[Federal Register Volume 68, Number 1 (Thursday, January 2, 2003)]
[Proposed Rules]
[Pages 160-185]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-32470]



[[Page 159]]

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Part II





Securities and Exchange Commission





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17 CFR Parts 210, 239, 249, 270, and 274



Shareholder Reports and Quarterly Portfolio Disclosure of Registered 
Management Investment Companies; Proposed Rule

  Federal Register / Vol. 68, No. 1 / Thursday, January 2, 2003 / 
Proposed Rules  

[[Page 160]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 239, 249, 270, and 274

[Release Nos. 33-8164; 34-47023; IC-25870; File No. S7-51-02]
RIN 3235-AG64


Shareholder Reports and Quarterly Portfolio Disclosure of 
Registered Management Investment Companies

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission is proposing rule and 
form amendments under the Securities Act of 1933, the Securities 
Exchange Act of 1934, and the Investment Company Act of 1940 to improve 
the periodic disclosure provided by registered management investment 
companies about their portfolio investments, costs, and past 
performance. The proposed amendments would permit a registered 
management investment company to include a summary portfolio schedule 
of investments in its reports to shareholders, provided that the 
complete schedule is filed with the Commission and is provided to 
shareholders upon request, free of charge. The proposals also would 
require a registered management investment company to include a tabular 
or graphic presentation of its portfolio holdings in its reports to 
shareholders. In addition, the proposed amendments would require a 
registered management investment company to disclose its complete 
portfolio schedule on a quarterly basis in filings with the Commission 
that would be available on the Commission's Electronic Data Gathering, 
Analysis, and Retrieval System. The proposed amendments also would 
require a registered open-end management investment company to include 
in its shareholder reports disclosure of fund expenses borne by 
shareholders during the reporting period. Finally, the proposals would 
require a registered open-end management investment company to include 
Management's Discussion of Fund Performance in its annual report to 
shareholders.

DATES: Comments must be received on or before February 14, 2003.

ADDRESSES: To help us process and review your comments more 
efficiently, comments should be sent by hard copy or electronic mail, 
but not by both methods.
    Comments sent by hard copy should be submitted in triplicate to 
Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 
Fifth Street, NW., Washington, DC 20549-0609. Comments also may be 
submitted electronically at the following E-mail address: [email protected]. All comment letters should refer to File No. S7-51-
02; this file number should be included in the subject line if 
electronic mail is used. Comment letters will be available for public 
inspection and copying in the Commission's Public Reference Room, 450 
Fifth Street, NW., Washington, DC 20549. Electronically submitted 
comment letters also will be posted on the Commission's Internet Web 
site (http://www.sec.gov).\1\
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    \1\ We do not edit personal identifying information, such as 
names or electronic mail addresses, from electronic submissions. You 
should submit only information that you wish to make available 
publicly.

FOR FURTHER INFORMATION CONTACT: David S. Schwartz, Senior Counsel, or 
Paul G. Cellupica, Assistant Director, Office of Disclosure Regulation, 
Division of Investment Management, (202) 942-0721, at the Securities 
and Exchange Commission, 450 Fifth Street NW., Washington, DC 20549-
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0506.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission (the 
``Commission'') is proposing for comment new rule 30b1-4 (17 CFR 
270.30b1-4) and new Form N-Q (17 CFR 274.129) under the Investment 
Company Act of 1940 (15 U.S.C. 80a-1 et seq.) (``Investment Company 
Act''); amendments to Forms N-1A (17 CFR 239.15A; 17 CFR 274.11A), N-2 
(17 CFR 239.14; 17 CFR 274.11a-1), and N-3 (17 CFR 239.17; 17 CFR 
274.11b) under the Investment Company Act and the Securities Act of 
1933 (15 U.S.C. 77a et seq.) (``Securities Act''); amendments to 
proposed Form N-CSR (17 CFR 249.33; 17 CFR 274.128) under the 
Investment Company Act and the Securities Exchange Act of 1934 (15 
U.S.C. 78a et seq.) (``Exchange Act''); and amendments to Article 6 (17 
CFR 210.6) and Article 12 (17 CFR 210.12) of Regulation S-X (17 CFR 
210).

Executive Summary

    We are proposing rule and form amendments that would:
    [sbull] Permit a management investment company registered under the 
Investment Company Act (``fund'') to include a summary portfolio 
schedule in its reports to shareholders, provided that the complete 
portfolio schedule is filed with the Commission on proposed Form N-CSR 
semi-annually and is provided to shareholders upon request, free of 
charge; \2\
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    \2\ A management investment company is an investment company 
other than a unit investment trust or face-amount certificate 
company. See Section 4 of the Investment Company Act (15 U.S.C. 80a-
4). Management investment companies typically issue shares 
representing an undivided proportionate interest in a changing pool 
of securities, and include open-end and closed-end companies. See T. 
Lemke, G. Lins, A. Smith III, Regulation of Investment Companies, 
Vol. I, ch. 4, section 4.04, at 4-5 (2002). An open-end company is a 
management company that is offering for sale or has outstanding any 
redeemable securities of which it is the issuer. A closed-end 
company is any management company other than an open-end company. 
See Section 5 of the Investment Company Act (15 U.S.C. 80a-5). Open-
end companies (``mutual funds'') generally offer and sell new shares 
to the public on a continuous basis, while closed-end companies 
generally engage in traditional underwritten offerings of a fixed 
number of shares and in most cases do not offer their shares to the 
public on a continuous basis.
    Proposed Form N-CSR would be used by registered management 
investment companies to file certified shareholder reports with the 
Commission under the Sarbanes-Oxley Act of 2002. See Investment 
Company Act Release No. 25723 (Aug. 30, 2002) (67 FR 57298 (Sept. 9, 
2002)); Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 
745 (2002). The Commission proposed amendments to Form N-CSR in 
Investment Company Act Release No. 25739 (Sept. 20, 2002) (67 FR 
60828 (Sept. 26, 2002)); Investment Company Act Release No. 25775 
(Oct. 22, 2002) (67 FR 66208 (Oct. 30, 2002)); Investment Company 
Act Release No. 25838 (Dec. 2, 2002) (67 FR 76780 (Dec. 13, 2002)); 
and Investment Company Act Release No. 25845 (Dec. 10, 2002).
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    [sbull] Exempt money market funds from including a portfolio 
schedule in reports to shareholders, provided that this information is 
filed with the Commission on proposed Form N-CSR and is provided to 
shareholders upon request, free of charge;
    [sbull] Require reports to shareholders by funds to include a 
tabular or graphic presentation of a fund's portfolio holdings by 
identifiable categories;
    [sbull] Require a fund to file its complete portfolio schedule as 
of the end of its first and third fiscal quarters with the Commission 
on new proposed Form N-Q;
    [sbull] Require open-end management investment companies (``mutual 
funds'') to disclose fund expenses borne by shareholders during the 
reporting period in reports to shareholders; and
    [sbull] Require a mutual fund to include Management's Discussion of 
Fund Performance in its annual report to shareholders.\3\
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    \3\ Item 5 of Form N-1A.
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    These proposed amendments are intended to provide better 
information to investors about fund investments, costs, and 
performance.

I. Background

    The Investment Company Act and rules thereunder require each fund 
to

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transmit a report to its shareholders semi-annually, within 60 days of 
the end of the period for which the shareholder report is made, and to 
file the report with the Commission no later than 10 days after it is 
transmitted to shareholders.\4\ Reports to shareholders currently are 
required to contain financial statements and other financial 
information,\5\ as well as information about the fund's officers and 
directors.\6\ Annual reports to shareholders of mutual funds typically 
also contain Management's Discussion of Fund Performance (``MDFP''), 
although they are not required to do so.\7\ MDFP includes narrative 
disclosure of the factors that materially affected the fund's 
performance during the fiscal year, a line graph comparing the fund's 
performance over 10 years to that of an appropriate broad-based market 
index, and a table of the fund's average annual total returns for 1-, 
5-, and 10-year periods.
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    \4\ See Section 30(e) of the Investment Company Act (15 U.S.C. 
80a-29(e)); Rule 30e-1 under the Investment Company Act (17 CFR 
270.30e-1) (transmission of report to shareholders); Section 
30(b)(2) of the Investment Company Act (15 U.S.C. 80a-30(b)(2)); 
Rule 30b2-1 under the Investment Company Act (17 CFR 270.30b2-1) 
(filing of shareholder report with the Commission); proposed Form N-
CSR (proposed Form to be used by registered management investment 
companies to file certified shareholder reports with the Commission 
under the Sarbanes-Oxley Act of 2002).
    \5\ See Item 22(b)(1), (b)(2), (c)(1), and (c)(2) of Form N-1A 
(registration statement of open-end management investment 
companies); Instructions 4.a, 4.b, 5.a, and 5.b to Item 23 of Form 
N-2 (registration statement of closed-end management investment 
companies); Instructions 4(i), 4(ii), 5(i), and 5(ii) to Item 27(a) 
of Form N-3 (registration statement of separate accounts organized 
as management investment companies that offer variable annuity 
contracts).
    \6\ Items 13(a)(1) and 22(b)(5) of Form N-1A; Item 18.1 and 
Instruction 4.e to Item 23 of Form N-2; Item 20(a) and Instruction 
4(v) to Item 27(a) of Form N-3.
    \7\ Item 5 of Form N-1A (MDFP required in prospectus unless 
included in annual report to shareholders).
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    Shareholder reports are one of the principal means by which funds 
provide periodic information to their investors. Fund shareholder 
reports historically have served primarily as a vehicle to provide 
financial statements and other financial information to 
shareholders.\8\ We believe that, with some modifications, fund 
shareholder reports could become a more effective vehicle for 
communicating information to investors. Today's proposals principally 
address disclosure of fund portfolio holdings and expenses, two 
significant areas for improvement that have been identified by investor 
groups, members of the fund industry, and others.
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    \8\ Section 30(e) of the Investment Company Act (15 U.S.C. 80a-
29(e)) (requiring a fund to transmit to its stockholders, at least 
semi-annually, reports containing financial statements and other 
financial information as the Commission may prescribe by rules and 
regulations); National Securities Markets Improvement Act of 1996, 
Pub. L. 104-290, Section 207, 110 Stat. 3416, 3430 (Oct. 11, 1996) 
(adding Section 30(f) to the Investment Company Act, which allows 
the Commission to require that semi-annual reports ``include such 
other information as the Commission deems necessary or appropriate 
in the public interest or for the protection of investors'').
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A. Disclosure of Fund Portfolio Holdings

    Currently, funds are required to include their complete portfolio 
holdings in the reports that are delivered to all shareholders twice a 
year.\9\ Investor groups, members of the fund industry, and others have 
suggested ways in which this current disclosure regime could be 
improved, both by making the portfolio schedule that is required to be 
delivered to investors more streamlined, useful, and understandable and 
by increasing the frequency with which funds disclose their entire 
portfolio holdings.
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    \9\ Rule 6-10(c)(1) of Regulation S-X (17 CFR 210.6-10(c)(1)) 
requires that a portfolio schedule be filed in support of the 
balance sheet entry for investments in securities of unaffiliated 
issuers. The form of the portfolio schedule is specified in Rule 12-
12 of Regulation S-X (17 CFR 210.12-12). This list of portfolio 
securities also is required to be included with the financial 
statements in the Statement of Additional Information (``SAI'') of a 
fund, which is part of the registration statement filed with the 
Commission under both the Securities Act and the Investment Company 
Act. See Item 22 of Form N-1A; Item 23 of Form N-2; Item 27(a) of 
Form N-3.
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    First, some have argued that permitting funds to include a summary 
portfolio schedule in lieu of a complete portfolio schedule in their 
shareholder reports would simplify those reports, enable investors to 
focus on a fund's principal holdings, and thereby better evaluate the 
fund's risk profile and investment strategy.\10\ At the same time, the 
fund's full portfolio schedule could remain available, upon request, to 
those investors who find this information useful. Because of its size 
or investment strategy, a fund may hold securities in hundreds, or even 
thousands, of portfolio companies, which may require as many as 35 or 
40 pages to list. For many funds, such as index funds, providing a 
lengthy portfolio schedule may not contribute significantly to investor 
understanding regarding the fund's primary investment focus. It may, 
however, result in significant printing and mailing costs, which are 
ultimately borne by investors. Similarly, because of the high turnover 
of portfolio holdings by money market funds, and the fact that money 
market funds' portfolios are circumscribed by the credit quality, 
maturity, and portfolio diversification requirements of rule 2a-7 under 
the Investment Company Act, some have also argued that such funds 
should be exempt from the requirement to list portfolio holdings in 
their reports to shareholders.\11\
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    \10\ See Letter from Craig S. Tyle, General Counsel, Investment 
Company Institute (``ICI''), to Barry P. Barbash, Director, Division 
of Investment Management, Securities and Exchange Commission 
(``SEC'') (Aug. 11, 1998); Letter from Heidi Stam, Principal, 
Securities Regulation, The Vanguard Group, to Cynthia Fornelli, 
Deputy Director, Division of Investment Management, SEC (Oct. 13, 
1999); Letter from Robert C. Pozen, General Counsel and Managing 
Director, Fidelity Investments, to The Honorable Steven Wallman, 
Commissioner, SEC (May 5, 1995). The letters are available for 
inspection and copying in File No. S7-51-02 in the Commission's 
public reference room.
    \11\ 17 CFR 270.2a-7. See Letter from Craig S. Tyle, General 
Counsel, ICI, to Barry P. Barbash, Director, Division of Investment 
Management, SEC (Aug. 11, 1998) at 2.
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    Advocates of this position have asserted that investors would be 
better served if fund shareholder reports contained a summary portfolio 
schedule listing a fund's most significant holdings, coupled with a 
chart, table, graph, or other graphical presentation breaking down a 
fund's investments by category. For example, a domestic equity fund 
might provide a graphical presentation that shows its portfolio 
investments broken down by industry sector, while a corporate or 
municipal bond fund might present its holdings broken down by credit 
quality or maturity.
    Second, others have argued that investors would benefit if funds 
were required to disclose their complete portfolio schedules more 
frequently than semi-annually. The Commission has received six 
rulemaking petitions in the past several years that advocate more 
frequent disclosure of funds' portfolio holdings.\12\ The petitioners 
argue that increasing the frequency of portfolio disclosure by funds 
will allow investors to better monitor the extent to which their funds' 
portfolios overlap, and hence will enable investors to make

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more informed asset allocation decisions. In addition, the petitioners 
argue that more frequent disclosure would expose ``style drift'' (when 
the actual portfolio holdings of a fund deviate from its stated 
investment objective) and provide investors with greater information 
about how a fund is complying with its stated investment objective. The 
petitioners also argue that more frequent disclosure would help to shed 
light on and prevent several potential forms of portfolio manipulation. 
These include ``window dressing'' (buying or selling portfolio 
securities shortly before the date as of which a fund's holdings are 
publicly disclosed, in order to convey an impression that the manager 
has been investing in companies that have had exceptional performance 
during the reporting period) and ``portfolio pumping'' (buying shares 
of stocks the fund already owns on the last day of the reporting 
period, in order to drive up the price of the stocks and inflate the 
fund's performance results). Those who seek more frequent portfolio 
disclosure advocate that this information be made readily available to 
shareholders, not that the information be separately delivered to each 
fund shareholder.
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    \12\ See Rulemaking Petition by the International Brotherhood of 
Teamsters (Jan. 18, 2001) (disclose portfolio holdings monthly); 
Rulemaking Petition by the American Federation of Labor and the 
Congress of Industrial Organizations (Dec. 20, 2000) (disclose 
portfolio holdings monthly); Rulemaking Petition by the National 
Association of Investors Corporation (Oct. 9, 2000) (disclose 
portfolio holdings monthly); Rulemaking Petition by the Consumer 
Federation of America, et al. (Aug. 8, 2000) (disclose portfolio 
holdings monthly and on random days throughout year); Rulemaking 
Petition by the Financial Planning Association (June 28, 2000) 
(increase frequency of portfolio holdings disclosure); Rulemaking 
Petition by Fund Democracy, LLC (June 28, 2000) (disclose portfolio 
holdings monthly). The petitions are available for inspection and 
copying in File No. S7-51-02 in the Commission's public reference 
room.
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B. Disclosure of Fund Expenses

    Potential mutual fund investors receive significant disclosure 
about fund fees and expenses. Since 1988, the Commission has required 
the mutual fund prospectus to include a fee table that shows all fees 
and charges associated with a mutual fund investment as a percentage of 
net assets.\13\ In addition, the Commission has undertaken efforts to 
educate investors about the significance of the costs that they pay in 
connection with mutual fund investments. In 1999, for example, the 
Commission introduced the Mutual Fund Cost Calculator, an Internet-
based tool available on the Commission's website that enables investors 
to compare the costs of owning different funds.\14\ In addition, the 
fund industry has undertaken efforts to educate investors and increase 
their awareness and understanding of mutual fund fees.\15\
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    \13\ Item 3 of Form N-1A; Investment Company Act Release No. 
16244 (Feb. 1, 1988) (53 FR 3192 (Feb. 4, 1988)) (release adopting 
mutual fund fee table); Investment Company Act Release No. 15932 
(Aug. 18, 1987) (52 FR 32018 (Aug. 25, 1987)) (release proposing 
mutual fund fee table).
    \14\ Mutual Fund Cost Calculator (last modified Sept. 6, 2000), 
http://www.sec.gov/mfcc-int.htm. See also Invest Wisely: An 
Introduction to Mutual Funds (last modified Apr. 4, 2001), http://www.sec.gov/investor/pubs/inwsmf.htm (investor brochure describing 
types of mutual fund fees and expenses).
    \15\ See, e.g., ICI, Frequently Asked Questions About Mutual 
Fund Fees, http://www.ici.org/aboutfunds/bro_mf_fees_faq.htm 
(visited Nov. 27, 2002); Fidelity Research & Management, How to Buy 
Funds Overview, http://www.fidelity.com/ products/funds (calculator 
for comparing the impact of fees and expenses from one fund to 
another) (visited Nov. 29, 2002); The Vanguard Group, How to Select 
a Mutual Fund, http://www.vanguard.com/VGApp/hnw/FundsCompareCostsIntro?entryPoint=PandA (calculator showing the 
impact of mutual fund loads, sales charges, fees, and other expenses 
on investment returns) (visited Nov. 29, 2002).
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    Despite existing disclosure requirements and educational efforts, 
the degree to which investors understand mutual fund fees and expenses 
remains a significant source of concern. Mutual fund fees are of two 
types, transactional (e.g., sales loads, redemption fees) and ongoing 
(e.g., asset-based charges such as management fees and 12b-1 fees).\16\ 
While transactional fees are relatively transparent, ongoing fees are 
less evident because they are deducted from fund assets and are 
reflected in reduced account balances rather than being separately 
stated. Significant concerns have been raised regarding the degree to 
which investors understand the nature and effect of these ongoing 
fees.\17\
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    \16\ A 12b-1 fee is a fee charged by some mutual funds against 
fund assets to pay for marketing and distribution activities. See 
Section 12(b) of the Investment Company Act (80 U.S.C. 80a-12(b)); 
Rule 12b-1 under the Investment Company Act (17 CFR 270.12b-1).
    \17\ See, e.g., Theo Francis, Getting the Most From Fund Costs, 
Wall street Journal, Dec. 2, 2002, at R1 (discussing the importance 
of considering fees and expenses when investing in mutual funds, and 
explaining how to use the SEC's cost calculator); James Glassman, A 
Failing Grade for Mutual Funds, Washington Post, Dec. 1, 2002, at H1 
(discussing importance of differences in expenses to fund returns, 
and using examples from SEC's cost calculator); Neil Weinberg, Fund 
Manager Knows Best; As Corporations are Fessing Up to Investors, 
Mutual Funds Still Gloss Over Costs, Forbes Magazine, Oct. 14, 2002 
(84% of investors believe higher expenses result in higher 
performance); Investors Need to Bone Up on Bonds and Costs, 
According to Vanguard/Money Investor Literacy Test, Press Release, 
Business Wire , Sept. 25, 2002 (75% of survey respondents could not 
accurately define fund expense ratio and 64% did not understand the 
impact of expenses on fund returns); Liz Pulliam Weston, Fees Making 
Matters Worse as Funds' Performance Drops, Chicago Tribune, Jan. 1, 
2002, at C5 (some investors are not aware of the impact of fund 
expenses on returns, while others do not realize that lower-cost 
alternatives are available); Michelle Singletary, Are Our Funds 
Milking Us? Who Can Tell?, Washington Post, Apr. 4, 1999, at H1 
(studies show that a great number of mutual fund investors do not 
understand what funds are costing them); Charles Gasparino, Go 
Figure; Investors Should Take a Close Look at the Fees Their Funds 
Are Charging, Chicago Tribune, Sept. 15, 1998, at C1 (investors 
often do not realize how fees affect their fund's performance).
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    A joint report of the Commission and the Office of the Comptroller 
of the Currency, for example, found that fewer than one in five fund 
investors could give any estimate of expenses for their largest mutual 
fund and fewer than one in six fund investors understood that higher 
expenses can lead to lower returns.\18\ These ongoing fees can have a 
dramatic effect on an investor's return. A 1% annual fee, for example, 
will reduce an ending account balance by 18% on an investment held for 
20 years.
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    \18\ Securities and Exchange Commission and Office of the 
Comptroller of the Currency, Report on the OCC/SEC Survey of Mutual 
Fund Investors (June 26, 1996).
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    In an important contribution to the public dialogue on fund fees, 
the United States General Accounting Office (``GAO'') issued a report 
in 2000, prepared pursuant to a request by Representative Michael G. 
Oxley, then Chairman of the Subcommittee on Finance and Hazardous 
Materials, House Committee on Commerce, and Representative John D. 
Dingell, Ranking Member of the Committee on Commerce, that analyzed 
mutual fund fees and the market forces that influence those fees.\19\ 
The report's principal conclusion was that additional disclosure could 
help to increase investor awareness and understanding of mutual fund 
fees and, thereby, promote additional competition among funds on the 
basis of fees.\20\ The GAO Report asserted that although mutual funds 
do not provide individual shareholders with information on the specific 
dollar amount of fees paid on their account statements, most other 
financial products and services (e.g., bank deposit accounts, stock or 
bond transactions through a securities broker) are required to make 
such disclosures, and that these disclosures may be one reason for the 
apparently vigorous price competition among firms offering these other 
products and services.\21\ The GAO Report therefore recommended that 
the Commission require funds to provide each investor with an exact 
dollar figure for fees paid in each quarterly account statement. 
However, the GAO Report acknowledged the potential costs associated 
with accounting for, and reporting, costs on an individual basis and 
encouraged the Commission to consider the cost and burden that various 
alternative means of making such disclosures would impose on the 
industry and investors. The GAO specifically discussed less costly 
alternatives, including providing the dollar amount of fees paid for 
preset

[[Page 163]]

investment amounts, such as $1,000, which investors could use to 
estimate the amount that they paid on their own accounts.
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    \19\ GAO, Mutual Fund Fees: Additional Disclosure Could 
Encourage Price Competition (June 7, 2000) (``GAO Report'').
    \20\ Id. at 97-98.
    \21\ Id. at 70-72.
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    In December 2000, the Commission staff issued a report on mutual 
fund fees and expenses (``Commission Staff Report''), which considered, 
among other issues, the recommendations in the GAO Report, and 
concluded that disclosure of the dollar amount of fees paid for a 
preset investment amount would likely have the most favorable trade-off 
between costs and benefits.\22\ The Commission Staff Report recommended 
requiring mutual funds to include in shareholder reports the cost in 
dollars associated with an investment of $10,000 that earned the fund's 
actual return for the period and incurred the fund's actual expenses 
for the period. Coupled with an investor's average account balance over 
the period, this would permit an individual investor to estimate the 
dollar costs that he or she incurred during the period. The staff also 
recommended that mutual funds disclose the cost in dollars, based on 
the fund's actual expenses, associated with an investment of $10,000 
that earned a standardized return (e.g., 5%) for the period. This would 
permit investors to compare the relative magnitudes of the ongoing 
costs of different funds.
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    \22\ Division of Investment Management, SEC, Report on Mutual 
Fund Fees and Expenses (Dec. 2000).
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    Today's proposals address these important issues. They are intended 
to improve the information disclosed to investors about a fund's 
investments, by enhancing and streamlining the information provided in 
reports to shareholders about a fund's portfolio holdings and by 
requiring funds to disclose their portfolio holdings quarterly rather 
than semi-annually. In addition, our proposals are targeted at 
heightening investors' understanding of ongoing fund fees and expenses.

