[Federal Register Volume 63, Number 55 (Monday, March 23, 1998)]
[Rules and Regulations]
[Pages 13968-13987]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-7071]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230 and 270

[Release Nos. 33-7513; IC-23065; File No. S7-18-96]
RIN 3235-AH03


New Disclosure Option for Open-End Management Investment 
Companies

AGENCY: Securities and Exchange Commission

ACTION: Final rule

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SUMMARY: The Securities and Exchange Commission is adopting a new rule 
that would permit a mutual fund to offer investors a new disclosure 
document called a ``Aprofile,'' which summarizes key information about 
the fund, including the fund's investment strategies, risks, 
performance, and fees, in a concise, standardized format. A fund that 
offers a profile will be able to give investors a choice of the amount 
of information that they wish to consider before making a decision 
about investing in the fund; investors will 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). An investor deciding to purchase fund shares based 
on the information in a profile will receive the fund's prospectus with 
the confirmation of purchase.

DATES: Effective on June 1, 1998.

FOR FURTHER INFORMATION CONTACT: Kathleen K. Clarke, Assistant 
Director, George J. Zornada, Team Leader, or Laura J. Riegel, Attorney, 
(202) 942-0721, Office of Disclosure Regulation, Division of Investment 
Management, Securities and Exchange Commission, 450 Fifth 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 or 450 Fifth Street, N.W., Mail Stop 5-6, 
Washington, D.C. 20549-6009 for additional information, including 
interpretive guidance, relating to this release or the profile.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission (the 
``Commission'') today is adopting new rule 498 [17 CFR 230.498] under 
the Securities Act of 1933 [15 U.S.C. 77a, et seq.] (``Securities 
Act'') and the Investment Company Act of 1940 [15 U.S.C. 80a-1, et 
seq.] (``Investment Company Act''). Rule 498 permits an open-end 
management investment company that registers on Form N-1A [17 CFR 
274.11A] (a ``fund'') to provide to investors a disclosure document 
called a ``profile,'' which summarizes key information about the fund 
and gives investors the option of purchasing the fund's shares based on 
the information in the profile. The Commission also is adopting 
amendments to rule 497 under the Securities Act [17 CFR 230.497] to 
require a fund to file a profile with the Commission at least 30 days 
prior to the profile's first use. In a companion release, the 
Commission is adopting revisions to the prospectus disclosure 
requirements in Form N-1A, the registration statement used by funds.\1\ 
These revisions seek to minimize prospectus disclosure about technical, 
legal, and operational matters that generally are common to all funds 
and to focus prospectus disclosure on essential information about a 
particular fund that would assist an investor in making a decision 
about investing in that fund.
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    \1\ Investment Company Act Release No. 23064 (Mar. 13, 1998) 
(``Form N-1A Release'').
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TABLE OF CONTENTS

I. Introduction and Background
II. Discussion
    A. General
    1. Overview of Comments
    2. Liability
    3. Plain English Disclosure
    4. Use of the Profile by Other Types of Investment Companies
    5. Standardized Format
    6. Additional Disclosure Items
    7. Eligibility
    8. Number of Funds Described in a Profile
    B. Profile Disclosure
    1. Cover Page
    2. Risk/Return Summary
    3. Other Disclosure Requirements
    4. Application to Purchase Shares
    C. Filing Requirements
    D. Dissemination of Profiles
    E. Modified Profiles for Certain Funds
III. Effective Date
IV. Cost/Benefit Analysis and Effects on Competition, Efficiency, 
and Capital Formation
V. Paperwork Reduction Act
VI. Summary of Final Regulatory Flexibility Analysis
VII. Statutory Authority
    Text of Rule

I. Introduction and Background

    Over the last decade, the fund industry has grown tremendously. 
Over 6,000 funds are now available to investors and close to 40 million 
American households own funds.\2\ Today, fund assets exceed the 
deposits of commercial banks.\3\
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    \2\ See INVESTMENT COMPANY INSTITUTE (``ICI''), Trends in Mutual 
Fund Investing: September 1997 at 3 (Oct. 30, 1997) (ICI News No. 
97-93) (``ICI Trends'') (as of Sept. 1997, there were 6,666 funds ) 
and ICI, Mutual Fund Ownership in the U.S., FUNDAMENTALS, Dec. 1996, 
at 1 (approximately 36.8 million households owned mutual funds 
either directly or through a retirement plan as of April 1996).
    \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).
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    As more investors turn to funds for professional management of 
current and retirement savings, funds have introduced new investment 
options and shareholder services to meet the needs of investors. While 
benefiting from these developments, investors also face an increasingly 
difficult task in choosing among different fund investments. The 
Commission, fund investors, and others have recognized the need to 
improve fund disclosure documents to help investors evaluate and 
compare funds.\4\ In the Commission's view, the growth of the fund 
industry and the diversity of fund investors warrant a new approach to 
fund disclosure that will offer more choices in the format and amount 
of information available about fund investments.\5\
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    \4\ See, e.g., ``Fulfilling the Promise of Disclosure,'' Remarks 
by Arthur Levitt, Chairman, SEC, before the American Savings 
Education Council, New York, NY (July 23, 1997); Remarks by Steven 
M.H. Wallman, Commissioner, SEC, before the ICI's 1995 Investment 
Company Directors Conference and New Directors Workshop, Wash., D.C. 
(Sept. 22, 1995); ``Mutual Funds and the International Marketplace: 
``A Regulatory Challenge,'' Remarks by Isaac C. Hunt, Jr., 
Commissioner, SEC, before the Sixth Annual Conference on 
International Issues, The University of Tulsa, Tulsa, Okla. (Mar. 6, 
1997). See also 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).
    \5\ The Commission has demonstrated an on-going commitment to 
improve the information provided in fund disclosure documents to 
meet changes in the fund industry and investors' needs. The 
Commission has taken a number of steps in recent years to meet this 
goal. See Investment Company Act Release No. 20974 (Mar. 29, 1995) 
[60 FR 17172] (requesting comment on ways to improve risk disclosure 
and comparability of fund risk levels) (``Risk Concept Release''); 
Investment Company Act Release No. 19382 (Apr. 6, 1993) [58 FR 
19050] (simplifying financial highlights information and requiring 
management's discussion of fund performance (``MDFP'')); Investment 
Company Act Release No. 16245 (Feb. 2, 1988) [53 FR 3868] (``Fund 
Performance Release'') (adopting a uniform formula for calculating 
fund performance); Investment Company Act Release No. 16244 (Feb. 1, 
1988) [53 FR 3182] (adopting a uniform fee table in fund 
prospectuses). See also SEC, REPORT OF THE ADVISORY COMMITTEE ON THE 
CAPITAL FORMATION AND REGULATORY PROCESSES (July 24, 1996); SEC, 
REPORT OF THE TASK FORCE ON DISCLOSURE SIMPLIFICATION (1996) 
(recommending specific improvements in the disclosure provided by 
corporate issuers).

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[[Page 13969]]

    In seeking to meet this goal, the Commission proposed, on February 
27, 1997, new rule 498, which would permit a fund to provide investors 
with a profile (the ``Proposed Profile'').\6\ The Proposed Profile 
would summarize key information about a fund, including the fund's 
investment objectives, strategies, risks, performance, fees, investment 
adviser and portfolio manager, purchase and redemption procedures, 
distributions, and the services available to the fund's investors. The 
Proposed Profile was designed to provide summary information about a 
fund that would assist an investor in deciding whether to invest in a 
fund or to request additional information about the fund before 
deciding whether to buy shares in that fund. Proposed rule 498 would 
require a fund to mail the prospectus and other information to the 
requesting investor within 3 business days of a request. An investor 
deciding to purchase fund shares based on the Proposed Profile would 
receive the fund's prospectus with the purchase confirmation.
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    \6\ Investment Company Act Release No. 22529 (Feb. 27, 1997) [62 
FR 10943], correction [62 FR 24160] (``Profile Proposing Release'').
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    On the same day that it proposed rule 498 for comment, the 
Commission published a release in which it proposed major changes to 
the prospectus disclosure requirements in Form N-1A (``Form N-1A 
Proposing Release'').\7\ The proposed amendments to Form N-1A were 
designed to focus prospectus disclosure on essential information about 
a particular fund that would assist an investor in making a decision 
about investing in that fund. The proposed amendments reflected the 
Commission's strongly-held belief that a prospectus, as the primary 
disclosure document contemplated under the federal securities laws, 
should present clear, concise, and understandable information about an 
investment in a fund.
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    \7\ Investment Company Act Release No. 22528 (Feb. 27, 1997) [62 
FR 10898], correction [62 FR 24160] (``Form N-1A Proposing 
Release'').
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    The Proposed Profile was based on a number of initiatives 
undertaken by the Commission to assess options for improving fund 
disclosure documents. One of these initiatives was a pilot program 
conducted by the Commission, with participation by the Investment 
Company Institute (``ICI'') and several large fund groups, in which the 
funds used profile-like summaries (``Pilot Profiles'') with their 
prospectuses.\8\ The Pilot Profiles, like the profile adopted today, 
summarized important information about funds. The purpose of the pilot 
program was to assess whether investors found the Pilot Profiles 
helpful in making investment decisions. Focus groups conducted on the 
Commission's behalf (``Focus Groups'') responded positively to the 
profile concept, indicating that a disclosure document such as the 
Pilot Profile would assist them in making investment decisions. Fund 
investors participating in a survey sponsored by the ICI also strongly 
supported the Pilot Profiles.\9\
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    \8\ 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 of Investment 
Management (``Division'') has permitted the pilot program to 
continue until adoption of proposed rule 498. See Investment Company 
Institute (pub. avail. July 16, 1997) (``1997 Profile Letter'').
    \9\ Letter from Paul Schott Stevens, Senior Vice President and 
General Counsel, ICI, to Barry P. Barbash, Director, Division of 
Investment Management, SEC, at 5-6 (May 20, 1996) (``ICI Survey 
Letter'') (enclosing Investment Company Institute, The Profile 
Prospectus: An Assessment by Mutual Fund Shareholders (1996) (survey 
of over 1,000 fund investors) (``ICI Profile Survey'')).
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    The Commission received 256 comment letters on the Proposed 
Profile, a large percentage of which were from individual investors 
(226 letters or 88%).\10\ Commenters expressed strong support for the 
Proposed Profile.\11\ Many commenters cited the advantages of a 
document that is less technical and easier to read. Commenters believed 
that the Proposed Profile would assist investors in selecting a fund in 
which to invest. Many of those commenting on the Proposed Profile, 
particularly individual investors, endorsed the Proposed Profile's goal 
of providing standardized, summary information about a fund.\12\
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    \10\ In addition to the comment letters from individuals, the 
Commission received comment letters from 6 broker-dealers and 
investment advisers, 8 funds, 3 law firms, 1 rating agency, 4 trade 
associations, and 8 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. S7-18-96.
    \11\ Of the comment letters received by the Commission, 88% 
supported the Proposed Profile.
    \12\ See also Middleton, Cure on the Way for * * * 
Prospectusphobia, Mutual Funds Magazine, June 1997, at 58; Fosback, 
Profiles--A Valuable New Tool for Investors, Mutual Funds Magazine, 
May 1997, at 10; Profile Prospectuses: An Idea Whose Time Has Come, 
Mutual Funds Magazine, Aug. 1996, at 11.
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    The Commission is adopting rule 498 with modifications that reflect 
the Commission's consideration of commenters' suggestions. Rule 498 
permits a fund to provide investors with a new disclosure option in the 
form of a profile that summarizes key information about the fund.\13\ A 
fund that makes a profile available will be able to offer an investor 
the option of purchasing the fund's shares after reviewing the 
information in the profile or of requesting and reviewing the fund's 
prospectus (and other information) before making an investment 
decision. An investor deciding to purchase fund shares based on the 
profile will receive the fund's prospectus with the purchase 
confirmation.
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    \13\ The ICI recently conducted a survey to assess information 
that investors considered before making a fund purchase. The results 
indicated that investors considered fund risk levels, total returns, 
and investment goals most frequently (listed respectively as first, 
second, and fourth). ICI, Uncerstanding Shareholders' Use of 
Information and Advisers at 4 (1997) (``ICI Shareholder Survey'').
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    Under rule 498, as adopted, the profile will include:

--Standardized Fund Summaries. The profile includes concise disclosure 
of 9 items of key information about a fund in a specific sequence.
--Improved Risk Disclosure. A risk/return summary (also required at the 
beginning of a fund's prospectus) provides information about a fund's 
investment objectives, principal strategies, risks, performance, and 
fees.
--Graphic Disclosure of Variability of Returns. The risk/return summary 
provides a bar chart of a fund's annual returns over a 10-year period 
that illustrates the variability of those 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-year periods to that of a broad-based securities 
market index.
--Other Fund Information. The profile includes information on the 
fund's investment adviser and portfolio manager, purchase and 
redemption procedures, tax considerations, and shareholder services.
--Plain English Disclosure. The Commission's recently adopted plain 
English disclosure requirements, which are designed to give investors 
understandable disclosure documents, will apply to the profile.\14\ The 
Commission's plain English rule requires the use of plain English 
writing principles, including short sentences, everyday language, 
active voice, tabular presentation of complex

[[Page 13970]]

material, no legal or business jargon, and no multiple negatives.\15\
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    \14\ See Securities Act Release No. 7497 (Jan. 28, 1998) [63 FR 
6370] (``Plain English Release'') (adopting amendments to rule 421 
under the Securities Act [17 CFR 230.421] requiring the use of plain 
English disclosure principles).
    \15\ Rule 421(d).

