[Federal Register Volume 68, Number 22 (Monday, February 3, 2003)]
[Rules and Regulations]
[Pages 5348-5371]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-2254]



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Part II





Securities and Exchange Commission





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17 CFR Parts 240, 249, et al.



Certification of Management Investment Company Shareholder Reports and 
Designation of Certified Shareholder Reports as Exchange Act Periodic 
Reporting Forms; Disclosure Required by Sections 406 and 407 of the 
Sarbanes-Oxley Act of 2002; Final Rule

  Federal Register / Vol. 68, No. 22 / Monday, February 3, 2003 / Rules 
and Regulations  

[[Page 5348]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240, 249, 270 and 274

[Release Nos. 34-47262; IC-25914; File Nos. S7-33-02; S7-40-02]
RIN 3235-AI63; RIN 3235-AI66


Certification of Management Investment Company Shareholder 
Reports and Designation of Certified Shareholder Reports as Exchange 
Act Periodic Reporting Forms; Disclosure Required by Sections 406 and 
407 of the Sarbanes-Oxley Act of 2002

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission is adopting rule and 
form amendments that require registered management investment companies 
to file certified shareholder reports on Form N-CSR with the 
Commission, and designating these certified reports as reports that are 
required under Sections 13(a) and 15(d) of the Securities Exchange Act 
of 1934 and Section 30 of the Investment Company Act of 1940. The 
amendments require each registered management investment company's 
principal executive and financial officers to certify the information 
contained in these reports in the manner specified by Section 302 of 
the Sarbanes-Oxley Act of 2002. We are providing that, for registered 
management investment companies other than small business investment 
companies, Form N-SAR will be filed under the Investment Company Act of 
1940 only and not the Securities Exchange Act of 1934. We are also 
removing the requirement that Form N-SAR be certified by a registered 
investment company's principal executive and financial officers. We are 
also adopting a new rule to require registered management investment 
companies to maintain disclosure controls and procedures designed to 
ensure that the information required in reports on Form N-CSR is 
recorded, processed, summarized, and reported on a timely basis.
    In addition, we are adopting forms and amendments that require 
registered management investment companies to include new disclosures 
on Form N-CSR or Form N-SAR in order to implement the requirements of 
Sections 406 and 407 of the Sarbanes-Oxley Act of 2002. First, the 
rules require a registered management investment company to disclose 
whether it has adopted a code of ethics that applies to the company's 
principal executive officer and senior financial officers. An 
investment company disclosing that it has not adopted such a code must 
disclose this fact and explain why it has not done so. An investment 
company also will be required to disclose amendments to, and waivers 
from, the code of ethics relating to any of those officers. Second, the 
rules require a registered management investment company to disclose 
whether it has at least one ``audit committee financial expert'' 
serving on its audit committee, and if so, the name of the expert and 
whether the expert is independent of management. An investment company 
that does not have an audit committee financial expert must disclose 
this fact and explain why it has no such expert.

DATES: Effective Date: March 1, 2003, except that the effective date of 
the removal of the certification requirement from Form N-SAR for 
registered management investment companies other than small business 
investment companies is May 1, 2003.
    Compliance Date: See Section III of this release for information on 
Transition Provisions and Compliance Dates.

FOR FURTHER INFORMATION CONTACT: John M. Faust, Attorney, Katy 
Mobedshahi, Senior Counsel, Tara L. Royal, Attorney, 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-
0506.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission 
(``Commission'') is adopting new rules 30a-3 [17 CFR 270.30a-3] and 
30d-1 [17 CFR 270.30d-1] under the Investment Company Act of 1940 [15 
U.S.C. 80a-1 et seq.] (``Investment Company Act''); amendments to rules 
8b-15 [17 CFR 270.8b-15], 30a-1 [17 CFR 270.30a-1], 30a-2 [17 CFR 
270.30a-2], 30b1-1 [17 CFR 270.30b1-1], 30b1-3 [17 CFR 270.30b1-3], and 
30b2-1 [17 CFR 270.30b2-1] under the Investment Company Act; and 
amendments to rules 12b-25 [17 CFR 240.12b-25], 13a-15 [17 CFR 240.13a-
15], and 15d-15 [17 CFR 240.15d-15], and Form 12b-25 [17 CFR 249.322] 
under the Securities Exchange Act of 1934 [15 U.S.C. 78a et seq.] 
(``Exchange Act''). The Commission also is adopting amendments to Form 
N-SAR [17 CFR 249.330; 17 CFR 274.101] under the Exchange Act and the 
Investment Company Act. Finally, the Commission is adopting new Form N-
CSR [17 CFR 249.331; 17 CFR 274.128] under the Exchange Act and the 
Investment Company Act.

I. Introduction and Background

    On July 30, 2002, the Sarbanes-Oxley Act of 2002 (``Sarbanes-Oxley 
Act'') was enacted.\1\ Section 302 of the Sarbanes-Oxley Act, entitled 
``Corporate Responsibility for Financial Reports,'' required the 
Commission to adopt final rules to be effective by August 29, 2002, 30 
days after the date of enactment, under which the principal executive 
officer or officers and the principal financial officer or officers, or 
persons performing similar functions, of an issuer each must certify 
the information contained in the issuer's quarterly and annual reports 
filed or submitted under Section 13(a) or 15(d) of the Exchange Act.\2\ 
Form N-SAR currently is the form designated for registered investment 
companies to comply with their reporting requirements under Sections 
13(a) and 15(d) of the Exchange Act, as well as periodic reporting 
requirements under Sections 30(a) and 30(b)(1) of the Investment 
Company Act.\3\
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    \1\ Pub. L. 107-204, 116 Stat. 745 (2002).
    \2\ Section 13(a) of the Exchange Act requires every issuer of a 
security registered pursuant to Section 12 of the Exchange Act to 
file with the Commission such annual reports and such quarterly 
reports as the Commission may prescribe. 15 U.S.C. 78m(a). Section 
15(d) of the Exchange Act requires each issuer that has filed a 
registration statement that has become effective pursuant to the 
Securities Act of 1933 (``Securities Act'') to file such 
supplementary and periodic information, documents, and reports as 
may be required pursuant to Section 13 of the Exchange Act in 
respect of a security registered pursuant to Section 12. 15 U.S.C. 
78o(d). The duty of an issuer to file under Section 15(d) is 
automatically suspended for any fiscal year, other than a fiscal 
year in which its registration statement becomes effective, if an 
issuer's securities are held of record by less than 300 persons. 15 
U.S.C. 78o(d).
    \3\ General Instruction A to current Form N-SAR; current Rule 
30a-1 under the Investment Company Act [17 CFR 270.30a-1]. See 
Investment Company Act Release No. 14299 (Jan. 4, 1985) [50 FR 1442 
(Jan. 11, 1985)] (release adopting Form N-SAR). Face-amount 
certificate companies do not file reports on Form N-SAR, but rather 
file periodic reports on Forms 10-K and 10-Q. See Investment Company 
Act Release No. 14080 (Aug. 6, 1984) [49 FR 32370, 32372 (Aug. 14, 
1984)] (face-amount certificate companies are required to file 
reports on other forms prescribed under the Exchange Act rather than 
Form N-SAR).
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    On August 28, 2002, the Commission implemented the certification 
requirement of Section 302 of the Sarbanes-Oxley Act with respect to 
registered investment companies by adopting new rule 30a-2 under the 
Investment Company Act and the Sarbanes-Oxley Act.\4\ Rule 30a-2 
requires a registered investment company that files periodic reports 
under Section 13(a) or 15(d) of the Exchange Act, i.e., Form N-SAR, to

[[Page 5349]]

include the certification specified by Section 302 in those periodic 
reports.
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    \4\ Investment Company Act Release No. 25722 (Aug. 28, 2002) [67 
FR 57276 (Sept. 9, 2002)].
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    In a companion release, we also proposed to require registered 
management investment companies to file certified shareholder reports 
with the Commission on new Form N-CSR and to designate these certified 
shareholder reports as reports that are required under Sections 13(a) 
and 15(d) of the Exchange Act and Section 30 of the Investment Company 
Act.\5\ As we noted in that release, we believe that the certification 
requirement of Section 302 of the Sarbanes-Oxley Act was intended to 
improve the quality of the disclosure that a company provides regarding 
its financial condition in its reports to investors.\6\ For registered 
management investment companies, the required reports to shareholders, 
rather than reports on Form N-SAR, are the primary vehicle for 
providing financial information to investors. We believe that the 
information in these reports to shareholders should be certified, and 
today we are adopting amendments to our forms and rules to require this 
certification.
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    \5\ See Investment Company Act Release No. 25723 (Aug. 30, 2002) 
[67 FR 57298 (Sept. 9, 2002)] (``Form N-CSR Proposing Release''). 
The Commission proposed amendments to Form N-CSR in Investment 
Company Act Release No. 25739 (Sept. 20, 2002) [67 FR 60828 (Sept. 
26, 2002)] (proxy voting disclosure); Investment Company Act Release 
No. 25775 (Oct. 22, 2002) [67 FR 66208 (Oct. 30, 2002)] (code of 
ethics and financial expert disclosure) (``Section 406/407 Proposing 
Release''); Investment Company Act Release No. 25838 (Dec. 2, 2002) 
[67 FR 76780 (Dec. 13, 2002)] (auditor independence provisions of 
the Sarbanes-Oxley Act); Investment Company Act Release No. 25845 
(Dec. 10, 2002) [67 FR 77593 (Dec. 18, 2002)] (revisions to rule 
10b-18 under the Exchange Act); Investment Company Act Release No. 
25870 (Dec. 18, 2002) [68 FR 160 (Jan. 2, 2003)] (shareholder 
reports and quarterly portfolio disclosure); and Investment Company 
Act Release No. 25885 (Jan. 8, 2003) [68 FR 2637 (Jan. 17, 2003)] 
(standards relating to listed company audit committees).
    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, Sec.  4.04, at 4-5 (2002).
    \6\ Form N-CSR Proposing Release, supra note , 67 FR at 57299.
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    In October 2002, we proposed amendments to proposed Form N-CSR and 
Form N-SAR to implement Sections 406 and 407 of the Sarbanes-Oxley Act 
with respect to registered investment companies, similar to disclosure 
requirements that we proposed at the same time with respect to 
operating companies.\7\ Section 406 directs the Commission to adopt 
rules requiring an issuer to disclose whether or not it has adopted a 
code of ethics for the issuer's senior financial officers, as well as 
any change to, or waiver of, that code of ethics. Section 407 directs 
the Commission to adopt rules: (1) Requiring an issuer to disclose 
whether or not its audit committee includes at least one member who is 
a financial expert; and (2) defining the term ``financial expert.'' 
Earlier this month, we adopted disclosure requirements to implement 
these provisions with respect to operating companies.\8\ Today, we 
adopt similar disclosure requirements for registered management 
investment companies.
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    \7\ Section 406/407 Proposing Release, supra note 5, 67 FR at 
66213-14 and 66217-18.
    \8\ Securities Act Release No. 8177 (January 23, 2003) 
(``Section 406/407 Adopting Release'').
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    In the same release in which we proposed to implement Sections 406 
and 407, we also proposed amendments to implement Section 404 of the 
Sarbanes-Oxley Act, relating to internal control reports, with respect 
to operating companies, as well as certain technical amendments to our 
rules and forms implementing Section 302 of the Sarbanes-Oxley Act for 
registered investment companies.\9\ We have deferred adoption of the 
final rules to implement Section 404 to a separate release to be issued 
at a later date,\10\ and we will also consider the technical amendments 
to our rules and forms implementing Section 302 for registered 
investment companies at that time.
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    \9\ Section 406/407 Proposing Release, supra note 5, 67 FR at 
66222-23.
    \10\ Section 406/407 Adopting Release, supra note 8.
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II. Discussion

    The Commission today is adopting new rules, rule and form 
amendments, and new Form N-CSR under the Investment Company Act to 
better implement the certification requirement of Section 302 of the 
Sarbanes-Oxley Act for registered management investment companies, with 
modifications to address commenters' concerns.\11\ Our amendments will 
require a registered management investment company to file semi-annual 
reports on Form N-CSR, and will require the certification specified by 
Section 302 of the Sarbanes-Oxley Act in these semi-annual reports. 
Further, our amendments will remove the certification requirement from 
Form N-SAR, with respect to all registered investment companies.\12\ In 
addition, we are adopting rules to require registered management 
investment companies to maintain, and regularly evaluate the 
effectiveness of, controls and procedures designed to ensure that the 
information required in reports on Form N-CSR is recorded, processed, 
summarized, and reported on a timely basis. Finally, we are adopting 
amendments to Form N-CSR and Form N-SAR to implement Sections 406 and 
407 of the Sarbanes-Oxley Act with respect to registered management 
investment companies, similar to amendments that we adopted earlier 
this month to implement these provisions with respect to operating 
companies.
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    \11\ We received 18 comment letters on the Form N-CSR Proposing 
Release from 17 commenters. The commenters included ten mutual 
funds, investment advisers, and financial advisers; one trade 
association; five law firms, law professors, attorneys, and bar 
associations; and one domestic government agency. These comment 
letters and a summary of the comments are available for public 
inspection and copying in our Public Reference Room, 450 Fifth 
Street, NW., Washington, DC 20549, in File No. S7-33-02. Public 
comments submitted electronically and a summary of the comments are 
available on our Web site <http://www.sec.gov.
    We received over 200 comment letters on the Section 406/407 
Proposing Release, including 23 comment letters on the proposed 
amendments applicable to investment companies. The commenters 
included 12 mutual funds and investment advisers; one trade 
association; four law firms, bar associations, and accounting firms; 
and six independent directors of investment companies. These comment 
letters are available for public inspection and copying in our 
Public Reference Room, 450 Fifth Street, NW., Washington, DC 20549, 
in File No. S7-40-02. Public comments submitted electronically are 
available on our Web site <http://www.sec.gov.
    \12\ Amendments to Item 133 and instructions to Items 77Q3, 
102P3, and 133 of Form N-SAR.
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A. Section 302 of the Sarbanes-Oxley Act--Certification Requirements

1. Certified Shareholder Reports
    We are adopting, as proposed, an amendment to rule 30b2-1 under the 
Investment Company Act, which currently requires registered investment 
companies to file copies of reports transmitted to shareholders with 
the Commission within 10 days of their transmission to shareholders. 
The amendment will require a registered management investment company 
to file a report with the Commission on new Form N-CSR (``certified 
shareholder report'') containing (i) a copy of any required shareholder 
report, (ii) additional information regarding disclosure controls and 
procedures, and (iii) the certification required by the Sarbanes-Oxley 
Act.\13\ As adopted, new

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Form N-CSR requires certified shareholder reports to contain the exact 
form of the certification prescribed by the form. The certification is 
required of each principal executive officer and financial officer, and 
the form of this certification parallels the form of the certification 
we have prescribed for other Exchange Act reporting forms, such as 
Forms 10-K and 10-Q. The certification must be filed as an exhibit to a 
report on Form N-CSR.\14\ In addition to the signature required on the 
certification, the report must be signed by the registrant, and on 
behalf of the registrant by its principal executive officer or officers 
and its principal financial officer or officers.\15\ The certification 
requirement will also apply to amendments of certified shareholder 
reports on Form N-CSR.\16\ In addition, we are adopting new rule 30d-1 
under the Investment Company Act, designating reports on Form N-CSR as 
periodic reports filed with the Commission under Section 13(a) or 15(d) 
of the Exchange Act.\17\
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    \13\ Rule 30b2-1(a) under the Investment Company Act [17 CFR 
270.30b2-1(a)]; 17 CFR 249.331; 17 CFR 274.128; Items 1, 9, and 
10(b) of Form N-CSR. In addition, we are amending rule 30a-2 under 
the Investment Company Act [17 CFR 270.30a-2] to require Form N-CSR 
to include the certification required by Section 302 of the 
Sarbanes-Oxley Act. No certified shareholder report on Form N-CSR 
would be required with respect to a report to shareholders that is 
not required under rule 30e-1 under the Investment Company Act [17 
CFR 270.30e-1], e.g., voluntary quarterly reports. These reports to 
shareholders would continue to be filed with the Commission as they 
are presently. Rule 30b2-1(b) under the Investment Company Act [17 
CFR 270.30b2-1(b)].
    \14\ See Item 10(b) of Form N-CSR. The EDGAR document type must 
be EX-99.CERT for an exhibit filed in response to Item 10(b). All 
certifications in a filing on Form N-CSR should be included in a 
single EDGAR exhibit document.
    \15\ See General Instruction E to Form N-CSR.
    \16\ Rule 8b-15 under the Investment Company Act [17 CFR 270.8b-
15].
    \17\ We are also adopting a technical conforming amendment that 
would delete the language in current rule 30a-1 [17 CFR 270.30a-1] 
stating that a registered management investment company required to 
file an annual report pursuant to Section 13(a) or 15(d) of the 
Exchange Act and Section 30(a) of the Investment Company Act shall 
be deemed to have satisfied its requirement to file an annual report 
by the filing of semi-annual reports on Form N-SAR. The amendments 
rename rule 30a-1 in order to specify that it relates to annual 
reports by registered unit investment trusts, and rename rule 30b1-1 
[17 CFR 270.30b1-1] in order to specify that it relates to semi-
annual reports of registered management investment companies.
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    The requirement to file certified shareholder reports will apply to 
registered management investment companies, regardless of whether they 
are subject to Section 13(a) or 15(d) of the Exchange Act.\18\ By its 
terms, Section 302 of the Sarbanes-Oxley Act directs the Commission to 
adopt rules that will apply to companies filing periodic reports under 
Section 13(a) or 15(d) of the Exchange Act.\19\ We believe, however, 
that it is important for the certification requirement, like our other 
reporting rules, to apply consistently to all registered investment 
companies, regardless of whether they fall within the periodic 
reporting requirements of the Exchange Act.\20\
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    \18\ Rule 30b2-1(a) [17 CFR 270.30b2-1(a)].
    \19\ See supra note (description of Exchange Act reporting 
requirements).
    \20\ Cf. General Instruction A to Form N-SAR (Form N-SAR is to 
be used for semi-annual and annual reports by all registered 
investment companies that have filed a registration statement that 
has become effective pursuant to the Securities Act, with the 
exception of face amount certificate companies.).
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    In light of the adoption of Form N-CSR as an Exchange Act reporting 
form, we are amending our rules and forms to provide that, for 
registered management investment companies, Form N-SAR will be filed 
under the Investment Company Act only and not the Exchange Act.\21\ We 
were persuaded by commenters who argued that certification of both Form 
N-SAR and shareholder reports would impose an unjustified burden on 
management investment companies. These commenters noted that Form N-SAR 
does not contain financial statements; that although Form N-SAR is 
publicly available, it was developed primarily to elicit information 
for use by the Commission in its compliance and inspections program; 
and that the information in Form N-SAR is not generally relied upon by 
investors.\22\ In light of the fact that registered management 
investment companies will be filing Form N-CSR under the Exchange Act, 
we do not believe that it is necessary for these companies to continue 
to file Form N-SAR under the Exchange Act or to certify Form N-SAR 
under the Sarbanes-Oxley Act.\23\ We believe that this is appropriate 
because, for registered management investment companies, the required 
reports to shareholders contained in Form N-CSR, rather than Form N-
SAR, are the primary vehicle for providing financial statements and 
other information to investors.\24\ The certification requirement was 
intended to improve the quality of the disclosure that a company 
provides about its financial condition in its periodic reports to 
investors.\25\
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    \21\ See Rule 30b1-1 under the Investment Company Act [17 CFR 
270.30b1-1]; 17 CFR 249.330; 17 CFR 274.101; General Instruction A 
to Form N-SAR.
    \22\ See Investment Company Act Release No. 14299 (Jan. 4, 1985) 
[50 FR 1442 (Jan. 11, 1985)] (release adopting Form N-SAR); 
Investment Company Act Release No. 14080 (Aug. 6, 1984) [49 FR 32370 
(Aug. 14, 1984)] (release proposing Form N-SAR).
    \23\ Instructions to item 77Q3 of Form N-SAR (amended to remove 
certification); rule 30b1-3 under the Investment Company Act [17 CFR 
270.30b1-3] (removing the certification requirement from transition 
reports on Form N-SAR).
    \24\ Sections 30(e) and (f) of the Investment Company Act (15 
U.S.C. 80a-29(e) and (f)) (requiring a registered investment company 
to transmit to its stockholders, at least semi-annually, reports 
containing financial statements and other information prescribed by 
the Commission).
    \25\ See, e.g., S. Rep. No. 107-205, at 2 (2002) (``The bill 
also requires steps to enhance the direct responsibility of senior 
corporate management for financial reporting and for the quality of 
financial disclosures made by public companies.''); 148 Cong. Rec. 
S7355 (July 25, 2002) (statement of Sen. Enzi) (``With respect to 
section 302, the conference recognizes that results presented in 
financial statements often necessarily require accompanying 
disclosures in order to apprise investors of the company's true 
financial condition and results of operations. The supplemental 
information contained in these additional disclosures increases 
transparency for investors. Accordingly, the relevant officers must 
certify that the financial statements together with the disclosures 
contained in the periodic report, taken as a whole, are appropriate 
and fairly represent, in all material respects, the operations and 
financial condition of the issuer.''); 148 Cong. Rec. S6760 (July 
15, 2002) (statement of Sen. Akaka) (``The legislation also requires 
additional corporate governance procedures to make Chief Executive 
Officers and Chief Financial Officers more directly responsible for 
the quality of financial reporting made to investors.'').
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2. Scope of Certification Requirement
    We are adopting, as proposed, the requirement that all of the 
information filed on Form N-CSR, including all of the information in a 
shareholder report filed as part of Form N-CSR, be certified. This 
would include information that is included voluntarily, as well as that 
required by Form N-CSR. In addition to financial statements, annual 
reports to shareholders of open-end management investment companies, or 
mutual funds, typically contain Management's Discussion of Fund 
Performance (``MDFP''), although, at present, they are not required to 
do so.\26\ MDFP includes narrative disclosure of the factors that 
materially affected a fund's performance during the reporting period, a 
line graph comparing the fund's performance to that of an appropriate 
broad-based market index, and a table of average annual total returns 
for the fund. In addition, the annual report to shareholders of a 
management investment company must contain other information, including 
certain basic information about the investment company's directors.\27\
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    \26\ Item 5 of Form N-1A. Management's Discussion of Fund 
Performance must be included in a fund's prospectus unless the fund 
is a money market fund or the information in the MDFP is included in 
the fund's annual report to shareholders under rule 30e-1 [17FR 
270.30e-1]. A fund that includes MDFP in its annual report must 
disclose in its prospectus that its annual report contains 
additional performance information that will be made available upon 
request and without charge. Item 1(b)(1) of Form N-1A. We recently 
proposed to require the MDFP to be included in a mutual fund's 
annual report to shareholders. Investment Company Act Release No. 
25870 (Dec. 18, 2002) [68 FR 160, 170 (Jan. 2, 2003)].
    \27\ 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.

