[Federal Register Volume 69, Number 79 (Friday, April 23, 2004)]
[Rules and Regulations]
[Pages 22300-22317]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-9150]



[[Page 22299]]

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Part IV





Securities and Exchange Commission





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17 CFR Parts 239 and 274



Disclosure Regarding Market Timing and Selective Disclosure of 
Portfolio Holdings; Final Rule

  Federal Register / Vol. 69, No. 79 / Friday, April 23, 2004 / Rules 
and Regulations  

[[Page 22300]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 239 and 274

[Release Nos. 33-8408; IC-26418; File No. S7-26-03]
RIN 3235-AI99


Disclosure Regarding Market Timing and Selective Disclosure of 
Portfolio Holdings

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission is adopting amendments 
to Form N-1A under the Securities Act of 1933 and the Investment 
Company Act of 1940 to require open-end management investment companies 
to disclose in their prospectuses both the risks to shareholders of 
frequent purchases and redemptions of investment company shares, and 
the investment company's policies and procedures with respect to such 
frequent purchases and redemptions. The Commission is also amending 
Forms N-3, N-4, and N-6 to require similar prospectus disclosure for 
insurance company separate accounts issuing variable annuity and 
variable life insurance contracts. In addition, the Commission is 
adopting amendments to Forms N-1A and N-3 to clarify that open-end 
management investment companies and insurance company managed separate 
accounts that offer variable annuities, other than money market funds, 
are required to explain both the circumstances under which they will 
use fair value pricing and the effects of using fair value pricing. 
Finally, the Commission is requiring open-end management investment 
companies and insurance company managed separate accounts that offer 
variable annuities to disclose both their policies and procedures with 
respect to the disclosure of their portfolio securities, and any 
ongoing arrangements to make available information about their 
portfolio securities.

DATES: Effective Date: May 28, 2004.
    Compliance Date: All initial registration statements and post-
effective amendments to effective registration statements filed on Form 
N-1A, N-3, N-4, or N-6 on or after December 5, 2004, must comply with 
the amendments. Section II.D. of this release contains more information 
on the compliance date.

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

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission 
(``Commission'') is adopting amendments to Forms N-1A,\1\ N-3,\2\ N-
4,\3\ and N-6,\4\ registration forms used by investment companies to 
register under the Investment Company Act of 1940 (``Investment Company 
Act'') and to offer their securities under the Securities Act of 1933 
(``Securities Act'').\5\
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    \1\ 17 CFR 239.15A; 17 CFR 274.11A.
    \2\ 17 CFR 239.17a; 17 CFR 274.11b.
    \3\ 17 CFR 239.17b; 17 CFR 274.11c.
    \4\ 17 CFR 239.17c; 17 CFR 274.11d.
    \5\ The Commission proposed these amendments in December 2003. 
Investment Company Act Release No. 26287 (Dec. 11, 2003) [68 FR 
70402 (Dec. 17, 2003)] (``Proposing Release'').
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Table of Contents

I. Introduction and Background
II. Discussion
    A. Disclosure Concerning Frequent Purchases and Redemptions of 
Fund Shares
    B. Disclosure of Circumstances Under Which Funds Will Use Fair 
Value Pricing and the Effects of Such Use
    C. Selective Disclosure of Fund Portfolio Holdings
    D. Compliance Date
III. Paperwork Reduction Act
IV. Cost/Benefit Analysis
V. Consideration of Effects on Efficiency, Competition, and Capital 
Formation
VI. Final Regulatory Flexibility Analysis
VII. Statutory Authority
Text of Rule and Form Amendments

I. Introduction and Background

    Millions of individual American investors hold shares of open-end 
management investment companies (``mutual funds''), relying on these 
funds for their retirements, their children's educations, and their 
other basic financial needs.\6\ The tremendous number of mutual fund 
investors reflects the trust that they have placed in both funds and 
the regulatory protections provided by the federal securities laws.
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    \6\ A management investment company is an investment company 
other than a unit investment trust or face-amount certificate 
company. See section 4 of the Investment Company Act [15 U.S.C. 80a-
4]. Management investment companies typically issue shares 
representing an undivided proportionate interest in a changing pool 
of securities, and include open-end and closed-end companies. See T. 
Lemke, G. Lins, A. Smith III, Regulation of Investment Companies, 
Vol. I, ch. 4, section 4.04, at 4-5 (2002). An open-end company is a 
management company that is offering for sale or has outstanding any 
redeemable securities of which it is the issuer.
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    Recent scandals, however, have revealed instances where some in the 
mutual fund industry, and some intermediaries that sell fund shares, 
have violated the trust that has been placed in them and lost sight of 
their obligations to investors under the federal securities laws. Many 
of these abuses relate to ``market timing,'' including the overriding 
of stated market timing policies by fund executives to benefit large 
investors at the expense of small investors, or to benefit the fund's 
investment adviser.\7\ Other abuses involve the selective disclosure by 
some fund managers of their funds' portfolio holdings in order to curry 
favor with large investors.\8\ This selective disclosure can facilitate 
fraud and have severe, adverse ramifications for a fund's investors if 
someone uses that portfolio information to trade against the fund, or 
otherwise uses the information in a way that would harm the fund.\9\
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    \7\ See, e.g., In re Massachusetts Financial Services Co., 
Investment Company Act Release No. 26347 (Feb. 5, 2004) (investment 
adviser and two of its executives violated federal securities laws 
by allowing widespread market timing trading in certain funds in 
contravention of those funds' prospectus disclosures); In re 
Alliance Capital Management, L.P., Investment Company Act Release 
No. 26312 (Dec. 18, 2003) (investment adviser violated federal 
securities laws by allowing market timing in certain of its mutual 
funds in exchange for fee-generating investments in its hedge funds 
and other mutual funds); In re James P. Connelly, Jr., Investment 
Company Act Release No. 26209 (Oct. 16, 2003) (executive of an 
investment adviser to a fund complex, in derogation of fund 
disclosures, violated federal securities laws by approving 
agreements that allowed select investors to market time certain 
funds in the complex).
    \8\ See, e.g., In the Matter of Alliance Capital Management, 
L.P., Investment Advisers Act Release No. 2205 (Dec. 18, 2003) and 
Investment Company Act Release No. 26312 (Dec. 18, 2003) (disclosure 
of material nonpublic information about certain mutual fund 
portfolio holdings permitted favored client to profit from market 
timing). More than 30% of mutual fund complexes that responded to a 
Commission examination request for information sent to 88 of the 
largest such complexes appear to have disclosed portfolio 
information in circumstances that may have provided certain fund 
shareholders with the ability to make advantageous decisions to 
place orders for fund shares.
    \9\ See Section I, ``Introduction and Background,'' of the 
Proposing Release for a fuller description of market timing and 
selective disclosure abuses. Proposing Release, supra note 5, 68 FR 
at 70402-70405.
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    The Commission is extremely concerned by the abuses that have 
surfaced in the mutual fund industry, and we have taken vigorous 
enforcement action where violations of the federal securities laws have 
been uncovered. We also believe, however, that regulatory reforms are 
necessary to help prevent such abuses from occurring in the future. 
Thus, the Commission has pursued an aggressive regulatory reform agenda 
to address

[[Page 22301]]

these abuses.\10\ As part of this agenda, in December 2003, we proposed 
rules intended to shed more light on market timing and selective 
disclosure of portfolio holdings.
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    \10\ Investment Company Act Release No. 26363 (Mar. 11, 2004) 
[69 FR 12752 (Mar. 17, 2004)] (proposing requirements for enhanced 
disclosure regarding portfolio managers of registered management 
investment companies); Investment Company Act Release No. 26375A 
(Mar. 5, 2004) [69 FR 11762 (Mar. 11, 2004)] (proposing mandatory 
redemption fee on short-term trades); Investment Company Act Release 
No. 26372 (Feb. 27, 2004) [69 FR 11244 (Mar. 9, 2004)] (adopting 
requirements for expense disclosure in fund shareholder reports and 
quarterly portfolio disclosure); Investment Company Act Release No. 
26356 (Feb. 24, 2004) [69 FR 9726 (Mar. 1, 2004)] (proposing to 
prohibit the use of brokerage commissions to finance distribution of 
fund shares); Investment Company Act Release No. 26350 (Feb. 11, 
2004) [69 FR 7852 (Feb. 19, 2004)] (proposing to require improved 
disclosure regarding the reasons for fund directors' approval of 
investment advisory contracts); Investment Company Act Release No. 
26341 (Jan. 29, 2004) [69 FR 6438 (Feb. 10, 2004)] (proposing point-
of-sale disclosure and a new confirmation statement for brokers to 
use when selling fund shares); Investment Company Act Release No. 
26337 (Jan. 20, 2004) [69 FR 4040 (Jan. 27, 2004)] (proposing 
requirement for investment adviser code of ethics); Investment 
Company Act Release No. 26323 (Jan. 15, 2004) [69 FR 3472 (Jan. 23, 
2004)] (proposing amendments to enhance independence of fund boards 
of directors); Investment Company Act Release No. 26313 (Dec. 18, 
2003) [68 FR 74820 (Dec. 24, 2003)] (requesting comment on measures 
to improve disclosure of mutual fund transaction costs); Investment 
Company Act Release No. 26299 (Dec. 17, 2003) [68 FR 74713 (Dec. 24, 
2003)] (adopting rules requiring funds and advisers to adopt and 
implement policies and procedures designed to prevent violations of 
the federal securities laws); Investment Company Act Release No. 
26298 (Dec. 17, 2003) [68 FR 74732 (Dec. 24, 2003)] (proposing 
amendments that would require enhanced disclosure regarding 
breakpoint discounts on front-end sales loads); Investment Company 
Act Release No. 26288 (Dec. 11, 2003) [68 FR 70388 (Dec. 17, 2003)] 
(proposing amendments to rules governing pricing of mutual fund 
shares intended to prevent unlawful late trading in fund shares).
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    The Commission received 47 comment letters relating to the 
proposals from investors, participants in the fund industry, and 
others. The commenters generally supported the Commission's proposals 
to improve the disclosure provided to investors, although some 
expressed concerns regarding portions of the disclosure or suggested 
changes. Today, the Commission is adopting these proposals, with 
modifications to address commenters' concerns.
    With respect to market timing, the amendments that the Commission 
is adopting will require improved disclosure in fund prospectuses of a 
mutual fund's risks, policies, and procedures.\11\ The amendments will:
     Require a mutual fund to describe in its 
prospectus the risks, if any, that frequent purchases and redemptions 
of fund shares may present for other shareholders;
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    \11\ Market timing may take many forms. In this release, we have 
used the term to refer to arbitrage activity involving the frequent 
buying and selling of mutual fund shares in order to take advantage 
of the fact that there may be a lag between a change in the value of 
a mutual fund's portfolio securities and the reflection of that 
change in the fund's share price.
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     Require a mutual fund to state in its prospectus 
whether or not the fund's board of directors has adopted policies and 
procedures with respect to frequent purchases and redemptions of fund 
shares and, if the board has not adopted any such policies and 
procedures, state the specific basis for the view of the board that it 
is appropriate for the fund not to have such policies and procedures;
     Require a mutual fund to describe in its 
prospectus any policies and procedures for deterring frequent purchases 
and redemptions of fund shares, and in its Statement of Additional 
Information (``SAI'') \12\ any arrangements to permit frequent 
purchases and redemptions of fund shares; and
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    \12\ The SAI is part of a fund's registration statement and 
contains information about a fund in addition to that contained in 
the prospectus. The SAI is required to be delivered to investors 
upon request and is available on the Commission's Electronic Data 
Gathering, Analysis, and Retrieval System.
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     Require similar disclosure in prospectuses for 
insurance company separate accounts offering variable insurance 
contracts, with respect to frequent transfers among sub-accounts.
    In addition, the amendments will clarify instructions to our 
registration forms to require all mutual funds (other than money market 
funds) and insurance company managed separate accounts that offer 
variable annuities to explain in their prospectuses both the 
circumstances under which they will use fair value pricing and the 
effects of using fair value pricing. Fair valuation of a fund's 
portfolio securities, which is required under certain circumstances, 
can serve to foreclose certain arbitrage opportunities available to 
market timers.
    With respect to selective disclosure of portfolio holdings, the 
amendments will require mutual funds and insurance company managed 
separate accounts that offer variable annuities to disclose their 
policies with respect to disclosure of portfolio holdings information. 
The amendments will:
     Require a fund to describe in its SAI any 
policies and procedures with respect to the disclosure of the fund's 
portfolio securities to any person and any ongoing arrangements to make 
available information about the fund's portfolio securities to any 
person; and
     Require a fund to state in its prospectus that a 
description of the policies and procedures is available in the fund's 
SAI, and on the fund's website, if applicable.