II. Discussion

A. Disclosure of Portfolio Holdings

    The Commission is proposing rule and form amendments that would: 
(1) Permit a fund to include a summary portfolio schedule in its 
reports to shareholders, provided that the complete portfolio schedule 
is filed with the Commission semi-annually on proposed Form N-CSR and 
is provided to shareholders upon request, free of charge; (2) exempt 
money market funds from including a portfolio schedule in reports to 
shareholders, provided that this information is filed with the 
Commission on proposed Form N-CSR and is provided to shareholders upon 
request, free of charge; (3) require reports to shareholders to include 
a tabular or graphic presentation of a fund's portfolio holdings by 
identifiable category; and (4) require a fund to file its complete 
portfolio schedule as of the end of its first and third fiscal quarters 
with the Commission on new proposed Form N-Q. Together, these proposals 
would replace a one-size-fits-all approach to portfolio holdings 
disclosure, where all funds deliver their full portfolio schedules to 
all their shareholders twice a year, with a ``layered'' approach that 
would make more information available while permitting funds to tailor 
their shareholder reports to their particular circumstances and 
investors to tailor the amount of information they receive to meet 
their particular needs.\23\ This ``layered'' approach is intended to 
result in the availability of enhanced portfolio information at reduced 
cost.
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    \23\ Cf. Disclosure in Management's Discussion and Analysis 
About Off-Balance Sheet Arrangements, Contractual Obligations and 
Contingent Liabilities and Commitments, Securities Act Release No. 
8144 (Nov. 4, 2002) [67 FR 68054, 68063 (Nov. 8, 2002)] (separate 
disclosure required in Management's Discussion and Analysis 
(``MD&A'') with respect to off-balance sheet arrangements would 
layer the MD&A, which would enable investors with varying levels of 
interest and financial acumen to easily obtain desired information); 
Chairman Harvey L. Pitt, SEC, Remarks before the Investment Company 
Institute, 2002 General Membership Meeting (May 24, 2002) (producing 
and disclosing financial information in layers benefits investors by 
yielding clear and concise financial statements that allow readers 
to explore whatever layer of detail they wish).
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1. Summary Portfolio Schedule
    We are proposing to permit funds to include in their reports to 
shareholders a summary portfolio schedule, in lieu of a complete 
portfolio schedule. The complete portfolio schedule would, however, 
continue to be available, free of charge, to those investors who are 
interested in this more detailed information. Our proposal is intended 
to address concerns that the current requirement for a fund to include 
in its shareholder reports a schedule that lists all investments held 
by the fund results, in many cases, in long lists of securities that do 
not provide meaningful information to most investors, and in 
substantial printing and mailing costs that are borne by fund 
investors.\24\ Permitting funds to provide a summary portfolio schedule 
in lieu of a complete portfolio schedule in required reports to 
shareholders could streamline these reports and help investors to focus 
on a fund's principal holdings, and thereby better evaluate the fund's 
risk profile and investment strategy.
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    \24\ See text accompanying note 10, supra.
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    Our proposed amendments to Regulation S-X would permit a fund to 
include in its reports to shareholders a summary portfolio schedule, 
Schedule VI--Summary schedule of investments in securities of 
unaffiliated issuers, in lieu of the full schedule contained in 
Schedule I--Investments in securities of unaffiliated issuers.\25\ The 
proposed summary portfolio schedule would include--in order of 
descending value--each of the fund's 50 largest holdings in 
unaffiliated issuers and each investment that exceeds one percent of 
the fund's net asset value. For purposes of determining whether the 
value of a security exceeds one percent of net asset value, a fund 
would be required to aggregate and treat as a single issue all 
securities of any one issuer. However, each issue would be required to 
be listed separately in the schedule, whether or not issued by a single 
issuer. Restricted securities could not be combined with unrestricted 
securities of the same issuer.\26\ All securities not separately listed 
in the summary schedule would be required to be listed in a category 
labeled ``Other Securities.'' \27\ Funds would continue to be required 
to include in their reports to shareholders the other schedules 
currently required by Regulation S-X.\28\
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    \25\ Schedule I of Regulation S-X (17 CFR 210.12-12); proposed 
Schedule VI of Regulation S-X (17 CFR 210.12-12C); proposed rule 6-
10(c)(2) of Regulation S-X (17 CFR 210.6-10(c)(2)); proposed 
Instruction 1 to Item 21(b)(1) and Instruction to Item 21(c)(1) of 
Form N-1A; proposed Instructions 4.a., 5.a., and 7 to Item 23 of 
Form N-2; proposed Instructions 4.(i), 5.(i), and 7 to Item 27(a) of 
Form N-3.
    \26\ Proposed Note 1 to Schedule VI.
    \27\ Proposed Note 2 to Schedule VI.
    \28\ In addition to Schedule I--Instruments in securities of 
unaffiliated issuers, Article 6-10(c) of Regulation S-X (17 CFR 
210.6-10(c)) requires the following schedules to be filed: Schedule 
II--Investments-other than securities (17 CFR 210.12-13); Schedule 
III--Investments in and advances to affiliates (17 CFR 210.12-14); 
Schedule IV--Investments-securities sold short (17 CFR 210.12-12A); 
and Schedule V--Open option contracts written (17 CFR 210.12-12B).
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    We are recommending that the summary portfolio schedule include the 
fund's 50 largest holdings and each investment that exceeds one percent 
of net assets, because we believe that this would result in inclusion 
of the most significant portfolio holdings information in shareholder 
reports.\29\

[[Page 164]]

However, we note that if funds were required to disclose a somewhat 
higher number of securities, such as 150, this could result in a 
significant majority of funds including their complete schedules in 
their shareholder reports, while still allowing the minority of funds 
with lengthy portfolio schedules to limit their portfolio disclosure to 
two or three printed pages. We estimate that as of October 2002, almost 
75% of all funds had portfolio holdings exceeding 50 securities, but 
only 25% of all funds had portfolio holdings exceeding 150 securities, 
and fewer than 10% of all funds had portfolio holdings exceeding 350 
securities.\30\
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    \29\ Cf. The American Institute of Certified Public Accountants 
(``AICPA'') Audit and Accounting Guide, Audits of Investment 
Companies section 7.10 (Dec. 2000) (requiring funds to disclose each 
investment whose fair value constitutes more than one percent of net 
assets, all investments in any one issuer whose fair values 
aggregate more than one percent of net assets, and the fifty largest 
investments).
    \30\ This estimate is based on the Commission staff's analysis 
of data from the Morningstar Principia Plus database (Nov. 2002) 
(data as of Oct. 2002).
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    The format of our proposed summary portfolio schedule would be 
similar to that of the complete schedule of investments in unaffiliated 
issuers currently contained in reports to shareholders. Thus, with 
respect to each issue required to be listed, the schedule would show 
(1) the name of the issuer and title of the issue; (2) the balance held 
at the close of the period (i.e., the number of shares or the principal 
amount of bonds and notes); and (3) the value of each item at the close 
of the period.\31\ Unlike the complete schedule, however, the summary 
schedule would also show the percentage value of the issue compared to 
net assets.\32\ The summary schedule would also show the total value of 
all investments in securities of unaffiliated issuers.\33\
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    \31\ Columns A, B, and C of proposed Schedule VI of Regulation 
S-X.
    \32\ Column D of proposed Schedule VI.
    \33\ Proposed Note 4 to proposed Schedule VI.
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    Because the proposed summary portfolio schedule would require 
investments to be listed in order of descending value, the requirement 
in the complete portfolio schedule that investments be listed 
separately by type (e.g., common shares, preferred shares, bonds and 
notes, time deposits, and put and call options purchased) would be 
inapplicable.\34\ However, the proposals would require each type of 
instrument to be identified by an appropriate symbol or footnote.\35\ 
As with the current requirements for disclosure of the complete 
portfolio schedule, the summary schedule would require funds to 
identify by appropriate symbols each issue of securities that is non-
income producing, each issue of securities held in connection with open 
put or call option contracts or loans for short sales, and each issue 
of restricted securities.\36\ Short-term debt instruments of the same 
issuer (with disclosure indicating the range of interest rates and 
maturity dates), and fully collateralized repurchase agreements (with 
footnote disclosure indicating the range of dates of the repurchase 
agreements, the total purchase price of the securities, the total 
amount to be received upon repurchase, the range of repurchase dates, 
and a description of the securities subject to the repurchase 
agreements) would be required to be aggregated and treated as a single 
issue.\37\ As in the current complete schedule, a fund also would be 
required to state in a footnote to the summary schedule the following 
amounts based on cost for Federal income tax purposes: (i) Aggregate 
gross unrealized appreciation for all securities in which there is an 
excess of value over tax cost; (ii) aggregate gross unrealized 
depreciation for all securities in which there is an excess of tax cost 
over value; (iii) net unrealized appreciation and depreciation; and 
(iv) the aggregate cost of securities for Federal income tax 
purposes.\38\
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    \34\ Note 2 to Schedule I (17 CFR 210.12-12).
    \35\ Proposed Note 2 to proposed Schedule VI.
    \36\ Proposed Notes 3, 5 and 6 to proposed Schedule VI; Notes 5, 
6, and 7 to Schedule I (17 CFR 210.12-12).
    \37\ Proposed Note 2 to proposed Schedule VI.
    \38\ Proposed Note 7 to proposed Schedule VI; note 8 to Schedule 
I (17 CFR 210.12-12).
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    To ensure that shareholders have continued access to a complete 
schedule of the fund's portfolio holdings, any fund that uses a summary 
portfolio schedule would be required to file its complete portfolio 
schedule with the Commission on proposed Form N-CSR, which would be 
available on the Commission's Electronic Data Gathering, Analysis, and 
Retrieval System (``EDGAR'').\39\ In addition, any fund that uses a 
summary portfolio schedule would be required to send its complete 
schedule of investments in securities of unaffiliated issuers to 
shareholders upon request within three business days of receipt of the 
request, by first-class mail or other means designed to ensure equally 
prompt delivery, and to disclose in its reports to shareholders that 
this complete portfolio schedule is available (i) without charge, upon 
request, by calling a specified toll-free (or collect) telephone 
number; (ii) on the fund's Web site, if applicable; and (iii) on the 
Commission's Web site.\40\
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    \39\ Proposed Item 7 of proposed Form N--CSR. Funds that include 
the complete portfolio schedule in their shareholder reports would 
also file this schedule on Form N-CSR, as part of the shareholder 
report. This schedule must be audited, except in the case of a 
report on Form N--CSR as of the end of a fiscal half-year. Proposed 
Instruction to Item 7 of proposed Form N-CSR.
    \40\ Proposed Instruction 1 to Item 21(b)(1) and proposed 
Instruction to Item 21(c)(1) of Form N-1A; proposed Instruction 7 to 
Item 23 of Form N-2; proposed Instruction 7 to Item 27(a) of Form N-
3.
    A fund may incorporate its financial statements by reference 
into its registration statement. A fund that includes a summary 
portfolio schedule in its reports to shareholders, and that chooses 
to incorporate its financial statements in its Statement of 
Additional Information (``SAI'') by reference, would be expected to 
incorporate by reference its full portfolio schedule from Form N-
CSR, along with the other financial statements and supporting 
schedules in its annual report to shareholders. See General 
Instruction D.1.(c) to Form N-1A (permitting incorporation by 
reference into the SAI generally); proposed General Instruction F to 
Form N-2 (permitting incorporation by reference of information from 
Form N-CSR in response to Item 23 (``Financial Statements'')); 
proposed General Instruction G to Form N-3 (permitting incorporation 
by reference of information from Form N-CSR in response to Item 27 
(``Financial Statements'')). Such a fund would be required to 
deliver the full portfolio schedule from Form N-CSR, as well as the 
shareholder report, upon a shareholder request for the SAI. See 
Instruction to Item 10(a)(2)(iii) of Form N-1A (requiring any 
information incorporated by reference into the SAI to be delivered 
with the SAI unless the information has been previously delivered in 
a shareholder report and the fund states that the shareholder report 
is available, without charge, upon request); General Instruction F 
to Form N-2 (requiring any information incorporated by reference 
into the SAI to be delivered with the SAI unless the person to whom 
the SAI is sent or given holds securities of the fund and otherwise 
has received copies of the material, and fund states that the 
material is available, without charge, upon request); General 
Instruction G to Form N-3 (same).
---------------------------------------------------------------------------

    We believe that permitting the use of a summary portfolio holdings 
schedule potentially could enable funds to provide more meaningful 
information in their annual and semi-annual reports to shareholders, 
and encourage investors to focus on a fund's most significant holdings 
in evaluating its risk profile and investment strategy. In addition, 
the costs of printing and mailing of shareholder reports should be 
reduced. At the same time, the proposals would require that the fund's 
complete portfolio schedule continue to be readily available, without 
charge, to shareholders who are interested in this information, and 
that the fund provide disclosure in its reports to shareholders of how 
this information may be obtained. This ``layered'' disclosure approach 
is intended to enable investors with varying degrees of interest in a 
fund's portfolio holdings to easily obtain the desired level of 
information about the fund. Thus, the proposals attempt to strike a 
balance that would result in maximum availability of information in a 
useful format and at minimum cost.
    We request comment on our proposal to permit funds to deliver a 
summary portfolio schedule in their reports to

[[Page 165]]

shareholders and specifically on the following issues.
    [sbull] Are the proposals to require funds to disclose their 50 
largest holdings and holdings accounting for one percent (and greater) 
of net assets appropriate? Should a smaller or larger number of 
holdings (e.g., 25, 100, 150, etc.) or a higher or lower percentage 
threshold (e.g., 0.5%, 2%, etc.) be used?
    [sbull] As proposed, securities disclosed in the summary schedule 
would be identified in order of descending value (largest holding to 
smallest). Should we adopt a different approach (e.g., listing 
portfolio securities by identifiable category)?
    [sbull] Should we require that a fund have a minimum number of 
securities to utilize a summary portfolio schedule (e.g., 150 or 250 
securities)? If so, should we select a number that is intended to 
ensure that the majority of funds continue to include their complete 
schedules of portfolio holdings?
    [sbull] Should we allow the use of a summary portfolio schedule 
with respect to other investments in addition to investments in 
securities of unaffiliated issuers (e.g., investments in securities 
sold short, open option contracts written, investments other than 
securities, and investments in and advances to affiliates)? \41\ If so, 
what modifications to the proposed summary portfolio schedule would be 
necessary?
---------------------------------------------------------------------------

    \41\Schedule II--Investments-other than securities (17 CFR 
210.12-13); Schedule III--Investments in and advances to affiliates 
(17 CFR 210.12-14); Schedule IV--Investments-securities sold short 
(17 CFR 210.12-12A); and Schedule V--Open option contracts written 
(17 CFR 210.12-12B).
---------------------------------------------------------------------------

    [sbull] As proposed, the summary portfolio schedule would require 
short-term debt instruments of the same issuer, and fully 
collateralized repurchase agreements, to be aggregated and treated as a 
single issue. Should aggregation be optional or mandatory? If fully 
collateralized repurchase agreements are permitted or required to be 
aggregated, what information about aggregate repurchase agreements of a 
fund should be required in the summary schedule?
    [sbull] Are there any modifications in the format of the proposed 
summary portfolio schedule that would be appropriate, such as 
eliminating or revising the requirements to indicate by appropriate 
symbols non-income producing securities and restricted securities?
    [sbull] Should we exempt index funds from the requirement to 
include their portfolio holdings in their reports to shareholders, as 
long as the holdings are filed with the Commission and made available 
to investors upon request and free of charge, on the grounds that 
delivery of this information to all shareholders is unnecessary as long 
as an index fund tracks its designated index? If so, how should we 
determine whether a fund tracks a designated index sufficiently closely 
to qualify for this exemption?
    [sbull] Should we require a shareholder report covering more than 
one fund to use the same type of portfolio schedule (summary or 
complete) for all funds included in the report?
    [sbull] Is Form N-CSR the appropriate location for funds that 
include a summary portfolio schedule in their shareholder reports to 
disclose their complete portfolio schedules? We have proposed, but not 
yet adopted, Form N-CSR to implement the certification requirement of 
section 302 of the Sarbanes-Oxley Act of 2002.\42\ If we ultimately do 
not adopt Form N-CSR to implement the Sarbanes-Oxley Act, should we 
nevertheless adopt Form N-CSR as a vehicle for a fund to disclose its 
complete portfolio holdings schedule? If not, how should a fund file 
its complete portfolio holdings schedule with the Commission?
---------------------------------------------------------------------------

    \42\ Sarbanes-Oxley Act of 2002, Pub. L. 107-204, 116 Stat. 745 
(2002).
---------------------------------------------------------------------------

    [sbull] Should a fund that uses a summary portfolio schedule be 
permitted to provide its complete portfolio schedule to investors 
exclusively through posting this information on its Web site?
2. Exemption of Money Market Funds From Portfolio Schedule Requirements 
in Shareholder Reports
    We are proposing to permit money market funds to omit Schedule I, 
the schedule of investments in securities of unaffiliated issuers, from 
their reports to shareholders, provided that they make this schedule 
available to shareholders upon request and free of charge, and disclose 
the availability of the schedule in their reports to shareholders.\43\ 
Currently, money market funds, like other funds, are required to 
include their portfolio schedules in the shareholder reports that are 
delivered to all investors. The investments of money market funds are, 
however, circumscribed by the credit quality, maturity, and portfolio 
diversification requirements of rule 2a-7 under the Investment Company 
Act.\44\ Portfolio holdings schedules of money market funds typically 
contain a list of short-term government and corporate debt securities 
that may not assist the average investor in evaluating the money market 
fund, or in distinguishing one money market fund from another. 
Moreover, investors generally treat money market funds as cash 
investments, and therefore may be less interested in the composition of 
money market fund portfolios than other types of funds.
---------------------------------------------------------------------------

    \43\ 17 CFR 210.12-12. See Proposed Instruction 2 to Item 
21(b)(1) and proposed Instruction to Item 21(c)(1) of Form N-1A; 
proposed Instruction 7(ii) to Item 27(a) of Form N-3.
    \44\ 17 CFR 270.2a-7.
---------------------------------------------------------------------------

    Our proposals would require money market funds to file their 
complete portfolio holdings schedules semi-annually with the Commission 
on proposed Form N-CSR, however, so that complete information about 
their portfolios would remain available to interested investors.\45\ We 
also are proposing to require any money market fund that does not 
include its complete portfolio schedule in its reports to shareholders 
to disclose in its shareholder reports that its complete schedule of 
investments in unaffiliated issuers is available (i) without charge, 
upon request, by calling a specified toll-free (or collect) telephone 
number; (ii) on the fund's Web site, if applicable; and (iii) on the 
Commission's Web site at http://www.sec.gov.\46\ The proposals also 
would require a money market fund to send its complete schedule of 
investments in securities of unaffiliated issuers within three business 
days of receipt of the request, by first-class mail or other means 
designed to ensure equally prompt delivery.\47\
---------------------------------------------------------------------------

    \45\ Proposed Item 7 of proposed Form N-CSR.
    \46\ Proposed Instruction 2 to Item 21(b)(1) and proposed 
Instruction to Item 21(c)(1) of Form N-1A; proposed Instruction 7 to 
Item 27(a) of Form N-3.
    \47\ Id.
---------------------------------------------------------------------------

    We request comment generally on whether money market funds should 
be permitted to omit their portfolio schedules from reports to 
shareholders and specifically on the following issues.
    [sbull] Would the proposed exemption be necessary or appropriate if 
the Commission permits, as also proposed, all funds to use summary 
portfolio schedules?
    [sbull] Is the information with respect to a money market fund in 
either a complete or the proposed summary portfolio schedule 
sufficiently important that it should be delivered to all investors in 
the fund?
    [sbull] Should the exemption for money market funds from the 
requirement to include a portfolio schedule in its reports to 
shareholders apply to all of the required schedules, or only the 
schedule of investments in unaffiliated issuers? \48\
---------------------------------------------------------------------------

    \48\ See Schedule II--Investments-other than securities (17 CFR 
210.12-13); Schedule III--Investments in and advances to affiliates 
(17 CFR 210.12-14); Schedule IV--Investments-securities sold short 
(17 CFR 210.12-12A); and Schedule V--Open option contracts written 
(17 CFR 210.12-12B).