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    Many commenters objected to our proposal to require certification 
of all of the information contained in shareholder reports, and instead 
suggested that the certification should apply only to the financial 
statements and other financial information in shareholder reports. 
Commenters argued that the narrative disclosure commonly found in 
shareholder reports, including the narrative section of MDFP as well as 
a fund president's letter to shareholders, interviews with portfolio 
managers, and other similar information that is intended to assist 
investors in understanding fund performance and portfolio composition, 
is not analogous to Management's Discussion & Analysis (MD&A) in Form 
10-K, and is not the type of objective financial information that the 
certification requirement of Section 302 was intended to cover.\28\ The 
MD&A, commenters noted, is intended to provide a narrative explanation 
of an operating company's financial statements and to provide the 
context within which the financial statements should be analyzed, while 
the MDFP is simply a narrative explanation of an investment company's 
performance comparative to the market. These commenters argued that the 
narrative disclosure in the shareholder reports, including that in the 
MDFP, does not lend itself to meaningful personal certification by an 
investment company's principal executive and financial officers, and 
that requiring certification of the entire shareholder report could 
have the unintended consequence of encouraging investment companies to 
reduce the scope of the narrative discussion provided voluntarily in 
shareholder reports, or even ceasing to provide it altogether.
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    \28\ See Item 303 of Regulation S-K [17 CFR 229.303] 
(Management's Discussion and Analysis).
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    We are not persuaded by these comments. Section 302 of the 
Sarbanes-Oxley Act does not limit the scope of the certification to 
financial information filed by a registrant. The MDFP and other 
narrative disclosure is relied upon by investors to explain the 
investment operations and performance of a mutual fund, which is as 
significant for investors in the fund as management's discussion and 
analysis of financial condition and results of operations is for 
investors in an operating company. 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. \29\ The Commission has asked the staff, in its 
review of a mutual fund's disclosure documents, to continue to focus on 
areas where funds' MDFP disclosure has been deficient.\30\ We believe 
that a requirement that MDFP, if included in shareholder reports, must 
be certified by the mutual fund's principal executive and financial 
officers, would encourage funds to include a more complete and accurate 
discussion of the factors that affected fund performance in their MDFP. 
Further, we note that in the operating company context, reports on Form 
10-K contain certain required non-financial information that must be 
certified.\31\
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    \29\ 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 investment companies' MDFP).
    \30\ Investment Company Act Release No. 25870, supra note, 68 FR 
at 170.
    \31\ See Item 401 of Regulation S-K [17 CFR 229.401] (requiring 
background information about directors and officers); Section 406/
407 Adopting Release, supra note (adopting Item 406 of Regulation S-
K, which requires disclosure with respect to codes of ethics 
applicable to a registrant's principal executive officer, principal 
financial officer, principal accounting officer or controller, or 
persons performing similar functions, and Item 401(h) of Regulation 
S-K, which requires disclosure of whether a company has at least one 
audit committee financial expert serving on its audit committee, and 
if so, the name of the expert and whether the expert is independent 
of management).
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    We also note that the only statement made in the certification with 
respect to this narrative information is that, based on the certifying 
officer's knowledge, the report does not contain any untrue statement 
of a material fact or omit to state a material fact necessary to make 
the statements made, in light of the circumstances under which such 
statements were made, not misleading with respect to the period covered 
by the report.\32\ This certification is consistent with the current 
obligation of registrants under the Exchange Act not to file reports 
that are materially misleading.\33\ Therefore, we believe that it is 
appropriate for the certifying officers to provide assurances to 
investors that the reports a fund files under the Exchange Act meet 
this standard.
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    \32\ Paragraph 3 of certification exhibit in Item 10(b) of Form 
N-CSR.
    \33\ Rule 10b-5 under the Exchange Act [17 CFR 240.10b-5] 
provides that: ``It shall be unlawful for any person, directly or 
indirectly, * * * to make any untrue statement of a material fact or 
to omit to state a material fact necessary in order to make the 
statements made, in the light of the circumstances under which they 
were made, not misleading * * *''
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3. Application of Certification Requirements to Unit Investment Trusts 
and Small Business Investment Companies
    To address commenters' concerns, we are amending Form N-SAR to 
eliminate the requirement that unit investment trusts (``UITs'') and 
small business investment companies (``SBICs'') certify their reports 
on Form N-SAR.\34\ Commenters noted that Form N-SAR, which does not 
contain financial statements, contains little, if any, information 
regarding a UIT that is of relevance or interest to investors. We 
agree. Form N-SAR requires both UITs and SBICs to include only limited 
financial and other information.\35\ Because Form N-SAR contains very 
limited information for UITs and SBICs and is not required to be sent 
to investors, certification of this information would not promote the 
intent of Section 302 of the Sarbanes-Oxley Act, which is to improve 
the quality of the disclosure that a company provides about its 
financial condition in its periodic reports to investors. We

[[Page 5352]]

have therefore concluded that requiring UITs and SBICs to certify their 
reports on Form N-SAR does not produce any meaningful benefit to 
investors.
---------------------------------------------------------------------------

    \34\ Instruction 102P3 of Form N-SAR; Instruction to Item 133 of 
Form N-SAR.
    A UIT is an unmanaged, fixed portfolio of securities that has no 
corporate management structure, and generally is not required to 
transmit reports to shareholders containing its financial 
statements. See Section 4(2) of the Investment Company Act [15 
U.S.C. 80a-4(2)] (defining UIT). SBICs are management investment 
companies that are licensed as SBICs under the Small Business 
Investment Act of 1958. See General Instruction A of Form N-5 [17 
CFR 239.24; 17 CFR 274.5] (describing SBIC).
    \35\ UITs report the following information on Form N-SAR: (i) 
Identifying information (Items 1-6); (ii) the names and addresses of 
the trust's depositors, sponsors, trustees, principal underwriters, 
and independent accountants (Items 111-115); (iii) whether the trust 
is part of a family of investment companies or an insurance company 
separate account (Items 116-117); (iv) the following numbers: Number 
of series, dollar amounts of deposits and prior series units, sales 
charges aggregated for all series, values of and income from various 
types of securities and expenses aggregated for all series (Items 
118-127, 131); (v) information regarding insurance and guarantees 
(Items 128-130); and (vi) a list of any pre-1972 Investment Company 
Act file numbers (Item 132). SBICs report the following information 
on Form N-SAR: (i) Identifying information (Items 1-6); (ii) the 
names and addresses of the SBIC's advisers, transfer agents, 
independent accountants, and custodian (Items 89-92); (iii) whether 
the adviser has clients other than investment companies (Item 93); 
(iv) whether the SBIC is part of a family of investment companies 
(Item 94); (v) information on the sales, repurchase and redemptions 
of the SBIC's securities (Item 95); (vi) securities of the SBIC 
registered on an exchange (Item 96); (vii) certain financial 
information, including income, expenses, assets, liabilities, and 
shareholders' equity (Items 97-101); (viii) exhibits (Item 102); 
(ix) information on subsidiaries (Items 103-104); and (x) 
information on fidelity bonds and officers and directors insurance 
(Items 105-110).
---------------------------------------------------------------------------

    While certification of Form N-SAR will no longer be required, UITs 
and SBICs will continue to file Form N-SAR under both the Exchange Act 
and the Investment Company Act.\36\ UITs and SBICs generally are not 
required to transmit reports to shareholders containing their financial 
statements, and UITs and SBICs will not be required to file certified 
shareholder reports under the Exchange Act.\37\ We do not believe that 
it would be appropriate to remove UITs and SBICs from Exchange Act 
reporting status by making Form N-SAR an Investment Company Act-only 
form.
---------------------------------------------------------------------------

    \36\ Rules 30a-1, 30b1-1, and 30d-1 under the Investment Company 
Act [17 CFR 270.30a-1; 17 CFR 270.30b1-1; 17 CFR 270.30d-1]; 17 CFR 
249.330; 17 CFR 274.101; General Instruction A to Form N-SAR.
    \37\ Rules 30b2-1(a) and 30d-1 under the Investment Company Act 
[17 CFR 270.30b2-1(a); 17 CFR 270.30d-1] and General Instruction A 
to Form N-CSR [17 CFR 249.331; 17 CFR 274.128]. SBICs are not 
required under rule 30e-1(a) [17 CFR 270.30e-1(a)] to transmit 
reports to shareholders containing their financial statements, 
because Form N-5 [17 CFR 239.24; 17 CFR 274.5], the registration 
form for SBICs, does not prescribe requirements for reports to 
shareholders by SBICs.
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4. Disclosure Controls and Procedures
    We are adopting, with modifications to address commenters' 
concerns, new rule 30a-3, which requires registered management 
investment companies to maintain, and regularly evaluate the 
effectiveness of, controls and procedures designed to ensure that the 
information required in filings on Form N-CSR is recorded, processed, 
summarized, and reported on a timely basis.\38\ Investment companies 
filing reports under Section 13(a) or 15(d) of the Exchange Act are 
currently required to maintain disclosure controls and procedures with 
respect to Exchange Act reports.\39\ Rule 30a-3 applies this 
requirement uniformly to all registered management investment 
companies, regardless of whether they are subject to Section 13(a) or 
15(d) of the Exchange Act.\40\ We believe that registered management 
investment companies filing Form N-CSR should maintain effective 
disclosure controls and procedures, regardless of whether they fall 
within the periodic reporting requirements of the Exchange Act. We are 
also amending the definition of ``disclosure controls and procedures'' 
in rule 30a-2(c) to make clear that such controls and procedures apply 
to registered management investment companies regardless of whether 
they are subject to Section 13(a) or 15(d) of the Exchange Act, and 
that they do not apply to SBICs and UITs filing Exchange Act reports on 
Form N-SAR that are not required to be certified.\41\
---------------------------------------------------------------------------

    \38\ 17 CFR 270.30a-3. SBICs will not be required to maintain 
disclosure controls and procedures as required by rule 30a-3 because 
they do not file reports on Form N-CSR. See supra note 37.
    \39\ Rules 13a-15 and 15d-15 under the Exchange Act [17 CFR 
240.13a-15; 17 CFR 15d-15].
    \40\ See supra note 2 (description of Exchange Act reporting 
requirements).
    \41\ Rule 30a-2(c) under the Investment Company Act [17 CFR 
270.30a-2(c)]. We are also adopting conforming amendments to rules 
13a-15 and 15d-15 under the Exchange Act [17 CFR 240.13a-15; 17 CFR 
240.15d-15] to exclude SBICs and UITs from the requirements to 
maintain disclosure controls and procedures under those rules.
---------------------------------------------------------------------------

    We are also adopting, as proposed, the requirement of rule 30a-3(b) 
that a registered management investment company, under the supervision 
and with the participation of the principal executive and financial 
officers, conduct an evaluation of its disclosure controls and 
procedures within the 90-day period prior to the filing date of each 
Form N-CSR requiring certification under Investment Company Act rule 
30a-2.\42\ We expect that this evaluation will be carried out in a 
manner that will form the basis for the certification required by 
Section 302 of the Sarbanes-Oxley Act regarding disclosure controls and 
procedures required by Investment Company Act rule 30a-2(b)(4).\43\
---------------------------------------------------------------------------

    \42\ 17 CFR 270.30a-3(b).
    \43\ We recognize that, in the case of a series fund or family 
of investment companies, the disclosure controls and procedures for 
each fund in the series or family may be the same. Therefore, for 
purposes of Rule 30a-2(b)(4)(ii) and (iii), a single evaluation of 
the effectiveness of the disclosure controls and procedures for the 
series or family could be used in multiple certifications for the 
funds in the series or family, as long as the evaluation has been 
performed within 90 days of the date of the report on Form N-CSR.
---------------------------------------------------------------------------

    As proposed, rule 30a-3 would have extended the requirement to 
maintain and evaluate disclosure controls and procedures to filings 
under the Securities Act of 1933 (``Securities Act'') and the 
Investment Company Act.\44\ Commenters argued that this extension would 
impose a larger burden on investment companies than on operating 
companies, which are only required to maintain disclosure controls and 
procedures with respect to their Exchange Act reports. Commenters 
pointed out that under the rule, as proposed, investment companies 
would have to establish and maintain, and conduct evaluations of the 
effectiveness of, disclosure controls and procedures on at least a 
semi-annual basis, with respect to all of the updates of their 
registration statements, as well as with respect to other filings 
required under the Securities Act and the Investment Company Act, 
including advertisements and sales literature.\45\ According to 
commenters, these periodic evaluations would add substantially to the 
workload of fund officers, but would not result in a discernible 
benefit to fund shareholders or further the intent of the Sarbanes-
Oxley Act.
---------------------------------------------------------------------------

    \44\ Form N-CSR Proposing Release, supra note, 67 FR at 57306 
(proposed rules 30a-2(c) and 30a-3 under the Investment Company 
Act).
    \45\ Section 24(b) of the Investment Company Act [15 U.S.C. 80a-
24(b)] requires investment companies to file ``any advertisement, 
pamphlet, circular, form letter, or other sales literature'' with 
the Commission. Rule 24b-3 under the Investment Company Act [17 CFR 
270.24b-3] permits investment companies to satisfy this requirement 
by filing sales literature with the National Association of 
Securities Dealers, Inc. (``NASD'') or another national securities 
association registered under Section 15A of the Exchange Act [15 
U.S.C. 78o]. Rule 497(a)(1) under the Securities Act [17 CFR 
230.497(a)(1)] requires an investment company advertisement pursuant 
to rule 482 under the Securities Act [17 CFR 230.482] to be filed 
with the Commission, and rule 497(i) under the Securities Act [17 
CFR 230.497(i)] permits a rule 482 advertisement to be considered 
filed with the Commission if it is filed with the NASD or another 
national securities association registered under Section 15A of the 
Exchange Act.
---------------------------------------------------------------------------

    Section 302 of the Sarbanes-Oxley Act does not require evaluations 
of disclosure controls and procedures with respect to non-Exchange Act 
filings, and we have determined that it would not be appropriate to 
extend this requirement to Securities Act and Investment Company Act 
filings at this time. We are concerned that the evaluation process 
could be unduly burdensome, relative to its benefits, when applied to 
these other filings. Therefore, we are limiting the requirement to 
maintain and evaluate disclosure controls and procedures to Form N-CSR, 
the Exchange Act document that will be subject to the Sarbanes-Oxley 
Act certification requirements.
    We wish to emphasize that effective disclosure controls and 
procedures are essential for an investment company to meet its 
disclosure obligations under all of the securities laws, including the 
Securities Act and the Investment Company Act. Our limitation of the 
definition of disclosure controls and procedures to Form N-CSR in the 
rules we adopt today in no way diminishes the importance of disclosure 
controls and procedures designed to ensure that the information 
required in other filings made by an investment company, including 
prospectuses and prospectus amendments, advertisements and sales 
literature, and Form N-SAR, is recorded, processed, summarized, and 
reported on a timely basis. Our determination to limit the scope of 
disclosure controls and procedures in these rules rests on our concern 
that the burdens of the specific evaluation

[[Page 5353]]

process mandated by the rules may outweigh its benefits when extended 
to these other filings.
5. Extension of Time for Filing Form N-CSR
    We are also adopting amendments to require an investment company to 
file a Form 12b-25 if it will not be able to file a report on Form N-
CSR in a timely manner.\46\ Filing of a Form 12b-25 would provide the 
investment company with an automatic extension of time to file Form N-
CSR of up to 15 calendar days following the prescribed due date. Form 
12b-25 currently may be used for reports on Form N-SAR, and we note 
that the form will continue to be available to all filers on Form N-
SAR, including registered management investment companies filing 
exclusively under the Investment Company Act.
---------------------------------------------------------------------------

    \46\ Rule 12b-25(a) and (b)(2)(ii) under the Exchange Act [17 
CFR 240.12b-25(a) and (b)(2)(ii)] and Exchange Act Form 12b-25 [17 
CFR 249.322].
---------------------------------------------------------------------------