    Rule 498, as adopted, also permits a fund that serves as an 
investment option for a participant-directed defined contribution plan 
(or for certain other tax-deferred arrangements) to provide investors 
with a profile that includes disclosure that is tailored for the plan 
(or other arrangement). Profiles tailored for such use can exclude 
information relating to the purchase and sale of fund shares, fund 
distributions, tax consequences, and fund services otherwise required 
in a profile.
    The Commission has determined to adopt rule 498 and permit funds to 
use summary disclosure documents in accordance with the rule under the 
authority of section 10(b) of the Securities Act \16\ and other 
provisions of the federal securities laws.\17\ Section 10(b) gives the 
Commission the authority to adopt rules allowing the use of a summary 
prospectus if the Commission determines that doing so is ``necessary or 
appropriate in the public interest and for the protection of 
investors.'' \18\ In making this determination about profiles, the 
Commission considered, among other things: An extensive analysis of 
fund disclosure issues it recently conducted; its assessment of funds' 
use of Pilot Profiles; its assessment of certain other disclosure 
initiatives; and its substantial experience gained in administering the 
two-part disclosure format adopted in 1983 permitting a fund to provide 
investors with a simplified prospectus containing essential information 
about the fund and to place more detailed information about the fund in 
a Statement of Additional Information (``SAI''), which investors can 
obtain upon request.\19\ The Commission believes, and the broad support 
for the Proposed Profile confirms its belief, that rule 498 will 
benefit investors and promote effective communication of information 
about funds.
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    \16\ 15 U.S.C. 77j(b). Section 10(b) of the Securities Act of 
1933 (``Securities Act'') permits the use of a summary prospectus 
(which provides information the substance of which is included in 
the prospectus) to communicate information for purposes of an offer 
under section 5(b)(1) of the Securities Act [15 U.S.C. 77e(b)(1)]. 
Section 5(b)(2) of the Securities Act [15 U.S.C. 77e(b)(2)] 
requires, as a condition of selling a security, the delivery to 
investors of a prospectus that meets the requirements of section 
10(a) of the Securities Act [15 U.S.C. 77j(a)].
    \17\ Congress recently confirmed the authority of the Commission 
to permit the use of a summary prospectus by adding new section 
24(g) to the Investment Company Act [15 U.S.C. 80a-24(g)]. National 
Securities Markets Improvement Act of 1996, Pub. L. 104-290 (1996) 
(``Improvements Act''), section 204 (amending section 24 to add new 
paragraph (g)). While the profile, as adopted, will include a 
summary of information that is required in the prospectus, the 
Commission may adopt other rules under section 24(g) allowing a fund 
to use a summary prospectus that includes information the substance 
of which is not included in the prospectus.
    \18\ See supra note 16.
    \19\ Investment Company Act Release No. 13436 (Aug. 12, 1983) 
[48 FR 37928] (``1983 Form N-1A Adopting Release''). See also supra 
note 5.
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    Today, the Commission also is adopting the proposed amendments to 
Form N-1A.\20\ As they did with the Proposed Profile, commenters 
strongly supported the revised prospectus disclosure requirements. 
Taken together, these two disclosure initiatives are intended to allow 
funds flexibility to respond to the diverse information needs of 
investors and to improve fund disclosure.\21\
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    \20\ See Form N-1A Release, supra note 1.
    \21\ The Commission also proposed as part of these disclosure 
initiatives a new rule to 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]. The 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 
Division is analyzing the comments and expects to recommend a final 
rule for Commission consideration in the near future.
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II. DISCUSSION

    A. General
    1. Overview of Comments
    The vast majority of commenters on the Proposed Profile expressed 
strong support for the profile and specifically supported the concept 
of giving investors the option of purchasing shares of a fund on the 
basis of information contained in a summary disclosure document.\22\ A 
small number of commenters, however, questioned whether providing 
investors with this option was in the best interests of fund investors. 
These commenters asserted that investors may not appreciate the 
significance of an investment in a fund if they purchase its shares 
based on a summary document rather than the prospectus. These 
commenters also were concerned that widespread use of a profile could 
cause fewer investors to read the prospectus and asserted that the 
Commission would be better advised to direct its efforts to improving 
the prospectus.
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    \22\ The Commission has long encouraged summary prospectuses 
under section 10(b) of the Securities Act to provide investors with 
a condensed statement of important information included in the 
prospectus. In 1956, the Commission adopted a rule permitting the 
use of a summary prospectus under section 10(b), which was extended 
to investment companies in 1972. See Securities Act Release No. 3722 
(Nov. 23, 1956) (adopting rule 434A [17 CFR 230.434A] to permit the 
use of a summary prospectus); Securities Act Release No. 5248 (May 
9, 1972) [37 FR 10071] (extending rule 434A to investment 
companies); Securities Act Release No. 6383 (Mar. 3, 1982) [47 FR 
11380] (renumbering rule 434A as rule 431) [17 CFR 230.431]. The 
profile permitted by rule 498 is intended to replace the summary 
prospectuses that funds are currently permitted to use by rule 431 
under the Securities Act, and the Commission is amending rule 431 to 
clarify that the rule no longer applies to funds. The Commission 
also is eliminating the ``Instructions as to Summary Prospectuses'' 
that now accompany Form N-1A. See Form N-1A Release, supra note 1.
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    Implicit in these comments would seem to be the view that all 
investors should use a longer document--the prospectus--rather than a 
shorter document--the profile--in making a decision about investing in 
a fund. Such a view appears to be inconsistent with the sentiments of 
fund investors. The Commission and others, in seeking to identify ways 
to improve the disclosure of information about mutual funds to 
investors, have collected data about investors. This data demonstrates 
that different investors desire and use different types and amounts of 
materials in determining whether to invest in funds.\23\ The Commission 
believes that the data supports its conclusion to allow funds the 
option of offering their shares through the profile with delivery of a 
prospectus with the confirmation of purchase.
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    \23\ As noted above, Focus Groups responded very positively to 
the profile option. A number of individual investors also have 
written to the Commission and expressed strong support for the 
profile. See Profile Proposing Release, supra note 6, at 10944. See 
also ICI Profile Survey, supra note 9, at 22, 26; ICI Shareholder 
Survey, supra note 13, at 4.
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    The Commission's strongly held belief is that the principal goal of 
fund disclosure, whether it takes the form of a long or short document, 
should be to provide investors with useful and relevant information. 
Each of the disclosure initiatives that the Commission is adopting 
today has this goal, which the Commission believes complements the 
themes underlying the recently adopted plain English rule.\24\ To 
further this goal, the Commission encourages all funds that decide to 
use profiles to take the steps necessary to ensure that their 
prospectuses effectively communicate information to investors. The 
Commission believes that funds need to take this action if the 
initiatives adopted today are to achieve their objectives.
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    \24\ See Plain English Release, supra note 14.
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2. Liability
    In its release proposing new rule 498 (``the Profile Proposing 
Release''), the Commission discussed the protections

[[Page 13971]]

afforded investors under the federal securities laws for false and 
misleading statements in a profile.\25\ These protections include the 
provisions of sections 12(a)(2) and 17(a) of the Securities Act, which 
impose civil and criminal liability upon any person who offers or sells 
securities using an untrue statement of material fact or who omits to 
state a material fact necessary in order to make a statement, in light 
of the circumstances under which it was made, not misleading.\26\ 
Investor protections applicable to a profile also include the antifraud 
provisions of section 10(b) of the Securities Exchange Act of 1934 and 
rule 10b-5 under that Act.\27\
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    \25\ See Profile Proposing Release, supra note 6, at 10950.
    \26\ 15 U.S.C. 77l(a)(2); 15 U.S.C. 77q(a).
    \27\ 15 U.S.C. 78j(b); 17 CFR 240.10b-5. In addition, the 
Commission has the authority under section 10(b) of the Securities 
Act to suspend the use of a profile, as a summary prospectus, if the 
profile includes a false or misleading statement or omits to state a 
material fact necessary in order to make the statements, in light of 
the circumstances under which they were made, not misleading. This 
authority supplements the Commission's authority under section 8(b) 
of the Securities Act [15 U.S.C. 77h(b)] to issue an order to stop 
the sale of securities by means of a materially inaccurate or 
incomplete section 10(a) prospectus.
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    When it gave the Commission the authority to permit the use of a 
summary prospectus under section 10(b) of the Securities Act, Congress 
provided a specific exception from strict liability for misleading 
statements and omissions imposed under section 11 of the Securities Act 
\28\ for these type of disclosure documents. The purpose of the 
exception was to encourage the use of a summary prospectus while 
maintaining investor protection by requiring delivery of a section 
10(a) prospectus at or before the time that the investor receives the 
confirmation of the purchase of the security described in the summary 
prospectus.\29\
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    \28\ 15 U.S.C. 77k.
    \29\ See I LOSS & SELIGMAN, SECURITIES REGULATION 480 and n.214 
(3d ed. 1989) (citing S. Rep. 1036, 83d Cong., 2d Sess. 17-18 (1954) 
and H.R. Rep. 1542, 83d Cong., 2d Sess. 26 (1954)). Although section 
11 liability would not apply to the profile, section 11 liability 
would apply to the sale of a fund's securities if a misleading 
statement is included in both the profile and the prospectus.
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    The Commission believes that the profile fits squarely within the 
statutory framework contemplated by Congress for the offering and sale 
of securities under the federal securities laws. The profile of a fund 
will be a summary prospectus under section 10(b) of the Securities Act, 
but the fund's section 10(a) prospectus will remain the primary 
disclosure document under the federal securities laws. To inform 
investors about the availability of the prospectus, a profile includes 
a legend on the cover page (or at the beginning of the profile) 
explaining that the profile is a summary document and stating that more 
information about the fund is available in the prospectus.\30\
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    \30\ The legend also indicates that other information about the 
fund is available in addition to the prospectus. See infra Section 
II.B.1 for a discussion of the profile legend.
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    While most commenters strongly favored the profile, several 
commenters expressed concern that a fund using a profile could face 
increased liability under the federal securities laws. These commenters 
argued in particular that a fund's use of a profile could result in 
claims under section 12(a)(2) of the Securities Act alleging that the 
profile is misleading because it omits information disclosed in the 
fund's prospectus.\31\
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    \31\ Section 12(a)(2) imposes liability for material 
misstatements or omissions when the seller cannot demonstrate the 
exercise of ``reasonable care.'' An action under section 12(a)(2) 
does not require proof of scienter (i.e., intent to mislead 
investors), e.g., Wigand v. Flo-Tek, Inc., 609 F.2d 1028, 1034 (2d 
Cir. 1979), or investor reliance on a misleading statement or 
omission, e.g., MidAmerica Fed. S. & L. Assoc. v. Shearson/American 
Express, Inc., 886 F.2d 1249, 1256 (10th Cir. 1989); Sanders v. John 
Nuveen & Co., 619 F.2d 1222, 1225 (7th Cir. 1980), cert. denied, 450 
U.S. 1005 (1981). In contrast, claims by private plaintiffs under 
the antifraud provisions of section 10(b) of the Securities Exchange 
Act of 1934 (``Securities Exchange Act'') require proof of scienter 
and investor reliance. Under either type of claim, however, it must 
be established that the misrepresentation or omission was 
``material,'' which generally means that a substantial likelihood 
exists that a reasonable investor would consider the information 
important in making an investment decision. TSC Industries, Inc. v. 
Northway, Inc., 426 U.S. 438, 449 (1976); Basic, Inc. v. Levinson, 
485 U.S. 224, 231-32 (1988). Commenters cited several cases as 
examples of the claims funds may face under section 12(a)(2) for 
alleged nondisclosures in profiles. See, e.g., In re TCW/DW North 
Am. Gov. Income Trust Secs. Litigation, 941 F. Supp. 326, 337-38 
(S.D.N.Y. 1996) (dismissing certain allegations that fund misstated 
and omitted information regarding risks of international investing 
on the basis that a reasonable investor would not have been misled); 
In Re Alliance North Am. Gov. Income Trust, Inc. Secs. Litigation, 
1996 U.S. Dist. LEXIS 14209 (S.D.N.Y. 1996) (same); Tabankin v. 
Kemper Short-Term Global Income Fund, 1994 U.S. Dist. LEXIS 965 
(N.D.Ill. 1994) (dismissing allegations that fund failed to disclose 
adequately the risks of investment).
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    To address this concern, several commenters urged the Commission to 
permit funds to incorporate by reference the prospectus into the 
profile to provide funds with a defense against unwarranted claims that 
a profile omits material information. As stated in the Profile 
Proposing Release, however, the Commission believes that allowing funds 
to incorporate by reference the prospectus into the profile would be 
inconsistent with the purpose of the profile and not in the public 
interest.\32\ The profile is designed to provide summary information 
about a fund in a self-contained format that will assist an investor in 
deciding to invest in, or in deciding to request additional information 
about, the fund. Permitting a fund to incorporate by reference the 
prospectus into the profile would result in the prospectus being 
considered a part of the profile and would be inconsistent with the 
profile being a self-contained document.\33\
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    \32\ Profile Proposing Release, supra note 6, at 10950. One 
commenter suggested as an alternative to incorporation by reference 
that the Commission create a liability ``safe harbor'' for funds 
using profiles. Under such a provision, a fund using a profile 
meeting the requirements of rule 498 would be deemed to have 
disclosed all material information about a fund for purposes of the 
profile if the fund's prospectus contained all material information. 
Such a provision, in effect, would amount to incorporation by 
reference and, in the Commission's view, would be inconsistent with 
the purpose of the profile.
    \33\ See White v. Melton, 757 F. Supp. 267, 271-72 (S.D.N.Y. 
1991). See also 1983 Form N-1A Adopting Release, supra note 19, at 
37930.
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    On the basis of, among other things, its prior experience with 
summary documents, such as advertisements designed to meet the 
requirements of rule 482 under the Securities Act,\34\ the Commission 
does not agree with commenters' claims that the use of profiles will 
lead to significant potential liabilities under the federal securities 
laws. In the Commission's view, a fund using a profile generally should 
not face liability for omitting information included in the fund's 
prospectus if the profile includes the information required or 
permitted by rule 498; potential liability would arise only if a 
profile contains a material misstatement or omits a statement necessary 
to make the disclosure in the profile not materially misleading. The 
mere omission of information from the profile that is required or 
permitted in the prospectus should not, in the Commission's view, give 
rise to liability under the federal securities laws.\35\
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    \34\ In 1979, the Commission adopted rule 434d under the 
Securities Act [17 CFR 230.434d], subsequently redesignated rule 482 
[17 CFR 230.482], which permits investment companies to use 
advertisements that are designed to be omitting prospectuses of the 
type contemplated by section 10(b) of the Securities Act. Securities 
Act Release No. 6116 (Aug. 31, 1979) [44 FR 52816].
    \35\ Like those commenting on the Proposed Profile, commenters 
on proposed rule 434d argued that a fund using an advertisement 
under the rule would be subject to potential liability under section 
12(a)(2) if the advertisement did not contain all of the information 
included in the fund's prospectus. In adopting rule 434d, the 
Commission stated its belief that a fund should not be liable under 
section 12(a)(2) merely because information included in the fund's 
section 10(a) prospectus was not included in the advertisement. 44 
FR at 52817. The Commission is not aware of any lawsuits brought 
since the adoption of rule 434d in which a fund was found liable for 
an advertisement meeting the requirements of the rule on the basis 
that the advertisement failed to include information contained in 
the fund's prospectus.