II. Discussion

A. Disclosure Concerning Frequent Purchases and Redemptions of Fund 
Shares

    The Commission is adopting, with several modifications to reflect 
commenters' concerns, amendments to Form N-1A, the registration form 
used by mutual funds, that will require disclosure of both the risks to 
fund shareholders of frequent purchases and redemptions of fund shares, 
and a fund's policies and procedures with respect to such frequent 
purchases and redemptions.\13\ Market timing strategies often involve 
such frequent purchases and redemptions of fund shares. These 
amendments are intended to require mutual funds to describe with 
specificity the restrictions they place on frequent purchases and 
redemptions, if any, and the circumstances under which any such 
restrictions will not apply. Commenters generally supported the 
proposed requirements, and agreed that the additional disclosure will 
enable investors to assess mutual funds' risks, policies, and 
procedures in this area and determine if a fund's policies and 
procedures are in line with their expectations.\14\
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    \13\ Item 6(e) of Form N-1A. The amendments to Form N-1A reflect 
the recent adoption of amendments to the Form that renumber Items 7 
(Shareholder Information), 12 (Description of the Fund and Its 
Investments and Risks), and 18 (Purchase, Redemption, and Pricing of 
Shares) as Items 6, 11, and 17, respectively. See Investment Company 
Act Release No. 26372 (Feb. 27, 2004) [69 FR 11244 (Mar. 9, 2004)].
    \14\ Under rule 38a-1 under the Investment Company Act [17 CFR 
270.38a-1], a fund must have procedures reasonably designed to 
ensure compliance with its disclosed policies regarding market 
timing. See Investment Company Act Release No. 26299 (Dec. 17, 2003) 
[68 FR 74714, 74720 (Dec. 24, 2003)].
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1. Description of the Risks of Frequent Purchases and Redemptions of 
Fund Shares
    We are adopting, as proposed, amendments that will require a mutual 
fund's prospectus to describe the risks, if any, that frequent 
purchases and redemptions of fund shares may present for other 
shareholders of the fund.\15\ These risks may include, among other 
things, dilution in the value of fund shares held by long-term 
shareholders, interference with the efficient management of the fund's 
portfolio, and increased brokerage and administrative

[[Page 22302]]

costs. The disclosure should be specific to the fund, taking into 
account its investment objectives, policies, and strategies. For 
example, we would generally expect a fund that invests in overseas 
markets to describe, among other things, the risks of time-zone 
arbitrage.
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    \15\ Item 6(e)(1) of Form N-1A.
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2. Adoption of Policies and Procedures by Fund's Board
    We are also adopting, as proposed, amendments that require a mutual 
fund's prospectus to state whether the fund's board of directors has 
adopted policies and procedures with respect to frequent purchases and 
redemptions of fund shares by fund shareholders.\16\ If the fund's 
board of directors has not adopted any such policies and procedures, 
the fund's prospectus will be required to include a statement of the 
specific basis for the view of the board that it is appropriate for the 
fund not to have such policies and procedures.\17\
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    \16\ Item 6(e)(2) of Form N-1A.
    \17\ Item 6(e)(3) of Form N-1A.
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3. Description of Fund Policies and Procedures With Respect to Frequent 
Purchases and Redemptions
    We are adopting, with one modification, a requirement that the 
fund's prospectus include a description of policies and procedures 
adopted by the board with respect to frequent purchases and 
redemptions, including:
     Whether or not the fund discourages frequent 
purchases and redemptions of fund shares by fund shareholders;
     Whether or not the fund accommodates frequent 
purchases and redemptions of fund shares by fund shareholders; and
     Any policies and procedures of the fund for 
deterring frequent purchases and redemptions of fund shares by fund 
shareholders.
    The description of the mutual fund's policies and procedures, if 
any, for deterring frequent purchases and redemptions of fund shares by 
fund shareholders will be required to include any restrictions imposed 
by the fund to prevent or minimize such frequent purchases and 
redemptions, including:
     Any restrictions on the volume or number of 
purchases, redemptions, or exchanges that a shareholder may make within 
a given time period;
     Any exchange fee or redemption fee;
     Any costs or administrative or other fees or 
charges that are imposed on shareholders deemed to be engaged in 
frequent purchases and redemptions of fund shares, together with a 
description of the circumstances under which such costs, fees, or 
charges will be imposed;
     Any minimum holding period that is imposed 
before an investor may make exchanges into another fund;
     Any restrictions imposed on exchange or purchase 
requests submitted by overnight delivery, electronically, or via 
facsimile or telephone; and
     Any right of the fund to reject, limit, delay, 
or impose other conditions on exchanges or purchases or to close or 
otherwise limit accounts based on a history of frequent purchases and 
redemptions of fund shares, including the circumstances under which 
such right will be exercised.
    The amendments will require a fund's policies and procedures for 
deterring frequent purchases and redemptions, including any 
restrictions imposed to prevent or minimize such frequent purchases and 
redemptions, to be described with specificity.\18\ For example, a fund 
might state that a 2% redemption fee will be applied to all redemptions 
within five days after purchase or, in describing any restrictions on 
the volume or number of purchases, redemptions, or exchanges that a 
shareholder may make within a given time period, a fund might state 
that it prohibits more than five round-trips in and out of a particular 
fund per year. A fund will also be required to indicate whether each 
restriction applies uniformly in all cases, or whether the restriction 
will not be imposed under certain circumstances. If any restriction 
will not be imposed under certain circumstances, the fund will be 
required to describe with specificity the circumstances under which the 
restriction will not be imposed.
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    \18\ Item 6(e)(4)(iii) of Form N-1A. A fund need not repeat this 
disclosure to the extent that it is provided in the prospectus in 
response to other Items of Form N-1A, including Items 3 (redemption 
and exchange fees), 6(c) (restrictions on redemptions, and 
redemption charges), and 7(a)(2) (exchange privileges).
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    Commenters were divided on whether funds' policies, procedures, and 
restrictions on purchases and redemptions should be required to be 
described with specificity. Many commenters, including a number of 
investors and intermediaries, argued that requiring specific disclosure 
of a fund's policies, procedures, and restrictions is important in 
order to put investors on notice of what types of activities the fund 
considers harmful, and to encourage funds to apply their restrictions 
uniformly. On the other hand, several commenters from the fund industry 
argued that the specificity requirement could have the unintended 
effect of assisting investors who wished to engage in frequent 
purchases and redemptions, and could deprive funds of flexibility in 
administering their policies and procedures to deter frequent purchases 
and redemptions. In addition, one commenter asked for clarification 
that a fund may reserve the right to reject any trade for any reason, 
because it is not possible to identify all types of potentially abusive 
trading in advance.
    On balance, we continue to believe that it is important that a 
fund's prospectus describe with specificity its policies, procedures, 
and restrictions with respect to frequent purchases and redemptions of 
fund shares. We believe that requiring specificity in this disclosure 
will help investors both to assess mutual funds' policies and 
procedures with respect to frequent purchases and redemptions, and to 
assess whether such policies and procedures are in line with their 
expectations. We agree with those commenters who argued that requiring 
specific disclosure may discourage funds from applying or waiving their 
restrictions arbitrarily. We also believe, however, that funds will be 
able to more effectively deter abusive market timing if they have some 
flexibility to address abuses as they arise. To that end, a fund may 
reserve the right to reject a purchase or exchange request for any 
reason, provided that it discloses this policy in its prospectus.
    We are removing the proposed requirement that a fund describe its 
policies and procedures for detecting frequent purchases and 
redemptions of fund shares.\19\ Many commenters who addressed this 
issue recommended either removing this requirement, or permitting the 
disclosure to be general in nature. These commenters argued that 
disclosure about how the fund detects frequent purchases and 
redemptions could be harmful to the fund, in that it might provide 
investors seeking to engage in market timing through frequent purchases 
and redemptions with a ``road map'' on how to avoid detection. Further, 
commenters argued that this disclosure would be of marginal utility to 
most investors. We agree.
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    \19\ Proposed Item 7(e)(4)(iv) of Form N-1A.
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    In connection with removing this proposed requirement, we are 
adding a statement clarifying that a fund's disclosure regarding 
whether its restrictions to prevent or minimize frequent purchases and 
redemptions are uniformly applied must indicate whether each such 
restriction applies to