B. Section 406 of the Sarbanes-Oxley Act--Code of Ethics

    We are adopting, with modifications to address commenters' 
concerns, our proposed amendments that implement Section 406 of the 
Sarbanes-Oxley Act with respect to registered management investment 
companies. These requirements are similar to those we recently adopted 
for operating companies, and we direct investment companies to that 
release for information concerning these requirements.\47\ The 
amendments we are adopting will require a registered management 
investment company to:
---------------------------------------------------------------------------

    \47\ See Section II.B., ``Code of Ethics,'' in Section 406/407 
Adopting Release, supra note 8.
---------------------------------------------------------------------------

    [sbull] Disclose annually whether the investment company has 
adopted a code of ethics that applies to the investment company's 
principal executive officer, principal financial officer, principal 
accounting officer or controller, or persons performing similar 
functions, regardless of whether these individuals are employed by the 
investment company or a third party;\48\
---------------------------------------------------------------------------

    \48\ Item 2(a) of Form N-CSR; Instruction 102P3(a)(1) of Form N-
SAR.
---------------------------------------------------------------------------

    [sbull] If the investment company has not adopted a code of ethics, 
explain why it has not done so;\49\
---------------------------------------------------------------------------

    \49\ Id.
---------------------------------------------------------------------------

    [sbull] Describe briefly the nature of any amendment to, or waiver 
from a provision of, the investment company's code of ethics in its 
report on Form N-CSR or Form N-SAR, as applicable. In the alternative, 
the investment company may disclose this information on its Internet 
website within five business days following the date of the amendment 
or waiver, if the investment company has disclosed in its most recently 
filed report on Form N-CSR or Form N-SAR its intention to provide 
disclosure in this manner and its Internet address, it makes the 
information available on its website for a 12-month period, and it 
retains the information for a period of not less than six years 
following the end of the fiscal year in which the amendment or waiver 
occurred.\50\
---------------------------------------------------------------------------

    \50\ Items 2(c), 2(d), and 2(e), and Instruction 3 to Item 2, of 
Form N-CSR; Instructions 102P3(a)(3), (a)(4), (a)(5), and (a)(9) of 
Form N-SAR.
---------------------------------------------------------------------------

    The rules, as adopted, reflect modifications that are similar to 
those we recently made to the proposed code of ethics disclosure 
requirements for operating companies, for the reasons described in the 
release adopting these disclosure requirements for operating companies. 
These modifications include:
    [sbull] Elimination of the component of the definition of a code of 
ethics requiring the code to promote the avoidance of conflicts of 
interest, including disclosure to an appropriate person or persons 
identified in the code of any material transaction or relationship that 
reasonably could be expected to give rise to such a conflict;\51\
---------------------------------------------------------------------------

    \51\ Item 2(b) of Form N-CSR; Instruction 102P3(a)(2) of Form N-
SAR; Section II.B.2.c., ``Final Definition of `Code of Ethics,' '' 
in Section 406/407 Adopting Release, supra note.
---------------------------------------------------------------------------

    [sbull] Addition of an instruction to indicate that a company may 
have separate codes of ethics for different types of officers and that 
the provisions of the company's code of ethics that address the 
elements listed in the definition and apply to those officers may be 
part of a broader code that addresses additional issues and applies to 
additional persons;\52\
---------------------------------------------------------------------------

    \52\ Instruction 1 to Item 2 of Form N-CSR; Instruction 
102P3(a)(7) of Form N-SAR; Section II.B.2.c., ``Final Definition of 
`Code of Ethics,' '' in Section 406/407 Adopting Release, supra note 
8.
---------------------------------------------------------------------------

    [sbull] Allowing a company to choose among three alternative 
methods of making their ethics codes publicly available, including:
    (i) Filing a copy of the code as an exhibit to its annual report on 
Form N-CSR or Form N-SAR;
    (ii) Posting the text of the code on the company's Internet website 
and disclosing, in its most recent report on Form N-CSR or Form N-SAR, 
its Internet address and the fact that it has posted the code of ethics 
on its Internet website; or
    (iii) Providing an undertaking in the company's most recent report 
on Form N-CSR or Form N-SAR to provide a copy of the code to any person 
without charge upon request, and explaining the manner in which such a 
request may be made;\53\
---------------------------------------------------------------------------

    \53\ Item 2(f) of Form N-CSR; Instruction 102P3(a)(6) of Form N-
SAR; Section II.B.3, ``Filing of Ethics Code as an Exhibit,'' in 
Section 406/407 Adopting Release, supra note 8. Because Forms N-CSR 
and N-SAR are filed semi-annually, unlike Forms 10-K and 10-KSB for 
operating companies, our rules require disclosure of the intention 
to provide Internet disclosure of the code of ethics, or the 
undertaking to provide a copy of the code of ethics to any person 
upon written request, in the investment company's most recently 
filed semi-annual report on Form N-CSR or N-SAR.
---------------------------------------------------------------------------

    [sbull] Extension of the deadline for disclosing any amendments to, 
or waivers from, the company's code of ethics on its Internet website 
from two business days to five business days after the amendment or 
waiver;\54\
---------------------------------------------------------------------------

    \54\ Instruction 3 to Item 2 of Form N-CSR; Instruction 
102P3(a)(9) of Form N-SAR; Section II.B.5, ``Form 8-K or Internet 
Disclosure Regarding Changes to, or Waivers from, the Code of 
Ethics,'' in Section 406/407 Adopting Release, supra note 8.
---------------------------------------------------------------------------

    [sbull] Clarification that only amendments to, and waivers from, a 
company's code relating to specified elements of the code and specified 
officers must be disclosed;\55\
---------------------------------------------------------------------------

    \55\ Items 2(c) and 2(d) of Form N-CSR; Instructions 102P3(a)(3) 
and (a)(4) of Form N-SAR; Section II.B.5, ``Form 8-K or Internet 
Disclosure Regarding Changes to, or Waivers from, the Code of 
Ethics,'' in Section 406/407 Adopting Release, supra note.
---------------------------------------------------------------------------

    [sbull] Addition of a definition of the terms ``waiver'' and 
``implicit waiver';\56\ and
---------------------------------------------------------------------------

    \56\ Instruction 5 to Item 2 of Form N-CSR; Instruction 
102P3(a)(11) of Form N-SAR; Section II.B.5, ``Form 8-K or Internet 
Disclosure Regarding Changes to, or Waivers from, the Code of 
Ethics,'' in Section 406/407 Adopting Release, supra note 8.
---------------------------------------------------------------------------

    [sbull] Clarification that a company does not need to disclose 
technical, administrative, or other non-substantive amendments to its 
code of ethics.\57\
---------------------------------------------------------------------------

    \57\ Instruction 4 to Item 2 of Form N-CSR; Instruction 
102P3(a)(10) of Form N-SAR; ``Form 8-K or Internet Disclosure 
Regarding Changes to, or Waivers from, the Code of Ethics,'' in 
Section 406/407 Adopting Release, supra note 8.
---------------------------------------------------------------------------

    These disclosure requirements will apply to all registered 
management investment companies, regardless of whether they are 
required to file reports pursuant to Section 13(a) or 15(d) of the 
Exchange Act. Management investment companies other than SBICs will 
provide the required disclosure in Item 2 of Form N-CSR, and SBICs will 
provide the required disclosure as an exhibit to Form N-SAR.\58\
---------------------------------------------------------------------------

    \58\ Item 2 of Form N-CSR; Instruction 102P3(a) of Form N-SAR.
---------------------------------------------------------------------------

    Several commenters suggested that the code of ethics requirements 
should not apply to any registered investment companies. These 
commenters argued that the proposed amendments were unnecessary and 
potentially duplicative, noting that investment companies are already 
required to disclose whether they have a code of

[[Page 5354]]

ethics pursuant to rule 17j-1 under the Investment Company Act, and 
that in any event, investment companies are highly regulated under the 
Investment Company Act, which addresses the underlying ethical concerns 
substantively rather than simply through disclosure.\59\
    We continue to believe, however, that the rule should apply with 
equal force to investment companies and operating companies, and we 
note that the Sarbanes-Oxley Act does not distinguish between them with 
respect to the code of ethics requirements. We recognize that rule 17j-
1 currently requires investment companies, and their investment 
advisers and principal underwriters, to adopt codes of ethics designed 
to prevent fraud resulting from personal trading in securities by 
portfolio managers and other employees. The amendments we are adopting 
today, however, will address a broader range of conduct, including 
disclosure provided in filings with the Commission; compliance with 
governmental laws, rules, and regulations; and ethical conduct 
generally, including the ethical handling of actual or apparent 
conflicts of interest.\60\
---------------------------------------------------------------------------

    \59\ 17 CFR 270.17j-1.
    \60\ General Instruction D to Form N-CSR permits a registered 
management investment company to incorporate its code of ethics by 
reference from another document, such as its registration statement. 
See Item 23(p) of Form N-1A; Item 24.2.r of Form N-2; Item 28(b)(17) 
of Form N-3 (requiring codes of ethics required by rule 17j-1 to be 
filed as exhibits to registration statements).
---------------------------------------------------------------------------

    The rules we are adopting will require disclosure of an investment 
company's code of ethics that applies to its principal executive 
officer, principal financial officer, principal accounting officer or 
controller, or persons performing similar functions, regardless of 
whether these individuals are employed by the investment company or a 
third party.\61\ Our proposed rules would also have required disclosure 
of certain codes of ethics of an investment company's investment 
adviser and principal underwriter that apply to the adviser's and 
underwriter's principal executive officer and senior financial 
officers.\62\
---------------------------------------------------------------------------

    \61\ Item 2 of Form N-CSR; Instruction 102P3(a) of Form N-SAR.
    \62\ Section 406/407 Proposing Release, supra note, 67 FR at 
66217.
---------------------------------------------------------------------------

    We are persuaded by commenters that including codes of ethics of 
the investment adviser and principal underwriter goes beyond the 
intended scope of Section 406. In large financial services 
organizations, the principal executive officer and senior financial 
officers may have little to do with the operations or financial 
reporting of the investment company, but are instead responsible 
principally for the adviser's or underwriter's own operations and 
financial reporting.
    In addition, we have determined to exclude UITs from the code of 
ethics disclosure requirements. Because UITs are unmanaged, passive 
investment companies, they typically do not have principal executive 
officers, principal financial officers, principal accounting officers 
or controllers, or persons performing similar functions. In light of 
the fact that we have limited the rules we are adopting to these 
persons, we believe that it is appropriate to exclude UITs from the 
disclosure requirements. We note that we have provided a similar 
exclusion to issuers of asset-backed securities.\63\
---------------------------------------------------------------------------

    \63\ See Instruction 3 to Item 406 of Regulation S-K [17 CFR 
229.406]; Section II.D., ``Asset-Backed Issuers,'' in Section 406/
407 Adopting Release, supra note 8.
---------------------------------------------------------------------------

C. Section 407 of the Sarbanes-Oxley Act--Audit Committee Financial 
Experts

    We are adopting, with modifications to address commenters' 
concerns, our proposals that implement Section 407 of the Sarbanes-
Oxley Act with respect to registered management investment companies. 
These requirements are similar to those that we recently adopted for 
operating companies, and we direct investment companies to that release 
for guidance concerning these requirements.\64\ Under the provisions 
that we are adopting, a registered management investment company must 
disclose annually that its board of directors has determined that the 
company either: (i) Has at least one ``audit committee financial 
expert'' serving on its audit committee, and if so, the name of the 
expert and whether the expert is ``independent'; or (ii) does not have 
an audit committee financial expert serving on its audit committee. An 
investment company disclosing that it does not have an audit committee 
financial expert must explain why it does not have such an expert.\65\
---------------------------------------------------------------------------

    \64\ See Section II.A, ``Audit Committee Financial Experts,'' in 
Section 406/407 Adopting Release, supra note 8.
    \65\ Registered management investment companies other than SBICs 
will be required to provide the audit committee financial expert 
disclosure in Item 3 of Form N-CSR. SBICs will be required to 
provide this disclosure in an exhibit to Form N-SAR, pursuant to 
Instruction 102P3(b) of Form N-SAR (SBICs).
---------------------------------------------------------------------------

    The rules, as adopted, reflect modifications that are similar to 
those that we recently made to the proposed financial expert disclosure 
requirements for operating companies, for the reasons described in the 
release adopting these disclosure requirements for operating companies. 
These modifications include:
    [sbull] Use of the term ``audit committee financial expert'' rather 
than ``financial expert;'' \66\
---------------------------------------------------------------------------

    \66\ Item 3 of Form N-CSR; Instruction 102P3(b) of Form N-SAR; 
Section II.A.1, ``Title of the Expert,'' in Section 406/407 Adopting 
Release, supra note 8. Throughout this release, we refer to both 
``audit committee financial experts'' and ``financial experts'' as 
appropriate in a particular context. For example, when discussing 
statutory provisions, we refer to ``financial experts.'' For 
purposes of the discussions in this release, the meanings of these 
terms are identical.
---------------------------------------------------------------------------

    [sbull] Modification of the proposals that would have required 
disclosure of the number and names of audit committee financial experts 
serving on a company's audit committee to more closely track the 
language used in Section 407 of the Sarbanes-Oxley Act, and to require 
a company to disclose that its board of directors has determined that 
the company either has at least one audit committee financial expert 
serving on its audit committee or does not have an audit committee 
financial expert serving on its audit committee;\67\
---------------------------------------------------------------------------

    \67\ Item 3(a)(1) of Form N-CSR; Instruction 102P3(b)(1) of Form 
N-SAR; Section II.A.2, ``Disclosure of the Number and Names of Audit 
Committee Financial Experts,'' in Section 406/407 Adopting Release, 
supra note 8.
---------------------------------------------------------------------------

    [sbull] Modification of the proposals to permit, but not require, 
an investment company to disclose that it has more than one audit 
committee financial expert on its audit committee. Therefore, once an 
investment company's board determines that a particular audit committee 
member qualifies as an audit committee financial expert, it may, but is 
not required to, determine whether additional audit committee members 
also qualify as experts. Every investment company subject to the audit 
committee disclosure requirements would, however, have to determine 
whether or not it has at least one audit committee financial expert; a 
company will not satisfy the new disclosure requirements by stating 
that it has decided not to make a determination or by simply disclosing 
the qualifications of all of its audit committee members. Furthermore, 
if the company's board determines that at least one of the audit 
committee members qualifies as an expert, the company must accurately 
disclose this fact. It will not be appropriate for a company to 
disclose that it does not have an audit committee financial expert if 
its board has determined that

[[Page 5355]]

such an expert serves on the audit committee;\68\
---------------------------------------------------------------------------

    \68\ Instruction 2 to Item 3(a) of Form N-CSR; Instruction 
102P3(b)(5) of Form N-SAR; Section II.A.2, ``Disclosure of the 
Number and Names of Audit Committee Financial Experts,'' in Section 
406/407 Adopting Release, supra note.
---------------------------------------------------------------------------

    [sbull] Reorganization of the components of the definition of audit 
committee financial expert to make it easier to read and to emphasize, 
by including them in the first part of the definition, the attributes 
that an audit committee financial expert must possess;\69\
---------------------------------------------------------------------------

    \69\ Items 3(b) and 3(c) of Form N-CSR; Instructions 102P3(b)(6) 
and (b)(7) of Form N-SAR; Section II.A.4.d., ``Discussion of 
Significant Modifications to the Proposed Definition of ``Financial 
Expert,''' in Section 406/407 Adopting Release, supra note 8.
---------------------------------------------------------------------------

    [sbull] Revision of the second attribute to state that the audit 
committee financial expert must have the ability to assess the general 
application of generally accepted accounting principles in connection 
with the accounting for estimates, accruals, and reserves, rather than 
stating that the expert must have experience applying these 
principles;\70\
---------------------------------------------------------------------------

    \70\ Item 3(b)(2) of Form N-CSR; Instruction 102P3(b)(6)(ii) of 
Form N-SAR; Section II.A.4.d.(ii), ``Discussion of Significant 
Modifications to the Proposed Definition of ``Financial Expert,''' 
in Section 406/407 Adopting Release, supra note.
---------------------------------------------------------------------------

    [sbull] Broadening of the third attribute by requiring an audit 
committee financial expert to have experience ``preparing, auditing, 
analyzing, or evaluating'' financial statements that present a breadth 
and level of complexity of accounting issues that are generally 
comparable to the breadth and complexity of issues that can reasonably 
be expected to be raised by the registrant's financial statements, or 
experience actively supervising a person who prepares, audits, analyzes 
or evaluates financial statements;\71\
---------------------------------------------------------------------------

    \71\ Item 3(b)(3) of Form N-CSR; Instruction 102P3(b)(6)(iii) of 
Form N-SAR; Section II.A.4.d., ``Discussion of Significant 
Modifications to the Proposed Definition of ``Financial Expert,''' 
in Section 406/407 Adopting Release, supra note 8. By active 
supervision, we do not simply mean that a traditional hierarchical 
reporting relationship exists between supervisor and those being 
supervised. Rather, we mean that a person engaged in active 
supervision addresses, albeit at a supervisory level, the same 
general types of issues regarding preparation, auditing, analysis, 
or evaluation of financial statements as those addressed by the 
person or persons being supervised.
---------------------------------------------------------------------------

    [sbull] Modification of the fourth attribute to require 
understanding of, rather than experience with, internal controls and 
procedures for financial reporting;\72\
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    \72\ Item 3(b)(4) of Form N-CSR; Instruction 102P3(b)(6)(iv) of 
Form N-SAR; Section II.A.4.d., ``Discussion of Significant 
Modifications to the Proposed Definition of ``Financial Expert,''' 
in Section 406/407 Adopting Release, supra note 8.
---------------------------------------------------------------------------

    [sbull] Modification of the definition to state that a person must 
have acquired the five necessary attributes through any one or more of 
the following: (i) Education and experience as a principal financial 
officer, principal accounting officer, controller, public accountant, 
or auditor or experience in one or more positions that involve the 
performance of similar functions; (ii) experience actively supervising 
a principal financial officer, principal accounting officer, 
controller, public accountant, auditor, or person performing similar 
functions; (iii) experience overseeing or assessing the performance of 
companies or public accountants with respect to the preparation, 
auditing, or evaluation of financial statements; or (iv) other relevant 
experience.\73\
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    \73\ Item 3(c) of Form N-CSR; Instruction 102P3(b)(7) of Form N-
SAR; Section II.A.4.d., ``Discussion of Significant Modifications to 
the Proposed Definition of ``Financial Expert,''' in Section 406/407 
Adopting Release, supra note 8.
---------------------------------------------------------------------------

    [sbull] Elimination of the requirement that an audit committee 
financial expert must have gained the relevant expertise with a company 
that was required to file reports pursuant to Section 13(a) or 15(d) of 
the Exchange Act;\74\
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    \74\ Item 3(c) of Form N-CSR; Instruction 102P3(b)(7) of Form N-
SAR; Section II.A.4.d., ``Discussion of Significant Modifications to 
the Proposed Definition of ``Financial Expert,''' in Section 406/407 
Adopting Release, supra note 8.
---------------------------------------------------------------------------

    [sbull] Addition of a requirement that if a person qualifies as an 
audit committee financial expert by virtue of possessing ``other 
relevant experience,'' the company's disclosure briefly list that 
person's experience;\75\
---------------------------------------------------------------------------