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[[Page 13972]]

    The Commission believes that the intended purpose of a profile as a 
summary disclosure document supports the view that a fund using a 
profile should not be subject to liability under the federal securities 
laws for omitting information from the profile that is included in the 
fund's prospectus. Rule 498 specifies the information that can or must 
be included in a fund's profile and requires the fund to state that the 
profile contains a summary of certain information in the fund's 
prospectus. The Commission's goal in adopting rule 498, which is to 
facilitate the use of a short, summary disclosure document that 
investors can use to evaluate and compare funds, would not be met 
unless rule 498 is read as limiting the information required to be 
included in the profile.
    Commenters on the Proposed Profile requested that the Commission 
provide guidance about the applicability of section 19(a) of the 
Securities Act to a fund that uses a profile under new rule 498. By its 
terms, section 19(a) protects a defendant from liability for actions 
taken in good faith in conformity with any rule of the Commission.\36\ 
The Commission believes that a fund that provides investors with a 
profile in good faith compliance with rule 498 would be able to rely on 
section 19(a) against a claim that its profile did not include 
information that is disclosed in the fund's prospectus.
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    \36\ 15 U.S.C. 77s(a). See also section 38(c) of the Investment 
Company Act [15 U.S.C. 80a-37(c)].
---------------------------------------------------------------------------

3. Plain English Disclosure
    In seeking to encourage all issuers, including funds, to provide 
disclosure materials required under the federal securities laws that 
are simpler, clearer, and more useful to investors, the Commission 
recently adopted initiatives that would require the use of plain 
English in drafting those materials.\37\ These initiatives contemplate 
disclosure documents using plain English writing principles including 
short sentences, everyday language, active voice, tabular presentation 
of complex material, no legal or business jargon, and no multiple 
negatives. The Commission strongly believes that, by drafting profiles 
in strict compliance with plain English principles, funds can provide 
improved disclosure to investors. Rule 498, as adopted, reflects this 
belief. The rule requires that funds disclose the information in the 
profile using the plain English writing principles set out in the 
Commission's plain English rule.\38\
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    \37\ See Plain English Release, supra note 14. 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.
    \38\ Instruction 2 to rule 498(b) (requiring funds to use the 
plain English writing principles set out in rule 421(d) in drafting 
the disclosure in the profile). See supra note 14 and accompanying 
text.
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4. Use of the Profile by Other Types of Investment Companies
    The Commission proposed to permit funds to use profiles, but did 
not propose to permit other types of investment companies, such as 
closed-end investment companies, unit investment trusts, and separate 
accounts that offer variable annuities, to rely on rule 498. Several 
commenters disagreed with the Commission's decision and urged the 
Commission to allow other types of investment companies to use 
profiles. The Commission is not persuaded at this time by these 
commenters, and rule 498, as adopted, is available only to funds. 
Although it recognizes that a short, summary disclosure document such 
as the profile could potentially benefit investors in other types of 
investment companies, the Commission has concluded that it should 
assess the use of profiles by funds over a period of time before 
considering a rule that would allow other types of investment companies 
to use similar summary documents. As the Commission gains experience 
with funds' use of the profile and analyzes the results of other pilot 
profile programs that are underway,\39\ it will consider expanding use 
of the concept to other types of investment companies.\40\
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    \39\ See National Association for Variable Annuities (pub. 
avail. June 4, 1996) (staff no-action letter allowing pilot program 
for variable annuity profiles). The Division has permitted this 
program to continue pending its taking any further action with 
respect to variable annuity profiles. National Association for 
Variable Annuities (pub. avail. May 30, 1997) (staff no-action 
letter).
    \40\ The Proposed Profile refined the prototype profile used in 
the pilot program, which allowed the Commission to evaluate use of 
the profile concept for funds. See supra note 8 and accompanying 
text. The Commission believes that further initiatives to adapt the 
profile concept for other types of investment companies should 
follow a similar approach that includes a review of existing 
prospectus disclosure requirements and an assessment of investor 
responses to a different disclosure format.
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5. Standardized Format
    The Proposed Profile required disclosure of 9 items of key 
information presented in a specific sequence following a question-and-
answer format. The purpose of standardizing the order of the items was 
to help investors locate similar information in the profiles of 
different funds and compare the funds. The proposed question-and-answer 
format, frequently used by many funds in their prospectuses, was 
intended to help communicate the required information effectively. Most 
commenters supported a standardized presentation in profiles, but 
several commenters criticized the prescribed question-and-answer 
format, suggesting that funds should be able to choose other formats to 
set out the information required in a profile. The Commission is 
adopting the standardized presentation requirement as proposed because 
it believes that requiring the profile items in a specific sequence 
will substantially assist investors in locating information and 
comparing funds. Consistent with the goal of allowing funds to design 
effective disclosure documents, however, rule 498 does not limit the 
presentation of the required information to a question-and-answer 
format.\41\ Any fund that chose to do so could use a question-and-
answer format in its profile.
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    \41\ The profile is, however, subject to certain other format 
requirements. Under rule 498, as adopted, profiles must meet 
requirements with respect to font size and legibility set out in 
rule 420 under the Securities Act [17 CFR 230.420]. Rule 420 
requires, among other things, that prospectuses be in roman type at 
least as large and as legible as 10-point modern type.
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6. Additional Disclosure Items
    Several commenters suggested that additional disclosure items would 
be useful in a profile, including:

--a fund's top ten portfolio holdings;
--an investment style box;
--additional measures of risk; and
--financial highlights.

The Commission acknowledges that the disclosure suggested by the 
commenters could be useful to some fund investors and could generally 
enhance the information available about funds. Nonetheless, the 
Commission has concluded that none of these items should be required by 
rule 498 at this time.
    In considering fund disclosure requirements, the Commission must 
balance many factors, including, among other things, the amount of 
information that is consistent with the purpose of a particular 
disclosure document. The purpose of the profile is to provide investors 
with a short, standardized disclosure document containing summary 
information about a fund. In the Commission's view, the additional 
items suggested by commenters could be of interest to some fund 
investors but are not necessarily essential information for the average 
or typical investor. The Commission believes that some of the

[[Page 13973]]

types of information cited by commenters may be more helpful in 
connection with a fund's discussion of its current investment 
activities that is presently included in fund shareholder reports.\42\ 
The Commission has directed the Division of Investment Management 
(``Division'') to begin work on a comprehensive assessment of the 
Commission's existing rules specifying the disclosure to be included in 
fund reports to shareholders to assess whether other types of 
information should be added to those reports.\43\
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    \42\ See section 30(d) of the Investment Company Act [15 U.S.C. 
80a-29(d)] and rule 30d-1 [17 CFR 270.30d-1] (requiring funds to 
provide investors with semi-annual reports about a fund's current 
operations).
    \43\ See Form N-1A Release, supra note 1. In proposing changes 
to improve the disclosure in fund prospectuses, the Commission 
recognized that revisions to shareholder report requirements could 
enhance the disclosure provided to investors. See Form N-1A 
Proposing Release, supra note 7, at 10912. Recent legislation gives 
the Commission greater authority to specify the content of annual 
reports and to require additional disclosure in annual and semi-
annual reports as necessary or appropriate in the public interest or 
for the protection of investors. Improvements Act, supra note 16, 
section 206(f) (amending section 30 of the Investment Company Act 
[15 U.S.C. 80a-29] to add new paragraph (f)). The Commission notes 
its preliminary view that an ``integrated'' approach to registration 
and reporting requirements applicable to funds could improve the 
overall information about funds available to investors. See Form N-
1A Release, supra note 1.
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7. Eligibility
    In the Profile Proposing Release, the Commission suggested that 
certain funds might not be eligible to use a profile. In particular, 
the Commission stated that, if material information about a fund exists 
but is not addressed by the 9 items of disclosure required to be in a 
profile, the fund might not appropriately use a profile.\44\ Several 
commenters strongly objected to this assertion. They argued that it is 
inconsistent with the premise underlying the profile initiative that a 
typical fund investor would have enough information to make an 
investment decision about a fund using a summary disclosure document 
containing the 9 required items accompanied by a statement about the 
availability of additional information in the fund's prospectus and 
other documents. One commenter suggested that the Commission address 
the eligibility issue by requiring the profile to provide additional 
summary information about other items of disclosure that are required 
in prospectuses. Another commenter suggested that, as an alternative, 
the Commission provide for a tenth item in the profile in response to 
which a fund could include at its option any other information that the 
fund believed was material to an investor's consideration of an 
investment in the fund. Several other commenters, however, argued that 
such an item was not consistent with the Commission's purpose in 
developing the Proposed Profile as a short, standardized, self-
contained disclosure document.
---------------------------------------------------------------------------

    \44\See Profile Proposing Release, supra note 6, at 10945.
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    After consideration of these comments, the Commission has 
determined to adopt rule 498 to require funds to include only the 
information specified by the 9 items in the rule and to delete any 
suggestion that certain funds may be ineligible to use profiles.\45\ 
The Commission has selected these items because it believes that they 
fulfill the goal of providing investors with a short, summary 
disclosure document on the basis of which investors can make decisions 
about investing in a fund. Under rule 498, as adopted, an investor who 
believes that he or she needs more information before making such a 
decision has the option of obtaining additional information by 
requesting the fund's prospectus or other disclosure materials.\46\
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    \45\ Rule 498(b). The profile generally will provide a summary 
of certain items in the prospectus, while the prospectus will 
provide a fuller description of each of these items. The prospectus, 
for example, discloses the amount of any rule 12b-1 fees charged by 
a fund in the fee table and includes a narrative discussion about 
the fund's rule 12b-1 fees. In contrast, the profile as a summary 
disclosure document discloses the amount of the fund's rule 12b-1 
fees as part of the fee table disclosure. Similarly, a prospectus 
identifies each investment adviser of a fund, including a sub-
adviser of the fund, while, in certain cases, a profile could 
disclose the number of sub-advisers managing the fund's portfolio 
without identifying each sub-adviser. See Form N-1A Release, supra 
note 1, and infra notes 90 and 93-94 and accompanying text.
    \46\ Proposed rule 498 provided that a fund could not use 
footnotes or include cross-references within the profile or to 
information appearing in another of the fund's disclosure documents, 
unless specifically required or permitted in the rule. See Profile 
Proposing Release, supra note 6, at 10945 n.22. The Commission 
believes that footnotes and cross-references should generally be 
unnecessary in a summary document such as a profile. The Commission 
acknowledges, however, that circumstances may exist under which 
footnotes or cross-references within the profile may result in 
better disclosure. Thus, the Commission is revising rule 498 to 
discourage, but not to preclude, the use of footnotes or cross-
references within a profile; under the rule, a fund may use 
footnotes or cross-references within a profile if their use promotes 
a better understanding of the information about the fund contained 
in the profile. Instruction 1 to rule 498(b). Rule 498, as adopted, 
continues to preclude use of cross-references to information 
appearing in another of the fund's disclosure documents. Such cross-
references would be inconsistent with the purpose that the profile 
be a self-contained document. For purposes of the profile only, a 
hyperlink to a fund's prospectus from the fund's profile when both 
documents are available electronically would not be deemed a cross-
reference. See infra note 120 (describing and explaining the use of 
hyperlinks in a profile).
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8. Number of Funds Described in a Profile
    Rule 498, as proposed, would permit a profile to describe more than 
one fund. As discussed in the Profile Proposing Release, the Commission 
concluded, on the basis of the Pilot Program and Focus Group responses, 
that a profile that describes more than one fund can be consistent with 
the goal of a summary disclosure document that assists investors in 
evaluating and comparing funds. Describing more than one fund or class 
in a profile, for example, could be a useful means of providing 
investors with information about related investment alternatives 
offered by a fund group (e.g., a range of tax-exempt funds or different 
types of money market funds) or about the classes of a multiple class 
fund.
    Recognizing that too much information could make the profile 
lengthy, complex, and difficult to understand, the Commission requested 
comment whether use of a profile should be limited to one fund or to 
some other number of funds. Most commenters supported the proposal to 
allow a profile to describe more than one fund. One commenter expressed 
concerns about the proposal and suggested that funds instead be allowed 
to bind separate profiles together.
    The Commission believes that the ability to describe different 
investment options in one summary document will enable funds to develop 
profiles that help investors compare investment alternatives offered by 
a fund group. Therefore, the Commission is adopting rule 498, as 
proposed, with no express limitation on the number of funds that can be 
described in a profile. Information about multiple funds in a single 
profile, however, would need to be set out in a concise and summary 
manner in a format designed to communicate the information 
effectively.\47\
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    \47\ Instruction 2 to rule 498(b). A fund must use plain English 
writing principles in drafting disclosure in the profile. See supra 
note 37. In response to a comment, the Commission is modifying rule 
498 to clarify that information that is common to all funds or 
classes described in a profile need be stated only once and not 
repeated for each fund or class. Instruction 4 to rule 498(b). Rule 
498, as adopted, does not preclude binding separate profiles for 
different funds together in one document.
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B. Profile Disclosure

1. Cover Page
    Proposed rule 498 would require the cover page of a fund's profile 
to include certain basic information about the fund

[[Page 13974]]

and to disclose that the profile is a summary disclosure document. As 
proposed, the cover page would identify the disclosure document as a 
``profile,'' would include a legend explaining the profile's purpose, 
and would include the fund's name. A fund also could describe its 
investment objectives or its type or category (e.g., that the fund is a 
growth fund or invests its assets in a particular country). Proposed 
rule 498 also would require the cover page to state the approximate 
date of the profile's first use and, if applicable, the date of the 
most recent updated performance information included in the profile.
    The Commission is adopting the proposed cover page requirements 
with modifications to reflect the suggestions of various 
commenters.\48\ Some commenters questioned the proposed requirement to 
state on a profile's cover page the date of the most recent performance 
information included in the profile, asserting that this requirement 
would necessitate a fund's reprinting its profile frequently to reflect 
updated performance information. These commenters suggested that, as an 
alternative, the Commission permit the date of the most recent 
performance information to accompany that information in the body of 
the profile. The Commission has concluded that the date of performance 
information included in a profile can be communicated to investors 
effectively if the date accompanies the disclosure of performance 
information. Rule 498, as adopted, reflects this conclusion.\49\
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    \48\ One commenter requested clarification whether a profile 
must include a separate cover page. Rule 498, as adopted, clarifies 
that a profile need not have a separate cover page so long as the 
specified cover page disclosure is included as introductory 
information at the beginning of the profile. The proposed cover page 
requirements were intended to identify introductory information that 
should appear at the beginning of a profile.
    \49\ Rule 498(c)(2)(iii). Rule 498 permits a fund to reflect 
updated performance information in a ``sticker'' or similar means to 
avoid requiring frequent reprinting of the profile to change this 
section of the profile. Instruction to rule 498(c)(2)(iii).
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    Proposed rule 498 would require funds to identify the document on 
the cover page as a ``profile'' without using the term ``prospectus.'' 
\50\ Several commenters asserted that funds should be able to refer to 
the profile as a prospectus because a profile is a summary prospectus 
under the federal securities laws.\51\ When proposing the profile as an 
optional disclosure document, the Commission made it clear that the 
profile was not intended to supersede the section 10(a) prospectus as 
the primary disclosure document for funds under the federal securities 
laws.\52\ In restricting funds from referring to the profile as a 
prospectus, the Commission intended to avoid investor confusion by 
distinguishing between the two documents. The Commission believes that, 
if a profile is labeled a prospectus, investors may not understand the 
difference between the two documents. In the Commission's view, the 
technical legal status of the profile as a summary prospectus should 
not be determinative of the appropriate label for the document. The 
Commission believes that investors will benefit from clear 
identification of the disclosure documents and is adopting rule 498, as 
proposed, with the restriction on the use of the term 
``prospectus.''\53\
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    \50\ Proposed rule 498(c)(1)(ii).
    \51\ See supra note 16.
    \52\ See Profile Proposing Release, supra note 6, at 10950. See 
also supra Section II.A.2.
    \53\ Rule 498(c)(1)(ii).
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    The Commission proposed that the cover page of the profile include 
a legend designed to alert an investor to the summary nature of a 
fund's profile and to inform the investor that he or she can obtain the 
fund's prospectus and other disclosure materials of the fund before 
making a decision about investing in the fund. In considering an 
appropriate profile legend, the Commission sought a concise, clear 
statement that minimized technical or legal jargon; provided investors 
with a description of a fund's profile; and informed them about the 
availability of other information about the fund. The Profile Proposing 
Release set out two alternative legends about which a number of 
commenters expressed strong views.\54\
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    \54\ See Profile Proposing Release, supra note 6, at 10946.
---------------------------------------------------------------------------

