Contents
Item 11. Fund History
Item 12. Description of the Fund and Its Investments and Risks
Item 13. Management of the Fund
Item 14. Control Persons and Principal Holders of Securities
Item 15. Investment Advisory and Other Services
Item 16. Brokerage Allocation and Other Practices
Item 17. Capital Stock and Other Securities
Item 18. Purchase, Redemption, and Pricing of Shares
Item 19. Taxation of the Fund
Item 20. Underwriters
Item 21. Calculation of Performance Data
Item 22. Financial Statements
Part C: Other Information
Item 23. Exhibits
Item 24. Persons Controlled by or Under Common Control with the Fund
Item 25. Indemnification
Item 26. Business and Other Connections of the Investment Adviser
Item 27. Principal Underwriters
Item 28. Location of Accounts and Records
Item 39. Management Services
Item 30. Undertakings
Signatures
GENERAL INSTRUCTIONS
A. Definitions
References to sections and rules in this Form N-1A are to the
Investment Company Act of 1940 [15 U.S.C. 80a-1 et seq.] (the
``Investment Company Act''), unless otherwise indicated. Terms used
in this Form N-1A have the same meaning as in the Investment Company
Act or the related rules, unless otherwise indicated. As used in
this Form N-1A, the terms set out below have the following meanings:
``Class'' means a class of shares issued by a Multiple Class
Fund that represents interests in the same portfolio of securities
under rule 18f-3 [17 CFR 270.18f-3] or under an order exempting the
Multiple Class Fund from sections 18(f), 18(g), and 18(i) [15 U.S.C.
80a-18(f), 18(g), and 18(i)].
[[Page 13946]]
``Fund'' means the Registrant or a separate Series of the
Registrant. When an item of Form N-1A specifically applies to a
Registrant or a Series, those terms will be used.
``Master-Feeder Fund'' means a two-tiered arrangement in which
one or more Funds (each a ``Feeder Fund'') holds shares of a single
Fund (the ``Master Fund'') in accordance with section 12(d)(1)(E)
[15 U.S.C. 80a-12(d)(1)(E)].
``Money Market Fund'' means a Fund that holds itself out as
money market fund and meets the maturity, quality, and
diversification requirements of rule 2a-7 [17 CFR 270.2a-7].
``Multiple Class Fund'' means a Fund that has more than one
Class.
``Registrant'' means an open-end management investment company
registered under the Investment Company Act.
``SAI'' means the Statement of Additional Information required
by Part B of this Form.
``Securities Act'' means the Securities Act of 1933 [15 U.S.C.
77a et seq.].
``Securities Exchange Act'' means the Securities Exchange Act of
1934 [15 U.S.C. 78a et seq.].
``Series'' means shares offered by a Registrant that represent
undivided interests in a portfolio of investments and that are
preferred over all other series of shares for assets specifically
allocated to that series in accordance with rule 18f-2(a) [17 CFR
270.18f-2(a)].
B. Filing and Use of Form N-1A
1. What is Form N-1A Used for?
Form N-1A is used by Funds, except insurance company separate
accounts and small business investment companies licensed under the
United States Small Business Administration, to file:
(a) An initial registration statement under the Investment
Company Act and amendments to the registration statement, including
amendments required by rule 8b-16 [17 CFR 270.8b-16];
(b) An initial registration statement under the Securities Act
and amendments to the registration statement, including amendments
required by section 10(a)(3) of the Securities Act [15 U.S.C.
77j(a)(3)]; or
(c) Any combination of the filings in paragraph (a) or (b).
2. What Is Included in the Registration Statement?
(a) For registration statements or amendments filed under both
the Investment Company Act and the Securities Act or only under the
Securities Act, include the facing sheet of the Form, Parts A, B,
and C, and the required signatures.
(b) For registration statements or amendments filed only under
the Investment Company Act, include the facing sheet of the Form,
responses to all Items of Parts A (except Items 1, 2, 3, 5, and 9),
B, and C (except Items 23(e) and (i)-(k)), and the required
signatures.
3. What Are the Fees for Form N-1A?
No registration fees are required with the filing of Form N-1A
to register as an investment company under the Investment Company
Act or to register securities under the Securities Act. See section
24(f) [15 U.S.C. 80a-24f-2] and related rule 24f-2 [17 CFR 270.24f-
2].
4. What Rules Apply to the Filing of a Registration Statement on Form
N-1A?
(a) For registration statements and amendments filed under both
the Investment Company Act and the Securities Act or only under the
Securities Act, the general rules regarding the filing of
registration statements in Regulation C under the Securities Act [17
CFR 230.400-230.497] apply to the filing of Form N-1A. Specific
requirements concerning Funds appear in rules 480-485 and 495-497 of
Regulation C.
(b) For registration statements and amendments filed only under
the Investment Company Act, the general provisions in rules 8b-1--
8b-32 [17 CFR 270.8b-1--270.8b-32] apply to the filing of Form N-1A.
(c) The plain English requirements of rule 421 under the
Securities Act [17 CFR 230.421] apply to prospectus disclosure in
Part A of Form N-1A.
(d) Regulation S-T [17 CFR 232.10--232.903] applies to all
filings on the Commission's Electronic Data Gathering, Analysis, and
Retrieval system (``EDGAR'').
C. Preparation of the Registration Statement
1. Administration of the Form N-1A Requirements
(a) The requirements of Form N-1A are intended to promote
effective communication between the Fund and prospective investors.
A Fund's prospectus should clearly disclose the fundamental
characteristics and investment risks of the Fund, using concise,
straightforward, and easy to understand language. A Fund should use
document design techniques that promote effective communication. The
prospectus should emphasize the Fund's overall investment approach
and strategy.
(b) The prospectus disclosure requirements in Form N-1A are
intended to elicit information for an average or typical investor
who may not be sophisticated in legal or financial matters. The
prospectus should help investors to evaluate the risks of an
investment and to decide whether to invest in a Fund by providing a
balanced disclosure of positive and negative factors. Disclosure in
the prospectus should be designed to assist an investor in comparing
and contrasting the Fund with other funds.
(c) Responses to the Items in Form N-1A should be as simple and
direct as reasonably possible and should include only as much
information as is necessary to enable an average or typical investor
to understand the particular characteristics of the Fund. The
prospectus should avoid: including lengthy legal and technical
discussions; simply restating legal or regulatory requirements to
which Funds generally are subject; and disproportionately
emphasizing possible investments or activities of the Fund that are
not a significant part of the Fund's investment operations. Brevity
is especially important in describing the practices or aspects of
the Fund's operations that do not differ materially from those of
other investment companies. Avoid excessive detail, technical or
legal terminology, and complex language. Also avoid lengthy
sentences and paragraphs that may make the prospectus difficult for
many investors to understand and detract from its usefulness.
(d) The requirements for prospectuses included in Form N-1A will
be administered by the Commission in a way that will allow variances
in disclosure or presentation if appropriate for the circumstances
involved while remaining consistent with the objectives of Form N-
1A.
2. Form N-1A is Divided Into Three Parts
(a) Part A. Part A includes the information required in a Fund's
prospectus under section 10(a) of the Securities Act. The purpose of
the prospectus is to provide essential information about the Fund in
a way that will help investors to make informed decisions about
whether to purchase the Fund's shares described in the prospectus.
In responding to the Items in Part A, avoid cross-references to the
SAI or shareholder reports. Cross-references within the prospectus
are most useful when their use assists investors in understanding
the information presented and does not add complexity to the
prospectus.
(b) Part B. Part B includes the information required in a Fund's
SAI. The purpose of the SAI is to provide additional information
about the Fund that the Commission has concluded is not necessary or
appropriate in the public interest or for the protection of
[[Page 13947]]
investors to be in the prospectus, but that some investors may find
useful. Part B affords the Fund an opportunity to expand discussions
of the matters described in the prospectus by including additional
information that the Fund believes may be of interest to some
investors. The Fund should not duplicate in the SAI information that
is provided in the prospectus, unless necessary to make the SAI
comprehensible as a document independent of the prospectus.
(c) Part C. Part C includes other information required in a
Fund's registration statement.
3. Additional Matters
(a) Organization of Information. Organize the information in the
prospectus and SAI to make it easy for investors to understand.
Disclose the information required by Items 2 and 3 (the Risk/Return
Summary) in numerical order at the front of the prospectus. Do not
precede these Items with any other Item except the Cover Page (Item
1) or a table of contents meeting the requirements of rule 481(c)
under the Securities Act. If the discussion in the Risk/Return
Summary also responds to the disclosure requirements in Item 4, a
Fund need not include additional disclosure in the prospectus
responding to Item 4. Disclose the information required by Item 8
(Distribution Arrangements) in one place in the prospectus.
(b) Other Information. A Fund may include, except in the Risk/
Return Summary, information in the prospectus or the SAI that is not
otherwise required. For example, a Fund may include charts, graphs
or tables so long as the information is not incomplete, inaccurate,
or misleading and does not, because of its nature, quantity, or
manner of presentation, obscure or impede understanding of the
information that is required to be included. The Risk/Return Summary
may not include disclosure other than that required or permitted by
Items 2 and 3.
(c) Use of Form N-1A by More Than One Registrant, Series or
Class. Form N-1A may be used by one or more Registrants, Series, or
Classes.
(i) When disclosure is provided for more than one Fund or Class,
the disclosure should be presented in a format designed to
communicate the information effectively. Funds may order or group
the response to any Item in any manner that organizes the
information into readable and comprehensible segments and is
consistent with the intent of the prospectus to provide clear and
concise information about the Funds or Classes. Funds are encouraged
to use, as appropriate, tables, side-by-side comparisons, captions,
bullet points, or other organizational techniques when presenting
disclosure for multiple Funds or Classes.
(ii) Paragraph (a) requires Funds to disclose the information
required by Items 2 and 3 in numerical order at the front of the
prospectus and not to precede the Items with other information. As a
general matter, multiple Funds or Multiple Class Funds may depart
from the requirement of paragraph (a) as necessary to present the
required information clearly and effectively (although the order of
information required by each Item must remain the same). For
example, the prospectus may present all of the Item 2 information
for several Funds followed by all of the Item 3 information for the
Funds, or may present Items 2 and 3 for each of several Funds
sequentially. Other presentations also would be acceptable if they
are consistent with the Form's intent to disclose the information
required by Items 2 and 3 in a standard order at the beginning of
the prospectus.
(d) Modified Prospectuses for Certain Funds.
(i) A Fund may modify or omit, if inapplicable, the information
required by Items 7(b)-(d) and 8(a)(2) for funds used as investment
options for:
(A) A defined contribution plan that meets the requirements for
qualification under section 401(k) of the Internal Revenue Code (26
U.S.C. 401(k));
(B) A tax-deferred arrangement under sections 403(b) or 457 of
the Internal Revenue Code (26 U.S.C. 403(b) and 457); and
(C) A variable contract as defined in section 817(d) of the
Internal Revenue Code (26 U.S.C. 817(d)), if covered in a separate
account prospectus.
(ii) A Fund that uses a modified prospectus under Instruction
(d)(i) may:
(A) Alter the legend required on the back cover page by Item
1(b)(1) to state, as applicable, that the prospectus is intended for
use in connection with a defined contribution plan, tax-deferred
arrangement, or variable contract; and
(B) Modify other disclosure in the prospectus consistent with
offering the Fund as a specific investment option for a defined
contribution plan, tax-deferred arrangement, or variable contract.
(e) Dates. Rule 423 under the Securities Act [17 CFR 230.423]
applies to the dates of the prospectus and the SAI. The SAI should
be made available at the same time that the prospectus becomes
available for purposes of rules 430 and 460 under the Securities Act
[17 CFR 230.430 and 230.460].
(f) Sales Literature. A Fund may include sales literature in the
prospectus so long as the amount of this information does not add
substantial length to the prospectus and its placement does not
obscure essential disclosure.
D. Incorporation by Reference
1. Specific Rules for Incorporation by Reference in Form N-1A
(a) A Fund may not incorporate by reference into a prospectus
information that Part A of this Form requires to be included in a
prospectus, except as specifically permitted by Part A of the Form.
(b) A Fund may incorporate by reference any or all of the SAI
into the prospectus (but not to provide any information required by
Part A to be included in the prospectus) without delivering the SAI
with the prospectus.
(c) A Fund may incorporate by reference into the SAI or its
response to Part C, information that Parts B and C require to be
included in the Fund's registration statement.
2. General Requirements
All incorporation by reference must comply with the requirements
of this Form and the following rules on incorporation by reference:
rule 10(d) of Regulation S-K under the Securities Act [17 CFR
229.10(d)] (general rules on incorporation by reference, which,
among other things, prohibit, unless specifically required by this
Form, incorporating by reference a document that includes
incorporation by reference to another document, and limits
incorporation to documents filed within the last 5 years, with
certain exceptions); rule 411 under the Securities Act [17 CFR
230.411] (general rules on incorporation by reference in a
prospectus); rule 303 of Regulation S-T [17 CFR 232.303] (specific
requirements for electronically filed documents); and rules 0-4, 8b-
23 and 8b-32 [17 CFR 270.0-4, 270.8b-23 and 270.8b-32] (additional
rules on incorporation by reference for Funds).
Part A: Information Required in a Prospectus
Item 1. Front and Back Cover Pages
(a) Front Cover Page. Include the following information, in
plain English under rule 421(d) under the Securities Act, on the
outside front cover page of the prospectus:
(1) The Fund's name.
(2) The date of the prospectus.
(3) The statement required by rule 481(b)(1) under the
Securities Act.
Instruction. A Fund may include on the front cover page a
statement of its investment objectives, a brief (e.g., one sentence)
description of its operations, or any additional information,
subject to the requirement set out in General Instruction C.3(b).
[[Page 13948]]
(b) Back Cover Page. Include the following information, in plain
English under rule 421(d) under the Securities Act, on the outside
back cover page of the prospectus:
(1) A statement that the SAI includes additional information
about the Fund, and a statement to the following effect:
Additional information about the Fund's investments is available
in the Fund's annual and semi-annual reports to shareholders. In the
Fund's annual report, you will find a discussion of the market
conditions and investment strategies that significantly affected the
Fund's performance during its last fiscal year.