    \75\ Instruction to Item 3 of Form N-CSR; Instruction 
102P3(b)(9) of Form N-SAR.
---------------------------------------------------------------------------

    [sbull] Elimination of the list of factors that a company's board 
of directors should consider in evaluating the education and experience 
of an audit committee financial expert candidate;\76\ and
---------------------------------------------------------------------------

    \76\ Section II.A.4.d., ``Discussion of Significant 
Modifications to the Proposed Definition of ``Financial Expert,''' 
in Section 406/407 Adopting Release, supra note 8.
---------------------------------------------------------------------------

    [sbull] Addition of a safe harbor in the audit committee disclosure 
requirements.\77\
---------------------------------------------------------------------------

    \77\ Item 3(d) of Form N-CSR; Instruction 102P3(b)(8) of Form N-
SAR; Section II.A.5, ``Safe Harbor from Liability for Audit 
Committee Financial Experts,'' in Section 406/407 Adopting Release, 
supra note 8.
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    We wish to emphasize that, as with an operating company, the board 
of an investment company must ensure that it names an audit committee 
financial expert who embodies the highest standards of personal and 
professional integrity. In this regard, a board should consider any 
disciplinary actions to which a potential expert is, or has been, 
subject in determining whether that person would be a suitable audit 
committee financial expert.\78\
    The disclosure requirements that we are adopting will apply to all 
registered management investment companies, regardless of whether they 
are required to file reports under Section 13(a) or 15(d) of the 
Exchange Act. Several commenters objected to our proposal to require a 
registered management investment company to provide disclosure about 
audit committee financial experts serving on its audit committee. They 
argued that investment companies should be excluded entirely from any 
disclosure requirement relating to audit committee financial experts, 
because the nature of investment company accounting is such that 
investment company audit committees rarely are required to apply 
complex accounting principles. These commenters stated that the 
preparation of investment company financial statements is 
straightforward and does not present the types of circumstances that 
require the exercise of judgment, such as selection of accounting 
policies, that preparation of the financial statements of operating 
companies would.
---------------------------------------------------------------------------

    \78\ Section II.A.4.d., ``Discussion of Significant 
Modifications to the Proposed Definition of ``Financial Expert,''' 
in Section 406/407 Adopting Release, supra note 8.
---------------------------------------------------------------------------

    We continue to believe, however, that the rule should apply with 
equal force to investment companies and operating companies, and we 
note that the Sarbanes-Oxley Act does not distinguish between them with 
respect to the financial expert disclosure requirements. In addition, 
while investment company financial statements may, in many cases, be 
simpler than those of some operating companies, the underlying 
financial systems, reporting mechanisms, and internal controls are 
sufficiently complex that an investment company's audit committee would 
benefit from having one or more members who meet the definition of 
audit committee financial expert. Finally, we note that the 
modifications that we have made to the definition of an audit committee 
financial expert should address the concerns of commenters that the 
definition was too narrowly drawn to apply in the context of investment 
companies. The commenters argued, in particular, that the second, 
third, and fourth required attributes were too restrictive, and that 
experience as a public accountant or auditor, or principal financial 
officer, controller, or public accounting officer of a company should 
not be the exclusive means for acquiring the attributes. As described 
above, we have made changes that are responsive to these concerns.

[[Page 5356]]

    We are adopting, substantially as proposed, a test for whether an 
audit committee financial expert may be considered to be 
``independent'' that differs from the test we have adopted for 
operating companies. The definition of ``independence'' adopted for 
operating companies refers to the definition of ``independent'' used in 
Item 7(d)(3)(iv) of Schedule 14A, which generally is not applicable to 
investment companies.\79\ Under the rules we are adopting, in order to 
be considered ``independent,'' a member of an audit committee of a 
registered management investment company may not, other than in his or 
her capacity as a member of the audit committee, the board of 
directors, or any other board committee: (i) Accept directly or 
indirectly any consulting, advisory, or other compensatory fee from the 
issuer; or (ii) be an ``interested person'' of the investment company, 
as defined in Section 2(a)(19) of the Investment Company Act.\80\
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    \79\ See Item 7(d)(3)(vii) of Schedule 14A [17 CFR 240.14a-101] 
(providing that a registered investment company, other than a 
closed-end investment company, need not provide the information 
required by Item 7(d)(3) about its audit committee).
    \80\ Item 3(a)(2) of Form N-CSR; Instruction 102P3(b)(2) of Form 
N-SAR.
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III. Transition Provisions and Compliance Dates

    Except as provided in the following sentence, the effective date of 
the rules, rule and form amendments, and Form N-CSR is March 1, 2003. 
The effective date of the removal of the certification requirement from 
Form N-SAR for registered management investment companies other than 
SBICs is May 1, 2003.
    A registered management investment company other than an SBIC that 
has a fiscal annual or semi-annual period ending on or before March 31, 
2003, may choose either to file Form N-CSR or to continue to comply 
with the certification requirements of Form N-SAR. A registered 
management investment company that elects to file Form N-CSR for a 
fiscal annual or semi-annual period ending on or before March 31, 2003, 
is not required to comply with paragraphs (b)(4), (5), and (6) of 
Investment Company Act Rule 30a-2, Item 9(a) of Form N-CSR, or 
paragraph (b) of Exchange Act Rules 13a-15 and 15d-15 and Investment 
Company Act Rule 30a-3 with respect to that Form N-CSR. A registered 
management investment company that elects to certify Form N-SAR for a 
fiscal annual or semi-annual period ending on or before March 31, 2003, 
must file its report to shareholders for that period as currently 
required. This transition is designed so that each such registered 
management investment company other than an SBIC will be required to 
provide a certification of its financial statements and financial 
information, while providing the flexibility to each company to 
determine whether to certify Form N-SAR or Form N-CSR during the 
transition period and sufficient time to establish and evaluate 
disclosure controls and procedures for Form N-CSR. A registered 
management investment company other than an SBIC that has a fiscal 
annual or semi-annual period ending on or after April 1, 2003, is 
required to file Form N-CSR for that period. Beginning immediately, a 
unit investment trust or an SBIC may omit the certification from Form 
N-SAR.
    Registered management investment companies must comply with the 
code of ethics disclosure requirements promulgated under Section 406 of 
the Sarbanes-Oxley Act in their annual reports on Form N-CSR or N-SAR 
for fiscal years ending on or after July 15, 2003. They also must 
comply with the requirements regarding disclosure of amendments to, and 
waivers from, their ethics codes on or after the date on which they 
file their first annual report on Form N-CSR or N-SAR in which 
disclosure of their code of ethics is required. Registered management 
investment companies similarly must comply with the audit committee 
financial expert disclosure requirements promulgated under Section 407 
of the Sarbanes-Oxley Act in their annual reports on Form N-CSR or N-
SAR for fiscal years ending on or after July 15, 2003.

IV. Paperwork Reduction Act

    The new rules and rule and form amendments contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\81\ We published notice requesting 
comment on the collection of information requirements in the release 
proposing Form N-CSR,\82\ submitted these requirements to the Office of 
Management and Budget (``OMB'') for review in accordance with the 
PRA,\83\ and received approval by OMB for this collection of 
information. In addition, we published notice requesting comment on the 
collection of information requirements in the proposing release 
implementing Sections 406 and 407 of the Sarbanes-Oxley Act \84\ and 
submitted these requirements to OMB for review. This request is pending 
before OMB.
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    \81\ 44 U.S.C 3501 et seq.
    \82\ Form N-CSR Proposing Release, supra note 5.
    \83\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
    \84\ Investment Company Act Release No. 25775 (Oct. 22, 2002) 
[67 FR 66208 (Oct. 30, 2002)].
---------------------------------------------------------------------------

    The titles for the collection of information are ``Form N-CSR under 
the Investment Company Act of 1940 and Securities Exchange Act of 1934, 
Certified Shareholder Report;'' ``Form N-SAR under the Investment 
Company Act of 1940, Semi-Annual Report for Registered Investment 
Companies;'' and ``Form 12b-25 under the Securities Exchange Act of 
1934, Notification of Late Filing.''
    Form N-SAR (OMB Control No. 3235-0330) under the Exchange Act and 
the Investment Company Act [17 CFR 249.330; 17 CFR 274.101] is used by 
registered investment companies to file periodic reports with the 
Commission. Form N-CSR (OMB Control No. 3235-0570) under the Exchange 
Act and the Investment Company Act [17 CFR 249.331; 17 CFR 274.128] 
will be used by registered management investment companies to file 
certified shareholder reports. Form 12b-25 (OMB Control No. 3235-0058) 
under the Exchange Act [17 CFR 249.322] provides notice to the 
Commission and the marketplace that a company will be unable to file a 
required report in a timely manner.
    Compliance with the new rules and rule and form amendments is 
mandatory and the information provided will not be kept confidential. 
Under our rules for retention of manual signatures, registered 
investment companies have to maintain the certifications for five 
years.\85\ An agency may not conduct or sponsor, and a person is not 
required to respond to, an information collection unless it displays a 
currently valid OMB control number.
---------------------------------------------------------------------------

    \85\ See Rule 302(b) of Regulation S-T [17 CFR 232.302(b)].
---------------------------------------------------------------------------

A. Summary of New Rules

    On August 28, 2002, the Commission implemented the certification 
requirement of Section 302 of the Sarbanes-Oxley Act with respect to 
registered investment companies by adopting new rule 30a-2 under the 
Investment Company Act and the Sarbanes-Oxley Act.\86\ Rule 30a-2 
requires a registered investment company that files periodic reports 
under Section 13(a) or 15(d) of the Exchange Act, i.e., Form N-SAR, to 
include the certification specified by Section 302 in those periodic 
reports.
---------------------------------------------------------------------------

    \86\ Investment Company Act Release No. 25722 (Aug. 28, 2002) 
[67 FR 57276 (Sept. 9, 2002)].
---------------------------------------------------------------------------

    In a companion release, we also proposed to require registered 
management investment companies to file certified shareholder reports 
with the Commission on new Form N-CSR

[[Page 5357]]

and to designate these certified shareholder reports as reports that 
are required under Sections 13(a) and 15(d) of the Exchange Act and 
Section 30 of the Investment Company Act.\87\ As we noted in that 
release, we believe that the certification requirement of Section 302 
of the Sarbanes-Oxley Act was intended to improve the quality of the 
disclosure that a company provides regarding its financial condition in 
its reports to investors.\88\ For registered management investment 
companies, the required reports to shareholders, rather than reports on 
Form N-SAR, are the primary vehicle for providing financial information 
to investors. We believe that the information in these reports to 
shareholders should be certified, and we are adopting amendments to our 
forms and rules to require this certification.
---------------------------------------------------------------------------

    \87\ See Form N-CSR Proposing Release, supra note 5.
    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, Sec.  4.04, at 4-5 (2002).
    \88\ Form N-CSR Proposing Release, supra note 5, 67 FR at 57299.
---------------------------------------------------------------------------

    We are adopting an amendment to rule 30b2-1 under the Investment 
Company Act, which will require a registered management investment 
company to file a report with the Commission on new Form N-CSR 
containing (i) a copy of any required shareholder report, (ii) 
additional information regarding disclosure controls and procedures, 
and (iii) the certification required by the Sarbanes-Oxley Act.\89\ New 
rule 30d-1 designates certified shareholder reports on Form N-CSR as 
periodic reports under Section 13(a) or 15(d) of the Exchange Act.\90\ 
New rule 30a-3 requires all registered management investment companies 
to maintain, and regularly evaluate the effectiveness of, disclosure 
controls and procedures designed to ensure that the information 
required in filings under the Exchange Act is recorded, processed, 
summarized, and reported on a timely basis. We are also amending the 
definition of ``disclosure controls and procedures'' in rule 30a-2(c) 
to make clear that such controls and procedures apply to all registered 
management investment companies regardless of whether they are required 
to file reports on Form N-CSR under the Exchange Act, and that they do 
not apply to SBICs and UITs filing Exchange Act reports on Form N-
SAR.\91\ Amendments to Exchange Act rules 13a-15 and 15d-15 will 
exclude SBICs and UITs from the requirements to maintain disclosure 
controls and procedures for purposes of the evaluation conducted as 
part of the required certification.\92\ We are also removing the 
requirement that Form N-SAR be certified by a registered investment 
company's principal executive and financial officers. This shifts the 
information collection burden relating to the certification specified 
by Section 302 of the Sarbanes-Oxley Act, for registered management 
investment companies, from Form N-SAR to Form N-CSR.
---------------------------------------------------------------------------

    \89\ Rule 30b2-1(a) under the Investment Company Act [17 CFR 
270.30b2-1(a)]; Items 1, 9, and 10(b). In addition, we are amending 
rule 30a-2 under the Investment Company Act [17 CFR 270.30a-2] to 
require Form N-CSR to include the certification required by Section 
302 of the Sarbanes-Oxley Act.
    \90\ We are also adopting a technical conforming amendment that 
would delete the language in current rule 30a-1 [17 CFR 270.30a-1] 
stating that a registered management investment company required to 
file an annual report pursuant to Section 13(a) or 15(d) of the 
Exchange Act and Section 30(a) of the Investment Company Act shall 
be deemed to have satisfied its requirement to file an annual report 
by the filing of semi-annual reports on Form N-SAR. The amendments 
rename rule 30a-1 in order to specify that it relates to annual 
reports by registered unit investment trusts, and rename rule 30b1-1 
[17 CFR 270.30b1-1] in order to specify that it relates to semi-
annual reports of registered management investment companies.
    \91\ Rule 30a-2(c) under the Investment Company Act [17 CFR 
270.30a-2].
    \92\ 17 CFR 240.13a-15(a); 17 CFR 240.15d-15(a).
---------------------------------------------------------------------------

    Finally, we are requiring registered management investment 
companies to include new disclosures on Form N-CSR or Form N-SAR, as 
appropriate, in order to implement the requirements of Sections 406 and 
407 of the Sarbanes-Oxley Act of 2002. First, the rules require a 
management investment company to disclose whether it has at least one 
``audit committee financial expert'' serving on its audit committee, 
and if so, the name of the expert and whether the expert is independent 
of management. A management investment company that does not have an 
audit committee financial expert must disclose this fact and explain 
why it has no such expert. Second, the rules require a management 
investment company to disclose whether it has adopted a code of ethics 
that applies to the company's principal executive officer and senior 
financial officers, or persons performing similar functions, regardless 
of whether they are employed by the management investment company or a 
third party. A management investment company disclosing that it has not 
adopted such a code must disclose this fact and explain why it has not 
done so. A management investment company also will be required to 
disclose amendments to, and waivers from, the code of ethics relating 
to any of those officers.
    All of these new rules and rule amendments are part of the 
collection of information of new Form N-CSR or Form N-SAR (in the case 
of SBICs) because Form N-CSR contains the requirement that each 
registered management investment company filing reports on this form 
has to certify the contents of the report, and Form N-CSR and Form N-
SAR contain the requirement that management investment companies must 
provide the appropriate audit committee financial expert and code of 
ethics disclosures.
    We are amending our rules and forms to provide that, for registered 
management investment companies other than small business investment 
companies, Form N-SAR will be filed under the Investment Company Act 
only and not the Exchange Act.\93\ Also, we have amended Form N-SAR to 
eliminate the requirement that UITs and SBICs certify their reports on 
Form N-SAR.\94\ We are also adopting amendments to require an 
investment company to file a Form 12b-25 if it will not be able to file 
a report on Form N-CSR in a timely manner.\95\
---------------------------------------------------------------------------

    \93\ See Rule 30b1-1 under the Investment Company Act [17 CFR 
270.30b1-1]; and General Instruction A to Form N-SAR [17 CFR 
274.101]. In addition, we are adopting technical conforming 
amendments to rule 30b1-3 [17 CFR 270.30b1-3] to remove the 
reference to Form N-SAR.
    \94\ Instruction 102P3 of Form N-SAR; Instruction to Item 133 of 
Form N-SAR.
    \95\ Rule 12b-25(a) and (b)(2)(ii) under the Exchange Act [17 
CFR 240.12b-25(a) and (b)(2)(ii)] and Exchange Act Form 12b-25 [17 
CFR 249.322]. There is no collection of information for the 
amendments to rule 12b-25 because they are attributed to Form 12b-
25.
---------------------------------------------------------------------------

B. Reporting and Cost Burden Estimates

Certification of Form N-CSR
    The reporting burden associated with the certification requirement 
requires the principal executive and financial officer to review and 
analyze each periodic report to be filed by an investment company in 
order to make the required certification. In the release proposing Form 
N-CSR, we estimated a total of five burden hours per respondent for the 
certification and asked for comment on this estimate.\96\ We received 
three comment letters specifically discussing our estimate of the 
burden for filing and certifying Form

[[Page 5358]]

N-CSR. Two commenters claimed that our estimate was too low, because it 
did not reflect the fact that investment companies often have multiple 
portfolios. We note that our estimate already takes into account that 
many registered management investment companies have multiple 
portfolios. Our estimate of the hour burden required for operating 
companies to certify their reporting forms, such as Form 10-K, is 
similar to our estimate of the burden for investment companies.\97\ 
While reports on Form N-CSR will contain financial statements for 
multiple portfolios, investment company financial statements are 
generally much simpler than operating company financial statements, and 
operating company reporting forms, such as Form 10-K, contain much 
information (i.e., Management's Discussion and Analysis) that Form N-
CSR will not contain. Based on the comments, however, we have revised 
our estimate, to estimate that the certification requirement required 
by Section 302 of the Sarbanes-Oxley Act will result in an increase of 
five burden hours per registrant per filing and an additional 0.5 hours 
per additional portfolio in connection with the certification of annual 
and semi-annual reports on Form N-CSR.\98\
---------------------------------------------------------------------------

    \96\ This estimate is based on the estimate of the burden of 
certification with respect to operating companies. See Investment 
Company Act Release No. 25722, supra note, 67 FR at 57284 
(estimating PRA burden of certification of Forms 10-K, 10-KSB, 10-Q, 
10-QSB, 20-F, and 40-F at five hours per form).
    \97\ Investment Company Act Release No. 25722, supra note, 67 FR 
at 57284 (estimating PRA burden of certification of Forms 10-K, 10-
KSB, 10-Q, 10-QSB, 20-F, and 40-F at five hours per form).
    \98\ Currently, the estimated total burden for the certification 
requirement of Form N-CSR is 37,000 hours, reflecting an estimate of 
3,700 management investment companies filing twice a year and an 
estimate of five hours per filing. In response to comments, we are 
increasing this estimate by 6,150 hours to reflect the additional 
burden for certification of multiple portfolios. We calculate 6,150 
hours as follows: We estimate that there are 9,850 total portfolios 
of registered management investment companies. This reflects 6,150 
additional series (i.e., series beyond the first series or the 3,700 
series already accounted for in the burden estimate) of multiple 
series funds filing twice a year and 0.5 hours per additional series 
per filing. Based on our experience with reporting forms in general, 
we estimate that the incremental burden hours of reviewing financial 
statements for other series will be relatively limited because many 
series may be able to use the same certification process for many of 
the items (i.e., disclosure controls and procedures). This new 
requirement will result in a new total of 43,150 burden hours for 
the certification requirement of Form N-CSR.
---------------------------------------------------------------------------

