[Federal Register Volume 69, Number 46 (Tuesday, March 9, 2004)]
[Rules and Regulations]
[Pages 11244-11273]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-4829]



[[Page 11243]]

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Part VI





Securities and Exchange Commission





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17 CFR Parts 210, 239, et al.



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

  Federal Register / Vol. 69, No. 46 / Tuesday, March 9, 2004 / Rules 
and Regulations  

[[Page 11244]]


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SECURITIES AND EXCHANGE COMMISSION

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

[Release Nos. 33-8393; 34-49333; IC-26372; File No. S7-51-02]
RIN 3235-AG64


Shareholder Reports and Quarterly Portfolio Disclosure of 
Registered Management Investment Companies

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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

DATES: Effective Date: May 10, 2004.
    Compliance Date: See Section II.D. of this release for information 
on compliance dates.

FOR FURTHER INFORMATION CONTACT: John M. Faust, Attorney, Christopher 
P. Kaiser, Special Counsel, or Paul G. Cellupica, Assistant Director, 
Office of Disclosure Regulation, Division of Investment Management, 
(202) 942-0721, at the Securities and Exchange Commission, 450 Fifth 
Street NW, Washington, DC 20549-0506.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission (the 
``Commission'') is adopting new rule 30b1-5 \1\ and amendments to rules 
30a-2,\2\ 30a-3,\3\ and 30d-1 \4\ under the Investment Company Act of 
1940 \5\ (``Investment Company Act''); amendments to Forms N-1A,\6\ N-
2,\7\ and N-3 \8\ under the Investment Company Act and the Securities 
Act of 1933\9\ (``Securities Act''); new Form N-Q \10\ and amendments 
to Form N-CSR \11\ under the Investment Company Act and the Securities 
Exchange Act of 1934 \12\ (``Exchange Act''); and amendments to Article 
6 \13\ and Article 12 \14\ of Regulation S-X.\15\
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    \1\ 17 CFR 270.30b1-5.
    \2\ 17 CFR 270.30a-2.
    \3\ 17 CFR 270.30a-3.
    \4\ 17 CFR 270.30d-1.
    \5\ 15 U.S.C. 80a-1 et seq.
    \6\ 17 CFR 239.15A; 17 CFR 274.11A.
    \7\ 17 CFR 239.14; 17 CFR 274.11a-1.
    \8\ 17 CFR 239.17; 17 CFR 274.11b.
    \9\ 15 U.S.C. 77a et seq.
    \10\ 17 CFR 249.332; 17 CFR 274.130.
    \11\ 17 CFR 249.331; 17 CFR 274.128.
    \12\ 15 U.S.C. 78a et seq.
    \13\ 17 CFR 210.6.
    \14\ 17 CFR 210.12.
    \15\ 17 CFR 210.

Table of Contents

Executive Summary

I. Background
    A. Disclosure of Fund Expenses
    B. Disclosure of Fund Portfolio Holdings
    C. The Commission's Proposal
II. Discussion
    A. Disclosure of Fund Expenses
    B. Disclosure of Portfolio Holdings
    1. Summary Portfolio Schedule
    2. Exemption of Money Market Funds from Portfolio Schedule 
Requirements in Shareholder Reports
    3. Tabular or Graphic Presentation of Portfolio Holdings
    4. Quarterly Filing of Complete Portfolio Schedule
    C. Management's Discussion of Fund Performance (``MDFP'')
    D. Compliance Date
III. Paperwork Reduction Act
IV. Cost/Benefit Analysis
V. Consideration of Burden on Competition; Promotion of Efficiency, 
Competition, and Capital Formation
VI. Final Regulatory Flexibility Analysis
VII. Statutory Authority
Text of Rule and Form Amendments

Executive Summary

    We are adopting rule and form amendments \16\ that:
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    \16\ The Commission proposed these amendments in December 2002. 
Investment Company Act Release No. 25870 (Dec. 18, 2002) [68 FR 160 
(Jan. 2, 2003)] (``Proposing Release'').
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     Require open-end management investment companies 
(``mutual funds'') to disclose fund expenses borne by shareholders 
during the reporting period in reports to shareholders;\17\
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    \17\ 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). An open-end company is a 
management company that is offering for sale or has outstanding any 
redeemable securities of which it is the issuer. A closed-end 
company is any management company other than an open-end company. 
See section 5 of the Investment Company Act [15 U.S.C. 80a-5]. Open-
end companies (``mutual funds'') generally offer and sell new shares 
to the public on a continuous basis, while closed-end companies 
generally engage in traditional underwritten offerings of a fixed 
number of shares and in most cases do not offer their shares to the 
public on a continuous basis.
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     Permit a management investment company 
registered under the Investment Company Act (``fund'') to include a 
summary portfolio schedule in its reports to shareholders, provided 
that the complete portfolio schedule is filed with the Commission on 
Form N-CSR semi-annually and is provided to shareholders upon request, 
free of charge;
     Exempt money market funds from including a 
portfolio schedule in reports to shareholders, provided that this 
information is filed with the Commission on Form N-CSR and is provided 
to shareholders upon request, free of charge;
     Require reports to shareholders by funds to 
include a tabular or graphic presentation of a fund's portfolio 
holdings by identifiable categories;
     Require a fund to file its complete portfolio 
schedule as of the end of its first and third fiscal quarters with the 
Commission on new Form N-Q, which will be filed under the Investment 
Company Act and the Exchange Act and certified by the fund's principal 
executive and financial officers; and
     Require a mutual fund to include Management's 
Discussion of Fund Performance in its annual report to 
shareholders.\18\
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    \18\ Item 5 of Form N-1A.
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    These amendments are intended to provide better information to 
investors

[[Page 11245]]

about fund costs, investments, and performance.

I. Background

    The Investment Company Act and rules thereunder require each fund 
to transmit a report to its shareholders semi-annually, within 60 days 
of the end of the period for which the shareholder report is made, and 
to file the report with the Commission no later than 10 days after it 
is transmitted to shareholders.\19\ Shareholder reports are one of the 
principal means by which funds provide periodic information to their 
investors. Fund shareholder reports historically have served primarily 
as a vehicle to provide financial statements and other financial 
information to shareholders.\20\ We believe that today's amendments and 
new rules will make these reports more effective vehicles for 
communicating information to investors. Today's amendments principally 
address disclosure of fund expenses and portfolio holdings, two 
significant areas for improvement that have been the subject of public 
discussion and concern.
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    \19\ See section 30(e) of the Investment Company Act [15 U.S.C. 
80a-29(e)]; Rule 30e-1 under the Investment Company Act [17 CFR 
270.30e-1] (transmission of report to shareholders); section 
30(b)(2) of the Investment Company Act [15 U.S.C. 80a-30(b)(2)]; 
Rule 30b2-1 under the Investment Company Act [17 CFR 270.30b2-1] 
(filing of shareholder report with the Commission); Form N-CSR (form 
used by registered management investment companies to file 
shareholder reports).
    \20\ Section 30(e) of the Investment Company Act [15 U.S.C. 80a-
29(e)] (requiring a fund to transmit to its stockholders, at least 
semi-annually, reports containing financial statements and other 
financial information as the Commission may prescribe by rules and 
regulations); National Securities Markets Improvement Act of 1996, 
Pub. L. 104-290, section 207, 110 Stat. 3416, 3430 (Oct. 11, 1996) 
(adding section 30(f) to the Investment Company Act, which allows 
the Commission to require that semi-annual reports ``include such 
other information as the Commission deems necessary or appropriate 
in the public interest or for the protection of investors'').
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A. Disclosure of Fund Expenses

    Potential mutual fund investors receive significant disclosure 
about fund fees and expenses. Since 1988, the Commission has required 
the mutual fund prospectus to include a fee table that shows all fees 
and charges associated with a mutual fund investment as a percentage of 
net assets.\21\ Recent rulemaking initiatives have also sought to 
improve disclosure to investors of mutual fund fees and charges. For 
example, the Commission recently adopted amendments requiring 
investment company advertisements to highlight the availability and 
importance of information on fees and charges found in the prospectus 
\22\ and has proposed amendments to the mutual fund prospectus that 
would require enhanced disclosure regarding breakpoint discounts on 
front-end sales loads.\23\ In addition, the Commission published a 
concept release seeking views regarding improving disclosure of 
transaction costs.\24\ Finally, the Commission recently proposed new 
rules that would require broker-dealers to provide their customers with 
information, at the point of sale and in transaction confirmations, 
regarding the costs and conflicts of interest that arise from the 
distribution of mutual fund shares.\25\
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    \21\ Item 3 of Form N-1A; Investment Company Act Release No. 
16244 (Feb. 1, 1988) [53 FR 3192 (Feb. 4, 1988)] (release adopting 
mutual fund fee table); Investment Company Act Release No. 15932 
(Aug. 18, 1987) [52 FR 32018 (Aug. 25, 1987)] (release proposing 
mutual fund fee table).
    \22\ See Investment Company Act Release No. 26195 (Sept. 29, 
2003) [68 FR 57760 (Oct. 6, 2003)].
    \23\ See Investment Company Act Release No. 26298 (Dec. 17, 
2003) [68 FR 74732 (Dec. 24, 2003)].
    \24\ See Investment Company Act Release No. 26313 (Dec. 18, 
2003) [68 FR 74820 (Dec. 24, 2003)].
    \25\ See Investment Company Act Release No. 26341 (Jan. 29, 
2004) [69 FR 6438 (Feb. 10, 2004)].
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    In addition, the Commission has undertaken efforts to increase 
investor awareness and understanding of the significance of the costs 
that they pay in connection with mutual fund investments. For example, 
we recently added educational information to our Web site addressing 
breakpoints on front-end sales loads and prospectus fee tables.\26\ 
Since 1999, the Commission has made available on its Web site the 
Mutual Fund Cost Calculator, an Internet-based tool that enables 
investors to compare the costs of owning different funds.\27\
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    \26\ See Breakpoints (last modified Jan. 17, 2003), http://www.sec.gov/answers/breakpt.htm; Tips for Reading a Prospectus (last 
modified Feb. 5, 2003), http://www.sec.gov/answers/mfprospectustips.htm.
    \27\ Mutual Fund Cost Calculator (last modified July 24, 2000), 
http://www.sec.gov/investor/tools/mfcc/mfcc-int.htm. See also Invest 
Wisely: An Introduction to Mutual Funds (last modified June 2, 
2003), http://www.sec.gov/investor/pubs/inwsmf.htm (investor 
brochure describing types of mutual fund fees and expenses); Mutual 
Fund Fees and Expenses (last modified Oct. 19, 2000), http:/
www.sec.gov/answers/mffees.htm.
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    Despite these ongoing efforts, the degree to which investors 
understand mutual fund fees and expenses remains a source of concern. 
Mutual fund fees are of two types, transactional (e.g., sales loads, 
redemption fees) and ongoing (e.g., asset-based charges such as 
management fees and 12b-1 fees).\28\ While transactional fees are 
relatively transparent, ongoing fees are less evident because they are 
deducted from fund assets and are reflected in reduced account balances 
rather than being separately stated. Significant concerns have been 
raised regarding the degree to which investors understand the nature 
and effect of these ongoing fees.\29\ These ongoing fees can have a 
dramatic effect on an investor's return. A 1% annual fee, for example, 
will reduce an ending account balance by 18% on an investment held for 
20 years. In December 2002, we proposed amendments intended to address 
these concerns, that would require a registered open-end management 
investment company to include in its shareholder reports disclosure of 
fund expenses borne by shareholders during the reporting period.\30\
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    \28\ A 12b-1 fee is a fee charged by some mutual funds against 
fund assets to pay for marketing and distribution activities. See 
section 12(b) of the Investment Company Act [80 U.S.C. 80a-12(b)]; 
Rule 12b-1 under the Investment Company Act [17 CFR 270.12b-1].
    \29\ See, e.g., Mara Der Haranesian, et al., How to Fix the 
Mutual Funds Mess, Business Week, Sept. 22, 2003, at 106 (discussing 
the impact of fees on returns and arguing that it is difficult for 
investors to determine what they personally pay based on a fund's 
expense ratio); Chuck Jaffe, In ``Plain English,'' Disclosure is a 
Joke, The Boston Globe, August 31, 2003, at E4 (arguing for more 
understandable fee disclosure in fund prospectuses); Theo Francis, 
Getting the Most From Fund Costs, Wall Street Journal, Dec. 2, 2002, 
at R1 (discussing the importance of considering fees and expenses 
when investing in mutual funds, and explaining how to use the SEC's 
cost calculator); James Glassman, A Failing Grade for Mutual Funds, 
Washington Post, Dec. 1, 2002, at H1 (discussing importance of 
differences in expenses to fund returns, and using examples from 
SEC's cost calculator); Neil Weinberg, Fund Manager Knows Best; As 
Corporations are Fessing Up to Investors, Mutual Funds Still Gloss 
Over Costs, Forbes Magazine, Oct. 14, 2002 (84% of investors believe 
higher expenses result in higher performance); Investors Need to 
Bone Up on Bonds and Costs, According to Vanguard/Money Investor 
Literacy Test, Press Release, Business Wire, Sept. 25, 2002 (75% of 
survey respondents could not accurately define fund expense ratio 
and 64% did not understand the impact of expenses on fund returns).
    \30\ See Proposing Release, supra note 16. Cf. Mutual Funds 
Integrity and Fee Transparency Act of 2003, H.R. 2420, 108th Cong. 
Sec.  101 (2003); Mutual Fund Investor Confidence Restoration Act of 
2003, S. 1971, 108th Cong. Sec.  101 (2003); Mutual Fund Investor 
Protection Act of 2003, S. 1958, 108th Cong. Sec.  101 (2003) 
(requiring enhanced disclosure of mutual fund operating expenses).
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B. Disclosure of Fund Portfolio Holdings

    Currently, funds are required to include their complete portfolio 
holdings in the reports that are delivered to all shareholders twice a 
year.\31\ Investor groups, members of the

[[Page 11246]]

fund industry, and others have suggested ways to improve this 
disclosure regime, both by increasing the frequency with which funds 
disclose their portfolio holdings, and by streamlining the portfolio 
schedules that are delivered to investors to make them more useful and 
understandable.
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    \31\ Rule 6-10(c)(1) of Regulation S-X [17 CFR 210.6-10(c)(1)] 
requires that schedules of investments be filed in support of the 
balance sheet entries for these investments. The forms of these 
schedules are specified in Rules 12-12 to 12-14 of Regulation S-X 
[17 CFR 210.12-12--12-14]. The schedules of investments are also 
required to be included with the financial statements in the 
Statement of Additional Information (``SAI'') of a fund, which is 
part of the registration statement filed with the Commission under 
both the Securities Act and the Investment Company Act. See current 
Item 22 of Form N-1A; Item 23 of Form N-2; Item 27(a) of Form N-3.
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    First, some have argued that investors would benefit if funds were 
required to disclose their complete portfolio schedules more frequently 
than semi-annually. The Commission has received six rulemaking 
petitions in the past several years that advocate more frequent 
disclosure of funds' portfolio holdings.\32\ The petitioners argue that 
increasing the frequency of portfolio disclosure by funds will allow 
investors to better monitor the extent to which their funds' portfolios 
overlap, and hence will enable investors to make more informed asset 
allocation decisions. In addition, the petitioners argue that more 
frequent disclosure would expose ``style drift'' (when the actual 
portfolio holdings of a fund deviate from its stated investment 
objective) and provide investors with greater information about how a 
fund is complying with its stated investment objective. The petitioners 
also argue that more frequent disclosure would help to shed light on 
and prevent several potential forms of portfolio manipulation, such as 
``window dressing'' (buying or selling portfolio securities shortly 
before the date as of which a fund's holdings are publicly disclosed, 
in order to convey an impression that the manager has been investing in 
companies that have had exceptional performance during the reporting 
period) and ``portfolio pumping'' (buying shares of stock the fund 
already owns on the last day of the reporting period, in order to drive 
up the price of the stocks and inflate the fund's performance results).
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    \32\ See Rulemaking Petition by the International Brotherhood of 
Teamsters (Jan. 18, 2001); Rulemaking Petition by the American 
Federation of Labor and the Congress of Industrial Organizations 
(Dec. 20, 2000); Rulemaking Petition by the National Association of 
Investors Corporation (Oct. 9, 2000); Rulemaking Petition by the 
Consumer Federation of America, et al. (Aug. 8, 2000); Rulemaking 
Petition by the Financial Planning Association (June 28, 2000); 
Rulemaking Petition by Fund Democracy, LLC (June 28, 2000). The 
petitions are available for inspection and copying in File No. S7-
51-02 in the Commission's public reference room.
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    Second, others have argued that permitting funds to include a 
summary portfolio schedule in lieu of a complete portfolio schedule in 
their shareholder reports would enable investors to focus on a fund's 
principal holdings and thereby better evaluate the fund's risk profile 
and investment strategy.\33\ At the same time, the fund's full 
portfolio schedule would remain available, upon request, to those 
investors who find this information useful. In addition, these 
advocates have argued that the use of a summary schedule would reduce 
the burden on the funds and their shareholders of providing 
unnecessarily lengthy schedules of portfolio investments, which at 
present may require as many as 35 or 40 pages to list. For many funds, 
such as index funds, providing a lengthy portfolio schedule may not 
contribute significantly to investor understanding regarding the fund's 
primary investment focus. It may, however, result in significant 
printing and mailing costs, which are ultimately borne by investors.
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    \33\ See Letter from Craig S. Tyle, General Counsel, Investment 
Company Institute, to Barry P. Barbash, Director, Division of 
Investment Management, Securities and Exchange Commission (``SEC'') 
(Aug. 11, 1998); Letter from Heidi Stam, Principal, Securities 
Regulation, The Vanguard Group, to Cynthia Fornelli, Deputy 
Director, Division of Investment Management, SEC (Oct. 13, 1999); 
Letter from Robert C. Pozen, General Counsel and Managing Director, 
Fidelity Investments, to The Honorable Steven Wallman, Commissioner, 
SEC (May 5, 1995). The letters are available for inspection and 
copying in File No. S7-51-02 in the Commission's public reference 
room.
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    The amendments that we proposed in December 2002 were intended to 
address both of these suggestions for improvement. First, the proposed 
amendments would require a fund to file its complete portfolio schedule 
as of the end of its first and third fiscal quarters with the 
Commission on proposed Form N-Q. Second, the proposed amendments would 
permit a fund to include a summary portfolio schedule of investments in 
its reports to shareholders, provided that the complete schedule is 
filed with the Commission and is provided to shareholders upon request, 
free of charge.

C. The Commission's Proposal

    The Commission received 65 comment letters on the proposed 
amendments regarding shareholder reports and quarterly portfolio 
disclosure from individual investors, professional and trade 
associations, investor advocacy groups, members of the fund industry, 
bar associations, accounting firms, consultants, and academics. These 
commenters generally supported the Commission's proposals to improve 
the periodic disclosure provided to investors, although some expressed 
concerns regarding portions of the proposals or suggested changes. 
Today, the Commission is adopting these proposed amendments, with 
certain modifications as described below to address the suggestions of 
commenters.