Explain that the SAI and the Fund's annual and semi-annual
reports are available, without charge, upon request, and explain how
shareholders in the Fund may make inquiries to the Fund. Provide a
toll-free (or collect) telephone number for investors to call: to
request the SAI; to request the Fund's annual report, if required by
Item 5; to request the Fund's semi-annual report; to request other
information about the Fund; and to make shareholder inquiries.
Instructions.
1. A Fund may indicate, if applicable, that the SAI and other
information are available on its Internet site and/or by E-mail
request.
2. A Fund may indicate, if applicable, that the SAI and other
information are available from a financial intermediary (such as a
broker-dealer or bank) through which shares of the Fund may be
purchased or sold.
3. When a Fund (or financial intermediary through which shares
of the Fund may be purchased or sold) receives a request for the
SAI, the annual report, or the semi-annual report, the Fund (or
financial intermediary) must send the requested document within 3
business days of receipt of the request, by first-class mail or
other means designed to ensure equally prompt delivery.
4. A Fund that has not yet been required to deliver an annual or
semi-annual report to shareholders under rule 30d-1 [17 CFR 270.30d-
1] may omit the statements required by this paragraph regarding the
reports.
5. A Fund that provides the information required by Item 5
(Management's Discussion of Fund Performance) in its prospectus (and
not in its annual report), or a Money Market Fund, may omit the
sentence indicating that a reader will find in the Fund's annual
report a discussion of the market conditions and investment
strategies that significantly affected the Fund's performance during
its last fiscal year.
6. A Fund that provides a separate disclosure document to
investors under Item 7(f) must include the statement required by
Item 7(f)(3).
(2) A statement whether and from where information is
incorporated by reference into the prospectus as permitted by
General Instruction D. Unless the information is delivered with the
prospectus, explain that the Fund will provide the information
without charge, upon request (referring to the telephone number
provided in response to paragraph (b)(1)).
Instruction. The Fund may combine the information about
incorporation by reference with the statements required under
paragraph (b)(1).
(3) A statement that information about the Fund (including the
SAI) can be reviewed and copied at the Commission's Public Reference
Room in Washington, D.C. Also state that information on the
operation of the public reference room may be obtained by calling
the Commission at 1-800-SEC-0330. State that reports and other
information about the Fund are available on the Commission's
Internet site at http://www.sec.gov and that copies of this
information may be obtained, upon payment of a duplicating fee, by
writing the Public Reference Section of the Commission, Washington,
D.C. 20549-6009.
(4) The Fund's Investment Company Act file number on the bottom
of the back cover page in type size smaller than that generally used
in the prospectus (e.g., 8-point modern type).
Item 2. Risk/Return Summary: Investments, Risks, and Performance
Include the following information, in plain English under rule
421(d) under the Securities Act, in the order and subject matter
indicated:
(a) Fund investment objectives/goals.
Disclose the Fund's investment objectives or goals. A Fund also
may identify its type or category (e.g., that it is a Money Market
Fund or a balanced fund).
(b) Principal investment strategies of the Fund.
Based on the information given in response to Item 4(b),
summarize how the Fund intends to achieve its investment objectives
by identifying the Fund's principal investment strategies (including
the type or types of securities in which the Fund invests or will
invest principally) and any policy to concentrate in securities of
issuers in a particular industry or group of industries.
(c) Principal risks of investing in the Fund.
(1) Narrative Risk Disclosure.
(i) Based on the information given in response to Item 4(c),
summarize the principal risks of investing in the Fund, including
the risks to which the Fund's portfolio as a whole is subject and
the circumstances reasonably likely to affect adversely the Fund's
net asset value, yield, and total return. Unless the Fund is a Money
Market Fund, disclose that loss of money is a risk of investing in
the Fund.
Instruction. A Fund may, in responding to this Item, describe
the types of investors for whom the Fund is intended or the types of
investment goals that may be consistent with an investment in the
Fund.
(ii) If the Fund is a Money Market Fund, state that:
An investment in the Fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by
investing in the Fund.
(iii) If the Fund is advised by or sold through an insured
depository institution, state that:
An investment in the Fund is not a deposit of the bank and is
not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Instruction. A Money Market Fund that is advised by or sold
through an insured depository institution should combine the
disclosure required by Items 2(c)(1)(ii) and (iii) in a single
statement.
(iv) If applicable, state that the Fund is non-diversified,
describe the effect of non-diversification (e.g., disclose that,
compared with other funds, the Fund may invest a greater percentage
of its assets in a particular issuer), and summarize the risks of
investing in a non-diversified fund.
(2) Risk/Return Bar Chart and Table.
(i) Include the bar chart and table required by paragraphs
(c)(2)(ii) and (iii) of this section. Provide a brief explanation of
how the information illustrates the variability of the Fund's
returns (e.g., by stating that the information provides some
indication of the risks of investing in the Fund by showing changes
in the Fund's performance from year to year and by showing how the
Fund's average annual returns for 1, 5, and 10 years compare with
those of a broad measure of market performance). Provide a statement
to the effect that how the Fund has performed in the past is not
necessarily an indication of how the Fund will perform in the
future.
(ii) If the Fund has annual returns for at least one calendar
year, provide a bar chart showing the Fund's annual total returns
for each of the last 10 calendar years (or for the life of the Fund
if less than 10 years), but only for periods subsequent to the
effective date of the Fund's registration statement. Present the
corresponding numerical return adjacent to each bar. If the Fund's
fiscal year is other than a calendar year, include the year-to-date
return information as of the end of the most recent quarter in
[[Page 13949]]
a footnote to the bar chart. Following the bar chart, disclose the
Fund's highest and lowest return for a quarter during the 10 years
or other period of the bar chart.
(iii) If the Fund has annual returns for at least one calendar
year, provide a table showing the Fund's average annual total
returns for 1, 5, and 10 calendar year periods ending on the date of
the most recently completed calendar year (or for the life of the
Fund, if shorter), but only for periods subsequent to the effective
date of the Fund's registration statement, and the returns of an
appropriate broad-based securities market index as defined in
Instruction 5 to Item 5(b) for the same periods. A Fund that has
been in existence for more than 10 years also may include average
annual returns for the life of the fund. A Money Market Fund may
provide the Fund's 7-day yield ending on the date of the most recent
calendar year or disclose a toll-free (or collect) telephone number
that investors can use to obtain the Fund's current 7-day yield.
Instructions.
1. Bar Chart.
(a) Provide annual total returns beginning with the earliest
calendar year. Calculate annual returns using the Instructions to
Item 9(a), except that the calculations should be based on calendar
years. If a Fund's shares are sold subject to a sales load or
account fees, state that sales loads or account fees are not
reflected in the bar chart and that, if these amounts were
reflected, returns would be less than those shown.
(b) For a Fund that provides annual total returns for only one
calendar year or for a Fund that does not include the bar chart
because it does not have annual returns for a full calendar year,
modify, as appropriate, the narrative explanation required by
paragraph (c)(2)(i) (e.g., by stating that the information gives
some indication of the risks of an investment in the Fund by
comparing the Fund's performance with a broad measure of market
performance).
2. Table.
(a) Calculate the Fund's average annual total returns under Item
21(b)(1) and a Money Market Fund's 7-day yield under Item 21(a).
(b) A Fund may include, in addition to the required broad-based
securities market index, information for one or more other indexes
as permitted by Instruction 6 to Item 5(b). If an additional index
is included, disclose information about the additional index in the
narrative explanation accompanying the bar chart and table (e.g., by
stating that the information shows how the Fund's performance
compares with the returns of an index of funds with similar
investment objectives).
(c) If the Fund selects an index that is different from the
index used in a table for the immediately preceding period, explain
the reason(s) for the selection of a different index and provide
information for both the newly selected and the former index.
(d) A Fund (other than a Money Market Fund) may include the
Fund's yield calculated under Item 21(b)(2). Any Fund may include
its tax-equivalent yield calculated under Item 21. If a Fund's yield
is included, provide a toll-free (or collect) telephone number that
investors can use to obtain current yield information.
3. Multiple Class Funds.
(a) When a Multiple Class Fund offers more than one Class in the
prospectus, provide annual total returns in the bar chart for only
one of those Classes. The Fund can select which Class to include
(e.g., the oldest Class, the Class with the greatest net assets) if
the Fund:
(i) Selects the Class offered in the prospectus with 10 or more
years of annual returns if other Classes have fewer than 10 years of
annual returns;
(ii) Selects the Class with the longest period of annual returns
when the Classes offered in the prospectus all have fewer than 10
years of returns; and
(iii) If the Fund provides annual total returns in the bar chart
for a Class that is different from the Class selected for the most
immediately preceding period, explain in a footnote to the bar chart
the reasons for the selection of a different Class.
(b) When a Multiple Class Fund offering one or more Classes
offers a new Class in a prospectus that does not offer the shares of
any other Class, include the bar chart with annual total returns for
any other existing Class for the first year that the Class is
offered. Explain in a footnote that the returns are for a Class that
is not offered in the prospectus that would have substantially
similar annual returns because the shares are invested in the same
portfolio of securities and the annual returns would differ only to
the extent that the Classes do not have the same expenses. Include
return information for the other Class reflected in the bar chart in
the performance table.
(c) Provide average annual total returns in the table for each
Class offered in the prospectus.
(d) If a Multiple Class Fund offers a Class in the prospectus
that converts into another Class after a stated period, compute
average annual total returns in the table by using the returns of
the other Class for the period after conversion.
4. Change in Investment Adviser. If the Fund has not had the
same investment adviser during the last 10 calendar years, the Fund
may begin the bar chart and the performance information in the table
on the date that the current adviser began to provide advisory
services to the Fund subject to the conditions in Instruction 11 of
Item 5(b).
Item 3. Risk/Return Summary: Fee Table
Include the following information, in plain English under rule
421(d) under the Securities Act, after Item 2 (unless the Fund
offers its shares exclusively to one or more separate accounts):
Fees and Expenses of the Fund
[This table describes the fees and expenses that you may pay if you buy
and hold shares of the Fund.]
------------------------------------------------------------------------
------------------------------------------------------------------------
Shareholder Fees (fees paid directly
from your investment):
Maximum Sales Charge (Load) Imposed
on Purchases (as a percentage of
offering price).................... %
Maximum Deferred Sales Charge (Load)
(as a percentage of )............. %
Maximum Sales Charge (Load) Imposed
on Reinvested Dividends [and other
Distributions] (as a percentage of
).................................. %
Redemption Fee (as a percentage of
amount redeemed, if applicable).... %
Exchange Fee........................ %
Maximum Account Fee................. %
Annual Fund Operating Expenses (expenses
that are deducted from Fund assets):
Management Fees..................... %
Distribution [and/or Service] (12b-
1) Fees............................ %
Other Expenses...................... %
------------------------------------
--- %
------------------------------------
--- %
------------------------------------
--- %
Total Annual Fund Operating Expenses %
------------------------------------------------------------------------
[[Page 13950]]
Example
This Example is intended to help you compare the cost of
investing in the Fund with the cost of investing in other mutual
funds.
The Example assumes that you invest $10,000 in the Fund for the
time periods indicated and then redeem all of your shares at the end
of those periods. The Example also assumes that your investment has
a 5% return each year and that the Fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based
on these assumptions your costs would be:
----------------------------------------------------------------------------------------------------------------
1 year 3 years 5 years 10 years
----------------------------------------------------------------------------------------------------------------
$.......................... $ $ $
----------------------------------------------------------------------------------------------------------------
You would pay the following expenses if you did not redeem your
shares:
----------------------------------------------------------------------------------------------------------------
1 year 3 years 5 years 10 years
----------------------------------------------------------------------------------------------------------------
$.......................... $ $ $
----------------------------------------------------------------------------------------------------------------
The Example does not reflect sales charges (loads) on reinvested
dividends [and other distributions]. If these sales charges (loads)
were included, your costs would be higher.
Instructions.
1. General.
(a) Round all dollar figures to the nearest dollar and all
percentages to the nearest hundredth of one percent.
(b) Include the narrative explanations in the order indicated. A
Fund may modify the narrative explanations if the explanation
contains comparable information to that shown.
(c) Include the caption ``Maximum Account Fees'' only if the
Fund charges these fees. A Fund may omit other captions if the Fund
does not charge the fees or expenses covered by the captions.
(d)(i) If the Fund is a Feeder Fund, reflect the aggregate
expenses of the Feeder Fund and the Master Fund in a single fee
table using the captions provided. In a footnote to the fee table,
state that the table and Example reflect the expenses of both the
Feeder and Master Funds.
(ii) If the prospectus offers more than one Class of a Multiple
Class Fund or more than one Feeder Fund that invests in the same
Master Fund, provide a separate response for each Class or Feeder
Fund.
2. Shareholder Fees.
(a)(i) ``Maximum Deferred Sales Charge (Load)'' includes the
maximum total deferred sales charge (load) payable upon redemption,
in installments, or both, expressed as a percentage of the amount or
amounts stated in response to Item 8(a), except that, for a sales
charge (load) based on net asset value at the time of purchase, show
the sales charge (load) as a percentage of the offering price at the
time of purchase. A Fund may include in a footnote to the table, if
applicable, a tabular presentation showing the amount of deferred
sales charges (loads) over time or a narrative explanation of the
sales charges (loads) (e.g., ----% in the first year after purchase,
declining to ----% in the ---- year and eliminated thereafter).
(ii) If more than one type of sales charge (load) is imposed
(e.g., a deferred sales charge (load) and a front-end sales charge
(load)), the first caption in the table should read ``Maximum Sales
Charge (Load)'' and show the maximum cumulative percentage. Show the
percentage amounts and the terms of each sales charge (load)
comprising that figure on separate lines below.
(iii) If a sales charge (load) is imposed on shares purchased
with reinvested capital gains distributions or returns of capital,
include the bracketed words in the third caption.
(b) ``Redemption Fee'' includes a fee charged for any redemption
of the Fund's shares, but does not include a deferred sales charge
(load) imposed upon redemption.