Audit Committee Financial Expert
    The amendments will increase the burden of completing Form N-CSR 
and Form N-SAR by requiring a management investment company to disclose 
whether it has at least one ``audit committee financial expert'' 
serving on its audit committee, and if so, the name of the expert and 
whether the expert is independent of management. A management 
investment company that does not have an audit committee financial 
expert must disclose this fact and explain why it has no such expert. 
In the release proposing these amendments, we estimated that the 
disclosure regarding audit committee financial experts would increase 
the annual burden of completing Form N-CSR or Form N-SAR by 0.5 hours 
per registered management investment company. We received no comments 
on this estimate. We believe the additional burden of these amendments 
would be limited, because they will not require any investment company 
to add an ``audit committee financial expert'' to its board. We 
estimate that the disclosure requirements regarding audit committee 
financial experts will result in an incremental increase of 0.5 burden 
hours per registrant per year in connection with preparing each annual 
report on Form N-CSR or Form N-SAR.\99\ Management investment companies 
(other than SBICs) will have to provide this disclosure on Form N-CSR; 
SBICs will have to provide this disclosure on Form N-SAR.
---------------------------------------------------------------------------

    \99\ We estimate the total new burden for this disclosure 
requirement to be 1,851 hours. ((0.5 hours x 3,700 management 
investment companies other than SBICs) + (0.5 hours x 2 SBICs) = 
1,851 hours).
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Codes of Ethics
    The amendments will require a registered management investment 
company to disclose whether it has adopted a written code of ethics for 
its principal executive officer, principal financial officer, principal 
accounting officer or controller, or persons serving similar functions, 
and file the code as an exhibit to Form N-CSR or Form N-SAR. An 
investment company disclosing that it has not adopted such a code must 
disclose this fact and explain why it has not done so. In the release 
proposing these amendments, we estimated that the disclosure regarding 
code of ethics would increase the annual burden by 0.5 hours per 
registered management investment company. We believe that the 
additional burden of these amendments would be limited, because they 
will not require any company to adopt such a code of ethics. Management 
should be readily able to determine whether or not its company has 
adopted a code of ethics. In certain cases, the required disclosure 
would require minimal analysis regarding why the company does not have 
a code. In addition, in the first year, registrants must file a copy of 
the code with the Commission. We estimate that the disclosure 
requirements regarding codes of ethics will also result in an 
incremental increase of 0.5 burden hours per registrant in connection 
with each annual report on Form N-CSR or Form N-SAR.\100\ Management 
investment companies (other than SBICs) will have to make this 
disclosure on Form N-CSR; SBICs will have to make this disclosure on 
Form N-SAR.
---------------------------------------------------------------------------

    \100\ We estimate the total new burden for this disclosure 
requirement to be 1,851 hours. (0.5 hours x 3,700 management 
investment companies other than SBICs) + (0.5 hours x 2 SBICs) = 
1,851 hours.
---------------------------------------------------------------------------

Form N-SAR
    The amendments remove the certification requirement from Form N-SAR 
and shift the burden of this requirement, for PRA purposes, to Form N-
CSR. We estimate that about 4,500 registrants, including 3,702 
management investment companies (including 2 SBICs), and 798 UITs, 
currently file reports on Form N-SAR. Based on an increase of 2 burden 
hours relating to audit committee financial experts and codes of ethics 
disclosure \101\ and a decrease of 41,010 burden hours relating to the 
removal of the certification of Form N-SAR,\102\ we estimate that, in 
the aggregate, all respondents will have an incremental decrease of 
41,008 burden hours associated with Form N-SAR to comply with the new 
rules and rule and form amendments.
---------------------------------------------------------------------------

    \101\ This estimate includes 1 hour for the audit committee 
financial expert disclosure (0.5 hours x 2 SBICs) and 1 hour for the 
code of ethics disclosure (0.5 hours x 2 SBICs).
    \102\ (3,702 management companies (including SBICs) x 10 hours 
annually) + (798 UITs x 5 hours annually) = 41,010 hours.
---------------------------------------------------------------------------

Form N-CSR
    We estimate that about 3,700 registrants will file Form N-CSR. 
Based on Commission experience with reporting forms in general and 
other related rules, we estimate that approximately 75% of the added 
burden hours will be expended by internal staff for internal review and 
the remaining 25% will be for outside legal costs associated with 
reviewing the new disclosures at a cost of $300 per hour.\103\ Based on 
the burden hour estimate for the certification of Form N-CSR, the 
disclosure related to an audit committee financial expert, and the 
disclosure related to the code of ethics, we estimate that, in the 
aggregate, all respondents will incur an incremental increase of

[[Page 5359]]

35,139 burden hours \104\ and $3,513,900 in outside legal costs \105\ 
to comply with the new rules and rule and form amendments.
---------------------------------------------------------------------------

    \103\ These percentages are based on consultations with several 
issuers, law firms and other persons who regularly assist issuers in 
preparing and filing reports with the Commission. We have used an 
estimated hourly rate of $300.00 to determine the estimated cost to 
issuers of having the required disclosures reviewed by outside 
counsel. We arrived at this hourly rate estimate based on 
consultations with several private law firms.
    \104\ 43,150 hours for certification + 1,851 hours for audit 
committee financial expert disclosure + 1,851 hours for code of 
ethics disclosure = 46,852 hours x .75 = 35,139 hours.
    \105\ 43,150 hours for certification + 1,851 hours for audit 
committee financial expert disclosure + 1,851 hours for code of 
ethics disclosure = 46,852 hours x .25 for outside counsel x $300 
per hour = $3,513,900.
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Form 12b-25
    Form 12b-25 provides notice to the Commission and the marketplace 
that registrants will be unable to file a required report in a timely 
manner. If certain conditions are met, the registrant will be granted 
an automatic filing extension. The proposed amendments would permit 
investment companies to use Form 12b-25 for the purpose of obtaining 
extensions with respect to filing Form N-CSR. We estimate that an 
average of 168 investment companies per year use Form 12b-25 to obtain 
extensions of time for filing Form N-SAR spending, on average, 
approximately 2.5 hours completing the form. We estimate that the same 
number of investment companies, though not necessarily the same 
specific investment companies, will also use Form 12b-25 to obtain 
extensions of filing Form N-CSR annually, resulting in an incremental 
increase of 420 burden hours \106\ to comply with the new rules and 
form and form and rule amendments.
---------------------------------------------------------------------------

    \106\ 168 registered investment companies x 2.5 hours = 420 
burden hours.
---------------------------------------------------------------------------

V. Cost-Benefit Analysis

    The Commission is sensitive to the costs and benefits imposed by 
its rules. Our rules and rule and form amendments more fully implement 
Section 302 of the Sarbanes-Oxley Act by requiring a registered 
management investment company, other than a small business investment 
company (``SBIC''), to file certified shareholder reports with the 
Commission on Form N-CSR containing (i) a copy of any required report 
to shareholders, (ii) additional information regarding disclosure 
controls and procedures, and (iii) the certification required by 
Section 302 of the Sarbanes-Oxley Act. These amendments also will 
designate certified shareholder reports on Form N-CSR, filed by 
management investment companies, as periodic reports filed with the 
Commission under the Exchange Act. Therefore, these amendments will 
require the certification of each management investment company's 
principal executive and financial officer to be included in its 
certified shareholder reports on Form N-CSR. We also are amending the 
instructions to Form N-SAR, the semi-annual reporting form for 
registered investment companies, to remove the certification 
requirement from the form and designate it as an Investment Company Act 
only filing for registered management investment companies other than 
SBICs. Further, we are amending Form 12b-25 to permit investment 
companies to use Form 12b-25 for the purpose of obtaining extensions 
with respect to filing Form N-CSR. In addition, the rules will require 
all registered management investment companies, other than SBICs, to 
maintain, and regularly evaluate the effectiveness of, disclosure 
controls and procedures designed to ensure that the information 
required in their filings on Form N-CSR is recorded, processed, 
summarized, and reported on a timely basis.
    Finally, we are requiring registered management investment 
companies to include new disclosures on Form N-CSR or Form N-SAR, as 
appropriate, in order to implement the requirements of Sections 406 and 
407 of the Sarbanes-Oxley Act of 2002. First, the rules require a 
management investment company to disclose whether it has at least one 
``audit committee financial expert'' serving on its audit committee, 
and if so, the name of the expert and whether the expert is independent 
of management. A management investment company that does not have an 
audit committee financial expert must disclose this fact and explain 
why it has no such expert. Second, the rules require a management 
investment company to disclose whether it has adopted a code of ethics 
that applies to the company's principal executive officer and senior 
financial officers, or persons performing similar functions, regardless 
of whether they are employed by the management investment company or 
any third party. A management investment company disclosing that it has 
not adopted such a code must disclose this fact and explain why it has 
not done so. A management investment company also will be required to 
disclose amendments to, and waivers from, the code of ethics relating 
to any of those officers.
    We received one comment letter specifically addressing this 
Section. The commenter urged the Commission to review its cost-benefit 
analysis with a view not only to the new rules but to the increased 
costs, such as legal and accounting fees, imposed on smaller investment 
companies associated with other recently adopted rules, such as anti-
money laundering procedures. The purpose of this cost-benefit analysis 
is to focus on the costs associated only with the adoption of the rules 
requiring the filing of Form N-CSR. The costs associated with other 
recently adopted rules imposed on smaller investment companies should 
be discussed in the cost-benefit sections of those specific 
rulemakings.

A. Benefits

Certification of Form N-CSR
    In adopting these new rules and rule and form amendments, we intend 
to more fully implement the intent of Section 302 of the Sarbanes-Oxley 
Act, by improving the quality of the disclosure that an investment 
company provides about its financial condition in its periodic reports 
to investors. Section 302 of the Sarbanes-Oxley Act requires the 
principal executive and financial officers of an issuer to certify the 
information contained in the issuer's quarterly or annual reports filed 
under Section 13(a) or 15(d) of the Exchange Act. Currently, Form N-SAR 
is the reporting form for registered investment companies that 
satisfies the filing requirement under Section 13(a) or 15(d) of the 
Exchange Act. Form N-SAR does not contain financial statements and is a 
regulatory compliance form that is not delivered to investors. Thus, 
the amendments will remove the certification requirement from Form N-
SAR, a form that does not contain financial statements, and will impose 
the certification requirement on Form N-CSR, a form that contains 
financial statements. Requiring a registered investment company's 
principal executive and financial officers to file certified 
shareholder reports on Form N-CSR will require these officers to 
certify, in part, that the financial statements and other financial 
information contained in the report fairly present in all material 
respects the financial condition, results of operations, changes in net 
assets, and cash flows (if the financial statements are required to 
include a statement of cash flows) of the registered investment 
company.
    The rules should help to ensure that registered investment 
companies maintain sufficient disclosure controls and procedures to 
provide reasonable assurance to investors that registered investment 
companies can record, process, summarize, and report on a timely basis 
information that is required on Form N-CSR, including information

[[Page 5360]]

contained in reports to shareholders.\107\ To the extent that 
registered investment companies do not maintain adequate procedures, 
the rules should lead to the development, or enhancement and 
modernization, of these procedures. Further, the certification 
requirement in our rules will require an investment company under the 
supervision of its management to conduct an evaluation of these 
disclosure controls and procedures within the 90-day period prior to 
the filing date of each report requiring certification. This will help 
to ensure that registered investment companies devote adequate 
resources and attention to the maintenance of their reporting systems. 
Additionally, the required evaluation will help to ensure the 
continuous, orderly, and timely flow of information within the 
registered investment company and, ultimately, to investors.
---------------------------------------------------------------------------

    \107\ See new rule 30a-3 under the Investment Company Act [17 
CFR 270.30a-3].
---------------------------------------------------------------------------

    By emphasizing the importance of the role of senior officers in the 
reporting process, the new rules and rule and form amendments will help 
to enhance investor confidence in the quality of the disclosure in 
registered investment companies' reports to shareholders. This, in 
turn, will help to encourage investor confidence in these investment 
companies. Even though the certification is consistent with the current 
obligation of officers and directors of a mutual fund not to make 
statements that are materially misleading, we believe that investors 
may benefit from the certification because the certifying officers 
provide additional assurance to investors that the reports that they 
file under the Exchange Act meet this standard. We requested comment on 
these benefits, but received none.
Audit Committee Financial Expert
    A management investment company must disclose whether it has at 
least one ``audit committee financial expert'' serving on its audit 
committee, and if so, the name of the expert and whether the expert is 
independent of management. A management investment company that does 
not have an audit committee financial expert must disclose this fact 
and explain why it has no such expert. We believe that investors will 
benefit from this disclosure by being able to consider it when 
reviewing the disclosure currently required about the background and 
affiliations of the directors of the investment company. Investors will 
also benefit to the extent that having an audit committee financial 
expert on an audit committee of a company increases their confidence in 
the company. The modifications we are making to our proposal will not 
reduce the level of required expertise and thus will not mitigate the 
benefits to investor confidence of requiring this disclosure. We 
requested comment on these benefits, but received none.
Codes of Ethics
    The requirement that investment companies file copies of their 
codes of ethics will allow investors to better understand the ethical 
principles that guide executives of companies in which they invest. 
Investors will also benefit to the extent that having disclosure of a 
code of ethics of a company increases their confidence in the company. 
We requested comment on these benefits, but received none.

B. Costs

    While the new rules and rule and form amendments may lead to some 
additional costs for registered investment companies, we believe that 
these costs should be limited.
Certification of Form N-CSR
    These amendments will require each registered management investment 
company's principal executive and financial officer to certify the 
information contained in its certified shareholder reports on Form N-
CSR. In order to provide the required certification, each principal 
executive and financial officer will need to review these reports. We 
believe that these officers already review these reports, so there 
should be no additional burden imposed on these companies. To the 
extent that these officers would need to spend additional time 
critically reviewing the overall context of the disclosure provided in 
these reports, the company would incur costs which are difficult for us 
to quantify.
    We believe that most registered management investment companies 
already maintain some form of disclosure controls and procedures for 
identifying and processing the information needed to satisfy their 
disclosure obligations to their shareholders. The amendments do not 
dictate that registered investment companies follow any particular 
procedure. Alternatively, we could have required specific controls and 
procedures for all investment companies. By allowing management 
investment companies to determine what procedures are necessary to meet 
the obligations of the new rules, the Commission is mitigating the 
costs associated with compliance. Some registered management investment 
companies may need to institute appropriate procedures while others may 
need to enhance existing informal or ad hoc procedures. These 
incremental costs are difficult to quantify. We do not have data to 
quantify the cost of implementing, or upgrading and strengthening 
existing, internal reporting procedures.
    The requirement in the certification that disclosure controls and 
procedures be evaluated within 90 days of the filing of a report may 
result in costs for registered management investment companies. Many 
registered management investment companies may already regularly 
monitor and evaluate their procedures. However, the size and scope of 
these internal systems are likely to vary among registered management 
investment companies, and it is difficult to provide an accurate cost 
estimate.
Audit Committee Financial Experts
    The added burden associated with the requirements to name the audit 
committee financial expert and disclose whether the audit committee 
financial expert is independent should be minimal. We have added a safe 
harbor provision to clarify that we do not intend to increase or 
decrease the current level of liability of audit committee members, or 
the audit committee member determined to be the expert, by requiring 
the disclosure as to whether an audit committee financial expert serves 
on the audit committee. We do not think that the requirement to name 
the audit committee financial expert should affect the expert's 
potential liability as an audit committee member. We requested comment 
on these costs, but received none.
Codes of Ethics
    We also note that we are adopting rules that require a registered 
management investment company to provide disclosure of any codes of 
ethics applicable to its principal executive officer and senior 
financial officers, regardless of whether they are employees of the 
registrant or a third party and provide this disclosure on Form N-CSR 
or Form N-SAR (in the case of SBICs). This additional disclosure may 
impose certain costs such as retrieval, printing and copying costs. 
However, this information should be readily available to the board of 
directors and management of the investment company. Therefore, we 
estimate the additional costs to investment companies in complying with 
these provisions will be limited.

[[Page 5361]]

We requested comment on these costs, but received none.
    We note that we have modified our proposed rules to provide two 
alternatives to the code of ethics filing requirement. An investment 
company may either post its code of ethics on its website if it 
discloses that it intends to do so in its report on Form N-CSR or N-
SAR, or undertake in its report on Form N-CSR or N-SAR to provide 
investors with a copy of its code of ethics upon request. These 
alternatives should allow registrants to choose the most cost-efficient 
method to meet the new requirements.
    We believe that the additional audit committee financial expert and 
code of ethics requirements are necessary to implement the purposes of 
the Sarbanes-Oxley Act and will impose minimal additional burden on 
companies. For example, we expect that investment companies will incur 
added costs to disclose the name of the audit committee financial 
expert, to disclose whether that person is independent and to file or 
otherwise make available copies of their codes of ethics to investors. 
Investment companies electing to disclose their codes of ethics, and 
changes in and waivers from their codes of ethics, via their websites 
in lieu of publicly filing such disclosure on Form N-CSR or N-SAR must 
disclose this election in their reports on Form N-CSR or N-SAR. Such 
costs do not include the costs imposed on investment companies by the 
Sarbanes-Oxley Act itself. Rather, they reflect the costs of our 
requirements beyond the requirements of the Sarbanes-Oxley Act.
Total Cost Calculations
    For purposes of the PRA,\108\ with respect to Form N-SAR, we 
further estimate that the removal of the certification requirement will 
remove an incremental 41,010 hours from the current total burden hours 
or $6,151,500\109\ and the disclosure of the code of ethics and audit 
committee financial experts will add an incremental 2 burden hours to 
the current total burden hours or $259.\110\ With respect to Form N-
CSR, all respondents will incur an incremental increase of 35,139 
burden hours \111\ or $5,152,782\112\ and $3,513,900 in outside legal 
costs \113\ to comply with the amendments. The current total burden 
hours of Form 12b-25 will incrementally increase by 420 hours or 
$15,468\114\ to comply with the amendments.
---------------------------------------------------------------------------

    \108\ See Section IV above.
    \109\ 41,010 hours x $150 = $6,151,500. The estimate cost 
savings is derived from the estimated reduction in burden hours, and 
an estimated hourly wage rate for principal executive officers of 
$150.00. The hourly wage rates for principal executive and financial 
officers are not published. We arrived at $150.00 based on other 
hourly wage rates published and consultations with individuals who 
are familiar with the hourly wage rates. This wage rate includes 35% 
for overhead. See Securities Industry Association, Report on 
Management & Professional Earnings in the Securities Industry 2001 
(Oct. 2001).
    \110\ 2 hours x $129.81 = $259. The hourly wage rate of $129.81 
is based on published hourly wage rates for the deputy general 
counsel. This wage rate includes 35% for overhead. See Securities 
Industry Association, Report on Management & Professional Earnings 
in the Securities Industry 2001 (Oct. 2001).
    \111\ 43,150 hours for certification + 1,851 hours for audit 
committee financial expert disclosure + 1,851 hours for code of 
ethics disclosure = 46,852 hours x .75 = 35,139 hours.
    \112\ 35,139 hours x $146.64 = $5,152,782. This estimated wage 
rate of $146.64 is a blended rate, based on published hourly wage 
rates for a deputy general counsel outside of New York City 
($129.81) and our estimated wage rate for principal executive and 
financial officers ($150.00). We estimate that principal executive 
and financial officers would spend 5 hours certifying the annual 
reports on Form N-CSR and a deputy general counsel would spend 1 
hour completing the code of ethics and audit committee financial 
expert disclosures. This yields a weighted wage rate of $146.64 
(($129.81 x \1/6\) + ($150.00 x \5/6\)) = $146.64. This weighted 
wage rate includes 35% for overhead. See Securities Industry 
Association, Report on Management & Professional Earnings in the 
Securities Industry 2001 (Oct. 2001).
    \113\ 43,150 hours for certification + 1,851 hours for audit 
committee financial expert disclosure + 1,851 hours for code of 
ethics disclosure = 46,852 hours x .25 of outside counsel x $300 per 
hour = $3,513,900.
    \114\ 420 hours x $36.83 = $15,468. We estimate that an attorney 
with an hourly wage rate of $36.83 completes Form 12b-25. This wage 
rate includes 35% for overhead. See Securities Industry Association, 
Report on Management & Professional Earnings in the Securities 
Industry 2001 (Oct. 2001).
---------------------------------------------------------------------------

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.\115\ In addition, Section 2(c) of the Investment Company Act,\116\ 
Section 2(b) of the Securities Act \117\ and Section 3(f) of the 
Exchange Act \118\ 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. We received no 
comments relating to this specific section.
---------------------------------------------------------------------------

    \115\ 15 U.S.C. 78w(a)(2).
    \116\ 15 U.S.C. 80a-2(c).
    \117\ 15 U.S.C. 77b(b).
    \118\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    The new rules and rule and form amendments are intended to more 
fully implement the intent of Section 302 of the Sarbanes-Oxley Act 
that we adopt rules requiring the principal executive and financial 
officers of investment companies to certify the accuracy of their 
periodic reports filed pursuant to Section 13(a) or 15(d) of the 
Exchange Act. Also, the amendments are intended, in part, to increase 
transparency regarding the competence of the audit committee and the 
application of codes of ethics to a company's principal executive 
officer and senior financial officers. We believe that the amendments 
will benefit investors by providing them with greater confidence in the 
accuracy and completeness of the disclosure contained in the annual and 
semi-annual reports that they receive from management investment 
companies, including the financial statements. However, the magnitude 
of the effect of the amendments on efficiency, competition, and capital 
formation is difficult to quantify, particularly given that most 
management investment companies currently are required to comply with 
the certification requirements in recently adopted amendments to Form 
N-SAR, which we are removing as part of the amendments we are adopting 
today.