II. Discussion

A. Disclosure of Fund Expenses

    We are adopting, substantially as proposed, the requirement that 
mutual funds disclose in their reports to shareholders fund expenses 
borne by shareholders during the reporting period. Mutual fund 
shareholder reports will be required to include: (1) The cost in 
dollars associated with an investment of $1,000, based on the fund's 
actual expenses and return for the period; and (2) the cost in dollars 
associated with an investment of $1,000, based on the fund's actual 
expenses for the period and an assumed return of 5 percent per 
year.\34\ The first figure is intended to permit investors to estimate 
the actual costs, in dollars, that they bore over the reporting period. 
The second figure is intended to provide investors with a basis for 
comparing the level of current period expenses of different funds. 
Together, the two expense figures are designed to increase investor 
understanding of the fees that they pay on an ongoing basis for 
investing in a fund.
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    \34\ Item 21(d)(1) of Form N-1A.
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Location of Disclosure
    We continue to believe that disclosure of current period expenses 
in the shareholder reports strikes an appropriate balance between 
investors' need for this information and the costs and burdens that 
would be associated with providing this information on an 
individualized basis. Commenters, including individual investors and 
fund groups, generally supported the proposed expense disclosure on the 
grounds that it would enhance investor understanding of fund expenses. 
However, two commenters encouraged the Commission to consider an 
alternative approach that would require expense disclosure in quarterly 
account statements, consisting of either the amount of expenses paid by 
the individual investor, or expenses associated with a standardized 
investment amount.
    We are not persuaded that expense disclosure in quarterly account 
statements would be preferable to the proposed shareholder reports 
disclosure. Disclosure of expenses in a fund's shareholder reports will 
enable investors to evaluate this information

[[Page 11247]]

alongside other key information about the fund's operating results, 
including management's discussion of the fund's performance. In effect, 
shareholders will be able to evaluate the costs they pay against the 
services they receive. By contrast, expense disclosure in quarterly 
account statements would provide a less effective context for investors 
to assess the expenses shown.
    In addition, disclosure of the cost in dollars associated with an 
investment of $1,000, based on the fund's actual expenses for the 
period and an assumed return of 5 percent per year, will provide 
investors with expense information in a standardized manner that will 
facilitate comparison of ongoing costs among funds. By contrast, 
personalized expense disclosure in quarterly account statements would 
not assist investors in making comparisons among funds because it would 
be based on different investment amounts and different rates of return.
    We acknowledge that individualized expense disclosure in quarterly 
account statements would have the benefit of providing cost disclosure 
tailored to each investor. Our approach, however, effectively permits 
an investor to estimate this personalized information readily (by 
dividing the investor's account value by $1,000 and multiplying the 
result by the cost shown for a $1,000 investment).
    The Commission's approach also avoids certain costs and logistical 
complexity that individualized disclosure in quarterly statements might 
entail. Mutual fund expenses are charged against fund assets and are 
not accounted for on an individual account basis. Therefore, 
implementation of individualized expense disclosure would require 
systems changes to provide for expense accounting on an individual 
account basis. Moreover, in many cases, fund shares are held by broker-
dealers, financial advisers, and other third-party intermediaries, who 
must prepare accurate and timely customer account statements by 
integrating data supplied by many unrelated fund groups. In addition to 
the systems changes necessary for the fund itself, these financial 
intermediaries would need to implement new systems in order to 
calculate and report personalized expense information for each fund 
held in an account each quarter. Estimates of the costs of these 
changes are substantial. One commenter estimated, based on a survey of 
various industry participants conducted in 2000, that the aggregate 
costs to survey respondents associated with calculating and disclosing 
individualized fund expenses would be $200.4 million in initial 
implementation costs and $65 million in annual, ongoing costs.\35\ By 
contrast, we estimate that the costs for standardized cost disclosure 
in shareholder reports, including printing and mailing costs, and the 
costs of preparing the new disclosure, would total approximately $16 
million annually.\36\
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    \35\ Investment Company Institute Survey on GAO Report on Mutual 
Fund Fees (Jan. 31, 2001) (available for inspection and copying in 
File No. S7-51-02 in the Commission's Public Reference Room).
    \36\ See Section IV., ``Cost/Benefit Analysis,'' infra.
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Format and Methodology
    Our amendments will require both an expense example based on the 
fund's actual expenses and actual return, and an expense example based 
on actual expenses and a 5% assumed return, as proposed. We note that 
several commenters objected to the second example. These commenters 
raised concerns that this example would make the fee disclosure 
unnecessarily cumbersome, particularly for multiple class funds. They 
also argued that it might confuse investors because the example in the 
shareholder report would be similar, but not identical, to the example 
in the fee table of the fund prospectus. For example, one commenter 
noted that the fee table example reflects sales charges, whereas the 
shareholder report example would not. We continue to believe, however, 
that this second example will enhance the utility to investors of the 
expense disclosure by facilitating comparison of ongoing expenses among 
funds. While the first example, based on the actual return of the fund, 
will enable investors to estimate readily the actual dollar cost that 
they paid over the reporting period, it cannot effectively serve as a 
vehicle for comparison of fund expenses, because the fund's return will 
necessarily affect the expenses incurred. The second example 
facilitates comparison by standardizing assumed return.
    The methodology for calculation of the expense disclosure that we 
are adopting is similar to that required for the expense example in the 
fee table of the mutual fund prospectus and, with one exception, is 
unchanged from our proposal.\37\ We are modifying the proposal to base 
the expense figures on costs associated with an investment of $1,000, 
as opposed to $10,000. We believe that it may be easier for 
shareholders to estimate their actual expenses using an example based 
on a $1,000 amount because it will simplify the multiplication 
involved, e.g., for shareholders holding less than $10,000 in a fund.
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    \37\ See Section II.B. of the Proposing Release, supra note 16, 
68 FR at 168-169 (describing methodology to be used).
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    We are also modifying the format of the expense example to include 
the account values for an initial investment of $1,000 as of the end of 
the period alongside the expense figures, and to show the fund's 
expense ratio expressed as a percentage. In the proposing release, we 
requested comment on better approaches to providing disclosure to 
investors about actual costs paid over the current period, and on 
possible modifications to the proposed computation methodology to help 
achieve the objective of permitting investors to estimate the actual 
costs, in dollars, that they bore over the reporting period. Several 
commenters addressed ways to improve the expense examples, and one 
commenter suggested addressing the impact of brokerage and related soft 
dollar expenses.
    The Commission has given additional consideration to the questions 
raised in its request for comment and the comments received and has 
determined to modify the expense example to include figures for ending 
account value, as well as the fund's expense ratio as a percentage.\38\ 
We believe that this revised format will help investors better 
understand the impact of fund expenses and the relationship between 
expenses and return, as well as the effect of brokerage and soft dollar 
expenses. These changes are designed to help investors understand 
ongoing fund costs and make better cost comparisons among funds.
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    \38\ See Section IV.B., ``Cost/Benefit Analysis: Costs,'' infra, 
for a discussion of the costs to funds of including the additional 
information.
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    Under the amendments we are adopting, the figures for beginning and 
ending account value and expenses paid will be required to be shown in 
a tabular format.\39\ The instructions to the table clarify that the 
expense calculations are to be based on the fund's most recent fiscal 
half-year (the fund's second fiscal half-year in the case of an annual 
report). A fund will be required to state, in a footnote to the table, 
that expenses are equal to the fund's annualized expense ratio, 
multiplied by the average account value over the period, multiplied by 
the number of days in the fund's most recent fiscal half-year divided 
by 365 or 366 (to reflect the one-half year period shown). The expense 
ratio shown in the footnote to the table will be expressed on an 
annualized basis and calculated in the

[[Page 11248]]

manner required in the financial highlights table using the expenses 
for the fund's most recent fiscal half-year.\40\
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    \39\ Item 21(d)(1) of Form N-1A.
    \40\ Instruction 1(c) to Item 21(d)(1) of Form N-1A.
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    The numerical expense disclosure will be accompanied by a 
prescribed narrative explanation, including an explanation of the types 
of costs charged by mutual funds and the assumptions used in the 
example.\41\ We are revising the proposed narrative disclosure 
requirements to reflect that expenses will be shown in a table 
alongside the ending account values for a $1,000 initial investment. In 
addition, we are adding headings and revising the narrative disclosure 
to separate more clearly the explanations of the two expense examples. 
We are also adding material to the required narrative disclosure, 
explaining how the investor can use the information in the first 
expense example, together with the investor's account value, to 
estimate the expenses that the investor paid. A fund that charges any 
account fees or other recurring fees that are not included in the 
expenses shown in the table will be required to disclose the amounts of 
these fees; describe the accounts that are charged these fees; and 
explain how an investor would use this information to estimate the 
total ongoing expenses paid over the period, the impact of these fees 
on ending account value, and how an investor would use this information 
to compare the ongoing costs of investing in different funds. Finally, 
a fund may modify the narrative explanations if the explanation 
contains comparable information to that shown, and will be required to 
make any modifications necessary to reflect accurately the fund's 
circumstances.\42\
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    \41\ Item 21(d)(1) and Instruction 1(b) to Item 21(d)(1) of Form 
N-1A.
    \42\ Instruction 1(b) to Item 21(d)(1) of Form N-1A.
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B. Disclosure of Portfolio Holdings

    The Commission is adopting, with several modifications to address 
commenters' concerns, rule and form amendments that will: (1) Permit a 
fund to include a summary portfolio schedule in its reports to 
shareholders, provided that the complete portfolio schedule is filed 
with the Commission semi-annually on Form N-CSR and is provided to 
shareholders upon request, free of charge; (2) exempt money market 
funds from including a portfolio schedule in reports to shareholders, 
provided that this information is filed with the Commission on Form N-
CSR and is provided to shareholders upon request, free of charge; (3) 
require reports to shareholders to include a tabular or graphic 
presentation of a fund's portfolio holdings by identifiable category; 
and (4) require a fund to file its complete portfolio schedule as of 
the end of its first and third fiscal quarters with the Commission on 
new Form N-Q, which will be certified by the fund's principal executive 
and financial officers. Together, these amendments will replace a one-
size-fits-all approach to portfolio holdings disclosure, where all 
funds deliver their full portfolio schedules to all their shareholders 
twice a year, with a layered approach that will make more information 
available while permitting funds to tailor their shareholder reports to 
their particular circumstances and investors to tailor the amount of 
information they receive to meet their particular needs. This approach 
is intended to result in the availability of enhanced portfolio 
information at a reduced cost.
1. Summary Portfolio Schedule
    We are adopting, with modifications to address commenters' 
concerns, amendments that will permit a fund to include in its reports 
to shareholders a summary portfolio schedule, in lieu of a complete 
portfolio schedule. The complete portfolio schedule will, however, 
continue to be available, free of charge, to those investors who are 
interested in this more detailed information. These amendments are 
designed to streamline shareholder reports and help investors to focus 
on a fund's principal holdings, and thereby better evaluate the fund's 
risk profile and investment strategy. Commenters generally supported 
these proposed amendments, agreeing that they would encourage investors 
to focus on a fund's most significant investments.
    Our amendments to Regulation S-X will permit a fund to include in 
its reports to shareholders a summary portfolio schedule, Schedule VI--
Summary schedule of investments in securities of unaffiliated issuers, 
in lieu of the full schedule contained in Schedule I--Investments in 
securities of unaffiliated issuers.\43\ The summary portfolio schedule 
will include each of the fund's 50 largest holdings in unaffiliated 
issuers and each investment in unaffiliated issuers that exceeds one 
percent of the fund's net asset value.\44\ Commenters generally 
supported these thresholds.
---------------------------------------------------------------------------

    \43\ Schedule I of Regulation S-X [17 CFR 210.12-12]; Schedule 
VI of Regulation S-X [17 CFR 210.12-12C]; Article 6-10(c)(2) of 
Regulation S-X [17 CFR 210.6-10(c)(2)]; Instruction 1 to Item 
21(b)(1) and Instruction to Item 21(c)(1) of Form N-1A; Instructions 
4.a., 5.a., and 7 to Item 23 of Form N-2; Instructions 4.(i), 5.(i), 
and 7 to Item 27(a) of Form N-3.
    \44\ Note 3 to Schedule VI.
---------------------------------------------------------------------------

    We are requiring, as proposed, that with respect to each issue 
required to be listed, the schedule would show (1) the name of the 
issuer and title of issue; (2) the balance held at the close of the 
period (i.e., the number of shares or the principal amount of bonds and 
notes); (3) the value of the issue at the close of the period; and (4) 
the percentage value of the issue compared to net assets.\45\ The 
summary schedule would also show the total value of all investments in 
securities of unaffiliated issuers.\46\
---------------------------------------------------------------------------

    \45\ Columns A, B, C, and D of Schedule VI.
    \46\ Note 7 to Schedule VI.
---------------------------------------------------------------------------

    Funds will continue to be required to include in their reports to 
shareholders the other schedules currently required by Regulation S-
X.\47\ Some commenters argued that funds should also be permitted to 
include the investments described by these schedules, and in particular 
investments in securities of affiliated issuers and investments other 
than securities, in a summary portfolio schedule. These commenters 
reasoned that inclusion of these investments in a summary schedule 
would serve to focus investors' attention on the fund's most 
significant investments in these areas. Other commenters, however, 
reasoned that providing a complete presentation of these investments is 
important to investors and gives them a better understanding of the 
nature of the fund's investments, its hedging strategies, its use of 
leverage, and any potential conflicts of interest in the management of 
the fund. We agree with these latter commenters. Requiring a complete 
presentation of investments other than securities of unaffiliated 
issuers in shareholder reports is important in order to provide 
investors with an understanding of the risks and potential conflicts of 
interest associated with the fund's portfolio.
---------------------------------------------------------------------------

    \47\ In addition to Schedule I--Instruments in securities of 
unaffiliated issuers, Article 6-10(c) of Regulation S-X [17 CFR 
210.6-10(c)] requires the following schedules to be filed: Schedule 
II--Investments--other than securities [17 CFR 210.12-13]; Schedule 
III--Investments in and advances to affiliates [17 CFR 210.12-14]; 
Schedule IV--Investments--securities sold short [17 CFR 210.12-12A]; 
and Schedule V--Open option contracts written [17 CFR 210.12-12B].
---------------------------------------------------------------------------

Format of the Summary Schedule
    As adopted, our amendments to Regulation S-X will require the 
securities in the summary schedule to be identified by category.\48\ 
Specifically, the summary schedule must be categorized by (i) the type 
of investment (such as common stocks, preferred stocks, convertible 
securities, fixed

[[Page 11249]]

income securities, government securities, options purchased, warrants, 
loan participations and assignments, commercial paper, bankers' 
acceptances, certificates of deposit, short-term securities, repurchase 
agreements, other investment companies, and so forth); and (ii) the 
related industry, country, or geographic region of the investment.\49\ 
We are also adopting a conforming amendment to clarify that these 
categories are required to be used in the complete portfolio schedule, 
in lieu of the current required categories.\50\
---------------------------------------------------------------------------

    \48\ Note 1 to Schedule VI.
    \49\ Note 1 to Schedule VI.
    \50\ Note 2 to Schedule I. Currently, the complete portfolio 
schedule requires a fund to list separately (a) common shares, (b) 
preferred shares, (c) bonds and notes, (d) time deposits, and (e) 
put and call options purchased. Within each of these subdivisions, a 
fund must classify investments in an appropriate manner according to 
type of business, e.g., aerospace, banking, chemicals, machinery and 
machine tools, petroleum, utilities, etc.; or according to type of 
instrument, e.g., commercial paper, bankers' acceptances, 
certificates of deposit.
---------------------------------------------------------------------------

    Our proposal would have required the securities in the summary 
schedule to be listed in order of descending value. However, we are 
persuaded by a number of commenters who asked that we require, or at 
least permit, funds to list securities according to identifiable 
categories. These commenters argued that this presentation would 
enhance investors' understanding of the different kinds of investments 
in the fund, for example, by illustrating whether a fund is 
significantly concentrated in one particular industry or geographic 
region. While we considered giving funds the flexibility to list the 
securities in the summary portfolio either in order of descending value 
or by categories, we determined that requiring a consistent approach 
would benefit investors who seek to compare the summary portfolio 
schedules of different funds, or the summary portfolio schedule and the 
complete portfolio schedule.
    We had proposed to require that all securities not separately 
listed in the summary schedule be listed in a category labeled ``Other 
securities.'' \51\ Because we are requiring issues in the summary 
schedule to be categorized, however, we are modifying the proposal to 
require a fund, within each category identified, to group all issues 
that are not separately listed in a sub-category labeled ``Other 
securities.'' \52\ The summary schedule will be required to show the 
subtotals for each category of investments, subdivided by industry, 
country, or geographic region, together with their percentage value 
compared to net assets.\53\
---------------------------------------------------------------------------

    \51\ Proposed Note 2 to Schedule VI.
    \52\ Note 4 to Schedule VI.
    \53\ Note 2 to Schedule VI.
---------------------------------------------------------------------------

    As in the current complete portfolio schedule, the summary schedule 
will require funds to identify by an appropriate symbol each issue of 
securities that is non-income producing, each issue of securities held 
in connection with open put or call option contracts or loans for short 
sales, and each issue of restricted securities.\54\ Also, as in the 
current complete schedule, a fund will be required to state in a 
footnote to the summary schedule the following amounts based on cost 
for Federal income tax purposes: (i) Aggregate gross unrealized 
appreciation for all securities in which there is an excess of value 
over tax cost; (ii) aggregate gross unrealized depreciation for all 
securities in which there is an excess of tax cost over value; (iii) 
net unrealized appreciation and depreciation; and (iv) the aggregate 
cost of securities for Federal income tax purposes.\55\
---------------------------------------------------------------------------

    \54\ Notes 8, 9, and 10 to Schedule VI; Notes 5, 6, and 7 to 
Schedule I.
    \55\ Note 11 to Schedule VI; Note 8 to Schedule I.
---------------------------------------------------------------------------

Aggregation of Issues in the Summary Schedule
    Our amendments include aggregation rules applicable to the summary 
portfolio schedule. First, we are adopting our proposed requirement 
that a fund aggregate and treat as a single issue short-term debt 
instruments of the same issuer (with disclosure indicating the range of 
interest rates and maturity dates).\56\ In response to a commenter's 
suggestion, we are also clarifying that short-term debt instruments are 
debt instruments whose maturities or expiration dates at the time of 
acquisition are one year or less, and we are adding a similar 
clarification to the full portfolio schedule.\57\
---------------------------------------------------------------------------

    \56\ Note 3 to Schedule VI.
    \57\ Note 3 to Schedule VI; Note 2 to Schedule I.
---------------------------------------------------------------------------

    Second, we are adopting our proposed requirement that a fund 
aggregate and treat as a single issue fully collateralized repurchase 
agreements (with footnote disclosure indicating the range of dates of 
the repurchase agreements, the total purchase price of the securities, 
the total amount to be received upon purchase, the range of purchase 
dates, and a description of the securities subject to the repurchase 
agreements).\58\ This aggregation would apply to all fully 
collateralized repurchase agreements without regard to their percentage 
of net asset value or their issuer.
---------------------------------------------------------------------------

    \58\ Note 3 to Schedule VI.
---------------------------------------------------------------------------

    Third, we are clarifying the treatment of restricted and 
unrestricted securities of the same issue. Restricted and unrestricted 
securities of the same issue should be aggregated for purposes of 
determining whether the issue is among the 50 largest issues, but 
should not be combined in the schedule.\59\ The proposal, which tracked 
the current complete portfolio schedule, stated that the summary 
schedule could not combine restricted securities with unrestricted 
securities of the same issue, but did not address whether these 
securities should be aggregated for purposes of determining whether an 
issue is among the 50 largest issues.
---------------------------------------------------------------------------

    \59\ Notes 3 and 4 to Schedule VI.
---------------------------------------------------------------------------

    Fourth, we are adopting our proposal that, for purposes of 
determining whether the value of an issue exceeds one percent of net 
asset value, a fund will be required to aggregate and treat as a single 
issue all securities of any one issuer.\60\ If multiple securities of 
an issuer aggregate to greater than one percent of net asset value, 
each issue will be required to be listed separately in the schedule, 
with the exceptions described in the following paragraph.\61\ We are 
clarifying that the U.S. Treasury and each agency, instrumentality, or 
corporation, including each government-sponsored entity, that issues 
U.S. government securities is a separate issuer. For example, Fannie 
Mae, Sallie Mae, and Freddie Mac each will be considered a separate 
issuer.
---------------------------------------------------------------------------

    \60\ Note 3 to Schedule VI. As described above, however, all 
fully collateralized repurchase agreements are required to be 
aggregated and treated as a single issue.
    \61\ Note 4 to Schedule VI. Restricted and unrestricted 
securities of the same issue will be listed separately.
---------------------------------------------------------------------------

    Fifth, if multiple securities of an issuer aggregate to greater 
than one percent of net asset value, a fund may aggregate and list as a 
single issue: (a) Fixed-income securities of the same issuer which are 
not among the 50 largest issues and whose value does not exceed one 
percent of net asset value of the registrant as of the close of the 
period (indicating the range of interest rates and maturity dates); and 
(b) U.S. government securities of a single agency, instrumentality, or 
corporation, which are not among the 50 largest issues and whose value 
does not exceed one percent of net asset value of the registrant as of 
the close of the period (indicating the range of interest rates and 
maturity dates).\62\ Under our proposal, all securities of each such 
issuer would have been aggregated to determine whether the value of the 
securities exceeded the 1% of net asset value threshold, but, if this 
threshold was exceeded, each such security would

[[Page 11250]]

then be listed separately (unless the securities were otherwise subject 
to aggregation as short-term debt instruments). One commenter pointed 
out that this requirement would nullify the benefits of the summary 
schedule for U.S. government and corporate fixed income funds that 
invest in numerous issues of a single issuer. In essence, the commenter 
argued that, for such government securities and fixed-income funds, the 
proposed rules would have required the listing of nearly every issue, 
regardless of size, and that this result would be inconsistent with the 
purpose of the summary schedule. We agree.
---------------------------------------------------------------------------

    \62\ Note 4 to Schedule VI.
---------------------------------------------------------------------------

    For example, assume that a fund that invests exclusively in U.S. 
Treasury securities holds the following: the fund's 50 largest 
holdings, 20 issues which each exceed 1% of net asset value but are not 
among the 50 largest holdings, and 930 issues each of which does not 
exceed 1% of net asset value (and is not among the 50 largest 
holdings). Also assume that none of the 1,000 issues qualifies as 
short-term debt. The rules we are adopting require that all securities 
of any one issuer be aggregated and treated as a single issue for 
purposes of determining whether the value of a security exceeds 1% of 
net asset value, so all 1,000 issues, considered in the aggregate, 
would exceed the threshold. As proposed, the summary schedule would 
have required that each of the 1,000 issues be listed separately. As 
adopted, however, the summary schedule would require a separate listing 
only for each of the 50 largest holdings and each of the 20 other 
issues that considered separately exceed the 1% of net asset value 
threshold. The remaining 930 issues would be aggregated and listed as a 
single issue.
    Sixth, we are modifying the proposed requirements for the summary 
portfolio schedule to permit certain securities to be identified as 
``Miscellaneous securities,'' as is currently permitted in the complete 
portfolio schedule.\63\ Currently, a fund's portfolio schedule may list 
an amount not exceeding five percent of the total value of the 
portfolio holdings in one amount as ``Miscellaneous securities,'' 
provided that securities so listed are not restricted, have been held 
for not more than one year prior to the date of the related balance 
sheet, and have not previously been reported by name to the 
shareholders, or set forth in any registration statement, application, 
or annual report or otherwise made available to the public.\64\ 
Commenters noted that funds rely on this exclusion in the complete 
portfolio schedule to guard against the premature release of certain 
positions in securities of unaffiliated issuers that could lead to 
front-running and other predatory trading practices.
---------------------------------------------------------------------------