[[Page 22303]]

trades that occur through omnibus accounts at intermediaries, such as 
investment advisers, broker dealers, transfer agents, third party 
administrators, and insurance companies.\20\ We continue to believe 
that investors should be informed about how a fund applies its 
restrictions on frequent purchases and redemptions to persons trading 
through omnibus accounts, which would have been addressed by the 
proposed disclosure regarding policies and procedures for detecting 
frequent purchases and redemptions. The overall effectiveness of a 
fund's restrictions on frequent purchases and redemptions may depend 
significantly on how effectively the fund can deter frequent purchases 
and redemptions made through such omnibus accounts.\21\
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    \20\ Item 6(e)(4)(iii) of Form N-1A.
    Persons that are not registered as broker-dealers need to 
consider whether the securities activities that they are undertaking 
are brokerage activities that require them to register as broker-
dealers. Section 3(a)(4) of the Securities Exchange Act of 1934 
(``Exchange Act'') defines a broker as a person engaged in the 
business of effecting transactions in securities. It includes 
several exceptions for certain bank activities. Section 15 of the 
Exchange Act essentially makes it unlawful for a broker or dealer 
``to effect any transactions in, or to induce or attempt to induce 
the purchase or sale of, any security (other than an exempted 
security or commercial paper, bankers' acceptances, or commercial 
bills)'' unless the broker or dealer is registered with the 
Commission.
    \21\ As part of our recent proposal for a mandatory redemption 
fee on short-term trades, we proposed a requirement that, on at 
least a weekly basis, each financial intermediary provide to a fund 
the Taxpayer Identification Number (``TIN'') and the amount and 
dates of all purchases, redemptions, or exchanges for each 
shareholder within an omnibus account. Investment Company Act 
Release No. 26375A (Mar. 5, 2004) [69 FR 11762, 11766 (Mar. 11, 
2004)] (proposed rule 22c-2(c) under the Investment Company Act). 
This information would assist funds in detecting market timers who a 
fund has prohibited from purchasing fund shares and who attempt to 
enter the fund through a different account. See also Jonas Max 
Ferris, Next Scandal: Brokers?, The Street.Com, Nov. 26, 2003 
(noting that although omnibus account structure has many benefits, 
it can be used to hide questionable trades by market timers); 
Kathleen Pender, 401(k) Plans Face Scrutiny, San Francisco 
Chronicle, Oct. 23, 2003, at B1 (discussing difficulty of mutual 
funds knowing when 401(k) participants are engaging in market timing 
because each retirement plan is usually one omnibus account).
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4. Inclusion of Disclosure Regarding Frequent Purchases and Redemptions 
in Prospectus
    The amendments that we are adopting also clarify, as proposed, that 
the new disclosure that will be required within the prospectus 
regarding frequent purchases and redemptions of fund shares may not be 
omitted from the prospectus in reliance on Item 6(g), formerly 
designated as Item 6(f).\22\ Item 6(g) permits funds to omit from the 
prospectus certain information concerning purchase and redemption 
procedures if, among other things, the information is included in a 
separate document that is incorporated by reference into, and filed and 
delivered with, the prospectus. We believe that the information 
required by new Item 6(e) is more appropriately included in the same 
document as the prospectus.
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    \22\ Item 6(g) of Form N-1A.
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5. Description of Arrangements Permitting Frequent Purchases and 
Redemptions
    We are adopting, substantially as proposed, the requirement that a 
mutual fund describe any arrangements with any person to permit 
frequent purchases and redemptions of fund shares, except that we are 
moving the required disclosure to the fund's SAI and requiring a cross-
reference to this disclosure in the fund's prospectus.\23\ The 
description of arrangements to permit frequent purchases and 
redemptions must include the identity of the persons permitted to 
engage in frequent purchases and redemptions and any compensation or 
other consideration received by the fund, its investment adviser, or 
any other party pursuant to such arrangements.\24\ Several commenters 
objected to this proposed requirement, and in particular to the 
proposed requirement for specific identification of persons permitted 
to engage in frequent purchases and redemptions. These commenters 
argued that specific identification of these investors may violate such 
investors' privacy, and that a long list of names would not be useful 
to investors and might tend to obscure other, more basic information 
that is more important to an investment decision. In particular, these 
commenters suggested that identification of these investors would not 
be useful in the case of investors who are trading through a defined 
contribution plan or similar plan that has an arrangement with the fund 
to permit frequent purchases and redemptions.
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    \23\ Items 6(e)(5) and 17(e) of Form N-1A.
    \24\ An instruction clarifies that the consideration required to 
be disclosed includes any agreement to maintain assets in the fund 
or in other investment companies or accounts managed by the 
investment adviser or by any affiliated person of the investment 
adviser. Instruction 1 to Item 17(e) of Form N-1A.
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    We believe that disclosure of the persons who have arrangements 
with a fund to permit frequent purchases and redemptions is necessary 
in order to help investors assess the risks to fund shareholders of 
frequent purchases and redemptions. We are, however, modifying the 
requirement to permit a fund that has an arrangement to permit frequent 
purchases and redemptions by a group of individuals, such as the 
participants in a defined contribution plan that meets the requirements 
for qualification under Section 401(k) of the Internal Revenue Code, to 
identify the group rather than identifying each individual group 
member. In addition, in order to address concerns that the description 
of the arrangements might be lengthy, and therefore that inclusion of 
this information in the prospectus might tend to obscure other, more 
basic information in the prospectus, we are permitting this disclosure 
to be included in the SAI.\25\ A fund that includes this disclosure in 
its SAI will be required to include a statement in its prospectus, 
adjacent to the other disclosure regarding frequent purchases and 
redemptions, that the fund's SAI includes a description of all 
arrangements with any person to permit frequent purchases and 
redemptions of fund shares.\26\
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    \25\ Item 17(e) of Form N-1A.
    \26\ Item 6(e)(5) of Form N-1A.
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    We reemphasize, as we stated in the Proposing Release, that a 
mutual fund that enters into an arrangement with any person to permit 
frequent purchases and redemptions of fund shares may only do so 
consistent with the antifraud provisions of the federal securities laws 
and the fiduciary duties of the fund and its investment adviser. 
Disclosure provided pursuant to these amendments will not make lawful 
conduct that is otherwise unlawful. For example, disclosure will not 
render lawful an arrangement whereby an investment adviser permits 
frequent purchases and redemptions of a mutual fund's shares in return 
for consideration that benefits the adviser, such as an agreement to 
maintain assets in other accounts managed by the adviser.
6. Applicability of Requirements to Exchange Traded Funds
    As adopted, the amendments to Form N-1A will apply to all mutual 
funds. Some commenters argued that exchange traded funds (``ETFs'') 
should be excluded from the proposed disclosure requirements. These 
commenters argued that market timing is generally not an issue for ETFs 
because, unlike traditional mutual funds, ETFs sell and redeem their 
shares at net asset value (``NAV'') only in large blocks, generally in 
exchange for a basket of securities that mirrors the composition of the 
ETF's portfolio, plus a small amount of cash. Further, the commenters 
noted, shares issued by ETFs are listed for trading on stock exchanges, 
which allows retail investors to purchase and

[[Page 22304]]

sell individual ETF shares among themselves at market prices throughout 
the day.\27\ However, we note that, in those cases when an ETF 
purchases and redeems its shares in cash rather than ``in kind,'' 
frequent purchases and redemptions may present risks for long-term 
shareholders of ETFs that are similar to the risks that frequent 
purchases and redemptions present for long-term mutual fund 
shareholders. Accordingly, we have determined not to exclude ETFs from 
the proposed disclosure requirements. If an ETF's board has determined 
that there are no risks to fund shareholders as a result of frequent 
purchases and redemptions of ETF shares, and therefore has determined 
not to adopt policies and procedures with respect to frequent purchases 
and redemptions of fund shares, the fund may reflect these facts in its 
disclosure.
---------------------------------------------------------------------------

    \27\ See Investment Company Act Release No. 25258 (Nov. 8, 2001) 
[66 FR 57614, 57614-57615 (Nov. 15, 2001)] (describing ETFs).
---------------------------------------------------------------------------

7. Amendments to Registration Forms for Variable Insurance Products
    We are also adopting requirements for similar disclosure in Forms 
N-3,\28\ N-4,\29\ and N-6,\30\ the registration forms for insurance 
company separate accounts that issue variable annuity and variable life 
insurance contracts, with respect to both the risks of frequent 
transfers of contract value among sub-accounts, and the separate 
account's policies and procedures with respect to such frequent 
transfers. As discussed in the Proposing Release, these disclosure 
requirements are similar to those applicable to mutual funds with 
respect to frequent purchases and redemptions, with modifications to 
address the different structure of these issuers.\31\ We note that we 
are making the same modifications to the proposed requirements for 
Forms N-3, N-4, and N-6 that we are making with respect to Form N-
1A.\32\
---------------------------------------------------------------------------

    \28\ Item 8(e) of Form N-3. Form N-3 is used by all insurance 
company separate accounts offering variable annuity contracts that 
are registered under the Investment Company Act as management 
investment companies.
    \29\ Item 7(e) of Form N-4. Form N-4 is used by all insurance 
company separate accounts offering variable annuity contracts that 
are registered under the Investment Company Act as unit investment 
trusts. See section 4(2) of the Investment Company Act [15 U.S.C. 
80a-4(2)] (defining ``unit investment trust'').
    \30\ Item 6(f) of Form N-6. Form N-6 is used by all insurance 
company separate accounts offering variable life insurance policies 
that are registered under the Investment Company Act as unit 
investment trusts.
    \31\ Proposing Release, supra note 5, 68 FR at 70407.
    \32\ Similar to the modification we are making to Item 
6(e)(4)(iii) of Form N-1A, we are adding a statement clarifying that 
a separate account's disclosure regarding whether its restrictions 
to prevent or minimize frequent transfers among sub-accounts are 
uniformly applied must indicate whether each such restriction 
applies to trades that occur through omnibus accounts at 
intermediaries, such as investment advisers, broker dealers, 
transfer agents, and third party administrators. See Item 
8(e)(iv)(C) of Form N-3; Item 7(e)(iv)(C) of Form N-4; Item 
6(f)(4)(iii) of Form N-6. In some cases, this disclosure may not be 
relevant to insurance company separate accounts issuing variable 
insurance contracts because the contracts are held in the name of 
the contractowner and not an intermediary.
---------------------------------------------------------------------------