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[[Page 166]]

3. Tabular or Graphic Presentation of Portfolio Holdings
    We also are proposing to require funds to include in their annual 
and semi-annual reports to shareholders a presentation using tables, 
charts, or graphs that depicts a fund's portfolio holdings by 
reasonably identifiable categories (e.g., industry sector, geographic 
region, credit quality, or maturity).\49\ This presentation would show 
the percentage of net asset value attributable to each category. We 
believe that such a presentation could illustrate, in a concise and 
user-friendly format, the allocation of a fund's investments across 
asset classes. We believe that this presentation, coupled with a 
summary portfolio schedule, has the potential to effectively convey to 
investors key information about a fund's investments. Particularly in 
the case of a fund with a large number of holdings, the combination of 
a summary portfolio schedule and a tabular or graphic asset allocation 
presentation could be significantly more useful to many investors than 
the fund's complete portfolio schedule standing alone.
---------------------------------------------------------------------------

    \49\ Proposed Item 21(d)(2) of Form N-1A; proposed Instruction 
6.a to Item 23 of Form N-2; proposed Instruction 6(i) to Item 27(a) 
of Form N-3.
---------------------------------------------------------------------------

    Under our proposals, a fund would have the flexibility to determine 
both the categories to be used (e.g., industry sector, geographic 
region, credit quality, maturity, etc.) and the format (e.g., tables, 
charts, graphs, etc.) of the presentation. The categories should be 
selected, and the format of the presentation designed, to provide the 
most useful information to investors about the types of investments 
made by the fund, given its investment objectives. For example, a 
domestic equity fund could choose to categorize its investments by 
attributes such as industry sector, market capitalization, or price-
earnings ratio. A bond fund could choose to categorize its investments 
by attributes such as credit quality or maturity or government versus 
non-government securities.\50\ Permitting a fund to determine the most 
useful means of presenting this portfolio information would allow each 
fund to tailor the presentation in a manner that is appropriate to its 
holdings. Further, over time, this flexible approach could enable both 
funds and the Commission to determine whether certain types of 
presentations are more effective for different types of funds.
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    \50\ Credit quality would be required to be the ratings grade 
assigned by a nationally recognized statistical rating organization 
(``NRSRO''), as that term is used in paragraphs (c)(2)(vi)(E), (F), 
and (H) of Rule 15c3-1 under the Exchange Act (17 CFR 240.15c3-
1(c)(2)(vi)(E), (F), and (H)]. The fund could use ratings of only 
one NRSRO. Proposed Item 21(d)(2) of Form N-1A; proposed Instruction 
6.a to Item 23 of Form N-2; proposed Instruction 6(i) to Item 27(a) 
of Form N-3.
---------------------------------------------------------------------------

    We request comment generally on the appropriateness of the proposed 
tabular or graphic presentation of fund holdings.
    [sbull] Would the proposed presentation be useful to shareholders? 
Should such a presentation be required or optional?
    [sbull] Are there any particular types of funds (e.g., money market 
funds or index funds) that should be exempt from the requirement to 
provide the tabular or graphic presentation of fund holdings? On what 
basis should such categories of funds be exempted?
    [sbull] Are there any alternative presentations that should be 
required for certain types of funds? For example, should an index fund 
by required to show the extent to which it tracks the designated index 
(``tracking error'')?
    [sbull] Would a tabular or graphic presentation be useful for a 
fund with a small number of holdings or should funds with, e.g., less 
than 25 or 50 or 100 securities (or some other number) be exempt from 
this requirement?
    [sbull] Should a fund that includes its full portfolio schedule, 
rather than a summary portfolio schedule, in its shareholder reports be 
exempt from the tabular or graphic presentation requirement since the 
full portfolio schedule requires classification of securities according 
to type of business or type of instrument? \51\ Is the tabular or 
graphic presentation necessary in a shareholder report that contains a 
summary portfolio schedule, where the holdings would be listed in order 
of descending value, with percentage of net assets identified?
---------------------------------------------------------------------------

    \51\ Note 2 to Schedule I--Investments in securities of 
unaffiliated issuers (17 CFR 210.12-12).
---------------------------------------------------------------------------

    [sbull] What alternative presentations should we permit funds to 
use to illustrate the percentage and categories of securities they 
hold?
    [sbull] Should we mandate the format of presentation?
    [sbull] Should we mandate identifiable categories of holdings for 
any or all types of funds (e.g., bond funds--credit quality or 
maturity; international funds--region, etc.)?
4. Quarterly Filing of Complete Portfolio Schedule
    We propose to require funds to file their complete portfolio 
holdings schedules with the Commission on a quarterly basis, rather 
than semi-annually as currently required. As described above, funds 
would be required to file their complete portfolio schedules for the 
second and fourth fiscal quarters on proposed Form N-CSR.\52\ In 
addition, funds would be required to file their portfolio schedules for 
the first and third fiscal quarters on new Form N-Q under the 
Investment Company Act, within 60 days of the end of the quarter.\53\ 
Form N-Q would require funds to file the same schedules of investments 
that are currently required in annual and semi-annual reports to 
shareholders. These schedules could be unaudited.\54\ Form N-Q would be 
a reporting form required under the Investment Company Act only, unlike 
proposed Form N-CSR, which is a combined Exchange Act and Investment 
Company Act form.\55\ Form N-Q would be required to be signed by the 
fund, and on behalf of the fund by its principal financial officer or 
officers.\56\
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    \52\ Proposed Item 7 of proposed Form N-CSR. See note supra and 
accompanying text.
    \53\ Proposed Form N-Q; proposed rule 30b1-4 under the 
Investment Company Act. Small business investment companies 
(``SBICs'') registered with the Commission on Form N-5 would not be 
required to file Form N-Q. General Instruction A to proposed Form N-
Q. Although they are management investment companies, SBICs are not 
currently required to deliver reports to shareholders containing 
financial statements, and hence are not required to deliver 
schedules of investments to their shareholders.
    \54\ See Proposed Item 1 of proposed Form Q; Schedule I--
Investments in securities of unaffiliated issuers (17 CFR 210.12-
12); Schedule II--Investments-other than securities (17 CFR 210.12-
13); Schedule III--Investments in and advances to affiliates (17 CFR 
210.12-14); Schedule IV--Investments-securities sold short (17 CFR 
210.12-12A); and Schedule V--Open option contracts written (17 CFR 
210.12-12B).
    \55\ See Investment Company Act Release No. 25723, supra note 2 
(proposed form N-CSR).
    \56\ General Instruction F.2.(a) to Form N-Q.
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    Our proposals are intended to provide greater transparency of fund 
portfolio holdings, without imposing significant costs on funds and, 
ultimately, their shareholders. The proposals would enable interested 
investors, through more frequent access to portfolio information, to 
monitor whether, and how, a fund is complying with its stated 
investment objective. Given the significant interest in more frequent 
portfolio information that has been expressed in rulemaking petitions 
to the Commission by investors groups and others,\57\ we believe that 
it is appropriate to propose more frequent portfolio reporting by funds 
for public comment at this time. We note, however, that the proposals 
would only require the filing of a fund's portfolio schedule on Form N-
Q with the Commission on EDGAR and not actual delivery of that 
information to shareholders. A fund would be required to include in its 
annual and semi-annual

[[Page 167]]

reports to shareholders a statement that: (i) The fund files its 
complete schedule of portfolio holdings with the Commission for the 
first and third quarters of each fiscal year on Form N-Q; (ii) the 
fund's Forms N-Q are available on the Commission's Web site at http://www.sec.gov; (iii) the fund's Forms N-Q may be reviewed and copied at 
the Commission's Public Reference Room, and how information on the 
operation of the Public Reference Room may be obtained; and (iv) if the 
fund makes the information on Form N-Q available to shareholders on its 
Web site or upon request, a description of how the information may be 
obtained from the fund.\58\ This proposal is intended to strike an 
appropriate balance between investors' interest in more frequent 
portfolio information and the costs associated with disclosing and 
making that information available to investors, which are ultimately 
borne by investors.
---------------------------------------------------------------------------

    \57\ See supra note 12.
    \58\ Proposed Item 21(d)(3) of Form N-1A; proposed Instruction 
6.b. to Item 23 of Form N-2; proposed Instruction 6.(ii) to Item 
27(a) of Form N-3.
---------------------------------------------------------------------------

    We are cognizant of concerns raised by some members of the fund 
industry that mandating more frequent portfolio disclosure would harm 
fund shareholders by expanding the opportunities for professional 
traders to exploit this information by engaging in predatory trading 
practices, such as trading ahead of funds, often called ``front-
running.'' \59\ They assert that more frequent portfolio disclosure 
would facilitate the ability of outside investors to ``free ride'' on a 
mutual fund's investment strategies, by obtaining for free the benefits 
of fund research and investment strategies that are paid for by fund 
shareholders.\60\
---------------------------------------------------------------------------

    \59\ See Letter from Craig S. Tyle, General Counsel, ICI, to 
Paul F. Roye, Director, Division of Investment Management, SEC (July 
17, 2001), available at http://www.ici.org/port_holdings_com.html; 
Russ Wermers, The Potential Effects of More Frequent Portfolio 
Disclosure on Mutual Fund Performance, ICI Perspective (June 2001), 
available at http://www.ici.org/pdf/per07-03.pdf. (increasing the 
frequency of portfolio holdings disclosure may increase the 
likelihood of predatory trading practices, such as ``front-
running''). These materials are available for inspection and copying 
in File No. S7-51-02 in the Commission's public reference room.
    \60\ Id.
---------------------------------------------------------------------------

    At this time, we are not persuaded that these concerns are 
significant enough to prevent our proposal from being put forward for 
public comment. We have endeavored to address those concerns by 
proposing a 60-day delay for the filing of the required additional 
quarterly disclosure. We believe that a 60-day filing delay would limit 
the ability of professional traders to engage in these harmful trading 
practices. In this regard, we note that a significant majority of funds 
already make their full portfolio schedules publicly available at least 
quarterly, apparently without concern about predatory trading 
practices.\61\
---------------------------------------------------------------------------

    \61\ See Scott Cooley, Tell Investors What They Own, Morningstar 
Online, Feb. 6, 2002 (more than 70% of funds currently provide 
monthly or quarterly portfolio disclosure to Morningstar). See also 
Tom Lauricella and Aaron Lucchetti, To Industry, Silence is Golden--
Mutual Funds Embrace Disclosure Rules--As Long as it Doesn't Involve 
Them, Wall Street Journal Europe, Aug. 1, 2002, at M1 (roughly 200 
fund firms and 17 of the top 20 largest funds provide quarterly or 
monthly holdings updates to investors); Survey of Fund Groups' 
Portfolio Disclosure Policies Summary of Results, Investment Company 
Institute (2001), available at http://www.ici.org/port_holdings_appdxa.html.
---------------------------------------------------------------------------

    We also note that currently, fund managers and other institutional 
investment managers exercising investment discretion over $100 million 
or more in certain equity securities must disclose information about 
portfolios that they manage on Form 13F within 45 days of the end of 
each quarter.\62\ Reports on Form 13F disclose a fund manager's 
aggregate holdings in each security required to be reported; the 
holdings of each individual mutual fund or other account over which an 
investment manager has discretion are not broken out separately.\63\ To 
the extent that required quarterly disclosure about a fund's portfolio 
investments raises concerns about predatory trading practices, these 
concerns are not new, since fund portfolio holdings have been disclosed 
on Form 13F, aggregated by investment manager, since 1979.\64\
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    \62\ See Section 13(f) of the Exchange Act (15 U.S.C. 78m(f)); 
Rule 13f-1 under the Exchange Act (17 CFR 240.13f-1). Securities 
required to be reported on Form 13F include, among other securities, 
all exchange-traded or NASDAQ-quoted securities. Rule 13f-1 under 
the Exchange Act (17 CFR 240.13f-1); Section 13(d)(1) of the 
Exchange Act (15 U.S.C. 78m(d)(1)). Congress enacted Section 13(f) 
in order to create a central depository of historical and current 
data about the investment activities of institutional investment 
managers that would be available to individuals, federal and state 
regulators, and other institutional investment managers. Report of 
Senate Comm. on Banking, Housing and Urban Affairs, S. Rep. No. 75, 
94th Cong., 1st Sess. 85 (1975). The dissemination of this data was 
intended to increase confidence among all investors in the integrity 
of the securities markets. Id. at 82.
    \63\ See Special Instruction 12 to Form 13F (17 CFR 249.325).
    \64\ Institutional investment managers may request confidential 
treatment of information in filings on Form 13F pursuant to Section 
13(f)(3) of the Exchange Act (15 U.S.C. 78m(f)(3)), on the basis, 
among others, that the information would reveal an investment 
manager's ongoing program of acquisition or disposition. See Report 
of Senate Comm. on Banking, Housing and Urban Affairs, S. Rep. No. 
75, 94th Cong., 1st Sess. 87 (1975) (describing intended exemption). 
An application for confidential treatment on this basis must, among 
other requirements: (a) describe the investment strategy being 
followed with respect to the relevant securities holdings; (b) 
explain why public disclosure of the securities would, in fact, be 
likely to reveal the investment strategy; (c) demonstrate that such 
revelation of an investment strategy would be premature, and 
indicate whether the manager was engaged in a program of acquisition 
or disposition of the security both at the end of the quarter and at 
the time of the filing; and (d) demonstrate that failure to grant 
the request for confidential treatment would be likely to cause 
substantial harm to the manager's competitive position. Instructions 
for Confidential Treatment Requests, Form 13F (17 CFR 249.325).
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    We request comment generally on whether more frequent portfolio 
holdings disclosure should be required and specifically on the 
following issues.
    [sbull] With regard to the proposed Form N-Q filing requirement, we 
request public comment on feasible alternatives that minimize the 
reporting burdens on registered management investment companies. In 
addition, we request comment on the utility to investors of the reports 
to the Commission in relation to the costs to registered management 
investment companies of providing those reports.
    [sbull] Are there less burdensome alternatives than requiring 
quarterly disclosure of a fund's full portfolio schedule of 
investments, as proposed?
    [sbull] What, if any, additional costs would funds incur as a 
result of filing their complete portfolio holdings schedules with the 
Commission via EDGAR on a quarterly basis with a 60-day delay?
    [sbull] How frequently should funds be required to disclose 
information about their portfolios? Monthly, quarterly, semi-annually, 
or some other frequency? In addressing this question, commenters should 
address both the benefits to investors from more frequent disclosure 
and the detriments to funds, and their shareholders, from predatory 
trading practices that could accompany more frequent disclosure.
    [sbull] Would a 60-day delay sufficiently discourage or impair the 
ability of third parties to ``front-run'' and ``free ride'' or should 
the period be longer, e.g., 75 days or 90 days? Would a 30- or 45-day 
or some other delay sufficiently discourage or impair the ability of 
third parties to engage in predatory trading practices? Is there any 
evidence that the current quarterly disclosure required by Form 13F 
either facilitates or does not facilitate predatory trading practices, 
such as ``front-running?''
    [sbull] Shareholder reports are currently required to be filed with 
the Commission within 70 days of the end of each semi-annual reporting 
period; reports on Form 13F are required to be filed within 45 days of 
the end of each quarter; and proposed Form N-Q would

[[Page 168]]

be required to be filed within 60 days of each semi-annual reporting 
period. Should the filing periods for these three forms be identical? 
If so, what period is appropriate, 30 days, 45 days, 60 days, 70 days, 
or some other period? Are concerns about predatory trading practices 
more or less significant in the context of disclosure about aggregate 
holdings in equity securities managed by an institutional investment 
manager (Form 13F), as opposed to disclosure of the securities in each 
fund (proposed Form N-Q)?
    [sbull] If we extended the time period for filing Form 13F to, for 
example, 60 days, would there continue to be a need for institutional 
investment managers to be able to request confidential treatment of 
filings on Form 13F on the basis of a manager's ongoing investment 
strategy? Are there other changes that should be made to Form 13F, such 
as, for example, modifying the $100 million filing threshold?
    [sbull] Would quarterly disclosure of portfolio holdings deter 
portfolio manipulation, such as ``window dressing'' and ``portfolio 
pumping?'' Are there additional ways to inhibit or curb these 
practices? For example, should we require the proposed summary 
portfolio schedule and/or the complete portfolio schedule to identify 
securities acquired within a designated number of days before the end 
of the reporting period (e.g., 20 days, 10 days, 5 days, 2 days)?
    [sbull] Should Form N-Q require disclosure of less than a fund's 
complete portfolio schedule (e.g., information comparable to that 
permitted in the proposed summary portfolio schedule, top 25 holdings, 
top 10 holdings, etc.)?
    [sbull] As proposed, Form N-Q would require quarterly disclosure of 
all of the schedules of investments required for funds by Regulation S-
X. Should any of this information be deleted from Form N-Q? Is there 
additional information that should be required on Form N-Q?
    [sbull] As proposed, Form N-Q would be filed under the Investment 
Company Act only. Should Form N-Q also be a reporting form under 
sections 13(a) and 15(d) of the Exchange Act, subject to certification 
under section 302 of the Sarbanes-Oxley Act of 2002?
    [sbull] As proposed, Form N-Q would be required to be signed by the 
fund, and on behalf of the fund by its principal financial officer or 
officers. Are the principal financial officer(s) the appropriate 
persons to be required to sign proposed Form N-Q? Should the chief 
executive officer(s) sign proposed Form N-Q?

B. Disclosure of Fund Expenses

    We are proposing to require mutual funds to disclose in their 
reports to shareholders fund expenses borne by shareholders during the 
reporting period. Fund shareholder reports would be required to 
include: (1) The cost in dollars associated with an investment of 
$10,000, based on the fund's actual expenses and return for the period; 
and (2) the cost in dollars, associated with an investment of $10,000, 
based on the fund's actual expenses for the period and an assumed 
return of 5 percent per year.\65\ The first figure is intended to 
permit investors to estimate the actual costs, in dollars, that they 
bore over the reporting period. The second figure is intended to 
provide investors with a basis for comparing the level of current 
period expenses at different funds. Together, the two expense figures 
in the proposed example are designed to increase investor understanding 
of the fees that they pay on an ongoing basis for investing in a fund.
---------------------------------------------------------------------------

    \65\ Proposed Item 21(d)(1) of Form N-1A.
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    The proposed disclosure in shareholder reports would supplement the 
fee disclosure required in the mutual fund prospectus. Funds are 
currently required to include in their prospectuses a fee table that 
includes, as a percentage of fund assets, all fees and charges 
associated with a mutual fund investment.\66\ The fee table reflects 
both (1) charges paid directly by a shareholder out of his or her 
investment, such as front- and back-end sales loads, and (2) recurring 
charges deducted from fund assets, such as management and 12b-1 
fees.\67\ The fee table is accompanied by a numerical example that 
illustrates the aggregate expenses that an investor could expect to pay 
over time on a $10,000 investment if he or she received a 5 percent 
annual return and remained in the fund for 1-, 3-, 5-, and 10-year 
periods.
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    \66\ Item 3 of Form N-1A.
    \67\ Id.
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    The numbers that we are proposing be disclosed in mutual fund 
shareholder reports are intended to provide information to investors 
about actual current period expenses. This disclosure would respond to 
concerns that have been raised regarding the degree to which investors 
understand the nature and effect of these ongoing fees.\68\ While some 
have advocated that this information should be provided on an 
individualized basis in shareholder account statements, our proposals 
are intended to strike an appropriate balance between investors' need 
for this information and the costs and burdens that would be associated 
with providing this information on an individualized basis.
---------------------------------------------------------------------------

    \68\ See discussion in Section I, ``Disclosure of Fund 
Expenses,'' supra.
---------------------------------------------------------------------------

    The methodology for calculation of the proposed fee disclosure 
would be similar to that required for the expense example in the fee 
table of the mutual fund prospectus, with modifications to reflect the 
fact that the example in shareholder reports is intended to reflect 
actual historical expenses borne by an investor, rather than 
hypothetical future expenses. In determining its actual operating 
expenses during the reporting period, a fund would be required to 
include all expenses that are deducted from its assets or charged to 
all shareholder accounts, including management fees, distribution (12b-
1) fees, and other expenses.\69\ The example would not reflect any 
exchange fees, redemption fees, or sales charges (loads).\70\
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    \69\ Proposed Instructions 2(a)(i) and 2(d) to Item 21(d)(1) of 
Form N-1A. ``Other expenses'' would include extraordinary expenses 
as determined under generally accepted accounting principles (see 
Accounting Principles Board Opinion No. 30). If extraordinary 
expenses were incurred that materially affected a fund's ``other 
expenses,'' the fund would be permitted to disclose in a footnote to 
the required example what ``actual operating expenses'' would have 
been had the extraordinary expenses not been included. See proposed 
Instruction 2(a)(ii) to Item 21(d)(1) of Form N-1A. If the fund is a 
feeder fund it would be required to reflect the aggregate expenses 
of the feeder fund and master fund, and to state in a footnote to 
the example that the example reflects the expenses of both the 
feeder and master fund. Proposed Instruction 1(c)(i) to Item 
21(d)(1) of Form N-1A. If the report covers more than one class of 
multiple class fund or more than one feeder fund that invests in the 
same master fund, a separate example would be required for each 
class or feeder fund. Proposed Instruction 1(c)(ii) to Item 21(d)(1) 
of Form N-1A.
    \70\ Proposed Instruction 2(a)(i) to Item 21(d)(1) of Form N-1A.
---------------------------------------------------------------------------

    Our proposal would require a fund to use its actual operating 
expenses (after expense reimbursement or fee waiver arrangements that 
reduced expenses) for the reporting period in calculating the 
example.\71\ Expenses that would be deducted from the fund's assets for 
the purposes of the required example would be the amounts shown as 
expenses in the fund's statement of operations.\72\ If there were any 
increases or decreases in fund operating expenses that occurred during 
the reporting period (or that occurred or would be expected to occur 
during the current fiscal year) that would have materially affected the 
information in the example had those changes been in place throughout 
the reporting period, the fund would be

[[Page 169]]

required to restate in a footnote to the example the expense 
information using the current fees as if they had been in effect 
throughout the entire reporting period.\73\ Account fees that are 
collected by more than one fund would be required to be allocated among 
the funds in proportion to the relative average net assets.\74\ The 
example would assume the reinvestment of all dividends and 
distributions.\75\
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    \71\ Proposed Instruction 2(c)(i) to Item 21(d)(1) of Form N-1A.
    \72\ Proposed Instruction 2(a)(i) to Item 21(d)(1) of Form N-1A.
    \73\ See proposed Instruction 2(c)(ii) to Item 21(d)(1) of Form 
N-1A. A change in actual operating expenses would not include a 
decrease in operating expenses as a percentage of assets due to 
economies of scale or breakpoints in a fee arrangement resulting 
from an increase in the fund's assets.
    \74\ Proposed Instruction 2(d) to Item 21(d)(1) of Form N-1A.
    \75\ Proposed Instruction 2(b) to Item 21(d)(1) of Form N-1A.
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    The proposed numerical expense disclosure would be accompanied by a 
prescribed narrative explanation.\76\ The narrative would explain that 
mutual funds charge both transaction costs and ongoing costs and that 
the example is intended to help a shareholder understand his or her 
ongoing costs and to compare these costs with the ongoing costs of 
investing in other mutual funds. The narrative also would explain the 
assumptions used in the example, note that the example does not reflect 
any transactional costs, and caution that the example is useful in 
comparing ongoing costs but not total costs of different funds. A fund 
would be permitted to modify the narrative explanation if the narrative 
contained comparable information to that prescribed, and a fund could 
eliminate any part of the narrative that is inapplicable.\77\ For 
example, a fund that did not charge loads could omit the statement that 
the example does not reflect loads.
---------------------------------------------------------------------------

    \76\ Proposed Item 21(d)(1) and proposed Instruction 1(b) to 
Item 21(d)(1) of Form N-1A.
    \77\ Id.
---------------------------------------------------------------------------

    As an alternative to our proposed approach, we considered the 
recommendation of the GAO Report that the Commission require mutual 
funds to provide each investor with an exact dollar figure for expenses 
paid in each quarterly account statement that the investor 
receives.\78\ The GAO Report's alternative would have the benefit of 
providing cost disclosure tailored to each investor. However, we have 
concerns about the cost and logistical complexity that this requirement 
might entail.\79\ Mutual fund expenses are charged against fund assets 
and are not currently accounted for on an individual account basis. 
Moreover, in many cases fund shares are held by broker-dealers, 
financial advisers, and other third-party financial intermediaries, 
which must prepare accurate and timely customer account statements by 
integrating data supplied by many unrelated fund groups. In addition to 
the systems changes necessary for the fund itself, these financial 
intermediaries would need to implement new systems in order to 
calculate and report personalized expense information for each fund 
held in an account each quarter. Because we believe that the costs of 
requiring this expense disclosure in quarterly account statements may 
outweigh the benefits, we determined that it would be more appropriate 
to propose including additional expense information in shareholder 
reports.\80\
---------------------------------------------------------------------------