    \63\ Note 5 to Schedule VI.
    \64\ Note 1 to Schedule I.
---------------------------------------------------------------------------

    We agree with these commenters that funds should not be forced to 
choose between using the summary schedule and relying on this 
exclusion. Thus, the final rules permit any issues that would otherwise 
be required to be listed separately or included in a group of 
securities that is listed in the aggregate as a single issue to be 
listed in one amount as ``Miscellaneous securities'' in the summary 
schedule, provided that the securities so listed are eligible to be, 
and are, categorized as ``Miscellaneous securities'' in the fund's 
complete schedule.\65\ The rules make clear, however, that if any 
security that is included in ``Miscellaneous securities'' would 
otherwise be required to be included in a group of securities that is 
listed in the aggregate as a single issue, the remaining securities of 
that group must nonetheless be listed as required even if the remaining 
securities alone would not otherwise be required to be listed in this 
manner.\66\ For example, assume that a fund holds three securities of 
Corporation X as follows: common stock valued at 0.7% of net asset 
value, preferred stock valued at 0.4% of net asset value, and bonds 
valued at 0.3% of net asset value, none of which is among the fund's 
largest 50 issues. If the fund lists the common stock as 
``Miscellaneous securities,'' it must still separately list the 
preferred stock and bonds because the aggregate value of all three 
issues exceeds one percent of net asset value.
---------------------------------------------------------------------------

    \65\ Note 5 to Schedule VI.
    \66\ Note 5 to Schedule VI.
---------------------------------------------------------------------------

    We note that the terms ``Miscellaneous securities'' and ``Other 
securities'' \67\ may be unclear to many investors. To avoid confusion, 
we are therefore requiring that, if any securities are listed as 
``Miscellaneous securities'' or ``Other securities,'' a fund briefly 
explain in a footnote what those terms represent.\68\ We are adopting a 
conforming requirement with respect to the term ``Miscellaneous 
securities'' in the complete portfolio schedule.\69\
---------------------------------------------------------------------------

    \67\ See discussion of ``Other securities'' in Section II.B.1, 
``Summary Portfolio Schedule: Format of the Summary Schedule,'' 
supra.
    \68\ Note 6 to Schedule VI.
    \69\ Note 1 to Schedule I.
---------------------------------------------------------------------------

Filing and Availability of Complete Portfolio Schedule
    To ensure that shareholders have continued access to a complete 
schedule of the fund's portfolio holdings, any fund that uses a summary 
portfolio schedule will be required to file its complete portfolio 
schedule with the Commission on Form N-CSR, which will be available on 
the Commission's Electronic Data Gathering, Analysis, and Retrieval 
System (``EDGAR'').\70\ In addition, any fund that uses a summary 
portfolio schedule will be required to send its complete schedule of 
investments in securities of unaffiliated issuers to shareholders upon 
request within three business days of receipt of the request, by first-
class mail or other means designed to ensure equally prompt delivery, 
and to disclose in its reports to shareholders that this complete 
portfolio schedule is available (i) without charge, upon request, by 
calling a specified toll-free (or collect) telephone number; (ii) on 
the fund's Web site, if applicable; and (iii) on the Commission's Web 
site.\71\
---------------------------------------------------------------------------

    \70\ Item 6 of Form N-CSR. Funds that include the complete 
portfolio schedule in their shareholder reports will also file this 
schedule on Form N-CSR, as part of the shareholder report. This 
schedule must be audited, except in the case of a report on Form N-
CSR as of the end of a fiscal half-year. Instruction to Item 6 of 
Form N-CSR.
    \71\ Instruction 1 to Item 21(b)(1) and Instruction to Item 
21(c)(1) of Form N-1A; Instruction 7 to Item 23 of Form N-2; 
Instruction 7 to Item 27(a) of Form N-3.
    A fund may incorporate its financial statements by reference 
into its registration statement. A fund that includes a summary 
portfolio schedule in its reports to shareholders, and that chooses 
to incorporate its financial statements in its Statement of 
Additional Information (``SAI'') by reference, would be expected to 
incorporate by reference its full portfolio schedule from Form N-
CSR, along with the other financial statements and supporting 
schedules in its annual report to shareholders. See General 
Instruction D.1.(c) to Form N-1A (permitting incorporation by 
reference into the SAI generally); General Instruction F to Form N-2 
(permitting incorporation by reference of information from Form N-
CSR in response to Item 23 (``Financial Statements'')); General 
Instruction G to Form N-3 (permitting incorporation by reference of 
information from Form N-CSR in response to Item 27 (``Financial 
Statements'')). Such a fund would be required to deliver the full 
portfolio schedule from Form N-CSR, as well as the shareholder 
report, upon a shareholder request for the SAI. See Instruction to 
Item 10(a)(2)(iii) of Form N-1A (requiring any information 
incorporated by reference into the SAI to be delivered with the SAI 
unless the information has been previously delivered in a 
shareholder report and the fund states that the shareholder report 
is available, without charge, upon request); General Instruction F 
to Form N-2 (requiring any information incorporated by reference 
into the SAI to be delivered with the SAI unless the person to whom 
the SAI is sent or given holds securities of the fund and otherwise 
has received copies of the material, and fund states that the 
material is available, without charge, upon request); General 
Instruction G to Form N-3 (same).

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

[[Page 11251]]

2. Exemption of Money Market Funds From Portfolio Schedule Requirements 
in Shareholder Reports
    We are adopting, as proposed, the amendment permitting money market 
funds to omit Schedule I, the schedule of investments in securities of 
unaffiliated issuers, from their reports to shareholders, provided that 
they make this schedule available to shareholders upon request and free 
of charge, and disclose the availability of the schedule in their 
reports to shareholders.\72\ Currently, money market funds, like other 
funds, are required to include their portfolio schedules in the 
shareholder reports that are delivered to all investors.
---------------------------------------------------------------------------

    \72\ 17 CFR 210.12-12. See Instruction 2 to Item 21(b)(1) and 
Instruction to Item 21(c)(1) of Form N-1A; Instruction 7(ii) to Item 
27(a) of Form N-3.
---------------------------------------------------------------------------

    While commenters generally supported the proposed exemption for 
money market funds from a requirement to include portfolio holdings in 
their reports to shareholders, some commenters objected. These 
commenters argued that information regarding a money market fund's 
significant investments is helpful to understanding a money market 
fund's financial statements, and that exclusion of such disclosure from 
shareholder reports implies that money market fund shareholders need 
not inform themselves about their fund's credit quality, maturity, and 
diversification characteristics. We continue to believe, however, that 
portfolio holdings disclosure of money market funds in reports to 
shareholders is not necessary because the investments of money market 
funds are circumscribed by the credit quality, maturity, and portfolio 
diversification requirements of rule 2a-7 under the Investment Company 
Act.\73\ Portfolio holdings schedules of money market funds typically 
contain a list of short-term government and corporate debt securities 
that may not assist the average investor in evaluating the money market 
fund, or in distinguishing one money market fund from another.
---------------------------------------------------------------------------

    \73\ 17 CFR 270.2a-7.
---------------------------------------------------------------------------

    Our amendments will require money market funds to file their 
complete portfolio holdings schedules semi-annually with the Commission 
on Form N-CSR, however, so that complete information about their 
portfolios will remain available to interested investors.\74\ In 
addition, we are requiring any money market fund that does not include 
its complete portfolio schedule in its reports to shareholders to 
disclose in its shareholder reports that its complete schedule of 
investments in unaffiliated issuers is available (i) without charge, 
upon request, by calling a specified toll-free (or collect) telephone 
number; (ii) on the fund's Web site, if applicable; and (iii) on the 
Commission's Web site at http://www.sec.gov.\75\ Finally, the 
amendments will require a money market fund to send its complete 
schedule of investments in securities of unaffiliated issuers within 
three business days of receipt of the request, by first-class mail or 
other means designed to ensure equally prompt delivery.\76\
---------------------------------------------------------------------------

    \74\ Item 6 of Form N-CSR.
    \75\ Instruction 2 to Item 21(b)(1) and Instruction to Item 
21(c)(1) of Form N-1A; Instruction 7(ii) to Item 27(a) of Form N-3.
    \76\ Id.
---------------------------------------------------------------------------

    As adopted, the exemption for money market funds from portfolio 
holdings disclosure in shareholder reports would not apply to 
disclosure of investments other than investments in securities of 
unaffiliated issuers. One commenter had suggested that the exemption be 
extended to other investments, particularly investments in securities 
of affiliated issuers. We disagree. We believe that, as with other 
funds, requiring a complete presentation of investments other than 
securities of unaffiliated issuers in money market fund shareholder 
reports is important in order to provide investors with an 
understanding of the risks and potential conflicts of interest 
associated with the money market fund's portfolio.
3. Tabular or Graphic Presentation of Portfolio Holdings
    We are also adopting, with modifications, the requirement that a 
fund include in its annual and semi-annual reports to shareholders a 
presentation using tables, charts, or graphs that depicts the fund's 
portfolio holdings by reasonably identifiable categories (e.g., 
industry sector, geographic region, credit quality, or maturity).\77\ 
We believe that such a presentation could illustrate, in a concise and 
user-friendly format, the allocation of a fund's investments across 
asset classes. We believe that this presentation, coupled with a 
summary portfolio schedule, has the potential to effectively convey to 
investors key information about a fund's investments. Particularly in 
the case of a fund with a large number of holdings, the combination of 
a summary portfolio schedule and a tabular or graphic asset allocation 
presentation could be significantly more useful to many investors than 
the fund's complete portfolio schedule standing alone.
---------------------------------------------------------------------------

    \77\ Item 21(d)(2) of Form N-1A; Instruction 6.a to Item 23 of 
Form N-2; Instruction 6(i) to Item 27(a) of Form N-3.
---------------------------------------------------------------------------

    A fund will have the flexibility to determine both the categories 
to be used (e.g., industry sector, geographic region, credit quality, 
maturity, etc.) and the format (e.g., tables, charts, graphs, etc.). 
The categories in this presentation will be required to be selected, 
and the presentation formatted, in a manner reasonably designed to 
depict clearly the types of investments made by the fund, given its 
investment objectives. We had proposed to require that the fund select 
categories and design the format of the tabular or graphic presentation 
to provide the ``most useful information'' to investors about the types 
of investments. However, one commenter objected to this standard, 
arguing that the determination of what constituted the ``most useful 
information'' about a fund would require a subjective judgment open to 
second-guessing, and that instead a requirement that a fund provide 
``useful information'' to investors would be sufficient. Another 
commenter, by contrast, suggested that the Commission prescribe the 
categories to be used in the tabular or graphic presentation, arguing 
that some degree of consistency in format is necessary to make the 
information in the presentation accessible and understandable to 
investors.
    We believe that it is not advisable at the present time to require 
a standardized format for the tabular or graphic presentation. 
Permitting a fund to determine the means of presenting this portfolio 
information will allow each fund to tailor this presentation in a 
manner that is appropriate to its holdings. For example, a domestic 
equity fund could choose to categorize its investments by attributes 
such as industry sector, market capitalization, or price-earnings 
ratio. A bond fund could choose to categorize its investments by 
attributes such as credit quality or maturity or government versus non-
government securities.\78\ Prescribing specific categories to be used, 
by contrast, might result in presentations that are not particularly 
relevant for investors in a given fund. For example, categories such as 
market capitalization and industry sector might be less relevant for 
investors in an international

[[Page 11252]]

or global equity fund than categories showing the distribution of the 
fund's holdings across regions or countries. In addition, a prescribed 
category, such as market capitalization or industry sector, might 
convey little useful information about a fund that has a principal 
investment strategy of investing primarily in securities in only one 
component of that category (e.g., a small capitalization fund).
---------------------------------------------------------------------------

    \78\ Credit quality would be required to be the ratings grade 
assigned by a nationally recognized statistical rating organization 
(``NRSRO''), as that term is used in paragraphs (c)(2)(vi)(E), (F), 
and (H) of Rule 15c3-1 under the Exchange Act [17 CFR 240.15c3-
1(c)(2)(vi)(E), (F), and (H)]. The fund could use ratings of only 
one NRSRO. Item 21(d)(2) of Form N-1A; Instruction 6.a to Item 23 of 
Form N-2; Instruction 6(i) to Item 27(a) of Form N-3.
---------------------------------------------------------------------------

    However, we also believe that a standard requiring that a fund's 
tabular or graphic presentation be designed merely to provide ``useful 
information'' may result in presentations that do not effectively 
convey to investors the allocation of a fund's investments across 
relevant asset classes. As a result, we are adopting a standard that 
should allow funds sufficient flexibility, while encouraging 
development of tabular or graphic presentations that clearly depict the 
types of investments made by a fund. Over time, this flexible approach 
may enable both funds and the Commission to determine whether certain 
types of presentations are more effective for different types of funds.
    Further, as adopted, the amendments will permit a fund the 
flexibility to base the tabular or graphic presentation on either net 
asset value or total investments, rather than solely net asset value, 
as proposed. However, as with the selection of the categories and the 
formatting of the presentation to be used, funds must select the basis 
of presentation (e.g., net asset value or total investments) in a 
manner reasonably designed to depict clearly the types of investments 
made by the fund, given its investment objectives. We are providing 
funds this flexibility because there may be instances where net asset 
value differs from total investments and a presentation based on total 
investments might be clearer to shareholders. A presentation based on 
total investments might be preferable when, for example, a fund has 
borrowed money for investment purposes. In this case, the fund's 
investments would total more than 100 percent of net asset value, 
making the fund's investments difficult to present graphically on a net 
asset value basis. Regardless of which method is chosen, funds should 
clearly identify the basis of the presentation and provide any 
additional explanatory information that would be useful in 
understanding the presentation.
    Finally, we have modified the amendments to require that the 
tables, charts, or graphs depict the ``portfolio holdings,'' rather 
than the ``securities holdings'' of the fund. We are adopting this 
modification to clarify that the tabular or graphic presentation must 
reflect all of the investment activities of the fund, and not just 
investments in securities of unaffiliated issuers or investments in 
securities generally.
4. Quarterly Filing of Complete Portfolio Schedule
    We are adopting the requirement that a fund file its complete 
portfolio holdings schedule with the Commission on a quarterly basis, 
with one modification. A fund will be required to file its complete 
portfolio schedules for the second and fourth fiscal quarters on Form 
N-CSR,\79\ and will be required to file its complete portfolio 
schedules for the first and third fiscal quarters on new Form N-Q, 
within 60 days of the end of the quarter.\80\ Form N-Q will require 
funds to file the same schedules of investments that are currently 
required in annual and semi-annual reports to shareholders. These 
schedules may be unaudited.\81\ As proposed, Form N-Q would have been 
filed under the Investment Company Act only. We are adopting Form N-Q 
as a combined Exchange Act and Investment Company Act form.
---------------------------------------------------------------------------

    \79\ Item 6 of Form N-CSR. See note and accompanying text, 
supra.
    \80\ Form N-Q; 17 CFR 249.332; 17 CFR 274.130; rule 30b1-5 under 
the Investment Company Act. Small business investment companies 
(``SBICs'') registered with the Commission on Form N-5 will not be 
required to file Form N-Q. General Instruction A to Form N-Q. 
Although they are management investment companies, SBICs are not 
currently required to deliver reports to shareholders containing 
financial statements, and hence are not required to deliver 
schedules of investments to their shareholders.
    \81\ See Item 1 of Form N-Q; Schedule I--Investments in 
securities of unaffiliated issuers [17 CFR 210.12-12]; Schedule II--
Investments-other than securities [17 CFR 210.12-13]; Schedule III--
Investments in and advances to affiliates [17 CFR 210.12-14]; 
Schedule IV--Investments-securities sold short [17 CFR 210.12-12A]; 
and Schedule V--Open option contracts written [17 CFR 210.12-12B].
---------------------------------------------------------------------------

    We are adopting, as proposed, the requirement that Form N-Q be 
filed with the Commission on EDGAR. Form N-Q will not be required to be 
delivered to shareholders. However, a fund will be required to include 
in its annual and semi-annual reports to shareholders a statement that: 
(i) The fund files its complete schedule of portfolio holdings with the 
Commission for the first and third quarters of each fiscal year on Form 
N-Q; (ii) the fund's Forms N-Q are available on the Commission's Web 
site at http://www.sec.gov; (iii) the fund's Forms N-Q may be reviewed 
and copied at the Commission's Public Reference Room, and how 
information on the operation of the Public Reference Room may be 
obtained; and (iv) if the fund makes the information on Form N-Q 
available to shareholders on its Web site or upon request, a 
description of how the information may be obtained from the fund.\82\ 
This approach is designed to strike an appropriate balance between 
investors' interest in more frequent portfolio information and the 
costs associated with disclosing and making that information available 
to investors, which are ultimately borne by investors.
---------------------------------------------------------------------------

    \82\ Item 21(d)(3) of Form N-1A; Instruction 6.b. to Item 23 of 
Form N-2; Instruction 6.(ii) to Item 27(a) of Form N-3.
---------------------------------------------------------------------------

    Commenters, including investors and many fund groups, generally 
supported the proposal for quarterly portfolio disclosure on Form N-Q. 
Commenters argued that quarterly disclosure with a 60-day delay would 
help investors to better monitor whether, and how, a fund is complying 
with its stated investment objective, and noted that quarterly 
disclosure would make it easier to track whether funds are engaging in 
forms of portfolio manipulation such as ``window dressing.'' However, 
some commenters, including individual investors and investor advocacy 
groups, suggested that portfolio disclosure be required even more 
frequently, such as monthly, or that the proposed delay for filing the 
quarterly disclosure be shortened to 30 days, to provide investors with 
even more certainty that a fund is investing consistent with its 
investment objective. By contrast, other commenters, including some 
fund groups, raised concerns that the proposed quarterly disclosure may 
expand the opportunities for professional traders to exploit portfolio 
information by engaging in predatory trading practices. The commenters 
suggested modifications to the proposals to address these concerns, 
including allowing funds to request confidential treatment of certain 
holdings otherwise required to be reported on Form N-Q, and decreasing 
the frequency of required reports on Form 13F or increasing the 45 day 
delay for these reports.\83\
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    \83\ See section 13(f) of the Exchange Act [15 U.S.C. 78m(f)]; 
rule 13f-1 under the Exchange Act [17 CFR 240.13f-1]. Fund managers 
and other institutional investment managers exercising investment 
discretion over $100 million or more in certain equity securities 
must disclose information about portfolios that they manage on Form 
13F within 45 days of the end of each quarter.
---------------------------------------------------------------------------

    We have determined to adopt the proposed requirement for quarterly 
disclosure of portfolio holdings with a 60-day delay. We are not 
requiring more frequent portfolio disclosure, or a shorter delay, 
because we take seriously concerns that more frequent portfolio 
holdings disclosure and/or a shorter delay for release of this 
information may expand the opportunities for predatory trading 
practices that harm fund

[[Page 11253]]

shareholders. However, we also do not believe that it is appropriate to 
modify our proposal by adopting a confidential treatment mechanism. We 
believe that such a mechanism is unnecessary because the 60-day delay 
in the quarterly disclosure will adequately protect funds from 
predatory trading practices. In addition, we believe that requiring 
quarterly portfolio disclosure, as proposed, may help to address the 
concerns raised by recent allegations that some mutual fund managers 
have selectively disclosed their portfolio holdings in order to reward 
large investors.\84\
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    \84\ See SEC v. Gary L. Pilgrim, Harold J. Baxter, and Pilgrim 
Baxter & Associates, Ltd, (United States District Court, E.D. Pa., 
Civil Action No. 03-CV-6341) (alleged disclosure of nonpublic fund 
portfolio information by adviser's principal permitted certain 
investors to exploit mispricing of the fund's net asset value); In 
the Matter of Alliance Capital Management, L.P., Investment Advisers 
Act Release No. 2205 (Dec. 18, 2003) (disclosure of material 
nonpublic information about certain mutual fund portfolio holdings 
permitted favored client to profit from market timing). See also 
Investment Company Act Release No. 26337 (Jan. 20, 2004) [69 FR 
40410 (Jan. 27, 2004)] (proposing requirements for investment 
adviser codes of ethics, including provisions reasonably designed to 
prevent misuse of material nonpublic information about client 
securities, holdings, and transactions); Investment Company Act 
Release No. 26299 Dec. 17, 2003) [68 FR 74714 (Dec. 24, 2003)] 
(stating that a fund's compliance policies and procedures should 
address misuses of nonpublic information, including the disclosure 
to third parties of material information about the fund's portfolio, 
its trading strategies, or pending transactions); Investment Company 
Act Release No. 26287 (Dec. 11, 2003) [68 FR 70402 (Dec. 17, 2003)] 
(proposing rules requiring disclosure by mutual funds of their 
policies and procedures with respect to the disclosure of their 
portfolio securities).
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    We have also determined not to modify the reporting requirements of 
Form 13F at this time. Fund portfolio holdings have been required to be 
disclosed on Form 13F, aggregated by investment manager, since 
1979.\85\ By contrast, concerns about predatory trading practices 
arising from Form 13F have surfaced recently in the context of the 
current proposal. Commenters have not presented concrete evidence that 
quarterly disclosure of aggregate holdings by institutional investment 
managers on Form 13F has resulted in such trading practices.
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    \85\ Institutional investment managers may request confidential 
treatment of information in filings on Form 13F pursuant to section 
13(f)(3) of the Exchange Act [15 U.S.C. 78m(f)(3)] on the basis, 
among others, that the information would reveal an investment 
manager's ongoing program of acquisition or disposition. See Report 
of Senate Comm. on Banking, Housing and Urban Affairs, S. Rep. No. 
75, 94th Cong., 1st Sess. 87 (1975). An application for confidential 
treatment on this basis must, among other requirements: (a) Describe 
the investment strategy being followed with respect to the relevant 
securities holdings; (b) explain why public disclosure of the 
securities would, in fact, be likely to reveal the investment 
strategy; (c) demonstrate that such revelation of an investment 
strategy would be premature, and indicate whether the manager was 
engaged in a program of acquisition or disposition of the security 
both at the end of the quarter and at the time of the filing; and 
(d) demonstrate that failure to grant the request for confidential 
treatment would be likely to cause substantial harm to the manager's 
competitive position. Instructions for Confidential Treatment 
Requests, Form 13F [17 CFR 249.325].
---------------------------------------------------------------------------