    The primary difference between the two legends proposed by the 
Commission was the reference to information in the prospectus. The 
first legend, which was similar to that used in the Pilot Profile, 
stated that the profile summarizes key information in the 
prospectus.\55\ The second legend added a statement that the prospectus 
includes additional material information about the fund.\56\
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    \55\ See id. The first proposed legend read as follows:
    This Profile summarizes key information about the Fund that is 
included in the Fund's prospectus. If you would like more 
information before you invest, you may obtain the Fund's prospectus 
and other information about the Fund at no cost by calling ______.
    \56\ See id. The second proposed legend read as follows:
    This Profile summarizes key information about the Fund that is 
included in the Fund's prospectus. The prospectus includes 
additional material information about the Fund that you may want to 
consider before you invest. You may obtain the Fund's prospectus and 
other information about the Fund at no cost by calling ______.
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    No commenters expressed support for the first proposed legend, and 
the comments on the second were mixed. Many commenters believed that 
the second legend would clearly inform investors that the profile 
contains summary disclosure of key information about a fund and that 
additional important information about the fund is available in the 
prospectus. Several of these commenters, however, strongly urged the 
Commission to delete the word material from the legend. They asserted 
that the use of that term would imply incorrectly that a fund's profile 
may be legally deficient simply because it did not contain all of the 
information contained in the fund's prospectus. Several commenters 
suggested that both of the proposed legends were insufficient and 
should be strengthened to alert investors more clearly about the 
summary nature of the profile and the availability of additional 
information in the prospectus.
    The Commission believes that the profile legend serves an important 
purpose and that the numerous comments that it received on the proposed 
legends clearly indicate that commenters share this belief. To ensure 
that the legend sufficiently serves its purpose of informing investors 
of the summary nature of the profile, the Commission has determined to 
strengthen the legend and include specific language offered by 
commenters. As adopted, rule 498 requires the following legend on the 
cover page, or at the beginning, of a profile:

    This profile summarizes key information about a Fund that is 
included in the Fund's prospectus. The Fund's prospectus includes 
additional information about the Fund, including a more detailed 
description of the risks associated with investing in the Fund that 
you may want to consider before you invest. You may obtain the 
prospectus and other information about the Fund at no cost by 
calling ______.\57\
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    \57\ Rule 498(c)(1)(iv). A fund will be required to provide a 
toll-free or collect telephone number for investors to request the 
prospectus or other information. A fund also may, if applicable, 
indicate that the prospectus is available on its Internet web site 
or by E-mail. Rule 498(c)(1)(v). Rule 498 requires that an 
application to purchase shares of a fund that accompanies the fund's 
profile present with equal prominence the option to invest in the 
fund based on the information included in the profile or to request 
the prospectus and other information before making an investment 
decision. Rule 498(c)(3). See infra note 104 and accompanying text.

    To ensure that fund investors who, after reviewing a profile, 
request other information about a fund receive that

[[Page 13975]]

information promptly, the Commission proposed to require a fund to send 
its prospectus to the requesting investors within 3 business days of a 
request. Those commenters addressing this requirement generally 
supported it, although one commenter maintained that revising the 
requirement to state that mailings need to be made ``reasonably 
promptly,'' which the commenter stated should normally be deemed to be 
within 3 business days of a request, would protect funds against claims 
that they failed to meet the requirements as a result of unforeseen 
circumstances. The Commission continues to believe, as discussed in the 
Profile Proposing Release, that prompt mailing of the prospectus to 
investors who request it is an essential component of the profile 
initiative and the goal of promoting effective communication of 
information about funds.\58\ Therefore, the Commission is adopting the 
3-business day mailing requirement as proposed.\59\
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    \58\ See Profile Proposing Release, supra note 6, at 10946.
    \59\ Instruction to rule 498(c)(1)(v). The Commission's Office 
of Compliance Inspections and Examinations will, as a part of its 
routine periodic inspections of a fund's operations, examine a 
fund's compliance with the 3-business day mailing requirement. In 
addition to the 3-business day mailing requirement for prospectuses, 
rule 498 requires a fund to send within 3 business days of a request 
its annual or semi-annual shareholder report and Statement of 
Additional Information (``SAI''). Id. The Commission staff also will 
examine a fund's compliance with this requirement. Failure to comply 
with either requirement could result in action by the Commission to 
ensure compliance, including an enforcement action in an appropriate 
case.
---------------------------------------------------------------------------

    Some commenters requested clarification from the Commission about 
the procedure that a fund should follow in responding to requests for 
additional information when its shares are sold through financial 
intermediaries, such as broker-dealers or banks. Commenters recommended 
that the Commission revise rule 498 to permit the legend to state that 
additional information in such a case may be obtained from financial 
intermediaries. 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, rule 498, as adopted, allows funds to state that 
additional information about a fund is available from a financial 
intermediary.\60\ A fund whose information is available through another 
entity, however, retains the obligation to ensure that information is 
sent to investors within 3 business days of an investor's request. The 
Commission expects that funds will fulfill this obligation through 
contractual arrangements with broker-dealers, banks, or other financial 
intermediaries.
---------------------------------------------------------------------------

    \60\ Instruction to Rule 498(c)(1)(v).
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2. Risk/Return Summary
    The Commission proposed that the first 4 items of the profile 
elicit information that would be substantially identical to the 
proposed risk/return summary at the beginning of every prospectus. Most 
commenters supported the risk/return summary in the profile, and the 
Commission is adopting it generally as proposed. The Form N-1A Release 
discusses in detail the prospectus risk/return summary.\61\ The risk/
return summary required in the profile by rule 498, as adopted, will 
incorporate substantially all of the requirements for the summary in 
Form N-1A, as amended. The following discussion summarizes the main 
features of the risk/return summary required by Form N-1A and discusses 
specific disclosure required in the profile.
---------------------------------------------------------------------------

    \61\ See Form N-1A Release, supra note 1.

---------------------------------------------------------------------------
--Fund Investment Objectives/Goals

    To assist investors in identifying funds that meet their general 
investment needs, the proposed risk/return summary would require a fund 
to disclose its investment objectives or goals. The Commission is 
adopting this disclosure requirement in rule 498 as proposed.\62\
---------------------------------------------------------------------------

    \62\ Rule 498(c)(2)(i).

---------------------------------------------------------------------------
--Principal Investment Strategies

    The proposed risk/return summary would require a fund to summarize, 
based on the information provided in its prospectus, how the fund 
intends to achieve its investment 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 invests or will invest principally, and any policy of 
the fund to concentrate its investments in an industry or group of 
industries. The Commission is adopting this requirement in rule 498 as 
proposed.\63\
---------------------------------------------------------------------------

    \63\ Rule 498(c)(2)(ii).
---------------------------------------------------------------------------

    In seeking to supplement the information about a fund's principal 
investment strategies set out in a profile, the Commission proposed to 
require that a fund's risk summary inform investors about the 
availability in the fund's shareholder reports of additional 
information about the fund's investments.\64\ Some commenters 
questioned the proposed placement of this disclosure, arguing that the 
disclosure should appear together with the legend on the cover page of 
the profile, while other commenters supported requiring the disclosure 
in the profile's risk/return summary. The Commission believes that 
requiring this disclosure on the cover page of the profile would result 
in too much information on the cover page. Therefore, the Commission is 
adopting the proposal requiring a fund's profile to indicate in its 
risk summary that additional information about a fund's investments is 
available in its shareholder reports.\65\
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    \64\ A fund's annual report to its shareholders typically 
contains a 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.
    \65\ Rule 498(c)(2)(ii). This provision requires a fund (other 
than a new fund) to include disclosure in the risk/return summary 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 the last fiscal year. You may obtain 
either or both of these reports at no cost by calling __________.

    Unlike rule 498, as adopted, Form N-1A, as amended, requires 
that the statement about the availability of a fund's shareholder 
reports appear together with disclosure about the availability of 
the fund's SAI and other information about the fund on the back 
cover page of the fund's prospectus. Item 1(b)(1) of Form N-1A.

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--Principal Risks of Investing in the Fund

    Summary Risk Disclosure. The proposed risk/return summary would 
require a fund to summarize the information contained in the fund's 
prospectus about the principal risks of investing in the fund. 
Reflecting the Commission's proposed new approach to risk disclosure 
described in the Form N-1A Proposing Release, the profile disclosure 
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.\66\ 
Commenters generally supported the summary risk disclosure contemplated 
by proposed rule 498, agreeing that it would be focused 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.\67\
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    \66\ See Form N-1A Proposing Release, supra note 7 (regarding 
fund risk disclosure required in the prospectus).
    \67\ Rule 498(c)(2)(iii) (incorporating Item 2(c)(1)(i) of Form 
N-1A).
---------------------------------------------------------------------------

    The Commission proposed to require that the risk summary identify 
the types

[[Page 13976]]

of investors for whom the fund may be an appropriate or inappropriate 
investment. 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 an 
investment suitable for a particular investor.\68\ Commenters also 
stated that the disclosure would tend to be generic and not meaningful 
or useful for investors.
---------------------------------------------------------------------------

    \68\ 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) para.4261 (suitability 
of recommendations); 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 profiles and has deleted this requirement from the 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. Therefore, 
the risk summary requirement, as adopted, will give a fund the option 
to include disclosure in its profile about the types of investors for 
whom the fund is intended and the types of investment goals that may be 
consistent with an investment in the fund.\69\
---------------------------------------------------------------------------

    \69\ Rule 498(c)(2)(iii) (incorporating Item 2(c)(1)(i) of Form 
N-1A).
---------------------------------------------------------------------------

    Under the proposed risk/return summary, a fund could at its option 
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 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 there 
should focus solely on the risks of investing in the fund. Thus, the 
Commission has determined to eliminate the option to describe the 
rewards of investing in a fund in the risk summary.\70\
---------------------------------------------------------------------------

    \70\ In keeping with the disclosure flexibility provided to 
funds under Form N-1A, as amended, a fund could discuss the 
potential rewards of investing in the fund elsewhere in its 
prospectus as long as the information is not incomplete, inaccurate, 
or misleading. See Form N-1A Release, supra note 1.
---------------------------------------------------------------------------

    Special Risk Disclosure Requirements. The Commission proposed to 
require special disclosure in the risk summary for money market 
funds\71\ and for funds advised by or sold through banks. Commenters 
supported the proposed disclosure requirements, and the Commission is 
adopting them substantially as proposed.\72\
---------------------------------------------------------------------------

    \71\ For these purposes, a money market fund is 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].
    \72\ Rule 498(c)(2)(iii) (incorporating Item 2(c)(1)(ii) of Form 
N-1A). This provision, as adopted, requires the following disclosure 
by a money market fund in the risk summary of its profile:
    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.
    A fund advised by or sold though a bank would disclose in the 
risk summary of its profile:
    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.
    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 bank regulators, the 
Commission has revised the required disclosure to add language 
indicating that an investment in a fund advised by or sold through a 
bank is not a deposit of the bank. The requirement, as amended in 
this way, is consistent with the requirement now in effect.
    The Commission is making conforming amendments to the disclosure 
requirement contained in rule 482(a)(7) for advertisements by money 
market funds. The Commission also is amending rule 482(d) under the 
Securities Act and rule 34b-1 under the Investment Company Act [17 
CFR 270.34b-1] to conform to changes made in Item 21 of Form N-1A, 
as amended. See Form N-1A Release, supra note 1.
---------------------------------------------------------------------------

    The Commission proposed to require a tax-exempt money market fund 
that concentrates its investments in a particular state (a ``single 
state money market fund'') to include specific disclosure in its 
profile risk summary describing certain risks associated with an 
investment in such a fund.\73\ In the Form N-1A Proposing Release, the 
Commission asked, however, whether it should continue to require this 
disclosure in prospectuses.\74\ The Commission noted that this 
disclosure may exaggerate the risk of investing in single state money 
market funds. 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.
---------------------------------------------------------------------------

    \73\ Proposed rule 498 would require a single state money market 
fund to make disclosure similar to that Form N-1A currently requires 
such a fund to disclose in its prospectus. Existing Form N-1A 
requires a single state money market fund to disclose that it may 
invest a significant percentage of its assets in a single issuer and 
that investing in it may be riskier than investing in other types of 
money market funds. See Form N-1A Proposing Release, supra note 7, 
at 10903.
    \74\ See Form N-1A Proposing Release, supra note 7, at 10904.
---------------------------------------------------------------------------

    In response to the Commission's question regarding single state 
money market funds, commenters indicated that the special disclosure 
now required in 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 commenters and has determined not to 
require the disclosure in either the profile or the prospectus.\75\
---------------------------------------------------------------------------

    \75\ See Form N-1A Release, supra note 1.
---------------------------------------------------------------------------

    Risk/Return Bar Chart and Table. The proposed risk/return summary 
would require a fund's profile 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. 
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 annual returns for a 10-year 
period have varied significantly from year to year or were relatively 
even over the period). Presenting return information in this format was 
designed to give investors some indication of the variability of a 
fund's annual returns and thus some idea of the risk of an investment 
in the fund. The average annual return information in the table would 
assist investors in evaluating a fund's performance and risks relative 
to ``the market.'' Commenters generally supported the proposed bar 
chart and performance table, and the Commission is adopting these 
requirements with

[[Page 13977]]

modifications to reflect suggestions of commenters.\76\
---------------------------------------------------------------------------

    \76\ Rule 498(c)(2)(iii) (incorporating Item 2(c)(2) of Form N-
1A). This provision requires a fund to have at least one calendar 
year of returns before including the bar chart and requires a fund 
whose profile does not include a bar chart because the fund does not 
have annual returns for a full calendar year to modify the narrative 
explanation to refer only to information presented in the table. The 
provision also requires the bar chart of a fund in operation for 
fewer than 10 years to include annual returns for the life of the 
fund.
    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 the variation in a fund's returns to the risk of 
investing in the fund. As it indicated in the Form N-1A Release, the 
Commission acknowledges that investors have a wide range of ideas of 
what ``risk'' means. See Form N-1A Release, supra note 1.
---------------------------------------------------------------------------

    In the Form N-1A Proposing Release, the Commission requested 
comment about alternative presentations that could improve fund risk 
disclosure.\77\ 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 this 
information could be presented in a separate table or included in the 
performance table.
---------------------------------------------------------------------------

    \77\ See Form N-1A Proposing Release, supra note 7, 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.\78\ Most commenters, 
however, opposed requiring additional information in the bar chart, 
asserting that it could complicate and reduce the effectiveness of the 
bar chart.
---------------------------------------------------------------------------

    \78\ Rule 498, as adopted, in incorporating the requirements of 
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. Rule 498(c)(2)(iii) (incorporating 
Instruction 2(b) to Item 2(c)(2) of Form N-1A).
---------------------------------------------------------------------------

    Several commenters supported the inclusion of annual 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 fund 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.
    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, as proposed, would 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 experience price 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.\79\ 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.
---------------------------------------------------------------------------

    \79\ Rule 498(c)(2)(iii) (incorporating Item 2(c)(2)(ii) of Form 
N-1A).
---------------------------------------------------------------------------

    Presentation of Return Information. The proposed risk/return 
summary would require a fund to include the bar chart and table 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, the profile risk/return summary, as adopted, does not 
require the sub-heading including the proposed risk/return summary. To 
help investors use the information in the bar chart and table, the 
profile risk/return summary, as adopted, however, does require a fund 
to provide a brief narrative explanation of how the information 
illustrates the variability of the fund's returns.\80\
---------------------------------------------------------------------------