    \78\ See GAO Report, supra note 19.
    \79\ See Letter from Colette D. Kimbrough, Chair, Investment 
Committee, Securities Industry Association, to Paul F. Roye, 
Director, Division of Investment Management, SEC (Dec. 7, 2000); 
Letter from Paul G. Haaga, Jr., Executive Vice President, Capital 
Research, to The Honorable Arthur Levitt, Jr., Chairman, SEC (Oct. 
27, 2000); Letter from John J. Brennan, Chairman and Chief Executive 
Officer, Vanguard, to The Honorable Arthur Levitt, Jr., Chairman, 
SEC (Oct. 13, 2000); Letter from David S. Pottruck, President and 
Co-CEO, The Charles Schwab Corporation, to The Honorable Arthur 
Levitt, Jr., Chairman, SEC (Sept. 7, 2000). The letters are 
available for inspection and copying in File No. S7-51-02 in the 
Commission's public reference room.
    \80\ The GAO Report estimated that the costs of personalized 
disclosure in account statements ``might be a few dollars or less 
per investor'' in one-time and annual costs. GAO Report, supra note 
19, at 97. As of year-end 2001, there were approximately 248 million 
shareholder accounts invested in funds. Investment Company 
Institute, Mutual Fund Fact Book 63 (42nd ed. 2002). At a cost of $1 
per shareholder account, this would be a cost of approximately $248 
million.
---------------------------------------------------------------------------

    We request comment generally on our proposal to require mutual 
funds to include in reports to shareholders the dollar cost associated 
with a $10,000 investment and specifically on the following issues.
    [sbull] Is the disclosure of actual costs paid over the current 
period useful to investors? If so, is there a better approach to 
providing this disclosure than that proposed?
    [sbull] Are there better vehicles than annual and semi-annual 
reports to shareholders in which to include additional disclosure about 
fund expenses? In particular, would requiring disclosure of the actual 
costs paid by an individual investor in his or her account statements 
be preferable? If so, what benefits would individualized cost 
disclosure in account statements provide to investors that disclosure 
in shareholder reports of the fees paid on an initial $10,000 
investment would not?
    [sbull] What would be the costs of requiring expense disclosure in 
quarterly account statements, compared to the costs of the proposed 
expense disclosure requirement in shareholder reports? How would these 
costs be different for funds sold through and held by third-party 
intermediaries, such as broker-dealers? Would there be any ways to 
reduce these costs?
    [sbull] Does the proposed example provide useful information as to 
current period costs? Does the first number required in the example, 
showing the cost in dollars associated with a $10,000 investment that 
earned the fund's actual return for the period and incurred the fund's 
actual expenses, appropriately convey to investors the actual fees that 
they have paid? Will investors understand how to estimate their own 
actual costs by using this number and the average assets they invested 
in the fund over the reporting period?
    [sbull] Does the second required number, showing the cost in 
dollars associated with a $10,000 investment that earned a standardized 
5% return for the period, provide an appropriate means for investors to 
compare the ongoing costs of different funds? Would the fact that this 
number does not reflect certain costs (e.g., exchange fees, sales 
charges (loads), redemption fees) cause shareholders to draw 
inappropriate conclusions about the relative costs of various funds? 
For example, would the proposed requirement to show the ongoing cost in 
dollars using a standardized return present funds with a front-end load 
in an unduly favorable light as compared to funds that impose 
distribution costs through asset-based 12b-1 fees? Is it useful to 
investors to compare current period costs, as opposed to total costs of 
fund ownership? If so, how should this number be presented and 
explained so that investors will understand that it does not reflect 
total costs?
    [sbull] Will our proposed disclosure lead to better cost 
comparisons among funds and between funds and other investment 
vehicles? How would our proposed disclosure affect the cost competition 
among mutual funds and between mutual funds and other savings and 
investment vehicles, such as bank certificates of deposit? Will mutual 
fund investors understand that the ongoing costs shown have already 
been deducted from returns shown by a fund? \81\
---------------------------------------------------------------------------

    \81\ See Instruction 3 to Item 21(b)(1); Instruction 5 to Item 
21(b)(2); and Instruction 5 to Item 21(b)(3) of Form N-1A 
(calculation of average annual total return requires deduction of 
all recurring fees); Rule 482(e)(3)(i) and (e)(4)(i) under the 
Securities Act (17 CFR 230.482(e)) (requiring calculation of average 
annual total return in a performance advertisement by a mutual fund 
to be based on methods of computation prescribed in Form N-1A).

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[[Page 170]]

    [sbull] Will the proposed computation methodology help us to 
achieve the objective of permitting investors to estimate the actual 
costs, in dollars, that they bore over the reporting period and also 
provide them with a basis for comparing the level of current period 
expenses at different funds? What, if any, modifications to the 
proposed computation methodology are appropriate?

C. Management's Discussion of Fund Performance (``MDFP'')

    We are proposing to require that MDFP, which is currently required 
for all mutual funds other than money market funds, be included in 
annual reports to shareholders.\82\ Currently, a mutual fund is 
required to include MDFP in its prospectus unless the information is 
included in the fund's latest annual report to shareholders.\83\ At the 
time we adopted MDFP, our authority to directly require information in 
annual reports was circumscribed.\84\ Mutual funds, however, typically 
include MDFP in their annual reports, and we believe that requiring 
MDFP to be included in the annual report would aid investors in 
assessing the fund's performance over the prior year, and would fit 
naturally with other ``backward looking'' information contained in the 
annual report, such as the fund's financial statements. We now have 
broad authority to prescribe the content of shareholder reports, and we 
propose to require MDFP in annual reports to shareholders.\85\
---------------------------------------------------------------------------

    \82\ Proposed Item 21(b)(7) of Form N-1A.
    \83\ Item 5 of Form N-1A. A fund that includes MDFP in its 
annual report must disclose in its prospectus that its annual report 
contains a discussion of the market conditions and investment 
strategies that significantly affected the fund's performance during 
its last fiscal year and that this discussion will be made available 
upon request and without charge. Item 1(b)(1) of Form N-1A. Because 
we are proposing to require MDFP in a fund's annual report, we are 
proposing to amend Instruction 5 to Item 1(b)(1) to require all 
funds except money market funds, which are not required to provide 
MDFP, to include this disclosure.
    \84\ See 15 U.S.C. 80a-29(d) (1988) (permitting the Commission 
to require that investment companies transmit to shareholders, at 
least semi-annually, reports containing the following information 
and financial statements: (1) A balance sheet accompanied by a 
statement of the aggregate value of investments; (2) a list showing 
the amount and value of securities owned; (3) a statement of income; 
(4) a statement of surplus; (5) a statement of aggregate 
remuneration paid by the company during the period to officers, 
directors, and certain affiliated persons; and (6) a statement of 
the aggregate dollar amounts of purchase and sales of investment 
securities, other than government securities, made during the period 
covered by the report); Investment Company Act Release No. 19382 
(Apr. 6, 1993) (58 FR 19050, 19052 (Apr. 12, 1993)) (permitting a 
fund to include MDFP in its prospectus or annual report to 
shareholders, but requiring a fund that placed MDFP in an annual 
report to disclose in its prospectus that its annual report 
contained additional performance information that would be made 
available upon request and without charge).
    \85\ The National Securities Markets Improvement Act of 1996 
(``NSMIA'') added Section 30(f) to the Investment Company Act, 
authorizing the Commission to require that reports to shareholders 
include information that ``the Commission deems necessary or 
appropriate in the public interest or for the protection of 
investors.'' National Securities Markets Improvement Act of 1996, 
Pub. L. 104-290, 207, 110 Stat. 3416 (Oct. 11, 1996); 15 U.S.C. 80a-
29(f).
---------------------------------------------------------------------------

    We wish to remind funds of their obligation to use MDFP to provide 
a complete and accurate discussion of the factors that affected fund 
performance over the past year. In its integrated reviews of mutual 
fund prospectuses and shareholder reports, the staff has identified 
instances where MDFP has provided insufficient substantive discussion 
of the factors that affected the fund's performance during the most 
recent fiscal year.\86\ The Commission has asked the staff, in its 
review of a fund's disclosure documents, to continue to focus on areas 
where funds' MDFP disclosure has been deficient. We expect that our 
proposed revisions to shareholder reports, coupled with improved MDFP 
disclosure by funds, should enhance the usefulness of shareholder 
reports and result in improved disclosure by funds about their 
operations.
---------------------------------------------------------------------------

    \86\ See In the Matter of Davis Selected Advisers-NY, Inc., 
Investment Advisers Act Release No. 2055 (Sept. 4, 2002) (fund 
violated Section 34(b) of the Investment Company Act (15 U.S.C. 80a-
34(b)) by failing to disclose the material impact that investments 
in initial public offerings had on its performance during its 
previous fiscal year in its MDFP); Tom Lauricella and Aaron 
Lucchetti, What's Your Fund Doing? Some Managers Don't Say, The Wall 
Street Journal, Oct. 7, 2002, at R23 (describing inadequate 
discussions in funds' MDFP).
---------------------------------------------------------------------------

    We request comment generally on our proposal to require mutual 
funds to include MDFP in their annual reports to shareholders.
    [sbull] Should we require MDFP in annual reports to shareholders?
    [sbull] Are there changes that we should make to the content of 
MDFP?

D. Compliance Date

    If we adopt the proposed amendments, we would expect to require all 
fund reports to shareholders filed for periods ending on or after the 
effective date of the amendments to comply with the proposed 
amendments. In addition, we would expect to require funds to file 
quarterly reports on Form N-Q with respect to any fiscal quarter ending 
on or after the effective date. The Commission requests comment on 
these proposed compliance dates.

III. General Request for Comments

    The Commission requests comment on the amendments proposed in this 
release, whether any further changes to our rules or forms are 
necessary or appropriate to implement the objectives of our proposed 
amendments, and on other matters that might have an effect on the 
proposals contained in this release.

IV. Paperwork Reduction Act

    Certain provisions of the proposed amendments contain ``collection 
of information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 [44 U.S.C. 3501, et seq.), and the Commission is 
submitting the proposed collections of information to the Office of 
Management and Budget (``OMB'') for review in accordance with 44 U.S.C. 
3507(d) and 5 CFR 1320.11. The titles for the collections of 
information are: (1) ``Form N-1A under the Investment Company Act of 
1940 and Securities Act of 1933, Registration Statement of Open-End 
Management Investment Companies''; (2) ``Form N-2--Registration 
Statement of Closed-End Management Investment Companies''; (3) ``Form 
N-3--Registration Statement of Separate Accounts Organized as 
Management Investment Companies''; (4) ``Form N-CSR--Certified 
Shareholder Report of Registered Management Investment Companies''; (5) 
``Rule 30e-1 under the Investment Company Act of 1940, Reports to 
Stockholders of Management Companies''; and (6) ``Form N-Q--Quarterly 
Schedule of Portfolio Holdings of Registered Management Investment 
Company.'' An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid OMB control number.
    Form N-1A (OMB Control No. 3235-0307), Form N-2 (OMB Control No. 
3235-0026), and Form N-3 (OMB Control No. 3235-0316) were adopted 
pursuant to Section 8(a) of the Investment Company Act (15 U.S.C. 80a-
8) and Section 5 of the Securities Act (15 U.S.C. 77e). We issued a 
release proposing Form N-CSR on August 30, 2002 (67 FR 57298 (Sept. 9, 
2002)), pursuant to Section 30 of the Investment Company Act (15 U.S.C. 
80a-8) and Sections 13 and 15(d) of the Exchange Act (15 U.S.C. 78m and 
78o(d)). We proposed amendments to Form N-CSR on September 20, 2002 
(Investment Company Act Release No. 25739) (67 FR 60828 (Sept. 26, 
2002)); October 22, 2002 (Investment Company Act Release No. 25775) (67 
FR 66208 (Oct. 30, 2002)); December 2, 2002 (Investment

[[Page 171]]

Company Act Release No. 25838); and December 10, 2002 (Investment 
Company Act Release No. 25845). Rule 30e-1 (OMB Control No. 3235-0025) 
was promulgated under section 30(e) of the Investment Company Act (15 
U.S.C. 80a-29(e)). New Form N-Q is being proposed under Section 30 of 
the Investment Company Act (15 U.S.C. 80a-29(e)).
    We are proposing a new rule and form, and rule and form amendments, 
that are intended to improve the periodic disclosure provided by 
registered management investment companies (``funds'') to their 
investors about fund investments, costs, and performance. The proposed 
amendments would:
    [sbull] Permit a fund to include a summary portfolio schedule in 
its reports to shareholders, and exempt a money market fund from the 
requirement to include a portfolio schedule of investments in 
securities of unaffiliated issuers in its reports to shareholders, 
provided that the complete portfolio schedule is filed with the 
Commission on proposed Form N-CSR semi-annually and is provided to 
shareholders upon request, free of charge;
    [sbull] Require reports to shareholders by funds to include a 
tabular or graphic presentation of a fund's portfolio holdings by 
identifiable categories;
    [sbull] Require a fund to file its complete portfolio schedule as 
of the end of its first and third fiscal quarters with the Commission 
on new proposed Form N-Q;
    [sbull] Require open-end management investment companies (``mutual 
funds'') to disclose fund expenses borne by shareholders during the 
reporting period in reports to shareholders; and
    [sbull] Require a mutual fund to include Management's Discussion of 
Fund Performance in its annual report to shareholders.
    These proposed amendments are intended to significantly improve the 
periodic disclosure that fund investors receive, particularly with 
respect to portfolio holdings and expenses, while reducing the costs of 
producing and delivering funds' annual and semi-annual reports to 
shareholders.

Form N-1A

    Form N-1A contains collection of information requirements. The 
likely respondents to this information collection are open-end funds 
registering with the Commission on Form N-1A. Compliance with the 
disclosure requirements of Form N-1A is mandatory. Responses to the 
disclosure requirements are not confidential.
    We estimate that the proposed amendments to Form N-1A would have no 
impact on the hour burden for filing registration statements on Form N-
1A. The amendments to Form N-1A relate solely to the contents of 
shareholder reports for funds registered on Form N-1A, and the 
additional burden hours imposed by these amendments are reflected in 
the collection of information requirements for shareholder reports 
required by rule 30e-1 under the Investment Company Act.

Form N-2

    Form N-2 contains collection of information requirements. The 
likely respondents to this information collection are closed-end funds 
registering with the Commission on Form N-2. Compliance with the 
disclosure requirements of Form N-2 is mandatory. Responses to the 
disclosure requirements are not confidential.
    We estimate that the proposed amendments to Form N-2 would have no 
impact on the hour burden for filing registration statements on Form N-
2. The amendments to Form N-2 relate solely to the contents of 
shareholder reports for funds registered on Form N-2, and the 
additional burden hours imposed by these amendments are reflected in 
the collection of information requirements for shareholder reports 
required by rule 30e-1 under the Investment Company Act.

Form N-3

    Form N-3, including the proposed amendments, contains collection of 
information requirements. The likely respondents to this information 
collection are separate accounts, organized as management investment 
companies and offering variable annuities, registering with the 
Commission on Form N-3. Compliance with the disclosure requirements of 
Form N-3 is mandatory. Responses to the disclosure requirements are not 
confidential.
    We estimate that the proposed amendments to Form N-3 would have no 
impact on the hour burden for filing registration statements on Form N-
3. The amendments to Form N-3 relate solely to the contents of 
shareholder reports for funds registered on Form N-3, and the 
additional burden hours imposed by these amendments are reflected in 
the collection of information requirements for shareholder reports 
required by rule 30e-1 under the Investment Company Act.

Form N-CSR

    Proposed Form N-CSR, including the proposed amendments, contains 
collection of information requirements. The respondents to this 
information collection would be management investment companies subject 
to rule 30e-1 under the Investment Company Act of 1940 registering with 
the Commission on Form N-1A, N-2, or N-3. Compliance with the 
disclosure requirements of Form N-CSR is proposed to be mandatory. 
Responses to the disclosure requirements are not confidential.
    We previously estimated that the weighted average hour burden for 
preparing a proposed Form N-CSR would be 16.38 hours per filing. We 
also estimated that 3,700 funds would file Form N-CSR on a semi-annual 
basis for a total of 7,400 filings. Thus, we estimated that the total 
annual hour burden for the preparation and filing of Form N-CSR would 
be 121,195 hours.\87\ We estimate that the 3,700 funds filing reports 
on Form N-CSR include 9,850 portfolios, including 9,100 portfolios of 
mutual funds registered on Form N-1A, 630 closed-end funds registered 
on Form N-2, and 120 sub-accounts of managed separate accounts 
registered on Form N-3.\88\
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    \87\ See Certification of Management Investment Company 
Shareholder Reports and Designation of Certified Shareholder Reports 
as Exchange Act Periodic Reporting Forms, Investment Company Act 
Release No. 25723 (Aug. 30, 2002) (67 FR 57298 (Sept. 9, 2002)); 
Disclosure of Proxy Voting Policies and Proxy Voting Records by 
Registered Management Investment Companies, Investment Company Act 
Release No. 25739 (Sept. 20, 2002) (67 FR 60828 (Sept. 26, 2002)); 
Disclosure Required by Sections 404, 406 and 407 of the Sarbanes-
Oxley Act of 2002, Investment Company Act Release No. 25775 (October 
22, 2002) (67 FR 66208 (Oct. 30, 2002)); Strengthening the 
Commission's Requirements Regarding Auditor Independence, Investment 
Company Act Release No. 25838 (Dec. 2, 2002) (67 FR 76780 (Dec. 13, 
2002)); Rule 10b-18 and Purchases of Certain Equity Securities by 
the Issuer and Others, Investment Company Act Release No. 25845 
(Dec. 10, 2002).
    \88\ The estimates of the number of mutual fund portfolios 
registered on Form N-1A and the number of closed-end funds 
registered on Form N-2 are based on the Commission staff's analysis 
of reports filed on Form N-SAR in 2002. The estimate of the number 
of sub-accounts of managed separate accounts registered on Form N-3 
is based on the staff's analysis of reports filed on Form N-SAR in 
2002, and the staff's estimate, based on its experience with Form N-
3, of four sub-accounts per managed separate account.
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    The proposed amendments would require a fund that has used a 
summary portfolio schedule in its reports to shareholders in lieu of 
including a complete schedule of investments in securities of 
unaffiliated issuers, or a money market fund that has omitted its 
schedule of investments in securities of unaffiliated issuers from its 
reports to

[[Page 172]]

shareholders, to file its complete schedule of investments in 
securities of unaffiliated issuers pursuant to Item 7 of Form N-CSR. We 
estimate that 7,195 fund portfolios, including 1,000 money market fund 
portfolios that would be exempt from including a portfolio schedule in 
their shareholder reports, and 6,195 portfolios (or 70% of the fund 
portfolios remaining) would take advantage of one of these provisions, 
and hence would be required to file a complete portfolio schedule on 
Item 7 of Form N-CSR.\89\ We estimate that the requirements of Item 7 
of Form N-CSR would increase the hour burden for filing Form N-CSR by 5 
hours per portfolio per filing, or 71,950 hours (7,195 portfolios x 5 
hours per portfolio x 2 filings per year). Thus, if the proposed 
amendments to Form N-CSR are adopted, the total annual hour burden for 
all funds for preparation and filing of Form N-CSR would be 193,145 
hours (121,195 hours + 71,950 hours). The weighted average burden per 
filing on Form N-CSR would be 26.1 hours.
---------------------------------------------------------------------------

    \89\ This is based on the Commission staff's estimate that more 
than 70% of funds had more than 50 securities in their portfolios, 
according to the staff's analysis of data from the Morningstar 
Principia Pro database.
---------------------------------------------------------------------------

Shareholder Reports

    Rule 30e-1, including the proposed amendments to Forms N-1A, N-2, 
and N-3, contains collection of information requirements.\90\ The 
respondents to this collection of information requirement are funds 
registered on Forms N-1A, N-2, and N-3. Compliance with the disclosure 
requirements of rule 30e-1 is mandatory. Responses to the disclosure 
requirements will not be kept confidential.
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    \90\ The proposed amendments are to the shareholder reports 
requirements in Forms N-1A, N-2, and N-3. Rule 30e-1(a) under the 
Investment Company Act of 1940 (17 CFR 270.30e-1(a)) requires funds 
to include in the shareholder reports the information that is 
required by the fund's registration statement form.
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    There are approximately 3,700 funds subject to rule 30e-1. We 
estimate that the current hour burden for preparing and filing semi-
annual and annual shareholder reports in compliance with rule 30e-1 is 
212.5 hours per fund, for a total annual burden to the industry of 
786,250 hours. We estimate that the 3,700 funds filing annual and semi-
annual shareholder reports pursuant to rule 30e-1 include 9,850 
portfolios, including 9,100 portfolios of mutual funds registered on 
Form N-1A, 630 closed-end funds registered on Form N-2, and 120 sub-
accounts of managed separate accounts registered on Form N-3.\91\
---------------------------------------------------------------------------

    \91\ This estimate is based on the Commission staff's analysis 
of reports filed on Form N-SAR in 2002.
---------------------------------------------------------------------------

    We estimate that there are 1,000 money market fund portfolios that 
would take advantage of the provision permitting a money market fund to 
omit its schedule of investments in securities of unaffiliated issuers 
from its shareholder reports. This would decrease the hour burden of 
complying with rule 30e-1 for these funds by 5 hours per portfolio per 
filing, or 10,000 hours (1,000 portfolios x 5 hours x 2 filings per 
year).
    We estimate that of the remaining 8,850 portfolios of funds filing 
shareholder reports, 70%, or 7,095 portfolios, would choose to take 
advantage of the provisions permitting use of a summary portfolio 
schedule. However, we estimate that use of the summary portfolio 
schedule provisions would have no net effect on the burden hours of 
complying with rule 30e-1. The estimated time necessary to prepare a 
summary portfolio schedule will be equivalent to the time currently 
required to prepare a complete portfolio schedule, because a fund will 
still need to evaluate the size of each of its investments in 
securities of unaffiliated issuers in order to prepare the summary 
portfolio schedule.
    Further, we estimate that the proposed requirement to include a 
tabular or graphic presentation in shareholder reports, which would 
apply to all funds, will increase the estimated burden hours for 
complying with rule 30e-1 by 3 hours per portfolio per filing, or 
59,100 hours (9,850 portfolios x 3 hours x 2 filings per year). We 
estimate that the requirement to disclose in shareholder reports the 
dollar cost of investing in the fund over the reporting period, which 
would apply only to mutual funds, will increase the estimated burden 
hours for complying with rule 30e-1 by 5 hours per portfolio per 
filing, or 91,000 hours (9,100 mutual fund portfolios x 5 hours x 2 
filings per year).\92\ Finally, we estimate that the requirement for 
mutual funds to include MDFP in annual reports to shareholders would 
have a negligible effect on the estimated burden hours for complying 
with rule 30e-1, because over 90% of mutual funds, in the staff's 
experience, already include MDFP in annual reports to shareholders.
---------------------------------------------------------------------------

    \92\ The estimate of the number of mutual funds is based on data 
derived from the Commission's EDGAR filing system of the number of 
mutual funds filing shareholder reports pursuant to rule 30e-1.
---------------------------------------------------------------------------

    Thus, the proposed amendments would have a net increase on the 
burden hours of complying with rule 30e-1 of 140,100 hours (-10,000 
hours + 59,100 hours + 91,000 hours), for a new total burden of 926,350 
hours.