    As proposed, Form N-Q would have been filed under the Investment 
Company Act only. We are adopting Form N-Q as a reporting form under 
sections 13 and 15(d) of the Exchange Act, in addition to the 
Investment Company Act. We are also requiring that Form N-Q be signed 
and certified by its principal executive and financial officers, 
consistent with section 302 of the Sarbanes-Oxley Act of 2002.\86\ In 
addition, we are amending rule 30a-3 under the Investment Company Act 
to broaden the definition of disclosure controls and procedures to 
include controls and procedures designed to ensure that information 
required to be disclosed on Form N-Q is recorded, processed, 
summarized, and reported within the time periods specified in the 
Commission's rules and forms.\87\ As is currently the case with Form N-
CSR, a fund's management would be required to evaluate, with the 
participation of its principal executive and financial officers, the 
effectiveness of the fund's disclosure controls and procedures within 
the 90-day period prior to the filing of a report on Form N-Q.\88\
---------------------------------------------------------------------------

    \86\ Rule 30d-1 under the Investment Company Act [17 CFR 
270.30d-1]; General Instruction F.2.(a) to Form N-Q; section 302 of 
the Sarbanes-Oxley Act of 2002, Pub. L. 107-204, 116 Stat. 745 
(2002).
    \87\ 17 CFR 270.30a-3(c).
    \88\ 17 CFR 270.30a-3(b).
---------------------------------------------------------------------------

    We are designating Form N-Q as a filing required under the Exchange 
Act, because the fund's portfolio schedule constitutes financial 
information of great significance to investors. We believe that 
requiring certification of this financial information is consistent 
with the intent of the certification requirement 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 also note that the complete financial 
statements required in the shareholder reports included in Form N-CSR 
are required to be certified, and that funds are required to maintain 
the disclosure controls and procedures, and internal control over 
financial reporting, referenced in the certification on Form N-CSR. The 
Commission believes that any marginal increase in costs associated with 
certifying the portfolio holdings information contained in filings on 
Form N-Q will be justified by the benefits to investors.
    The certification required for Form N-Q will be similar to that 
required for Form N-CSR. However, because Form N-Q will only contain a 
fund's schedules of investments and not complete financial statements, 
the certification on Form N-Q will require a certifying officer to 
state, based on the officer's knowledge, that the schedules of 
investments included in the report fairly present in all material 
respects the investments of the registrant as of the end of the fiscal 
quarter for which the report is filed.\89\ By contrast, the 
certification in Form N-CSR requires a certifying officer to state, 
based on the officer's knowledge, that the financial statements, and 
other financial information included 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 registrant as of, 
and for, the periods presented in the report.\90\
---------------------------------------------------------------------------

    \89\ Paragraph 3 of certification exhibit of Item 3 of Form N-Q.
    \90\ Paragraph 3 of certification exhibit of Item 11(a)(2) of 
Form N-CSR.
---------------------------------------------------------------------------

    In addition, because funds will now be filing periodic reports 
under the Exchange Act on a quarterly basis, the form of certification 
for Form N-Q will require a certifying officer to state that he or she 
has disclosed in the report any change in the registrant's internal 
control over financial reporting that occurred during the most recent 
fiscal quarter, rather than the registrant's most recent fiscal half-
year, as Form N-CSR currently requires.\91\ We are adding an Item to 
Form N-Q for funds to disclose any such change in internal control over 
financial reporting.\92\ We are also adopting conforming changes to the 
comparable disclosure item and the certification of Form N-CSR.\93\ 
Because the certification of Form N-Q, like the current certification 
of Form N-CSR, will require the certifying officers to state that they 
have conducted an evaluation of the fund's disclosure controls and 
procedures and have presented in the report their conclusions about the 
effectiveness of the disclosure controls and procedures as of a date 
within 90 days prior to the filing date of the report, Form N-Q will

[[Page 11254]]

include an Item requiring disclosure of the conclusions of this 
evaluation.\94\
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    \91\ Paragraph 4(d) of certification exhibit of Item 3 of Form 
N-Q.
    \92\ Item 2(b) of Form N-Q.
    \93\ Item 10(b) of Form N-CSR; paragraph 4(d) of certification 
exhibit of Item 11(a)(2) of Form N-CSR.
    \94\ Item 2(a) of Form N-Q.
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C. Management's Discussion of Fund Performance (``MDFP'')

    We are adopting, as proposed, a requirement that a mutual fund, 
other than a money market fund, include MDFP in its annual reports to 
shareholders.\95\ Currently, a mutual fund is required to include MDFP 
in its prospectus unless the fund includes the information in its 
latest annual report to shareholders.\96\ We note that mutual funds 
typically include MDFP in their annual reports. We believe that 
requiring MDFP to be included in the annual report will aid investors 
in assessing a fund's performance over the prior year and will 
complement other ``backward looking'' information required in the 
annual report, such as financial statements. In addition, requiring 
MDFP to be included in annual reports to shareholders will mean that 
this information will be required to be certified by a fund's principal 
executive and financial officers pursuant to section 302 of the 
Sarbanes-Oxley Act and rule 30a-2 under the Investment Company Act.
---------------------------------------------------------------------------

    \95\ Item 21(b)(7) of Form N-1A.
    \96\ Current Item 5 of Form N-1A. Currently, a fund that 
includes MDFP in its annual report must disclose in its prospectus 
that its annual report contains a discussion of the market 
conditions and investment strategies that significantly affected the 
fund's performance during its last fiscal year and that this 
discussion will be made available upon request and without charge. 
Current Item 1(b)(1) of Form N-1A. Because we are now requiring MDFP 
in a mutual fund's annual report, we are amending Instruction 5 to 
Item 1(b)(1) to require all funds, other than many market funds 
(which are not required to provide MDFP), to include this prospectus 
disclosure.
---------------------------------------------------------------------------

    Most commenters supported the proposed requirement that MDFP be 
included in mutual fund annual reports. However, one commenter argued 
that requiring MDFP to be certified by a fund's principal executive and 
financial officers would have a negative impact on the quality of MDFP, 
as funds may be reluctant to include subjective, albeit useful, 
information that does not readily lend itself to meaningful 
certification. We disagree with this commenter's conclusion that MDFP 
should not be certified. Investors rely upon MDFP to explain the 
investment operations and performance of a mutual fund, which is as 
significant for investors in a fund as management's discussion and 
analysis of financial condition and results of operations is for 
investors in an operating company. We believe that a requirement that 
MDFP be included in shareholder reports and certified by a mutual 
fund's principal executive and financial officers will encourage funds 
to include a more complete and accurate discussion of the factors that 
affected fund performance in their MDFP. We have asked our staff in 
their review of fund shareholder reports to continue to focus on the 
sufficiency of MDFP disclosures and identify instances where funds have 
failed to provide sufficient substantive discussion of the factors that 
affected the fund's performance during the reporting period.\97\
---------------------------------------------------------------------------

    \97\ 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). See also Investment Company Act 
Release No. 25870, supra note 16, 68 FR at 170 (noting that the 
staff has identified instances where MDFP has provided insufficient 
substantive discussion of the factors that affected the fund's 
performance, and asking the staff to continue to focus on 
deficiencies in MDFP disclosure).
---------------------------------------------------------------------------

D. Compliance Date

    The effective date for these amendments will be May 10, 2004. We 
are requiring all fund reports to shareholders for periods ending on or 
after July 9, 2004 to comply with the amendments. In addition, we are 
requiring funds to file quarterly reports on Form N-Q with respect to 
any fiscal quarter ending on or after July 9, 2004. This timeframe is 
consistent with the transition period requested by most commenters, and 
is appropriate in light of the systems changes and other tasks that 
many funds may have to undertake.
    Funds will be required to comply with the amendments to Items 10(b) 
and 11 of Form N-CSR upon the effective date. However, we are adding 
transition provisions in Form N-CSR that will require funds to comply 
with some of the current requirements of these Items, which require 
disclosure of changes in internal control over financial reporting with 
respect to the entire semi-annual period covered by the report, until 
the earlier of June 30, 2005, or the date that a fund has filed its 
first report on Form N-Q.\98\ We would expect that by June 30, 2005, 
all funds will have begun to file reports on Form N-Q that would 
include disclosure regarding changes in internal control over financial 
reporting that occurred during the most recent fiscal quarter. This 
transition rule is intended to prevent any gap in the disclosure that 
funds provide regarding changes in internal control over financial 
reporting.
---------------------------------------------------------------------------

    \98\ Instruction to Item 10(b) of Form N-CSR; Instruction to 
Item 11(a)(2) of Form N-CSR.
---------------------------------------------------------------------------

    Funds will not be required to comply with the portion of the 
introductory language in paragraph 4 of the certification in Item 3 of 
the Form N-Q that refers to the certifying officers' responsibility for 
establishing and maintaining internal control over financial reporting, 
or with paragraph 4(b) of the certification, until the first report on 
Form N-Q following a report on Form N-CSR that is required to contain 
these portions of the certification. This compliance date is consistent 
with the transition period we provided in adopting these portions of 
the certification for Form N-CSR, in which we stated that funds must 
comply with these portions of the certification beginning with the 
first annual report on Form N-CSR for a fiscal year ending on or after 
June 15, 2004.\99\
---------------------------------------------------------------------------

    \99\ Investment Company Act Release No. 26068 (June 5, 2003) [68 
FR 36636, 36650 (June 18, 2003)] (amending Form N-CSR 
certification).
---------------------------------------------------------------------------

III. Paperwork Reduction Act

    As explained in the Proposing Release, certain provisions of the 
amendments contain ``collection of information'' requirements within 
the meaning of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501, et 
seq). The titles for the collections of information are: (1) ``Form N-
1A under the Investment Company Act of 1940 and Securities Act of 1933, 
Registration Statement of Open-End Management Investment Companies;'' 
(2) ``Form N-2--Registration Statement of Closed-End Management 
Investment Companies;'' (3) ``Form N-3--Registration Statement of 
Separate Accounts Organized as Management Investment Companies;'' (4) 
``Form N-CSR--Certified Shareholder Report of Registered Management 
Investment Companies;'' (5) ``Rule 30e-1 under the Investment Company 
Act of 1940, Reports to Stockholders of Management Companies;'' (6) 
``Form N-Q--Quarterly Schedule of Portfolio Holdings of Registered 
Management Investment Company;'' and (7) ``Rule 30b1-5 under the 
Investment Company Act of 1940, `Quarterly Report.''' An agency may not 
conduct or sponsor, and a person is not required to respond to, a 
collection of information unless it displays a currently valid OMB 
control number.
    Form N-1A (OMB Control No. 3235-0307), Form N-2 (OMB Control No. 
3235-0026), and Form N-3 (OMB Control No. 3235-0316) were adopted 
pursuant to section 8(a) of the Investment Company Act (15 U.S.C. 80a-
8) and section 5 of the Securities Act (15 U.S.C. 77e). Form N-CSR (OMB 
Control No. 3235-0570) was adopted pursuant to section 30 of the 
Investment

[[Page 11255]]

Company Act (15 U.S.C. 80a-29) and sections 13 and 15(d) of the 
Exchange Act (15 U.S.C. 78m and 78o(d)). Rule 30e-1 (OMB Control No. 
3235-0025) was adopted pursuant to section 30(e) of the Investment 
Company Act (15 U.S.C. 80a-29(e)). Form N-Q (OMB Control No. 3235-0578) 
is being adopted pursuant to section 30 of the Investment Company Act 
(15 U.S.C. 80a-29) and sections 13 and 15(d) of the Exchange Act (15 
U.S.C. 78m and 78o(d)). Rule 30b1-5 under the Investment Company Act is 
being adopted pursuant to section 30(b)(1) of the Investment Company 
Act (15 U.S.C. 80a-29(b)(1)).
    We published notice soliciting comments on the collection of 
information requirements in the Proposing Release and submitted these 
requirements to the Office of Management and Budget (``OMB'') for 
review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11.\100\ OMB 
approved these collection requirements. We received no comments on the 
collection of information requirements.
---------------------------------------------------------------------------

    \100\ See Proposing Release, supra note 16, 68 FR at 170-73.
---------------------------------------------------------------------------

    The amendments adopted in this release will:
     Require a mutual fund to disclose fund expenses 
borne by shareholders during the reporting period in reports to 
shareholders;
     Permit a fund to include a summary portfolio 
schedule in its reports to shareholders, and exempt a money market fund 
from the requirement to include a portfolio schedule of investments in 
securities of unaffiliated issuers in its reports to shareholders, 
provided that the complete portfolio schedule is filed with the 
Commission on Form N-CSR semi-annually and is provided to shareholders 
upon request, free of charge;
     Require reports to shareholders by funds to 
include a tabular or graphic presentation of a fund's portfolio 
holdings by identifiable categories;
     Require a fund to file its complete portfolio 
schedule as of the end of its first and third fiscal quarters with the 
Commission on new Form N-Q, which will be filed under the Investment 
Company Act and the Exchange Act and certified by the fund's principal 
executive and financial officers; and
     Require a mutual fund to include Management's 
Discussion of Fund Performance in its annual report to shareholders.
    These amendments are intended to provide better information to 
investors about fund costs, investments, and performance.

Forms N-1A, N-2, and N-3

    The purposes of Forms N-1A, N-2, and N-3 are to meet the 
registration and disclosure requirements of the Securities Act and the 
Investment Company Act and to provide investors with information 
necessary to evaluate an investment in a fund. Forms N-1A, N-2, and N-3 
contain collection of information requirements. The likely respondents 
to the information collection in Form N-1A are open-end funds 
registering with the Commission. The likely respondents to the 
information collection in Form N-2 are closed-end funds registering 
with the Commission. The likely respondents to the information 
collection in Form N-3 are separate accounts, organized as management 
investment companies and offering variable annuities, registering with 
the Commission. Compliance with the disclosure requirements of Forms N-
1A, N-2, and N-3 is mandatory. Responses to the disclosure requirements 
are not confidential.
    We estimate that the amendments to Forms N-1A, N-2, and N-3 will 
have no impact on the hour burden for filing registration statements on 
these forms. The amendments to Forms N-1A, N-2, and N-3 relate solely 
to the contents of shareholder reports for funds registered on these 
forms, and the additional burden hours imposed by these amendments are 
reflected in the collection of information requirements for shareholder 
reports required by rule 30e-1 under the Investment Company Act.

Form N-CSR

    Form N-CSR, including the amendments, contains collection of 
information requirements. The respondents to this information 
collection are funds subject to rule 30e-1 under the Investment Company 
Act of 1940 registering with the Commission on Form N-1A, N-2, or N-3. 
Compliance with the disclosure requirements of Form N-CSR is mandatory. 
Responses to the disclosure requirements are not confidential.
    The amendments will require a fund that has used a summary 
portfolio schedule in its reports to shareholders, in lieu of including 
a complete schedule of investments in securities of unaffiliated 
issuers, or a money market fund that has omitted its schedule of 
investments in securities of unaffiliated issuers from its reports to 
shareholders, to file its complete schedule of investments in 
securities of unaffiliated issuers pursuant to Item 6 of Form N-CSR. As 
described in the Proposing Release, we continue to estimate that the 
hour burden associated with the requirements of Item 6 of Form N-CSR 
will increase the burden of filing Form N-CSR by 5 hours per portfolio 
per filing. Since the Proposing Release, however, our estimate of the 
number of portfolios that will file Form N-CSR has changed. We now 
estimate that 3,800 funds file reports on Form N-CSR, representing 
9,706 portfolios, including 1,000 money market portfolios.\101\ Of 
these, we estimate that 7,094 portfolios will file complete schedules 
of investments in securities of unaffiliated issuers pursuant to Item 6 
of Form N-CSR.\102\
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    \101\ The total number of portfolios is comprised of 8,938 
portfolios of mutual funds registered on Form N-1A, 733 portfolios 
of closed-end funds registered on Form N-2, and 35 sub-accounts of 
managed separate accounts registered on Form N-3. The estimates of 
the total number of funds, the number of mutual fund portfolios 
registered on Form N-1A, the number of money market portfolios, and 
the number of closed-end funds registered on Form N-2 are based on 
the Commission staff's analysis of reports filed on Form N-SAR in 
2003. The estimate of the number of sub-accounts of managed separate 
accounts registered on Form N-3 is based on the staff's analysis of 
reports filed on Form N-SAR in 2003.
    \102\ We calculate this number assuming that all 1,000 money 
market portfolios will omit portfolio schedules from their 
shareholder reports and that 70% of the remaining 8,706 portfolios 
will include a summary schedule in lieu of the complete schedule. As 
a result 1,000 money market portfolios and 6,094 (8,706 portfolios x 
.70) other portfolios would be required to complete Item 6 of Form 
N-CSR, for a total of 7,094.
---------------------------------------------------------------------------

    Based on these estimates, the total estimated increase in burden 
hours associated with the change to Form N-CSR is 70,940 hours (7,094 
portfolios x 5 hours per portfolio x 2 filings per year). This 
represents an estimate that is 1,010 hours lower that the 71,950 hours 
estimate in the Proposing Release. The current total hour burden 
associated with Form N-CSR before these amendments is 142,619 hours and 
the per filing burden is 19.27 hours.\103\ Thus, we now estimate that 
the total hour burden for filing Form N-CSR, as amended, would be 
141,609 hours (142,619 hours--1,010 hours reduction) and that the 
weighted average burden per filing on Form N-CSR would be approximately 
18.63 hours (141,609 hours / (3,800 filers x 2 filings per year)).
---------------------------------------------------------------------------

    \103\ The current OMB approved burden associated with Form N-CSR 
is 142,498 hours. The Commission has submitted a request to increase 
the approved burden to 142,619 hours. This request is still pending.
---------------------------------------------------------------------------

Shareholder Reports

    Rule 30e-1, which requires funds to include in the shareholder 
reports the information that is required by the fund's registration 
statement form, contains collection of information

[[Page 11256]]

requirements.\104\ The respondents to this collection of information 
requirement are funds registered on Forms N-1A, N-2, and N-3. 
Compliance with the disclosure requirements of rule 30e-1 is mandatory. 
Responses to the disclosure requirements will not be kept confidential.
---------------------------------------------------------------------------

    \104\ The amendments being adopted are to the shareholder 
reports requirements in Forms N-1A, N-2, and N-3. Rule 30e-1(a) 
under the Investment Company Act of 1940 [17 CFR 270.30e-1(a)] 
requires funds to include in the shareholder reports the information 
that is required by the fund's registration statement form.
---------------------------------------------------------------------------

    We estimate that approximately 3,800 funds are subject to rule 30e-
1.\105\ The current hour burden for preparing and filing semi-annual or 
annual shareholder reports in compliance with rule 30e-1 is 125.18 
hours per report per fund, for a total of 926,350 hours (125.18 x 2 x 
3,800 funds). As a result of an increase in the number of registered 
investment companies required to prepare and file these reports, the 
burden has increased to 951,368 annual burden hours (125.18 hours per 
report x 2 reports x 3,800 funds). We estimate that the 3,800 funds 
filing annual and semi-annual shareholder reports pursuant to rule 30e-
1 include 9,706 portfolios, including 8,938 portfolios of mutual funds 
registered on Form N-1A, 733 closed-end funds registered on Form N-2, 
and 35 sub-accounts of managed separate accounts registered on Form N-
3.\106\
---------------------------------------------------------------------------

    \105\ See supra note .
    \106\ Id.
---------------------------------------------------------------------------

    We estimate, as we did in the Proposing Release, that there are 
1,000 money market fund portfolios that will take advantage of the 
provision permitting a money market fund to omit its schedule of 
investments in securities of unaffiliated issuers from its shareholder 
reports. This will decrease the hour burden of complying with rule 30e-
1 for these funds by 5 hours per portfolio per filing, or 10,000 hours 
(1,000 portfolios x 5 hours x 2 filings per year). We estimate that, of 
the remaining 8,706 portfolios of funds filing shareholder reports, 
70%, or 6,094 portfolios, will choose to take advantage of the 
provisions permitting use of a summary portfolio schedule.\107\ 
However, as we discussed in the Proposing Release, we continue to 
estimate that use of the summary portfolio schedule provisions will 
have no net effect on the burden hours of complying with rule 30e-1. 
The estimated time necessary to prepare a summary portfolio schedule is 
equivalent to the time currently required to prepare a complete 
portfolio schedule, because a fund will still need to evaluate the size 
of each of its investments in securities of unaffiliated issuers in 
order to prepare the summary portfolio schedule. Further, we continue 
to estimate that the requirement to include a tabular or graphic 
presentation in shareholder reports, which will apply to all funds, 
will increase the estimated burden hours for complying with rule 30e-1 
by 3 hours per portfolio per filing. Due to the change in the number of 
portfolios, we now estimate that the annual burden associated with this 
requirement is 58,236 hours (9,706 portfolios x 3 hours x 2 filings per 
year). We estimate that the requirement to disclose in shareholder 
reports the dollar cost of investing in the fund over the reporting 
period, which would apply only to mutual funds, will increase the 
estimated burden hours for complying with rule 30e-1 by 5 hours per 
portfolio per filing. We estimate that the modifications that we are 
adopting that will require the expense example to include the ending 
account values for an initial investment of $1,000, and the fund's 
expense ratio expressed as a percentage, will not increase this burden, 
because the annualized expense ratio will be based on information 
required elsewhere in the shareholder report as part of the financial 
highlights table, and funds will be calculating ending account value 
for an initial investment of $1,000 in order to calculate expenses paid 
on that investment. Due to the change in the number of portfolios, we 
now estimate that the associated annual burden associated with this 
requirement is 89,380 hours (8,938 mutual fund portfolios x 5 hours x 2 
filings per year). Finally, we continue to estimate that the 
requirement for mutual funds to include MDFP in annual reports to 
shareholders would have a negligible effect on the estimated burden 
hours for complying with rule 30e-1, because, in the staff's 
experience, over 90% of mutual funds already include MDFP in annual 
reports to shareholders.
---------------------------------------------------------------------------

    \107\ This is based on the Commission staff's estimate that more 
than 70% of funds had more than 50 securities in their portfolios, 
according to the staff's analysis of data from the Morningstar 
Principia Pro database.
---------------------------------------------------------------------------

    Thus, taking into account the change in the number of portfolios, 
we estimate that the amendments will have a net increase on the burden 
hours of complying with rule 30e-1 of 137,616 hours (-10,000 hours + 
58,236 hours + 89,380 hours), for a new total burden of 1,088,984 hours 
(951,368 total hours + 137,616 hours increase).