(c) ``Exchange Fee'' includes the maximum fee charged for any
exchange or transfer of interest from the Fund to another fund. The
Fund may include in a footnote to the table, if applicable, a
tabular presentation of the range of exchange fees or a narrative
explanation of the fees.
(d) ``Maximum Account Fees.'' Disclose account fees that may be
charged to a typical investor in the Fund; fees that apply to only a
limited number of shareholders based on their particular
circumstances need not be disclosed. Include a caption describing
the maximum account fee (e.g., ``Maximum Account Maintenance Fee''
or ``Maximum Cash Management Fee''). State the maximum annual
account fee as either a fixed dollar amount or a percentage of
assets. Include in a parenthetical to the caption the basis on which
any percentage is calculated. If an account fee is charged only to
accounts that do not meet a certain threshold (e.g., accounts under
$5,000), the Fund may include the threshold in a parenthetical to
the caption or footnote to the table. The Fund may include an
explanation of any non-recurring account fee in a parenthetical to
the caption or in a footnote to the table.
3. Annual Fund Operating Expenses.
(a) ``Management Fees'' include investment advisory fees
(including any fees based on the Fund's performance), any other
management fees payable to the investment adviser or its affiliates,
and administrative fees payable to the investment adviser or its
affiliates that are not included as ``Other Expenses.''
(b) ``Distribution [and/or Service] (12b-1) Fees'' include all
distribution or other expenses incurred during the most recent
fiscal year under a plan adopted pursuant to rule 12b-1 [17 CFR
270.12b-1]. Under an appropriate caption or a subcaption of ``Other
Expenses,'' disclose the amount of any distribution or similar
expenses deducted from the Fund's assets other than pursuant to a
rule 12b-1 plan.
(c)(i) ``Other Expenses'' include all expenses not otherwise
disclosed in the table that are deducted from the Fund's assets or
charged to all shareholder accounts. The amount of expenses deducted
from the Fund's assets are the amounts shown as expenses in the
Fund's statement of operations (including increases resulting from
complying with paragraph 2(g) of rule 6-07 of Regulation S-X [17 CFR
210.6-07]).
(ii) ``Other Expenses'' do not include extraordinary expenses as
determined under generally accepted accounting principles (see
Accounting Principles Board Opinion No. 30). If extraordinary
expenses were incurred that materially affected the Fund's ``Other
Expenses,'' disclose in a footnote to the table what ``Other
Expenses'' would have been had the extraordinary expenses been
included.
(iii) The Fund may subdivide this caption into no more than
three subcaptions that identify the largest expense or expenses
comprising ``Other Expenses,'' but must include a total of all
``Other Expenses.'' Alternatively, the Fund may include the
components of ``Other Expenses'' in a parenthetical to the caption.
(d)(i) Base the percentages of ``Annual Fund Operating
Expenses'' on amounts incurred during the Fund's most recent fiscal
year, but include in expenses amounts that would have been incurred
absent expense reimbursement or fee waiver arrangements. If the Fund
has changed its fiscal year and, as a result, the most recent fiscal
year is less than three months, use the fiscal year prior to the
most recent fiscal year as the basis for determining ``Annual Fund
Operating Expenses.''
(ii) If there have been any changes in ``Annual Fund Operating
Expenses'' that would materially affect the information disclosed in
the table:
[[Page 13951]]
(A) Restate the expense information using the current fees as if
they had been in effect during the previous fiscal year; and
(B) In a footnote to the table, disclose that the expense
information in the table has been restated to reflect current fees.
(iii) A change in ``Annual Fund Operating Expenses'' means
either an increase or a decrease in expenses that occurred during
the most recent fiscal year or that is expected to occur during the
current fiscal year. A change in ``Annual Fund Operating Expenses''
does not include a decrease in operating expenses as a percentage of
assets due to economies of scale or breakpoints in a fee arrangement
resulting from an increase in the Fund's assets.
(e) The Fund may reflect actual operating expenses that include
expense reimbursement or fee waiver arrangements in a footnote to
the table. If the Fund provides this disclosure, also disclose the
period for which the expense reimbursement or fee waiver arrangement
is expected to continue, or whether it can be terminated at any time
at the option of the Fund.
4. Example.
(a) Assume that the percentage amounts listed under ``Annual
Fund Operating Expenses'' remain the same in each year of the 1-, 3-
, 5-, and 10-year periods, except that an adjustment may be made to
reflect reduced annual expenses resulting from completion of the
amortization of initial organization expenses.
(b) For any breakpoint in any fee, assume that the amount of the
Fund's assets remains constant as of the level at the end of the
most recently completed fiscal year.
(c) Assume reinvestment of all dividends and distributions.
(d) Reflect recurring and non-recurring fees charged to all
investors other than any exchange fees or any sales charges (loads)
on shares purchased with reinvested dividends or other
distributions. If sales charges (loads) are imposed on reinvested
dividends or other distributions, include the narrative explanation
following the Example and include the bracketed words when sales
charges (loads) are charged on reinvested capital gains
distributions or returns of capital. Reflect any shareholder account
fees collected by more than one Fund by dividing the total amount of
the fees collected during the most recent fiscal year for all Funds
whose shareholders are subject to the fees by the total average net
assets of the Funds. Add the resulting percentage to ``Annual Fund
Operating Expenses'' and assume that it remains the same in each of
the 1-, 3-, 5-, and 10-year periods. A Fund that charges account
fees based on a minimum account requirement exceeding $10,000 may
adjust its account fees based on the amount of the fee in relation
to the Fund's minimum account requirement.
(e) Reflect any deferred sales charge (load) by assuming
redemption of the entire account at the end of the year in which the
sales charge (load) is due. In the case of a deferred sales charge
(load) that is based on the Fund's net asset value at the time of
payment, assume that the net asset value at the end of each year
includes the 5% annual return for that and each preceding year.
(f) Include the second 1-, 3-, 5-, and 10-year periods and
related narrative explanation only if a sales charge (load) or other
fee is charged upon redemption.
5. New Funds. For purposes of this Item, a ``New Fund'' is a
Fund that does not include in Form N-1A financial statements
reporting operating results or that includes financial statements
for the Fund's initial fiscal year reporting operating results for a
period of 6 months or less. The following Instructions apply to New
Funds.
(a) Base the percentages expressed in ``Annual Fund Operating
Expenses'' on payments that will be made, but include in expenses,
amounts that will be incurred without reduction for expense
reimbursement or fee waiver arrangements, estimating amounts of
``Other Expenses.'' Disclose in a footnote to the table that ``Other
Expenses'' are based on estimated amounts for the current fiscal
year.
(b) The New Fund may reflect expense reimbursement or fee waiver
arrangements that are expected to reduce any Fund operating expense
or the estimate of ``Other Expenses'' (regardless of whether the
arrangement has been guaranteed) in a footnote to the table. If the
New Fund provides this disclosure, also disclose the period for
which the expense reimbursement or fee waiver arrangement is
expected to continue, or whether it can be terminated at any time at
the option of the Fund.
(c) Complete only the 1-and 3-year period portions of the
Example and estimate any shareholder account fees collected.
Item 4. Investment Objectives, Principal Investment Strategies, and
Related Risks
(a) Investment Objectives. State the Fund's investment
objectives and, if applicable, state that those objectives may be
changed without shareholder approval.
(b) Implementation of Investment Objectives. Describe how the
Fund intends to achieve its investment objectives. In the
discussion:
(1) Describe the Fund's principal investment strategies,
including the particular type or types of securities in which the
Fund principally invests or will invest.
Instructions.
1. A strategy includes any policy, practice, or technique used
by the Fund to achieve its investment objectives.
2. Whether a particular strategy, including a strategy to invest
in a particular type of security, is a principal investment strategy
depends on the strategy's anticipated importance in achieving the
Fund's investment objectives, and how the strategy affects the
Fund's potential risks and returns. In determining what is a
principal investment strategy, consider, among other things, the
amount of the Fund's assets expected to be committed to the
strategy, the amount of the Fund's assets expected to be placed at
risk by the strategy, and the likelihood of the Fund's losing some
or all of those assets from implementing the strategy.
3. A negative strategy (e.g., a strategy not to invest in a
particular type of security or not to borrow money) is not a
principal investment strategy.
4. Disclose any policy to concentrate in securities of issuers
in a particular industry or group of industries (i.e., investing
more than 25% of a Fund's net assets in a particular industry or
group of industries).
5. Disclose any other policy specified in Item 12(c)(1) that is
a principal investment strategy of the Fund.
6. Disclose, if applicable, that the Fund may, from time to
time, take temporary defensive positions that are inconsistent with
the Fund's principal investment strategies in attempting to respond
to adverse market, economic, political, or other conditions. Also
disclose the effect of taking such a temporary defensive position
(e.g., that the Fund may not achieve its investment objective).
7. Disclose whether the Fund (if not a Money Market Fund) may
engage in active and frequent trading of portfolio securities to
achieve its principal investment strategies. If so, explain the tax
consequences to shareholders of increased portfolio turnover, and
how the tax consequences of, or trading costs associated with, a
Fund's portfolio turnover may affect the Fund's performance.
(2) Explain in general terms how the Fund's adviser decides
which securities to buy and sell (e.g., for an equity fund, discuss,
if applicable, whether the Fund emphasizes value or growth or blends
the two approaches).
(c) Risks. Disclose the principal risks of investing in the
Fund, including the risks to which the Fund's particular portfolio
as a whole is expected to be subject and the circumstances
reasonably likely to affect adversely the Fund's net asset value,
yield, or total return.
Item 5. Management's Discussion of Fund Performance
Disclose the following information unless the Fund is a Money
Market Fund or the information is included in the Fund's latest
annual report to shareholders under rule 30d-1 [17 CFR 270.30d-1]
and the Fund provides a copy of the annual report, upon request and
without charge, to each person to whom a prospectus is delivered:
(a) Discuss the factors that materially affected the Fund's
performance during the most recently completed fiscal year,
including the relevant market conditions and the investment
strategies and techniques used by the Fund's investment adviser.
[[Page 13952]]
(b)(1) Provide a line graph comparing the initial and subsequent
account values at the end of each of the most recently completed 10
fiscal years of the Fund (or for the life of the Fund, if shorter),
but only for periods subsequent to the effective date of the Fund's
registration statement. Assume a $10,000 initial investment at the
beginning of the first fiscal year in an appropriate broad-based
securities market index for the same period.
(2) In a table placed within or next to the graph, provide the
Fund's average annual total returns for the 1-, 5-, and 10-year
periods as of the end of the last day of the most recent fiscal year
computed in accordance with Item 21(b)(1). Include a statement
accompanying the graph to the effect that past performance does not
predict future performance.
Instructions.
1. Line Graph Computation.
(a) Assume that the initial investment was made at the offering
price last calculated on the business day before the first day of
the first fiscal year.
(b) Base subsequent account values on the net asset value of the
Fund last calculated on the last business day of the first and each
subsequent fiscal year.
(c) Calculate the final account value by assuming the account
was closed and redemption was at the price last calculated on the
last business day of the most recent fiscal year.
(d) Base the line graph on the Fund's required minimum initial
investment if that amount exceeds $10,000.
2. Sales Load. Reflect any sales load (or any other fees charged
at the time of purchasing shares or opening an account) by beginning
the line graph at the amount that actually would be invested (i.e.,
assume that the maximum sales load, and other charges deducted from
payments, is deducted from the initial $10,000 investment). For a
Fund whose shares are subject to a contingent deferred sales load,
assume that the deduction of the maximum deferred sales load (or
other charges) that would apply for a complete redemption that
received the price last calculated on the last business day of the
most recent fiscal year. For any other deferred sales load, assume
that the deduction in the amount(s) and at the time(s) that the
sales load actually would have been deducted.
3. Dividends and Distributions. Assume reinvestment of all of
the Fund's dividends and distributions on the reinvestment dates
during the period, and reflect any sales load imposed upon
reinvestment of dividends or distributions or both.
4. Account Fees. Reflect recurring fees that are charged to all
accounts.
(a) For any account fees that vary with the size of the account,
assume a $10,000 account size.
(b) Reflect, as appropriate, any recurring fees charged to
shareholder accounts that are paid other than by redemption of the
Fund's shares.
(c) Reflect an annual account fee that applies to more than one
Fund by allocating the fee in the following manner: divide the total
amount of account fees collected during the year by the Funds' total
average net assets, multiply the resulting percentage by the average
account value for each Fund and reduce the value of each
hypothetical account at the end of each fiscal year during which the
fee was charged.
5. Appropriate Index. For purposes of this Item, an
``appropriate broad-based securities market index'' is one that is
administered by an organization that is not an affiliated person of
the Fund, its investment adviser or principal underwriter, unless
the index is widely recognized and used. Adjust the index to reflect
the reinvestment of dividends on securities in the index, but do not
reflect the expenses of the Fund.
6. Additional Indexes. A Fund is encouraged to compare its
performance not only to the required broad-based index, but also to
other more narrowly based indexes that reflect the market sectors in
which the Fund invests. A Fund also may compare its performance to
an additional broad-based index, or to a non-securities index (e.g.,
the Consumer Price Index), so long as the comparison is not
misleading.
7. Change in Index. If the Fund uses an index that is different
from the one used for the immediately preceding fiscal year, explain
the reason(s) for the change and compare the Fund's annual change in
the value of an investment in the hypothetical account with the new
and former indexes.
8. Other Periods. The line graph may cover earlier fiscal years
and may compare the ending values of interim periods (e.g., monthly
or quarterly ending values), so long as those periods are after the
effective date of the Fund's registration statement.
9. Scale. The axis of the graph measuring dollar amounts may use
either a linear or a logarithmic scale.
10. New Funds. A New Fund (as defined in Instruction 5 to Item
3) is not required to include the information specified by this Item
in its prospectus (or annual report), unless Form N-1A (or the
annual report) contains audited financial statements covering a
period of at least 6 months.