VII. Final Regulatory Flexibility Analysis

    This Final Regulatory Flexibility Analysis (``Analysis'') has been 
prepared in accordance with 5 U.S.C. 604, and relates to the 
Commission's rules and rule and form amendments under the Exchange Act 
and the Investment Company Act that will require registered management 
investment companies to file certified shareholder reports on Form N-
CSR with the Commission, will designate these certified reports as 
reports that are required under Sections 13(a) and 15(d) of the 
Exchange Act, and will implement Sections 406 and 407 of the Sarbanes-
Oxley Act. Initial Regulatory Flexibility Analyses (``IRFAs''), which 
were prepared in accordance with 5 U.S.C. 603, were published in the 
release proposing Form N-CSR and in the release proposing rules to 
implement Sections 406 and 407 of the Sarbanes-Oxley Act.
    The rule amendments require each registered management investment 
company's principal executive and financial officers to certify the 
information contained in these reports in the manner specified by 
Section 302

[[Page 5362]]

of the Sarbanes-Oxley Act of 2002. In addition, we are providing that, 
for registered management investment companies other than small 
business investment companies, Form N-SAR will be filed under the 
Investment Company Act of 1940 only and not the Securities Exchange Act 
of 1934. We are also removing the requirement that Form N-SAR be 
certified by a registered investment company's principal executive and 
financial officers. Furthermore, we are adopting a new rule to require 
every registered management investment company, other than small 
business investment companies, to maintain disclosure controls and 
procedures designed to ensure that the information required in reports 
on Form N-CSR is recorded, processed, summarized, and reported on a 
timely basis. Finally, we are requiring registered management 
investment companies to include new disclosures on Form N-CSR or Form 
N-SAR, as appropriate, in order to implement the requirements of 
Sections 406 and 407 of the Sarbanes-Oxley Act of 2002. First, the 
rules require a management investment company to disclose whether it 
has at least one ``audit committee financial expert'' serving on its 
audit committee, and if so, the name of the expert and whether the 
expert is independent of management. A management investment company 
that does not have an audit committee financial expert must disclose 
this fact and explain why it has no such expert. Second, the rules 
require a management investment company to disclose whether it has 
adopted a code of ethics that applies to the company's principal 
executive officer and senior financial officers, or persons performing 
similar functions, regardless of whether they are employed by the 
management investment company or a third party. A management investment 
company disclosing that it has not adopted such a code must disclose 
this fact and explain why it has not done so. A management investment 
company also will be required to disclose amendments to, and waivers 
from, the code of ethics relating to any of those officers.

A. Need for, and Objectives of, Amendments

    The purpose of the new rules and rule and form amendments is to 
more fully implement the intent of Section 302 of the Sarbanes-Oxley 
Act that we adopt rules requiring the officers of investment companies 
to certify the accuracy of their periodic reports filed pursuant to 
Section 13(a) or 15(d) of the Exchange Act.
    The amendments will require registered management investment 
companies to file with the Commission certified shareholder reports on 
Form N-CSR, and will designate these reports as filings which satisfy 
the reporting requirements of Sections 13(a) and 15(d) of the Exchange 
Act for management investment companies. We believe that by requiring 
the certification required by Section 302 of the Sarbanes-Oxley Act to 
be included in a management investment company's certified shareholder 
report on Form N-CSR, which contains financial statements, we are more 
fully implementing the intent of Section 302, which is to improve the 
quality of the disclosure that companies provide about their financial 
condition in their shareholder reports. In addition, we are adopting 
new disclosure requirements required to comply with Sections 406 and 
407 of the Sarbanes-Oxley Act.

B. Significant Issues Raised by Public Comment

    In both the IRFA for the release proposing Form N-CSR and the IRFA 
for the release proposing to implement Sections 406 and 407 of the 
Sarbanes-Oxley Act, we requested comment on any aspect of the IRFAs, 
including the number of small entities that would be affected by the 
proposal, the nature of the impact, how to quantify the numbers of 
small entities that would be affected, and how to quantify the impact 
of the proposals. We received one comment letter concerning the IRFA 
for the release proposing Form N-CSR. The commenter raised a concern 
that more flexible alternatives should have been considered for small 
investment companies (such as not mandating Form N-CSR or new reporting 
requirements at all) because a small amount of fraud is committed by 
such investment companies. We note that Congress' mandate for the 
Commission to require the certification specified by Section 302 of the 
Sarbanes-Oxley Act does not distinguish between small and large 
investment companies. Further, our disclosure rules generally do not 
distinguish between small and large investment companies. While we have 
the discretion to require that only larger investment companies file 
new Form N-CSR, it would not be appropriate to provide investors in 
larger investment companies with greater confidence in the accuracy and 
completeness of the disclosure contained in the annual and semi-annual 
reports that they receive from their investment companies, but not 
investors in small investment companies.

C. Small Entities Subject to the Rule

    The new rules and rule and form amendments will affect registered 
investment companies that are small entities. For purposes of the 
Regulatory Flexibility Act (``RFA''), 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.\119\ We estimate 
that there are approximately 205 investment companies together with 
other investment companies in the same group of related investment 
companies that have net assets of $50 million or less as of the end of 
its most recent fiscal year.\120\
---------------------------------------------------------------------------

    \119\ 17 CFR 270.0-10.
    \120\ This estimate is based on figures compiled by the 
Commission 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 new rules and rule and form amendments will require management 
investment companies to file certified shareholder reports on Form N-
CSR, containing (i) a copy of any required shareholder report, (ii) 
additional information regarding disclosure controls and procedures, 
and (iii) the certification required by Section 302 of the Sarbanes-
Oxley Act. The form of the certification will parallel the form of the 
certification we adopted on Form N-SAR, and on Forms 10-K and 10-Q. The 
certification will require the management investment company's 
principal executive and financial officers to state, in part, that, 
based on their knowledge, the information in the certified shareholder 
report does not contain any untrue statement of a material fact or omit 
to state a material fact necessary to make the statements made not 
misleading with respect to the period covered by the report, and that 
the financial statements, and other financial information included in 
the report, fairly present the financial condition, results of 
operations, changes in net assets, and cash flows (if the financial 
statements are required to include a statement of cash flows) of the 
registrant. The certification also will require the signing officers to 
certify that they have established and maintained disclosure controls 
and procedures to ensure that material

[[Page 5363]]

information relating to the registrant is made known to senior 
management, and also to certify that they have evaluated these 
procedures within 90 days of the filing date of the report. The 
amendments may increase the costs associated with compliance with 
investment companies' reporting obligations. However, this cost 
increase is expected to be limited, because most management investment 
companies are currently required to provide a similar certification 
with respect to their reports on Form N-SAR.
    In addition, the amendments will require registered management 
investment companies to disclose information regarding whether an audit 
committee financial expert serves on the investment company's audit 
committee and whether the investment company has adopted a code of 
ethics that applies to the investment company's principal executive 
officer and senior financial officers. All registered management 
investment companies, including those that are not required to file 
reports pursuant to Section 13(a) or 15(d) of the Exchange Act, will be 
subject to these amendments. Because the disclosure requirements of 
these amendments will be new, management investment companies may need 
to hire outside counsel or other third parties to prepare the new 
disclosure. We expect that reporting information in response to these 
new disclosure items will increase costs incurred by small entities 
because the new disclosure items will require these entities to compile 
and report more information. For purposes of the PRA and our cost-
benefit analysis,\121\ with respect to Form N-SAR, we further estimate 
that the removal of the certification requirement will remove an 
incremental 41,010 hours from the current total burden hours, 
equivalent to a cost of $6,151,500Sec.  \122\ and the disclosure of the 
code of ethics and audit committee financial experts will add an 
incremental 2 burden hours to the current total burden hours, 
equivalent to a cost of $259.\123\ With respect to Form N-CSR, all 
respondents will incur an incremental increase of 35,139 burden 
hours,\124\ equivalent to internal costs of $5,152,782Sec.  \125\ and 
$3,513,900 in outside legal costs \126\ to comply with the amendments. 
The current total burden hours of Form 12b-25 will incrementally 
increase by 420 hours or $15,468 \127\ as a result of the amendments.
---------------------------------------------------------------------------

    \121\ See Sections IV and V above.
    \122\ 41,010 hours x $150 = $6,151,500. See supra note 109 
(explaining the wage rate).
    \123\ 2 hours x $129.81 = $259. See supra note (explaining the 
wage rate).
    \124\ 43,150 hours for certification + 1,851 hours for audit 
committee financial expert disclosure + 1,851 hours for code of 
ethics disclosure = 46,852 hours x .75 = 35,139 hours.
    \125\ 35,139 hours x $146.64 = $5,152,782. See supra note 112 
(explaining the wage rate).
    \126\ 43,150 hours for certification + 1,851 hours for audit 
committee financial expert disclosure + 1,851 hours for code of 
ethics disclosure = 46,852 hours x .25 of outside counsel x $300 per 
hour = $3,513,900.
    \127\ 420 hours x $36.83 = $15,468. See supra note 114 
(explaining the wage rate).
---------------------------------------------------------------------------

E. Agency Action to Minimize Effect on Small Entities

    As required by Section 603 of the RFA, and with respect to Sections 
302, 406, and 407 of the Sarbanes-Oxley Act, the Commission has 
considered the following alternatives to minimize the economic impact 
of the proposed rules and rule amendments on small entities: (i) The 
establishment of differing compliance or reporting requirements 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; and (iii) an exemption from coverage of the proposed 
amendments, or any part thereof, for small entities.
    The rules we are adopting are intended to more fully implement the 
intent of Section 302 of the Sarbanes-Oxley Act, and should help ensure 
that information about an investment company's business and financial 
condition, specifically its financial statements, is adequately 
reviewed by an investment company's senior executives, thereby 
enhancing investor confidence in the quality of its disclosure. In 
addition, the rules we are adopting implement Sections 406 and 407 of 
the Sarbanes-Oxley Act by requiring disclosure with respect to codes of 
ethics and audit committee financial experts to provide investors 
better understanding of the ethical principles and background and 
affiliations of the executives and directors of the investment company.
    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 designation of certified shareholder 
reports on Form N-CSR as reporting forms that must contain the 
certification required by Section 302 of the Sarbanes-Oxley Act is 
intended to improve investor confidence in the quality of an investment 
company's disclosure to investors in its shareholder reports, 
particularly the financial statements contained in these reports. We 
believe it is important that the benefits resulting from the 
certification of shareholder reports as required by the new rules be 
provided to investors in all management investment companies, not just 
investors in management investment companies that are not considered 
small entities. The Commission also notes that Section 302 of the 
Sarbanes-Oxley Act does not distinguish between small entities and 
other investment companies. Similarly, Sections 406 and 407 of the 
Sarbanes-Oxley Act do not distinguish between small entities and other 
investment companies.
    We believe that different compliance or reporting requirements or 
timetables for small entities would interfere with achieving the 
primary goal of increasing transparency of corporate activities and 
internal procedures. We generally believe that an exemption for small 
entities from coverage of the new rules is not appropriate and is 
inconsistent with the policies underlying the Sarbanes-Oxley Act. We 
also think that the disclosure requirements relating to the audit 
committee financial experts and codes of ethics are clear and 
straightforward. In addition, we are not aware of any way to clarify or 
simplify compliance for small entities.

VIII. Statutory Authority

    The rules and rule and form amendments contained in this release 
are being adopted pursuant to 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], 
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], and Sections 
3(a), 302, 406, and 407 of the Sarbanes-Oxley Act of 2002 [Pub. L. 107-
204, 116 Stat. 745].

List of Subjects

17 CFR Parts 240 and 249

    Reporting and recordkeeping requirements, Securities.

17 CFR Parts 270 and 274

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

Text of Amendments

    In accordance with the foregoing, Title 17, Chapter II, of the Code 
of Federal Regulations is amended as follows:

[[Page 5364]]

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. The authority citation for Part 240 is amended by adding the 
specific authority for ``Section 240.12b-25'' in numerical order to 
read as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-
3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *

    Section 240.12b-25 is also issued under 15 U.S.C. 80a-8, 80a-
24(a), 80a-29, and 80a-37.
* * * * *

    2. Section 240.12b-25 is amended by revising the section heading 
and paragraphs (a) and (b)(2)(ii) to read as follows:


Sec.  240.12b-25  Notification of inability to timely file all or any 
required portion of a Form 10-K, 10-KSB, 20-F, 11-K, N-SAR, N-CSR, 10-Q 
or 10-QSB.

    (a) If all or any required portion of an annual or transition 
report on Form 10-K, 10-KSB, 20-F or 11-K (17 CFR 249.310, 249.310b, 
249.220f or 249.311), or a quarterly or transition report on Form 10-Q 
or 10-QSB (17 CFR 249.308a or 249.308b) required to be filed pursuant 
to sections 13 or 15(d) of the Act (15 U.S.C. 78m or 78o(d)) and rules 
thereunder, or if all or any required portion of a semi-annual, annual 
or transition report on Form N-CSR (17 CFR 249.331; 17 CFR 274.128) or 
Form N-SAR (17 CFR 249.330; 17 CFR 274.101) required to be filed 
pursuant to sections 13 or 15(d) of the Act or section 30 of the 
Investment Company Act of 1940 (15 U.S.C. 80a-29) and the rules 
thereunder, is not filed within the time period prescribed for such 
report, the registrant, no later than one business day after the due 
date for such report, shall file a Form 12b-25 (17 CFR 249.322) with 
the Commission which shall contain disclosure of its inability to file 
the report timely and the reasons therefor in reasonable detail.
    (b) * * *
    (2) * * *
    (ii) The subject annual report, semi-annual report or transition 
report on Form 10-K, 10-KSB, 20-F, 11-K, N-SAR, or N-CSR, or portion 
thereof, will be filed no later than the fifteenth calendar day 
following the prescribed due date; or the subject quarterly report or 
transition report on Form 10-Q or 10-QSB, or portion thereof, will be 
filed no later than the fifth calendar day following the prescribed due 
date; and
* * * * *

    3. Section 240.13a-15 is amended by revising paragraph (a) to read 
as follows:


Sec.  240.13a-15  Issuer's disclosure controls and procedures related 
to preparation of required reports.

    (a) Every issuer that has a class of securities registered pursuant 
to section 12 of the Act (15 U.S.C. 78l), other than an Asset-Backed 
Issuer (as defined in Sec.  240.13a-14(g) of this chapter), a small 
business investment company registered on Form N-5 (Sec. Sec.  239.24 
and 274.5 of this chapter), or a unit investment trust as defined by 
Section 4(2) of the Investment Company Act of 1940 (15 U.S.C. 80a-
4(2)), must maintain disclosure controls and procedures (as defined in 
Sec.  240.13a-14(c) of this chapter).
* * * * *

    4. Section 240.15d-15 is amended by revising paragraph (a) to read 
as follows:


Sec.  240.15d-15  Issuer's disclosure controls and procedures related 
to preparation of required reports.

    (a) Every issuer that files reports under section 15(d) of the Act 
(15 U.S.C. 78o(d)), other than an Asset-Backed Issuer (as defined in 
Sec.  240.13a-14(g) of this chapter), a small business investment 
company registered on Form N-5 (Sec. Sec.  239.24 and 274.5 of this 
chapter), or a unit investment trust as defined by Section 4(2) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-4(2)), must maintain 
disclosure controls and procedures (as defined in Sec.  240.15d-14(c) 
of this chapter).
* * * * *

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

    5. The authority citation for Part 249 is amended by adding the 
following citations in numerical order to read as follows:

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

    Section 249.330 is also issued under secs. 3(a), 406, and 407, 
Pub. L. No. 107-204, 116 Stat. 745.
    Section 249.331 is also issued under secs. 3(a), 302, 406, and 
407, Pub. L. 107-204, 116 Stat. 745.


    6. Section 249.322 is amended by revising paragraph (a) to read as 
follows:


Sec.  249.322  Form 12b-25--Notification of late filing.

    (a) This form shall be filed pursuant to Sec.  240.12b-25 of this 
chapter by issuers who are unable to file timely all or any required 
portion of an annual or transition report on Form 10-K and Form 10-KSB, 
20-F, or 11-K (Sec. Sec.  249.310, 249.310b, 249.220f or 249.311) or a 
quarterly or transition report on Form 10-Q and Form 10-QSB (Sec. Sec.  
249.308a and 249.308b) pursuant to section 13 or 15(d) of the Act (15 
U.S.C. 78m or 78o(d)) or a semi-annual, annual, or transition report on 
Form N-SAR (Sec. Sec.  249.330; 274.101) or Form N-CSR (Sec. Sec.  
249.331; 274.128) pursuant to section 13 or 15(d) of the Act or section 
30 of the Investment Company Act of 1940 (15 U.S.C. 80a-29). The filing 
shall consist of a signed original and three conformed copies, and 
shall be filed with the Commission at Washington, DC 20549, no later 
than one business day after the due date for the periodic report in 
question. Copies of this form may be obtained from ``Publications,'' 
Securities and Exchange Commission, 450 5th Street, NW., Washington, DC 
20549 and at our Web site at http://www.sec.gov.
* * * * *

    7. Form 12b-25 (referenced in Sec.  249.322) is amended by:
    a. Revising the preamble;
    b. Revising paragraph (b) of Part II; and
    c. Revising Part III to read as follows:

    Note: The text of Form 12b-25 does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form 12b-25

Notification of Late Filing

(Check One): -- Form 10-K -- Form 20-F -- Form 11-K -- Form 10-Q
 -- Form N-SAR -- Form N-CSR
* * * * *

Part II--Rules 12b-25(b) and (c)

* * * * *
    (b) The subject annual report, semi-annual report, transition 
report on Form 10-K, Form 20-F, Form 11-K, Form N-SAR or Form N-CSR, or 
portion thereof, will be filed on or before the fifteenth calendar day 
following the prescribed due date; or the subject quarterly report or 
transition report on Form 10-Q, or portion thereof, will be filed on or 
before the fifth calendar day following the prescribed due date; and
* * * * *

Part III--Narrative

    State below in reasonable detail why Forms 10-K, 20-F, 11-K, 10-Q, 
N-SAR, N-CSR, or the transition report or portion thereof, could not be 
filed within the prescribed time period.
* * * * *

    8. Section 249.330 is revised to read as follows:

[[Page 5365]]

Sec.  249.330  Form N-SAR, annual and semi-annual report of certain 
registered investment companies.