Rule 30b1-5

    The purpose of Rule 30b1-5 is to improve transparency of 
information about funds' portfolio holdings. Rule 30b1-5 will require 
funds to file a quarterly report via the Commission's EDGAR system on 
Form N-Q, not more than sixty calendar days after the close of each 
first and third fiscal quarter, containing their complete portfolio 
holdings. The likely respondents to Rule 30b1-5 will be registered 
management investment companies, other than small business investment 
companies registered with the Commission on Form N-5.
    We estimate that Rule 30b1-5 will affect approximately 3,800 
portfolios, each of which will be required to file a complete portfolio 
holdings schedule via EDGAR on Form N-Q. However, for purposes of this 
Paperwork Reduction Act analysis, the burden associated with the 
requirements of Rule 30b1-5 has been included in the collection of 
information requirements of Form N-Q, rather than the new rule.
    Compliance with rule 30b1-5 is mandatory for every registered fund. 
Responses to the disclosure requirements will not be kept confidential.

Form N-Q

    The purpose of Form N-Q is to meet the disclosure requirement of 
the Investment Company Act and the Exchange Act and to provide 
investors with information necessary to evaluate an investment in the 
fund. Form N-Q contains collection of information requirements. The 
respondents to this information collection will be management 
investment companies subject to rule 30e-1 under the Investment Company 
Act registering with the Commission on Forms N-1A, N-2, or N-3. 
Compliance with the disclosure requirements of Form N-Q will be 
mandatory. Responses to the disclosure requirements will not be kept 
confidential.
    Every registered management investment company, other than a small 
business investment company registered on Form N-5, will be required to 
file a quarterly report on Form N-Q disclosing the information required 
therein, not more than sixty calendar days after the close of the first 
and third quarters of each fiscal year. In the Proposing Release, we 
estimated that for each of those funds the disclosure of their 
portfolio holdings schedules in filings on Form N-Q as of the end of 
each first and third fiscal quarter would require, on average, 10 hours 
per

[[Page 11257]]

portfolio per filing.\108\ We have, however, modified Form N-Q since 
the proposal to require that the form be certified by the fund's 
principal executive and financial officers, similar to the present 
requirement in Form N-CSR. We estimate that the increase in hour burden 
associated with the new requirement for certification of Form N-Q will 
be 1 hour per registered investment company plus 0.25 hours for every 
additional portfolio in the company beyond the first portfolio.\109\ We 
currently estimate that Form N-Q will affect approximately 3,800 funds, 
which include 9,706 portfolios. Taking into account the change in the 
number of portfolios, the annual hours associated with filing Form N-Q, 
absent the certification requirement, would be 194,120 hours (9,706 
portfolios x 2 reports per year x 10 hours per portfolio). We estimate 
that the annual hour burden increase attributable to the requirement to 
certify Form N-Q will equal 10,554 hours (((3,800 funds x 1 hour per 
fund) + (5,906 additional portfolios x .25 hour per additional 
portfolio)) x 2 filings per year). The total hour burden estimate 
associated with Form N-Q, including compliance with the certification 
requirement, is 204,674 hours (194,120 hours + 10,554 hours 
attributable to certification).
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    \108\ This estimate was based on a review of the estimated hour 
burdens associated with other rules and forms under the Investment 
Company Act that impose similar disclosure requirements.
    \109\ Our estimate of the burden hours associated with the Form 
N-Q certification requirement is based on the staff's experience 
reviewing financial statements, including portfolio schedules, and 
the staff's previous estimate of the hour burden associated with 
certification under Form N-CSR. Investment Company Release No. 25914 
(Jan. 27, 2003) [68 FR 5348, 5357-58 (Feb. 3, 2003)] (estimating the 
hour burden for certification of Form N-CSR to be 5 hours per 
registrant plus 0.5 hours per additional portfolio.)
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IV. Cost/Benefit Analysis

    The Commission is sensitive to the costs and benefits imposed by 
its rules. Our amendments are intended to improve the periodic 
disclosure provided by funds about their costs, portfolio investments, 
and past performance. The amendments:
     Require mutual funds to disclose fund expenses 
borne by shareholders during the reporting period in reports to 
shareholders;
     Permit a fund to include a summary portfolio 
schedule in its reports to shareholders, and exempt a money market fund 
from the requirement to include a portfolio schedule of investments in 
securities of unaffiliated issuers in its reports to shareholders, 
provided that the complete portfolio schedule is filed with the 
Commission on Form N-CSR semi-annually and is provided to shareholders 
upon request, free of charge;
     Require reports to shareholders by funds to 
include a tabular or graphic presentation of a fund's portfolio 
holdings by identifiable categories;
     Require a fund to file and certify its complete 
portfolio schedule as of the end of its first and third fiscal quarters 
with the Commission on new Form N-Q under the Investment Company Act 
and the Exchange Act; and
     Require a mutual fund to include Management's 
Discussion of Fund Performance in its annual report to shareholders.
    These amendments are intended to significantly improve the periodic 
disclosure that fund investors receive, particularly with respect to 
portfolio holdings and expenses, while reducing the costs of printing 
and delivering funds' annual and semi-annual reports to shareholders.
    In the Proposing Release, we provided an analysis of the costs and 
benefits of the proposed amendments, and we requested comments.\110\ 
Seven commenters commented directly on this cost/benefit analysis, 
while others raised cost and benefit issues with regard to specific 
substantive provisions without specifically mentioning the cost/benefit 
analysis. These comments are discussed in further detail below.
---------------------------------------------------------------------------

    \110\ See Section V, ``Cost/Benefit Analysis,'' of the Proposing 
Release, supra note 16, 68 FR at 173-176.
---------------------------------------------------------------------------

A. Benefits

    Disclosure of Fund Expenses in Shareholder Reports. The requirement 
for mutual funds to disclose in their reports to shareholders fund 
expenses borne by shareholders during the reporting period should 
benefit investors by increasing their awareness and understanding of 
the fees that they pay on an ongoing basis for investing in a mutual 
fund. The benefits of the improved transparency of funds' ongoing fees 
and expenses are difficult to quantify, however.
    Use of Summary Portfolio Schedule and Exemption of Money Market 
Funds from Portfolio Schedule Requirements in Shareholder Reports. The 
Commission estimates that more than 70% of all non-money market funds 
may realize at least some cost savings, through reduced printing and 
mailing expenses, by use of a summary portfolio holdings schedule in 
their shareholder reports.\111\ Similar benefits would be available to 
all money market funds, which will be exempt from the requirement to 
include the schedule of investments in securities of unaffiliated 
issuers in their reports to shareholders. For funds with large numbers 
of holdings, such as index funds, the cost savings in printing and 
mailing could be substantial.
---------------------------------------------------------------------------

    \111\ See supra note 107.
---------------------------------------------------------------------------

    As of year-end 2002, there were approximately 257 million 
shareholder accounts invested in funds affected by the amendments.\112\ 
For each account, funds are required to provide an annual and semi-
annual shareholder report, although our rules allow the delivery of a 
single shareholder report to investors who share an address 
(``householding'') under certain conditions.\113\ Assuming that the use 
of householding would reduce the number of shareholder reports by at 
least 10%, we estimate that, as a result, funds currently print and 
deliver approximately 462.4 million (257 million accounts x 2 reports x 
.9 (using 10% savings estimate)) shareholder reports per year.\114\ 
Estimating that 70% of these reports will include summary schedules in 
lieu of complete ones, 323.82 million (462.4 million shareholder 
reports x .7) shareholder reports may be streamlined, reducing the 
associated printing and mailing costs.\115\ If funds reduce their 
printing and distribution expenses by only one page per shareholder 
report, at an estimated cost of 2[cent] per page, funds could save 
approximately $6.48 million per year (323.82 million shareholder 
reports x $.02 per page).\116\ The Commission believes, however, that 
some funds may be able to reduce the length of their shareholder 
reports by more than a single printed page, and we therefore expect 
that the cost savings to funds may exceed these estimates. These 
potential savings may be passed on to fund shareholders.\117\
---------------------------------------------------------------------------

    \112\ The estimate is based on the staff's review of N-SAR 
filings and information from the Investment Company Institute. 
Investment Company Institute, Mutual Fund Fact Book 65 (43rd ed. 
2003).
    \113\ See Investment Company Act Release No. 24123 (Nov. 4, 
1999) [64 FR 62540, 62543 (Nov. 16, 1999)] (estimating that 
householding rules would produce a decline in the number of 
shareholder reports required to be delivered of between 10 and 30 
percent) (``Householding Release'').
    \114\ Id.
    \115\ These calculations are based on the estimate that 70% of 
funds that will use a summary portfolio schedule and hence may 
benefit from reduced printing costs. See text accompanying note, 
supra.
    \116\ This cost per page is based on an estimate that the 
typical shareholder report is approximately 25 pages long and costs 
$.52 to print and deliver. See Householding Release, supra. note, 64 
FR at 62543.
    \117\ The provision permitting use of a summary portfolio 
schedule in shareholder reports, and the exemption for money market 
funds from the requirement to include in shareholder reports a 
complete schedule of investments in securities of unaffiliated 
issuers, are not expected to result in any reduction in internal 
costs for funds, because funds that utilize these provisions will 
still be required to file their complete portfolio schedules on Item 
6 of Form N-CSR.

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[[Page 11258]]

    Apart from savings in printing and distribution costs, use of a 
summary portfolio schedule may benefit investors by helping them focus 
on a fund's principal holdings, and thereby better evaluate a fund's 
risk profile and investment strategy. These benefits to investors are 
difficult to quantify, however.\118\
---------------------------------------------------------------------------

    \118\ We note that, for purposes of the Paperwork Reduction Act, 
we have estimated that the exemption for money market funds from the 
requirement to include complete portfolio schedules in their reports 
to shareholders will reduce the internal burden hours for compliance 
with shareholder reports requirements by 10,000 hours, translating 
into a cost savings of $689,400 annually. However, this cost savings 
is offset by an equal increase in the burden associated with the 
requirement for money market funds to file a complete portfolio 
schedule in Item 6 of Form N-CSR.
---------------------------------------------------------------------------

    The estimated cost savings is derived from the estimated reduction 
in burden hours, and an estimated hourly wage rate for professional and 
non-professional staff of $78.48. This estimated wage rate is a blended 
rate, based on published hourly wage rates for compliance attorneys 
($74.22) and programmers ($42.05) in New York City, and the estimate 
that professional and non-professional staff will divide time equally 
on compliance with the disclosure requirements, yielding a weighted 
wage rate of $58.135 (($74.22 x .50) + ($42.05 x .50)) = $58.135). See 
Securities Industry Association, Report on Management & Professional 
Earnings in the Securities Industry 2001 (Oct. 2001) (for most current 
rate for compliance attorneys in New York City); Securities Industry 
Association, Report on Management & Professional Earnings in the 
Securities Industry 2002 (Sep. 2002) (for most current rate for 
programmers in New York City). This weighted wage rate was then 
adjusted upward by 35% for overhead, reflecting the costs of 
supervision, space, and administrative support, to obtain the total per 
hour internal cost of $78.48 ($58.135 x 1.35 = $78.48).
    A number of commenters addressed the benefits of allowing the use 
of the summary portfolio schedule. These commenters supported the 
conclusion that summary schedules should reduce costs associated with 
printing and mailing shareholder reports and provide more meaningful 
information to shareholders, although they did not specifically mention 
the cost-benefit analysis or provide any quantitative analysis.
    Tabular or Graphic Presentation of Portfolio Holdings. The 
requirements for funds to provide a tabular or graphic presentation of 
their portfolio holdings in their annual and semi-annual reports to 
shareholders should benefit fund investors by illustrating, in a 
concise and user-friendly format, the allocation of a fund's 
investments across asset classes. This presentation, coupled with a 
summary portfolio schedule, could be significantly more useful to many 
investors than the fund's complete portfolio schedule standing alone, 
particularly in the case of funds with large numbers of holdings. These 
benefits to investors resulting from the use of a tabular or graphic 
presentation are difficult to quantify, however.
    Quarterly Filing of Complete Portfolio Schedule. The requirement 
for a fund to file its complete portfolio schedule on new Form N-Q via 
EDGAR, within 60 days after the end of the first and third fiscal 
quarters, should benefit investors by providing them with greater 
information about whether, and how, a fund is complying with its stated 
investment objective. These requirements will allow investors, and 
their advisers or other investment professionals, to better monitor the 
extent to which the portfolios of the funds that investors hold 
overlap, and hence should promote more informed asset allocation 
decisions. In addition, quarterly disclosure of a fund's portfolio 
holdings may expose instances of ``style drift,'' when the actual 
portfolio holdings of a fund deviate from its stated investment 
objective.
    The increased transparency resulting from quarterly disclosure may 
also deter several forms of portfolio manipulation by portfolio 
managers, including ``window dressing'' (buying or selling portfolio 
securities shortly before the date as of which a fund's holdings are 
publicly disclosed, in order to convey an impression that the manager 
has been investing in companies that have had exceptional performance 
during the reporting period) and ``portfolio pumping'' (buying shares 
of stocks the fund already owns on the last day of the reporting 
period, in order to drive up the price of the stocks and inflate the 
fund's performance results). Any of these forms of portfolio 
manipulation enhance the appearance of the portfolio at the expense of 
portfolio returns. By increasing the frequency of reporting, engaging 
in these activities becomes more expensive in terms of returns. 
Therefore, we expect fewer funds to engage in these activities. To the 
extent that portfolio managers currently engage in these activities, 
shareholders will be better off as a result of the amendments. More 
broadly, the increased frequency of disclosure will permit investors to 
better link the composition of a fund portfolio to fund performance.
    In addition, the requirement that reports on Form N-Q be signed and 
certified by a fund's principal executive and financial officers, 
consistent with section 302 of the Sarbanes-Oxley Act, will benefit 
investors. A fund's portfolio schedule constitutes financial 
information of great significance to investors. Requiring certification 
of this financial information should help to enhance investor 
confidence in this disclosure, and is consistent with the intent of the 
certification requirement of section 302.
    Inclusion of MDFP in Annual Reports to Shareholders by Mutual 
Funds. The requirement that funds include MDFP in their annual reports 
to shareholders should assist investors in assessing the fund's 
performance over the prior year. Requiring MDFP in the annual report, 
as opposed to the fund's prospectus, may benefit shareholders by 
enabling them to assess information provided in the MDFP together with 
other ``backward looking'' information contained in the annual report. 
We note, however, that to the extent that, based on the staff's 
experience, over 90% of mutual funds already include this information 
in their annual reports to shareholders, these benefits are already 
being realized.

B. Costs

    The amendments may lead to some additional costs for funds, which 
could be passed on to fund shareholders. In the case of the additional 
disclosure requirements being adopted, these costs will include both 
internal costs (for attorneys and other non-legal staff of a fund, such 
as computer programmers, to prepare and review the required disclosure) 
and external costs (for printing and typesetting of the disclosure).
    Disclosure of Fund Expenses in Shareholder Reports. We estimate 
that in order for mutual funds to comply with the requirement to 
include in annual and semi-annual reports disclosure of the dollar cost 
associated with investing a standardized amount in a fund, a typical 
mutual fund will need to add one additional page to each of its annual 
and semi-annual reports, at a cost of $0.02 per page.\119\ We estimate 
that there are approximately 251 million shareholder accounts 
associated with mutual fund companies, which will send out 451.8 
million reports to shareholders annually.\120\ Therefore,

[[Page 11259]]

this additional disclosure in shareholder reports will cost 
approximately $9,036,000 ((451.8 million shareholder reports x $0.02 
per page) in external costs per mutual fund annually.
---------------------------------------------------------------------------

    \119\ See supra note 116.
    \120\ Investment Company Institute, Mutual Fund Fact Book, at 63 
(43rd ed. 2003) (estimating approximately 251 million shareholder 
accounts associated with mutual funds). We estimated the number of 
shareholder reports by multiplying the number of accounts by 2 to 
reflect the requirement that each fund must deliver an annual and a 
semi-annual report to each account-holder, and then reducing that 
number by 10% to reflect an estimated 10% savings in the number of 
reports that must be delivered to shareholders due to householding 
rules, arriving at 451.8 million shareholder reports annually (251 
million shareholder accounts x 2 reports per year x .9 reduction due 
to householding). See supra note 113.
---------------------------------------------------------------------------

    In addition, we estimate for purposes of the Paperwork Reduction 
Act that these disclosure requirements will add 89,730 burden hours for 
mutual funds required to transmit shareholder reports, equal to 
internal costs of $7,042,010 for the industry annually.\121\ Thus, we 
estimate that the total cost of this requirement would be approximately 
$16 million annually. We estimate that the modifications that we are 
adopting that will require the expense example to include the ending 
account values for an initial investment of $1,000, and the fund's 
expense ratio expressed as a percentage, will not increase this cost 
estimate, because the annualized expense ratio will be based on 
information required elsewhere in the shareholder report as part of the 
financial highlights table, and funds will be calculating ending 
account value for an initial investment of $1,000 in order to calculate 
expenses paid on that investment.
---------------------------------------------------------------------------

    \121\ This figure is based on an estimated hourly wage rate of 
$78.48. See supra note 118.
---------------------------------------------------------------------------

    As the Commission considered how to best disclose to investors the 
fees and expenses that they incur with investment in a fund, it 
considered the costs and benefits of various alternatives, including 
providing fund shareholders with individualized cost information (in 
dollars) as to the fees and expenses that they paid in quarterly 
account statements. We estimate that the cost of providing this 
individualized cost disclosure would greatly exceed the cost of our 
amendments. According to a report of the U.S. General Accounting Office 
which recommended requiring individualized cost disclosure in account 
statements, one broker-dealer with approximately 6.5 million customer 
accounts estimated that for it to develop the systems necessary to 
produce such statements might cost as much as $4 million, with 
additional annual costs of $5 million.\122\ Given that as of year-end 
2002, there were approximately 251 million shareholder accounts 
invested in mutual funds, estimated industry-wide costs could easily 
exceed $100 million annually.\123\
---------------------------------------------------------------------------

    \122\ U.S. General Accounting Office, Mutual Fund Fees: 
Additional Disclosure Could Encourage Price Competition 79 (June 7, 
2000).
    \123\ See Investment Company Institute, Mutual Fund Fact Book, 
supra note 112, at 63 (estimating number of shareholder accounts in 
mutual funds).
---------------------------------------------------------------------------