11. Change in Investment Adviser. If the Fund has not had the
same investment adviser for the previous 10 fiscal years, the Fund
may begin the line graph on the date that the current adviser began
to provide advisory services to the Fund so long as:
(a) Neither the current adviser nor any affiliate is or has been
in ``control'' of the previous adviser under section 2(a)(9) [15
U.S.C. 80a-2(a)(9)];
(b) The current adviser employs no officer(s) of the previous
adviser or employees of the previous adviser who were responsible
for providing investment advisory or portfolio management services
to the Fund; and
(c) The graph is accompanied by a statement explaining that
previous periods during which the Fund was advised by another
investment adviser are not shown.
(d) Discuss the effect of any policy or practice of maintaining
a specified level of distributions to shareholders on the Fund's
investment strategies and per share net asset value during the last
fiscal year. Also discuss the extent to which the Fund's
distribution policy resulted in distributions of capital.
Item 6. Management, Organization, and Capital Structure
(a) Management.
(1) Investment Adviser.
(i) Provide the name and address of each investment adviser of
the Fund. Describe the investment adviser's experience as an
investment adviser and the advisory services that it provides to the
Fund.
(ii) Describe the compensation of each investment adviser of the
Fund as follows:
(A) If the Fund has operated for a full fiscal year, state the
aggregate fee paid to the adviser for the most recent fiscal year as
a percentage of average net assets. If the Fund has not operated for
a full fiscal year, state what the adviser's fee is as a percentage
of average net assets, including any breakpoints.
(B) If the adviser's fee is not based on a percentage of average
net assets (e.g., the adviser receives a performance-based fee),
describe the basis of the adviser's compensation.
Instructions.
1. If the Fund changed advisers during the fiscal year, describe
the compensation and the dates of service for each adviser.
2. Explain any changes in the basis of computing the adviser's
compensation during the fiscal year.
3. If a Fund has more than one investment adviser, disclose the
aggregate fee paid to all of the advisers, rather than the fees paid
to each adviser, in response to this Item.
(2) Portfolio Manager. State the name, title, and length of
service of the person or persons employed by or associated with an
investment adviser of the Fund (or the Fund), if any, who are
primarily responsible for the day-to-day management of the Fund's
portfolio. Also state each person's business experience during the
past 5 years.
[[Page 13953]]
Instructions.
1. This requirement does not apply to a Money Market Fund or to
a Fund that has an investment objective to replicate the performance
of an index.
2. If a committee, team or other group of persons associated
with an investment adviser of the Fund (``Adviser Group'') is
jointly and primarily responsible for the day-to-day management of
the Fund's portfolio, provide disclosure to the effect that the
Fund's investments are managed by the Adviser Group; the names of
the members of the Adviser Group need not be provided.
3. If the role of the Adviser Group is generally limited to
overseeing, approving or ratifying the decisions of an individual(s)
who is primarily responsible for the day-to-day management of the
Fund, information in response to this Item is required only about
the individual(s).
4. If an Adviser Group and an individual(s) share day-to-day
responsibility with respect to the Fund, provide disclosure to the
effect that the Fund's investments are managed jointly by the
Adviser Group and an individual(s) associated with the Fund's
adviser; disclosure about the individual(s) contemplated by this
Item need be provided only if the individual(s) is primarily
responsible for implementing a principal investment strategy of the
Fund as that term is defined in the Instruction to Item 4. For
example, assume that a Fund has an investment strategy of investing
in certain industry sectors, and that the Fund considers the
selection of specific investments within those sectors generally not
determinative in achieving the Fund's objective. If an Adviser Group
was responsible for selecting the sectors in which the Fund invests
and an individual was responsible for selecting the Fund's
investments within the sectors, the Fund would not be required to
disclose the information contemplated by this Item about the
individual. If, however, the selection of companies within a certain
sector or sectors was central to the Fund's achieving its investment
objective, and an individual was responsible for selecting the
Fund's investments within the sector or sectors, the Fund would be
required to provide the information contemplated by this Item for
that individual.
(3) Legal Proceedings. Describe any material pending legal
proceedings, other than ordinary routine litigation incidental to
the business, to which the Fund or the Fund's investment adviser or
principal underwriter is a party. Include the name of the court in
which the proceedings are pending, the date instituted, the
principal parties involved, a description of the factual basis
alleged to underlie the proceeding, and the relief sought. Include
similar information as to any legal proceedings instituted, or known
to be contemplated, by a governmental authority.
Instruction. For purposes of this requirement, legal proceedings
are material only to the extent that they are likely to have a
material adverse effect on the Fund or the ability of the investment
adviser or principal underwriter to perform its contract with the
Fund.
(b) Capital Stock. Disclose any unique or unusual restrictions
on the right freely to retain or dispose of the Fund's shares or
material obligations or potential liabilities associated with
holding the Fund's shares (not including investment risks) that may
expose investors to significant risks.
Item 7. Shareholder Information
(a) Pricing of Fund Shares. Describe the procedures for pricing
the Fund's shares, including:
(1) An explanation that the price of Fund shares is based on the
Fund's net asset value and the method used to value Fund shares
(market price, fair value, or amortized cost).
Instruction. If a Fund has a policy that contemplates using fair
value pricing under special circumstances (e.g., when an event
occurs after the close of the exchange on which the Fund's portfolio
securities are principally traded that is likely to have changed the
value of the securities), provide a brief explanation of the
circumstances and the effects of this policy. If the Fund's policy
is to use fair value pricing only when market prices are
unavailable, it need not explain the circumstances and the effects
of the policy.
(2) A statement as to when calculations of net asset value are
made and that the price at which a purchase or redemption is
effected is based on the next calculation of net asset value after
the order is placed.
(3) A statement identifying in a general manner any national
holidays when shares will not be priced and specifying any
additional local or regional holidays when the Fund shares will not
be priced.
Instructions.
1. In responding to this Item, a Fund may use a list of specific
days or any other means that effectively communicates the
information (e.g., explaining that shares will not be priced on the
days on which the New York Stock Exchange is closed for trading).
2. If the Fund has portfolio securities that are primarily
listed on foreign exchanges that trade on weekends or other days
when the Fund does not price its shares, disclose that the net asset
value of the Fund's shares may change on days when shareholders will
not be able to purchase or redeem the Fund's shares.
(b) Purchase of Fund Shares. Describe the procedures for
purchasing the Fund's shares, including any minimum initial or
subsequent investment requirements.
(c) Redemption of Fund Shares. Describe the procedures for
redeeming the Fund's shares, including:
(1) Any restrictions on redemptions.
(2) Any redemption charges, including how these charges will be
collected and under what circumstances the charges will be waived.
(3) If the Fund has reserved the right to redeem in kind.
(4) Any procedure that a shareholder can use to sell the Fund's
shares to the Fund or its underwriter through a broker-dealer,
noting any charges that may be imposed for such service.
Instruction. The specific fees paid through the broker-dealer
for such service need not be disclosed.
(5) The circumstances, if any, under which the Fund may redeem
shares automatically without action by the shareholder in accounts
below a certain number or value of shares.
(6) The circumstances, if any, under which the Fund may delay
honoring a request for redemption for a certain time after a
shareholder's investment (e.g., whether a Fund does not process
redemptions until clearance of the check for the initial
investment).
(7) Any restrictions on, or costs associated with, transferring
shares held in street name accounts.
(d) Dividends and Distributions. Describe the Fund's policy with
respect to dividends and distributions, including any options that
shareholders may have as to the receipt of dividends and
distributions.
(e) Tax Consequences.
(1) Describe the tax consequences to shareholders of buying,
holding, exchanging and selling the Fund's shares, including, as
applicable, that:
(i) The Fund intends to make distributions that may be taxed as
ordinary income and capital gains (which may be taxable at different
rates depending on the length of time the Fund holds its assets). If
the Fund expects that its distributions, as a result of its
investment objectives or strategies, will consist primarily of
ordinary income or capital gains, provide disclosure to that effect.
(ii) The Fund's distributions, whether received in cash or
reinvested in additional shares of the Fund, may be subject to
federal income tax.
(iii) An exchange of the Fund's shares for shares of another
fund will be treated as a sale of the Fund's shares and any gain on
the transaction may be subject to federal income tax.
(2) For a Fund that holds itself out as investing in securities
generating tax-exempt income:
(i) Modify the disclosure required by paragraph (e)(1) to
reflect that the Fund intends to distribute tax-exempt income.
[[Page 13954]]
(ii) Also disclose, as applicable, that:
(A) The Fund may invest a portion of its assets in securities
that generate income that is not exempt from federal or state income
tax;
(B) Income exempt from federal tax may be subject to state and
local income tax; and
(C) Any capital gains distributed by the Fund may be taxable.
(3) If the Fund does not expect to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code
[I.R.C. 851 et seq.], explain the tax consequences. If the Fund
expects to pay an excise tax under the Internal Revenue Code [I.R.C.
4982] with respect to its distributions, explain the tax
consequences.
(f) Separate Disclosure Document. A Fund may omit from the
prospectus information about purchase and redemption procedures
required by Items 7(b)-(d) and 8(a)(2) and provide it in a separate
document if the Fund:
(1) Incorporates the separate purchase and redemption document
into the prospectus by reference and files the document with Part A
of Form N-1A;
(2) Includes a legend on the front cover page of the separate
document explaining that the information disclosed is part of, and
incorporated in, the prospectus;
(3) Includes a statement on the outside back cover page of the
prospectus that the purchase and sale information is provided in a
separate document that is incorporated by reference into the
prospectus; and
(4) Delivers the separate purchase and redemption document with
the prospectus.
Instruction. When delivering multiple prospectuses, all of which
incorporate the same separate purchase and sale document by
reference, a Fund may deliver a single separate document.
Item 8. Distribution Arrangements
(a) Sales Loads.
(1) Describe any sales loads, including deferred sales loads,
applied to purchases of the Fund's shares. Include in a table any
front-end sales load (and each breakpoint in the sales load, if any)
as a percentage of both the offering price and the net amount
invested.
Instructions.
1. If the Fund's shares are sold subject to a front-end sales
load, explain that the term ``offering price'' includes the front-
end sales load.
2. Disclose, if applicable, that sales loads are imposed on
shares, or amounts representing shares, that are purchased with
reinvested dividends or other distributions.
3. Discuss, if applicable, how deferred sales loads are imposed
and calculated, including:
(a) Whether the specified percentage of the sales load is based
on the offering price, or the lesser of the offering price or net
asset value at the time the sales load is paid.
(b) The amount of the sales load as a percentage of both the
offering price and the net amount invested.
(c) A description of how the sales load is calculated (e.g., in
the case of a partial redemption, whether or not the sales load is
calculated as if shares or amounts representing shares not subject
to a sales load are redeemed first, and other shares or amounts
representing shares are then redeemed in the order purchased).
(d) If applicable, the method of paying an installment sales
load (e.g., by withholding of dividend payments, involuntary
redemptions, or separate billing of a shareholder's account).
(2) Unless disclosed in response to paragraph (a)(1), in the
SAI, or in a separate disclosure document under Item 7(f), describe
any other arrangements that result in breakpoints in, or elimination
of, sales loads (e.g., letters of intent, accumulation plans,
dividend reinvestment plans, withdrawal plans, exchange privileges,
employee benefit plans, and redemption reinvestment plans). Identify
each class of individuals or transactions to which the arrangements
apply and state each different breakpoint as a percentage of both
the offering price and the amount invested.
(b) Rule 12b-1 Fees. If the Fund has adopted a plan under rule
12b-1, state the amount of the distribution fee payable under the
plan and provide disclosure to the following effect:
(1) The Fund has adopted a plan under rule 12b-1 that allows the
Fund to pay distribution fees for the sale and distribution of its
shares; and
(2) Because these fees are paid out of the Fund's assets on an
on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales
charges.
Instructions. If the Fund pays service fees under its rule 12b-1
plan, modify this disclosure to reflect the payment of these fees
(e.g., by indicating that the Fund pays distribution and other fees
for the sale of its shares and for services provided to
shareholders). For purposes of this paragraph, service fees have the
same meaning given that term under rule 2830(b)(9) of the NASD
Conduct Rules [NASD Manual (CCH) 4622].
(c) Multiple Class and Master-Feeder Funds.
(1) Describe the main features of the structure of the Multiple
Class Fund or Master-Feeder Fund.
(2) If more than one Class of a Multiple Class Fund is offered
in the prospectus, provide the information required by paragraphs
(a) and (b) for each of those Classes.
(3) If a Multiple Class Fund offers in the prospectus shares
that provide for mandatory or automatic conversions or exchanges
from one Class to another Class, provide the information required by
paragraphs (a) and (b) for both the shares offered and the Class
into which the shares may be converted or exchanged.
(4) If a Feeder Fund has the ability to change the Master Fund
in which it invests, describe briefly the circumstances under which
the Feeder Fund can do so.
Instruction. A Feeder Fund that does not have the authority to
change its Master Fund need not disclose the possibility and
consequences of its no longer investing in the Master Fund.
Item 9. Financial Highlights Information
(a) Provide the following information for the Fund, or for the
Fund and its subsidiaries, audited for at least the latest 5 years
and consolidated as required in Regulation S-X [17 CFR 210].
Financial Highlights
The financial highlights table is intended to help you
understand the Fund's financial performance for the past 5 years
[or, if shorter, the period of the Fund's operations]. Certain
information reflects financial results for a single Fund share. The
total returns in the table represent the rate that an investor would
have earned [or lost] on an investment in the Fund (assuming
reinvestment of all dividends and distributions). This information
has been audited by ____________________, whose report, along with
the Fund's financial statements, are included in [the SAI or annual
report], which is available upon request.
Net Asset Value, Beginning of Period
Income From Investment Operations
Net Investment Income
Net Gains or Losses on Securities (both realized and unrealized)
[[Page 13955]]
Total From Investment Operations
Less Distributions
Dividends (from net investment income)
Distributions (from capital gains)
Returns of Capital
Total Distributions
Net Asset Value, End of Period
Total Return
Ratios/Supplemental Data
Net Assets, End of Period
Ratio of Expenses to Average Net Assets
Ratio of Net Income to Average Net Assets
Portfolio Turnover Rate
Instructions.