    Separate accounts funding a variable insurance contract are 
generally divided into a number of sub-accounts, each of which invests 
in a different underlying mutual fund. Several commenters argued that 
certain aspects of the proposed disclosure requirements did not 
sufficiently take account of the unique nature of variable insurance 
contracts, in particular their two-tier structure. These commenters 
raised three concerns. First, they argued that the disclosure 
requirements will cause underlying funds to adopt new policies and 
procedures restricting frequent transfers. According to the commenters, 
these new policies and procedures of the underlying funds will be 
inconsistent with one another, and the separate accounts' prospectus 
disclosure of these policies and procedures will therefore be 
voluminous and potentially confusing. Second, the commenters noted that 
the insurance company depositors for separate accounts will have the 
task of administering the policies and procedures of the underlying 
funds, and that in many cases an insurance company will not be able to 
administer all of the different variations of policies and procedures, 
and may as a result decide to limit the number of funds that the 
separate account offers. Third, the commenters argued that the ability 
of an insurance company to adopt corresponding restrictions on 
contractowners' rights to engage in frequent transfers unilaterally at 
the separate account level will be limited by state insurance law and 
by provisions in existing contracts. In order to address these 
concerns, commenters asked that disclosure by both the separate account 
and the underlying fund be permitted to be general, or, in the 
alternative, that we clarify that underlying funds may rely on the 
restrictions on frequent transfers adopted by the insurance company 
depositor at the separate account level.
    We believe that it is important for issuers of variable insurance 
contracts to provide disclosure regarding their policies and procedures 
with respect to transfers of contract value that is as specific as the 
disclosure that will be required for mutual funds with respect to 
frequent purchases and redemptions of fund shares. Market timing of 
mutual funds through a variable annuity or variable life insurance 
contract, in the form of tax-free transfers of contract value among 
sub-accounts,\33\ can be as detrimental for investors in variable 
insurance products as market timing can be for investors in mutual 
funds. With respect to the concerns raised about the possible 
inconsistency of policies and procedures of different underlying funds 
and about potential limits on an insurer's ability to restrict 
transfers at the separate account level, we note that the disclosure 
requirements do not require issuers of variable insurance contracts, or 
underlying funds, to adopt any particular restrictions on transfers of 
contract value. It is the responsibility of insurance company 
depositors for separate accounts and underlying funds to adopt and 
implement appropriate and workable policies, procedures, and 
restrictions with respect to frequent transfers among sub-accounts. The 
rules that we are adopting simply require disclosure of these policies, 
procedures, and restrictions in the variable insurance contract 
prospectus and the underlying fund prospectus.
---------------------------------------------------------------------------

    \33\ Increases in the cash values of variable annuity and 
variable life insurance contracts--known as the ``inside buildup''--
are tax-deferred until the contract's surrender or maturity. See 
I.R.C. 7702(g) (1986).
---------------------------------------------------------------------------

B. Disclosure of Circumstances Under Which Funds Will Use Fair Value 
Pricing and the Effects of Such Use

    The Commission is adopting, with one modification to address 
commenters' concerns, proposed amendments to the Instruction to Item 
6(a)(1) of Form N-1A, and adding a corresponding Instruction to Form N-
3, to clarify that all mutual funds and managed separate accounts that 
offer variable annuities, other than money market funds, are required 
to explain briefly in their prospectuses both the circumstances under 
which they will use fair value pricing and the effects of using fair 
value pricing.\34\ We are adopting these amendments to clearly reflect 
that funds are required to use fair value prices any time that market 
quotations for their portfolio securities are not readily available 
(including

[[Page 22305]]

when they are not reliable).\35\ Money market funds will not be subject 
to the requirement to disclose the circumstances under which they will 
use fair value pricing and the effects of such use, because such funds 
are subject to rule 2a-7 under the Investment Company Act, which 
contains its own detailed pricing requirements.\36\ Commenters 
generally supported this proposed amendment.
---------------------------------------------------------------------------

    \34\ Instruction to Item 6(a)(1) of Form N-1A; Instruction to 
Item 11(c) of Form N-3. We are not amending Forms N-4 and N-6 
because these forms are used by insurance company separate accounts 
that are organized as unit investment trusts and typically hold only 
securities issued by underlying mutual funds. These underlying 
mutual funds are responsible for valuing their own portfolio 
securities, including, as required, through fair valuation.
    \35\ See Investment Company Act Release No. 14244 (Nov. 21, 
1984) [49 FR 46558, 46559-46660 n.7 (Nov. 27, 1984)] (proposing 
amendments to rule 22c-1).
    \36\ Rule 2a-7(c) under the Investment Company Act [17 CFR 
270.2a-7(c)] (describing the requirements for calculating the share 
price of money market funds using the amortized cost and penny-
rounding methods).
---------------------------------------------------------------------------

    The required disclosure regarding the circumstances under which a 
fund will use fair value pricing should be specific to the fund. For 
example, if a fund invests exclusively in frequently traded exchange 
listed securities of large capitalization domestic issuers and 
calculates its NAV as of the time the exchange typically closes, there 
may be very limited circumstances in which it will use fair value 
pricing (e.g., if the exchange on which a portfolio security is 
principally traded closes early or if trading in a particular portfolio 
security was halted during the day and did not resume prior to the 
fund's NAV calculation). By contrast, if a fund invests primarily in 
securities that are traded on overseas markets, we would expect a 
fuller discussion of the circumstances under which the fund will use 
fair value pricing, such as specific events occurring after the close 
of the overseas exchange that would cause the fund to use fair value 
pricing.\37\ The instruction we are adopting will also require a fund 
to explain the effects of using fair value pricing, similar to the 
current instruction.\38\
---------------------------------------------------------------------------

    \37\ We note that rule 38a-1 under the Investment Company Act 
[17 CFR 270.38a-1] requires funds to adopt policies and procedures 
that require a fund to monitor for circumstances that may 
necessitate the use of fair value prices, establish criteria for 
determining when market quotations are no longer reliable for a 
particular portfolio security, provide a methodology or 
methodologies by which the fund determines the current fair value of 
the portfolio security, and regularly review the appropriateness and 
accuracy of the method used in valuing securities and make any 
necessary adjustments. See Investment Company Act Release No. 26299 
(Dec. 17, 2003) [68 FR 74713, 74718 (Dec. 24, 2003)].
    \38\ See Investment Company Act Release No. 23064 (Mar. 13, 
1998) [63 FR 13916 (Mar. 23, 1998)] (adopting Instruction to Item 
7(a)(1) of Form N-1A requiring a brief explanation of the 
circumstances and the effects of using fair value pricing). In the 
Proposing Release, we stated that we would expect that the 
description of the effects of using fair value pricing would be fund 
specific, e.g., minimizing the possibilities for time-zone 
arbitrage, in the case of a fund investing in overseas markets. See 
Proposing Release, supra note 5, 68 FR at 70408. As one commenter 
noted, minimizing the possibilities for time-zone arbitrage may be 
more appropriately characterized as an objective of fair value 
pricing than a guaranteed result or effect.
---------------------------------------------------------------------------

    A number of commenters expressed concern that requiring specific 
disclosure of the circumstances under which a fund will use fair value 
pricing might help arbitrageurs to identify circumstances in which they 
could take unfair advantage of a fund's pricing policies. In addition, 
one such commenter argued that limiting funds to specific formulas that 
can be changed only by registration statement amendments or supplements 
may prove unworkable in volatile markets or business emergencies. These 
commenters recommended that the Commission require only general 
disclosure of the circumstances under which a fund will use fair value 
pricing. We wish to clarify that neither the requirement we are 
adopting, nor the current requirement, requires disclosure of the 
specific methodologies and formulas that a fund uses to determine fair 
value prices. For example, if a fund has a policy to fair value price 
securities traded on overseas markets in the event that there is a 
specific percentage change in the value of one or more domestic 
securities indices following the close of the overseas markets, the 
fund will not be required to disclose the specific percentage change 
that would trigger fair valuation. In addition, a fund's disclosure 
need not be so specific that the fund may not adjust the triggering 
events from time to time in response to market events or other causes.
    Our amendments will require the fair value pricing disclosure to be 
included in a fund's prospectus, as proposed. Some commenters suggested 
that the required information about fair value pricing may be more 
appropriately included in a fund's SAI. In addition, some commenters 
suggested that the location of the disclosure should depend on the 
significance of market timing as a potential problem for the fund; 
thus, in cases where market timing is a more important concern, such as 
foreign stock funds that are subject to time-zone arbitrage, the 
information should be included in the prospectus itself. We continue to 
believe, however, that information about the circumstances under which 
a fund will use fair value pricing and the effects of using fair value 
pricing should be included in the prospectus together with other key 
information about a fund. We also believe that it is preferable for 
investors if the information is uniformly located in one document, 
rather than located in the prospectus for some funds and the SAI for 
others. In addition, the instruction requires the disclosure regarding 
fair value pricing to be brief, and, as noted above, funds will not be 
required to provide detailed information about their fair value pricing 
methodologies and formulas.
    One commenter also requested clarification regarding how the 
instruction would apply in the case of a mutual fund that invests in 
other mutual funds, such as a fund of funds. The commenter noted that 
each mutual fund in which a fund is invested will have to include in 
its own prospectus a brief explanation of the circumstances under which 
it will use fair value pricing and the effects of such use. We are 
adding language to the instruction to clarify that, with respect to any 
portion of a fund's assets that are invested in one or more mutual 
funds, the fund may briefly explain that the fund's NAV is calculated 
based upon the NAVs of the mutual funds in which the fund invests, and 
that the prospectuses for those funds explain the circumstances under 
which they will use fair value pricing and the effects of using fair 
value pricing.\39\
---------------------------------------------------------------------------

    \39\ Instruction to Item 6(a)(1) of Form N-1A; Instruction to 
Item 11(c) of Form N-3.
---------------------------------------------------------------------------

C. Selective Disclosure of Fund Portfolio Holdings

    We are adopting, with modifications to address commenters' 
concerns, amendments to Form N-1A that will require mutual funds to 
disclose both their policies and procedures with respect to the 
disclosure of their portfolio securities and any ongoing arrangements 
to make available information about their portfolio securities.\40\ We 
are also adopting parallel amendments to Form N-3 for managed separate 
accounts that issue variable annuities.\41\ These amendments are 
intended to provide greater transparency of fund practices with respect 
to the disclosure of the fund's portfolio holdings, and to reinforce 
funds' and advisers' obligations to

[[Page 22306]]

prevent the misuse of material, nonpublic information.
---------------------------------------------------------------------------