    Several commenters addressed the cost of including individualized 
expense information in quarterly account statements, and agreed with 
the cost/benefit analysis provided in the Proposing Release that such a 
requirement would involve significant costs and logistical challenges. 
One commenter who supported requiring individualized cost disclosure 
acknowledged that the alternative might impose large costs on funds, 
but recommended that the Commission consider whether the additional 
costs truly would outweigh the potential benefits that improved fee 
disclosure and the attendant increase in price competition would 
provide.
    Use of Summary Portfolio Schedule and Exemption of Money Market 
Funds From Portfolio Schedule Requirements in Shareholder Reports. Our 
amendments that will allow funds to include summary portfolio schedules 
in reports to shareholders may result in some costs to funds.\124\ For 
purposes of the Paperwork Reduction Act, we estimate that these 
amendments will not increase the hour burden for completing a 
shareholder report in compliance with rule 30e-1 under the Investment 
Company Act. However, we estimate that use of either the provision 
permitting use of a summary portfolio schedule or the provision 
permitting a money market fund to omit its schedule of investments in 
securities of unaffiliated issuers will increase the hour burden for 
filing Form N-CSR by 5 hours per portfolio per filing, or 70,940 hours 
(7,094 portfolios x 5 hours per portfolio x 2 filings per year), 
resulting in an additional cost of filing Form N-CSR of 
$5,567,371.\125\
---------------------------------------------------------------------------

    \124\ The amendments would have no net impact on the hour burden 
of compliance for money market funds, for purposes of the Paperwork 
Reduction Act, because the increase in burden hours associated with 
filing the complete portfolio schedule pursuant to Item 6 of Form N-
CSR would be offset by a decrease in the burden associated with the 
exemption allowing money market funds to omit this schedule from 
their shareholder reports. See supra note 118.
    \125\ These figures are based on an estimated hourly wage rate 
of $78.48. See supra note 118 (explaining calculation of wage rate).
---------------------------------------------------------------------------

    Further, to the extent that investors want to see a complete 
portfolio schedule, investors will incur search costs to gather this 
information (i.e., requesting the information from the fund). However, 
since funds will be required to deliver the complete portfolio schedule 
within three days and free of charge to all investors who request it, 
we expect these costs to be minimal.
    Tabular or Graphic Presentation of Portfolio Holdings. The 
amendments will require funds to provide one or more tables, charts, or 
graphs depicting the securities holdings of the fund by reasonably 
identifiable categories (e.g., type of security, industry sector, 
geographic region, credit quality, or maturity) showing the percentage 
of net asset value or total investments attributable to each. We 
estimate that these costs will be limited, however, because a fund will 
have the flexibility to select categories and format the presentation 
in a manner reasonably designed to depict clearly the types of 
investments made by the fund, given its investment objectives, and 
because a majority of funds, according to the staff's estimate, already 
provide some type of tabular or graphic depiction of their holdings in 
shareholder reports. For purposes of the Paperwork Reduction Act, we 
have estimated that the disclosure requirements will add 3 hours per 
portfolio to the burden of completing each annual and semi-annual 
report to shareholders, or 58,236 hours total (3 hours per portfolio x 
2 reports per year x 9,706 portfolios of funds required to provide 
reports to shareholders). We estimate that this additional burden will 
equal total internal costs of $4,570,361 annually.\126\ Further, 
because most funds already include a similar type of presentation 
voluntarily in shareholder reports, we estimate that this new 
disclosure requirement will not increase printing and mailing costs of 
shareholder reports for most funds, and hence the external costs to 
funds of this requirement will be minimal.
---------------------------------------------------------------------------

    \126\ These figures are based on an estimated hourly wage rate 
of $78.48. See supra note 118 (explaining calculation of wage rate).
---------------------------------------------------------------------------

    Quarterly Filing of Complete Portfolio Schedule. Our requirement 
for funds to certify and file with the Commission for the first and 
third fiscal quarters of each fiscal year their complete portfolio 
holdings schedule on Form N-Q, and to disclose the availability of the 
filing on the Commission's Web site, will impose certain costs on 
funds. We estimate that, for purposes of the Paperwork Reduction Act, 
these disclosure requirements will impose 10 burden hours per portfolio 
per filing on Form N-Q, plus an additional 1 hour per fund and 0.25 
hours for every additional portfolio in a fund beyond the first. We 
estimate that the total burden will

[[Page 11260]]

therefore be 204,674 hours, or $16,062,816 in total internal costs 
annually, based on an estimate of 3,800 funds filing reports on Form N-
Q for 9,706 fund portfolios.\127\ Because this quarterly disclosure 
will only be required to be filed on EDGAR, and not actually delivered 
to shareholders, we estimate that the external costs per fund, for 
typesetting, printing, and mailing, of this additional disclosure will 
be negligible.
---------------------------------------------------------------------------

    \127\ This estimate is based on data from the Commission's EDGAR 
system of the number of registered management investment companies, 
and an estimated hourly wage rate of $78.48. See supra note 118.
---------------------------------------------------------------------------

    Mandating quarterly portfolio disclosure may impose other costs on 
funds and their shareholders. We received several comments on this 
issue. In the Proposing Release, we addressed the possibility that more 
frequent disclosure of portfolio holdings may expand the opportunities 
for professional traders to exploit this information by engaging in 
predatory trading practices, such as trading ahead of funds, often 
called ``front-running,'' and thereby increasing funds'' costs which 
ultimately are borne by shareholders. However, we noted that, in order 
for ``front-running'' to significantly decrease investment returns 
under the quarterly reporting requirements, it appears that several 
conditions may have to be present, and we indicated that these 
conditions may rarely be met, and hence the resulting costs of front-
running may be minimal.\128\
---------------------------------------------------------------------------

    \128\ See Proposing Release, supra note 16, 68 FR at 175-176.
---------------------------------------------------------------------------

    The Commission's cost-benefit analysis in the Proposing Release 
also addressed the possibility that more frequent portfolio disclosure 
may facilitate the ability of outside investors to ``free ride'' on a 
mutual fund's investment strategies, by obtaining for free the benefits 
of fund research and investment strategies that are paid for by fund 
shareholders. The Commission's analysis noted that the extent to which 
the quarterly disclosure requirement, with a 60-day lag, will result in 
these types of costs is difficult to quantify, and may depend on a 
number of assumptions and conditions. The Commission's analysis 
concluded that these conditions may not often simultaneously hold, 
although when they do, funds may be adversely impacted. The 
Commission's analysis also noted, however, that once the fund adviser 
has completed its trading strategy, it may hope that other traders will 
follow it because the price impacts of their trading will make the 
fund's trades profitable. The net effect of ``free riding'' therefore 
is not necessarily negative.\129\
---------------------------------------------------------------------------

    \129\ Proposing Release, supra note 16, 68 FR at 176.
---------------------------------------------------------------------------

    One commenter supported the Commission's analysis, arguing that it 
thoroughly rebutted any arguments that front-running and other 
predatory trading practices would occur with more frequent portfolio 
disclosure. Other commenters disagreed with aspects of the Commission's 
analysis. One such commenter argued that more frequent disclosure of 
fund portfolio holdings would add to the mix of information that is 
currently available about the individual portfolio securities of funds 
(including information from reports filed by institutional investment 
managers on Form 13F) and thus could be expected to compound the risk 
of front-running of fund trades that already exists. The commenter also 
argued that evidence indicates that free-riding based on fund portfolio 
holdings disclosure can be achieved, and will be facilitated by more 
frequent portfolio disclosure.
    Inclusion of MDFP in Annual Reports to Shareholders by Mutual 
Funds. We estimate that the requirement that mutual funds include MDFP 
in their annual reports to shareholders will not impose any costs on 
funds or shareholders. The staff estimates that over 90 percent of 
mutual funds already include MDFP in their annual reports to 
shareholders. Further, a fund that does not include MDFP in its annual 
reports must include MDFP in its prospectus. Thus, this amendment will 
not impose any new disclosure requirement on funds, but rather will 
only mandate a change in the location of the required disclosure for 
the minority of funds that do not already include MDFP in their annual 
reports. To the extent, however, that a fund does not already include 
MDFP in its annual report to shareholders, the fund may incur 
additional printing and mailing costs.

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

    Section 23(a)(2) of the Exchange Act requires the Commission, 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 the 
Commission from adopting any rule that would impose a burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Exchange Act.\130\ In addition, section 2(c) of the Investment 
Company Act, section 2(b) of the Securities Act, and section 3(f) of 
the Exchange Act require the Commission, when engaging in rulemaking 
that requires it to consider or determine whether an action is 
necessary or appropriate in the public interest, to consider, in 
addition to the protection of investors, whether the action will 
promote efficiency, competition, and capital formation.\131\ In the 
Proposing Release, we requested comments on whether the proposed 
amendments would promote efficiency, competition, and capital 
formation. We received no comments on this section of the proposals.
---------------------------------------------------------------------------

    \130\ 15 U.S.C. 78w(a)(2).
    \131\ 15 U.S.C. 77(b), 78c(f), and 80a-2(c).
---------------------------------------------------------------------------

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

VI. 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 rule and form amendments under the Securities Act, the 
Exchange Act, and the Investment Company Act to improve the quality of 
periodic disclosure provided by funds about their costs, portfolio 
investments, and past performance. These rule amendments are intended 
to enable funds to provide

[[Page 11261]]

more meaningful information to shareholders while reducing the costs of 
producing and delivering annual and semi-annual reports to 
shareholders. An Initial Regulatory Flexibility Analysis (``IRFA''), 
which was prepared in accordance with 5 U.S.C. 603, was published in 
the release proposing these amendments.

A. Need for, and Objectives of, Amendments

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

B. Significant Issues Raised by Public Comment

    In the IRFA for the proposed amendments, we requested comment on 
any aspect of the IRFA, including the number of small entities that 
would be affected by the proposed amendments, the likely impact of the 
proposal on small entities, the nature of any impact, and providing any 
empirical data supporting the extent of the impact. We received no 
comment letters on this section.

C. Small Entities Subject to the Rule

    The amendments adopted by the Commission will affect registered 
investment companies that are small entities. For purposes of the 
Regulatory Flexibility Act, an investment company is a small entity if 
it, together with other investment companies in the same group of 
related investment companies, has net assets of $50 million or less as 
of the end of its most recent fiscal year.\132\ Approximately 205 out 
of 3700 investment companies that will be affected by these amendments 
meet this definition.\133\
---------------------------------------------------------------------------

    \132\ 17 CFR 270.0-10.
    \133\ This estimate is based on figures compiled by Division of 
Investment Management staff regarding investment companies 
registered on Form N-1A, Form N-2, and Form N-3. In determining 
whether an insurance company separate account is a small entity for 
purposes of the Regulatory Flexibility Act, the assets of insurance 
company separate accounts are aggregated with the assets of their 
sponsoring insurance companies. Investment Company Act rule 0-10(b) 
[17 CFR 270.0-10(b)].
---------------------------------------------------------------------------

D. Reporting, Recordkeeping, and Other Compliance Requirements

    The amendments will:
     Require mutual funds to disclose fund expenses 
borne by shareholders during the reporting period in reports to 
shareholders;
     Permit a fund to include a summary portfolio 
schedule in its reports to shareholders, and exempt a money market fund 
from the requirement to include a portfolio schedule of investments in 
unaffiliated issuers in its reports to shareholders, provided that the 
complete portfolio schedule is filed with the Commission on Form N-CSR 
semi-annually and is provided to shareholders upon request, free of 
charge;
     Require reports to shareholders by funds to 
include a tabular or graphic presentation of a fund's portfolio 
holdings by identifiable categories;
     Require a fund to file its complete portfolio 
schedule as of the end of its first and third fiscal quarters with the 
Commission on new Form N-Q which will be filed under the Investment 
Company Act and the Exchange Act and certified by the fund's principal 
executive and financial officers; and
     Require a mutual fund to include Management's 
Discussion of Fund Performance in its annual report to shareholders.
    The amendments will apply equally to funds that are small entities 
and to other funds. The Commission estimates that the amendments will 
result in some one-time formatting and ongoing costs and burdens that 
would be imposed on all funds, but which may have a relatively greater 
impact on smaller firms. These include the costs related to disclosing 
the dollar cost associated with investing a standardized amount in a 
fund and the requirement that funds file their complete portfolio 
schedules with the Commission on a quarterly basis, in filings that 
would be certified by a fund's principal executive and financial 
officers. These costs also could include expenses for computer time, 
legal and accounting fees, information technology staff, and additional 
computer and telephone equipment. However, we believe that the benefits 
that will result to shareholders through better information about their 
funds' costs, portfolio investments, and past performance justify these 
potential costs.

E. Agency Action To Minimize Effect on Small Entities

    The Regulatory Flexibility Act directs us to consider significant 
alternatives that would accomplish our stated objective, while 
minimizing any significant adverse impact on small issuers. In 
connection with the rule amendments, the Commission considered the 
following alternatives: (i) The establishment of differing compliance 
or reporting requirements or timetables that take into account the 
resources available to small entities; (ii) the clarification, 
consolidation, or simplification of compliance and reporting 
requirements under the proposed amendments for small entities; (iii) 
the use of performance rather than design standards; and (iv) an 
exemption from coverage of the proposed amendments, or any part 
thereof, for small entities.
    The Commission believes at the present time that special compliance 
or reporting requirements for small entities, or an exemption from 
coverage for small entities, will not be appropriate or consistent with 
investor protection. The disclosure amendments will provide 
shareholders with greater transparency regarding a fund's investments, 
costs, and performance. Different disclosure requirements for small 
entities may create the risk that shareholders of those small entities 
will not have access to sufficient information to make informed 
evaluations. For example, requiring less frequent filing of portfolio 
holdings reports by small entities will make it more difficult for the 
shareholders of small entities to determine whether the fund is 
complying with its stated investment objective. Likewise, reducing the 
disclosure requirements in the shareholder reports of small entities 
would, for example, leave the shareholders of small funds less able to 
assess the amount of fees and charges that they pay. We believe it is 
important that the disclosure that will be required by the rule 
amendments be provided to shareholders by all funds, not just funds 
that are not considered small entities.
    We have endeavored throughout these rule amendments to minimize the 
regulatory burden on all funds, including small entities, while meeting 
our regulatory objectives. For example, we have modified our proposal 
to extend the compliance date an additional 60 days. We also note that 
some of the amendments contained in this release, such as the exemption 
for money market funds from the requirement to include a complete 
schedule in their shareholder reports,

[[Page 11262]]

work to lessen the regulatory burden on all funds. Small entities 
should benefit from the Commission's reasoned approach to the rule 
amendments to the same degree as other investment companies. Further 
clarification, consolidation, or simplification of the proposals for 
funds that are small entities would be inconsistent with the 
Commission's concern for investor protection. Finally, we do not 
consider using performance rather than design standards to be 
consistent with our statutory mandate of investor protection in the 
present context.

VII. Statutory Authority

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

List of Subjects

17 CFR Parts 210, 270, and 274

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

17 CFR Parts 239 and 249

    Reporting and recordkeeping requirements, Securities.

Text of Rule and Form Amendments

0
For the reasons set out in the preamble, Title 17, Chapter II of the 
Code of Federal Regulations is amended as follows:

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

0
1. The authority citation for part 210 continues to read as follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 
77aa(25), 77aa(26), 78c, 78j-1, 78l, 78m, 78n, 78o(d), 78q, 78u-5, 
78w(a), 78ll, 78mm, 79e(b), 79j(a), 79n, 79t(a), 80a-8, 80a-20, 80a-
29, 80a-30, 80a-31, 80a-37(a), 80b-3, 80b-11, 7202 and 7262, unless 
otherwise noted.

0
2. Paragraph (c) of Sec.  210.6-10 is revised to read as follows:


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

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

0
3. Section 210.12-12 is amended by:
0
a. Adding a sentence to the end of footnote 1 to the table; and
0
b. Revising the first three sentences of footnote 2 to the table.
    The addition and revision would read as follows:


Sec.  210.12-12  Investments in securities of unaffiliated issuers.

    \1\ * * * If any securities are listed as ``Miscellaneous 
securities,'' briefly explain in a footnote what the term 
represents.
    \2\ Categorize the schedule by (i) the type of investment (such 
as common stocks, preferred stocks, convertible securities, fixed 
income securities, government securities, options purchased, 
warrants, loan participations and assignments, commercial paper, 
bankers' acceptances, certificates of deposit, short-term 
securities, repurchase agreements, other investment companies, and 
so forth); and (ii) the related industry, country, or geographic 
region of the investment. Short-term debt instruments (i.e., debt 
instruments whose maturities or expiration dates at the time of 
acquisition are one year or less) of the same issuer may be 
aggregated, in which case the range of interest rates and maturity 
dates shall be indicated. * * *

* * * * *

0
4. Section 210.12-12C is added to read as follows:


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

[[Page 11263]]



----------------------------------------------------------------------------------------------------------------
               Column A                        Column B                 Column C                 Column D
----------------------------------------------------------------------------------------------------------------
Name of issuer and title of issue 1 3  Balance held at close    Value of each item at    Percentage value
 4 5 6.                                 of period. Number of     close of period 2 7 9    compared to net
                                        shares--principal        10 11.                   assets.
                                        amount of bonds and
                                        notes8.
----------------------------------------------------------------------------------------------------------------
\1\ Categorize the schedule by (a) the type of investment (such as common stocks, preferred stocks, convertible
  securities, fixed income securities, government securities, options purchased, warrants, loan participations
  and assignments, commercial paper, bankers' acceptances, certificates of deposit, short-term securities,
  repurchase agreements, other investment companies, and so forth); and (b) the related industry, country, or
  geographic region of the investment.
\2\ The subtotals for each category of investments, subdivided by industry, country, or geographic region, shall
  be shown together with their percentage value compared to net assets.
\3\ Except as provided in note 5, list separately the 50 largest issues and any other issue the value of which
  exceeded one percent of net asset value of the registrant as of the close of the period. For purposes of the
  list (including, in the case of short-term debt instruments, the first sentence of note 4), aggregate and
  treat as a single issue, respectively, (a) short-term debt instruments (i.e., debt instruments whose
  maturities or expiration dates at the time of acquisition are one year or less) of the same issuer (indicating
  the range of interest rates and maturity dates); and (b) fully collateralized repurchase agreements (indicate
  in a footnote the range of dates of the repurchase agreements, the total purchase price of the securities, the
  total amount to be received upon repurchase, the range of repurchase dates, and description of securities
  subject to the repurchase agreements). Restricted and unrestricted securities of the same issue should be
  aggregated for purposes of determining whether the issue is among the 50 largest issues, but should not be
  combined in the schedule. For purposes of determining whether the value of an issue exceeds one percent of net
  asset value, aggregate and treat as a single issue all securities of any one issuer, except that all fully
  collateralized repurchase agreements shall be aggregated and treated as a single issue. The U.S. Treasury and
  each agency, instrumentality, or corporation, including each government-sponsored entity, that issues U.S.
  government securities is a separate issuer.
\4\ If multiple securities of an issuer aggregate to greater than one percent of net asset value, list each
  issue of the issuer separately (including separate listing of restricted and unrestricted securities of the
  same issue) except that the following may be aggregated and listed as a single issue: (a) Fixed-income
  securities of the same issuer which are not among the 50 largest issues and whose value does not exceed one
  percent of net asset value of the registrant as of the close of the period (indicating the range of interest
  rates and maturity dates); and (b) U.S. government securities of a single agency, instrumentality, or
  corporation, which are not among the 50 largest issues and whose value does not exceed one percent of net
  asset value of the registrant as of the close of the period (indicating the range of interest rates and
  maturity dates). For each category identified pursuant to note 1, group all issues that are neither separately
  listed nor included in a group of securities that is listed in the aggregate as a single issue in a sub-
  category labeled ``Other securities,'' and provide the information for Columns C and D.
\5\ Any securities that would be required to be listed separately or included in a group of securities that is
  listed in the aggregate as a single issue may be listed in one amount as ``Miscellaneous securities,''
  provided the securities so listed are eligible to be, and are, categorized as ``Miscellaneous securities'' in
  the registrant's Schedule of Investments in Securities of Unaffiliated Issuers required under Sec.   210.12-
  12. However, if any security that is included in ``Miscellaneous securities'' would otherwise be required to
  be included in a group of securities that is listed in the aggregate as a single issue, the remaining
  securities of that group must nonetheless be listed as required by notes 3 and 4 even if the remaining
  securities alone would not otherwise be required to be listed in this manner (e.g., because the combined value
  of the security listed in ``Miscellaneous securities'' and the remaining securities of the same issuer exceeds
  one percent of net asset value, but the value of the remaining securities alone does not exceed one percent of
  net asset value).
\6\ If any securities are listed as ``Miscellaneous securities'' pursuant to note 5 or ``Other securities''
  pursuant to note 4, briefly explain in a footnote what those terms represent.
\7\ Total Column C. The total of column C should equal the total shown on the related balance sheet for
  investments in securities of unaffiliated issuers.
\8\ Indicate by an appropriate symbol each issue of securities which is non-income producing. Evidences of
  indebtedness and preferred shares may be deemed to be income producing if, on the respective last interest
  payment date or date for the declaration of dividends prior to the date of the related balance sheet, there
  was only a partial payment of interest or a declaration of only a partial amount of the dividends payable; in
  such case, however, each such issue shall be indicated by an appropriate symbol referring to a note to the
  effect that, on the last interest or dividend date, only partial interest was paid or partial dividends
  declared. If, on such respective last interest or dividend date, no interest was paid or no cash or in kind
  dividends declared, the issue shall not be deemed to be income producing. Common shares shall not be deemed to
  be income producing unless, during the last year preceding the date of the related balance sheet, there was at
  least one dividend paid upon such common shares.
\9\ Indicate by an appropriate symbol each issue of restricted securities. State the following in a footnote:
  (a) as to each such issue: (1) Acquisition date, (2) carrying value per unit of investment at date of related
  balance sheet, e.g., a percentage of current market value of unrestricted securities of the same issuer, etc.,
  and (3) the cost of such securities; (b) as to each issue acquired during the year preceding the date of the
  related balance sheet, the carrying value per unit of investment of unrestricted securities of the same issuer
  at: (1) The day the purchase price was agreed to; and (2) the day on which an enforceable right to acquire
  such securities was obtained; and (c) the aggregate value of all restricted securities and the percentage
  which the aggregate value bears to net assets.
\10\ Indicate by an appropriate symbol each issue of securities held in connection with open put or call option
  contracts or loans for short sales.
\11\ State in a footnote the following amounts based on cost for Federal income tax purposes: (a) Aggregate
  gross unrealized appreciation for all securities in which there is an excess of value over tax cost, (b) the
  aggregate gross unrealized depreciation for all securities in which there is an excess of tax cost over value,
  (c) the net unrealized appreciation or depreciation, and (d) the aggregate cost of securities for Federal
  income tax purposes.