    This form shall be used by registered unit investment trusts and 
small business investment companies for semi-annual or annual reports 
to be filed pursuant to Sec.  270.30a-1 or Sec.  270.30b1-1 of this 
chapter in satisfaction of the requirement of section 30(a) of the 
Investment Company Act of 1940 that every registered investment company 
must file annually with the Commission such information, documents, and 
reports as investment companies having securities registered on a 
national securities exchange are required to file annually pursuant to 
section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m) 
and the rules and regulations thereunder.

    9. Section 249.331 is added to read as follows:


Sec.  249.331  Form N-CSR, certified shareholder report.

    This form shall be used by registered management investment 
companies to file reports pursuant to Sec.  270.30b2-1(a) of this 
chapter not later than 10 days after the transmission to stockholders 
of any report that is required to be transmitted to stockholders under 
Sec.  270.30e-1 of this chapter.

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

    10. The authority citation for Part 270 is amended by revising the 
general authority citation and the specific authority for ``Section 
270.30a-2'' and adding the following citations in numerical order to 
read as follows:

    Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, and 80a-
39, unless otherwise noted.

* * * * *
    Section 270.30a-1 is also issued under 15 U.S.C. 78m, 78o(d), 
80a-8, and 80a-29.
    Section 270.30a-2 is also issued under 15 U.S.C. 78m, 78o(d), 
80a-8, and 80a-29, and secs. 3(a) and 302, Pub. L. 107-204, 116 
Stat. 745.
    Section 270.30a-3 is also issued under 15 U.S.C. 78m, 78o(d), 
80a-8, and 80a-29, and secs. 3(a) and 302, Pub. L. 107-204, 116 
Stat. 745.
    Section 270.30b1-1 is also issued under 15 U.S.C. 78m, 78o(d), 
80a-8, and 80a-29.
    Section 270.30b2-1 is also issued under 15 U.S.C. 78m, 78o(d), 
80a-8, and 80a-29, and secs. 3(a) and 302, Pub. L. 107-204, 116 
Stat. 745.
    Section 270.30d-1 is also issued under 15 U.S.C. 78m, 78o(d), 
80a-8, and 80a-29, and secs. 3(a) and 302, Pub. L. 107-204, 116 
Stat. 745.

* * * * *

    11. Section 270.8b-15 is amended by adding a sentence at the end of 
the section to read as follows:


Sec.  270.8b-15  Amendments.

    * * * An amendment to any report required to include the 
certification as specified in Sec.  270.30a-2 must provide a new 
certification by each principal executive officer and principal 
financial officer of the registrant.

    12. Section 270.30a-1 is revised to read as follows:


Sec.  270.30a-1  Annual reports for unit investment trusts.

    Every registered unit investment trust shall file an annual report 
on Form N-SAR with respect to each calendar year not more than sixty 
calendar days after the close of each year. A registered unit 
investment trust 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.

    13. Section 270.30a-2 is revised by:
    a. Revising the section heading; and
    b. Revising paragraphs (a) and (c) to read as follows:


Sec.  270.30a-2  Certification of Form N-CSR.

    (a) Each report filed on Form N-CSR (Sec. Sec.  249.331 and 274.128 
of this chapter) by a registered management investment company must 
include a certification containing the information set forth in 
paragraph (b) of this section in the form specified in the report. Each 
principal executive officer or officers and principal financial officer 
or officers of the investment company, or persons performing similar 
functions, at the time of filing of the report must sign the 
certification.
* * * * *
    (c) For purposes of this section and Sec.  270.30a-3, the term 
``disclosure controls and procedures'' means controls and other 
procedures of a registered management investment company that are 
designed to ensure that information required to be disclosed by the 
investment company on Form N-CSR is recorded, processed, summarized, 
and reported within the time periods specified in the Commission's 
rules and forms. Disclosure controls and procedures include, without 
limitation, controls and procedures designed to ensure that information 
required to be disclosed by an investment company in the reports that 
it files or submits on Form N-CSR is accumulated and communicated to 
the investment company's management, including its principal executive 
officer or officers and principal financial officer or officers, or 
persons performing similar functions, as appropriate to allow timely 
decisions regarding required disclosure.
* * * * *

    14. Section 270.30a-3 is added to read as follows:


Sec.  270.30a-3  Disclosure controls and procedures related to 
preparation of required filings.

    (a) 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), must maintain disclosure controls 
and procedures (as defined in Sec.  270.30a-2(c)).
    (b) Within the 90-day period prior to the filing date of each 
report requiring certification under Sec.  270.30a-2, an evaluation 
must be carried out under the supervision, and with the participation 
of, the registered management investment company's management, 
including the registered management investment company's principal 
executive officer or officers and principal financial officer or 
officers, or persons performing similar functions, of the effectiveness 
of the design and operation of the registered management investment 
company's disclosure controls and procedures.

    15. Section 270.30b1-1 is revised to read as follows:


Sec.  270.30b1-1  Semi-annual report for registered management 
investment companies.

    Every registered management investment company shall file a semi-
annual report on Form N-SAR (Sec.  274.101 of this chapter) not more 
than sixty calendar days after the close of each fiscal year and fiscal 
second quarter. 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.

    16. Section 270.30b1-3 is revised to read as follows:

[[Page 5366]]

Sec.  270.30b1-3  Transition reports.

    Every registered management investment company filing reports on 
Form N-SAR that changes its fiscal year end shall file a report on Form 
N-SAR not more than 60 calendar days after the later of either the 
close of the transition period or the date of the determination to 
change the fiscal year end which report shall not cover a period longer 
than six months.

    17. Section 270.30b2-1 is revised to read as follows:


Sec.  270.30b2-1  Filing of reports to stockholders.

    (a) Every registered management investment company shall file a 
report on Form N-CSR (Sec. Sec.  249.331 and 274.128 of this chapter) 
not later than 10 days after the transmission to stockholders of any 
report that is required to be transmitted to stockholders under Sec.  
270.30e-1.
    (b) A registered investment company shall file with the Commission 
a copy of every periodic or interim report or similar communication 
containing financial statements that is transmitted by or on behalf of 
such registered investment company to any class of such company's 
security holders and that is not required to be filed with the 
Commission under paragraph (a) of this section. The filing shall be 
made not later than 10 days after the transmission to security holders.

    18. Section 270.30d-1 is added to read as follows:


Sec.  270.30d-1  Designation of periodic reports under the Securities 
Exchange Act of 1934.

    A 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), that is required to file annual and 
quarterly reports pursuant to section 13(a) or 15(d) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) shall satisfy its 
requirement to file such reports by the filing, in accordance with the 
rules and procedures specified therefor, of reports on Form N-CSR 
(Sec. Sec.  249.331 and 274.128 of this chapter). A registered unit 
investment trust or a small business investment company registered on 
Form N-5 that is required to file annual and quarterly reports pursuant 
to section 13(a) or 15(d) of the Securities Exchange Act of 1934 shall 
satisfy its requirement to file such reports by the filing, in 
accordance with the rules and procedures specified therefor, of reports 
on Form N-SAR (Sec. Sec.  249.330 and 274.101 of this chapter).

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

    19. 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, unless otherwise 
noted.
    Section 274.101 is also issued under secs. 3(a), 406, and 407, 
Pub. L. 107-204, 116 Stat. 745.
    Section 274.128 is also issued under secs. 3(a), 302, 406, and 
407, Pub. L. 107-204, 116 Stat. 745.


    20. Section 274.101 is revised to read as follows:


Sec.  274.101  Form N-SAR, semi-annual report of registered investment 
companies.

    This form shall be used by registered management investment 
companies for semi-annual or annual reports to be filed pursuant to 
rule 30b1-1 (17 CFR 270.30b1-1) and by registered unit investment 
trusts for annual reports to be filed pursuant to rule 30a-1 (17 CFR 
270.30a-1).

    21. Form N-SAR (referenced in Sec. Sec.  249.330 and 274.101) is 
amended by:
    a. Revising the reference ``133'' in item 6 to read ``132'';
    b. Removing item 133;
    c. Revising the first, fifth, and sixth paragraphs of General 
Instruction A;
    d. Removing the reference ``and item 133'' at the end of paragraph 
(1) of General Instruction D;
    e. Removing paragraph (5) of General Instruction G;
    f. Revising the Instruction to sub-item 77Q3 in Instructions to 
Specific Items;
    g. Revising the Instruction to sub-item 102P3 in Instructions to 
Specific Items;
    h. Removing the Instruction to Item 133 in Instructions to Specific 
Items; and
    i. Revising the reference ``133'' in the Signature Page section in 
Instructions to Specific Items to read ``132''.
    These additions and revisions read as follows:

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

Form N-SAR

* * * * *

General Instructions

A. Rule as to Use of Form N-SAR

    Form N-SAR is a reporting form that is to be used for semi-annual 
and annual reports by all registered investment companies that have 
filed a registration statement which has become effective pursuant to 
the Securities Act of 1933 (``1933 Act'') with the exception of face 
amount certificate companies. Face amount certificate companies should 
continue to file periodic reports pursuant to Section 13 or 15(d) of 
the Securities Exchange Act of 1934 (``1934 Act''). Registered 
management investment companies, other than small business investment 
companies, are required to file semi-annual and annual reports on Form 
N-SAR under the Investment Company Act of 1940 (the ``Act'') and rule 
30b1-1 (17 CFR 270.30b1-1) under the Act. Registered small business 
investment companies are required to file semi-annual and annual 
reports under the Act and rule 30b1-1 (17 CFR 270.30b1-1) under the 
Act, and, if applicable, Section 13 or 15(d) of the 1934 Act. 
Registered unit investment trusts (``UITs'') are required to file 
annual reports on Form N-SAR under the Act and rule 30a-1 (17 CFR 
270.30a-1) under the Act, and, if applicable, Section 13 or 15(d) of 
the 1934 Act.
* * * * *
    Unit investment trusts: The fourth section of the form, which 
contains items 111 through 132, is to be completed only by all UITs. 
Each UIT is required to complete appropriate items in this section once 
a year for the 12-month period ending December 31 and to include 
information for all of its series.
    Under Section 30 of the Act, Sections 13 and 15(d) of the 1934 Act, 
and the rules and regulations thereunder, the Commission is authorized 
to solicit the information required by Form N-SAR from registered 
investment companies. Disclosure of the information specified on Form 
N-SAR is mandatory. Information supplied on Form N-SAR will be included 
routinely in the public files of the Commission and will be available 
for inspection by any interested persons.
* * * * *

Instructions to Specific Items

* * * * *

Sub-Item 77Q3

    Furnish any other information required to be included as an exhibit 
pursuant to such rules and regulations as the Commission may prescribe.
* * * * *

Sub-Item 102P3

    (a)(1)Disclose whether, as of the end of the period covered by the 
report, the registrant has adopted a code of ethics that applies to the 
registrant's principal executive officer, principal financial officer, 
principal accounting officer or controller, or persons performing

[[Page 5367]]

similar functions, regardless of whether these individuals are employed 
by the registrant or a third party. If the registrant has not adopted 
such a code of ethics, explain why it has not done so. The information 
required by this paragraph (a)(1) is only required in an annual report 
on this Form N-SAR.
    (2) For purposes of this Instruction 102P3(a), the term ``code of 
ethics'' means written standards that are reasonably designed to deter 
wrongdoing and to promote:
    (i) Honest and ethical conduct, including the ethical handling of 
actual or apparent conflicts of interest between personal and 
professional relationships;
    (ii) Full, fair, accurate, timely, and understandable disclosure in 
reports and documents that a registrant files with, or submits to, the 
Commission and in other public communications made by the registrant;
    (iii) Compliance with applicable governmental laws, rules, and 
regulations;
    (iv) The prompt internal reporting of violations of the code to an 
appropriate person or persons identified in the code; and
    (v) Accountability for adherence to the code.
    (3) The registrant must briefly describe the nature of any 
amendment, during the period covered by the report, to a provision of 
its code of ethics that applies to the registrant's principal executive 
officer, principal financial officer, principal accounting officer or 
controller, or persons performing similar functions, regardless of 
whether these individuals are employed by the registrant or a third 
party, and that relates to any element of the code of ethics definition 
enumerated in paragraph (a)(2) of this Instruction 102P3. The 
registrant must file a copy of any such amendment as an exhibit to this 
report on Form N-SAR, unless the registrant has elected to satisfy 
paragraph (a)(6) of this Instruction 102P3 by posting its code of 
ethics on its website pursuant to paragraph (a)(6)(ii) of this 
Instruction 102P3, or by undertaking to provide its code of ethics to 
any person without charge, upon request, pursuant to paragraph 
(a)(6)(iii) of this Instruction 102P3.
    (4) If the registrant has, during the period covered by the report, 
granted a waiver, including an implicit waiver, from a provision of the 
code of ethics to the registrant's principal executive officer, 
principal financial officer, principal accounting officer or 
controller, or persons performing similar functions, regardless of 
whether these individuals are employed by the registrant or a third 
party, that relates to one or more of the items set forth in paragraph 
(a)(2) of this Instruction 102P3, the registrant must briefly describe 
the nature of the waiver, the name of the person to whom the waiver was 
granted, and the date of the waiver.
    (5) If the registrant intends to satisfy the disclosure requirement 
under paragraph (a)(3) or (4) of this Instruction 102P3 regarding an 
amendment to, or a waiver from, a provision of its code of ethics that 
applies to the registrant's principal executive officer, principal 
financial officer, principal accounting officer or controller, or 
persons performing similar functions and that relates to any element of 
the code of ethics definition enumerated in paragraph (a)(2) of this 
Instruction 102P3 by posting such information on its Internet website, 
disclose the registrant's Internet address and such intention.
    (6) The registrant must:
    (i) File with the Commission a copy of its code of ethics that 
applies to the registrant's principal executive officer, principal 
financial officer, principal accounting officer or controller, or 
persons performing similar functions, as an exhibit to its annual 
report on this Form N-SAR;
    (ii) Post the text of such code of ethics on its Internet website 
and disclose, in its most recent report on this Form N-SAR, its 
Internet address and the fact that it has posted such code of ethics on 
its Internet website; or
    (iii) Undertake in its most recent report on this Form N-SAR to 
provide to any person without charge, upon request, a copy of such code 
of ethics and explain the manner in which such request may be made.
    (7) A registrant may have separate codes of ethics for different 
types of officers. Furthermore, a ``code of ethics'' within the meaning 
of paragraph (a)(2) of this Instruction 102P3 may be a portion of a 
broader document that addresses additional topics or that applies to 
more persons than those specified in paragraph (a)(1). In satisfying 
the requirements of paragraph (a)(6), a registrant need only file, 
post, or provide the portions of a broader document that constitutes a 
``code of ethics'' as defined in paragraph (a)(2) and that apply to the 
persons specified in paragraph (a)(1).
    (8) If a registrant elects to satisfy paragraph (a)(6) of this 
Instruction 102P3 by posting its code of ethics on its website pursuant 
to paragraph (a)(6)(ii), the code of ethics must remain accessible on 
its website for as long as the registrant remains subject to the 
requirements of this Instruction 102P3 and chooses to comply with this 
Instruction 102P3 by posting its code on its website pursuant to 
paragraph (a)(6)(ii).
    (9) The registrant does not need to provide any information 
pursuant to paragraphs (a)(3) and (4) of this Instruction 102P3 if it 
discloses the required information on its Internet website within five 
business days following the date of the amendment or waiver and the 
registrant has disclosed in its most recently filed report on this Form 
N-SAR its Internet address and intention to provide disclosure in this 
manner. If the amendment or waiver occurs on a Saturday, Sunday, or 
holiday on which the Commission is not open for business, then the five 
business day period shall begin to run on and include the first 
business day thereafter. If the registrant elects to disclose this 
information through its website, such information must remain available 
on the website for at least a 12-month period. The registrant must 
retain the information for a period of not less than six years 
following the end of the fiscal year in which the amendment or waiver 
occurred. Upon request, the registrant must furnish to the Commission 
or its staff a copy of any or all information retained pursuant to this 
requirement.
    (10) The registrant does not need to disclose technical, 
administrative, or other non-substantive amendments to its code of 
ethics.
    (11) For purposes of this Instruction 102P3(a):
    (i) The term ``waiver'' means the approval by the registrant of a 
material departure from a provision of the code of ethics; and
    (ii) The term ``implicit waiver'' means the registrant's failure to 
take action within a reasonable period of time regarding a material 
departure from a provision of the code of ethics that has been made 
known to an executive officer, as defined in rule 3b-7 under the 1934 
Act (17 CFR 240.3b-7), of the registrant.
    (b)(1) Disclose that the registrant's board of directors has 
determined that the registrant either:
    (i) Has at least one audit committee financial expert serving on 
its audit committee; or
    (ii) Does not have an audit committee financial expert serving on 
its audit committee.
    (2) If the registrant provides the disclosure required by paragraph 
(b)(1)(i) of this Instruction 102P3, it must disclose the name of the 
audit committee financial expert and whether that person is 
``independent.'' In order to be considered ``independent'' for purposes 
of this Instruction 102P3(b), a member of an audit committee may not,

[[Page 5368]]

other than in his or her capacity as a member of the audit committee, 
the board of directors, or any other board committee:
    (i) Accept directly or indirectly any consulting, advisory, or 
other compensatory fee from the issuer; or
    (ii) Be an ``interested person'' of the investment company as 
defined in Section 2(a)(19) of the Act (15 U.S.C. 80a-2(a)(19)).
    (3) If the registrant provides the disclosure required by paragraph 
(b)(1)(ii) of this Instruction 102P3, it must explain why it does not 
have an audit committee financial expert.
    (4) The information required by paragraphs (b)(1) ``-(3) of this 
Instruction 102P3 is only required in an annual report on Form N-SAR.
    (5) If the registrant's board of directors has determined that the 
registrant has more than one audit committee financial expert serving 
on its audit committee, the registrant may, but is not required to, 
disclose the names of those additional persons. A registrant choosing 
to identify such persons must indicate whether they are independent 
pursuant to paragraph (b)(2) of this Instruction 102P3.
    (6) For purposes of this Instruction 102P3, an ``audit committee 
financial expert'' means a person who has the following attributes:
    (i) An understanding of generally accepted accounting principles 
and financial statements;
    (ii) The ability to assess the general application of such 
principles in connection with the accounting for estimates, accruals, 
and reserves;
    (iii) Experience preparing, auditing, analyzing, or evaluating 
financial statements that present a breadth and level of complexity of 
accounting issues that are generally comparable to the breadth and 
complexity of issues that can reasonably be expected to be raised by 
the registrant's financial statements, or experience actively 
supervising one or more persons engaged in such activities;
    (iv) An understanding of internal controls and procedures for 
financial reporting; and
    (v) An understanding of audit committee functions.
    (7) A person shall have acquired such attributes through:
    (i) Education and experience as a principal financial officer, 
principal accounting officer, controller, public accountant, or auditor 
or experience in one or more positions that involve the performance of 
similar functions;
    (ii) Experience actively supervising a principal financial officer, 
principal accounting officer, controller, public accountant, auditor, 
or person performing similar functions;
    (iii) Experience overseeing or assessing the performance of 
companies or public accountants with respect to the preparation, 
auditing, or evaluation of financial statements; or
    (iv) Other relevant experience.
    (8)(i) A person who is determined to be an audit committee 
financial expert will not be deemed an ``expert'' for any purpose, 
including without limitation for purposes of Section 11 of the 1933 Act 
(15 U.S.C. 77k), as a result of being designated or identified as an 
audit committee financial expert pursuant to this Instruction 102P3(b).
    (ii) The designation or identification of a person as an audit 
committee financial expert pursuant to this Instruction 102P3(b) does 
not impose on such person any duties, obligations, or liability that 
are greater than the duties, obligations, and liability imposed on such 
person as a member of the audit committee and board of directors in the 
absence of such designation or identification.
    (iii) The designation or identification of a person as an audit 
committee financial expert pursuant to this Instruction 102P3(b) does 
not affect the duties, obligations, or liability of any other member of 
the audit committee or board of directors.
    (9) If a person qualifies as an audit committee financial expert by 
means of having held a position described in paragraph (b)(7)(iv) of 
this Instruction 102P3, the registrant shall provide a brief listing of 
that person's relevant experience.
    (c) Furnish any other information required to be included as an 
exhibit pursuant to such rules and regulations as the Commission may 
prescribe.
* * * * *

    22. Section 274.128 and Form N-CSR (referenced in Sec. Sec.  
249.331 and 274.128) are added to read as follows:


Sec.  274.128  Form N-CSR, certified shareholder report.