1. General.
(a) Present the information in comparative columnar form for
each of the last 5 fiscal years of the Fund (or for such shorter
period as the Fund has been in operation), but only for periods
subsequent to the effective date of the Fund's registration
statement. Also present the information for the period between the
end of the latest fiscal year and the date of the latest balance
sheet or statement of assets and liabilities. When a period in the
table is for less than a full fiscal year, a Fund may annualize
ratios in the table and disclose that the ratios are annualized in a
note to the table.
(b) List per share amounts at least to the nearest cent. If the
offering price is expressed in tenths of a cent or more, then state
the amounts in the table in tenths of a cent. Present the
information using a consistent number of decimal places.
(c) Include the narrative explanation before the financial
information. A Fund may modify the explanation if the explanation
contains comparable information to that shown.
2. Per Share Operating Performance.
(a) Derive net investment income data by adding (deducting) the
increase (decrease) per share in undistributed net investment income
for the period to (from) dividends from net investment income per
share for the period. The increase (decrease) per share may be
derived by comparing the per share figures obtained by dividing
undistributed net investment income at the beginning and end of the
period by the number of shares outstanding on those dates. Other
methods of computing net investment income may be acceptable.
Provide an explanation in a note to the table of any other method
used to compute net investment income.
(b) The amount shown at the Net Gains or Losses on Securities
caption is the balancing figure derived from the other amounts in
the statement. The amount shown at this caption for a share
outstanding throughout the year may not agree with the change in the
aggregate gains and losses in the portfolio securities for the year
because of the timing of sales and repurchases of the Fund's shares
in relation to fluctuating market values for the portfolio.
(c) For any distributions made from sources other than net
investment income and capital gains, state the per share amounts
separately at the Returns of Capital caption and note the nature of
the distributions.
3. Total Return.
(a) Assume an initial investment made at the net asset value
calculated on the last business day before the first day of each
period shown.
(b) Do not reflect sales loads or account fees in the initial
investment, but, if sales loads or account fees are imposed, note
that they are not reflected in total return.
(c) Reflect any sales load assessed upon reinvestment of
dividends or distributions.
(d) Assume a redemption at the price calculated on the last
business day of each period shown.
(e) For a period less than a full fiscal year, state the total
return for the period and disclose that total return is not
annualized in a note to the table.
4. Ratios/Supplemental Data.
(a) Calculate ``average net assets'' based on the value of the
net assets determined no less frequently than the end of each month.
(b) Calculate the Ratio of Expenses to Average Net Assets using
the amount of expenses shown in the Fund's statement of operations
for the relevant fiscal period, including increases resulting from
complying with paragraph 2(g) of rule 6-07 of Regulation S-X and
reductions resulting from complying with paragraphs 2(a) and (f) of
rule 6-07 regarding fee waivers and reimbursements. If a change in
the methodology for determining the ratio of expenses to average net
assets results from applying paragraph 2(g) of rule 6-07, explain in
a note that the ratio reflects fees paid with brokerage commissions
and fees reduced in connection with specific agreements only for
periods ending after September 1, 1995.
(c) A Fund that is a Money Market Fund may omit the Portfolio
Turnover Rate.
(d) Calculate the Portfolio Turnover Rate as follows:
(i) Divide the lesser of amounts of purchases or sales of
portfolio securities for the fiscal year by the monthly average of
the value of the portfolio securities owned by the Fund during the
fiscal year. Calculate the monthly average by totaling the values of
portfolio securities as of the beginning and end of the first month
of the fiscal year and as of the end of each of the succeeding 11
months and dividing the sum by 13.
(ii) Exclude from both the numerator and the denominator amounts
relating to all securities, including options, whose maturities or
expiration dates at the time of acquisition were one year or less.
Include all long-term securities, including long-term U.S.
Government securities. Purchases include any cash paid upon the
conversion of one portfolio security into another and the cost of
rights or warrants. Sales include net proceeds of the sale of rights
and warrants and net proceeds of portfolio securities that have been
called or for which payment has been made through redemption or
maturity.
(iii) If the Fund acquired the assets of another investment
company or of a personal holding company in exchange for its own
shares during the fiscal year in a purchase-of-assets transaction,
exclude the value of securities acquired from purchases and
securities sold from sales to realign the Fund's portfolio. Adjust
the denominator of the portfolio turnover computation to reflect
these excluded purchases and sales and disclose them in a footnote.
(iv) Include in purchases and sales any short sales that the
Fund intends to maintain for more than one year and put and call
options with expiration dates more than one year from the date of
acquisition. Include proceeds from a short sale in the value of the
portfolio securities sold during the period; include the cost of
covering a short sale in the value of portfolio securities purchased
during the period. Include premiums paid to purchase options in the
value of portfolio securities purchased during the reporting period;
include premiums received from the sale of options in the value of
the portfolio securities sold during the period.
(b) A Fund may incorporate by reference the Financial Highlights
Information from a report to shareholders under rule 30d-1 into the
prospectus in response to this Item if the Fund delivers the
shareholder report with the prospectus or, if the report has been
previously delivered (e.g., to a current shareholder), the Fund
includes the statement required by Item 1(b)(1).
Part B: Information Required in a Statement of Additional Information:
Item 10. Cover Page and Table of Contents
(a) Front Cover Page. Include the following information on the
outside front cover page of the SAI:
[[Page 13956]]
(1) The Fund's name and, if the Fund is a Series, also provide
the Registrant's name.
(2) A statement or statements:
(i) That the SAI is not a prospectus;
(ii) How the prospectus may be obtained; and
(iii) Whether and from where information is incorporated by
reference into the SAI, as permitted by General Instruction D.
Instruction. Any information incorporated by reference into the
SAI must be delivered with the SAI unless the information has been
previously delivered in a shareholder report (e.g., to a current
shareholder), and the Fund states that the shareholder report is
available, without charge, upon request. Provide a toll-free (or
collect) telephone number to call to request the report.
(3) The date of the SAI and of the prospectus to which the SAI
relates.
(b) Table of Contents. Include under appropriate captions (and
subcaptions) a list of the contents of the SAI and, when useful,
provide cross-references to related disclosure in the prospectus.
Item 11. Fund History
(a) Provide the date and form of organization of the Fund and
the name of the state or other jurisdiction in which the Fund is
organized.
(b) If the Fund has engaged in a business other than that of an
investment company during the past 5 years, state the nature of the
other business and give the approximate date on which the Fund
commenced business as an investment company. If the Fund's name was
changed during that period, state its former name and the
approximate date on which it was changed. Briefly describe the
nature and results of any change in the Fund's business or name that
occurred in connection with any bankruptcy, receivership, or similar
proceeding, or any other material reorganization, readjustment or
succession.
Item 12. Description of the Fund and Its Investments and Risks
(a) Classification. State that the Fund is an open-end,
management investment company and indicate, if applicable, that the
Fund is diversified.
(b) Investment Strategies and Risks. Describe any investment
strategies, including a strategy to invest in a particular type of
security, used by an investment adviser of the Fund in managing the
Fund that are not principal strategies and the risks of those
strategies.
(c) Fund Policies.
(1) Describe the Fund's policy with respect to each of the
following:
(i) Issuing senior securities;
(ii) Borrowing money, including the purpose for which the
proceeds will be used;
(iii) Underwriting securities of other issuers;
(iv) Concentrating investments in a particular industry or group
of industries;
(v) Purchasing or selling real estate or commodities;
(vi) Making loans; and
(vii) Any other policy that the Fund deems fundamental or that
may not be changed without shareholder approval, including, if
applicable, the Fund's investment objectives.
Instruction. If the Fund reserves freedom of action with respect
to any practice specified in paragraph (c)(1), state the maximum
percentage of assets to be devoted to the practice and disclose the
risks of the practice.
(2) State whether shareholder approval is necessary to change
any policy specified in paragraph (c)(1). If so, describe the vote
required to obtain this approval.
(d) Temporary Defensive Position. Disclose, if applicable, the
types of investments that a Fund may make while assuming a temporary
defensive position described in response to Item 4(b).
(e) Portfolio Turnover. Explain any significant variation in the
Fund's portfolio turnover rates over the two most recently completed
fiscal years or any anticipated variation in the portfolio turnover
rate from that reported for the last fiscal year in response to Item
9.
Instruction. This paragraph does not apply to a Money Market
Fund.
Item 13. Management of the Fund
(a) Board of Directors. Briefly describe the responsibilities of
the board of directors with respect to the Fund's management.
Instruction. A Fund may respond to this paragraph by providing a
general statement as to the responsibilities of the board of
directors with respect to the Fund's management under the applicable
laws of the state or other jurisdiction in which the Fund is
organized.
(b) Management Information. Provide the information required by
the following table for each director and officer of the Fund, and,
if the Fund has an advisory board, for each member of the board.
Explain in a footnote to the table any family relationship between
persons listed.
------------------------------------------------------------------------
(3) Principal
(1) Name, address, and (2) Position(s) held occupation(s) during
age with fund past 5 years
------------------------------------------------------------------------
------------------------------------------------------------------------
Instructions.
1. For purposes of this paragraph, the term ``officer'' means
the president, vice-president, secretary, treasurer, controller, and
any other officers who perform policy-making functions for the Fund.
The term ``family relationship'' means any relationship by blood,
marriage, or adoption, not more remote than first cousin.
2. State the principal business of any corporation or other
organization listed under column (3) unless the principal business
is implicit in its name.
3. Identify members of any executive or investment committee,
and provide a concise statement of the duties and functions of each
committee.
4. Indicate with an asterisk the directors who are interested
persons.
(c) For each individual listed in column (1) of the table
required by paragraph (b), describe any positions held with
affiliated persons or principal underwriters of the Fund.
Instruction. When an individual holds the same position(s) with
two or more registered investment companies that are part of a
``Fund Complex'' as that term is defined in Item 22(a) of Schedule
14A under the Securities Exchange Act [17 CFR 240.14a-101], the Fund
may, rather than listing each investment company, identify the Fund
Complex and provide the number of positions held.
(d) Compensation. For all directors of the Fund and for all
members of any advisory board who receive compensation from the
Fund, and for each of the three highest paid executive officers or
any affiliated person of the Fund who received aggregate
compensation from the Fund for the most recently completed fiscal
year exceeding $60,000 (``Compensated Persons''):
[[Page 13957]]
(1) Provide the information required by the following table:
Compensation Table
----------------------------------------------------------------------------------------------------------------
(3) Pension or (5) Total
(2) Aggregate retirement (4) Estimated compensation from
(1) Name of person, position compensation from benefits accrued annual benefits fund and fund
fund as part of fund upon retirement complex paid to
expenses directors
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Instructions.
1. For column (1), indicate, as necessary, the capacity in which
the remuneration is received.
For Compensated Persons who are directors of the Fund,
compensation is amounts received for service as a director.
2. If the Fund has not completed its first full year since its
organization, provide the information for the current fiscal year,
estimating future payments that would be made under an existing
agreement or understanding. Disclose in a footnote to the
Compensation Table the period for which the information is given.
3. Include in column (2) amounts deferred at the election of the
Compensated Person, whether under a plan established under section
401(k) of the Internal Revenue Code [I.R.C. 401(k)] or otherwise,
for the fiscal year in which earned. Disclose in a footnote to the
Compensation Table the total amount of deferred compensation
(including interest) payable to or accrued for any Compensated
Person.
4. Include in columns (3) and (4) all pension or retirement
benefits proposed to be paid under any existing plan in the event of
retirement at normal retirement date, directly or indirectly, by the
Fund, any of its subsidiaries, or other investment companies in the
Fund Complex. Omit column (4) when retirement benefits are not
determinable.
5. For any defined benefit or actuarial plan under which
benefits are determined primarily by final compensation (or average
final compensation) and years of service, provide the information
required in column (4) in a separate table showing estimated annual
benefits payable upon retirement (including amounts attributable to
any defined benefit supplementary or excess pension award plans) in
specified compensation and years of service classifications. Also
provide the estimated credited years of service for each Compensated
Person.
6. Include in column (5) only aggregate compensation paid to a
director for service on the board and all other boards of investment
companies in a Fund Complex specifying the number of any other
investment companies.
(2) Describe briefly the material provisions of any pension,
retirement, or other plan or any arrangement, other than fee
arrangements disclosed in paragraph (d)(1), under which the
Compensated Persons are or may be compensated for services provided,
including amounts paid, if any, to the Compensated Person under
these arrangements during the most recently completed fiscal year.
Specifically include the criteria used to determine amounts payable
under the plan, the length of service or vesting period required by
the plan, the retirement age or other event that gives rise to
payment under the plan, and whether the payment of benefits is
secured or funded by the Fund.
(e) Sales Loads. Disclose any arrangements that result in
breakpoints in, or elimination of, sales loads for directors and
other affiliated persons of the Fund. Identify each class of
individuals and transactions to which the arrangements apply and
state each different breakpoint as a percentage of both the offering
price and the net amount invested of the Fund's shares. Explain, as
applicable, the reasons for the difference in the price at which
securities are offered generally to the public, and the prices at
which securities are offered to directors and other affiliated
persons of the Fund.
Item 14. Control Persons and Principal Holders of Securities
Provide the following information as of a specified date no more
than 30 days prior to the date of filing the registration statement
or an amendment.
(a) Control Persons. State the name and address of each person
who controls the Fund and explain the effect of that control on the
voting rights of other security holders. For each control person,
state the percentage of the Fund's voting securities owned or any
other basis of control. If the control person is a company, give the
jurisdiction under the laws of which it is organized. List all
parents of the control person.
Instruction. For purposes of this paragraph, ``control'' means
(i) the beneficial ownership, either directly or through one or more
controlled companies, of more than 25% of the voting securities of a
company; (ii) the acknowledgment or assertion by either the
controlled or controlling party of the existence of control; or
(iii) an adjudication under section 2(a)(9), which has become final,
that control exists.
(b) Principal Holders. State the name, address, and percentage
of ownership of each person who owns of record or is known by the
Fund to own beneficially 5% or more of any Class of the Fund's
outstanding equity securities.
Instructions.
1. Calculate the percentages based on the amount of securities
outstanding.
2. If securities are being registered under or in connection
with a plan of acquisition, reorganization, readjustment or
succession, indicate, as far as practicable, the ownership that
would result from consummation of the plan based on present holdings
and commitments.