    \40\ Items 4(d) and 11(f) of Form N-1A. A fund's compliance 
policies and procedures under rule 38a-1 under the Investment 
Company Act should address potential 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. 26299 (Dec. 
17, 2003) [68 FR 74714, 74719 (Dec. 24, 2003)].
    \41\ Items 5(f) and 19(e) of Form N-3. We are not amending Forms 
N-4 and N-6 because these forms are used by insurance company 
separate accounts that are organized as unit investment trusts, 
which typically hold only securities issued by underlying mutual 
funds.
---------------------------------------------------------------------------

    We reemphasize, as we stated in the Proposing Release, that a 
mutual fund or investment adviser that discloses the fund's portfolio 
securities may only do so consistent with the antifraud provisions of 
the federal securities laws and the fund's or adviser's fiduciary 
duties. Disclosure provided pursuant to these amendments would not make 
lawful conduct that is otherwise unlawful. Divulging nonpublic 
portfolio holdings to selected third parties is permissible only when 
the fund has legitimate business purposes for doing so and the 
recipients are subject to a duty of confidentiality, including a duty 
not to trade on the nonpublic information.\42\ Examples of instances in 
which selective disclosure of a fund's portfolio securities may be 
appropriate, subject to confidentiality agreements and trading 
restrictions, include disclosure for due diligence purposes to an 
investment adviser that is in merger or acquisition talks with the 
fund's current adviser, disclosure to a newly hired investment adviser 
or sub-adviser prior to commencing its duties, or disclosure to a 
rating agency for use in developing a rating.
---------------------------------------------------------------------------

    \42\ Cf. Investment Company Act Release No. 24209 (Dec. 20, 
1999) [64 FR 72590, 72595 (Dec. 28, 1999)] (proposing exemption from 
Regulation FD for disclosure of material information to persons who 
have expressly agreed to maintain the information in confidence, and 
noting that such a confidentiality agreement would also include an 
agreement not to trade on the nonpublic information).
---------------------------------------------------------------------------

1. Policies and Procedures
    Under the amendments we are adopting, a fund will be required to 
describe its policies and procedures with respect to the disclosure of 
its portfolio securities in its SAI, and to state in its prospectus 
that a description of the fund's policies and procedures is available 
in its SAI and, if applicable, on its Web site (i.e., if the fund posts 
this description on its Web site).\43\ Commenters generally supported 
these proposed requirements, including the proposed inclusion of the 
fund's policies and procedures in the SAI.
---------------------------------------------------------------------------

    \43\ Items 4(d) and 11(f)(1) of Form N-1A; Items 5(f) and 
19(e)(i) of Form N-3.
---------------------------------------------------------------------------

    Under our amendments, the SAI description of the mutual fund's 
policies and procedures with respect to the disclosure of its portfolio 
securities will be required to include:
     How the policies and procedures apply to 
disclosure to different categories of persons, including individual 
investors, institutional investors, intermediaries that distribute the 
fund's shares, third-party service providers, rating and ranking 
organizations, and affiliated persons of the fund;\44\
---------------------------------------------------------------------------

    \44\ Item 11(f)(1)(i) of Form N-1A. With respect to managed 
separate accounts issuing variable annuity contracts registered on 
Form N-3, the categories will include contractowners, participants, 
annuitants, and beneficiaries. Item 19(e)(i)(A) of Form N-3.
---------------------------------------------------------------------------

     Any conditions or restrictions placed on the use 
of information about portfolio securities that is disclosed, including 
any requirement that the information be kept confidential or 
prohibitions on trading based on the information, and any procedures to 
monitor the use of this information;\45\
---------------------------------------------------------------------------

    \45\ Item 11(f)(1)(ii) of Form N-1A; Item 19(e)(i)(B) of Form N-
3.
---------------------------------------------------------------------------

     The frequency with which information about 
portfolio securities is disclosed, and the length of the lag, if any, 
between the date of the information and the date on which the 
information is disclosed;\46\
---------------------------------------------------------------------------

    \46\ Item 11(f)(1)(iii) of Form N-1A; Item 19(e)(i)(C) of Form 
N-3.
---------------------------------------------------------------------------

     Any policies and procedures with respect to the 
receipt of compensation or other consideration by the fund, its 
investment adviser, or any other party in connection with the 
disclosure of information about portfolio securities;\47\
---------------------------------------------------------------------------

    \47\ Item 11(f)(1)(iv) of Form N-1A. With respect to managed 
separate accounts issuing variable annuity contracts registered on 
Form N-3, this description will also be required to include any 
policies and procedures with respect to the receipt of compensation 
or other consideration by the sponsoring insurance company. Item 
19(e)(i)(D) of Form N-3. See Section II.C.2., ``Arrangements to Make 
Portfolio Holdings Available,'' below (discussing restrictions on 
receipt of consideration in connection with disclosure of portfolio 
holdings).
---------------------------------------------------------------------------

     The individuals or categories of individuals who 
may authorize disclosure of the fund's portfolio securities;\48\
---------------------------------------------------------------------------

    \48\ Item 11(f)(1)(v) of Form N-1A; Item 19(e)(i)(E) of Form N-
3.
---------------------------------------------------------------------------

     The procedures that the fund uses to ensure that 
disclosure of information about portfolio securities is in the best 
interests of fund shareholders, including procedures to address 
conflicts between the interests of fund shareholders, on the one hand, 
and those of the fund's investment adviser; principal underwriter; or 
any affiliated person of the fund, its investment adviser, or its 
principal underwriter, on the other;\49\ and
---------------------------------------------------------------------------

    \49\ Item 11(f)(1)(vi) of Form N-1A. With respect to managed 
separate accounts issuing variable annuity contracts registered on 
Form N-3, this description will be required to include the 
procedures that are used to ensure that disclosure of information 
about portfolio securities is in the best interests of 
contractowners, participants, annuitants, and beneficiaries, 
including procedures to address conflicts between the interests of 
such persons, on the one hand, and those of the separate account's 
investment adviser or principal underwriter; the sponsoring 
insurance company; or any affiliated person of the separate account, 
its investment adviser or principal underwriter, or the sponsoring 
insurance company, on the other. Item 19(e)(i)(F) of Form N-3.
---------------------------------------------------------------------------

     The manner in which the board of directors 
exercises oversight of disclosure of the fund's portfolio 
securities.\50\
---------------------------------------------------------------------------

    \50\ Item 11(f)(1)(vii) of Form N-1A; Item 19(e)(i)(G) of Form 
N-3.
---------------------------------------------------------------------------

    A mutual fund's disclosure of its policies and procedures with 
respect to the disclosure of its portfolio securities will be required 
to include any policies and procedures of the fund's investment 
adviser, or any other third party, that the fund uses or that are used 
on the fund's behalf.\51\
---------------------------------------------------------------------------

    \51\ Instruction to Item 11(f)(1) of Form N-1A; Instruction to 
Item 19(e)(i) of Form N-3.
---------------------------------------------------------------------------

    We are clarifying that a fund may satisfy the requirement to 
disclose the persons who may authorize disclosure of the fund's 
portfolio holdings by describing either the individuals or categories 
of individuals who may authorize disclosure.\52\ We agree with one 
commenter that disclosure of these persons by category may provide 
investors with more relevant information than the names of select 
individuals. We emphasize, however, that funds will be required to 
identify either individuals (e.g., a fund's chief executive officer) or 
categories of individuals (e.g., a fund's executive officers) and not 
entities or categories of entities. Thus, it would not suffice for a 
fund to disclose that the fund's investment adviser or its service 
providers may authorize disclosure of portfolio holdings.
---------------------------------------------------------------------------

    \52\ Item 11(f)(1)(v) of Form N-1A; Item 19(e)(i)(E) of Form N-
3.
---------------------------------------------------------------------------

2. Arrangements To Make Portfolio Holdings Available
    We are also adopting, with modifications, a requirement that a 
mutual fund describe in its SAI any ongoing arrangements to make 
available information about the fund's portfolio securities to any 
person, including the identity of the persons who receive information 
pursuant to such arrangements and any compensation or other 
consideration received by the fund, its investment adviser, or any 
other party in connection with each such arrangement.\53\ An 
instruction to this requirement clarifies that the consideration 
required to be disclosed includes any agreement to maintain assets in 
the fund or in other investment

[[Page 22307]]

companies or accounts managed by the fund's investment adviser or by 
any affiliated person of the investment adviser.\54\ As indicated 
above, however, divulging portfolio holdings to selected third parties 
is permissible only when the fund has legitimate business purposes for 
doing so. The Commission is not aware of any situation where the 
receipt of consideration by the fund's investment adviser or its 
affiliates in connection with an arrangement to make available 
information about the fund's portfolio securities would be a legitimate 
business purpose. With respect to any ongoing arrangements, a fund will 
also be required to describe:
---------------------------------------------------------------------------

    \53\ Item 11(f)(2) of Form N-1A. With respect to managed 
separate accounts issuing variable annuity contracts registered on 
Form N-3, disclosure of any compensation or other consideration 
received by the sponsoring insurance company will also be required. 
Item 19(e)(ii) of Form N-3.
    \54\ Instruction 1 to Item 11(f)(2) of Form N-1A. With respect 
to managed separate accounts issuing variable annuity contracts 
registered on Form N-3, the consideration required to be disclosed 
will also include any agreement to maintain assets in other 
investment companies or accounts managed or sponsored by the 
sponsoring insurance company of the registrant or by an affiliated 
person of such sponsoring insurance company. Instruction 1 to Item 
19(e)(ii) of Form N-3.
---------------------------------------------------------------------------

     Any conditions or restrictions placed on the use 
of information about portfolio securities that is disclosed, including 
any requirement that the information be kept confidential or 
prohibitions on trading based on the information, and any procedures to 
monitor the use of this information;
     The frequency with which information about 
portfolio securities is disclosed, and the length of the lag, if any, 
between the date of the information and the date on which the 
information is disclosed; and
     The individuals or categories of individuals who 
may authorize disclosure of the fund's portfolio securities.\55\
---------------------------------------------------------------------------

    \55\ Item 11(f)(2) of Form N-1A; Item 19(e)(ii) of Form N-3.
---------------------------------------------------------------------------