    This form shall be used by registered management investment 
companies to file reports pursuant to Sec.  270.30b2-1(a) of this 
chapter not later than 10 days after the transmission to stockholders 
of any report that is required to be transmitted to stockholders under 
Sec.  270.30e-1 of this chapter.
* * * * *

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

FORM N-CSR

Certified Shareholder Report of Registered Management Investment 
Companies

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

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

(Zip code)

-----------------------------------------------------------------------
(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-CSR is to be used by management investment companies to file 
reports with the Commission not later than 10 days after the 
transmission to stockholders of any report that is required to be 
transmitted to stockholders under Rule 30e-1 under the Investment 
Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the 
information provided on Form N-CSR in its regulatory, disclosure 
review, inspection, and policymaking roles.
    A registrant is required to disclose the information specified by 
Form N-CSR, and the Commission will make this information public. A 
registrant is not required to respond to the collection of information 
contained in Form N-CSR unless the Form displays a currently valid 
Office of Management and Budget (``OMB'') control number. Please direct 
comments concerning the accuracy of the information collection burden 
estimate and any suggestions for reducing the burden to Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW, Washington, 
DC 20549-0609. The OMB has reviewed this collection of information 
under the clearance requirements of 44 U.S.C. 3507.

General Instructions

A. Rule as to Use of Form N-CSR

    Form N-CSR is a combined reporting form that is to be used for 
reports of registered management investment companies under Section 
30(b)(2) of the Investment Company Act of 1940 (the ``Act'') and 
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the 
``Exchange Act''), filed pursuant to Rule 30b2-1(a) under the Act (17 
CFR 270.30b2-1(a)). A report on this Form shall be filed within 10 days 
after the transmission to stockholders of any annual or semi-annual 
report that is required to be transmitted to

[[Page 5369]]

stockholders pursuant to Rule 30e-1 under the Act (17 CFR 270.30e-1).

B. Application of General Rules and Regulations

    The General Rules and Regulations under the Act and the Exchange 
Act contain certain general requirements that are applicable to 
reporting on any form under those Acts. 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 and Rules 
12b-11 (17 CFR 240.12b-11) and 12b-12 (17 CFR 240.12b-12) under the 
Exchange 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.
    3. Attention is directed to Rule 12b-20 under the Exchange Act (17 
CFR 240.12b-20), which states: ``In addition to the information 
expressly required to be included in a statement or report, there shall 
be added such further material information, if any, as may be necessary 
to make the required statements, in the light of the circumstances 
under which they are made not misleading.''

D. Incorporation by Reference

    A registrant may incorporate by reference information required by 
Item 10(a), but no other Items of the Form shall be answered by 
incorporating any information by reference. 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 Exchange Act (17 CFR 240.12b-23 and 240.12b-32) 
(additional rules on incorporation by reference for reports filed 
pursuant to Sections 13 and 15(d) of the Exchange Act); 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-CSR 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 shall be 
filed with each exchange on which any class of securities of the 
registrant is registered. At least one complete copy of the report 
filed with the Commission and one such copy filed with each exchange 
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 executive officer or officers (who 
also must provide the certification required by Rule 30a-2 under the 
Act (17 CFR 270.30a-2) exactly as specified in this Form) and its 
principal financial officer or officers (who also must provide the 
certification required by Rule 30a-2 under the Act (17 CFR 270.30a-2) 
exactly as specified in this Form).
    (b) The name of each person who signs the report shall be typed or 
printed beneath his or her signature. Any person who occupies more than 
one of the specified positions shall indicate each capacity in which he 
or she signs the report. Attention is directed to Rule 12b-11 under the 
Exchange Act (17 CFR 240.12b-11) and Rule 8b-11 under the Act (17 CFR 
270.8b-11) concerning manual signatures and signatures pursuant to 
powers of attorney.
Item 1. Reports to Stockholders
    Include a copy of the report transmitted to stockholders pursuant 
to Rule 30e-1 under the Act (17 CFR 270.30e-1).
Item 2. Code of Ethics
    (a) Disclose whether, as of the end of the period covered by the 
report, the registrant has adopted a code of ethics that applies to the 
registrant's principal executive officer, principal financial officer, 
principal accounting officer or controller, or persons performing 
similar functions, regardless of whether these individuals are employed 
by the registrant or a third party. If the registrant has not adopted 
such a code of ethics, explain why it has not done so.
    Instruction to paragraph (a).
    The information required by this Item is only required in an annual 
report on this Form N-CSR.
    (b) For purposes of this Item, the term ``code of ethics'' means 
written standards that are reasonably designed to deter wrongdoing and 
to promote:
    (1) Honest and ethical conduct, including the ethical handling of 
actual or apparent conflicts of interest between personal and 
professional relationships;
    (2) Full, fair, accurate, timely, and understandable disclosure in 
reports and documents that a registrant files with, or submits to, the 
Commission and in other public communications made by the registrant;
    (3) Compliance with applicable governmental laws, rules, and 
regulations;
    (4) The prompt internal reporting of violations of the code to an 
appropriate person or persons identified in the code; and
    (5) Accountability for adherence to the code.
    (c) The registrant must briefly describe the nature of any 
amendment, during the period covered by the report, to a provision of 
its code of ethics that applies to the registrant's principal executive 
officer, principal financial officer, principal accounting officer or 
controller, or persons performing similar functions, regardless of 
whether these individuals are employed by the registrant or a third 
party, and that relates to any element of the code of ethics definition 
enumerated in paragraph (b) of this Item. The registrant must file a 
copy of any such amendment as an exhibit pursuant to Item 10(a), unless 
the registrant has elected to satisfy paragraph (f) of this Item by 
posting its code of ethics on its website pursuant to paragraph (f)(2) 
of this Item, or by undertaking to provide its code of ethics to any 
person without charge, upon request, pursuant to paragraph (f)(3) of 
this Item.
    (d) If the registrant has, during the period covered by the report, 
granted a waiver, including an implicit waiver,

[[Page 5370]]

from a provision of the code of ethics to the registrant's principal 
executive officer, principal financial officer, principal accounting 
officer or controller, or persons performing similar functions, 
regardless of whether these individuals are employed by the registrant 
or a third party, that relates to one or more of the items set forth in 
paragraph (b) of this Item, the registrant must briefly describe the 
nature of the waiver, the name of the person to whom the waiver was 
granted, and the date of the waiver.
    (e) If the registrant intends to satisfy the disclosure requirement 
under paragraph (c) or (d) of this Item regarding an amendment to, or a 
waiver from, a provision of its code of ethics that applies to the 
registrant's principal executive officer, principal financial officer, 
principal accounting officer or controller, or persons performing 
similar functions and that relates to any element of the code of ethics 
definition enumerated in paragraph (b) of this Item by posting such 
information on its Internet website, disclose the registrant's Internet 
address and such intention.
    (f) The registrant must:
    (1) File with the Commission, pursuant to Item 10(a), a copy of its 
code of ethics that applies to the registrant's principal executive 
officer, principal financial officer, principal accounting officer or 
controller, or persons performing similar functions, as an exhibit to 
its annual report on this Form N-CSR;
    (2) Post the text of such code of ethics on its Internet website 
and disclose, in its most recent report on this Form N-CSR, its 
Internet address and the fact that it has posted such code of ethics on 
its Internet website; or
    (3) Undertake in its most recent report on this Form N-CSR to 
provide to any person without charge, upon request, a copy of such code 
of ethics and explain the manner in which such request may be made.
    Instructions to Item 2.
    1. A registrant may have separate codes of ethics for different 
types of officers. Furthermore, a ``code of ethics'' within the meaning 
of paragraph (b) of this Item may be a portion of a broader document 
that addresses additional topics or that applies to more persons than 
those specified in paragraph (a). In satisfying the requirements of 
paragraph (f), a registrant need only file, post, or provide the 
portions of a broader document that constitutes a ``code of ethics'' as 
defined in paragraph (b) and that apply to the persons specified in 
paragraph (a).
    2. If a registrant elects to satisfy paragraph (f) of this Item by 
posting its code of ethics on its website pursuant to paragraph (f)(2), 
the code of ethics must remain accessible on its website for as long as 
the registrant remains subject to the requirements of this Item and 
chooses to comply with this Item by posting its code on its website 
pursuant to paragraph (f)(2).
    3. The registrant does not need to provide any information pursuant 
to paragraphs (c) and (d) of this Item if it discloses the required 
information on its Internet website within five business days following 
the date of the amendment or waiver and the registrant has disclosed in 
its most recently filed report on this Form N-CSR its Internet address 
and intention to provide disclosure in this manner. If the amendment or 
waiver occurs on a Saturday, Sunday, or holiday on which the Commission 
is not open for business, then the five business day period shall begin 
to run on and include the first business day thereafter. If the 
registrant elects to disclose this information through its website, 
such information must remain available on the website for at least a 
12-month period. The registrant must retain the information for a 
period of not less than six years following the end of the fiscal year 
in which the amendment or waiver occurred. Upon request, the registrant 
must furnish to the Commission or its staff a copy of any or all 
information retained pursuant to this requirement.
    4. The registrant does not need to disclose technical, 
administrative, or other non-substantive amendments to its code of 
ethics.
    5. For purposes of this Item:
    (a) The term ``waiver'' means the approval by the registrant of a 
material departure from a provision of the code of ethics; and
    (b) The term ``implicit waiver'' means the registrant's failure to 
take action within a reasonable period of time regarding a material 
departure from a provision of the code of ethics that has been made 
known to an executive officer, as defined in Rule 3b-7 under the 
Exchange Act (17 CFR 240.3b-7), of the registrant.
Item 3. Audit Committee Financial Expert
    (a)(1) Disclose that the registrant's board of directors has 
determined that the registrant either:
    (i) Has at least one audit committee financial expert serving on 
its audit committee; or
    (ii) Does not have an audit committee financial expert serving on 
its audit committee.
    (2) If the registrant provides the disclosure required by paragraph 
(a)(1)(i) of this Item, it must disclose the name of the audit 
committee financial expert and whether that person is ``independent.'' 
In order to be considered ``independent'' for purposes of this Item, a 
member of an audit committee may not, other than in his or her capacity 
as a member of the audit committee, the board of directors, or any 
other board committee:
    (i) Accept directly or indirectly any consulting, advisory, or 
other compensatory fee from the issuer; or
    (ii) Be an ``interested person'' of the investment company as 
defined in Section 2(a)(19) of the Act (15 U.S.C. 80a-2(a)(19)).
    (3) If the registrant provides the disclosure required by paragraph 
(a)(1)(ii) of this Item, it must explain why it does not have an audit 
committee financial expert.
    Instructions to paragraph (a).
    1. The information required by this Item is only required in an 
annual report on Form N-CSR.
    2. If the registrant's board of directors has determined that the 
registrant has more than one audit committee financial expert serving 
on its audit committee, the registrant may, but is not required to, 
disclose the names of those additional persons. A registrant choosing 
to identify such persons must indicate whether they are independent 
pursuant to paragraph (a)(2) of this Item.
    (b) For purposes of this Item, an ``audit committee financial 
expert'' means a person who has the following attributes:
    (1) An understanding of generally accepted accounting principles 
and financial statements;
    (2) The ability to assess the general application of such 
principles in connection with the accounting for estimates, accruals, 
and reserves;
    (3) Experience preparing, auditing, analyzing, or evaluating 
financial statements that present a breadth and level of complexity of 
accounting issues that are generally comparable to the breadth and 
complexity of issues that can reasonably be expected to be raised by 
the registrant's financial statements, or experience actively 
supervising one or more persons engaged in such activities;
    (4) An understanding of internal controls and procedures for 
financial reporting; and
    (5) An understanding of audit committee functions.
    (c) A person shall have acquired such attributes through:
    (1) Education and experience as a principal financial officer, 
principal

[[Page 5371]]

accounting officer, controller, public accountant, or auditor or 
experience in one or more positions that involve the performance of 
similar functions;
    (2) Experience actively supervising a principal financial officer, 
principal accounting officer, controller, public accountant, auditor, 
or person performing similar functions;
    (3) Experience overseeing or assessing the performance of companies 
or public accountants with respect to the preparation, auditing, or 
evaluation of financial statements; or
    (4) Other relevant experience.
    (d)(1) A person who is determined to be an audit committee 
financial expert will not be deemed an ``expert'' for any purpose, 
including without limitation for purposes of Section 11 of the 
Securities Act of 1933 (15 U.S.C. 77k), as a result of being designated 
or identified as an audit committee financial expert pursuant to this 
Item.
    (2) The designation or identification of a person as an audit 
committee financial expert pursuant to this Item does not impose on 
such person any duties, obligations, or liability that are greater than 
the duties, obligations, and liability imposed on such person as a 
member of the audit committee and board of directors in the absence of 
such designation or identification.
    (3) The designation or identification of a person as an audit 
committee financial expert pursuant to this Item does not affect the 
duties, obligations, or liability of any other member of the audit 
committee or board of directors.
    Instruction to Item 3.
    If a person qualifies as an audit committee financial expert by 
means of having held a position described in paragraph (c)(4) of this 
Item, the registrant shall provide a brief listing of that person's 
relevant experience.
Items 4-8. [Reserved]
Item 9. Controls and Procedures
    (a) Disclose the conclusions of the registrant's principal 
executive officer or officers and principal financial officer or 
officers, or persons performing similar functions, about the 
effectiveness of the registrant's disclosure controls and procedures 
(as defined in Rule 30a-2(c) under the Act (17 CFR 270.30a-2(c))) based 
on their evaluation of these controls and procedures as of a date 
within 90 days of the filing date of the report that includes the 
disclosure required by this paragraph.
    (b) Disclose whether or not there were significant changes in the 
registrant's internal controls or in other factors that could 
significantly affect these controls subsequent to the date of their 
evaluation, including any corrective actions with regard to significant 
deficiencies and material weaknesses.
Item 10. Exhibits
    File the exhibits listed below as part of this Form. Letter or 
number the exhibits in the sequence indicated.
    (a) Any code of ethics, or amendment thereto, that is the subject 
of the disclosure required by Item 2, to the extent that the registrant 
intends to satisfy the Item 2 requirements through filing of an 
exhibit.
    (b) A separate certification for each principal executive officer 
and principal financial officer of the registrant as required by Rule 
30a-2 under the Act (17 CFR 270.30a-2) in the exact form set forth 
below:

Certifications

    I, [identify the certifying individual], certify that:
    1. I have reviewed this report on Form N-CSR of [identify 
registrant];
    2. Based on my knowledge, this report does not contain any untrue 
statement of a material fact or omit to state a material fact necessary 
to make the statements made, in light of the circumstances under which 
such statements were made, not misleading with respect to the period 
covered by this report;
    3. Based on my knowledge, the financial statements, and other 
financial information included in this report, fairly present in all 
material respects the financial condition, results of operations, 
changes in net assets, and cash flows (if the financial statements are 
required to include a statement of cash flows) of the registrant as of, 
and for, the periods presented in this report;
    4. The registrant's other certifying officers and I are responsible 
for establishing and maintaining disclosure controls and procedures (as 
defined in Rule 30a-2(c) under the Investment Company Act of 1940) for 
the registrant and have:
    (a) Designed such disclosure controls and procedures to ensure that 
material information relating to the registrant, including its 
consolidated subsidiaries, is made known to us by others within those 
entities, particularly during the period in which this report is being 
prepared;
    (b) evaluated the effectiveness of the registrant's disclosure 
controls and procedures as of a date within 90 days prior to the filing 
date of this report (the ``Evaluation Date''); and
    (c) presented in this report our conclusions about the 
effectiveness of the disclosure controls and procedures based on our 
evaluation as of the Evaluation Date;
    5. The registrant's other certifying officers and I have disclosed, 
based on our most recent evaluation, to the registrant's auditors and 
the audit committee of the registrant's board of directors (or persons 
performing the equivalent functions):
    (a) all significant deficiencies in the design or operation of 
internal controls which could adversely affect the registrant's ability 
to record, process, summarize, and report financial data and have 
identified for the registrant's auditors any material weaknesses in 
internal controls; and
    (b) any fraud, whether or not material, that involves management or 
other employees who have a significant role in the registrant's 
internal controls; and
    6. The registrant's other certifying officers and I have indicated 
in this report whether or not there were significant changes in 
internal controls or in other factors that could significantly affect 
internal controls subsequent to the date of our most recent evaluation, 
including any corrective actions with regard to significant 
deficiencies and material weaknesses.

Date:------------------------------------------------------------------
-----------------------------------------------------------------------
[Signature] [Title]

Signatures

[See General Instruction F]

    Pursuant to the requirements of the Securities Exchange Act of 1934 
and 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-------------------------------------------------------------------

    Pursuant to the requirements of the Securities Exchange Act of 1934 
and the Investment Company Act of 1940, this report has been signed 
below by the following persons on behalf of the registrant and in the 
capacities and on the dates indicated.

By (Signature and Title)*----------------------------------------------
Date-------------------------------------------------------------------
By (Signature and Title)*----------------------------------------------
-----------------------------------------------------------------------
    Date
    * Print the name and title of each signing officer under his or her 
signature.

    Dated: January 27, 2003.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-2254 Filed 1-31-03; 8:45 am]
BILLING CODE 8010-01-P