3. Indicate whether the securities are owned of record,
beneficially, or both. Show the respective percentage owned in each
manner.
(c) Management Ownership. State the percentage of the Fund's
equity securities owned by all officers, directors, and members of
any advisory board of the Fund as a group. If the amount owned by
directors and officers as a group is less than 1% of the Class,
provide a statement to that effect.
Item 15. Investment Advisory and Other Services
(a) Investment Advisers. Disclose the following information with
respect to each investment adviser:
(1) The name of any person who controls the adviser, the basis
of the person's control, and the general nature of the person's
business. Also disclose, if material, the business history of any
organization that controls the adviser.
(2) The name of any affiliated person of the Fund who also is an
affiliated person of the adviser, and a list of all capacities in
which the person is affiliated with the Fund and with the adviser.
Instruction. If an affiliated person of the Fund alone or
together with others controls the adviser, state that fact. It is
not necessary to provide the amount or percentage of the outstanding
voting securities owned by the controlling person.
(3) The method of calculating the advisory fee payable by the
Fund including:
(i) The total dollar amounts that the Fund paid to the adviser
(aggregated with amounts paid to affiliated advisers, if any), and
any advisers who are not affiliated persons of the adviser, under
the investment advisory contract for the last three fiscal years;
[[Page 13958]]
(ii) If applicable, any credits that reduced the advisory fee
for any of the last three fiscal years; and
(iii) Any expense limitation provision.
Instructions.
1. If the advisory fee payable by the Fund varies depending on
the Fund's investment performance in relation to a standard,
describe the standard along with a fee schedule in tabular form. The
Fund may include examples showing the fees that the adviser would
earn at various levels of performance as long as the examples
include calculations showing the maximum and minimum fee percentages
that could be earned under the contract.
2. State separately each type of credit or offset.
3. When a Fund is subject to more than one expense limitation
provision, describe only the most restrictive provision.
4. For a Registrant with more than one Series, or a Multiple
Class Fund, describe the methods of allocation and payment of
advisory fees for each Series or Class.
(b) Principal Underwriter. State the name and principal business
address of any principal underwriter for the Fund. Disclose, if
applicable, that an affiliated person of the Fund is an affiliated
person of the principal underwriter and identify the affiliated
person.
(c) Services Provided by Each Investment Adviser and Fund
Expenses Paid by Third Parties.
(1) Describe all services performed for or on behalf of the Fund
supplied or paid for wholly or in substantial part by each
investment adviser.
(2) Describe all fees, expenses, and costs of the Fund that are
to be paid by persons other than an investment adviser or the Fund,
and identify those persons.
(d) Service Agreements. Summarize the substantive provisions of
any other management-related service contract that may be of
interest to a purchaser of the Fund's shares, under which services
are provided to the Fund, indicating the parties to the contract,
and the total dollars paid and by whom for the past three years.
Instructions.
1. The term ``management-related service contract'' includes any
contract with the Fund to keep, prepare, or file accounts, books,
records, or other documents required under federal or state law, or
to provide any similar services with respect to the daily
administration of the Fund, but does not include the following:
(a) Any contract with the Fund to provide investment advice;
(b) Any agreement with the Fund to perform as custodian,
transfer agent, or dividend-paying agent for the Fund; and
(c) Any contract with the Fund for outside legal or auditing
services, or contract for personal employment entered into with the
Fund in the ordinary course of business.
2. No information need be given in response to this paragraph
with respect to the service of mailing proxies or periodic reports
to the Fund's shareholders.
3. In summarizing the substantive provisions of any management-
related service contract, include the following:
(a) The name of the person providing the service;
(b) The direct or indirect relationships, if any, of the person
with the Fund, an investment adviser of the Fund or the Fund's
principal underwriter; and
(c) The nature of the services provided, and the basis of the
compensation paid for the services for the last three fiscal years.
(e) Other Investment Advice. If any person (other than a
director, officer, member of an advisory board, employee, or
investment adviser of the Fund), through any understanding, whether
formal or informal, regularly advises the Fund or the Fund's
investment adviser with respect to the Fund's investing in,
purchasing, or selling securities or other property, or has the
authority to determine what securities or other property should be
purchased or sold by the Fund, and receives direct or indirect
remuneration, provide the following information:
(1) The person's name;
(2) A description of the nature of the arrangement, and the
advice or information provided; and
(3) Any remuneration (including, for example, participation,
directly or indirectly, in commissions or other compensation paid in
connection with transactions in the Fund's portfolio securities)
paid for the advice or information, and a statement as to how the
remuneration was paid and by whom it was paid for the last three
fiscal years.
Instruction. Do not include information for the following:
(a) Persons who advised the investment adviser or the Fund
solely through uniform publications distributed to subscribers;
(b) Persons who provided the investment adviser or the Fund with
only statistical and other factual information, advice about
economic factors and trends, or advice as to occasional transactions
in specific securities, but without generally advising about the
purchase or sale of securities by the Fund;
(c) A company that is excluded from the definition of
``investment adviser'' of an investment company under section
2(a)(20)(iii) [15 U.S.C. 80a-2(a)(20)(iii)];
(d) Any person the character and amount of whose compensation
for these services must be approved by a court; or
(e) Other persons as the Commission has by rule or order
determined not to be an ``investment adviser'' of an investment
company.
(f) Dealer Reallowances. Disclose any front-end sales load
reallowed to dealers as a percentage of the offering price of the
Fund's shares.
(g) Rule 12b-1 Plans. If the Fund has adopted a plan under rule
12b-1, describe the material aspects of the plan, and any agreements
relating to the implementation of the plan, including:
(1) A list of the principal types of activities for which
payments are or will be made, including the dollar amount and the
manner in which amounts paid by the Fund under the plan during the
last fiscal year were spent on:
(i) Advertising;
(ii) Printing and mailing of prospectuses to other than current
shareholders;
(iii) Compensation to underwriters;
(iv) Compensation to broker-dealers;
(v) Compensation to sales personnel;
(vi) Interest, carrying, or other financing charges; and
(vii) Other (specify).
(2) The relationship between amounts paid to the distributor and
the expenses that it incurs (e.g., whether the plan reimburses the
distributor only for expenses incurred or compensates the
distributor regardless of its expenses).
(3) The amount of any unreimbursed expenses incurred under the
plan in a previous year and carried over to future years, in dollars
and as a percentage of the Fund's net assets on the last day of the
previous year.
(4) Whether the Fund participates in any joint distribution
activities with another Series or investment company. If so,
disclose, if applicable, that fees paid under the Fund's rule 12b-1
plan may be used to finance the distribution of the shares of
another Series or investment company, and state the method of
allocating distribution costs (e.g., relative net asset size, number
of shareholder accounts).
(5) Whether any of the following persons had a direct or
indirect financial interest in the operation of the plan or related
agreements:
(i) Any interested person of the Fund; or
(ii) Any director of the Fund who is not an interested person of
the Fund.
(6) The anticipated benefits to the Fund that may result from
the plan.
(h) Other Service Providers.
[[Page 13959]]
(1) Unless disclosed in response to paragraph (d), identify any
person who provides significant administrative or business affairs
management services for the Fund (e.g., an ``administrator''),
describe the services provided, and the compensation paid for the
services.
(2) State the name and principal business address of the Fund's
transfer agent and the dividend-paying agent.
(3) State the name and principal business address of the Fund's
custodian and independent public accountant and describe generally
the services performed by each. If the Fund's portfolio securities
are held by a person other than a commercial bank, trust company, or
depository registered with the Commission as custodian, state the
nature of the business of that person or persons.
(4) If an affiliated person of the Fund, or an affiliated person
of the affiliated person, acts as custodian, transfer agent, or
dividend-paying agent for the Fund, describe the services that the
person performs and the basis for remuneration.
Item 16. Brokerage Allocation and Other Practices
(a) Brokerage Transactions. Describe how transactions in
portfolio securities are effected, including a general statement
about brokerage commissions, markups, and markdowns on principal
transactions and the aggregate amount of any brokerage commissions
paid by the Fund during its three most recent fiscal years. If,
during either of the two years preceding the Fund's most recent
fiscal year, the aggregate dollar amount of brokerage commissions
paid by the Fund differed materially from the amount paid during the
most recent fiscal year, state the reason(s) for the difference(s).
(b) Commissions.
(1) Identify, disclose the relationship, and state the aggregate
dollar amount of brokerage commissions paid by the Fund during its
three most recent fiscal years to any broker:
(i) That is an affiliated person of the Fund or an affiliated
person of that person; or
(ii) An affiliated person of which is an affiliated person of
the Fund, its investment adviser, or principal underwriter.
(2) For each broker identified in response to paragraph (b)(1),
state:
(i) The percentage of the Fund's aggregate brokerage commissions
paid to the broker during the most recent fiscal year; and
(ii) The percentage of the Fund's aggregate dollar amount of
transactions involving the payment of commissions effected through
the broker during the most recent fiscal year.
(3) State the reasons for any material difference in the
percentage of brokerage commissions paid to, and the percentage of
transactions effected through, a broker disclosed in response to
paragraph (b)(1).
(c) Brokerage Selection. Describe how the Fund will select
brokers to effect securities transactions for the Fund and how the
Fund will evaluate the overall reasonableness of brokerage
commissions paid, including the factors that the Fund will consider
in making these determinations.
Instructions.
1. If the Fund will consider the receipt of products or services
other than brokerage or research services in selecting brokers,
specify those products and services.
2. If the Fund will consider the receipt of research services in
selecting brokers, identify the nature of those research services.
3. State whether persons acting on the Fund's behalf are
authorized to pay a broker a higher brokerage commission than
another broker might have charged for the same transaction in
recognition of the value of (a) brokerage or (b) research services
provided by the broker.
4. If applicable, explain that research services provided by
brokers through which the Fund effects securities transactions may
be used by the Fund's investment adviser in servicing all of its
accounts and that not all of these services may be used by the
adviser in connection with the Fund. If other policies or practices
are applicable to the Fund with respect to the allocation of
research services provided by brokers, explain those policies and
practices.
(d) Directed Brokerage. If, during the last fiscal year, the
Fund or its investment adviser, through an agreement or
understanding with a broker, or otherwise through an internal
allocation procedure, directed the Fund's brokerage transactions to
a broker because of research services provided, state the amount of
the transactions and related commissions.
(e) Regular Broker-Dealers. If the Fund has acquired during its
most recent fiscal year or during the period of time since
organization, whichever is shorter, securities of its regular
brokers or dealers as defined in rule 10b-1 [17 CFR 270.10b-1] or of
their parents, identify those brokers or dealers and state the value
of the Fund's aggregate holdings of the securities of each issuer as
of the close of the Fund's most recent fiscal year.
Instruction. The Fund need only disclose information about an
issuer that derived more than 15% of its gross revenues from the
business of a broker, a dealer, an underwriter, or an investment
adviser during its most recent fiscal year.
Item 17. Capital Stock and Other Securities
(a) Capital Stock. For each class of capital stock of the Fund,
provide:
(1) The title of each class; and
(2) A full discussion of the following provisions or
characteristics of each class, if applicable:
(i) Restrictions on the right freely to retain or dispose of the
Fund's shares;
(ii) Material obligations or potential liabilities associated
with owning the Fund's shares (not including investment risks);
(iii) Dividend rights;
(iv) Voting rights (including whether the rights of shareholders
can be modified by other than a majority vote);
(v) Liquidation rights;
(vi) Preemptive rights;
(vii) Conversion rights;
(viii) Redemption provisions;
(ix) Sinking fund provisions; and
(x) Liability to further calls or to assessment by the Fund.
Instructions.
1. If any class described in response to this paragraph
possesses cumulative voting rights, disclose the existence of those
rights and explain the operation of cumulative voting.
2. If the rights evidenced by any class described in response to
this paragraph are materially limited or qualified by the rights of
any other class, explain those limitations or qualifications.
(b) Other Securities. Describe the rights of any authorized
securities of the Fund other than capital stock. If the securities
are subscription warrants or rights, state the title and amount of
securities called for, and the period during which and the prices at
which the warrants or rights are exercisable.
Item 18. Purchase, Redemption, and Pricing of Shares
(a) Purchase of Shares. Describe how the Fund's shares are
offered to the public. Include any special purchase plans or methods
not described in the prospectus or elsewhere in the SAI, including
letters of intent, accumulation plans, withdrawal plans, exchange
privileges, and services in connection with retirement plans.
Instruction. A Fund may incorporate the information required by
Item 18(a) into the SAI by reference to a separate disclosure
document that may be provided to investors with the SAI or
separately, in response to investor requests. File the separate
document, if any, with Part B of Form N-1A.
(b) Fund Reorganizations. Disclose any arrangements that result
in breakpoints in, or elimination of, sales loads in connection with
the terms of a merger, acquisition, or exchange offer made under a
plan of reorganization. Identify each class of individuals
[[Page 13960]]
to which the arrangements apply and state each different sales load
available as a percentage of both the offering price and the net
amount invested.
(c) Offering Price. Describe the method followed or to be
followed by the Fund in determining the total offering price at
which its shares may be offered to the public and the method(s) used
to value the Fund's assets.
Instructions.
1. Describe the valuation procedure(s) that the Fund uses in
determining the net asset value and public offering price of its
shares.
2. Explain how the excess of the offering price over the net
amount invested is distributed among the Fund's principal
underwriters or others and the basis for determining the total
offering price.
3. Explain the reasons for any difference in the price at which
securities are offered generally to the public, and the prices at
which securities are offered for any class of transactions or to any
class of individuals.
4. Unless provided as a continuation of the balance sheet in
response to Item 22, include a specimen price-make-up sheet showing
how the Fund calculates the total offering price per unit. Base the
calculation on the value of the Fund's portfolio securities and
other assets and its outstanding securities as of the date of the
balance sheet filed by the Fund.
(d) Redemption in Kind. If the Fund has received an order of
exemption from section 18(f) or has filed a notice of election under
rule 18f-1 that has not been withdrawn, describe the nature, extent,
and effect of the exemptive relief or notice.