    \80\ Rule 498(c)(2)(iii) (incorporating Item 2(c)(2)(i) of Form 
N-1A).
---------------------------------------------------------------------------

    Bar Chart Return Information. The Commission proposed to require 
that a fund's 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 the annual returns 
among funds, which typically have fiscal periods that do not correspond 
to the calendar year.\81\ 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.
---------------------------------------------------------------------------

    \81\ The Commission understands that funds increasingly organize 
themselves as series companies and tend to stagger the financial 
periods of their series to spread audits and financial reporting 
periods 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 periods will 
promote understandable information in the profile. Therefore, the risk/
return summary, as adopted, requires calendar-year periods for both the 
bar chart and table.\82\ Under rule 498, as adopted, the average annual 
return information in the table in a fund's profile risk/return summary 
must be as of the most recent calendar quarter and updated 
quarterly.\83\
---------------------------------------------------------------------------

    \82\ Rule 498(c)(2)(iii) (incorporating Item 2(c)(2) of Form N-
1A).
    \83\ Rule 498(c)(2)(iii). Unlike rule 498, as adopted, Form N-
1A, as amended, requires the fund's prospectus risk/return summary 
to reflect average annual return information as of the end of a 
fund's most recent calendar year. Item 2(c)(2) of Form N-1A, as 
amended. A fund would update the information in the prospectus in 
connection with the filing of an annual post-effective amendment to 
update a fund's registration statement.
---------------------------------------------------------------------------

    The proposed bar chart would 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. 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 fund shares, it 
would be difficult for funds to compute annual returns for the purpose 
of the bar chart and to communicate the information effectively to 
investors.\84\ In addition, the Commission has concluded that more 
precise return information is not necessary for the bar chart to serve 
the purposes of graphically showing a fund's annual returns and 
illustrating

[[Page 13978]]

the variability of an investment in the fund over a 10-year period. 
Therefore, the bar chart, as adopted, is not required to show returns 
adjusted for sales loads.
---------------------------------------------------------------------------

    \84\ In contrast, sales loads can be accurately and fairly 
reflected in 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. Consistent with the bar chart as proposed, 
the bar chart, as adopted, may include return information for more than 
one fund.\85\ In contrast, the risk/return summary, as adopted, would 
require a fund offering more than one class of shares in a profile to 
include annual return information in its bar chart for only one 
class.\86\ Unlike individual funds, classes of funds represent 
interests in the same portfolio of securities and the returns of each 
class differ only to the extent that the classes do not have the same 
expenses. The Commission believes that including return information for 
all classes offered through a fund's profile is not necessary to 
provide an 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 profile so that 
investors will be able to identify and compare the performance of each 
class.\87\
---------------------------------------------------------------------------

    \85\ While rule 498 does not limit the number of funds whose 
return information may be included in a bar chart, the presentation 
of the bar chart is subject to the general requirement that 
disclosure should be presented in a format designed to communicate 
information effectively. Instruction 2 to rule 498(b).
    \86\ Rule 498(c)(2)(iii) (incorporating Instruction 3(a) to Item 
2(c)(2) of form N-1A).
    \87\ Rule 498(c)(2)(iii) (incorporating Instruction 3(b) to Item 
2(c)(2) of form N-1A).
---------------------------------------------------------------------------

    The proposed risk/return summary would require the bar chart of a 
fund offering more than one class of shares through a profile to 
reflect annual return information for the class offered in the profile 
that had the longest performance history over the last 10 years. Most 
commenters considering the issue suggested that the Commission instead 
permit such a fund 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.\88\ 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 the bar chart requirement and provide investors with 
sufficient information to evaluate the variability of returns for any 
class of the fund. Therefore, the profile risk/return summary, as 
adopted, permits a fund to choose the class to be reflected in the bar 
chart, subject to certain limitations.\89\

    \88\ 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 
services, 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.
    \89\ Rule 498(c)(2)(iii) (incorporating Instruction 3(a) to Item 
2(c)(2) of Form N-1A). 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 profile have returns for less 
than 10 years, the bar chart must reflect returns for the class that 
has returns for the longest period.
---------------------------------------------------------------------------

--Fees and Expenses of the Fund

    The proposed risk/return summary would require a table accompanying 
a fund's bar chart showing the fund's fees and expenses, including any 
sales loads charged in connection with an investment in the fund. 
Including the fee table in both the profile and the prospectus 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. The 
Commission is adopting the requirement for a fee table with 
modifications incorporating suggestions from commenters.\90\
---------------------------------------------------------------------------

    \90\ Rule 498(c)(2)(iv) (incorporating Item 3 of Form. N-A). The 
modifications adopted by the Commission are discussed in Form N-1A 
Release, supra note 1.
---------------------------------------------------------------------------

3. Other Disclosure Requirements
    The Commission proposed to require the profile of a fund to include 
not only the risk/return summary, but also disclosure about other key 
aspects of investing in the fund. Commenters generally supported these 
disclosure requirements, which are summarized below, and the Commission 
is adopting them substantially as proposed.

--Investment Adviser and Portfolio Manager of the Fund

    Proposed rule 498 would generally require a fund to identify in its 
profile its investment adviser and the person or persons primarily 
responsible for the day-to-day management of the fund's portfolio 
(``portfolio manager''). The proposed disclosure in the profile about 
portfolio managers also would require a fund to indicate the length of 
time that a portfolio manager has managed the fund and to summarize the 
portfolio manager's business experience for the last 5 years. Proposed 
rule 498 contemplated that a fund for which a committee or other group 
shared day-to-day management of its portfolio would disclose that it 
was managed in this fashion and not identify any individual portfolio 
manager. Commenters supported all of these proposed requirements, which 
the Commission has determined to adopt.\91\
---------------------------------------------------------------------------

    \91\ Rule 498(c)(2)(v). Item 6(a)(2) of Form N-1A sets out the 
disclosure requirements for Form N-1A covering this information. As 
discussed in the Form N-1A Release, the Commission has provided 
additional guidance in Form N-1A regarding the prospectus disclosure 
obligations of a fund for which day-to-day management 
responsibilities are shared. See Form N-1A Release, supra note 1 
(Instructions to Item 6(a)(2)).
---------------------------------------------------------------------------

    In seeking to meet its goal that profile disclosure be clear, 
concise, and summary in nature, the Commission proposed that, subject 
to one exception, a fund having 3 or more portfolio managers, each with 
responsibility over a portion of the fund's portfolio, could choose to 
disclose the number, and not the names, of its portfolio managers. 
Under the proposed exception, a fund would be required to disclose the 
identity of a portfolio manager who was responsible for managing 40% or 
more of its portfolio.\92\ One commenter questioned the operation of 
these provisions and suggested that the Commission instead adopt a 
requirement that a fund disclose the name and experience of only those 
portfolio managers having responsibility over the day-to-day management 
of a significant portion of the fund's investments. The commenter 
suggested further that 30 to 40% of a fund's portfolio should be deemed 
significant for this purpose.
---------------------------------------------------------------------------

    \92\ Under the 1996 Profile Letter, supra note 8, at 3, a fund 
could disclose that 3 or more persons managed the fund's portfolio, 
without regard to the percentage of the portfolio managed by any one 
person.
---------------------------------------------------------------------------

    The Commission believes that the commenter's suggestions are 
consistent with the goal underlying the profile and could result in 
better disclosure than that contemplated by the Commission's proposal. 
Thus, under rule 498, as adopted, a fund with 3 or more portfolio 
managers need not identify each of the managers, except that the fund 
must identify any manager who is (or is reasonably expected to be) 
responsible for the management of a significant portion of the fund's 
assets.\93\ Under rule 498, as adopted, a portfolio manager of 30% or 
more of a fund's net assets generally would be deemed to be responsible 
for the management of a

[[Page 13979]]

significant portion of the fund's net assets.\94\
---------------------------------------------------------------------------

    \93\ Rule 498(c)(2)(v)(C). In tying this disclosure to the 
portion of a fund's net assets over which a person has day-to-day 
responsibility, the Commission intends to provide funds with a 
standard way of determining whether a person has responsibility over 
a significant portion of a fund's portfolio. Like Form N-1A, as 
amended, rule 498, as adopted, does not require disclosure about the 
portfolio manager of a money market fund or an index fund.
    \94\ Rule 498, as adopted, requires disclosure about a portfolio 
manager of a fund who is, or who is reasonably expected to be, 
responsible for the management rather than one who ``manages'' a 
significant portion of the fund's portfolio. The revised language 
recognizes that the portion of a fund's portfolio over which a 
manager has responsibility may change from time to time.

    Proposed rule 498 generally would require a fund to identify in its 
profile any person or entity serving as a sub-adviser of the fund.\95\ 
Under the proposal, a fund would not need to identify a sub-adviser 
whose sole responsibility for the fund is limited to managing the 
fund's cash positions on a day-to-day basis.\96\ Commenters supported, 
and the Commission has adopted, this provision, with a clarification 
that recognizes that responsibility for cash management generally is 
incidental to a fund's investment objectives and unlikely to affect the 
fund's overall portfolio management and risks.\97\
---------------------------------------------------------------------------

    \95\ See section 2(a)(20) of the Investment Company Act [15 
U.S.C. 80a-2(a)(20)] (defining ``investment adviser'' broadly so as 
to include a sub-adviser).
    \96\ In contrast the 1996 Profile Letter, supra note 8, at 3, 
required disclosure about a sub-adviser only if it managed a 
material portion of a fund's portfolio.
    \97\ Rule 498(c)(2)(v). As adopted, this exception does not 
apply to any sub-adviser for a money market fund because the primary 
investment objective for such a fund can be viewed as cash 
management. The exception also does not apply to any other type of 
fund with a principal strategy of regularly holding cash or cash 
equivalent instruments. A fund, for example, with a principal 
strategy of allocating its assets among cash equivalents, equity 
securities, and income securities, and which employed different sub-
advisers to manage each of these asset categories, would need to 
identify all of the sub-advisers.
---------------------------------------------------------------------------

    Under rule 498, as proposed, a fund with 3 or more sub-advisers, 
each of which manages a portion of the fund's portfolio, could choose 
to disclose the number, and not the identity, of its sub-advisers, 
subject to one exception. Under the exception, a fund would be required 
to identify any sub-adviser that manages 40% or more of its net assets. 
Consistent with the modification to the disclosure requirement for 
portfolio managers, rule 498, as adopted, requires a fund to identify 
any sub-adviser that is (or is reasonably expected to be) responsible 
for the management of a significant portion of the fund's net assets. 
The rule defines a significant portion of the fund's net assets for 
this purpose generally to be 30% or more of the fund's net assets.\98\
---------------------------------------------------------------------------

    \98\ Rule 498(c)(2)(v)(B)(2).

---------------------------------------------------------------------------
--Purchase and Sale of Fund Shares

    The Commission proposed to require a fund to describe in its 
profile how to purchase its shares under one caption and how to redeem 
its shares under another caption. Proposed rule 498 would require, 
under the purchase caption, information about the fund's minimum 
investment requirements (e.g., initial and minimum account balances) 
and, when applicable, any breakpoints in or waivers of sales loads.
    Several commenters criticized the generic nature of the information 
on purchases and sales of fund shares contemplated by proposed rule 
498. They argued that without some guidance as to the specific kinds of 
information relating to purchases and sales of fund shares that the 
Commission believes is of importance to investors, funds would include 
an excessive amount of information in their profiles. The Commission 
believes that such a result would be inconsistent with the profile's 
intended purpose as a summary disclosure document and has revised rule 
498 to specify in greater detail the information about a fund's 
purchase and sale procedures that funds must include in a profile. 
Under rule 498, as adopted, a fund must disclose the minimum initial or 
subsequent investment requirements, the initial sales load (or other 
loads), and, if applicable, the initial sales load breakpoints or 
waivers.\99\ Rule 498 also requires a fund to state that its shares are 
redeemable, to identify the procedures for redeeming shares (e.g., on 
any business day by written request, telephone, or wire transfer), and 
to identify any charges or sales loads that may be assessed upon 
redemption (including, if applicable, the existence of waivers of these 
charges). \100\
---------------------------------------------------------------------------

    \99\ Rule 498(c)(2)(vi).
    \100\ Rule 498(c)(2)(vii).

---------------------------------------------------------------------------
--Fund Distributions and Tax Information

    The Commission is adopting the proposed requirement that a fund 
disclose information in its profile about the terms and conditions 
under which it makes distributions, as well as the expected tax 
treatment of those distributions.\101\ Rule 498, as adopted, requires a 
fund's profile to describe how frequently the fund intends to make 
distributions and what reinvestment options for distributions (if any) 
are available to investors in the fund. Rule 498 also requires a fund 
to disclose whether its distributions to shareholders may be taxed as 
ordinary income or capital gains and that the rates shareholders pay on 
capital gains will depend on the length of time that the fund holds its 
assets.\102\ Rule 498 requires a tax-exempt fund to state that it 
intends to distribute tax-exempt income and to disclose, as applicable, 
that a portion of its distributions may be taxable.
---------------------------------------------------------------------------

    \101\ Rule 498(c)(2)(viii).
    \102\ If a fund expects that its distributions, as a result of 
its investment objectives or strategies, primarily will consist of 
ordinary income or capital gains, the fund must provide disclosure 
to that effect in responding to rule 498(c)(2)(viii). 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. To the extent that a 
fund has a principal investment objective or strategy to achieve 
tax-managed results (e.g., to maximize long-term gains and minimize 
ordinary income), the fund would be required under rule 498 to 
provide disclosure to that effect in the discussion of its 
investment objectives. Rule 498(c)(2)(ii).