Rule 30b1-4

    The purpose of proposed Rule 30b1-4 is to improve transparency of 
information about funds' portfolio holdings. Proposed Rule 30b1-4 would 
require funds to file a quarterly report via the Commission's EDGAR 
system on proposed Form N-Q, not more than sixty calendar days after 
the close of each first and third fiscal quarter, containing their 
complete portfolio holdings. The likely respondents to Rule 30b1-4 
would be registered management investment companies, other than small 
business investment companies registered with the Commission on Form N-
5.
    We estimate that there are approximately 3,700 funds that would be 
affected by the proposed rule. Each of those 3,700 funds would be 
required by proposed Rule 30b1-4 to file a complete portfolio holdings 
schedule via EDGAR on proposed Form N-Q. For purposes of this Paperwork 
Reduction Act analysis, the burden associated with the requirements of 
proposed Rule 30b1-4 has been included in the collection of information 
requirements of proposed Form N-Q, rather than the proposed Rule.
    Compliance with rule 30b1-4 is mandatory for every registered fund. 
Responses to the disclosure requirements will not be kept confidential.

Form N-Q

    Proposed Form N-Q contains collection of information requirements. 
The respondents to this information collection would be management 
investment companies subject to rule 30e-1 under the Investment Company 
Act of 1940 registering with the Commission on Forms N-1A, N-2, or N-3. 
Compliance with the disclosure requirements of Form N-Q would be 
mandatory. Responses to the disclosure requirements would not be kept 
confidential.
    Every registered management investment company, other than a small 
business investment company registered on Form N-5, would be required 
to file a quarterly report on Form N-Q disclosing the information 
required therein, not more than sixty calendar days after the close of 
the first and third quarters of each fiscal year. We estimate that 
there are approximately 3,700 funds that would be affected by the 
proposal, which include 9,850 fund portfolios. We therefore estimate 
that for each of those

[[Page 173]]

funds the disclosure of their portfolio holdings schedules in filings 
on Form N-Q as of the end of each first and third fiscal quarter would 
require, on average, 10 hours per portfolio per filing,\93\ for a total 
annual hour burden of 197,000 hours (10 hours per filing x 2 filings 
per year x 9,850 fund portfolios).
---------------------------------------------------------------------------

    \93\ This estimate is based on a review of the estimated hour 
burdens currently associated with other rules and forms under the 
Investment Company Act that impose similar disclosure requirements.
---------------------------------------------------------------------------

Request for Comments

    We request your comments on the accuracy of our estimates. Pursuant 
to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments to: (1) 
Evaluate whether the proposed collection of information is necessary 
for the proper performance of the functions of the agency, including 
whether the information will have practical utility; (2) evaluate the 
accuracy of the Commission's estimate of burden of the proposed 
collection of information; (3) determine whether there are ways to 
enhance the quality, utility, and clarity of the information to be 
collected; and (4) evaluate whether there are ways to minimize the 
burden of the collection of information on those who are to respond, 
including through the use of automated collection techniques or other 
forms of information technology.
    Persons submitting comments on the collection of information 
requirements should direct the comments to the Office of Management and 
Budget, Attention: Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Room 3208, 
New Executive Office Building, Washington, DC 20503, and should send a 
copy to Jonathan G. Katz, Secretary, Securities and Exchange 
Commission, 450 5th Street, NW., Washington, DC 20549-0609, with 
reference to File No. S7-51-02. Requests for materials submitted to OMB 
by the Commission with regard to this collection of information should 
be in writing, refer to File No. S7-51-02, and be submitted to the 
Securities and Exchange Commission, Records Management, Office of 
Filing and Information Services, 450 Fifth Street NW., Washington, DC 
20549. OMB is required to make a decision concerning the collection of 
information between 30 and 60 days after publication of this release. 
Consequently, a comment to OMB is best assured of having its full 
effect if OMB receives it within 30 days after publication of this 
Release.

V. Cost/Benefit Analysis

    The Commission is sensitive to the costs and benefits imposed by 
its rules. Our proposed amendments are intended to improve the periodic 
disclosure provided by registered management investment companies 
(``funds'') about their portfolio investments, costs, and past 
performance. The proposed amendments would:
    [sbull] Permit a fund to include a summary portfolio schedule in 
its reports to shareholders, and exempt a money market fund from the 
requirement to include a portfolio schedule of investments in 
securities of unaffiliated issuers in its reports to shareholders, 
provided that the complete portfolio schedule is filed with the 
Commission on proposed Form N-CSR semi-annually and is provided to 
shareholders upon request, free of charge;
    [sbull] Require reports to shareholders by funds to include a 
tabular or graphic presentation of a fund's portfolio holdings by 
identifiable categories;
    [sbull] Require a fund to file its complete portfolio schedule as 
of the end of its first and third fiscal quarters with the Commission 
on new proposed Form N-Q;
    [sbull] Require open-end management investment companies (``mutual 
funds'') to disclose fund expenses borne by shareholders during the 
reporting period in reports to shareholders; and
    [sbull] Require a mutual fund to include Management's Discussion of 
Fund Performance in its annual report to shareholders.
    These proposed amendments are intended to significantly improve the 
periodic disclosure that fund investors receive, particularly with 
respect to portfolio holdings and expenses, while reducing the costs of 
producing and delivering funds' annual and semi-annual reports to 
shareholders.

A. Benefits

    Use of Summary Portfolio Schedule and Exemption of Money Market 
Funds from Portfolio Schedule Requirements in Shareholder Reports. The 
Commission estimates that more than 70% of all funds may realize at 
least some cost savings, through reduced printing and mailing expenses, 
by use of a summary portfolio holdings schedule in their shareholder 
reports.\94\ Money market funds would realize similar benefits with 
respect to the proposed exemption from the requirement to include the 
schedule of investments in unaffiliated issuers in their reports to 
shareholders. In addition, for purposes of the Paperwork Reduction Act, 
we have estimated that this exemption for money market funds would 
reduce the burden hours for compliance with shareholder reports 
requirements by 10,000 hours, translating into a cost savings of 
$689,400 annually.\95\
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    \94\ This is based on the Commission staff's estimate that more 
than 70% of funds had more than 50 securities in their portfolios, 
according to the staff's analysis of data from the Morningstar 
Principia Pro database.
    \95\ See Section IV., supra (estimating that 1,000 money market 
fund portfolios would take advantage of the provision permitting a 
money market fund to omit its schedule of investments in securities 
of unaffiliated issuers from its shareholder reports, resulting in 
an estimated decrease of 5 hours per portfolio per filing). The 
estimated cost savings is derived from the estimated reduction in 
burden hours, and an estimated hourly wage rate for professional and 
non-professional staff of $68.94. This estimated wage rate is a 
blended rate, based on published hourly wage rates for compliance 
attorneys in New York City ($74.22) and programmers ($27.91), and 
the estimate that professional and non-professional staff would 
divide time equally on compliance with the proposed disclosure 
requirements, yielding a weighted wage rate of $68.94 (($74.22 x 
.50) + ($27.91 x .50)) = $51.065). See Securities Industry 
Association, Report on Management & Professional Earnings in the 
Securities Industry 2001 (Oct. 2001). This weighted wage rate was 
then adjusted upward by 35% for overhead, reflecting the costs of 
supervision, space, and administrative support, to obtain the total 
per hour internal cost of $68.94 ($51.065 x 1.35) = $68.94.
---------------------------------------------------------------------------

    For funds with large numbers of holdings, such as index funds, the 
cost savings in printing and mailing could be substantial. As of year-
end 2001, there were approximately 248 million shareholder accounts 
invested in funds.\96\ For each account, funds are required to provide 
an annual and semi-annual shareholder report, although our rules allow 
the delivery of a single shareholder report to investors who share an 
address (``householding'') under certain conditions. We estimate that, 
as a result, funds may print and deliver approximately 347.2 million 
and 446.4 million shareholder reports annually.\97\ Annually, use of a 
summary portfolio schedule could therefore impact approximately 243.0 
million to 312.5 million shareholder reports.\98\ Although we are 
unable to precisely quantify the overall cost savings, at a minimum, if 
funds could reduce their printing and distribution expenses by one page 
per shareholder report, at a cost of 2[cent] per page, shareholders 
could

[[Page 174]]

save approximately $4.9 million to $6.3 million per year.\99\ The 
Commission believes, however, that some funds may be able to reduce the 
length of their shareholder reports by more than a single printed page 
and we therefore expect the cost savings to funds may exceed these 
estimates.\100\ These potential savings may be passed on to fund 
shareholders.\101\
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    \96\ Investment Company Institute, Mutual Fund Fact Book 63 
(42nd ed. 2002).
    \97\ See Delivery of Disclosure Documents to Households, 
Investment Company Act Release No. IC-24123 (64 FR 62540, 62543 
(Nov. 16, 1999)) (estimating that householding rules would produce a 
decline in the number of shareholder reports required to be 
delivered of between 10 and 30 percent).
    \98\ This number reflects the estimated 70% of funds that would 
use a summary portfolio schedule and hence may benefit from reduced 
printing costs.
    \99\ This is based on an estimate that the typical shareholder 
report is approximately 25 pages long and costs $.52 to print and 
deliver. See Delivery of Disclosure Documents to Households, 
Securities Act Release No. 33-7766 (Nov. 4, 1999) (64 FR 62540, 
62543 (Nov. 16, 1999)).
    \100\ See e.g., Letter from Craig S. Tyle, General Counsel, ICI, 
to Barry P. Barbash, Director, Division of Investment Management, 
SEC, supra note 10, at 2 (portfolio holdings schedule contained in 
one large equity fund's March 31, 1998 annual report was nineteen 
pages long and listed approximately 480 securities); Letter from 
Heidi Stam, Principal, Securities Regulation, Vanguard, to Cynthia 
Fornelli, Division of Investment Management, SEC, supra note 10, at 
1-2 (portfolio holdings schedule in the Vanguard Total Stock Market 
Index Fund June 30, 1999 semi-annual report was 29 pages long and 
listed 3,204 securities).
    \101\ The provision permitting use of a summary portfolio 
schedule in shareholder reports, and the exemption for money market 
funds from the requirement to include in shareholder reports a 
complete schedule of investments in securities of unaffiliated 
issuers, are not expected to result in any reduction in internal 
costs for funds, because funds that utilize these provisions would 
still be required to file their complete portfolio schedules on Item 
7 of Form N-CSR.
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    Apart from savings in printing and distribution costs, use of a 
summary portfolio schedule may benefit investors by helping them focus 
on a fund's principal holdings, and thereby better evaluate a fund's 
risk profile and investment strategy. These benefits to investors are 
difficult to quantify, however. We request comment on the extent and 
magnitude of the benefits to funds and investors that would result from 
permitting use of a summary portfolio schedule in shareholder reports, 
and permitting money market funds to omit a schedule of investments in 
securities of unaffiliated issuers from shareholder reports.
    Tabular or Graphic Presentation of Portfolio Holdings. The proposed 
requirements for funds to provide a tabular or graphic presentation of 
their portfolio holdings in their annual and semi-annual reports to 
shareholders should benefit fund investors by illustrating, in a 
concise and user-friendly format, the allocation of a fund's 
investments across asset classes. This presentation, coupled with a 
summary portfolio schedule, may more effectively convey key information 
about a fund's investments than would the fund's complete portfolio 
schedule standing alone, particularly in the case of funds with large 
numbers of holdings. These benefits to investors resulting from the use 
of a tabular or graphic presentation are difficult to quantify, 
however. We request comment on the extent and magnitude of the benefits 
to funds and investors that would result from use of a summary 
portfolio schedule in shareholder reports.
    Quarterly Filing of Complete Portfolio Schedule. The proposal to 
require the quarterly filing of a fund's complete portfolio schedule 
via EDGAR, within 60 days after the end of the first and third fiscal 
quarters, should benefit investors by providing them with greater 
information about whether, and how, a fund is complying with its stated 
investment objective. The proposal would allow investors, and their 
advisers or other investment professionals, to better monitor the 
extent to which the portfolios of the funds that investors hold 
overlap, and hence should promote more informed asset allocation 
decisions. In addition, quarterly disclosure of a fund's portfolio 
holdings may expose instances of ``style drift,'' when the actual 
portfolio holdings of a fund deviate from its stated investment 
objective. The increased transparency resulting from quarterly 
disclosure may also deter several forms of portfolio manipulation by 
portfolio managers, including ``window dressing'' (buying or selling 
portfolio securities shortly before the date as of which a fund's 
holdings are publicly disclosed, in order to convey an impression that 
the manager has been investing in companies that have had exceptional 
performance during the reporting period) and ``portfolio pumping'' 
(buying shares of stocks the fund already owns on the last day of the 
reporting period, in order to drive up the price of the stocks and 
inflate the fund's performance results).\102\ Any of these forms of 
portfolio manipulation enhance the apparent composition of the 
portfolio at the expense of portfolio returns. By increasing the 
frequency of reporting, engaging in these activities becomes more 
expensive in terms of returns. Therefore, we would expect fewer funds 
to engage in these activities. To the extent that portfolio managers 
currently engage in these activities, shareholders would be better off 
as a result of the proposed amendments. More broadly, the increased 
frequency of disclosure will permit investors to better link the 
composition of a fund portfolio to fund performance.
---------------------------------------------------------------------------

    \102\ See Rulemaking Petition by the American Federation of 
Labor and the Congress of Industrial Organizations, supra note 12 at 
2-3; Rulemaking Petition by the Consumer Federation of America, et 
al., supra note 12 at 2; Rulemaking Petition by Fund Democracy, LLC, 
supra note 12, ``Memorandum in Support of Rulemaking Petition'' at 
7-8, 15-21.
---------------------------------------------------------------------------

    We request comment on the benefits to investors of quarterly 
portfolio disclosure, and in particular on whether, and to what extent, 
quarterly portfolio disclosure might deter forms of portfolio 
manipulation.
    Disclosure of Fund Expenses in Shareholder Reports. The proposed 
requirement for mutual funds to disclose in their reports to 
shareholders fund expenses borne by shareholders during the reporting 
period should benefit investors by increasing their awareness and 
understanding of the fees that they pay on an ongoing basis for 
investing in a mutual fund. The benefits of the improved transparency 
of funds' ongoing fees and expenses are difficult to quantify, however. 
We request comment on the extent and magnitude of these benefits, as 
well as the benefits of alternative means of disclosure of the ongoing 
costs of funds.
    Inclusion of MDFP in Annual Reports to Shareholders by Mutual 
Funds. The proposals to require funds to include MDFP in their annual 
reports to shareholders should assist investors in assessing the fund's 
performance over the prior year. Requiring MDFP in the annual report, 
as opposed to the fund's prospectus, may benefit shareholders by 
enabling them to assess information provided in the MDFP together with 
other ``backward looking'' information contained in the annual report. 
We note, however, that to the extent that, based on the staff's 
experience, over 90% of mutual funds already include this information 
in their annual reports to shareholders, these benefits are already 
being realized.

B. Costs

    The proposed amendments may lead to some additional costs for 
funds, which could be passed on to fund shareholders. In the case of 
the additional disclosure requirements being proposed, these costs 
would include both internal costs (for attorneys and other non-legal 
staff of a fund, such as computer programmers, to prepare and review 
the required disclosure) and external costs (for printing and 
typesetting of the disclosure).
    Use of Summary Portfolio Schedule and Exemption of Money Market 
Funds from Portfolio Schedule Requirements in Shareholder Reports. Our 
proposals to allow funds to include summary portfolio schedules in 
reports to shareholders, and to exempt money market funds from the 
requirement to include a portfolio schedule of investments in 
securities of unaffiliated issuers in their reports to shareholders,

[[Page 175]]

may result in some costs to funds. For purposes of the Paperwork 
Reduction Act, we estimate that these proposals would not increase the 
hour burden for completing a shareholder report in compliance with rule 
30e-1 under the Investment Company Act. However, we estimate that use 
of either the provision permitting use of a summary portfolio schedule 
or the provision permitting a money market fund to omit its schedule of 
investments in securities of unaffiliated issuers would increase the 
hour burden for filing Form N-CSR by 5 hours per portfolio per filing, 
or 71,950 hours (7,195 portfolios x 5 hours per portfolio x 2 filings 
per year), resulting in an additional cost of filing Form N-CSR of 
$4,960,233.\103\
---------------------------------------------------------------------------

    \103\ These figures are based on an estimated hourly wage rate 
of $68.94. See supra note (explaining calculation of wage rate).
---------------------------------------------------------------------------

    Further, under our proposals, to the extent that investors want to 
see a complete portfolio schedule, investors would incur search costs 
to gather this information (i.e., requesting the information from the 
fund). However, since funds will be required to deliver the complete 
portfolio schedule within three days and free of charge to all 
investors who request it, we expect these costs to be very small. We 
request comment on these estimates.
    Tabular or Graphic Presentation of Portfolio Holdings. The 
proposals would require funds to provide one or more tables, charts, or 
graphs depicting the securities holdings of the fund by reasonably 
identifiable categories (e.g., type of security, industry sector, 
geographic region, credit quality, or maturity) showing the percentage 
of net asset value attributable to each. We estimate that these costs 
would be limited, however, because a fund could select the most 
appropriate means by which it would convey information to investors 
about the types of investments made by the fund, given its investment 
objectives, and because a majority of funds, according to the staff's 
estimate, already provide some type of tabular or graphic depiction of 
their holdings in shareholder reports. For purposes of the Paperwork 
Reduction Act, we have estimated that the disclosure requirements would 
add 3 hours per portfolio to the burden of completing each annual and 
semi-annual report to shareholders, or 59,100 hours total (3 hours per 
portfolio x 2 reports per year x 9,850 portfolios of funds required to 
provide reports to shareholders). We estimate that this additional 
burden would equal total internal costs of $4,074,354 annually.\104\ 
Further, because most funds already include a similar type of 
presentation voluntarily in shareholder reports, we estimate that this 
new disclosure requirement will not increase printing and mailing costs 
of shareholder reports for most funds, and hence the external costs to 
funds of the tabular and graphic disclosure requirement would be 
minimal. We request comment on these estimates.
---------------------------------------------------------------------------

    \104\ These figures are based on an estimated hourly wage rate 
of $68.94. See supra note 95 (explaining calculation of wage rate).
---------------------------------------------------------------------------

    Quarterly Filing of Complete Portfolio Schedule. Our proposals to 
require funds to file with the Commission for the first and third 
fiscal quarters of each fiscal year their complete portfolio holdings 
schedule on proposed Form N-Q, and to disclose the availability of the 
filing on the Commission's website, would impose certain costs on 
funds. We estimate that for purposes of the Paperwork Reduction Act, 
these disclosure requirements would impose 10 burden hours per 
portfolio per filing on Form N-Q. We estimate that the total burden 
would therefore be 197,000 hours, or $13,581,180 in total internal 
costs annually, based on an estimate of 3,700 funds filing reports on 
Form N-Q for 9,850 fund portfolios.\105\ Because this quarterly 
disclosure would only be required to be filed on EDGAR, and not 
actually delivered to shareholders, we estimate that the external costs 
per fund, for typesetting, printing, and mailing, of this additional 
disclosure would be negligible.
---------------------------------------------------------------------------

    \105\ This estimate is based on data from the Commission's EDGAR 
system of the number of registered management investment companies, 
and an estimated hourly wage rate of $68.94; see supra note 95.
---------------------------------------------------------------------------

    Mandating quarterly portfolio disclosure may impose other costs on 
funds and their shareholders. Arguments have been made that more 
frequent disclosure of portfolio holdings may expand the opportunities 
for professional traders to exploit this information by engaging in 
predatory trading practices, such as trading ahead of funds, often 
called ``front-running.'' \106\ However, in order for ``front-running'' 
to significantly decrease investment returns under the proposed 
quarterly reporting requirements, it appears that the following 
conditions may have to be present:
---------------------------------------------------------------------------

    \106\ See Letter from Craig S. Tyle, General Counsel, ICI to 
Paul F. Roye, Director, Division of Investment Management, SEC, 
supra note 59; Russ Wermers, Potential Effects of More Frequent 
Portfolio Disclosure on Mutual Fund Performance, ICI Perspective, 
supra note 59.
---------------------------------------------------------------------------

    1. To accomplish the goals of the trade that might be front run, 
the fund manager has limited discretion over the timing of the trade.
    2. The trade occurs during a quarter at the end of which the fund 
otherwise would not have had to report its portfolio holdings.
    3. The order is so large that it cannot be reasonably completed 
within the disclosure window.
    4. The market is sufficiently illiquid so that large orders may be 
reasonably expected to have a substantial impact on price.
    5. When the fund's portfolio is revealed, the size of the remaining 
order is sufficiently large that it is worth front-running.
    6. Other traders recognize the front-running opportunity.
    7. Other traders are willing to assume the risks of trading on the 
front-running opportunity.
    8. The fund manager cannot delay the trade without a significant 
effect on performance.
    It appears that front running may be a profitable strategy if all 
of these conditions hold simultaneously. It also appears that these 
conditions may rarely be met. If this is correct, the resulting costs 
of front-running under our proposals should be minimal.\107\
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    \107\ A delay of 60 days in reporting is intended to 
significantly mitigate the potential costs to funds caused by 
quarterly portfolio disclosure. The Commission staff estimates that 
approximately 99% of fund portfolio holdings represent an average of 
nine days of trading volume or less in the securities held. Thus, 
even if a fund decided it needed to significantly alter or exit a 
position at the end of a reporting period, it appears likely that 
the fund generally could unwind that position in the time between 
the end of the reporting period and the date of disclosure with only 
minimal price impact.
---------------------------------------------------------------------------

    Furthermore, there are two additional potential costs that may be 
associated with these proposals. First, it has been argued that, given 
public data about aggregate flows of new cash to funds, more frequent 
disclosure of portfolio holdings would allow traders to effectively 
identify the securities in which the fund(s) will transact to 
accommodate this flow. This may, in turn, provide a potentially 
profitable front-running strategy to these traders.\108\ Second, a 
requirement for more frequent disclosure may disrupt trades that are 
made for potential tax-

[[Page 176]]

timing advantages.\109\ These potential costs are particular cases of 
front-running, and it appears that they may require the same conditions 
to hold as those described above, along with additional conditions 
specific to these strategies.
---------------------------------------------------------------------------

    \108\ See, e.g., Russ Wermers, Potential Effects of More 
Frequent Portfolio Disclosure on Mutual Fund Performance, ICI 
Perspective, supra note , at 9-10. Some empirical evidence suggests 
that portfolio holdings are correlated across all funds. See Paul A. 
Gompers and Andrew Metrick, Institutional Investors and Equity 
Prices, National Bureau of Economic Research Working Paper 6723 
(Sept. 1998), available at http://www.nber.org/papers/w6723. If this 
is correct, more frequent disclosure of individual holdings is 
unlikely to make current trading strategies more profitable, since 
quarterly aggregate holdings data is currently available through 13F 
filings.
    \109\ Russ Wermers, Potential Effects of More Frequent Portfolio 
Disclosure on Mutual Fund Performance, ICI Perspective, supra note 
59, at 10-11.
---------------------------------------------------------------------------