Item 19. Taxation of the Fund
(a) If applicable, state that the Fund is qualified or intends
to qualify under Subchapter M of the Internal Revenue Code. Disclose
the consequences to the Fund if it does not qualify under Subchapter
M.
(b) Disclose any special or unusual tax aspects of the Fund,
such as taxation resulting from foreign investment or from status as
a personal holding company, or any tax loss carry-forward to which
the Fund may be entitled.
Item 20. Underwriters
(a) Distribution of Securities. For each principal underwriter
distributing securities of the Fund, state:
(1) The nature of the obligation to distribute the Fund's
securities;
(2) Whether the offering is continuous; and
(3) The aggregate dollar amount of underwriting commissions and
the amount retained by the principal underwriter for each of the
Fund's last three fiscal years.
(b) Compensation. Provide the information required by the
following table with respect to all commissions and other
compensation received by each principal underwriter, who is an
affiliated person of the Fund or an affiliated person of that
affiliated person, directly or indirectly, from the Fund during the
Fund's most recent fiscal year:
----------------------------------------------------------------------------------------------------------------
(2) Net
(1) Name of principal underwriting (3) Compensation (4) Brokerage (5) Other
underwriter discounts and on redemptions and commissions compensation
commissions repurchases
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Instruction. Disclose in a footnote to the table the type of
services rendered in consideration for the compensation listed under
column (5).
(c) Other Payments. With respect to any payments made by the
Fund to an underwriter or dealer in the Fund's shares during the
Fund's last fiscal year, disclose the name and address of the
underwriter or dealer, the amount paid and basis for determining
that amount, the circumstances surrounding the payments, and the
consideration received by the Fund. Do not include information
about:
(1) Payments made through deduction from the offering price at
the time of sale of securities issued by the Fund;
(2) Payments representing the purchase price of portfolio
securities acquired by the Fund;
(3) Commissions on any purchase or sale of portfolio securities
by the Fund; or
(4) Payments for investment advisory services under an
investment advisory contract.
Instructions.
1. Do not include in response to this paragraph information
provided in response to paragraph (b) or with respect to service
fees under the Instruction to Item 8(b)(2). Do not include any
payment for a service excluded by Instructions 1 and 2 to Item 15(d)
or by Instruction 2 to Item 30.
2. If the payments were made under an arrangement or policy
applicable to dealers generally, describe only the arrangement or
policy.
Item 21. Calculation of Performance Data
(a) Money Market Funds. If a Money Market Fund advertises a
yield quotation(s), disclose, as applicable, the yield quotation(s)
calculated according to paragraphs (a)(1)-(4). Use the same
calculations for a yield quotation(s) included in the prospectus.
(1) Yield Quotation. Based on the 7 days ended on the date of
the most recent balance sheet included in the registration
statement, calculate the Fund's yield by determining the net change,
exclusive of capital changes and income other than investment
income, in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period, subtracting a
hypothetical charge reflecting deductions from shareholder accounts,
and dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return, and
then multiplying the base period return by (365/7) with the
resulting yield figure carried to at least the nearest hundredth of
one percent.
(2) Effective Yield Quotation. Based on the 7 days ended on the
date of the most recent balance sheet included in the registration
statement, calculate the Fund's effective yield, carried to at least
the nearest hundredth of one percent, by determining the net change,
exclusive of capital changes, in the value of a hypothetical pre-
existing account having a balance of one share at the beginning of
the period, subtracting a hypothetical charge reflecting deductions
from shareholder accounts, and dividing the difference by the value
of the account at the beginning of the base period to obtain the
base period return, and then compounding the base period return by
adding 1, raising the sum to a power equal to 365 divided by 7, and
subtracting 1 from the result, according to the following formula:
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1)365/7]-1.
(3) Tax Equivalent Current Yield Quotation. Calculate the Fund's
tax equivalent current yield by dividing that portion of the Fund's
yield (as calculated under paragraph (a)(1)) that is tax-exempt by 1
minus a stated income tax rate and adding the quotient to that
portion, if any, of the Fund's yield that is not tax-exempt.
(4) Tax Equivalent Effective Yield Quotation. Calculate the
Fund's tax equivalent effective yield by dividing that portion of
the Fund's effective yield (as calculated under paragraph (a)(2))
that is tax-exempt by 1 minus a stated income tax rate and adding
the quotient to that portion, if any, of the Fund's effective yield
that is not tax-exempt.
[[Page 13961]]
(5) State:
(i) The length of and the last day in the base period used in
calculating the quotation(s);
(ii) A description of the method(s) by which the yield
quotation(s) is calculated; and
(iii) The income tax rate used in the calculation, if
applicable.
Instructions.
1. When calculating yield or effective yield quotations, the
calculation of net change in account value must include:
(a) The value of additional shares purchased with dividends from
the original share and dividends declared on both the original
shares and additional shares; and
(b) All fees, other than nonrecurring account or sales charges,
that are imposed on all shareholder accounts in proportion to the
length of the base period. For any account fees that vary with the
size of the account, assume an account size equal to the Fund's mean
(or median) account size.
2. Exclude realized gains and losses from the sale of securities
and unrealized appreciation and depreciation from the calculation of
yield and effective yield. Exclude income other than investment
income.
3. Disclose the amount or specific rate of any nonrecurring
account or sales charges not included in the calculation of the
yield.
4. If the Fund holds itself out as distributing income that is
exempt from federal, state, or local income taxation, in calculating
yield and effective yield (but not tax equivalent yield or tax
equivalent effective yield), reduce the yield quoted by the effect
of any income taxes on the shareholder receiving dividends, using
the maximum rate for individual income taxation. For example, if the
Fund 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 Funds. If the Fund advertises performance data,
disclose, as applicable, the performance information calculated
according to paragraphs (b)(1)-(4). Use the same calculations for
performance information included in the prospectus.
(1) Average Annual Total Return Quotation. For the 1-, 5-, and
10-year periods ended on the date of the most recent balance sheet
included in the registration statement (or for the periods the Fund
has been in operation), calculate the Fund's average annual total
return by finding the average annual compounded rates of return over
the 1-, 5-, and 10-year periods (or for the periods of the Fund's
operations) that would equate the initial amount invested to the
ending redeemable value, according to the following formula:
P(1+T)n = ERV
Where:
P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 payment made
at the beginning of the 1-, 5-, or 10-year periods at the end of the
1-, 5-, or 10-year periods (or fractional portion).
Instructions.
1. Assume the maximum sales load (or other charges deducted from
payments) is deducted from the initial $1,000 payment. If
shareholders are assessed a deferred sales load, assume the maximum
deferred sales load is deducted at the times, in the amounts, and
under the terms disclosed in the prospectus.
2. Assume all dividends and distributions by the Fund are
reinvested at the price stated in the prospectus (including any
sales load imposed upon reinvestment of dividends) on the
reinvestment dates during the period.
3. Include all recurring fees that are charged to all
shareholder accounts. For any account fees that vary with the size
of the account, assume an account size equal to the Fund's mean (or
median) account size. Reflect, as appropriate, any recurring fees
charged to shareholder accounts that are paid other than by
redemption of the Fund's shares.
4. Determine the ending redeemable value by assuming a complete
redemption at the end of the 1-, 5-, or 10-year periods and the
deduction of all nonrecurring charges deducted at the end of each
period.
5. State the total return quotation to the nearest hundredth of
one percent.
6. Total return information in the prospectus need only be
current to the end of the Fund's most recent fiscal year.
(2) Yield Quotation. Based on a 30-day (or one month) period
ended on the date of the most recent balance sheet included in the
registration statement, calculate the Fund's yield by dividing the
net investment income per share earned during the period by the
maximum offering price per share on the last day of the period,
according to the following formula:
[GRAPHIC] [TIFF OMITTED] TR23MR98.000
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
Instructions.
1. To calculate interest earned on debt obligations for purposes
of ``a'' above:
(a) Calculate the yield to maturity of each obligation held by
the Fund based on the market value of the obligation (including
actual accrued interest) at the close of business on the last
business day of each month or, with respect to obligations purchased
during the month, the purchase price (plus actual accrued interest).
The maturity of an obligation with a call provision(s) is the next
call date on which the obligation reasonably may be expected to be
called, or if none, the maturity date.
(b) Divide the yield to maturity by 360 and multiply the
quotient by the market value of the obligation (including actual
accrued interest) to determine the interest income on the obligation
for each day of the subsequent month that the obligation is in the
portfolio. Assume that each month has 30 days.
(c) Total the interest earned on all debt obligations and all
dividends accrued on all equity securities during the 30-day (or one
month) period. Although the period for calculating interest earned
is based on calendar months, a 30-day yield may be calculated by
aggregating the daily interest on the portfolio from portions of 2
months. In addition, a Fund may recalculate daily interest income on
the portfolio more than once a month.
(d) For a tax-exempt obligation issued without original issue
discount and having a current market discount, use the coupon rate
of interest in lieu of the yield to maturity. For a tax-exempt
obligation with original issue discount in which the discount is
based on the current market value and exceeds the then-remaining
portion of original issue discount (market discount), base the yield
to maturity on the imputed rate of the original issue discount
calculation. For a tax-exempt obligation with original issue
discount, where the discount based on the current market value is
less than the then-remaining portion of original issue discount
(market premium), base the yield to maturity on the market value.
[[Page 13962]]
2. For discount and premium on mortgage or other receivables-
backed obligations that are expected to be subject to monthly
payments of principal and interest (``paydowns''):
(a) Account for gain or loss attributable to actual monthly
paydowns as an increase or decrease to interest income during the
period; and
(b) The Fund may elect:
(i) To amortize the discount and premium on the remaining
securities, based on the cost of the securities, to the weighted
average maturity date, if the information is available, or to the
remaining term of the securities, if the weighted average maturity
date is not available; or
(ii) Not to amortize the discount or premium on the remaining
securities.
3. Solely for the purpose of calculating yield, recognize
dividend income by accruing 1/360 of the stated dividend rate of the
security each day that the security is in the portfolio.
4. Do not use equalization accounting in calculating yield.
5. Include expenses accrued under a plan adopted under rule 12b-
1 in the expenses accrued for the period. Reimbursement accrued
under the plan may reduce the accrued expenses, but only to the
extent the reimbursement does not exceed expenses accrued for the
period.
6. Include in the expenses accrued for the period all recurring
fees that are charged to all shareholder accounts in proportion to
the length of the base period. For any account fees that vary with
the size of the account, assume an account size equal to the Fund's
mean (or median) account size.
7. If a broker-dealer or an affiliate of the broker-dealer (as
defined in rule 1-02(b) of Regulation S-X [17 CFR 210.1-02(b)]) has,
in connection with directing the Fund's brokerage transactions to
the broker-dealer, provided, agreed to provide, paid for, or agreed
to pay for, in whole or in part, services provided to the Fund
(other than brokerage and research services as those terms are used
in section 28(e) of the Securities Exchange Act [15 U.S.C.
78bb(e)]), add to expenses accrued for the period an estimate of
additional amounts that would have been accrued for the period if
the Fund had paid for the services directly in an arm's length
transaction.
8. Undeclared earned income, calculated in accordance with
generally accepted accounting principles, may be subtracted from the
maximum offering price. Undeclared earned income is the net
investment income that, at the end of the base period, has not been
declared as a dividend, but is reasonably expected to be and is
declared as a dividend shortly thereafter.
9. Disclose the amount or specific rate of any nonrecurring
account or sales charges.
10. If, in connection with the sale of the Fund's shares, a
deferred sales load payable in installments is imposed, the
``maximum public offering price'' includes the aggregate amount of
the installments (``installment load amount'').
(3) Tax Equivalent Yield Quotation. Based on a 30-day (or one
month) period ended on the date of the most recent balance sheet
included in the registration statement, calculate the Fund's tax
equivalent yield by dividing that portion of the Fund's yield (as
calculated under paragraph (b)(2)) that is tax-exempt by 1 minus a
stated income tax rate and adding the quotient to that portion, if
any, of the Fund's yield that is not tax-exempt.
(4) Non-Standardized Performance Quotation. A Fund may calculate
performance using any other historical measure of performance (not
subject to any prescribed method of computation) if the measurement
reflects all elements of return.
(5) State:
(i) The length of and the last day in the base period used in
calculating the quotation(s);
(ii) A description of the method(s) by which the performance
data is calculated; and
(iii) The income tax rate used in the calculation, if
applicable.
Item 22. Financial Statements
(a) Registration Statement. Include, in a separate section
following the responses to the preceding Items, the financial
statements and schedules required by Regulation S-X. The specimen
price-make-up sheet required by Instruction 4 to Item 18(c) may be
provided as a continuation of the balance sheet specified by
Regulation S-X.
Instructions.
1. The statements of any subsidiary that is not a majority-owned
subsidiary required by Regulation S-X may be omitted from Part B and
included in Part C.
2. In addition to the requirements of rule 3-18 of Regulation S-
X [17 CFR 210.3-18], any Fund registered under the Investment
Company Act that has not previously had an effective registration
statement under the Securities Act must include in its initial
registration statement under the Securities Act any additional
financial statements and condensed financial information (which need
not be audited) necessary to make the financial statements and
condensed financial information included in the registration
statement current as of a date within 90 days prior to the date of
filing.
(b) Annual Report. Every annual report to shareholders required
under rule 30d-1 must contain the following:
(1) The audited financial statements required, and for the
periods specified, by Regulation S-X.
(2) The condensed financial information required by Item 9(a)
with at least the most recent fiscal year audited.
(3) Unless shown elsewhere in the report as part of the
financial statements required by paragraph (b)(1), the aggregate
remuneration paid by the Fund during the period covered by the
report to:
(i) All directors and all members of any advisory board for
regular compensation;
(ii) Each director and each member of an advisory board for
special compensation;
(iii) All officers; and
(iv) Each person of whom any officer or director of the Fund is
an affiliated person.
(4) The information concerning changes in and disagreements with
accountants and on accounting and financial disclosure required by
Item 304 of Regulation S-K [17 CFR 229.304].