    Several commenters objected to the application of the proposed 
requirement for disclosure of ongoing arrangements to a number of 
different types of potential recipients of portfolio holdings 
information, including third-party providers of auditing, custody, 
proxy voting, and other services for the fund, as well as rating and 
ranking organizations. These commenters argued that detailed 
information about the fund's sharing of portfolio holdings information 
with these third-party service providers, where necessary to enable the 
provider to perform services for the fund, would not be useful to 
investors. The commenters also argued that a fund could have 
arrangements to provide portfolio holdings information to other types 
of recipients, such as financial planners for use in providing asset 
allocation services to their clients, or institutional investors who 
are considering whether to invest in a fund, and that individual 
identification of these recipients would be burdensome and could raise 
confidentiality concerns.
    We have determined not to modify the proposed requirement as 
suggested by these commenters, because we believe that investors have a 
significant interest in knowing how widely and with whom the fund 
shares its portfolio holdings information. Further, we do not believe 
that the required disclosure of arrangements to make available 
information about the fund's portfolio securities will be overly 
burdensome, because circumstances in which the fund may have legitimate 
business purposes for entering into an arrangement to selectively 
disclose its portfolio holdings information typically would be limited. 
In most cases, these arrangements would be with a relatively small 
number of service providers to the fund.
    One commenter recommended that the Commission clarify that any 
arrangement in which a fund provides publicly available portfolio 
holdings information to any person would not be covered by the 
requirement to disclose ongoing arrangements. Another commenter asked 
that the Commission confirm that posting information to a Web site 
constitutes public disclosure.
    We are adding two exceptions from the requirement to describe 
ongoing arrangements which we believe will address these commenters' 
concerns. First, a mutual fund will not be required to describe an 
ongoing arrangement to make available information about the fund's 
portfolio securities if, not later than the time that the fund makes 
available the portfolio securities information to any person pursuant 
to the arrangement, the fund discloses the information in a publicly 
available filing with the Commission that is required to include the 
information.\56\ A fund may not satisfy this exception by making a 
voluntary filing of its portfolio information with the Commission, 
e.g., a filing on Form N-Q to disclose month-end portfolio holdings.
---------------------------------------------------------------------------

    \56\ Instruction 2 to Item 11(f)(2) of Form N-1A; Instruction 2 
to Item 19(e)(ii) of Form N-3. Currently, filings that are required 
to include portfolio securities information would include a fund's 
required semi-annual filings on Form N-CSR [17 CFR 249.331; 17 CFR 
274.128] and required filings for the first and third fiscal 
quarters on Form N-Q [17 CFR 249.332; 17 CFR 274.130].
---------------------------------------------------------------------------

    Second, a fund will not be required to describe an ongoing 
arrangement to make available information about its portfolio 
securities if it (i) makes that information available on its Web site; 
and (ii) discloses in its prospectus the availability of the 
information on its Web site.\57\ Specifically, a fund will not be 
required to describe such an arrangement if it makes the portfolio 
securities information available to any person pursuant to the 
arrangement no earlier than the day next following the day on which the 
fund makes the information available on its website in the manner 
specified in its prospectus.\58\ In order to rely on this exception, a 
fund will be required to disclose in its current prospectus that the 
portfolio securities information will be available on its website, 
including (i) the nature of the information that will be available, 
including both the date as of which the information will be current 
(e.g., month-end) and the scope of the information (e.g., complete 
portfolio holdings, largest 20 holdings); (ii) the date when the 
information will first become available and the period for which the 
information will remain available, which shall end no earlier than the 
date on which the fund files a Form N-CSR or Form N-Q for the period 
that includes the date as of which the Web site information is current; 
and (iii) the location on the fund's website where either the 
information or a prominent hyperlink (or series of prominent 
hyperlinks) to the information will be available.\59\
---------------------------------------------------------------------------

    \57\ Instruction 3 to Item 11(f)(2) of Form N-1A; Instruction 3 
to Item 19(e)(ii) of Form N-3.
    \58\ Instruction 3(a) to Item 11(f)(2) of Form N-1A; Instruction 
3.a. to Item 19(e)(ii) of Form N-3.
    \59\ Instruction 3(b) to Item 11(f)(2) of Form N-1A; Instruction 
3.b. to Item 19(e)(ii) of Form N-3.
---------------------------------------------------------------------------

    These exceptions will permit a fund to omit disclosure of 
arrangements to make portfolio information available in these two 
specific situations, when the information is, in any event, either 
publicly available in a required filing with the Commission or readily 
accessible on the fund's Web site.\60\ This will permit a fund, for 
example, to e-mail its portfolio holdings information regularly to 
investors who had requested this information without being required to 
disclose the names of all the investors on the e-mail list, provided 
that the information is also available through one of the two means 
specified in the rule.
---------------------------------------------------------------------------

    \60\ Except where specifically provided by Commission rule, 
making information accessible on a website is not necessarily 
adequate disclosure under the federal securities laws.
---------------------------------------------------------------------------

D. Compliance Date

    The effective date for these amendments is May 28, 2004. All 
initial registration statements on Forms N-1A, N-3, N-4, and N-6, and 
all post-effective amendments to effective registration statements on 
these forms,

[[Page 22308]]

filed on or after December 5, 2004, must include the disclosure 
required by the amendments. We are selecting this compliance date in 
order to coordinate with the compliance date for new rule 38a-1 under 
the Investment Company Act, which is October 5, 2004. Rule 38a-1 
requires fund boards to adopt policies and procedures with respect to 
market timing, pricing of portfolio securities, and misuses of 
nonpublic information, including the disclosure to third parties of 
material information about the fund's portfolio.\61\ A compliance date 
of December 5, 2004, will provide sufficient time for funds and their 
boards to review and update their policies and procedures in connection 
with the implementation of rule 38a-1, and to draft new disclosure to 
reflect these updated policies and procedures. Generally, a fund should 
file its first post-effective amendment complying with the new 
disclosure requirements pursuant to rule 485(a) under the Securities 
Act because such post-effective amendments typically will involve a 
number of material changes that do not fall within the scope of rule 
485(b).\62\
---------------------------------------------------------------------------

    \61\ See Investment Company Act Release No. 26287 (Dec. 11, 
2003) [68 FR 70402 (Dec. 17, 2003)].
    \62\ A post-effective amendment may only be filed under rule 
485(b) [17 CFR 230.485(b)] if it is filed for one or more specified 
purposes, including to make non-material changes to the registration 
statement. A post-effective amendment filed for any purpose not 
specified in rule 485(b) must be filed pursuant to rule 485(a) under 
the Securities Act [17 CFR 230.485(a)]. A post-effective amendment 
filed under rule 485(b) may become effective immediately upon 
filing, while a post-effective amendment filed under rule 485(a) 
generally becomes effective either 60 days or 75 days after filing, 
unless the effective date is accelerated by the Commission.
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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-3--Registration Statement of Separate Accounts Organized 
as Management Investment Companies''; (3) ``Form N-4--Registration 
Statement of Separate Accounts Organized as Unit Investment Trusts''; 
and (4) ``Form N-6 under the Investment Company Act of 1940 and the 
Securities Act of 1933, Registration Statement of Insurance Company 
Separate Accounts Registered as Unit Investment Trusts that Offer 
Variable Life Insurance Policies.'' 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-3 (OMB Control No. 
3235-0316), Form N-4 (OMB Control No. 3235-0318), and Form N-6 (OMB 
Control No. 3235-0503) were adopted pursuant to section 8(a) of the 
Investment Company Act [15 U.S.C. 80a-8(a)] and section 5 of the 
Securities Act [15 U.S.C. 77e]. We published notice soliciting comments 
on the collection of information requirements in the Proposing Release 
and submitted these proposed collections of information to the Office 
of Management and Budget (``OMB'') for review in accordance with 44 
U.S.C. 3507(d) and 5 CFR 1320.11. OMB approved the collections of 
information for the amendments to Forms N-1A, N-3, N-4 and N-6. We 
received no comments on the proposed collection of information 
requirements.
    The amendments adopted in this release will amend Form N-1A to 
require mutual funds to provide improved disclosure regarding their 
policies and procedures with respect to frequent purchases and 
redemptions of fund shares. The amendments will also amend Forms N-3, 
N-4, and N-6 to require similar disclosure in prospectuses for 
insurance company separate accounts offering variable insurance 
contracts, with respect to frequent transfers among sub-accounts. In 
addition, the Commission is adopting amendments to instructions to 
Forms N-1A and N-3 that clarify that all mutual funds and managed 
separate accounts that issue variable annuities (other than money 
market funds) are required to explain in their prospectuses the 
circumstances under which they will use fair value pricing, and the 
effects of using fair value pricing. Finally, the Commission is 
adopting amendments to Form N-1A to require disclosure regarding mutual 
funds' policies and procedures with respect to the selective disclosure 
of their portfolio holdings to any person, and parallel amendments to 
Form N-3 for managed separate accounts that issue variable annuities.

Form N-1A

    Form N-1A, including the amendments, contains collection of 
information requirements. The likely respondents to this information 
collection are open-end funds registering with the Commission. 
Compliance with the disclosure requirements of Form N-1A is mandatory. 
Responses to the disclosure requirements are not confidential.
    We continue to estimate that the amendments will increase the hour 
burden per portfolio per filing of an initial registration statement by 
10 hours and will increase the hour burden per portfolio per filing of 
a post-effective amendment to a registration statement by 4 hours. The 
estimated total annual hour burden for all funds for preparation and 
filing of initial registration statements and post-effective amendments 
to Form N-1A is 1,142,296 hours.\63\
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    \63\ This estimate differs from the estimate of 1,107,078 hours 
contained in the Proposing Release due to the following additional 
annual hour burdens for Form N-1A that were not taken into account 
in the Proposing Release: 2,252 hours resulting from the proposed 
rules relating to sales load breakpoint disclosure; 1,968 hours 
resulting from the proposed rules relating to disclosure of sales 
loads and revenue sharing in connection with the proposals for new 
mutual fund confirmation and point of sale disclosure; and 30,998 
hours resulting from proposed amendments relating to portfolio 
manager disclosure. The estimate is based on the following 
calculation: (822.5 hours per portfolio per initial registration 
statement x 483 portfolios) + (108.5 hours per portfolio per post-
effective amendment x 6,542 portfolios) + 2,252 hours + 1,968 hours 
+ 30,998 hours = 1,142,296 hours.
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Form N-3

    Form N-3, including the amendments, contains collection of 
information requirements. The likely respondents to this information 
collection are separate accounts, organized as management investment 
companies offering variable annuities, registering with the Commission 
on Form N-3. Compliance with the disclosure requirements of Form N-3 is 
mandatory. Responses to the disclosure requirements are not 
confidential.
    We continue to estimate that the amendments will increase the hour 
burden per portfolio per filing of an initial registration statement on 
Form N-3 by 10 hours and will increase the hour burden per portfolio 
per filing of a post-effective amendment to a registration statement on 
Form N-3 by 4 hours. The estimated total annual hour burden for all 
funds for preparation and filing of initial registration statements and 
post-effective amendments on Form N-3 is 34,832 hours.\64\
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    \64\ This estimate differs from the estimate of 34,662 hours 
contained in the Proposing Release due to an additional annual hour 
burden of 170 hours for Form N-3 resulting from proposed amendments 
relating to portfolio manager disclosure that was not taken into 
account in the Proposing Release. The estimate is based on the 
following calculation: (11,144.4 hours for filing initial 
registration statements) + (23,517.8 hours for filing post-effective 
amendments) + 170 hours = 34,832 hours.