---------------------------------------------------------------------------
--Other Services Provided by the Fund

    Recognizing that funds often seek to distinguish themselves by the 
services that they offer investors and that investors often select 
funds for the services that they provide, the Commission proposed to 
require a fund to summarize or list in its profile the services 
available to its investors, including, for example, any exchange 
privileges or automated information services. One commenter expressed 
concern about the open-ended nature of this item and suggested that the 
Commission clarify that a fund need not respond to the item by 
disclosing all of its services available to all investors. This 
clarification, according to the commenter, would ensure that the 
profile serves its intended purpose as a summary document that includes 
information of use to a typical fund investor. The Commission agrees, 
and as adopted, rule 498 requires only that a fund's profile provide a 
summary of services available to typical investors in the fund.\103\
---------------------------------------------------------------------------

    \103\ Rule 498(c)(2)(ix).
---------------------------------------------------------------------------

4. Application to Purchase Shares
    The Commission proposed to permit a fund to include in its profile 
an application to purchase its shares.\104\ To ensure that investors 
are informed of the

[[Page 13980]]

availability of a fund's prospectus, which can be reviewed by an 
investor before investing in the fund, proposed rule 498 would require 
the application to note with equal prominence that an investor has the 
option of purchasing shares of the fund after reviewing the information 
in the profile or after requesting and reviewing the fund's prospectus 
(and other information).
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    \104\ Proposed rule 498(c)(3). Rule 482 under the Securities Act 
prohibits a fund from including an application to purchase its 
shares in an advertisement. This prohibition was based on concerns 
that an application would be inconsistent with the purpose of rule 
482, which was to provide a limited amount of information about a 
fund and a means of requesting a fund's prospectus. See Fund 
Performance Release, supra, note 5. In 1993, the Commission proposed 
to amend rule 482 to permit a fund to include in an advertisement a 
purchase application if the advertisement included certain 
information about a fund. Investment Company Act Release No. 19342 
(Mar. 5, 1993) [58 FR 16141]. In lieu of adopting the proposed 
revisions to rule 482, the Commission is adopting rule 498. The 
Commission is amending rule 482 in a number of respects to reflect 
the adoption of rule 498. In addition, the Commission is adopting 
revisions to rule 482 to permit letters or other materials permitted 
under the rule to accompany a profile. See infra note 123 and 
accompanying text.
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    Commenters generally supported permitting a fund to include an 
application in its profile, and the Commission is adopting rule 498 as 
proposed. One commenter questioned why an application needed to be 
included within a profile and suggested that it should be sufficient 
for an application to accompany the profile. The Commission recognizes 
that allowing funds to separate purchase applications from profiles may 
facilitate the printing and distribution of profiles and make it easier 
for funds to administer and process investors' applications. The 
Commission is concerned, however, that separating the application from 
the profile may cause investors to overlook the information provided in 
the profile. Balancing these concerns with a desire to ease the 
administrative burden on funds, the Commission has revised rule 498 to 
permit a fund to provide an application for purchase of fund shares 
either in the profile, or together with the profile in a manner 
reasonably designed to alert investors that the application is to be 
considered along with the information about the fund disclosed in the 
profile.\105\
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    \105\ Instruction to rule 498(c)(3).
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C. Filing Requirements

    The Commission proposed to require a fund to file its profile with 
the Commission at least 30 days before its first use.\106\ Proposed 
rule 498 would require a fund to file any profile containing 
substantive changes to a previously filed profile 30 days before use. 
The proposed rule would not require a fund to re-file a previously 
filed profile that has been revised only to update return information 
about the fund's past performance included in the risk/return summary. 
Commenters generally supported the proposed filing requirement, 
although some commenters suggested that it was unnecessary to require 
the subsequent re-filing of a profile with substantive changes 30 days 
before use. Commenters recommended that, if the Commission believes 
that such a filing requirement is necessary, the period before an 
amended profile can be used should be shortened to 5 days. Other 
commenters requested clarification about the kinds of changes made to a 
profile in use that would trigger a second filing requirement.
---------------------------------------------------------------------------

    \106\ Proposed rule 498 would require a fund to file the profile 
under rule 497, which sets out general filing requirements for fund 
prospectuses. The Commission proposed to include the profile 
requirement in new paragraph (k) to rule 497.
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    The Commission has determined to adopt the proposed filing 
requirements with modifications to address commenters' concerns.\107\ 
As discussed in the Profile Proposing Release, requiring profiles to be 
filed prior to their first use will allow the Commission's staff to 
monitor the document's compliance with the provisions of rule 498 and 
other provisions under the federal securities laws.\108\ The Commission 
believes that the 30-day filing requirement for a new profile will 
provide the staff with sufficient time to review the profile.\109\ The 
subsequent filing of an amended profile was intended to enable the 
Commission to continue to monitor and assess the use of profiles by 
funds. Because substantive changes to the profile, particularly the 
risk/return summary, will be reflected in amended prospectus filed with 
the Commission that can be reviewed by the Division, the Commission 
believes that a subsequent filing of amendments to a profile before its 
use is not necessary. Therefore, the Commission has revised the 
procedures under which profiles are filed to require that a fund file 
its amended profile within 5-business days after its use.\110\
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    \107\ The Commission has determined that it is not necessary or 
appropriate in the public interest or for the protection of 
investors to require that a fund's profile be filed as part of the 
fund's registration statement on Form N-1A. Filing the profile as 
part of a registration statement would not add to the Commission's 
ability to monitor the disclosure in the profile, would provide no 
additional protection to investors, and would impose unnecessary 
administrative burdens on funds.
    \108\ See Profile Proposing Release, supra note 6, at 10950. 
Under rule 498, as adopted, a profile can be used by a fund only 
with an effective registration statement and a current prospectus.
    \109\ Rule 497, as amended, requires a fund to file a definitive 
form of any profile required to be filed with the Commission within 
5 days after it is used.
    \110\ Rule 497(k)(1)(ii). Rule 497(k) separates filings of 
amended profiles into those that contain a material change to the 
investment objectives/goals, strategies, or risks of investing in 
the fund (changes to the information in, respectively, paragraphs 
(c)(2)(i)-(iii) of rule 498) and those that do not. Rule 
497(k)(1)(iii) (A) and (B). As with any profile filing, rule 497 
requires that a fund filing an amended profile designate under which 
paragraph and sub-paragraph of rule 497 the fund is filing the 
amended profile. Rule 497(k)(2)(i). This requirement will assist the 
staff of the Division in determining whether an amended profile 
contains substantive changes to the information in the risk/return 
summary.
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    Funds would be required to submit profiles electronically on the 
Commission's electronic data gathering analysis and retrieval 
(``EDGAR'') system.\111\ Because filings on the EDGAR system currently 
are text-only, do not reflect formatting, and do not reproduce graphic 
images (such as the bar chart required to be in the profile), the 
Commission proposed to require a fund to submit 2 copies of the profile 
in the primary form intended to be distributed to investors (e.g., 
paper or electronic media) with its electronically-filed profile. The 
purpose of this requirement was to allow the Commission to assess how 
funds present information in the profile.\112\ Pointing out that all 
funds are now required to file their disclosure documents required 
under the federal securities laws electronically and are no longer 
permitted to file paper copies, one commenter argued that it would be 
burdensome to require an additional paper submission of a profile and 
that the paper filing was not necessary to review the content of the 
profile. The commenter suggested that, if the Commission determines 
that a paper (or other distributed form of) filing is necessary, the 
Commission should require that the first filing of the profile be in 
its primary format and allow subsequent filings to be made 
electronically on EDGAR only. The Commission believes that review of 
profiles in the form in which they will be distributed to investors 
will allow its staff to evaluate the effectiveness of the profile and 
will be helpful in assessing whether the Commission should permit other 
types of investment companies to use a form of profile.\113\ To avoid 
unnecessary administrative burdens on funds, which file most forms 
required by the Commission electronically, however, the Commission is 
revising the additional profile filing requirement. Under these 
revisions, the first profile filing must be accompanied by the 
submission of a profile in the format in which it will be distributed 
to investors.\114\ Subsequent filings will not require the additional 
formatted profile.
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    \111\ The Commission requires most other filings to be made in 
the same manner. Rule 101(a)(1)(i) of Regulation S-T [17 CFR 
232.101(a)(1)(i)], for example requires prospectuses filed pursuant 
to the Securities Act to be submitted in electronic format.
    \112\ See Profile Proposing Release, supra note 6, at 10951 nn. 
86-88 and accompanying text.
    \113\ See supra Section II.A.4 (discussion of use of profile by 
other investment companies).
    \114\ Rule 497(k)(2)(ii). If a fund intends to disseminate its 
profile electronically, the supplemental submission need only 
include the Internet web site electronic address (``URL'').
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D. Dissemination of Profiles

    The Commission believes, on the basis of its own research and 
studies

[[Page 13981]]

undertaken by others, that the profile has the potential to be used by 
a significant number of fund investors. To facilitate use of the 
profile, the Commission proposed to permit profiles to be distributed 
to investors through any form of media.\115\ Commenters generally 
supported this approach, although one commenter urged the Commission to 
limit distribution of the profile to mass print media, arguing that the 
use of electronic media or direct mail to distribute a profile could 
promote fraud. The Commission believes that the profile's filing 
requirements and its staff's periodic regular review of fund operations 
through its inspections program provide important safeguards against 
the fraudulent use of the profile. In addition, the Commission has 
determined that it is in the interest of fund investors to provide them 
with different means to access sources of information about funds. 
Therefore, the Commission has decided not to restrict the means that 
funds may use to distribute profiles.
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    \115\ For example, a fund could make a profile available through 
direct mail and mass print (e,g, magazines and newspapers), 
broadcast, and electronic media, such as electronic bulletin boards, 
E-mail, facsimiles, Internet web sites, audiotapes. See e.g., 
Investment Company Act Release No. 21399 (Oct. 6, 1995) [60 FR 
53458, 53458 n.9] (``Electronic Distribution Release''). A fund may 
find that posting both its profile and its prospectus (and other 
information) on its Internet web site may disseminate disclosure 
documents to investors more efficiently than other ways.
    The Commission has encouraged the electronic dissemination of 
information by allowing funds and other types of companies 
significant choice in selecting and using distribution media. See, 
e.g., id. at 53460 n.20 (providing guidance on the electronic 
delivery of documents including prospectuses, shareholder reports, 
and proxies, under the Securities Act, the Securities Exchange Act, 
and the Investment Company Act); Investment Company Act Release No. 
21945 (May 9, 1996) [61 FR 24644] (addressing the use of electronic 
media by broker-dealers, transfer agents, and investment advisers); 
Investment Company Act Release No. 21946 (May 9, 1996) [61 FR 24652] 
(``Release 21946'') (adopting technical amendments to rules premised 
on the delivery of paper documents).
---------------------------------------------------------------------------

    Notwithstanding its decision to permit funds to use all media to 
distribute profiles, the Commission acknowledges that some media may 
have limitations that make communicating information in a profile 
difficult or that raise issues about whether investors have adequate 
opportunity to consider the information conveyed by that form of 
media.\116\ Regardless of how it is distributed (e.g., through 
electronic means or in paper format), a profile must contain all of the 
information contemplated by rule 498.\117\ In addition, while a fund's 
profile may be delivered without the fund's prospectus, the profile, if 
accompanied by supplemental sales literature, cannot be delivered 
without the prospectus.\118\
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    \116\ The Commission noted the same point generally in the 
Electronic Distribution Release, supra note 115, at 53460 & n.20. 
For example, broadcast media may be more difficult to use for 
disseminating the profile because they may not communicate the 
profile information effectively (e.g., the bar chart may not be 
effectively conveyed by a radio broadcast) or provide a meaningful 
opportunity for retaining the information (e.g., a short television 
commercial).
    \117\ Release 21946, supra note 115, at 24653. The Commission 
has taken the position generally that any document contemplated by 
the federal securities laws, whether delivered electronically or on 
paper, must contain all required information and, if the order of 
information has been specified by the Commission, must present the 
information in substantially the prescribed order. Electronic 
Distribution Release, supra note 115, at 53460 n.20.
    \118\ Profiles may be accompanied by material deemed to be an 
omitting prospectus within the meaning of rule 482 under the 
Securities Act. The conclusion that a profile accompanied by 
supplemental sales literature cannot be delivered to investors 
without the prospectus is based on section 2(a)(10) of the 
Securities Act [15 U.S.C. 77b(a)(10)], which excludes sales 
literature from the definition of a ``prospectus'' (and from the 
filing requirements under the Securities Act) if a section 10(a) 
prospectus (but not a summary prospectus under section 10(b)) 
precedes or accompanies the sales literature. For a discussion of 
the use of a profile with rule 482 materials, see infra notes 121 
and 122 and accompanying text. See also Electronic Distribution 
Release, supra note 115, at 53463 and 53465 (examples 15 and 35).
---------------------------------------------------------------------------

    As discussed in the Profile Proposing Release, electronic media, 
such as the Internet, may be particularly well suited for the delivery 
of the profile to investors.\119\ Including the profile together with 
the prospectus (and other information) on a fund's Internet web site 
may be an efficient method for the fund to disseminate, and for 
investors to receive, disclosure documents. Electronic availability of 
both the profile and prospectus would allow investors to access the 
fund's prospectus for more information contemporaneously with deciding 
to make an investment in the fund.\120\
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    \119\ See Profile Proposing Release, supra note 6, at 10951.
    \120\ A fund could provide a hyperlink to its prospectus from 
its profile. A hyperlink in a document (which, for example, may be 
an underlined word or phrase) permits a viewer to move to another 
document (or part of the same document) with a computer command. The 
words ``investment strategies'' in the profile, for example, could 
be set up as a hyperlink to the discussion of investment strategies 
in the prospectus. Using hyperlinks could facilitate the profile's 
serving as a means through which fund investors can obtain 
additional information in the prospectus and other documents. An 
investor's use of an electronic profile application contemplated by 
rule 498 would create the inference of delivery of the prospectus if 
both the profile and the prospectus are available at the same 
electronic site. Cf. Electronic Distribution Release, supra note 
115, at 43565-66 (example (39)) (``If the fund can identify the 
application form as coming from the electronic system that contains 
both the application and the prospectus, electronic delivery of the 
prospectus can be inferred.''). A fund that does not electronically 
disseminate the profile and prospectus together could not rely on 
this presumption and generally would be required to provide a copy 
of the prospectus with the purchase confirmation.
---------------------------------------------------------------------------

    Several commenters pointed out that funds could decide to send 
profiles to prospective investors with cover letters designed to be 
``omitting prospectuses'' within the meaning of rule 482 under the 
Securities Act.\121\ Noting that rule 482 materials are designed for a 
purpose different from that of the profile and are required to contain 
a legend that is inconsistent with the legend in the profile, the 
commenters requested that the Commission clarify the circumstances 
under which these materials could be used with a profile. The 
commenters suggested specifically that the statement required by rule 
482, that a prospectus is available from a fund and that the investor 
should read it carefully before investing, could confuse investors who 
receive rule 482 materials with a profile that contains an application 
to purchase shares of the fund. To avoid this type of confusion, the 
Commission is revising rule 482 so that a fund can indicate in a letter 
or other rule 482 material accompanying the fund's profile that 
information about the fund, and the procedures for investing in the 
fund, are available in the accompanying profile.\122\ The Commission 
also is revising rule 482 to provide that a profile containing, or 
accompanied by, an application can be used with rule 482 
materials.\123\
---------------------------------------------------------------------------

    \121\ See supra note 104.
    \122\ Rule 482(a)(3).
    \123\ Rule 482(a)(5).
---------------------------------------------------------------------------

E. Modified Profiles for Certain Funds

    The Commission proposed to permit a fund to tailor a profile for 
use by investors in participant-directed defined contribution plans 
(``plans''). The Commission believes that plan participants may find a 
profile helpful in evaluating and comparing the funds offered as 
investment alternatives in a plan.\124\ In proposing rule 498, the 
Commission recognized that certain information of importance to typical 
fund investors is of little importance to participants in plans. Thus, 
proposed rule 498 would permit a fund offered through a plan to omit 
information relating to the purchase and sale of fund

[[Page 13982]]

shares, fund distributions, and tax consequences.\125\
---------------------------------------------------------------------------

    \124\ The Division has taken the view that certain informational 
materials about a fund offered as an investment option in a defined 
contribution plan can be deemed an omitting prospectus within the 
meaning of rule 482. Fidelity Institutional Retirement Services 
Company, Inc. (pub. avail. Apr. 5, 1995) (staff no-action letter). 
None of the initiatives being adopted by the Commission today is 
intended to supersede this position of the Division.
    \125\ Proposed rule 498(c)(4). The proposed rule also would 
permit funds to exclude information about some fund services (e.g., 
exchange privileges) that may not apply to plan participants. In 
addition, the proposed rule acknowledged that a plan typically 
effects purchases and sales of a fund's shares on behalf of plan 
participants and would permit the fund's profile to include the 
plan's enrollment form in lieu of the application form.
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    Commenters generally supported allowing funds to develop profiles 
containing disclosure of particular relevance for plan participants who 
invest in funds. The Commission is adopting the special provisions for 
profiles used for plans as proposed with modifications to reflect 
suggestions of the commenters.\126\
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    \126\ Rule 498(d). General Instruction C.3.(d) of Form N-1A 
includes similar provisions enabling funds to omit certain 
information from their prospectuses that are used in connection with 
plans. Form N-1A Release, supra note 1.
---------------------------------------------------------------------------