    We request comment on the analysis above, and on the nature and 
magnitude of any potential costs of front-running resulting from more 
frequent disclosure of portfolio holdings.
    Arguments have also been made that more frequent portfolio 
disclosure may facilitate the ability of outside investors to ``free 
ride'' on a mutual fund's investment strategies, by obtaining for free 
the benefits of fund research and investment strategies that are paid 
for by fund shareholders.\110\ The extent to which our proposed 
quarterly disclosure requirement, with a 60 day lag, would result in 
these types of costs is difficult to quantify, and may depend on a 
number of assumptions. In general, it appears that the following 
conditions must be satisfied for free-riding to be a profitable 
strategy:
---------------------------------------------------------------------------

    \110\ See Letter from Craig S. Tyle, General Counsel, ICI to 
Paul F. Roye, Director, Division of Investment Management, SEC, 
supra note 59; Russ Wermers, Potential Effects of More Frequent 
Portfolio Disclosure on Mutual Fund Performance, ICI Perspective, 
supra note 59.
---------------------------------------------------------------------------

    1. The market is able to consistently identify skilled fund 
managers.\111\
---------------------------------------------------------------------------

    \111\ Some empirical studies of mutual fund performance 
evaluation have suggested that the consistent identification of 
skilled mutual fund managers is not likely. See Mark Carhart, On the 
Persistence of Mutual Fund Performance, Journal of Finance, March 
1997, at 57-82.
---------------------------------------------------------------------------

    2. The trading information of skilled fund managers remains 
valuable from 2 to 5 months after the trade is initiated.
    It appears that a fund may be damaged by free-riding if its trading 
positions are incomplete when the fund's portfolio is disclosed and the 
front-running conditions discussed above are met. In addition, it 
appears that the market for the securities being traded pursuant to the 
strategy must be sufficiently illiquid to generate price impacts such 
that completion of the trading strategy is more costly to the fund 
manager. It appears that these conditions may not often simultaneously 
hold, although when they do, funds may be adversely impacted.
    We also note, however, that once the fund adviser has completed its 
trading strategy, it may hope that other traders will follow it because 
the price impacts of their trading will make the fund's trades 
profitable. The net effect of ``free riding'' therefore is not 
necessarily negative.
    We request comment on this analysis and on the nature and magnitude 
of any potential costs of free-riding that may result from more 
frequent disclosure of portfolio holdings.
    We request comment generally on whether, and to what extent, our 
proposals would impose costs resulting from predatory trading 
practices, and on any other costs that would be imposed by our proposed 
quarterly portfolio disclosure requirement.
    Disclosure of Fund Expenses in Shareholder Reports. We estimate 
that in order for mutual funds to comply with the proposed requirement 
to include in annual and semi-annual reports disclosure of the dollar 
cost associated with investing a standardized amount in a fund, a 
typical mutual fund would need to add two additional pages to its 
annual and semi-annual reports, at a cost of $0.02 per page.\112\ We 
estimate that a typical fund may have, on average, 30,000 shareholder 
accounts, and will send out between 42,000 and 54,000 reports to 
shareholders annually.\113\ Therefore, this additional disclosure in 
shareholder reports would cost approximately $2,400 (($0.04 x 30,000 
shareholder accounts) x 2 reports per year) in external costs per fund 
annually. Based on an estimate of 3,100 mutual funds filing annual and 
semi-annual reports with the Commission pursuant to rule 30e-1, we 
estimate these external costs would be $7,440,000 for the industry as a 
whole. In addition, we estimate for purposes of the Paperwork Reduction 
Act that these disclosure requirements would add 91,000 burden hours 
for mutual funds required to transmit shareholder reports, or 10 hours 
per mutual fund portfolio, equal to internal costs of $6,273,540 for 
the industry annually.\114\ We request comment on these estimates.
---------------------------------------------------------------------------

    \112\ See supra note 99.
    \113\ The estimate regarding the average number of shareholder 
accounts per typical fund is derived from data provided in the 
Mutual Fund Fact Book, supra note 96, at 63, 64. The estimates that 
42,000 to 54,000 reports to shareholders must be delivered to 
shareholders annually are derived from the number of shareholder 
accounts, the requirement that each fund must deliver an annual and 
a semi-annual report to each account-holder, and an estimated 10 to 
30 percent savings in the number of reports that must be delivered 
to shareholders due to householding rules. See supra note 97.
    \114\ These figures are based on the staff's estimate, derived 
from data from the Commission's EDGAR filing system, that 
approximately 3,100 mutual funds file shareholder reports with the 
Commission and hence would be subject to the proposed amendments, 
and an estimated hourly wage rate of $68.94. See supra note 104.
---------------------------------------------------------------------------

    As the Commission considered how to best disclose to investors the 
fees and expenses that they incur with investment in a fund, it 
considered the costs and benefits of various alternatives, including 
providing fund shareholders with individualized cost information (in 
dollars) as to the fees and expenses that they paid in quarterly 
account statements. We estimate that the cost of providing this 
individualized cost disclosure would greatly exceed the cost of our 
proposal. According to the GAO Report which recommended requiring 
individualized cost disclosure in account statements, one broker-dealer 
with approximately 6.5 million customer accounts estimated that for it 
to develop the systems necessary to produce such statements might cost 
as much as $4 million, with additional annual costs of $5 million.\115\ 
Given that as of year-end 2001, there were approximately 248 million 
shareholder accounts invested in funds, estimated industry-wide costs 
could easily exceed $100 million annually.\116\ We request comment on 
the costs of alternative methods of increasing investors' awareness of 
fund fees and expenses.
---------------------------------------------------------------------------

    \115\ GAO Report, supra note 19, at 79.
    \116\ See Investment Company Institute, Mutual Fund Fact Book, 
supra note 96, at 63.
---------------------------------------------------------------------------

    Inclusion of MDFP in Annual Reports to Shareholders by Mutual 
Funds. We estimate that the proposed requirement that mutual funds 
include MDFP in their annual reports to shareholders would not impose 
any costs on funds or shareholders. The staff estimates that over 90% 
of mutual funds already include MDFP in their annual reports to 
shareholders. Further, a fund that does not include MDFP in its annual 
reports must include MDFP in its prospectus. Thus, this proposed 
amendment would not impose any new disclosure requirement on funds, but 
rather would only mandate a change in the location of the required 
disclosure, for the minority of funds that do not already include MDFP 
in their annual reports. To the extent, however, that a fund does not 
already include MDFP in its annual report to shareholders, the fund may 
incur additional printing and mailing costs. We request comment on this 
estimate.

C. Request for Comments

    We request comments on all aspects of this cost-benefit analysis, 
including identification of any additional costs or benefits of, or 
suggested alternatives to, the proposed amendments. Commenters are 
requested to provide empirical data and other factual support for their 
views to the extent possible.

[[Page 177]]

VI. Consideration of Burden on Competition; Promotion of Efficiency, 
Competition, and Capital Formation

    Section 23(a)(2) of the Exchange Act requires us, when adopting 
rules under the Exchange Act, to consider the impact that any new rule 
would have on competition. Section 23(a)(2) also prohibits us from 
adopting any rule that would impose a burden on competition not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act.\117\ In addition, Section 2(c) of the Investment Company Act, 
Section 2(b) of the Securities Act, and Section 3(f) of the Exchange 
Act require the Commission, when engaging in rulemaking that requires 
it to consider or determine whether an action is necessary or 
appropriate in the public interest, to consider, in addition to the 
protection of investors, whether the action will promote efficiency, 
competition, and capital formation.\118\
---------------------------------------------------------------------------

    \117\ 15 U.S.C. 78w(a)(2).
    \118\ 15 U.S.C. 77(b), 78c(f), and 80a-2(c).
---------------------------------------------------------------------------

    The proposed amendments are intended to provide greater 
transparency for fund shareholders regarding their investments in 
funds. These proposed amendments may improve efficiency. The enhanced 
disclosure requirements may provide shareholders with more frequent 
access to portfolio holdings of the funds in which they invest, which 
may promote more efficient allocation of investments by investors and 
more efficient allocation of assets among competing funds. The proposed 
amendments may also improve competition, as enhanced disclosure may 
lead to better-informed investors and may prompt funds to seek to 
provide better-informed investors with improved products and services. 
In addition, permitting funds to deliver summary portfolio schedules in 
shareholder reports may provide a significant reduction in printing and 
delivery costs ultimately borne by shareholders. Finally, the effects 
of the proposed amendments on capital formation are unclear. Although, 
as noted above, we believe that the proposed amendments would benefit 
investors, the magnitude of the effect of the proposed amendments on 
efficiency, competition, and capital formation is difficult to 
quantify, particularly given that many funds do not currently provide 
the type of disclosure contemplated by the proposed amendments.
    We request comment on whether the proposed amendments, if adopted, 
would impose a burden on competition. We also request comment on 
whether the proposed amendments, if adopted, would promote efficiency, 
competition, and capital formation. Commenters are requested to provide 
empirical data and other factual support for their views if possible.

VII. Initial Regulatory Flexibility Analysis

    This Initial Regulatory Flexibility Analysis (``Analysis'') has 
been prepared in accordance with 5 U.S.C. 603, and relates to the 
Commission's proposed rule and form amendments under the Securities 
Act, the Exchange Act, and the Investment Company Act to improve the 
quality of periodic disclosure provided by registered management 
investment companies (``funds'') about their portfolio investments, 
costs, and past performance. These proposed amendments are intended to 
enable funds to provide more meaningful information to shareholders 
while reducing the costs of producing and delivering annual and semi-
annual reports to shareholders.

A. Reasons for, and Objectives of, Proposed Amendments

    Shareholder reports are one of the principal means by which funds 
provide periodic information to their investors. Fund shareholder 
reports historically have served primarily as a vehicle to provide 
financial statements and other financial information to 
shareholders.\119\ The Commission believes that, with some 
modifications, fund shareholder reports could become a more effective 
vehicle for communicating information to investors. The proposed 
amendments principally address disclosure of fund portfolio holdings 
and expenses, two significant areas for improvement that have been 
identified by investor groups, members of the fund industry, and 
others.
---------------------------------------------------------------------------

    \119\ Section 30(e) of the Investment Company Act (15 U.S.C. 
80a-29(e)] (requiring a fund to transmit to its stockholders, at 
least semi-annually, reports containing financial statements and 
other financial information as the Commission may prescribe by rules 
and regulations); National Securities Markets Improvement Act of 
1996, Pub. L. 104-290, 207, 110 Stat. 3416 (Oct. 11, 1996) (adding 
Section 30(f) to the Investment Company Act, which allows the 
Commission to require that semi-annual reports ``include such other 
information as the Commission deems necessary or appropriate in the 
public interest or for the protection of investors.'')
---------------------------------------------------------------------------

B. Legal Basis

    The Commission is proposing amendments to Regulation S-X pursuant 
to authority set forth in sections 5, 6, 7, 8, and 19(a) of the 
Securities Act (15 U.S.C. 77e, 77f, 77g, 77h, and 77s(a)), sections 12, 
13, 15(d) and 23(a) of the Exchange Act (15 U.S.C. 78l, 78m, 78o(d), 
and 78w(a)) and sections 8, 24(a), 30, 31, and 38 of the Investment 
Company Act (15 U.S.C. 80a-8, 80a-24(a), 80a-29, 80a-30, and 80a-37). 
The Commission is proposing new rule 30b1-4 and new Form N-Q pursuant 
to authority set forth in sections 8, 30, 31, and 38 of the Investment 
Company Act (15 U.S.C. 80a-8, 80a-29, 80a-30, and 80a-37). The 
Commission is proposing amendments to Forms N-1A, N-2, and N-3 pursuant 
to authority set forth in sections 5, 6, 7, 10, 19(a), and 28 of the 
Securities Act (15 U.S.C. 77e, 77f, 77g, 77j, 77s(a), and 77z-3) and 
sections 6(c), 8, 24(a), 30, and 38 of the Investment Company Act (15 
U.S.C. 80a-6(c), 80a-8, 80a-24(a), 80a-29, and 80a-37). The Commission 
is proposing amendments to proposed Form N-CSR pursuant to authority 
set forth in sections 10(b), 13, 15(d), 23(a), and 36 of the Exchange 
Act (15 U.S.C. 78j(b), 78m, 78o(d), 78w(a), and 78mm) and sections 
6(c), 8, 24(a), 30, and 38 of the Investment Company Act (15 U.S.C. 
80a-6(c), 80a-8, 80a-24(a), 80a-29, and 80a-37).

C. Small Entities Subject to the Rule

    For purposes of the Regulatory Flexibility Act, an investment 
company is a small entity if it, together with other investment 
companies in the same group of related investment companies, has net 
assets of $50 million or less as of the end of its most recent fiscal 
year.\120\ Approximately 205 out of 3700 investment companies that 
would be affected by this rule meet this definition.\121\
---------------------------------------------------------------------------

    \120\ 17 CFR 270.0-10.
    \121\ This estimate is based on figures compiled by Division of 
Investment Management staff regarding investment companies 
registered on Form N-1A, Form N-2, and Form N-3. In determining 
whether an insurance company separate account is a small entity for 
purposes of the Regulatory Flexibility Act, the assets of insurance 
company separate accounts are aggregated with the assets of their 
sponsoring insurance companies. Investment Company Act rule 0-10(b) 
(17 CFR 270.0-10(b)).
---------------------------------------------------------------------------

D. Reporting, Recordkeeping, and Other Compliance Requirements

    The proposed amendments would:
    [sbull] Permit a fund to include a summary portfolio schedule in 
its reports to shareholders, and exempt a money market fund from the 
requirement to include a portfolio schedule of investments in 
unaffiliated issuers in its reports to shareholders, provided that the 
complete portfolio schedule is filed with the Commission on proposed 
Form N-CSR semi-annually and is provided to shareholders upon request, 
free of charge;

[[Page 178]]

    [sbull] Require reports to shareholders by funds to include a 
tabular or graphic presentation of a fund's portfolio holdings by 
identifiable categories;
    [sbull] Require a fund to file its complete portfolio schedule as 
of the end of its first and third fiscal quarters with the Commission 
on new proposed Form N-Q;
    [sbull] Require open-end management investment companies (``mutual 
funds'') to disclose fund expenses borne by shareholders during the 
reporting period in reports to shareholders; and
    [sbull] Require a mutual fund to include Management's Discussion of 
Fund Performance in its annual report to shareholders.
    The proposed amendments would apply equally to funds that are small 
entities and to other funds. The Commission estimates that the proposed 
amendments may result in some one-time formatting and ongoing costs and 
burdens that would be imposed on all funds, but which may have a 
relatively greater impact on smaller firms. These include the costs 
related to disclosing the dollar cost associated with investing a 
standardized amount in a fund; and the requirement that funds file 
their complete portfolio schedules with the Commission on a quarterly 
basis. These costs also could include expenses for computer time, legal 
and accounting fees, information technology staff, and additional 
computer and telephone equipment. However, we believe the benefits that 
will result to shareholders through better information about their 
funds' investments, costs, and past performance justify these potential 
costs.
    The Commission solicits comment on the effect the proposed 
amendments would have on small entities.

E. Duplicative, Overlapping or Conflicting Federal Rules

    There are no rules that duplicate, overlap, or conflict with the 
proposed amendments.

F. Significant Alternatives

    The Regulatory Flexibility Act directs us to consider significant 
alternatives that would accomplish our stated objective, while 
minimizing any significant adverse impact on small issuers. In 
connection with the proposed amendments, the Commission considered the 
following alternatives: (i) The establishment of differing compliance 
or reporting requirements or timetables that take into account the 
resources available to small entities; (ii) the clarification, 
consolidation, or simplification of compliance and reporting 
requirements under the proposed amendments for small entities; (iii) 
the use of performance rather than design standards; and (iv) an 
exemption from coverage of the proposed amendments, or any part 
thereof, for small entities.
    The Commission believes at the present time that special compliance 
or reporting requirements for small entities, or an exemption from 
coverage for small entities, would not be appropriate or consistent 
with investor protection. The proposed disclosure amendments would 
provide shareholders with greater transparency regarding a fund's 
investments, costs, and performance. Different disclosure requirements 
for small entities, such as reducing the frequency of portfolio 
holdings reports that small entities would have to file with the 
Commission, may create the risk that shareholders of those small 
entities would not have access to sufficient information to make an 
informed evaluation as to whether the fund is complying with its stated 
investment objective. We believe it is important that the disclosure 
that would be required by the proposed amendments be provided to 
shareholders by all funds, not just funds that are not considered small 
entities.
    We have endeavored throughout these proposed amendments to minimize 
the regulatory burden on all funds, including small entities, while 
meeting our regulatory objectives. Small entities should benefit from 
the Commission's reasoned approach to the proposed amendments to the 
same degree as other investment companies. Further clarification, 
consolidation, or simplification of the proposals for funds that are 
small entities would be inconsistent with the Commission's concern for 
investor protection. Finally, we do not consider using performance 
rather than design standards to be consistent with our statutory 
mandate of investor protection in the present context.

G. Solicitation of Comments

    The Commission encourages the submission of written comments with 
respect to any aspect of this analysis. Comment is specifically 
requested on the number of small entities that would be affected by the 
proposed amendments and the likely impact of the proposals on small 
entities. Commenters are asked to describe the nature of any impact and 
provide empirical data supporting the extent of the impact. These 
comments will be considered in the preparation of the Final Regulatory 
Flexibility Analysis, if the proposed amendments are adopted, and will 
be placed in the same public file as comments on the proposed 
amendments themselves. Comments should be submitted in triplicate to 
Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 
Fifth Street, NW., Washington, DC 20549-0609. Comments also may be 
submitted electronically at the following e-mail address: [email protected]. To help us process and review your comments more 
efficiently, comments should be sent by hard copy or electronically, 
but not by both methods. All comment letters should refer to File No. 
S7-51-02; this file number should be included on the subject line if E-
mail is used. Comment letters will be available for public inspection 
and copying in the Commission's Public Reference Room, 450 Fifth 
Street, NW., Washington, DC 20549-0102. Electronically submitted 
comment letters also will be posted on the Commission's Internet Web 
site (http://www.sec.gov).\122\
---------------------------------------------------------------------------

    \122\ We do not edit personal identifying information, such as 
names or electronic mail addresses, from electronic submissions. You 
should submit only information that you wish to make available 
publicly.
---------------------------------------------------------------------------

VIII. Consideration of Impact on the Economy

    For purposes of the Small Business Enforcement Fairness Act of 
1996,\123\ a rule is ``major'' if it results or is likely to result in:
---------------------------------------------------------------------------

    \123\ Pub. L. 104-21, Title II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

    [sbull] An annual effect on the economy of $100 million or more;
    [sbull] A major increase in costs or prices for consumers or 
individual industries; or
    [sbull] Significant adverse effects on competition, investment, or 
innovation.
    The Commission requests comment on the potential impact of the 
proposed amendments on the U.S. economy on an annual basis. Commenters 
are requested to provide empirical data to support their views.

IX. Statutory Authority

    The Commission is proposing amendments to Regulation S-X pursuant 
to authority set forth in sections 5, 6, 7, 8, and 19(a) of the 
Securities Act (15 U.S.C. 77e, 77f, 77g, 77h, and 77s(a)]; sections 12, 
13, 15(d), and 23(a) of the Exchange Act (15 U.S.C. 78l, 78m, 78o(d), 
and 78w(a)]; and sections 8, 24(a), 30, 31, and 38 of the Investment 
Company Act (15 U.S.C. 80a-8, 80a-24(a), 80a-29, 80a-30, and 80a-37]. 
The Commission is proposing new rule 30b1-4 and new Form N-Q pursuant 
to authority set forth in sections 8, 30, 31, and 38 of the

[[Page 179]]

Investment Company Act (15 U.S.C. 80a-8, 80a-29, 80a-30, and 80a-37]. 
The Commission is proposing amendments to Forms N-1A, N-2, and N-3 
pursuant to authority set forth in sections 5, 6, 7, 10, 19(a), and 28 
of the Securities Act (15 U.S.C. 77e, 77f, 77g, 77j, 77s(a), and 77z-3] 
and sections 6(c), 8, 24(a), 30, and 38 of the Investment Company Act 
(15 U.S.C. 80a-6(c), 80a-8, 80a-24(a), 80a-29, and 80a-37]. The 
Commission is proposing amendments to proposed Form N-CSR pursuant to 
authority set forth in sections 10(b), 13, 15(d), 23(a), and 36 of the 
Exchange Act (15 U.S.C. 78j(b), 78m, 78o(d), 78w(a), and 78mm] and 
sections 6(c), 8, 24(a), 30, and 38 of the Investment Company Act (15 
U.S.C. 80a-6(c), 80a-8, 80a-24(a), 80a-29, and 80a-37].

List of Subjects

17 CFR Parts 210, 270, and 274

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

17 CFR Parts 239 and 249

    Reporting and recordkeeping requirements, Securities.

Text of Proposed Rule and Form Amendments

    For the reasons set out in the preamble, Title 17, chapter II of 
the Code of Federal Regulations is proposed to be amended as follows:

PART 210--FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL 
STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 
1934, PUBLIC UTILITY HOLDING COMPANY ACT OF 1935, INVESTMENT 
COMPANY ACT OF 1940, INVESTMENT ADVISERS ACT OF 1940, AND ENERGY 
POLICY AND CONSERVATION ACT OF 1975

    1. The authority citation for part 210 continues to read as 
follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 
77aa(25), 77aa(26), 78c, 78j-1, 78l, 78m, 78n, 78o(d), 78q, 78u-5, 
78w(a), 78ll, 78mm, 79e(b), 79j(a), 79n, 79t(a), 80a-8, 80a-20, 80a-
29, 80a-30, 80a-37(a), 80b-3, 80b-11 unless otherwise noted.

    2. Paragraph (c) of Sec.  210.6-10 is revised to read as follows:


Sec.  210.6-10  What schedules are to be filed.

* * * * *
    (c) Management investment companies. (1) Except as otherwise 
provided in the applicable form, the schedules specified in this 
paragraph shall be filed for management investment companies as of the 
dates of the most recent audited balance sheet and any subsequent 
unaudited statement being filed for each person or group.
    Schedule I--Investments in securities of unaffiliated issuers. The 
schedule prescribed by Sec.  210.12-12 shall be filed in support of 
caption 1 of each balance sheet.
    Schedule II--Investments--other than securities. The schedule 
prescribed by Sec.  210.12-13 shall be filed in support of caption 3 of 
each balance sheet. This schedule may be omitted if the investments, 
other than securities, at both the beginning and end of the period 
amount to less than one percent of the value of total investments 
(Sec.  210.6-04.4).
    Schedule III--Investments in and advances to affiliates. The 
schedule prescribed by Sec.  210.12-14 shall be filed in support of 
caption 2 of each balance sheet.
    Schedule IV--Investments--securities sold short. The schedule 
prescribed by Sec.  210.12-12A shall be filed in support of caption 
10(a) of each balance sheet.
    Schedule V--Open option contracts written. The schedule prescribed 
by Sec.  210.12-12B shall be filed in support of caption 10(b) of each 
balance sheet.
    (2) When permitted by the applicable form, the schedule specified 
in this paragraph may be filed for management investment companies as 
of the dates of the most recent audited balance sheet and any 
subsequent unaudited statement being filed for each person or group.
    Schedule VI--Summary schedule of investments in securities of 
unaffiliated issuers. The schedule prescribed by Sec.  210.12-12C may 
be filed in support of caption 1 of each balance sheet.
* * * * *
    3. Add Sec.  210.12-12C to read as follows:


Sec.  210.12-12C  Summary schedule of investments in securities of 
unaffiliated issuers.