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[[Page 22309]]

Form N-4

    Form N-4, including the amendments, contains collection of 
information requirements. The likely respondents to this information 
collection are separate accounts, organized as unit investment trusts 
that offer variable annuity contracts, registering with the Commission 
on Form N-4. Compliance with the disclosure requirements of Form N-4 is 
mandatory. Responses to the disclosure requirements are not 
confidential.
    We continue to estimate that the amendments will increase the hour 
burden per filing of an initial registration statement on Form N-4 by 5 
hours and will increase the hour burden per filing of a post-effective 
amendment to a registration statement on Form N-4 by 2 hours. The 
estimated total annual hour burden for separate accounts for 
preparation and filing of initial registration statements and post-
effective amendments on Form N-4 is 288,701 hours.\65\
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    \65\ This estimate is the same as the estimate in the Proposing 
Release. This estimate is based on the following calculation: 
(43,717 hours for filing initial registration statements) + (244,984 
hours for filing post-effective amendments) = 288,701 hours.
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Form N-6

    Form N-6, including the amendments, contains collection of 
information requirements. The likely respondents to this information 
collection are separate accounts, organized as unit investment trusts 
that offer variable life insurance policies, registering with the 
Commission on Form N-6. Compliance with the disclosure requirements of 
Form N-6 is mandatory. Responses to the disclosure requirements are not 
confidential.
    We continue to estimate that the amendments will increase the hour 
burden per filing of an initial registration statement on Form N-6 by 5 
hours, and will increase the hour burden per filing of a post-effective 
amendment that is an annual update on Form N-6 by 2 hours. The 
estimated total annual hour burden for separate accounts for 
preparation and filing of initial registration statements and post-
effective amendments on Form N-6 is 52,100 hours.\66\
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    \66\ This estimate is the same as the estimate in the Proposing 
Release. This estimate is based on the following calculation: 
(38,512 hours for filing initial registration statements) + (10,088 
hours for filing post-effective amendments that are annual updates) 
+ (3,500 hours for other post-effective amendments) = 52,100 hours.
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IV. Cost/Benefit Analysis

    The Commission is sensitive to the costs and benefits imposed by 
its rules. The amendments that the Commission is adopting will require 
mutual funds to provide enhanced disclosure about their policies and 
procedures with respect to frequent purchases and redemptions of fund 
shares. Specifically, the amendments:
     Require a mutual fund to describe in its 
prospectus the risks, if any, that frequent purchases and redemptions 
of fund shares may present for other shareholders;
     Require a mutual fund to state in its prospectus 
whether or not the fund's board of directors has adopted policies and 
procedures with respect to frequent purchases and redemptions of fund 
shares and, if the board has not adopted any such policies and 
procedures, state the specific basis for the view of the board that it 
is appropriate for the fund not to have such policies and procedures;
     Require a mutual fund to describe in its 
prospectus any policies and procedures for deterring frequent purchases 
and redemptions of fund shares, and in its SAI any arrangements to 
permit frequent purchases and redemptions of fund shares; and
     Require similar disclosure in prospectuses for 
insurance company separate accounts offering variable insurance 
contracts, with respect to frequent transfers among sub-accounts.
    The Commission is also adopting amendments to clarify instructions 
to its registration forms for mutual funds and insurance company 
managed separate accounts that offer variable annuities to require that 
all such funds (other than money market funds) explain in their 
prospectuses both the circumstances under which they will use fair 
value pricing and the effects of using fair value pricing.
    In addition, the amendments require mutual funds, and insurance 
company managed separate accounts that offer variable annuities, to 
disclose their policies with respect to the disclosure of portfolio 
holdings information. The amendments:
     Require a fund to describe in its SAI any 
policies and procedures with respect to the disclosure of the fund's 
portfolio securities to any person and any ongoing arrangements to make 
available information about the fund's portfolio securities to any 
person; and
     Require a fund to state in its prospectus that a 
description of the policies and procedures is available in the fund's 
SAI, and on the fund's website, if applicable.

A. Benefits

    The amendments we are adopting to our registration forms will 
benefit investors in a number of respects. First, the amendments will 
benefit fund investors by providing them with more detailed information 
about mutual fund practices relating to frequent purchases and 
redemptions of fund shares (or, in the case of insurance company 
separate accounts offering variable insurance products, frequent 
transfers of contract value among sub-accounts). The amendments are 
intended to require mutual funds and insurance company separate 
accounts to describe with specificity the restrictions they place on 
frequent purchases and redemptions (or frequent transfers among sub-
accounts), if any, and the circumstances under which each such 
restriction will not apply. Market timing arbitrage strategies often 
involve such frequent purchases and redemptions of mutual fund shares 
or frequent transfers among sub-accounts of insurance company separate 
accounts. By increasing transparency of funds' policies and procedures 
in this area, the amendments are designed to help restore investor 
confidence in the fairness of fund operations and in the practices and 
procedures of intermediaries selling fund shares. This additional 
disclosure will enable investors to assess funds' risks, policies, and 
procedures in this area and determine if a fund's policies and 
procedures are in line with the investor's expectations. In addition, 
increasing transparency regarding arrangements to permit frequent 
purchases and redemptions of fund shares (or frequent transfers among 
sub-accounts) and selective disclosure of portfolio holdings 
information may benefit fund shareholders by deterring arrangements 
motivated by considerations of the interests of the fund's adviser 
rather than the interests of fund shareholders.
    Second, the amendments to Forms N-1A and N-3 relating to fair value 
pricing will benefit investors by clarifying that all mutual funds and 
managed separate accounts that offer variable annuities, other than 
money market funds, are required to explain both the circumstances 
under which they will use fair value pricing and the effects of using 
such pricing. These amendments will clearly reflect that funds are 
required to use fair value prices any time that market quotations for 
their portfolio securities are not readily available (including when 
they are not reliable). Fair valuation of a fund's portfolio 
securities, which is required under certain circumstances, can serve to 
foreclose arbitrage opportunities available to market timers.
    Finally, the amendments to Forms N-1A and N-3 relating to funds' 
policies and procedures with respect to the

[[Page 22310]]

selective disclosure of portfolio holdings information may benefit 
investors by providing greater transparency of fund practices relating 
to the disclosure of the fund's portfolio holdings, and by reinforcing 
funds' and advisers' obligations to prevent the misuse of material, 
non-public information.

B. Costs

    The amendments will impose new requirements on mutual funds to 
provide disclosure of their policies and procedures with respect to 
frequent purchases and redemptions of fund shares (or frequent 
transfers of contract value among sub-accounts, in the case of 
insurance company separate accounts offering variable insurance 
contracts), and selective disclosure of portfolio holdings information. 
We estimate that complying with the new disclosure requirements will 
entail a relatively small financial burden. The information regarding a 
fund's policies and procedures in these areas should be readily 
available to management and the board of directors of a fund. 
Therefore, we expect that the cost of compiling and reporting this 
information should be limited.
    The amendments will require additional prospectus disclosure by a 
mutual fund regarding its policies and procedures relating to frequent 
purchases and redemptions by fund shareholders and additional 
prospectus disclosure by an insurance company separate account that 
issues variable insurance contracts regarding its policies and 
procedures relating to frequent transfers among sub-accounts. In 
addition, the amendments will require disclosure in the SAI for these 
registrants of arrangements to permit frequent purchases and 
redemptions (or frequent transfers among sub-accounts, in the case of 
insurance company separate accounts issuing variable insurance 
contracts). In addition, the amendments will require each mutual fund 
and insurance company managed separate account to describe in its SAI 
any policies and procedures regarding the disclosure of the fund's 
portfolio holdings information, and to state in its prospectus that a 
description of those policies and procedures is available in the fund's 
SAI.\67\ These costs may 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).\68\ For purposes of the 
Paperwork Reduction Act, we have estimated that the new disclosure 
requirements will add 35,545 hours to the burden of completing Forms N-
1A, N-3, N-4, and N-6.\69\ We estimate that this additional burden will 
equal total internal costs of $2,977,605 annually, or approximately 
$784 per fund.\70\
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    \67\ The amendments clarifying mutual funds' and insurance 
company managed separate accounts' disclosure requirements with 
respect to fair value pricing are not expected to result in any 
significant costs.
    \68\ We note that, with respect to the amendments regarding 
mutual funds' policies and procedures with respect to frequent 
purchases and redemptions and insurance company separate accounts' 
policies and procedures with respect to frequent transfers among 
sub-accounts, in many cases funds currently provide disclosure in 
their prospectuses or elsewhere of the limitations that they place 
on frequent trading in order to discourage market timing.
    \69\ This represents 30,998 additional hours for Form N-1A, 728 
additional hours for Form N-3, 3,269 additional hours for Form N-4, 
and 550 additional hours for Form N-6.
    \70\ These figures are based on a Commission estimate that 
approximately 3,800 investment companies will be subject to the 
amendments and an estimated hourly wage rate of $83.77. The estimate 
of the number of investment companies is based on data derived from 
the Commission's EDGAR filing system. The estimated wage rate is a 
blended rate, based on published hourly wage rates for assistant/
associate general counsels ($82.05) 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 $62.05 
(($82.05x.50)+(42.05x.50))= $62.05). See Securities Industry 
Association, Report on Management & Professional Earnings in the 
Securities Industry 2003 (Sept. 2003). 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 $83.77 ($62.05x1.35)=$83.77). This 
estimate differs from the estimate in the Proposing Release, which 
was based on published compensation for compliance attorneys 
($37.60) and programmers ($29.44) outside New York City, contained 
in the Securities Industry Association's Report on Management and 
Professional Earnings in the Securities Industry 2002.
---------------------------------------------------------------------------