    Under rule 498, as adopted, funds can tailor disclosure for 
profiles to be used for investments in defined contribution plans 
qualified under the Internal Revenue Code.\127\ One commenter suggested 
that the Commission also permit funds that serve as investment options 
for variable insurance contracts to modify profiles to take into 
account specialized purchase and sale procedures and tax consequences 
applicable to these funds.\128\ In response to the commenter's 
suggestions, the Commission is revising rule 498 to permit the profile 
to be tailored for funds offered through variable insurance contracts. 
The Commission believes that this revision will help to ensure that 
profiles contain information that investors will find meaningful and 
useful. Rule 498, as adopted, permits a profile for a fund offered as 
an investment option for a plan to include, or be accompanied by, an 
enrollment form for the plan.\129\ An application or enrollment form 
for a variable insurance contract may accompany the profile for the 
funds that serve as investment options, however, only if the form also 
is accompanied by a full prospectus for the contract.\130\
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    \127\ 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).
    \128\ The prospectus for a variable insurance contract discloses 
the purchase and sale procedures and tax consequences of investing 
in the contract and is provided to investors in addition to 
prospectuses for one or more funds that are offered as investment 
options under the contract. Use of a profile for the available 
investment options could make it easier for investors in variable 
contracts to compare and select from the investment alternatives 
available under the contract.
    \129\ Rule 498(d)(3).
    \130\ The Commission is currently considering whether it should 
extend the profile to variable annuity contracts. See supra note 39 
and accompanying text. The staff of the Division has indicated that, 
for variable annuity contracts used to fund employee retirement 
plans, summaries of the contract and fund prospectuses, accompanied 
by payroll deduction and allocation forms, could be treated as 
satisfying the requirements of rule 482 under certain circumstances. 
See Aetna Life Insurance and Annuity Co. (pub. avail. Jan. 6, 1997) 
(staff no-action letter). A profile could be used as a summary of a 
fund prospectus for these purposes.
---------------------------------------------------------------------------

    Some commenters suggested that rule 498 permit other modifications 
to the disclosure in fund profiles used in connection with plans, such 
as including information about purchases and sales of the fund's 
shares, taxation, or transfer of participant accounts under the plan or 
describing from whom this information can be obtained. Commenters also 
suggested that rule 498 permit such a fund to alter the legend in its 
profile used by plans to distinguish clearly that profile from another 
profile of the same fund. Consistent with the goal of providing 
meaningful and useful information that is effectively communicated to 
investors, rule 498, as adopted, permits funds to modify the legend and 
other disclosure in profiles intended for use in connection with 
defined contribution plans, other tax-deferred arrangements described 
in the rule, and variable insurance contracts.

III. Effective Date

    The Commission proposed a transition period after the effective 
date of revised Form N-1A to give funds sufficient time to prepare 
their registration statements under the proposed amendments.\131\ One 
commenter suggested that, in light of the significant overlap of 
information in fund prospectuses and profiles, funds would revise their 
prospectuses and develop profiles concurrently, and requested that the 
transition period be the same for both rule 498 and Form N-1A, as 
amended. The commenter also requested that the Commission continue to 
permit funds to use Pilot Profiles during the transition period.\132\ 
The Commission expects that the practical result of the adoption of 
rule 498 and revisions to prospectus disclosure requirements may be 
that funds begin using both documents at the same time. In light of the 
profile's purpose to provide investors with a new source of clear, 
concise information about funds, the Commission believes that funds 
should have the option to use the profile as soon as possible and is 
making rule 498 effective on June 1, 1998.\133\ The amendments to Form 
N-1A will become effective on the same date.\134\ Although existing 
funds will have until December 1, 1999 to comply with the Form N-1A 
amendments, a fund may, at its option, prepare documents in accordance 
with the requirements of the amended Form at any time after the 
effective date of the amendments.
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    \131\ See Form N-1A Proposing Release, supra note 7, at 10921.
    \132\ In the 1977 Profile Letter, supra note 8, the Division 
stated that the Commission would address the transition from use of 
a Pilot Profile in connection with the adoption of proposed rule 
498.
    \133\ After the effective date of rule 498, funds could continue 
to use a Pilot Profile as supplemental sales literature.
    \134\ To simplify compliance with rule 498 and the revised 
prospectus disclosure requirements, the Commission is specifying the 
same effective date for both as June 1, 1998. All new registration 
statements or post-effective amendments that are annual updates to 
effective registration statements filed after December 1, 1998 must 
comply with the amendments to Form N-1A. The final compliance date 
for filing amendments to effective registration statements to 
conform with the new Form N-1A requirements is December 1, 1999. See 
Form N-1A Release, supra note 1.
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IV. Cost/Benefit Analysis and Effects on Competition, Efficiency, 
and Capital Formation

    Section 2(b) of the Securities Act provides that whenever the 
Commission engages in rulemaking requiring it 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.\135\ For the reasons stated in the cost/benefit analysis 
below, as well as the reasons discussed elsewhere in this adopting 
release, the Commission has concluded that rule 498 will protect 
investors and will promote efficiency, competition, and capital 
formation.
---------------------------------------------------------------------------

    \135\ 15 U.S.C. 77b(b). See also section 2(c) of the Investment 
Company Act [15 U.S.C. 80a-2(c)].
---------------------------------------------------------------------------

    Evaluating and comparing funds has become an increasingly difficult 
task for investors as the number of funds has grown. The Commission has 
designed the profile to allow funds to use different offering documents 
to meet the diverse information needs of investors. The Commission 
believes that rule 498 allows funds to provide investors with a profile 
that conveys information to investors efficiently, to the benefit of 
investors and funds. For example, funds may include profiles in various 
media, such as magazines, and may use profiles specifically tailored 
for investors in defined contribution plans, certain other tax-deferred 
arrangements, and variable insurance contracts. The profile, by 
providing investors with a concise, standardized information option, 
also may enable investors to use information

[[Page 13983]]

efficiently by making it easier to compare funds before investing. This 
result will promote competition among funds and better enable investors 
to select an investment that is appropriate and consistent with their 
investment goals.
    The Commission did not receive any comments addressing specifically 
the cost associated with rule 498. Acknowledging that it is difficult 
to quantify costs and benefits related to the use of a profile, the 
Commission notes that commenters strongly favored the proposal. A 
fund's use of a profile under rule 498 is voluntary and not every fund 
will choose to prepare a profile. Developing a profile consistent with 
rule 498, however, would not be burdensome, because a fund that chooses 
to use a profile is likely to have developed much of the information 
required to appear in a profile as a part of its registration statement 
on Form N-1A. As discussed in the Commission's Paperwork Reduction Act 
submission in conjunction with the Profile Proposing Release, the 
Commission estimated that approximately 2,500 funds, or one third of 
eligible funds, will prepare profiles, and that the average profile 
will describe 2 funds. The Commission estimated that the annual cost to 
the industry of preparing and filing updated profiles would be 
approximately $5,600,000.\136\
---------------------------------------------------------------------------

    \136\ Profile Proposing Release, supra note 6.
---------------------------------------------------------------------------

    The Commission anticipates that the use of profiles may cause funds 
to restructure their expenditures on advertising. It is difficult, 
however, to determine how the use of profiles will affect aggregate 
expenditures on advertising. Expenditures on profiles may be offset by 
reductions in other advertising costs, resulting in no net cost 
increase.
    The Commission has taken steps to minimize the costs associated 
with the use of a profile, such as designing the required risk/return 
summary to allow funds to update return information without 
necessitating the reprinting of the entire profile. The ability to 
provide better information to investors and encourage investments in a 
fund may offset any additional costs to funds created by the 
development of a profile. Profiles also may lead to lower printing and 
distribution costs for funds that mail fewer prospectuses. On balance, 
the Commission believes that rule 498 fosters efficiency and tends to 
promote competition and capital formation without imposing significant 
costs on funds.

V. Paperwork Reduction Act

    As set forth in the Profile Proposing Release, this rulemaking 
contains ``collection of information'' requirements within the meaning 
of the Paperwork Reduction Act of 1995 (``PRA'').\137\ The collection 
of information requirements in the Profile Proposing 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 ``Profiles for Open-End Management 
Investment Companies'' and assigned it control number 3235-0488. The 
collection of information contained in the Profile Proposing Release is 
in accordance with the clearance requirements of 44 U.S.C. 3507. An 
agency may not conduct or sponsor, and a person is not required to 
respond to, a collection of information unless an agency displays a 
valid OMB control number.
---------------------------------------------------------------------------

    \137\ 44 U.S.C. 3501, et seq.
---------------------------------------------------------------------------

    Rule 498 permits funds to provide investors with a profile that 
contains a summary of key information about a fund. A fund that chooses 
to make a profile available would give investors the option of 
purchasing the fund's shares after reviewing the information contained 
in the profile or after requesting and reviewing the fund's prospectus 
(and other information about the fund). Under rule 498, use of the 
profile by a fund is voluntary, but compliance with the rule is 
mandatory for any fund that decides to use a profile. Responses to the 
collection of information will not be confidential.
    The Profile Proposing Release solicited public comment on the 
collection of information requirements contained in that release. The 
Commission received no comments on the PRA portion of the release. The 
estimated total reporting burden, purpose, use and necessity of the 
collection of information, as detailed in the Profile Proposing 
Release, remains the same.

VI. Summary of Final Regulatory Flexibility Analysis

    A summary of the Initial Regulatory Flexibility Analysis 
(``Analysis''), which was prepared in accordance with the Regulatory 
Flexibility Act, 5 U.S.C. 603, was published in the Profile Proposing 
Release. The Commission received no comments on the Analysis. The 
Commission has prepared a Final Regulatory Flexibility Analysis 
(``FRFA'') in accordance with 5 U.S.C. 604. The FRFA explains that a 
profile would include a summary of key information about a fund in a 
concise, standardized format designed to help investors evaluate and 
compare funds. The FRFA also explains that, if a fund makes a profile 
available, investors will have the option to purchase 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). 
An investor deciding to purchase fund shares based on the information 
in the profile would receive the fund's propsectus no later than with 
the confirmation of the purchase.
    The FRFA discusses the effect of rule 498 on small entity 
investment companies, which are defined, for the purposes of the 
Securities Act and Investment Company Act, as investment companies with 
net assets of $50 million or less as of the end of the most recent 
fiscal year [17 CFR 230.157(b) and 270.0-10]. The Commission estimates 
that there are approximately 620 small entity investment companies and 
that approximately one-third (207) could choose to use proposed rule 
498. As explained in more detail in the FRFA, the Commission estimates 
that the total hour burden on small entities to prepare, file, and 
update the profile annually would be approximately 2,420 hours. While 
the profile would include a summary of key information about the fund 
that is included in the prospectus, the disclosure requirements for the 
profile and the prospectus are designed for different purposes.
    The FRFA explains that rule 498 would not be significantly 
burdensome for small entity investment companies because use of the 
profile is optional, and the information to be included in a fund's 
profile will typically be drawn from information required to be 
disclosed in the fund's prospectus. In addition, some investors may use 
profiles instead of prospectuses to narrow their choices among funds, 
which would reduce a fund's printing and distribution costs. Lower 
printing and distribution costs could benefit small entities as much as 
or more than it could for large funds.
    As stated in the FRFA, the Commission considered several 
alternatives to rule 498, including establishing different compliance 
or reporting requirements for small entity investment companies or 
exempting them from all or part of the rule. Because use of the profile 
would be optional, and, if used, profiles of all funds would be subject 
to the same disclosure requirements, the Commission believes that the 
rule would not impose additional burdens

[[Page 13984]]

on small entity investment companies. Separate treatment for small 
entity investment companies would be inconsistent with the protection 
of investors.
    A copy of the Final Regulatory Flexibility Analysis may be obtained 
by contacting George J. Zornada, Team Leader, Office of Disclosure 
Regulation, Division of Investment Management, Securities and Exchange 
Commission, 450 Fifth Street, NW., Mail Stop 5-6, Washington, DC 20549-
6009.

VII. Statutory Authority

    The Commission is adopting rule 498 under 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 rule precede the text of the amendments.

List of Subjects in 17 CFR Parts 230 and 270

    Investment companies, Reporting and recordkeeping requirement, 
Securities.

Text of Rule

    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, 
in part, 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-
28, 80a-29, 80a-30, and 80a-37, unless otherwise noted.
* * * * *
    2. Amend Sec. 230.431 to revise the introductory text of paragraph 
(a) to read as follows:


Sec. 230.431  Summary prospectuses.

    (a) A summary prospectus prepared and filed (except a summary 
prospectus filed by an open-end management investment company 
registered under the Investment Company Act of 1940) as part of a 
registration statement in accordance with this section shall be deemed 
to be a prospectus permitted under section 10(b) of the Act (15 U.S.C. 
77j(b)) for the purposes of section 5(b)(1) of the Act (15 U.S.C. 
77e(b)(1)) if the form used for registration of the securities to be 
offered provides for the use of a summary prospectus and the following 
conditions are met:
* * * * *
    3. Amend Sec. 230.482 to revise the introductory text of paragraph 
(a), paragraphs (a)(3), (a)(5), and (a)(7), and in paragraph (d) remove 
the period at the end of paragraph (d)(1)(ii) and add in its place ``; 
or'' and add paragraph (d)(1)(iii) to read as follows:


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

    (a) An advertisement or other sales material that is not a 
prospectus, or an advertisement or sales material excluded from the 
definition of prospectus by section 2(10) of the Act (15 U.S.C. 
77b(10)) and related Sec. 230.134, will be deemed to be a prospectus 
under section 10(b) of the Act (15 U.S.C. 77j(b)) for the purpose of 
section 5(b)(1) of the Act (15 U.S.C. 77e(b)(1)), if:
* * * * *
    (3) It includes a conspicuous statement that:
    (i) Identifies a source from which an investor may obtain a 
prospectus containing more complete information about the investment 
company, which should be read carefully before investing; or
    (ii) If used with a profile under Sec. 230.498 (``Profile''), 
indicates that information is available in the Profile about the 
investment company, the procedures for investing in the investment 
company, and the availability of the investment company's prospectus.

    Note to Paragraph (a)(3). The fact that the statements included 
in the advertisement are included in the section 10(a) prospectus 
does not relieve the issuer, underwriter, or dealer of the 
obligation to ensure that the advertisement is not false or 
misleading.
* * * * *
    (5) It does not contain and is not accompanied by any application 
by which a prospective investor may invest in the investment company, 
except that:
    (i) A prospectus meeting the requirements of section 10(a) of the 
Act (15 U.S.C. 77j(a)) by which a unit investment trust offers periodic 
payment plan certificates may contain a contract application although 
the prospectus includes another prospectus that, pursuant to this 
section, omits certain information required by section 10(a) of the 
Act, regarding investment companies in which the unit investment trusts 
invests; and
    (ii) It may be used with a Profile that includes, or is accompanied 
by, an application to purchase shares of the investment company as 
permitted under Sec. 230.498.
* * * * *
    (7)(i) In the case of an investment company that holds itself out 
to be a money market fund, it includes the following statement:

    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.