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

0
5. The general authority citation for Part 239 is revised to read as 
follows:

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

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

0
6. The authority citation for part 249 continues to read, in part, as 
follows:

    Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; and 18 U.S.C. 
1350, unless otherwise noted.
* * * * *

0
7. Section 249.332 is added to read as follows:


Sec.  249.332  Form N-Q, quarterly schedule of portfolio holdings of 
registered management investment company.

    This form shall be used by registered management investment 
companies, other than small business investment companies registered on 
Form N-5 (Sec. Sec.  239.24 and 274.5 of this chapter), to file reports 
pursuant to Sec.  270.30b1-5 of this chapter not later than 60 days 
after the close of the first and third quarters of each fiscal year.

[[Page 11264]]

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

0
8. The authority citation for part 270 continues to read, in part, as 
follows:

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

0
9. Section 270.30a-2 is amended by revising the section heading and 
paragraph (a) to read as follows:


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

    (a) Each report filed on Form N-CSR (Sec. Sec.  249.331 and 274.128 
of this chapter) or Form N-Q (Sec. Sec.  249.332 and 274.130 of this 
chapter) by a registered management investment company must include 
certifications in the form specified in Item 11(a)(2) of Form N-CSR or 
Item 3 of Form N-Q, as applicable, and such certifications must be 
filed as an exhibit to such report. Each principal executive and 
principal financial officer of the investment company, or persons 
performing similar functions, at the time of filing of the report must 
sign a certification.
* * * * *

0
10. Section 270.30a-3 is amended by revising paragraphs (b) and (c) to 
read as follows:


Sec.  270.30a-3  Controls and procedures.

* * * * *
    (b) Each such registered management investment company's management 
must evaluate, with the participation of the company's principal 
executive and principal financial officers, or persons performing 
similar functions, the effectiveness of the company's disclosure 
controls and procedures, within the 90-day period prior to the filing 
date of each report on Form N-CSR (Sec. Sec.  249.331 and 274.128 of 
this chapter) and Form N-Q (Sec. Sec.  249.332 and 274.130 of this 
chapter).
    (c) For purposes of this section, 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 (Sec. Sec.  249.331 and 274.128 of this chapter) and Form N-Q 
(Sec. Sec.  249.332 and 274.130 of this chapter) 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 and Form N-Q is 
accumulated and communicated to the investment company's management, 
including its principal executive and principal financial officers, or 
persons performing similar functions, as appropriate to allow timely 
decisions regarding required disclosure.
* * * * *

0
11. Section 270.30b1-5 is added to read as follows:


Sec.  270.30b1-5  Quarterly report.

    Every registered management investment company, other than a small 
business investment company registered on Form N-5 (Sec. Sec.  239.24 
and 274.5 of this chapter), shall file a quarterly report on Form N-Q 
(Sec. Sec.  249.332 and 274.130 of this chapter) not more than 60 days 
after the close of the first and third quarters of each fiscal year. A 
registered management investment company that has filed a registration 
statement with the Commission registering its securities for the first 
time under the Securities Act of 1933 is relieved of this reporting 
obligation with respect to any reporting period or portion thereof 
prior to the date on which that registration statement becomes 
effective or is withdrawn.

0
12. Section 270.30d-1 is revised to read as follows:


Sec.  270.30d-1  Filing of copies of reports to shareholders.

    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) and Form N-Q 
(Sec. Sec.  249.332 and 274.130 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 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

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

0
13. The authority citation for part 274 is amended by adding the 
following citation in numerical order 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 274.130 is also issued under 15 U.S.C. 7202 and 7241.


0
14. Form N-1A (referenced in Sec. Sec.  239.15A and 274.11A) is amended 
by:
0
a. Removing Item 5 and redesignating Items 6 through 30 as Items 5 
through 29;
0
b. In paragraph B.2(b) of the General Instructions, revising the phrase 
``(except Items 1, 2, 3, 5, and 9), B, and C (except Items 23(e) and 
(i)--(k))'' to read ``(except Items 1, 2, 3, and 8), B, and C (except 
Items 22(e) and (i)--(k))'';
0
c. In paragraph C.3(a) of the General Instructions, revising the 
reference ``Item 8'' to read ``Item 7'';
0
d. In paragraph C.3(d)(i), introductory text, of the General 
Instructions and in newly redesignated Item 6, the introductory text of 
paragraph (f), revising the reference ``Items 7(b)-(d) and 8(a)(2)'' to 
read ``Items 6(b)--(d) and 7(a)(2)'';
0
e. In paragraph (b)(1) of Item 1, removing the phrase ``, if required 
by Item 5'';
0
f. In Instruction 6 to Item 1(b)(1) and paragraph (a)(2) of newly 
redesignated Item 7, revising the reference ``Item 7(f)'' to read 
``Item 6(f)'';
0
g. In Instruction 6 to Item 1(b)(1), revising the reference ``Item 
7(f)(3)'' to read ``Item 6(f)(3)'';
0
h. In Item 2(c)(2)(iii), revising the phrase ``Instruction 5 to Item 
5(b)'' to read ``Instruction 5 to Item 21(b)(7)'';
0
i. In Instruction 1(a) to Item 2(c)(2), revising the reference ``Item 
9(a)'' to read ``Item 8(a)'';
0
j. In Instruction 2(a) to Item 2(c)(2), revising the references ``Item 
21(a)'', ``Item 21(b)(1)'', and ``Items 21(b)(2) and (3)'' to read 
``Item 20(a)'', ``Item 20(b)(1)'', and ``Items 20(b)(2) and (3)'', 
respectively;
0
k. In Instruction 2(b) to Item 2(c)(2), revising the phrase 
``Instruction 6 to Item 5(b)'' to read ``Instruction 6 to Item 
21(b)(7)'';
0
l. In Instruction 2(d) to Item 2(c)(2), revising the references ``Item 
21(b)(2)'' and ``Item 21'' to read ``Item 20(b)(2)'' and ``Item 20'', 
respectively;
0
m. In Instruction 4 to Item 2(c)(2), revising the phrase ``Instruction 
11 of

[[Page 11265]]

Item 5(b)'' to read ``Instruction 11 to Item 21(b)(7)'';
0
n. In Instruction 2(a)(i) to Item 3, revising the reference ``Item 
8(a)'' to read ``Item 7(a)'';
0
o. In Instruction 5 to Item 4(b)(1), revising the reference ``Item 
12(c)(1)'' to read ``Item 11(c)(1)'';
0
p. In paragraph (e) of newly redesignated Item 11, revising the 
reference ``Item 9'' to read ``Item 8'';
0
q. Revising the reference ``Item 13'' to read ``Item 12'' in the 
following places:
0
i. Instruction 1 to newly redesignated Item 12;
0
ii. Paragraph (a)(2) of newly redesignated Item 12;
0
iii. Paragraph (b)(3) of newly redesignated Item 12;
0
iv. Paragraph (b)(6) of newly redesignated Item 12;
0
v. Instructions 6, 8, and 10 to newly redesignated Item 12(b)(7) each 
time it appears;
0
vi. Paragraph (b)(8) of newly redesignated Item 12 each time it 
appears;
0
vii. Instructions 2, 4, 6, 7, and 8 to newly redesignated Item 12(b)(8) 
each time it appears; and
0
viii. Paragraph (b)(9)(iii) of newly redesignated Item 12.
0
r. In Instruction to paragraph (a) of newly redesignated Item 17, 
revising the reference ``Item 18(a)'' to read ``Item 17(a)'';
0
s. In Instruction 4 to paragraph (c) of newly redesignated Item 17 and 
paragraph (k) of newly redesignated Item 22, revising the reference 
``Item 22'' to read ``Item 21'';
0
t. In Instruction 1 to paragraph (c) of newly redesignated Item 19, 
revising the references ``Item 8(b)(2)'', ``Item 15(d)'', and ``Item 
30'' to read ``Item 7(b)(2)'', ``Item 14(d)'', and ``Item 29'', 
respectively;
0
u. In paragraph (b) of newly redesignated Item 26, revising the 
reference ``Item 20'' to read ``Item 19'';
0
v. In Instruction 2 to paragraph (c) of newly redesignated Item 26, 
revising the reference ``Item 20(c)'' to read ``Item 19(c)'';
0
w. In Instruction 1 to newly redesignated Item 28, revising the 
reference ``Item 15'' to read ``Item 14''; and
0
x. Revising Instruction 5 to Item 1(b)(1) and newly redesignated Item 
21. The revisions read as follows:

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

Form N-1A

* * * * *

Item 1. Front and Back Cover Pages

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

Instructions

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

Item 21. Financial Statements

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

Instructions

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

Instructions

    1. Schedule VI `` Summary schedule of investments in securities of 
unaffiliated issuers [17 CFR 210.12-12C] may be included in the 
financial statements in lieu of Schedule I--Investments in securities 
of unaffiliated issuers [17 CFR 210.12-12] if: (a) The Fund states in 
the report that the Fund's complete schedule of investments in 
securities of unaffiliated issuers is available (i) without charge, 
upon request, by calling a specified toll-free (or collect) telephone 
number; (ii) on the Fund's Web site, if applicable; and (iii) on the 
Commission's Web site at http://www.sec.gov; and (b) whenever the Fund 
(or financial intermediary through which shares of the Fund may be 
purchased or sold) receives a request for the Fund's schedule of 
investments in securities of unaffiliated issuers, the Fund (or 
financial intermediary) sends a copy of Schedule I--Investments in 
securities of unaffiliated issuers within 3 business days of receipt by 
first-class mail or other means designed to ensure equally prompt 
delivery.
    2. In the case of a Money Market Fund, Schedule I `` Investments in 
securities of unaffiliated issuers (17 CFR 210.12-12C) may be omitted 
from its financial statements, provided that: (a) The Fund states in 
the report that the Fund's complete schedule of investments in 
securities of unaffiliated issuers is available (i) without charge, 
upon request, by calling a specified toll-free (or collect) telephone 
number; (ii) on the Fund's Web site, if applicable; and (iii) on the 
Commission's Web site at http://www.sec.gov; and (b) whenever the Fund 
(or financial intermediary through which shares of the Fund may be 
purchased or sold) receives a request for the Fund's schedule of 
investments in securities of unaffiliated issuers, the Fund (or 
financial intermediary) sends a copy of Schedule I--Investments in 
securities of unaffiliated issuers within 3 business days of receipt by 
first-class mail or other means designed to ensure equally prompt 
delivery.
    (2) Condensed Financial Information. The condensed financial 
information required by Item 8(a) with at least the most recent fiscal 
year audited.
    (3) Remuneration Paid to Directors, Officers, and Others. Unless 
shown elsewhere in the report as part of the financial statements 
required by paragraph (b)(1), the aggregate remuneration paid by the 
Fund during the period covered by the report to:
    (i) All directors and all members of any advisory board for regular 
compensation;
    (ii) Each director and each member of an advisory board for special 
compensation;
    (iii) All officers; and
    (iv) Each person of whom any officer or director of the Fund is an 
affiliated person.
    (4) Changes in and Disagreements with Accountants. The information 
concerning changes in and disagreements with accountants and on 
accounting and financial disclosure

[[Page 11266]]

required by Item 304 of Regulation S-K [17 CFR 229.304].
    (5) Management Information. The management information required by 
Item 12(a)(1).
    (6) Availability of Additional Information about Fund Directors. A 
statement that the SAI includes additional information about Fund 
directors and is available, without charge, upon request, and a toll-
free (or collect) telephone number for shareholders to call to request 
the SAI.
    (7) Management's Discussion of Fund Performance. Disclose the 
following information unless the Fund is a Money Market Fund:
    (i) Discuss the factors that materially affected the Fund's 
performance during the most recently completed fiscal year, including 
the relevant market conditions and the investment strategies and 
techniques used by the Fund's investment adviser.
    (ii)(A) Provide a line graph comparing the initial and subsequent 
account values at the end of each of the most recently completed 10 
fiscal years of the Fund (or for the life of the Fund, if shorter), but 
only for periods subsequent to the effective date of the Fund's 
registration statement. Assume a $10,000 initial investment at the 
beginning of the first fiscal year in an appropriate broad-based 
securities market index for the same period.
    (B) In a table placed within or next to the graph, provide the 
Fund's average annual total returns for the 1-, 5-, and 10-year periods 
as of the end of the last day of the most recent fiscal year (or for 
the life of the Fund, if shorter), but only for periods subsequent to 
the effective date of the Fund's registration statement. Average annual 
total returns should be computed in accordance with Item 20(b)(1). 
Include a statement accompanying the graph and table to the effect that 
past performance does not predict future performance and that the graph 
and table do not reflect the deduction of taxes that a shareholder 
would pay on fund distributions or the redemption of fund shares.

Instructions

    1. Line Graph Computation.
    (a) Assume that the initial investment was made at the offering 
price last calculated on the business day before the first day of the 
first fiscal year.
    (b) Base subsequent account values on the net asset value of the 
Fund last calculated on the last business day of the first and each 
subsequent fiscal year.
    (c) Calculate the final account value by assuming the account was 
closed and redemption was at the price last calculated on the last 
business day of the most recent fiscal year.
    (d) Base the line graph on the Fund's required minimum initial 
investment if that amount exceeds $10,000.
    2. Sales Load. Reflect any sales load (or any other fees charged at 
the time of purchasing shares or opening an account) by beginning the 
line graph at the amount that actually would be invested (i.e., assume 
that the maximum sales load, and other charges deducted from payments, 
is deducted from the initial $10,000 investment). For a Fund whose 
shares are subject to a contingent deferred sales load, assume the 
deduction of the maximum deferred sales load (or other charges) that 
would apply for a complete redemption that received the price last 
calculated on the last business day of the most recent fiscal year. For 
any other deferred sales load, assume that the deduction is in the 
amount(s) and at the time(s) that the sales load actually would have 
been deducted.
    3. Dividends and Distributions. Assume reinvestment of all of the 
Fund's dividends and distributions on the reinvestment dates during the 
period, and reflect any sales load imposed upon reinvestment of 
dividends or distributions or both.
    4. Account Fees. Reflect recurring fees that are charged to all 
accounts.
    (a) For any account fees that vary with the size of the account, 
assume a $10,000 account size.
    (b) Reflect, as appropriate, any recurring fees charged to 
shareholder accounts that are paid other than by redemption of the 
Fund's shares.
    (c) Reflect an annual account fee that applies to more than one 
Fund by allocating the fee in the following manner: divide the total 
amount of account fees collected during the year by the Funds' total 
average net assets, multiply the resulting percentage by the average 
account value for each Fund and reduce the value of each hypothetical 
account at the end of each fiscal year during which the fee was 
charged.
    5. Appropriate Index. For purposes of this Item, an ``appropriate 
broad-based securities market index'' is one that is administered by an 
organization that is not an affiliated person of the Fund, its 
investment adviser, or principal underwriter, unless the index is 
widely recognized and used. Adjust the index to reflect the 
reinvestment of dividends on securities in the index, but do not 
reflect the expenses of the Fund.
    6. Additional Indexes. A Fund is encouraged to compare its 
performance not only to the required broad-based index, but also to 
other more narrowly based indexes that reflect the market sectors in 
which the Fund invests. A Fund also may compare its performance to an 
additional broad-based index, or to a non-securities index (e.g., the 
Consumer Price Index), so long as the comparison is not misleading.
    7. Change in Index. If the Fund uses an index that is different 
from the one used for the immediately preceding fiscal year, explain 
the reason(s) for the change and compare the Fund's annual change in 
the value of an investment in the hypothetical account with the new and 
former indexes.
    8. Other Periods. The line graph may cover earlier fiscal years and 
may compare the ending values of interim periods (e.g., monthly or 
quarterly ending values), so long as those periods are after the 
effective date of the Fund's registration statement.
    9. Scale. The axis of the graph measuring dollar amounts may use 
either a linear or a logarithmic scale.
    10. New Funds. A New Fund (as defined in Instruction 5 to Item 3) 
is not required to include the information specified by this Item in 
its prospectus (or annual report), unless Form N-1A (or the annual 
report) contains audited financial statements covering a period of at 
least 6 months.
    11. Change in Investment Adviser. If the Fund has not had the same 
investment adviser for the previous 10 fiscal years, the Fund may begin 
the line graph on the date that the current adviser began to provide 
advisory services to the Fund so long as:
    (a) Neither the current adviser nor any affiliate is or has been in 
``control'' of the previous adviser under section 2(a)(9) [15 U.S.C. 
80a-2(a)(9)];
    (b) The current adviser employs no officer(s) of the previous 
adviser or employees of the previous adviser who were responsible for 
providing investment advisory or portfolio management services to the 
Fund; and
    (c) The graph is accompanied by a statement explaining that 
previous periods during which the Fund was advised by another 
investment adviser are not shown.
    (iii) Discuss the effect of any policy or practice of maintaining a 
specified level of distributions to shareholders on the Fund's 
investment strategies and per share net asset value during the last 
fiscal year. Also discuss the extent to which the Fund's distribution 
policy resulted in distributions of capital.
    (c) Semi-Annual Report. Every semi-annual report to shareholders 
required by rule 30e-1 must contain the following (which need not be 
audited):
    (1) Financial Statements. The financial statements required by

[[Page 11267]]

Regulation S-X for the period commencing either with:
    (i) The beginning of the Fund's fiscal year (or date of 
organization, if newly organized); or
    (ii) A date not later than the date after the close of the period 
included in the last report under rule 30e-1 and the most recent 
preceding fiscal year.
    Instruction. Instructions 1 and 2 to Item 21(b)(1) also apply to 
this Item 21(c)(1).
    (2) Condensed Financial Information. The condensed financial 
information required by Item 8(a), for the period of the report as 
specified by paragraph (c)(1), and the most recent preceding fiscal 
year.
    (3) Remuneration Paid to Directors, Officers, and Others. Unless 
shown elsewhere in the report as part of the financial statements 
required by paragraph (c)(1), the aggregate remuneration paid by the 
Fund during the period covered by the report to the persons specified 
under paragraph (b)(3).
    (4) Changes in and Disagreements with Accountants. The information 
concerning changes in and disagreements with accountants and on 
accounting and financial disclosure required by Item 304 of Regulation 
S-K [17 CFR 229.304].
    (d) Annual and Semi-Annual Reports. Every annual and semi-annual 
report to shareholders required by rule 30e-1 must contain the 
following:
    (1) Expense Example. The following information regarding expenses 
for the period:

Example

    As a shareholder of the Fund, you incur two types of costs: (1) 
transaction costs, including sales charges (loads) on purchase 
payments, reinvested dividends, or other distributions; redemption 
fees; and exchange fees; and (2) ongoing costs, including management 
fees; distribution [and/or service] (12b-1) fees; and other Fund 
expenses. This Example is intended to help you understand your 
ongoing costs (in dollars) of investing in the Fund and to compare 
these costs with the ongoing costs of investing in other mutual 
funds.
    The Example is based on an investment of $1,000 invested at the 
beginning of the period and held for the entire period [insert 
dates].

Actual Expenses

    The first line of the table below provides information about 
actual account values and actual expenses. You may use the 
information in this line, together with the amount you invested, to 
estimate the expenses that you paid over the period. Simply divide 
your account value by $1,000 (for example, an $8,600 account value 
divided by $1,000 = 8.6), then multiply the result by the number in 
the first line under the heading entitled ``Expenses Paid During 
Period'' to estimate the expenses you paid on your account during 
this period. [If the Fund charges any account fees or other 
recurring fees that are not included in the expenses shown in the 
table, for example, because they are not charged to all investors, 
disclose the amounts of these fees, describe the accounts that are 
charged these fees, and explain how an investor would use this 
information to estimate the total ongoing expenses paid over the 
period and the impact of these fees on ending account value.]

Hypothetical Example for Comparison Purposes

    The second line of the table below provides information about 
hypothetical account values and hypothetical expenses based on the 
Fund's actual expense ratio and an assumed rate of return of 5% per 
year before expenses, which is not the Fund's actual return. The 
hypothetical account values and expenses may not be used to estimate 
the actual ending account balance or expenses you paid for the 
period. You may use this information to compare the ongoing costs of 
investing in the Fund and other funds. To do so, compare this 5% 
hypothetical example with the 5% hypothetical examples that appear 
in the shareholder reports of the other funds. [If the Fund charges 
any account fees or other recurring fees that are not included in 
the expenses shown in the table, for example, because they are not 
charged to all investors, disclose the amounts of these fees, 
describe the accounts that are charged these fees, and explain how 
an investor would use this information in making the foregoing 
comparison.]
    Please note that the expenses shown in the table are meant to 
highlight your ongoing costs only and do not reflect any 
transactional costs, such as sales charges (loads), redemption fees, 
or exchange fees. Therefore, the second line of the table is useful 
in comparing ongoing costs only, and will not help you determine the 
relative total costs of owning different funds. In addition, if 
these transactional costs were included, your costs would have been 
higher.