----------------------------------------------------------------------------------------------------------------
             Column A                       Column B                  Column C                  Column D
----------------------------------------------------------------------------------------------------------------
Name of issuer and title of issue  Balance held at close of   Value of each item at     Percentage value
 1, 2.                              period. Number of          close of period 4, 5,     compared to net assets
                                    shares--principal amount   6, 7.
                                    of bonds and notes \3\.
----------------------------------------------------------------------------------------------------------------
\1\ List the 50 largest issues and any other securities the value of which exceeded one percent of net asset
  value of the registrant as of the close of the period in order of descending value. For purposes of
  determining whether the value of a security exceeds one percent of net asset value, aggregate and treat as a
  single issue all securities of any one issuer. List each issue separately, whether or not issued by a single
  issuer, except as provided in note 2. Restricted securities shall not be combined with unrestricted securities
  of the same issuer.
\2\ Identify by an appropriate symbol or footnote the type of instrument. For purposes of the list, aggregate
  and treat as a single issue, respectively, (a) short-term debt instruments of the same issuer (indicating the
  range of interest rates and maturity dates), and (b) fully collateralized repurchase agreements (indicate in a
  footnote the range of dates of the repurchase agreements, the total purchase price of the securities, the
  total amount to be received upon repurchase, the range of repurchase dates, and description of securities
  subject to the repurchase agreements). Group all securities not separately listed in a category labeled
  ``Other Securities.''
\3\ Indicate by an appropriate symbol each issue of securities which is non-income producing. Evidences of
  indebtedness and preferred shares may be deemed to be income producing if, on the respective last interest
  payment date or date for the declaration of dividends prior to the date of the related balance sheet, there
  was only a partial payment of interest or a declaration of only a partial amount of the dividends payable; in
  such case, however, each such issue shall be indicated by an appropriate symbol referring to a note to the
  effect that, on the last interest or dividend date, only partial interest was paid or partial dividends
  declared. If, on such respective last interest or dividend date, no interest was paid or no cash or in kind
  dividends declared, the issue shall not be deemed to be income producing. Common shares shall not be deemed to
  be income producing unless, during the last year preceding the date of the related balance sheet, there was at
  least one dividend paid upon such common shares.
\4\ Total Column C. The total of column C should equal the total shown on the related balance sheet for
  investments in securities of unaffiliated issuers.
\5\ Indicate by an appropriate symbol each issue of restricted securities. State the following in a footnote:
  (a) as to each such issue: (1) acquisition date, (2) carrying value per unit of investment at date of related
  balance sheet, e.g., a percentage of current market value of unrestricted securities of the same issuer, etc.,
  and (3) the cost of such securities; (b) as to each issue acquired during the year preceding the date of the
  related balance sheet, the carrying value per unit of investment of unrestricted securities of the same issuer
  at: (1) the day the purchase price was agreed to; and (2) the day on which an enforceable right to acquire
  such securities was obtained; and (c) the aggregate value of all restricted securities and the percentage
  which the aggregate value bears to net assets.
\6\ Indicate by an appropriate symbol each issue of securities held in connection with open put or call option
  contracts or loans for short sales.

[[Page 180]]

 
\7\ State in a footnote the following amounts based on cost for Federal income tax purposes: (a) Aggregate gross
  unrealized appreciation for all securities in which there is an excess of value over tax cost, (b) the
  aggregate gross unrealized depreciation for all securities in which there is an excess of tax cost over value,
  (c) the net unrealized appreciation or depreciation, and (d) the aggregate cost of securities for Federal
  income tax purposes.

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

    4. The authority citation for part 239 continues to read, in part, 
as follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77sss, 78c, 
78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 
79l, 79m, 79n, 79q, 79t, 80a-8, 80a-24, 80a-26, 80a-29, 80a-30, and 
80a-37, unless otherwise noted.
* * * * *

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

    5. The authority citation for part 249 continues to read, in part, 
as follows:

    Authority: 15 U.S.C. 78a, et seq., unless otherwise noted.
* * * * *

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

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

    Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, and 80a-
39, unless otherwise noted.
* * * * *
    7. Section 270.30b1-4 is added to read as follows:


Sec.  270.30b1-4  Quarterly report.

    Every registered management investment company, other than a small 
business investment company registered on Form N-5 (Sec. Sec.  239.24 
and 274.5 of this chapter), shall file a quarterly report on Form N-Q 
(Sec.  274.129 of this chapter) not more than sixty calendar days after 
the close of the first and third quarters of each fiscal year. A 
registered management investment company that has filed a registration 
statement with the Commission registering its securities for the first 
time under the Securities Act of 1933 is relieved of this reporting 
obligation with respect to any reporting period or portion thereof 
prior to the date on which that registration statement becomes 
effective or is withdrawn.

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

    8. The authority citation for part 274 is revised to read as 
follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m, 
78n, 78o(d), 80a-8, 80a-24, 80a-26, and 80a-29, and sections 3(a) 
and 302, Pub. L. No. 107-204, 116 Stat. 745, unless otherwise noted.

    Section 274.128 is also issued under secs. 3(a) and 302, Pub. L. 
107-204, 116 Stat. 745.

    8a. Section 274.129 is added to read as follows:


Sec.  274.129  Form N-Q, quarterly schedule of portfolio holdings of 
registered management investment company.

    This form shall be used by registered management investment 
companies, other than small business investment companies registered on 
Form N-5 (Sec. Sec.  239.24 and 274.5 of this chapter), for quarterly 
reports to be filed for the first and third quarters of each fiscal 
year, pursuant to seciton 30 of the Investment Company Act of 1940 and 
Sec.  270.30b1-4 of this chapter.
    9. Form N-1A (referenced in Sec. Sec.  239.15A and 274.11A) is 
amended by:

    a. Removing Item 5 and redesignating Items 6 through 30 as Items 
5 through 29;
    b. In paragraph B.2(b) of the General Instructions, revising the 
phrase ``(except Items 1, 2, 3, 5, and 9), B, and C (except Items 
23(e) and (i)-(k))'' to read ``(except Items 1, 2, 3, and 8), B, and 
C (except Items 22(e) and (i)-(k))'';
    c. In paragraph C.3(a) of the General Instructions, revising the 
reference ``Item 8'' to read ``Item 7'';
    d. In paragraph C.3(d)(i), introductory text, of the General 
Instructions and in newly redesignated Item 6, the introductory text 
of paragraph (f), revising the reference ``Items 7(b)-(d) and 
8(a)(2)'' to read ``Items 6(b)-(d) and 7(a)(2)'';
    e. In paragraph (b)(1) of Item 1, removing the phrase '', if 
required by Item 5'';
    f. Removing Instruction 5 to Item 1(b)(1) and redesignating 
Instruction 6 to Item 1(b)(1) as Instruction 5 to Item 1(b)(1);
    g. In newly redesignated Instruction 5 to Item 1(b)(1) and 
paragraph (a)(2) of newly redesignated Item 7, revising the 
reference ``Item 7(f)'' to read ``Item 6(f)'';
    h. In newly redesignated Instruction 5 to Item 1(b)(1), revising 
the reference ``Item 7(f)(3)'' to read ``Item 6(f)(3)'';
    i. In Item 2(c)(2)(iii), revising the phrase ``Instruction 5 to 
Item 5(b)'' to read ``Instruction 5 to Item 21(b)(7)'';
    j. In Instruction 1(a) to Item 2(c)(2), revising the reference 
``Item 9(a)'' to read ``Item 8(a)'';
    k. In Instruction 2(a) to Item 2(c)(2), revising the references 
``Item 21(a)'', ``Item 21(b)(1)'', and ``Items 21(b)(2) and (3)'' to 
read ``Item 20(a)'', ``Item 20(b)(1)'', and ``Items 20(b)(2) and 
(3)'', respectively;
    l. In Instruction 2(b) to Item 2(c)(2), revising the phrase 
``Instruction 6 to Item 5(b)'' to read ``Instruction 6 to Item 
21(b)(7)'';
    m. In Instruction 2(d) to Item 2(c)(2), revising the references 
``Item 21(b)(2)'' and ``Item 21'' to read ``Item 20(b)(2)'' and 
``Item 20'', respectively;
    n. In Instruction 4 to Item 2(c)(2), revising the phrase 
``Instruction 11 of Item 5(b)'' to read ``Instruction 11 to Item 
21(b)(7)'';
    o. In Instruction 2(a)(i) to Item 3, revising the reference 
``Item 8(a)'' to read ``Item 7(a)'';
    p. In Instruction 5 to Item 4(b)(1), revising the reference 
``Item 12(c)(1)'' to read ``Item 11(c)(1)''; q. In paragraph (e) of 
newly redesignated Item 11, revising the reference ``Item 9'' to 
read ``Item 8'';
    r. Revising the reference ``Item 13'' to read ``Item 12'' in the 
following places:
    i. Instruction 1 to newly redesignated Item 12;
    ii. Paragraph (a)(2) of newly redesignated Item 12;
    iii. Paragraph (b)(3) of newly redesignated Item 12;
    iv. Paragraph (b)(6) of newly redesignated Item 12;
    v. Instructions 6, 8, and 10 to newly redesignated Item 12(b)(7) 
each time it appears;
    vi. Paragraph (b)(8) of newly redesignated Item 12 each time it 
appears;
    vii. Instructions 2, 4, 6, 7, and 8 to newly redesignated Item 
12(b)(8) each time it appears; and
    viii. Paragraph (b)(9)(iii) of newly redesignated Item 12.
    s. In Instruction to paragraph (a) of newly redesignated Item 
17, revising the reference ``Item 18(a)'' to read ``Item 17(a)'';
    t. In Instruction 4 to paragraph (c) of newly redesignated Item 
17 and paragraph (k) of newly redesignated Item 22, revising the 
reference ``Item 22'' to read ``Item 21'';
    u. In Instruction 1 to paragraph (c) of newly redesignated Item 
19, revising the references ``Item 8(b)(2)'', ``Item 15(d)'', and 
``Item 30'' to read ``Item 7(b)(2)'', ``Item 14(d)'', and ``Item 
29'', respectively;
    v. In paragraph (b) of newly redesignated Item 26, revising the 
reference ``Item 20'' to read ``Item 19'';
    w. In Instruction 2 to paragraph (c) of newly redesignated Item 
26, revising the reference ``Item 20(c)'' to read ``Item 19(c)'';
    x. In Instruction 1 to newly redesignated Item 28, revising the 
reference ``Item 15'' to read ``Item 14''; and
    y. Revising Instruction 5 to Item 1(b)(1) and newly redesignated 
Item 21.
    The revisions read as follows.

    Note: The text of Form N-1A does not and this amendment will not 
appear in the Code of Federal Regulations.

Form N-1A

* * * * *

Item 1. Front and Back Cover Pages

* * * * *
    (b) * * *
    (1) * * *

Instructions.

* * * * *

[[Page 181]]

    5. A Money Market Fund may omit the sentence indicating that a 
reader will find in the Fund's annual report a discussion of the 
market conditions and investment strategies that significantly 
affect the Fund's performance during its last fiscal year.
* * * * *

Item 21. Financial Statements

    (a) Registration Statement. Include, in a separate section 
following the responses to the preceding Items, the financial 
statements and schedules required by Regulation S-X. The specimen 
price-make-up sheet required by Instruction 4 to Item 17(c) may be 
provided as a continuation of the balance sheet specified by 
Regulation S-X.

Instructions

    1. The statements of any subsidiary that is not a majority-owned 
subsidiary required by Regulation S-X may be omitted from Part B and 
included in Part C.
    2. In addition to the requirements of rule 3-18 of Regulation S-
X (17 CFR 210.3-18), any Fund registered under the Investment 
Company Act that has not previously had an effective registration 
statement under the Securities Act must include in its initial 
registration statement under the Securities Act any additional 
financial statements and condensed financial information (which need 
not be audited) necessary to make the financial statements and 
condensed financial information included in the registration 
statement current as of a date within 90 days prior to the date of 
filing.
    (b) Annual Report. Every annual report to shareholders required 
by rule 30e-1 must contain the following:
    (1) Financial Statements. The audited financial statements 
required, and for the periods specified, by Regulation S-X.

Instructions.

    1. Schedule VI--Summary schedule of investments in securities of 
unaffiliated issuers (17 CFR 210.12-12C) may be included in the 
financial statements in lieu of Schedule I--Investments in 
securities of unaffiliated issuers (17 CFR 210.12-12) if: (a) the 
Fund states in the report that the Fund's complete schedule of 
investments in securities of unaffiliated issuers is available (i) 
without charge, upon request, by calling a specified toll-free (or 
collect) telephone number; (ii) on the Fund's Web site, if 
applicable; and (iii) on the Commission's Web site at http://www.sec.gov; and (b) whenever the Fund (or financial intermediary 
through which shares of the Fund may be purchased or sold) receives 
a request for the Fund's schedule of investments in securities of 
unaffiliated issuers, the Fund (or financial intermediary) sends a 
copy of Schedule I--Investments in securities of unaffiliated 
issuers within 3 business days of receipt by first-class mail or 
other means designed to ensure equally prompt delivery.
    2. In the case of a Money Market Fund, Schedule I--Investments 
in securities of unaffiliated issuers (17 CFR 210.12-12C) may be 
omitted from its financial statements, provided that: (a) the Fund 
states in the report that the Fund's complete schedule of 
investments in securities of unaffiliated issuers is available (i) 
without charge, upon request, by calling a specified toll-free (or 
collect) telephone number; (ii) on the Fund's Web site, if 
applicable; and (iii) on the Commission's Web site at http://www.sec.gov; and (b) whenever the Fund (or financial intermediary 
through which shares of the Fund may be purchased or sold) receives 
a request for the Fund's schedule of investments in securities of 
unaffiliated issuers, the Fund (or financial intermediary) sends a 
copy of Schedule I--Investments in securities of unaffiliated 
issuers within 3 business days of receipt by first-class mail or 
other means designed to ensure equally prompt delivery.
    (2) Condensed Financial Information. The condensed financial 
information required by Item 8(a) with at least the most recent 
fiscal year audited.
    (3) Remuneration Paid to Directors, Officers, and Others. Unless 
shown elsewhere in the report as part of the financial statements 
required by paragraph (b)(1), the aggregate remuneration paid by the 
Fund during the period covered by the report to:
    (i) All directors and all members of any advisory board for 
regular compensation;
    (ii) Each director and each member of an advisory board for 
special compensation;
    (iii) All officers; and
    (iv) Each person of whom any officer or director of the Fund is 
an affiliated person.
    (4) Changes in and Disagreements with Accountants. The 
information concerning changes in and disagreements with accountants 
and on accounting and financial disclosure required by Item 304 of 
Regulation S-K (17 CFR 229.304).
    (5) Management Information. The management information required 
by Item 12(a)(1).
    (6) Availability of Additional Information about Fund Directors. 
A statement that the SAI includes additional information about Fund 
directors and is available, without charge, upon request, and a 
toll-free (or collect) telephone number for shareholders to call to 
request the SAI.
    (7) Management's Discussion of Fund Performance. Disclose the 
following information unless the Fund is a Money Market Fund:
    (i) Discuss the factors that materially affected the Fund's 
performance during the most recently completed fiscal year, 
including the relevant market conditions and the investment 
strategies and techniques used by the Fund's investment adviser.
    (ii)(A)Provide a line graph comparing the initial and subsequent 
account values at the end of each of the most recently completed 10 
fiscal years of the Fund (or for the life of the Fund, if shorter), 
but only for periods subsequent to the effective date of the Fund's 
registration statement. Assume a $10,000 initial investment at the 
beginning of the first fiscal year in an appropriate broad-based 
securities market index for the same period.
    (B) In a table placed within or next to the graph, provide the 
Fund's average annual total returns for the 1-, 5-, and 10-year 
periods as of the end of the last day of the most recent fiscal year 
(or for the life of the Fund, if shorter), but only for periods 
subsequent to the effective date of the Fund's registration 
statement. Average annual total returns should be computed in 
accordance with Item 20(b)(1). Include a statement accompanying the 
graph and table to the effect that past performance does not predict 
future performance and that the graph and table do not reflect the 
deduction of taxes that a shareholder would pay on fund 
distributions or the redemption of fund shares.

Instructions.

    1. Line Graph Computation.
    (a) Assume that the initial investment was made at the offering 
price last calculated on the business day before the first day of 
the first fiscal year.
    (b) Base subsequent account values on the net asset value of the 
Fund last calculated on the last business day of the first and each 
subsequent fiscal year.
    (c) Calculate the final account value by assuming the account 
was closed and redemption was at the price last calculated on the 
last business day of the most recent fiscal year.
    (d) Base the line graph on the Fund's required minimum initial 
investment if that amount exceeds $10,000.
    2. Sales Load. Reflect any sales load (or any other fees charged 
at the time of purchasing shares or opening an account) by beginning 
the line graph at the amount that actually would be invested (i.e., 
assume that the maximum sales load, and other charges deducted from 
payments, is deducted from the initial $10,000 investment). For a 
Fund whose shares are subject to a contingent deferred sales load, 
assume the deduction of the maximum deferred sales load (or other 
charges) that would apply for a complete redemption that received 
the price last calculated on the last business day of the most 
recent fiscal year. For any other deferred sales load, assume that 
the deduction is in the amount(s) and at the time(s) that the sales 
load actually would have been deducted.
    3. Dividends and Distributions. Assume reinvestment of all of 
the Fund's dividends and distributions on the reinvestment dates 
during the period, and reflect any sales load imposed upon 
reinvestment of dividends or distributions or both.
    4. Account Fees. Reflect recurring fees that are charged to all 
accounts.
    (a) For any account fees that vary with the size of the account, 
assume a $10,000 account size.
    (b) Reflect, as appropriate, any recurring fees charged to 
shareholder accounts that are paid other than by redemption of the 
Fund's shares.
    (c) Reflect an annual account fee that applies to more than one 
Fund by allocating the fee in the following manner: Divide the total 
amount of account fees collected during the year by the Funds' total 
average net assets, multiply the resulting percentage by the average 
account value for each Fund and reduce the value of each 
hypothetical account at the end of each fiscal year during which the 
fee was charged.
    5. Appropriate Index. For purposes of this Item, an 
``appropriate broad-based securities

[[Page 182]]

market index'' is one that is administered by an organization that 
is not an affiliated person of the Fund, its investment adviser, or 
principal underwriter, unless the index is widely recognized and 
used. Adjust the index to reflect the reinvestment of dividends on 
securities in the index, but do not reflect the expenses of the 
Fund.
    6. Additional Indexes. A Fund is encouraged to compare its 
performance not only to the required broad-based index, but also to 
other more narrowly based indexes that reflect the market sectors in 
which the Fund invests. A Fund also may compare its performance to 
an additional broad-based index, or to a non-securities index (e.g., 
the Consumer Price Index), so long as the comparison is not 
misleading.
    7. Change in Index. If the Fund uses an index that is different 
from the one used for the immediately preceding fiscal year, explain 
the reason(s) for the change and compare the Fund's annual change in 
the value of an investment in the hypothetical account with the new 
and former indexes.
    8. Other Periods. The line graph may cover earlier fiscal years 
and may compare the ending values of interim periods (e.g., monthly 
or quarterly ending values), so long as those periods are after the 
effective date of the Fund's registration statement.
    9. Scale. The axis of the graph measuring dollar amounts may use 
either a linear or a logarithmic scale.
    10. New Funds. A New Fund (as defined in Instruction 5 to Item 
3) is not required to include the information specified by this Item 
in its prospectus (or annual report), unless Form N-1A (or the 
annual report) contains audited financial statements covering a 
period of at least 6 months.
    11. Change in Investment Adviser. If the Fund has not had the 
same investment adviser for the previous 10 fiscal years, the Fund 
may begin the line graph on the date that the current adviser began 
to provide advisory services to the Fund so long as:
    (a) Neither the current adviser nor any affiliate is or has been 
in ``control'' of the previous adviser under section 2(a)(9) (15 
U.S.C. 80a-2(a)(9)];
    (b) The current adviser employs no officer(s) of the previous 
adviser or employees of the previous adviser who were responsible 
for providing investment advisory or portfolio management services 
to the Fund; and
    (c) The graph is accompanied by a statement explaining that 
previous periods during which the Fund was advised by another 
investment adviser are not shown.
    (iii) Discuss the effect of any policy or practice of 
maintaining a specified level of distributions to shareholders on 
the Fund's investment strategies and per share net asset value 
during the last fiscal year. Also discuss the extent to which the 
Fund's distribution policy resulted in distributions of capital.
    (c) Semi-Annual Report. Every semi-annual report to shareholders 
required by rule 30e-1 must contain the following (which need not be 
audited):
    (1) Financial Statements. The financial statements required by 
Regulation S-X for the period commencing either with:
    (i) The beginning of the Fund's fiscal year (or date of 
organization, if newly organized); or
    (ii) A date not later than the date after the close of the 
period included in the last report under rule 30e-1 and the most 
recent preceding fiscal year.
    Instruction. Instructions 1 and 2 to Item 21(b)(1) also apply to 
this Item 21(c)(1).
    (2) Condensed Financial Information. The condensed financial 
information required by Item 8(a), for the period of the report as 
specified by paragraph (c)(1), and the most recent preceding fiscal 
year.
    (3) Remuneration Paid to Directors, Officers, and Others. Unless 
shown elsewhere in the report as part of the financial statements 
required by paragraph (c)(1), the aggregate remuneration paid by the 
Fund during the period covered by the report to the persons 
specified under paragraph (b)(3).
    (4) Changes in and Disagreements with Accountants. The 
information concerning changes in and disagreements with accountants 
and on accounting and financial disclosure required by Item 304 of 
Regulation S-K (17 CFR 229.304).
    (d) Annual and Semi-Annual Reports. Every annual and semi-annual 
report to shareholders required by rule 30e-1 must contain the 
following:
    (1) Expense Example. The following information regarding 
expenses for the period:
    Example:
    As a shareholder of the Fund, you incur two types of costs: (1) 
transaction costs, including sales charges (loads) on purchase 
payments, reinvested dividends, or other distributions, redemption 
fees, and exchange fees; and (2) ongoing costs, including management 
fees, distribution (and/or service) (12b-1) fees, and other Fund 
expenses. This Example is intended to help you understand your 
ongoing costs (in dollars) of investing in the Fund and to compare 
this cost with the ongoing cost of investing in other mutual funds.
    The Example assumes that you had a $10,000 investment in the 
Fund at the beginning of the reporting period and continued to hold 
your shares at the end of the reporting period. The Example uses the 
Fund's actual operating expenses for the period [insert dates], 
including account fees.
    The Example contains two numbers. The first number uses the 
actual return earned by the Fund during the period from [insert 
dates] to show the actual ongoing costs incurred on a $10,000 
investment.
    The second number uses a hypothetical 5% annual return. You may 
use this number to compare the ongoing costs of investing in the 
Fund over the current period with the ongoing costs of investing in 
other Funds, which appear in their shareholder reports. Please note 
that the Example does not reflect any transactional costs, such as 
sales charges (loads), redemption fees, or exchange fees. Therefore, 
the Example is useful in comparing ongoing costs only, and will not 
help you determine the relative total costs of owning different 
funds. In addition, if these transactional costs were included, your 
costs would have been higher.
    Although your actual ongoing costs may have been higher or 
lower, based on the assumptions described, the costs would have 
been:
    $---- (using the Fund's actual return for the reporting period); 
and
    $---- (using a hypothetical 5% return for the reporting period).