    (ii) A money market fund that does not hold itself out as 
maintaining a stable net asset value may omit the second sentence of 
the statement in (a)(7)(i) of this section.
* * * * *
    (d) * * *
    (1) * * *
    (iii) A quotation or quotations of tax equivalent yield or tax 
equivalent effective yield if it appears in the same advertisement as a 
quotation of current yield and each quotation relates to the same base 
period as the quotation of current yield, is presented with equal 
prominence, and states the income tax rate used in the calculation.
* * * * *
    4. Amend Sec. 230.497 to revise paragraph (a) and to add paragraph 
(k) to read as follows:


Sec. 230.497   Filing of investment company prospectuses--number of 
copies.

    (a) Five copies of every form of prospectus sent or given to any 
person prior to the effective date of the registration statement that 
varies from the form or forms of prospectus included in the 
registration statement filed pursuant to Sec. 230.402(a) shall be filed 
as part of the registration statement not later than the date that form 
of prospectus is first sent or given to any person, except that:
    (1) An investment company advertisement under Sec. 230.482 shall be 
filed under this paragraph (a) (but not as part of the registration 
statement) unless filed under paragraph (i) of this section; and
    (2) A profile under Sec. 230.498 shall be filed in accordance with 
paragraph (k) of this section and not as part of the registration 
statement.
* * * * *
    (k)(1) Profile filing requirements. A form of profile under 
Sec. 230.498 shall not be used unless:
    (i) The form of profile that has not been previously filed with the 
Commission is filed at least 30 days before the date that it is first 
sent or given to any person.
    (A) No additional filing is required during the 30-day period for 
changes (material or otherwise) to a form of

[[Page 13985]]

profile filed under this paragraph if the changes are included in the 
definitive profile that is filed with the Commission under paragraph 
(k)(2)(ii) of this section.
    (B) The form of profile filed under this paragraph (k)(1)(i) can be 
used on the later of 30 days after the date of filing or, if the 
profile is filed in connection with an initial registration statement 
or a post-effective amendment that adds a series of an investment 
company to a registration statement, or reflects changes to a 
prospectus included in a post-effective amendment filed to update a 
registration statement under Sec. 230.485, the date that the 
registration statement or post-effective amendment becomes effective.
    (ii) A definitive form of a profile filed under paragraph (k)(1)(i) 
of this section is filed with the Commission no later than the fifth 
business day after the date that it is used.
    (iii) A form of profile that differs from any definitive form of 
profile that was filed under this paragraph (k) is filed with the 
Commission in definitive form no later than the fifth business day 
after the date that it is first used. This filing shall be made under 
one of the following according to the character of the change contained 
in the form of profile:
    (A) A form of profile that contains a material change to the 
information disclosed under Sec. 230.498 (c)(2)(i)-(iii); and
    (B) A form of profile that does not contain a material change to 
the information under Sec. 230.498 (c)(2)(i)-(iii).
    (2) Filing procedures. (i) Designate, at the top of the first page 
of any form of profile that is filed under this paragraph (k), the 
paragraph and sub-paragraph under which the profile is filed.
    (ii) Send two additional copies of the first definitive form of 
profile filed electronically under paragraph (k)(1)(ii) of this section 
to the Commission, in the primary form intended to be used for 
distribution to investors (e.g., paper, electronic media), by mail or 
other means reasonable calculated to result in receipt by the 
Commission, no late than the fifth business day after the date the 
profile is first sent or given to any person. Send copies to the 
following address: Office of Disclosure and Review, Division of 
Investment Management, U.S. Securities and Exchange Commission, 450 
Fifth St., N.W., Mail Stop 5-6, Washington, D.C. 20549-6009. Note 
prominently that the submission is made in accordance with 
Sec. 230.497(k)(2) of Regulation C under the Securities Act. If the 
profile is distributed primarily on the Internet, supply, in lieu of 
copies, the electronic address (``URL'') of the profile page(s) in an 
exhibit to the electronic filing under this paragraph (k). This 
additional requirement will expire on June 1, 2000.
    5. Add Sec. 230.498 under the undesignated center heading 
``Regulation C-Registration'' to read as follows:


Sec. 230.498   Profiles for certain open-end management investment 
companies.

    (a) Definitions. (1) A Fund means an open-end management investment 
company, or any series of such a company, that has, or is included in, 
an effective registration statement on Form N-1A (Secs. 274.11A and 
239.15A of this chapter) and that has a current prospectus under 
section 10(a) of the Act (15 U.S.C. 77j(a)).
    (2) A Profile means a summary prospectus that is authorized under 
section 10(b) of the Act (15 U.S.C. 77j(b)) and section 24(g) of the 
Investment Company Act (15 U.S.C. 80a-24(g) for the purpose of section 
5(b)(1) of the Act (15 U.S.C. 77e(b)(1)).
    (b) General requirements. A Fund may provide a Profile to 
investors, which may include, or be accompanied by, and application 
that investors may use to purchase the Fund's shares, if the Profile 
contains the information required or not precluded by paragraph (c) of 
this section and does not incorporate any information by reference to 
another document.

    Instructions to paragraph (b).
    1. The Profile is intended to be a standardized summary of key 
information in the Fund's prospectus under section 10(b) of the Act. 
Additional information is available in the Fund's prospectus under 
section 10(a) of the Act, in the Fund's Statement of Additional 
Information under Form N-1A, and in the Fund's annual and semi-
annual shareholder reports prepared in accordance with Sec. 270.30d-
1. Funds may not use cross-references in the Profile to other Fund 
disclosure documents unless required or permitted by this rule. 
Funds should minimize cross-reference and the use of footnotes 
within the Profile; cross-references and footnotes should generally 
be used only to promote a better understanding of the information 
about the Fund contained in the Profile.
    2. Provide clear and concise information in the Profile in a 
format designed to communicate the information effectively. Avoid 
excessive detail, technical or legal terms, and long sentences and 
paragraphs. Provide the information in the Profile using the plain 
English writing principles in Sec. 230.421(d).
    3. A Fund may use document design techniques intended to promote 
effective communication of the information in the Profile unless 
inconsistent with the requirements of this section.
    4. A Profile may describe more than one Fund or class of a Fund. 
A Profile that offers the securities of more than one Fund or class 
of a Fund does not need to repeat information that is the same for 
each Fund or class of Fund described in the Profile.
    5. File the Profile with the Commission as required by 
Sec. 230.497(k).

    (c) Specific requirements. (1) Include on the cover page of the 
Profile or at the beginning of the Profile:
    (i) The Fund's name and, at the Fund's option, the Fund's 
investment objective or the type of fund or class offered, or both;
    (ii) A statement identifying the document as a ``Profile,'' without 
using the term ``prospectus'';
    (iii) The approximate date of the Profile's first use;
    (iv) The following legend:

    This Profile summarizes key information about the Fund that is 
included in the Fund's prospectus. The Fund's prospectus includes 
additional information about the Fund, including a more detailed 
description of the risks associated with investing in the Fund that 
you may want to consider before you invest. You may obtain the 
prospectus and other information about the Fund at no cost by 
calling __________.

    (v) Provide a toll-free (or collect) telephone number that 
investors can use to obtain the prospectus and other information. The 
Fund may indicate, as applicable, that the prospectus and other 
information is available on the Fund's Internet site or by E-mail 
request. The Fund also may indicate, if applicable, that the prospectus 
and other information is available from a financial intermediary (such 
as a broker-dealer or bank) through which shares of the Fund may be 
purchased or sold.

    Instruction to Paragraph (c)(1)(v). When the Fund (or financial 
intermediary through which shares of the Fund may be purchased or 
sold) receives a request for the Fund's prospectus, the Fund's 
Statement of Additional Information, or the Fund's annual or semi-
annual report, the Fund (or financial intermediary) must send the 
requested document within three business days of receipt of the 
request, by first-class mail or other means designed to ensure 
equally prompt delivery. Funds are encouraged to send other 
information requested by shareholders within the same period.

    (2) Provide the information required by paragraphs (c)(2) (i) 
through (ix) of this section in the order indicated:
    (i) Fund objectives/goals. Provide the information about the Fund's 
investment objectives or goals required by Item 2(a) of Form N-1A.
    (ii) Principal investment strategies of the Fund. Provide the 
information about the Fund's principal investment strategies required 
by Item 2(b) of Form N-1A. In addition, a Fund (other than a Fund that 
has not yet been required to deliver a semi-annual or annual

[[Page 13986]]

report under Sec. 270.30d-1 of this chapter) must 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 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 the last fiscal year. You may obtain 
either or both of these reports at no cost by calling __________.

    (iii) Principal risks of investing in the Fund. Provide the 
narrative disclosure, bar chart, and table required by Item 2(c) of 
Form N-1A. Provide in the table the Fund's average annual total returns 
and, if applicable, yield as of the end of the most recent calendar 
quarter prior to the Profile's first use. Update the return information 
as of the end of each succeeding calendar quarter as soon as 
practicable after the completion of the quarter. Disclose the date of 
the return information adjacent to the table.

    Instruction to Paragraph (c)(2)(iii). A Fund may reflect the 
updated performance information in this section of the profile by 
affixing a label or sticker, or by other reasonable means.

    (iv) Fees and expenses of the Fund. Include the fee table required 
by Item 3 of Form N-1A.
    (v) Investment adviser, sub-adviser(s) and portfolio manager(s) of 
the Fund. (A) Identify the Fund's investment adviser.
    (B) Identify the Fund's sub-adviser(s) (if any) except that:
    (1) A Fund need not identify a sub-adviser(s) whose sole 
responsibility for the Fund is limited to day-to-day management of the 
Fund's holdings of cash and cash equivalent instruments, unless the 
Fund is a money market fund or other Fund with a principal investment 
strategy of regularly holding cash and cash equivalent instruments.
    (2) A Fund having three or more sub-advisers, each of which manages 
a portion of the Fund's portfolio, need not identify each such sub-
adviser, except that the Fund must identify any sub-adviser that is (or 
is reasonably expected to be) responsible for the management of a 
significant portion of the Fund's net assets. For purposes of this 
paragraph (c)(2)(v)(B)(2), a significant portion of a Fund's net assets 
generally will be deemed to be 30% or more of the fund's net assets.
    (C) State the name and length of service of the person or persons 
employed by or associated with the Fund's investment adviser (or the 
Fund) who are primarily responsible for the day-to-day management of 
the Fund's portfolio and summarize each person's business experience 
for the last five years in accordance with the Instructions to Item 
6(a)(2) of Form N-1A. A Fund with three or more such persons, each of 
whom is (or is reasonably expected to be) responsible for the 
management of a portion of the Fund's portfolio, need not identify each 
person, except that a Fund must identify and summarize the business 
experience for the last five years of each person who is (or is 
reasonably expected to be) responsible for the management of a 
significant portion of the Fund's net assets. For purposes of this 
paragraph (c)(2)(v)(C), a significant portion of a Fund's net assets 
generally will be deemed to be 30% or more of the Fund's net assets.
    (vi) Purchase of Fund shares. Disclose the Fund's minimum initial 
or subsequent investment requirements, the initial sales load (or other 
loads) to which the Fund's shares are subject, and, if applicable, the 
initial sales load breakpoints or waivers.
    (vii) Sale of Fund shares. Disclose that the Fund's shares are 
redeemable, identify the procedures for redeeming shares (e.g., on any 
business day by written request, telephone, or wire transfer), and 
identify any charges or sales loads that may be assessed upon 
redemption (including, if applicable, the existence of waivers of these 
charges).
    (viii) Fund distributions and tax information. Describe how 
frequently the Fund intends to make distributions and what options for 
reinvestment of distributions (if any) are available to investors. 
State, as applicable, that the Fund intends to make distributions that 
may be taxed as ordinary income or capital gains (which may be taxable 
at different rates depending on the length of time that the Fund holds 
its assets) or that the Fund intends to distribute tax-exempt income. 
If a Fund expects that its distributions, as a result of its investment 
objectives or strategies, primarily will consist of ordinary income or 
capital gains, provide disclosure to that effect. For a Fund that holds 
itself out as investing in securities generating tax-exempt income, 
provide, as applicable, a general statement to the effect that a 
portion of the Fund's distributions may be subject to federal income 
tax.
    (ix) Other services are available from the Fund. Provide a brief 
summary of services available to the Fund's shareholders (e.g., any 
exchange privileges or automated information services), unless 
otherwise disclosed in response to paragraphs (c)(2)(vi) through (viii) 
of this section.

    Instruction to Paragraph (c)(2)(ix). A Fund should disclose only 
those services that generally are available to typical investors in 
the Fund.

    (3) The Profile may include an application that a prospective 
investor can use to purchase the Fund's shares as long as the 
application explains with equal prominence that an investor has the 
option of purchasing shares of the Fund after reviewing the information 
in the Profile or after requesting and reviewing the Fund's prospectus 
(and other information) before making a decision about investing in the 
Fund.

    Instruction to Paragraph (c)(3). a Fund may include the 
application in a Profile or otherwise provide an application 
together with a Profile in any manner reasonably designed to alert 
investors that the application is to be considered along with the 
information about the Fund disclosed in the Profile.

    (d) Modified Profile for certain funds. (1) A Fund may modify or 
omit the information required by paragraphs (c)(2)(vi) through (ix) of 
this section for a Profile to be used for a Fund that is offered as an 
investment option for:
    (i) 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));
    (ii) A tax-deferred arrangement under section 403(b) or 457 of the 
Internal Revenue Code (26 U.S.C. 403(b) and 457); and
    (iii) Variable contracts as defined in section 817(d) of the 
Internal Revenue Code (26 U.S.C. 817(d)).
    (2) A Fund that uses a Profile permitted under paragraph (d)(1) of 
this section may:
    (i) Alter the legend required by paragraph (c)(1)(iv) of this 
section to include a statement to the effect that the Profile is 
intended for use in connection with a defined contribution plan, 
another tax-deferred arrangement, or a variable contract, as 
applicable, and is not intended for use by other investors; and
    (ii) Modify other disclosure in a Profile consistent with offering 
the Fund as a specific investment option for a defined contribution 
plan, tax-deferred arrangement, or variable contract.
    (3) A Profile used under paragraph (d)(1)(i) or (ii), but not 
paragraph (d)(1)(iii), of this section may include, or be accompanied 
by, an enrollment form for the plan or arrangement. The enrollment form 
does not need to be filed with the Profile under Sec. 230.497.

[[Page 13987]]

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

    6. The general authority citation for part 270 is revised to read, 
in part, as follows:

    Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39 
unless otherwise noted:
* * * * *
    7. Amend Sec. 270.34b-1 to revise paragraph (b)(1)(ii)(B) to read 
as follows:


Sec. 270.34b-1  Sales literature deemed to be misleading.

* * * * *
    (b)(1) * * *
    (ii) * * *
    (B) Accompany any quotation of the money market fund's tax 
equivalent yield or tax equivalent effective yield with a quotation of 
current yield as specified in Sec. 230.482(d)(1)(iii) of this chapter; 
and
* * * * *
    Dated: March 13, 1998.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-7071 Filed 3-20-98; 8:45 am]
BILLING CODE 8010-01-U