------------------------------------------------------------------------
                                                                Expenses
                                         Beginning    Ending      paid
                                          account    account     during
                                           value      value      period
                                           [date]     [date]      \*\
                                                                [dates]
------------------------------------------------------------------------
Actual.................................     $1,000  .........  .........
Hypothetical (5% return before               1,000  .........  .........
 expenses).............................
------------------------------------------------------------------------
\*\ Expenses are equal to the Fund's annualized expense ratio of [--%],
  multiplied by the average account value over the period, multiplied by
  [number of days in most recent fiscal half-year/365 [or 366]] (to
  reflect the one-half year period).

Instructions

    1. General.
    (a) Round all dollar figures to the nearest dollar.
    (b) Include the narrative explanations in the order indicated. A 
Fund may modify the narrative explanations if the explanation contains 
comparable information to that shown, and is required to make any 
modifications necessary to reflect accurately the Fund's circumstances. 
A Fund may eliminate any parts of the narrative explanations that are 
inapplicable. For example, a Fund that does not charge loads need not 
include the statement that the Example does not reflect loads or that 
costs would be higher if loads were included.
    (c) The Fund's expense ratio shown in the footnote to the table 
should be calculated in the manner required by Instruction 4(b) to Item 
8(a) using the expenses for the Fund's most recent fiscal half-year 
(the Fund's second fiscal half-year in the case of an annual report). 
Express the expense ratio on an annualized basis.
    (d)(i) If the Fund is a Feeder Fund, reflect the aggregate expenses 
of the Feeder Fund and the Master Fund. In a footnote to the Example, 
state that the Example reflects the expenses of both the Feeder and 
Master Funds.
    (ii) If the report covers more than one Class of a Multiple Class 
Fund or more than one Feeder Fund that invests in the same Master Fund, 
provide a separate Example for each Class or Feeder Fund.
    2. Computation.
    (a)(i) In determining the Fund's ``actual expenses'' for purposes 
of this example, include all expenses that are deducted from the Fund's 
assets or charged to all shareholder accounts, including ``Management 
Fees,'' ``Distribution [and/or Service] (12b-1) Fees,'' and ``Other 
Expenses'' as those terms are defined in Instruction 3 to Item 3 of 
this form as modified by Instructions 2(a)(ii) and (c)(i) to this Item. 
Reflect recurring and non-

[[Page 11268]]

recurring fees charged to all investors other than any exchange fees, 
sales charges (loads), or fees charged upon redemption of the Fund's 
shares. The amount of expenses deducted from the Fund's assets are the 
amounts shown as expenses in the Fund's statement of operations 
(including increases resulting from complying with paragraph 2(g) of 
rule 6-07 of Regulation S-X [17 CFR 210.6-07]).
    (ii) For purposes of this Item 21(d)(1), ``Other Expenses'' include 
extraordinary expenses as determined under generally accepted 
accounting principles (see Accounting Principles Board Opinion No. 30). 
If extraordinary expenses were incurred that materially affected the 
Fund's ``Other Expenses,'' the Fund may disclose in a footnote to the 
Example what ``actual expenses'' would have been had the extraordinary 
expenses not been included.
    (b) Assume reinvestment of all dividends and distributions.
    (c)(i) Base the percentages of ``actual expenses'' on amounts 
incurred during the Fund's most recent fiscal half-year (the Fund's 
second fiscal half-year in the case of an annual report). ``Actual 
expenses'' should reflect actual expenses after expense reimbursement 
or fee waiver arrangements that reduced expenses during the most recent 
fiscal half-year.
    (ii) If there have been any increases or decreases in Fund expenses 
that occurred during the Fund's most recent fiscal half-year (or that 
have occurred or are expected to occur during the current fiscal year) 
that would have materially affected the information in the Example had 
those changes been in place throughout the most recent fiscal half-
year, restate in a footnote to the Example the expense information 
using the current fees as if they had been in effect throughout the 
entire most recent fiscal half-year. A change in Fund expenses does not 
include a decrease in expenses as a percentage of assets due to 
economies of scale or breakpoints in a fee arrangement resulting from 
an increase in the Fund's assets.
    (d) Reflect any shareholder account fees collected by more than one 
Fund by allocating the total amount of the fees collected during the 
Fund's most recent fiscal half-year (the Fund's second fiscal half-year 
in the case of an annual report) for all such Funds to each Fund in 
proportion to the relative average net assets of the Fund. A Fund that 
charges account fees based on a minimum account requirement exceeding 
$1,000 may adjust its account fees based on the amount of the fee in 
relation to the Fund's minimum account requirement.
    (2) Graphical Representation of Holdings. One or more tables, 
charts, or graphs depicting the portfolio holdings of the Fund by 
reasonably identifiable categories (e.g., type of security, industry 
sector, geographic region, credit quality, or maturity) showing the 
percentage of net asset value or total investments attributable to 
each. The categories and the basis of presentation (e.g., net asset 
value or total investments) should be selected, and the presentation 
should be formatted, in a manner reasonably designed to depict clearly 
the types of investments made by the Fund, given its investment 
objectives. Credit quality should be the ratings grade assigned by a 
nationally recognized statistical rating organization (``NRSRO''), as 
that term is used in paragraphs (c)(2)(vi)(E), (F), and (H) of Rule 
15c3-1 under the Exchange Act (17 CFR 240.15c3-1(c)(2)(vi)(E), (F), and 
(H)). The fund should use ratings of only one NRSRO.
    (3) Statement Regarding Availability of Quarterly Portfolio 
Schedule. A statement that: (i) The Fund files its complete schedule of 
portfolio holdings with the Commission for the first and third quarters 
of each fiscal year on Form N-Q; (ii) the Fund's Forms N-Q are 
available on the Commission's Web site at http://www.sec.gov; (iii) the 
Fund's Forms N-Q may be reviewed and copied at the Commission's Public 
Reference Room in Washington, DC, and that information on the operation 
of the Public Reference Room may be obtained by calling 1-800-SEC-0330; 
and (iv) if the Fund makes the information on Form N-Q available to 
shareholders on its Web site or upon request, a description of how the 
information may be obtained from the Fund.
    (4) Statement Regarding Availability of Proxy Voting Policies and 
Procedures. A statement that a description of the policies and 
procedures that the Fund uses to determine how to vote proxies relating 
to portfolio securities is available (i) without charge, upon request, 
by calling a specified toll-free (or collect) telephone number; (ii) on 
the Fund's Web site, if applicable; and (iii) on the Commission's Web 
site at http://www.sec.gov.
    Instruction. When a Fund (or financial intermediary through which 
shares of the Fund may be purchased or sold) receives a request for a 
description of the policies and procedures that the Fund uses to 
determine how to vote proxies, the Fund (or financial intermediary) 
must send the information disclosed in response to Item 12(f) of this 
Form, within three business days of receipt of the request, by first-
class mail or other means designed to ensure equally prompt delivery.
    (5) Statement Regarding Availability of Proxy Voting Record. A 
statement that information regarding how the Fund voted proxies 
relating to portfolio securities during the most recent 12-month period 
ended June 30 is available (i) without charge, upon request, by calling 
a specified toll-free (or collect) telephone number; or on or through 
the Fund's Web site at a specified Internet address; or both; and (ii) 
on the Commission's Web site at http://www.sec.gov.

Instructions

    1. If a Fund discloses that the Fund's proxy voting record is 
available by calling a toll-free (or collect) telephone number, and the 
Fund (or financial intermediary through which shares of the Fund may be 
purchased or sold) receives a request for this information, the Fund 
(or financial intermediary) must send the information disclosed in the 
Fund's most recently filed report on Form N-PX, within three business 
days of receipt of the request, by first-class mail or other means 
designed to ensure equally prompt delivery.
    2. If a Fund discloses that the Fund's proxy voting record is 
available on or through its Web site, the Fund must make available free 
of charge the information disclosed in the Fund's most recently filed 
report on Form N-PX on or through its Web site as soon as reasonably 
practicable after filing the report with the Commission. The 
information disclosed in the Fund's most recently filed report on Form 
N-PX must remain available on or through the Fund's Web site for as 
long as the Fund remains subject to the requirements of Rule 30b1-4 (17 
CFR 270.30b1-4) and discloses that the Fund's proxy voting record is 
available on or through its Web site.
* * * * *

0
15. Form N-2 (referenced in Sec. Sec.  239.14 and 274.11a-1) is amended 
by:
0
a. Revising the fourth paragraph and subparagraph 2 of General 
Instruction F;
0
b. Revising Instructions 4.a. and 5.a. to Item 23;
0
c. Removing Instructions 4.g., 4.h., 5.e., and 5.f. to Item 23;
0
d. Adding ``and'' at the end of Instruction 4.e. to Item 23;
0
e. Removing the semi-colon from the end of Instruction 4.f. to Item 23 
and in its place adding a period;
0
f. Adding ``and'' at the end of Instruction 5.c. to Item 23;
0
g. Removing the semi-colon from the end of Instruction 5.d. to Item 23 
and in its place adding a period;

[[Page 11269]]

0
h. Redesignating Instructions 6 and 7 to Item 23 as Instructions 8 and 
9; and
0
i. Adding new Instructions 6 and 7 to Item 23.
    The additions and revisions read as follows:

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

Form N-2

* * * * *

General Instructions

* * * * *

F. Incorporation by Reference

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

Item 23. Financial Statements

* * * * *

Instructions

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

0
16. Form N-3 (referenced in Sec. Sec.  239.17 and 274.11b) is amended 
by:
0
a. Revising the fourth paragraph and subparagraph 2 of General 
Instruction G;
0
b. Revising Instructions 4(i) and 5(i) to Item 27(a);
0
c. Removing Instructions 4(vii), 4(viii), 5(v), and 5(vi) to Item 
27(a);
0
d. Adding ``and'' at the end of Instruction 4(v) to Item 27(a);
0
e. Removing the semi-colon from the end of Instruction 4(vi) to Item 
27(a) and in its place adding a period;

[[Page 11270]]

0
f. Adding ``and'' at the end of Instruction 5(iii) to Item 27(a);
0
g. Removing the semi-colon from the end of Instruction 5(iv) to Item 
27(a) and in its place adding a period;
0
h. Redesignating Instructions 6 and 7 to Item 27(a) as Instructions 8 
and 9 to Item 27(a);
0
i. Adding new Instructions 6 and 7 to Item 27(a); and
0
j. Revising newly redesignated Instruction 9 to Item 27(a).
    The additions and revisions read as follows.

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

Form N-3

* * * * *

General Instructions

* * * * *

G. Incorporation by Reference

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

Item 27. Financial Statements

    (a) * * *

Instructions

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

[[Page 11271]]

http://www.sec.gov; and (B) whenever the Registrant (or financial 
intermediary through which shares of the Registrant may be purchased or 
sold) receives a request for the Registrant's schedule of investments 
in securities of unaffiliated issuers, the Registrant (or financial 
intermediary) sends a copy of Schedule I--Investments in securities of 
unaffiliated issuers within 3 business days of receipt by first-class 
mail or other means designed to ensure equally prompt delivery.
* * * * *
    9. See General Instruction G regarding incorporation by reference.
* * * * *

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

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

0
17. Form N-CSR (referenced in Sec. Sec.  249.331 and 274.128) is 
amended by:
0
a. Adding new Item 6;
0
b. Revising paragraph (b) of Item 10;
0
c. Adding an Instruction to paragraph (b) of Item 10;
0
d. Revising paragraph 4(d) of the Certification in Item 11(a)(2); and
0
e. Adding an Instruction to paragraph (a)(2) of Item 11.
    The additions and revisions read as follows:

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

Form N-CSR

* * * * *

Item 6. Schedule of Investments

    File Schedule I--Investments in securities of unaffiliated issuers 
as of the close of the reporting period as set forth in Sec.  210.12-12 
of Regulation S-X [17 CFR 210.12-12], unless the schedule is included 
as part of the report to shareholders filed under Item 1 of this Form.

Instruction

    Schedule I--Investments in securities of unaffiliated issuers filed 
under this Item must be audited, except that in the case of a report on 
this Form N-CSR as of the end of a fiscal half-year Schedule I--
Investments in securities of unaffiliated issuers need not be audited.
* * * * *

Item 10. Controls and Procedures

* * * * *
    (b) Disclose any change in the registrant's internal control over 
financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR 
270.30a-3(d)) that occurred during the second fiscal quarter of the 
period covered by this report that has materially affected, or is 
reasonably likely to materially affect, the registrant's internal 
control over financial reporting.
    Instruction to paragraph (b).
    Until the earlier of June 30, 2005, or the date that the registrant 
has filed its first report on Form N-Q (17 CFR 249.332; 17 CFR 
274.130), the registrant must disclose, pursuant to paragraph (b) of 
this Item, any change in the registrant's internal control over 
financial reporting that occurred during the registrant's last fiscal 
half-year (the registrant's second fiscal half-year in the case of an 
annual report) that has materially affected, or is reasonably likely to 
materially affect, the registrant's internal control over financial 
reporting.

Item 11. Exhibits

    (a) * * *
    (2) * * *

Certifications

    I, [Identify the certifying individual], certify that:
* * * * *
    4. * * *
    (d) Disclosed in this report any change in the registrant's 
internal control over financial reporting that occurred during the 
second fiscal quarter of the period covered by this report that has 
materially affected, or is reasonably likely to materially affect, the 
registrant's internal control over financial reporting; and
* * * * *
    Instruction to paragraph (a)(2).
    Until the earlier of June 30, 2005, or the date that the registrant 
has filed its first report on Form N-Q (17 CFR 249.332; 17 CFR 
274.130), in paragraph 4(d) of the certification required by Item 
11(a)(2), the registrant's certifying officers must certify that they 
have disclosed in the report any change in the registrant's internal 
control over financial reporting that occurred during the registrant's 
most recent fiscal half-year (the registrant's second fiscal half-year 
in the case of an annual report) that has materially affected, or is 
reasonably likely to materially affect, the registrant's internal 
control over financial reporting.
* * * * *

0
18. Section 274.130 and Form N-Q (referenced in Sec.  249.332 and Sec.  
274.130) are added to read as follows:


Sec.  274.130  Form N-Q, quarterly schedule of portfolio holdings of 
registered management investment company.

    This form shall be used by registered management investment 
companies, other than small business investment companies registered on 
Form N-5 (Sec. Sec.  239.24 and 274.5 of this chapter), to file reports 
pursuant to Sec.  270.30b1-5 of this chapter not later than 60 days 
after the close of the first and third quarters of each fiscal year.

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

OMB Approval

OMB Number: 3235-0578
Expires: February 28, 2006
Estimated average burden hours per response: 20.00

Securities and Exchange Commission, Washington, DC 20549

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

Investment Company Act file number-------------------------------------
-----------------------------------------------------------------------
(Exact name of registrant as specified in charter)
-----------------------------------------------------------------------
(Address of principal executive offices)
-----------------------------------------------------------------------
(Zip code)
-----------------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: ----------------
Date of fiscal year end: --------
Date of reporting period: --------

    Form N-Q is to be used by management investment companies, other 
than small business investment companies registered on Form N-5 
(Sec. Sec.  239.24 and 274.5 of this chapter), to file reports with the 
Commission, not later than 60 days after the close of the first and 
third fiscal quarters, pursuant to rule 30b1-5 under the Investment 
Company Act of 1940 (17 CFR 270.30b1-5). The Commission may use the 
information provided on Form N-Q in its regulatory, disclosure review, 
inspection, and policymaking roles.
    A registrant is required to disclose the information specified by 
Form N-Q, and the Commission will make this information public. A 
registrant is not required to respond to the collection of information 
contained in Form N-Q unless the Form displays a currently valid Office 
of Management and Budget (``OMB'') control number. Please direct 
comments concerning the accuracy of the information collection burden 
estimate and any suggestions for reducing the burden to the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609. The OMB has reviewed

[[Page 11272]]

this collection of information under the clearance requirements of 44 
U.S.C. 3507.

General Instructions

A. Rule as to Use of Form N-Q

    Form N-Q is a combined reporting form that is to be used for 
reports of registered management investment companies, other than small 
business investment companies registered on Form N-5 (Sec. Sec.  239.24 
and 274.5 of this chapter), under section 30(b) 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 30b1-5 under the Act (17 CFR 270.30b1-5). Registered management 
investment companies, other than small business investment companies 
registered on Form N-5, shall file their complete portfolio holdings on 
Form N-Q as of the close of the first and third quarters of each fiscal 
year. A report on this form shall be filed not later than 60 days after 
the close of the first and third quarters of each fiscal year.

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 
the Form. All incorporation by reference must comply with the 
requirements of this Form and the following rules on incorporation by 
reference: Rule 10(d) of Regulation S-K under the Securities Act of 
1933 (17 CFR 229.10(d)) (general rules on incorporation by reference, 
which, among other things, prohibit, unless specifically required by 
this Form, incorporating by reference a document that includes 
incorporation by reference to another document, and limits 
incorporation to documents filed within the last 5 years, with certain 
exceptions); Rule 303 of Regulation S-T (17 CFR 232.303) (specific 
requirements for electronically filed documents); Rules 12b-23 and 12b-
32 under the Exchange Act (17 CFR 240.12b-23 and 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-Q have meanings as defined in the Act and the rules and 
regulations thereunder. Unless otherwise indicated, all references in 
the form to statutory sections or to rules are sections of the Act and 
the rules and regulations thereunder.

F. Signature and Filing of Report

    1. If the report is filed in paper pursuant to a hardship exemption 
from electronic filing (see Item 201 et seq. of Regulation S-T (17 CFR 
232.201 et seq.)), eight complete copies of the report shall be filed 
with the Commission. At least one complete copy of the report 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 and principal financial 
officers.
    (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. Schedule of Investments
    File the schedules as of the close of the reporting period as set 
forth in Sec. Sec.  210.12-12--12-14 of Regulation S-X [17 CFR 210.12-
12--12-14]. The schedules need not be audited.
Item 2. Controls and Procedures
    (a) Disclose the conclusions of the registrant's principal 
executive and principal financial officers, or persons performing 
similar functions, regarding the effectiveness of the registrant's 
disclosure controls and procedures (as defined in Rule 30a-3(c) under 
the Act (17 CFR 270.30a-3(c))) as of a date within 90 days of the 
filing date of the report that includes the disclosure required by this 
paragraph, based on the evaluation of these controls and procedures 
required by Rule 30a-3(b) under the Act (17 CFR 270.30a-3(b)) and Rule 
13a-15(b) or 15d-15(b) under the Exchange Act (17 CFR 240.13a-15(b) or 
240.15d-15(b)).
    (b) Disclose any change in the registrant's internal control over 
financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR 
270.30a-3(d)) that occurred during the registrant's last fiscal quarter 
that has materially affected, or is reasonably likely to materially 
affect, the registrant's internal control over financial reporting.
Item 3. Exhibits
    File as exhibits as part of this Form a separate certification for 
each principal executive officer and principal financial officer of the 
registrant as required by Rule 30a-2(a) under the Act (17 CFR 270.30a-
2(a)), exactly as set forth below:

Certifications

    I, [identify the certifying individual], certify that:
    1. I have reviewed this report on Form N-Q 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 schedules of investments included in

[[Page 11273]]

this report fairly present in all material respects the investments of 
the registrant as of the end of the fiscal quarter for which the report 
is filed;
    4. The registrant's other certifying officer(s) and I are 
responsible for establishing and maintaining disclosure controls and 
procedures (as defined in Rule 30a-3(c) under the Investment Company 
Act of 1940) and internal control over financial reporting (as defined 
in Rule 30a-3(d) under the Investment Company Act of 1940) for the 
registrant and have:
    (a) Designed such disclosure controls and procedures, or caused 
such disclosure controls and procedures to be designed under our 
supervision, 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) Designed such internal control over financial reporting, or 
caused such internal control over financial reporting to be designed 
under our supervision, to provide reasonable assurance regarding the 
reliability of financial reporting and the preparation of financial 
statements for external purposes in accordance with generally accepted 
accounting principles;
    (c) Evaluated the effectiveness of the registrant's disclosure 
controls and procedures and presented in this report our conclusions 
about the effectiveness of the disclosure controls and procedures, as 
of a date within 90 days prior to the filing date of this report, based 
on such evaluation; and
    (d) Disclosed in this report any change in the registrant's 
internal control over financial reporting that occurred during the 
registrant's most recent fiscal quarter that has materially affected, 
or is reasonably likely to materially affect, the registrant's internal 
control over financial reporting; and
    5. The registrant's other certifying officer(s) and I have 
disclosed 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 and material weaknesses in the 
design or operation of internal control over financial reporting which 
are reasonably likely to adversely affect the registrant's ability to 
record, process, summarize, and report financial information; and
    (b) Any fraud, whether or not material, that involves management or 
other employees who have a significant role in the registrant's 
internal control over financial reporting.

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.

    By the Commission.

    Dated: February 27, 2004.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-4829 Filed 3-8-04; 8:45 am]
BILLING CODE 8010-01-P