Instructions.

1. General.

    (a) Round all dollar figures to the nearest dollar.
    (b) Include the narrative explanations in the order indicated. A 
Fund may modify the narrative explanations if the explanation 
contains comparable information to that shown. A Fund may eliminate 
any parts of the narrative explanations that are inapplicable. For 
example, a Fund that does not charge loads need not include the 
statement that the Example does not reflect loads or that costs 
would be higher if loads were included.
    (c)(i) If the Fund is a Feeder Fund, reflect the aggregate 
expenses of the Feeder Fund and the Master Fund. In a footnote to 
the Example, state that the Example reflects the expenses of both 
the Feeder and Master Funds.
    (ii) If the report covers more than one Class of a Multiple 
Class Fund or more than one Feeder Fund that invests in the same 
Master Fund, provide a separate Example for each Class or Feeder 
Fund.

2. Computation

    (a)(i) In determining the Fund's ``actual operating expenses'' 
for purposes of this example, include all expenses that are deducted 
from the Fund's assets or charged to all shareholder accounts, 
including ``Management Fees,'' ``Distribution (and/or Service) (12b-
1) Fees,'' and ``Other Expenses'' as those terms are defined in 
Instruction 3 to Item 3 of this form as modified by Instructions 
2(a)(ii) and (c)(i) to this Item. Reflect recurring and non-
recurring fees charged to all investors other than any exchange 
fees, sales charges (loads), or fees charged upon redemption of the 
Fund's shares. The amount of expenses deducted from the Fund's 
assets are the amounts shown as expenses in the Fund's statement of 
operations (including increases resulting from complying with 
paragraph 2(g) of rule 6-07 of Regulation S-X (17 CFR 210.6-07)).
    (ii) For purposes of this Item 21(d)(1), ``Other Expenses'' 
include extraordinary expenses as determined under generally 
accepted accounting principles (see Accounting Principles Board 
Opinion No. 30). If extraordinary expenses were incurred that 
materially affected the Fund's ``Other Expenses,'' the Fund may 
disclose in a footnote to the Example what ``actual operating 
expenses'' would have been had the extraordinary expenses not been 
included.
    (b) Assume reinvestment of all dividends and distributions.
    (c)(i) Base the percentages of ``actual operating expenses'' on 
amounts incurred during the reporting period. ``Actual operating 
expenses'' should reflect actual expenses after expense 
reimbursement or fee

[[Page 183]]

waiver arrangements that reduced expenses during the reporting 
period.
    (ii) If there have been any increases or decreases in Fund 
operating expenses that occurred during the reporting period (or 
that have occurred or are expected to occur during the current 
fiscal year) that would have materially affected the information in 
the Example had those changes been in place throughout the reporting 
period, restate in a footnote to the Example the expense information 
using the current fees as if they had been in effect throughout the 
entire reporting period. A change in Fund operating expenses does 
not include a decrease in operating expenses as a percentage of 
assets due to economies of scale or breakpoints in a fee arrangement 
resulting from an increase in the Fund's assets.
    (d) Reflect any shareholder account fees collected by more than 
one Fund by allocating the total amount of the fees collected during 
the reporting period for all such Funds to each Fund in proportion 
to the relative average net assets of the Fund. A Fund that charges 
account fees based on a minimum account requirement exceeding 
$10,000 may adjust its account fees based on the amount of the fee 
in relation to the Fund's minimum account requirement.
    (2) Graphical Representation of Holdings. One or more tables, 
charts, or graphs depicting the securities holdings of the Fund by 
reasonably identifiable categories (e.g., type of security, industry 
sector, geographic region, credit quality, or maturity) showing the 
percentage of net asset value attributable to each. The categories 
should be selected, and the format of the presentation designed, to 
provide the most useful information to investors about the types of 
investments made by the Fund, given its investment objectives. 
Credit quality should be the ratings grade assigned by a nationally 
recognized statistical rating organization (``NRSRO''), as that term 
is used in paragraphs (c)(2)(vi)(E), (F), and (H) of Rule 15c3-1 
under the Exchange Act (17 CFR 240.15c3-1(c)(2)(vi)(E), (F), and 
(H)). The fund should use ratings of only one NRSRO.
    (3) Statement Regarding Availability of Quarterly Portfolio 
Schedule. A statement that: (i) the Fund files its complete schedule 
of portfolio holdings with the Commission for the first and third 
quarters of each fiscal year on Form N-Q; (ii) the Fund's Forms N-Q 
are available on the Commission's Website at http://www.sec.gov; 
(iii) the Fund's Forms N-Q may be reviewed and copied at the 
Commission's Public Reference Room in Washington, DC, and that 
information on the operation of the Public Reference Room may be 
obtained by calling 1-800-SEC-0330; and (iv) if the Fund makes the 
information on Form N-Q available to shareholders on its website or 
upon request, a description of how the information may be obtained 
from the Fund.
    10. Form N-2 (referenced in Sec. Sec.  239.14 and 274.11a-1) is 
amended by:
    a. Revising the fourth paragraph and subparagraph 2 of General 
Instruction F;
    b. Revising Instructions 4.a. and 5.a. to Item 23;
    c. Redesignating Instruction 6 to Item 23 as Instruction 8; and
    d. Adding new Instructions 6 and 7 to Item 23.
    The additions and revisions read as follows:

    Note: The text of Form N-2 does not and this amendment will not 
appear in the Code of Federal Regulations

Form N-2

* * * * *

General Instructions

* * * * *

F. Incorporation by Reference

    A Registrant may incorporate by reference into the prospectus or 
the SAI in response to Item 4.1 or 23 of this form the information 
contained in Form N-CSR (17 CFR 249.331 and 274.128) or any report 
to shareholders meeting the requirements of section 30(e) of the 
1940 Act (15 U.S.C. 80a-29(e)] and Rule 30e-1 (17 CFR 270.30e-1) 
thereunder (and a Registrant that has elected to be regulated as a 
business development company may so incorporate into Items 4.2, 
8.6.c, or 23 of this form the information contained in its annual 
report under the Securities Exchange Act of 1934 (15 U.S.C. 78a et 
seq.) (the ``Exchange Act'')), provided:
* * * * *
    2. The Registrant states in the prospectus or the SAI, at the 
place where the information required by Items 4.1, 4.2, 8.6.c., or 
23 of this form would normally appear, that the information is 
incorporated by reference from a report to shareholders or a report 
on Form N-CSR. (The Registrant also may describe briefly, in either 
the prospectus, the SAI, or Part C of the registration statement (in 
response to Item 24.1) those portions of the report to shareholders 
or report on Form N-CSR that are not incorporated by reference and 
are not a part of the registration statement.); and
* * * * *

Item 23. Financial Statements

* * * * *

Instructions.

* * * * *
    4. * * *
    a. The audited financial statements required by Regulation S-X 
for the periods specified by Regulation S-X, modified to permit the 
omission of the statements and schedules that may be omitted from 
Part B of the registration statement by Instruction 2 above and as 
permitted by Instruction 7 below;
* * * * *
    5. * * *
    a. The financial statements required by Regulation S-X for the 
period commencing either with (1) the beginning of the company's 
fiscal year (or date of organization, if newly organized); or (2) a 
date not later than the date after the close of the period included 
in the last report conforming with the requirements of Rule 30e-1 
and the most recent preceding fiscal year, modified to permit the 
omission of the statements and schedules that may be omitted from 
part B of the registration statement by Instruction 2 above and as 
permitted by Instruction 7 below;
* * * * *
    6. Every annual and semi-annual report to shareholders required 
by Section 30(e) of the 1940 Act and Rule 30e-1 thereunder shall 
contain the following information:
    a. One or more tables, charts, or graphs depicting the 
securities holdings of the Registrant by reasonably identifiable 
categories (e.g., type of security, industry sector, geographic 
region, credit quality, or maturity) showing the percentage of net 
asset value attributable to each. The categories should be selected, 
and the format of the presentation designed, to provide the most 
useful information to investors about the types of investments made 
by the Registrant, given its investment objectives. Credit quality 
should be the ratings grade assigned by a nationally recognized 
statistical rating organization (``NRSRO''), as that term is used in 
paragraphs (c)(2)(vi)(E), (F) and (H) of Rule 15c3-1 under the 
Exchange Act (17 CFR 240.15c3-1(c)(2)(vi)(E), (F) and (H)). The 
Registrant should use ratings of only one NRSRO; and
    b. A statement that: (i) The Registrant files its complete 
schedule of portfolio holdings with the Commission for the first and 
third quarters of each fiscal year on Form N-Q; (ii) the 
Registrant's Forms N-Q are available on the Commission's Web site at 
http://www.sec.gov; (iii) the Registrant's Forms N-Q may be reviewed 
and copied at the Commission's Public Reference Room in Washington, 
DC, and that information on the operation of the Public Reference 
Room may be obtained by calling 1-800-SEC-0330; and (iv) if the 
Registrant makes the information on Form N-Q available to 
shareholders on its website or upon request, a description of how 
the information may be obtained from the Registrant.
    7. Schedule VI--Summary schedule of investments in securities of 
unaffiliated issuers (17 CFR 210.12-12C) may be included in the 
financial statements required under Instructions 4.a. and 5.a. of 
this Item in lieu of Schedule I--Investments in securities of 
unaffiliated issuers (17 CFR 210.12-12) if: (a) The Registrant 
states in the report that the Registrant's complete schedule of 
investments in securities of unaffiliated issuers is available (i) 
without charge, upon request, by calling a specified toll-free (or 
collect) telephone number; (ii) on the Registrant's website, if 
applicable; and (iii) on the Commission's Web site at http://www.sec.gov; and (b) whenever the Registrant (or financial 
intermediary through which shares of the Registrant may be purchased 
or sold) receives a request for the Registrant's schedule of 
investments in securities of unaffiliated issuers, the Registrant 
(or financial intermediary) sends a copy of Schedule I--Investments 
in securities of unaffiliated issuers within 3 business days of 
receipt by first-class mail or other means designed to ensure 
equally prompt delivery.
* * * * *
    11. Form N-3 (referenced in Sec. Sec.  239.17 and 274.11b) is 
amended by:
    a. Revising the fourth paragraph and subparagraph 2 of General 
Instruction G;

[[Page 184]]

    b. Revising Instructions 4.i. and 5.i. to Item 27(a);
    c. Redesignating Instruction 6 to Item 27(a) as Instruction 8 to 
Item 27(a);
    d. Adding new Instructions 6 and 7 to Item 27(a); and
    e. Revising newly redesignated Instruction 8 to Item 27(a).
    The additions and revisions read as follows.

    Note: The text of Form N-3 does not and this amendment will not 
appear in the Code of Federal Regulations.

Form N-3

* * * * *

General Instructions

* * * * *

G. Incorporation by Reference

    Subject to these rules, a Registrant may incorporate by 
reference into the prospectus or the Statement of Additional 
Information in response to Items 4(a) or 27 of Form N-3 the 
information in Form N-CSR (17 CFR 249.331 and 274.128) or any report 
to contractowners meeting the requirements of Section 30(e) of the 
1940 Act (15 U.S.C. 80a-29(e)) and Rule 30e-1 (17 CFR 270.30e-1) 
provided:
* * * * *
    2. The Registrant states in the prospectus or the Statement of 
Additional Information, at the place where the information would 
normally appear, that the information is incorporated by reference 
from a report to securityholders or a report on Form N-CSR. The 
Registrant may also describe, in either the prospectus, the 
Statement of Additional Information, or Part C of the Registration 
Statement (in response to Item 28(a)), any parts of the report to 
securityholders or the report on Form N-CSR that are not 
incorporated by reference and are not a part of the Registration 
Statement; and
* * * * *

Item 27. Financial Statements

    (a) * * *

Instructions:

* * * * *
    4. * * *
    (i) The audited financial statements required by Regulation S-X 
for the periods specified by Regulation S-X, as modified by 
Instruction 2 above and as permitted by Instruction 7 below;
* * * * *
    5. * * *
    (i) The financial statements required by Regulation S-X for the 
period commencing either with (A) the beginning of the separate 
account's fiscal year (or date of organization, if newly organized); 
or (B) a date not later than the date after the close of the period 
included in the last report conforming with the requirements of Rule 
30e-1 and the most recent preceding fiscal year, as modified by 
Instruction 2 above and as permitted by Instruction 7 below;
* * * * *
    6. Every report required by Section 30(e) of the 1940 Act and 
Rule 30e-1 under it (17 CFR 270.30e-1) shall contain the following 
information:
    (i) One or more tables, charts, or graphs depicting the 
securities holdings of the Registrant by reasonably identifiable 
categories (e.g., type of security, industry sector, geographic 
region, credit quality, or maturity) showing the percentage of net 
asset value attributable to each. If the Registrant has sub-
accounts, provide the information separately for each sub-account. 
The categories should be selected, and the format of the 
presentation designed, to provide the most useful information to 
investors about the types of investments made by the Registrant, 
given its investment objectives. Credit quality should be the 
ratings grade assigned by a nationally recognized statistical rating 
organization (``NRSRO''), as that term is used in paragraphs 
(c)(2)(vi)(E), (F), and (H) of Sec.  240.15c3-1 of Rule 15c3-1 under 
the Exchange Act (17 CFR 240.15c3-1(c)(2)(vi)(E), (F), and (H)). The 
Registrant should use ratings of only one NRSRO; and
    (ii) A statement that: (A) The Registrant files its complete 
schedule of portfolio holdings with the Commission for the first and 
third quarters of each fiscal year on Form N-Q; (B) the Registrant's 
Forms N-Q are available on the Commission's Web site at http://www.sec.gov; (C) the Registrant's Forms N-Q may be reviewed and 
copied at the Commission's Public Reference Room in Washington, DC, 
and that information on the operation of the Public Reference Room 
may be obtained by calling 1-800-SEC-0330; and (D) if the Registrant 
makes the information on Form N-Q available to contractowners on its 
website or upon request, a description of how the information may be 
obtained from the Registrant.
    7.(i) Schedule VI--Summary schedule of investments in securities 
of unaffiliated issuers (17 CFR 210.12-12C) may be included in the 
financial statements required under Instructions 4.(i) and 5.(i) of 
this Item in lieu of Schedule I--Investments in securities of 
unaffiliated issuers (17 CFR 210.12-12) if: (A) the Registrant 
states in the report that the Registrant's complete schedule of 
investments in securities of unaffiliated issuers is available (1) 
without charge, upon request, by calling a specified toll-free (or 
collect) telephone number; (2) on the Registrant's Web site, if 
applicable; and (3) on the Commission's Web site at http://www.sec.gov; and (B) whenever the Registrant (or financial 
intermediary through which shares of the Registrant may be purchased 
or sold) receives a request for the Registrant's schedule of 
investments in securities of unaffiliated issuers, the Registrant 
(or financial intermediary) sends a copy of Schedule I--Investments 
in securities of unaffiliated issuers within 3 business days of 
receipt by first-class mail or other means designed to ensure 
equally prompt delivery.
    (ii) In the case of a Registrant or sub-account of a Registrant 
that holds itself out as a money market account or sub-account and 
meets the maturity, quality, and diversification requirements of 
rule 2a-7 (17 CFR 270.2a-7) under the 1940 Act, Schedule I--
Investments in securities of unaffiliated issuers (17 CFR 210.12-
12C) may be omitted from the financial statements required under 
Instructions 4.(i) and 5.(i) of this Item, provided that: (A) the 
Registrant states in the report that the Registrant's complete 
schedule of investments in securities of unaffiliated issuers is 
available (1) without charge, upon request, by calling a specified 
toll-free (or collect) telephone number; (2) on the Registrant's 
website, if applicable; and (3) on the Commission's Web site at 
http://www.sec.gov; and (B) whenever the Registrant (or financial 
intermediary through which shares of the Registrant may be purchased 
or sold) receives a request for the Registrant's schedule of 
investments in securities of unaffiliated issuers, the Registrant 
(or financial intermediary) sends a copy of Schedule I--Investments 
in securities of unaffiliated issuers within 3 business days of 
receipt by first-class mail or other means designed to ensure 
equally prompt delivery.
    8. See General Instruction G regarding incorporation by 
reference.
* * * * *
    PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT

Company Act of 1940

    12. Form N-CSR (referenced in Sec. Sec.  249.331 and 274.128) is 
amended by:
    a. Redesignating Items 7 and 8 as Items 8 and 9; and
    b. Adding new Item 7 to read as follows:

    Note: The text of Form N-CSR does not and this amendment will 
not appear in the Code of Federal Regulations.

Form N-CSR

* * * * *

Item 7. Schedule of Investments.

    File Schedule I-Investments in securities of unaffiliated 
issuers as of the close of the reporting period as set forth in 
Sec.  210.12-12 of Regulation S-X (17 CFR 210.12-12), unless the 
schedule is included as part of the report to shareholders filed 
under Item 9(a) of this Form.

Instruction.

    Schedule I--Investments in securities of unaffiliated issuers 
filed under this Item must be audited, except that in the case of a 
report on this Form N-CSR as of the end of a fiscal half-year 
Schedule I--Investments in securities of unaffiliated issuers need 
not be audited.
    13. Add Form N-Q (referenced in Sec.  274.129) to read as 
follows:

    Note: The text of Form N-Q will not appear in the Code of 
Federal Regulations.

United States Securities and Exchange Commission, Washington, DC 20549

Form N-Q--Quarterly Schedule of Portfolio Holdings of Registered 
Management Investment Company

 Investment Company Act file number------------------------------------
-----------------------------------------------------------------------
(Exact name of registrant as specified in charter)

-----------------------------------------------------------------------
(Address of principal executive offices)

-----------------------------------------------------------------------
(Zip code)

-----------------------------------------------------------------------

[[Page 185]]

(Name and address of agent for service)

 Registrant's telephone number, including area code:-------------------
 Date of fiscal year end:----------------------------------------------
 Date of reporting period:---------------------------------------------

    Form N-Q is to be used by registered management investment 
companies, other than small business investment companies registered 
on Form N-5 (Sec. Sec.  239.24 and 274.5 of this chapter), to file 
reports with the Commission, not later than sixty days after the 
close of the first and third fiscal quarters, containing a schedule 
of portfolio holdings pursuant to section 30 of the Investment 
Company Act of 1940 and rule 30b1-4 thereunder (17 CFR 270.30b1-4). 
The Commission may use the information provided on Form N-Q in its 
regulatory, disclosure review, inspection, and policymaking roles.
    A registrant is required to disclose the information specified 
by Form N-Q, and the Commission will make this information public. A 
registrant is not required to respond to the collection of 
information contained in Form N-Q unless the Form displays a 
currently valid Office of Management and Budget (``OMB'') control 
number. Please direct comments concerning the accuracy of the 
information collection burden estimate and any suggestions for 
reducing the burden to the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. The 
OMB has reviewed this collection of information under the clearance 
requirements of 44 U.S.C. Sec.  3507.

General Instructions

A. Rule as to Use of Form N-Q

    Form N-Q is to be used for quarterly reports pursuant to Section 
30 of the Investment Company Act of 1940 (the ``Act'') and Rule 
30b1-4 under the Act (17 CFR 270.30b1-4) by all registered 
management investment companies, other than small business 
investment companies registered on Form N-5 (Sec. Sec.  239.24 and 
274.5 of this chapter), to file their complete portfolio holdings as 
of the close of the first and third quarters of each fiscal year. A 
report on this form shall be filed not later than sixty days after 
the close of the covered reporting period.

B. Application of General Rules and Regulations

    The General Rules and Regulations under the Act contain certain 
general requirements that are applicable to reporting on any form 
under the Act. These general requirements should be carefully read 
and observed in the preparation and filing of reports on this form, 
except that any provision in the form or in these instructions shall 
be controlling.

C. Preparation of Report

    1. This Form is not to be used as a blank form to be filled in, 
but only as a guide in preparing the report in accordance with Rules 
8b-11 (17 CFR 270.8b-11) and 8b-12 (17 CFR 270.8b-12) under the Act. 
The Commission does not furnish blank copies of this form to be 
filled in for filing.
    2. These general instructions are not to be filed with the 
report.

D. Incorporation by Reference

    A registrant may incorporate by reference information required 
by the Form. All incorporation by reference must comply with the 
requirements of this Form and the following rules on incorporation 
by reference: Rule 10(d) of Regulation S-K under the Securities Act 
of 1933 (17 CFR 229.10(d)) (general rules on incorporation by 
reference, which, among other things, prohibit, unless specifically 
required by this Form, incorporating by reference a document that 
includes incorporation by reference to another document, and limits 
incorporation to documents filed within the last 5 years, with 
certain exceptions); Rule 303 of Regulation S-T (17 CFR 232.303) 
(specific requirements for electronically filed documents); Rules 
12b-23 and 12b-32 under the Securities Exchange Act of 1934 
(additional rules on incorporation by reference for reports filed 
pursuant to Sections 13 and 15(d) of the Securities Exchange Act of 
1934); and Rules 0-4, 8b-23, and 8b-32 under the Act (17 CFR 270.0-
4, 270.8b-23, and 270.8b-32) (additional rules on incorporation by 
reference for investment companies).

E. Definitions

    Unless the context clearly indicates the contrary, terms used in 
this Form N-Q have meanings as defined in the Act and the rules and 
regulations thereunder. Unless otherwise indicated, all references 
in the form to statutory sections or to rules are sections of the 
Act and the rules and regulations thereunder.

F. Signature and Filing of Report

    1. If the report is filed in paper pursuant to a hardship 
exemption from electronic filing (see Item 201 et seq. of Regulation 
S-T (17 CFR 232.201 et seq.)), eight complete copies of the report 
shall be filed with the Commission. At least one complete copy of 
the report filed with the Commission must be manually signed. Copies 
not manually signed must bear typed or printed signatures.
    2.(a) The report must be signed by the registrant, and on behalf 
of the registrant by its principal financial officer or officers.
    (b) The name and title of each person who signs the report shall 
be typed or printed beneath his or her signature. Attention is 
directed to Rule 8b-11 under the Act (17 CFR 270.8b-11) concerning 
manual signatures and signatures pursuant to powers of attorney.

Item 1. Schedule of Investments

    File the schedules as of the close of the reporting period as 
set forth in Sec. Sec.  210.12-12--12-14 of Regulation S-X (17 CFR 
210.12-12--12-14). The schedules need not be audited.

SIGNATURES

(See General Instruction F)

    Pursuant to the requirements of the Investment Company Act of 1940, 
the registrant has duly caused this report to be signed on its behalf 
by the undersigned, thereunto duly authorized.

 (Registrant)----------------------------------------------------------
 By (Signature and Title)*---------------------------------------------
 Date------------------------------------------------------------------

*Print the name and title of each signing officer under his or her 
signature.

    By the Commission.
    Dated: December 18, 2002.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-32470 Filed 12-31-02; 8:45 am]
BILLING CODE 8010-01-P