(c) Semi-Annual Report. Every semi-annual report to shareholders
required by rule 30d-1 must contain the following information (which
need not be audited):
(1) The financial statements required by Regulation S-X for the
period commencing either with:
(i) The beginning of the Fund's fiscal year (or date of
organization, if newly organized); or
(ii) A date not later than the date after the close of the
period included in the last report under rule 30d-1 and the most
recent preceding fiscal year.
(2) The condensed financial information required by Item 9(a),
for the period of the report as specified by paragraph (c)(1), and
the most recent preceding fiscal year.
(3) Unless shown elsewhere in the report as part of the
financial statements required by paragraph (c)(1), the aggregate
remuneration paid by the Fund during the period covered by the
report to the persons specified under paragraph (b)(3).
(4) The information concerning changes in and disagreements with
accountants and on accounting and financial disclosure required by
Item 304 of Regulation S-K.
Part C: Other Information
Item 23. Exhibits
Subject to General Instruction D regarding incorporation by
reference and rule 483 under the Securities Act [17 CFR 230.483],
file the exhibits listed below as part of the registration
statement. Letter or number the exhibits in the sequence indicated
and file
[[Page 13963]]
copies rather than originals, unless otherwise required by rule 483.
Reflect any exhibit incorporated by reference in the list below and
identify the previously filed document containing the incorporated
material.
(a) Articles of Incorporation. The Fund's current articles of
incorporation, charter, declaration of trust or corresponding
instruments and any related amendment.
(b) By-laws. The Fund's current by-laws or corresponding
instruments and any related amendment.
(c) Instruments Defining Rights of Security Holders. Instruments
defining the rights of holders of the securities being registered,
including the relevant portion of the Fund's articles of
incorporation or by-laws.
(d) Investment Advisory Contracts. Investment advisory contracts
relating to the management of the Fund's assets.
(e) Underwriting Contracts. Underwriting or distribution
contracts between the Fund and a principal underwriter, and
agreements between principal underwriters and dealers.
(f) Bonus or Profit Sharing Contracts. Bonus, profit sharing,
pension, or similar contracts or arrangements in whole or in part
for the benefit of the Fund's directors or officers in their
official capacity. Describe in detail any plan not included in a
formal document.
(g) Custodian Agreements. Custodian agreements and depository
contracts under section 17(f) [15 U.S.C. 80a-17(f)] concerning the
Fund's securities and similar investments, including the schedule of
remuneration.
(h) Other Material Contracts. Other material contracts not made
in the ordinary course of business to be performed in whole or in
part on or after the filing date of the registration statement.
(i) Legal Opinion. An opinion and consent of counsel regarding
the legality of the securities being registered, stating whether the
securities will, when sold, be legally issued, fully paid, and
nonassessable.
(j) Other Opinions. Any other opinions, appraisals, or rulings,
and related consents relied on in preparing the registration
statement and required by section 7 of the Securities Act [15 U.S.C.
77g].
(k) Omitted Financial Statements. Financial statements omitted
from Item 22.
(l) Initial Capital Agreements. Any agreements or understandings
made in consideration for providing the initial capital between or
among the Fund, the underwriter, adviser, promoter or initial
shareholders and written assurances from promoters or initial
shareholders that purchases were made for investment purposes and
not with the intention of redeeming or reselling.
(m) Rule 12b-1 Plan. Any plan entered into by the Fund under
rule 12b-1 and any agreements with any person relating to the plan's
implementation.
(n) Financial Data Schedule. A Financial Data Schedule meeting
the requirements of rule 483 under the Securities Act.
(o) Rule 18f-3 Plan. Any plan entered into by the Fund under
rule 18f-3, any agreement with any person relating to the plan's
implementation, and any amendment to the plan or an agreement.
Item 24. Persons Controlled by or Under Common Control With the
Fund
Provide a list or diagram of all persons directly or indirectly
controlled by or under common control with the Fund. For any person
controlled by another person, disclose the percentage of voting
securities owned by the immediately controlling person or other
basis of that person's control. For each company, also provide the
state or other sovereign power under the laws of which the company
is organized.
Instructions.
1. Include the Fund in the list or diagram and show the
relationship of each company to the Fund and to the other companies
named, using cross-references if a company is controlled through
direct ownership of its securities by two or more persons.
2. Indicate with appropriate symbols subsidiaries that file
separate financial statements, subsidiaries included in consolidated
financial statements, or unconsolidated subsidiaries included in
group financial statements. Indicate for other subsidiaries why
financial statements are not filed.
Item 25. Indemnification
State the general effect of any contract, arrangements or
statute under which any director, officer, underwriter or affiliated
person of the Fund is insured or indemnified against any liability
incurred in their official capacity, other than insurance provided
by any director, officer, affiliated person, or underwriter for
their own protection.
Item 26. Business and Other Connections of the Investment Adviser
Describe any other business, profession, vocation or employment
of a substantial nature that each investment adviser, and each
director, officer or partner of the adviser, is or has been engaged
within the last two fiscal years for his or her own account or in
the capacity of director, officer, employee, partner, or trustee.
Instructions.
1. Disclose the name and principal business address of any
company for which a person listed above serves in the capacity of
director, officer, employee, partner, or trustee, and the nature of
the relationship.
2. The names of investment advisory clients need not be given in
answering this Item.
Item 27. Principal Underwriters
(a) State the name of each investment company (other than the
Fund) for which each principal underwriter currently distributing
the Fund's securities also acts as a principal underwriter,
depositor, or investment adviser.
(b) Provide the information required by the following table for
each director, officer, or partner of each principal underwriter
named in the response to Item 20:
----------------------------------------------------------------------------------------------------------------
(1) Name and principal business (2) Positions and offices with (3) Positions and offices with
address underwriter fund
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
(c) Provide the information required by the following table for
all commissions and other compensation received, directly or
indirectly, from the Fund during the last fiscal year by each
principal underwriter who is not an affiliated person of the Fund or
any affiliated person of an affiliated person:
----------------------------------------------------------------------------------------------------------------
(2) Net (3) Compensation
(1) Name of principal underwriting on redemption and (4) Brokerage (5) Other
underwriter discounts and repurchases commissions compensation
commissions
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
[[Page 13964]]
Instructions.
1. Disclose the type of services rendered in consideration for
the compensation listed under column (5).
2. Instruction 1 to Item 20(c) also applies to this Item.
Item 28. Location of Accounts and Records
State the name and address of each person maintaining physical
possession of each account, book, or other document required to be
maintained by section 31(a) [15 U.S.C. 80a-30(a)] and the rules
under that section.
Item 29. Management Services
Provide a summary of the substantive provisions of any
management-related service contract not discussed in Part A or B,
disclosing the parties to the contract and the total amount paid and
by whom for the Fund's last three fiscal years.
Instructions.
1. The instructions to Item 15 also apply to this Item.
2. Exclude information about any service provided for payments
totaling less than $5,000 during each of the last three fiscal
years.
Item 30. Undertakings
In initial registration statements filed under the Securities
Act, provide an undertaking to file an amendment to the registration
statement with certified financial statements showing the initial
capital received before accepting subscriptions from more than 25
persons if the Fund intends to raise its initial capital under
section 14(a)(3) [15 U.S.C. 80a-14(a)(3)].
Signatures
Pursuant to the requirements of (the Securities Act and) the
Investment Company Act, the Fund (certifies that it meets all of the
requirement for effectiveness of this registration statement under
rule 485(b) under the Securities Act and) has duly caused this
registration statement to be signed on its behalf by the
undersigned, duly authorized, in the City of ________________, and
State of ________________ on the day of ____________________,
____________________ (year)
Fund ____________________
By---------------------------------------------------------------------
(Signature and Title)
Pursuant to the requirements of the Securities Act, this
registration statement has been signed below by the following
persons in the capacities and on the date(s) indicated.
----------------------------------------------------------------------
(Signature)
----------------------------------------------------------------------
(Title)
----------------------------------------------------------------------
(Date)
Dated: March 13, 1998.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[Note: Appendix A and Appendix B to the preamble will not appear in
the Code of Federal Regulations.]
Appendix A--Analysis of Form N-1A Items, as Amended
----------------------------------------------------------------------------------------------------------------
Form N-1A, as amended Source of form N-1A items
----------------------------------------------------------------------------------------------------------------
Facing Sheet........................ Facing Sheet--revised.
General Instructions:
A. Definitions.................. New.
B. Filing and Use of Form N-1A.. Revised General Instructions A, B, C, and F.
C. Preparation of the Revised General Instructions G and I.
Registration Statement.
D. Incorporation by Reference... Revised General Instruction E.
Part A
Item 1. Front and Back Cover Pages:
(a) Front cover page............ Revised Item 1.
(b) Back cover page............. New.
Item 2. Risk/Return Summary:
Investments, Risks, and
Performance:
(a) Fund investment objectives/ New.
goals.
(b) Principal investment New.
strategies of the fund.
(c) Principal risks of investing New.
in the fund.
(1) Narrative risk New.
disclosure.
(2) Risk/Return Bar Chart New.
and Table.
Item 3. Risk/Return Summary: Fee Revised Item 2.
Table
Item 4. Investment Objectives,
Principal Strategies, and Related
Risks:
(a) Investment Objectives....... Revised Item 4(a)(ii).
(b) Implementation of Investment Revised Item 4(a)(ii)(B).
Objectives.
(c) Risks....................... Revised Item 4(c).
Item 5. Management's Discussion of Item 5A.
Fund Performance.
Item 6. Management, Organization,
and Capital Structure:
[[Page 13965]]
(a) Management
(1) Investment adviser...... Revised Item 5(b).
(2) Portfolio manager....... Revised Item 5(c).
(3) Legal proceedings....... Revised Item 9.
(b) Capital stock............... Revised Item 6(a).
Item 7. Shareholder Information:
(a) Pricing of Fund Shares...... Revised Items 7(b)(i) and (ii).
(b) Purchase of Fund Shares..... Revised Items 7 (introductory sentence) and 7(d).
(c) Redemption of Fund Shares... Revised Item 8.
(d) Dividends and Distributions. Revised Item 6(f).
(e) Tax Consequences............ Revised Item 6(g).
(f) Separate Disclosure Document New.
Item 8. Distribution Arrangements:
(a) Sales Loads................. Revised Items 7(b)(iii), (c) and (g).
(b) Rule 12b-1 Fees............. Revised Items 7 (e) and (f).
(c) Multiple Class and Master- Revised General Instruction I and Item 6(h).
Feeder Funds.
Item 9. Financial Highlights
Information:
(a) Financial Highlights........ Revised Item 3(a).
(b) Shareholder Reports......... Revised Item 3(d).
Part B
Item 10. Cover Page and Table of
Contents:
(a) Front Cover Page............ Revised Item 10.
(b) Table of Contents........... Item 11.
Item 11. Fund History:
(a) Date and Form of Item 4(a)(i)(A).
Organization.
(b) Prior Businesses of Fund.... Item 12.
Item 12. Description of the Fund and
Its Investments and Risks:
(a) Classification.............. Revised Item 4(a)(i)(B).
(b) Investments Strategies and Revised Items 4(b) and 13(c).
Risks.
(c) Fund Policies............... Revised Items 13(a) and (b).
(d) Temporary Defensive Position New.
(e) Portfolio Turnover.......... Revised Item 13(d).
Item 13. Management of the Fund:
(a) Board of Directors.......... Revised Item 5(a).
(b) Management Information...... Item 14(a).
(c) Affiliated Positions Held... Item 14(b).
(d) Compensation................ Item 14(c).
(e) Sales Loads................. Revised Item 7(c).
Item 14. Control Persons and
Principal Holders of Securities:
(a) Control Persons............. Revised Items 6(b) and 15(a).
(b) Principal Holders........... Revised Item 15(b).
(c) Management Ownership........ Item 15(c).
Item 15. Investment Advisory and
Other Services:
(a) Investment Advisers......... Revised Item 16(a).
(b) Principal Underwriter....... Revised Item 7(a).
(c) Services Provided by Each Revised Items 5(b)(ii) and 16(c).
Investment Adviser and Fund
Expenses Paid by Third Parties.
(d) Service Agreements.......... Item 16(d).
(e) Other Investment Advice..... Item 16(e).
(f) Dealer Reallowances......... Item 7(b)(iv).
(g) Rule 12b-1 Plans............ Revised Items 7(f) and 16(f).
(h) Other Service Providers:
(1) Administrator........... Item 5(d).
(2) Dividend-paying agent/ Item 5(e).
transfer agent.
(3) Custodian/accountant.... Revised Items 16(g) and (h).
(4) Affiliated persons...... Item 16(i).
Item 16. Brokerage Allocation and Revised Items 5(g) and 17.
Other Practices.
Item 17. Capital Stock and Other
Securities:
(a) Capital Stock............... Revised Items 6(a), 6(c), and 18(a).
(b) Other Securities............ Item 18(b).
Item 18. Purchase, Redemption and
Pricing of Shares:
(a) Purchase of Shares.......... Revised Item 19(a).
(b) Fund Reorganizations........ Revised Item 7(c).
(c) Offering Price.............. Revised Item 19(b).
(d) Redemptions in Kind......... Revised Item 19(c).
Item 19. Taxation of the Fund....... Revised Item 20.
Item 20. Underwriters............... Revised Item 21.
Item 21. Calculation of Performance Revised Item 22.
Data.
Item 22. Financial Statements....... Revised Item 23.
Part C
Item 23. Exhibits................... Revised Item 24.
[[Page 13966]]
Item 24. Persons Controlled by or Item 25.
Under Common Control with the Fund.
Item 25. Indemnification............ Revised Item 27.
Item 26. Business and Other Item 28.
Connections of the Investment
Adviser.
Item 27. Principal Underwriters..... Item 29.
Item 28. Location of Accounts and Item 30.
Records.
Item 29. Management Services........ Item 31.
Item 30. Undertakings............... Revised Item 32.
----------------------------------------------------------------------------------------------------------------
BILLING CODE 8010-01-U
[[Page 13967]]
[GRAPHIC] [TIFF OMITTED] TR23MR98.001
[[Page 13968]]
[FR Doc. 98-7070 Filed 3-20-98; 8:45 am]
BILLING CODE 8010-01-C