    The external costs of providing the new prospectus disclosure 
relating to frequent purchases and redemptions of mutual fund shares 
and frequent transfers among sub-accounts of insurance company separate 
accounts may or may not be significant, depending on the complexity of 
a fund's policies and procedures in these areas, the extent to which 
restrictions on frequent purchases and redemptions or transfers among 
sub-accounts apply uniformly in all cases or will not be imposed under 
certain circumstances, and the extent to which a fund currently 
provides specific disclosure in this area. We expect that the external 
costs of providing disclosure regarding arrangements to permit frequent 
purchases and redemptions of mutual fund shares and frequent transfers 
among sub-accounts of insurance company separate accounts will be 
minimal, because this disclosure will be included in the SAI, which is 
delivered to investors upon request. We also expect that the external 
costs of providing the new disclosure relating to each mutual fund's 
and insurance company managed separate account's policies and 
procedures with respect to disclosure of portfolio holdings information 
will be minimal, because the required description of a fund's policies 
and procedures with respect to the disclosure of the fund's portfolio 
securities to any person and any ongoing arrangements to make available 
information about the fund's portfolio securities will be required in 
the fund's SAI.\71\
---------------------------------------------------------------------------

    \71\ A fund will be required to state in its prospectus that a 
description of its policies and procedures is available in the 
fund's SAI, and on the fund's website, if applicable.
---------------------------------------------------------------------------

V. Consideration of Effects on Efficiency, Competition, and Capital 
Formation

    Section 2(c) of the Investment Company Act [15 U.S.C. 80a-2(c)] and 
section 2(b) of the Securities Act [15 U.S.C. 77(b)] 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.
    The amendments are intended to provide greater transparency for 
mutual fund shareholders regarding a fund's policies and procedures 
with respect to frequent purchases and redemptions of fund shares (or 
frequent transfers of contract value among sub-accounts, in the case of 
insurance company separate accounts offering variable insurance 
contracts), and selective disclosure of portfolio holdings 
information.\72\ These changes may improve efficiency. The enhanced 
disclosure requirements are intended to enable shareholders to make a 
more informed assessment as to whether a particular fund is in line 
with shareholders' investment objectives, which could promote more 
efficient allocation of investments by investors and more efficient 
allocation of assets among competing funds. The amendments may also 
improve competition, as enhanced disclosure may prompt funds to compete 
to provide investors with policies and

[[Page 22311]]

procedures that effectively protect long-term investors from harmful 
market timing, and from the misuse of portfolio holdings information 
through selective disclosure. Finally, the effects of the amendments on 
capital formation are unclear.
---------------------------------------------------------------------------

    \72\ The amendments clarifying mutual funds' and insurance 
company managed separate accounts' disclosure requirements with 
respect to fair value pricing are not expected to have a significant 
effect on efficiency, competition, and capital formation.
---------------------------------------------------------------------------

    Although, as noted above, we believe that the amendments will 
benefit investors, the magnitude of the effect of the amendments on 
efficiency, competition, and capital formation, and the extent to which 
they will be offset by the costs of the amendments, are difficult to 
quantify. We note that, with respect to the amendments regarding funds' 
policies and procedures with respect to frequent purchases and 
redemptions (or frequent transfers among sub-accounts), in many cases 
funds currently provide disclosure in their prospectuses or elsewhere 
of the limitations that they place on frequent trading in order to 
discourage market timing.
    We received one comment on the possible effects of the proposed 
amendments on competition, from a trade association affiliated with the 
variable life insurance industry. The commenter urged the Commission to 
modify the rule to prevent any anticompetitive impact, by implementing 
constructive market timing solutions that operate fairly across all 
product platforms. As discussed above, we believe that is important for 
issuers of variable insurance contracts to provide disclosure regarding 
their policies and procedures with respect to transfers of contract 
value that is as specific as the disclosure that will be required for 
mutual funds with respect to frequent purchases and redemptions of fund 
shares. Market timing of mutual funds through a variable annuity or 
variable life insurance contract, in the form of tax-free transfers of 
contract value among sub-accounts, can be as detrimental for investors 
in variable insurance products as market timing can be for investors in 
mutual funds.

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 form 
amendments under the Securities Act and the Investment Company Act that 
require funds to provide additional disclosure about their policies and 
procedures with respect to frequent purchases and redemptions of mutual 
fund shares (or, with respect to insurance company separate accounts, 
frequent transfers among sub-accounts) and selective disclosure of fund 
portfolio holdings to any person. An Initial Regulatory Flexibility 
Analysis (``IRFA''), which was prepared in accordance with 5 U.S.C. 
603, was published in the Proposing Release.

A. Reasons for, and Objectives of, the Amendments

    Sections I and II of this Release describe the reasons for and 
objectives of the amendments. As discussed in detail above, the 
amendments adopted by the Commission include disclosure reforms 
intended to shed more light on market timing and selective disclosure 
of portfolio holdings information.

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, and the nature of any impact, and we asked 
commenters to provide any empirical data supporting the extent of the 
impact. We received no comment letters specifically on the IRFA, but 
one commenter requesting an extension of the compliance date stated 
that the Commission should be mindful of the costs that would be 
incurred by small mutual funds if successive disclosure changes are 
required, particularly in light of the compliance costs these funds 
face currently.

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.\73\ Approximately 145 
investment companies registered on Form N-1A meet this definition.\74\ 
We estimate that few, if any, registered separate accounts registered 
on Form N-3, N-4, or N-6 are small entities.\75\
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    \73\ 17 CFR 270.0-10.
    \74\ This estimate is based on analysis by the Division of 
Investment Management staff of information from databases compiled 
by third-party information providers, including Morningstar, Inc. 
and Lipper.
    \75\ This estimate is based on figures compiled by Division of 
Investment Management staff regarding separate accounts registered 
on Forms N-3, N-4, and N-6. 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. Rule 0-10(b) under the Investment Company Act 
[17 CFR 270.0-10(b)].
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D. Reporting, Recordkeeping, and Other Compliance Requirements

    The amendments will require a mutual fund to disclose in its 
prospectus both the risks to shareholders of the frequent purchase and 
redemption of fund shares, and the fund's policies and procedures with 
respect to frequent purchases and redemptions of fund shares. The 
amendments will require similar prospectus disclosure for insurance 
company separate accounts issuing variable insurance contracts. The 
amendments also clarify that all mutual funds and insurance company 
managed separate accounts that issue variable annuities, other than 
money market funds, are required to explain both the circumstances 
under which they will use fair value pricing, and the effects of using 
fair value pricing. Finally, the amendments require mutual funds and 
insurance company managed separate accounts that issue variable 
annuities to disclose their policies and procedures with respect to the 
disclosure of their portfolio securities to any person and any ongoing 
arrangements to make available information about their portfolio 
securities.
    The Commission estimates some one-time formatting and ongoing costs 
and burdens that will be imposed on all funds, including funds that are 
small entities. We note, however, that in many cases funds currently 
provide disclosure in their prospectuses of the limitations that they 
place on frequent trading in order to discourage market timing. For 
purposes of the Paperwork Reduction Act, we have estimated that the new 
disclosure requirements will increase the hour burden per portfolio per 
filing of an initial registration statement on Forms N-1A and N-3 by 10 
hours each and will increase the hour burden per portfolio per filing 
of a post-effective amendment to a registration statement on each such 
form by 4 hours. For purposes of the Paperwork Reduction Act, we have 
estimated that the new disclosure requirements will increase the hour 
burden per portfolio per filing of an initial registration statement on 
Forms N-4 and N-6 by 5 hours each and will increase the hour burden per 
portfolio per filing of a post-effective amendment to a registration 
statement on each such form by 2 hours. We estimate that this 
additional burden will increase total internal costs per fund by 
approximately $838 annually per portfolio for funds filing initial 
registration statements, and $335

[[Page 22312]]

annually per portfolio for funds filing post-effective amendments, on 
Forms N-1A and N-3. We estimate that this additional burden will 
increase total internal costs per separate account by approximately 
$419 annually for filing an initial registration statement, and $168 
annually for filing a post-effective amendment, on Forms N-4 and N-
6.\76\
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    \76\ These figures are based on an estimated hourly wage rate of 
$83.77. See supra note 70.
---------------------------------------------------------------------------

    The external costs of providing the new prospectus disclosure 
relating to frequent purchases and redemptions of mutual fund shares 
and frequent transfers among sub-accounts of insurance company separate 
accounts that issue variable insurance contracts may or may not be 
significant, depending on the complexity of a fund's policies and 
procedures in these areas, the extent to which restrictions on frequent 
purchases and redemptions or frequent transfers among sub-accounts 
apply uniformly in all cases or will not be imposed under certain 
circumstances, and the extent to which a fund currently provides 
specific disclosure in this area. We expect that the external costs of 
providing disclosure regarding arrangements to permit frequent 
purchases and redemptions of mutual fund shares and frequent transfers 
among sub-accounts of insurance company separate accounts will be 
minimal, because this disclosure will be included in the SAI, which is 
delivered to investors upon request. We also expect that the external 
costs of providing the new disclosure relating to a mutual fund's or 
insurance company managed separate account's policies and procedures 
with respect to disclosure of portfolio holdings information will be 
minimal, because the required description of a fund's policies and 
procedures with respect to the disclosure of the fund's portfolio 
securities to any person and any ongoing arrangements to make available 
information about the fund's portfolio securities will be required in 
the fund's SAI.\77\
---------------------------------------------------------------------------

    \77\ The amendments clarifying mutual funds' and insurance 
company managed separate accounts' disclosure requirements with 
respect to fair value pricing are not expected to result in any 
significant 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 proposed amendments, the Commission considered the 
following alternatives: (i) The establishment of differing compliance 
or reporting requirements or timetables that take into account the 
resources available to small entities; (ii) the clarification, 
consolidation, or simplification of compliance and reporting 
requirements under the proposed amendments for small entities; (iii) 
the use of performance rather than design standards; and (iv) an 
exemption from coverage of the proposed amendments, or any part 
thereof, for small entities.
    The Commission believes at the present time that special compliance 
or reporting requirements for small entities, or an exemption from 
coverage for small entities, would not be appropriate or consistent 
with investor protection. The disclosure amendments will provide 
shareholders with greater transparency with respect to mutual funds' 
policies and procedures regarding frequent purchases and redemptions of 
fund shares (and, in the case of insurance company separate accounts 
that issue variable insurance contracts, frequent transfers among sub-
accounts) and mutual funds' and insurance company managed separate 
accounts' policies and procedures regarding selective disclosure of 
their portfolio holdings. Different disclosure requirements for funds 
that are small entities may create the risk that the shareholders in 
these funds would not be as able as investors in larger funds to assess 
a fund's risks, policies, and procedures with respect to frequent 
purchases and redemptions of fund shares, as well as a fund's practices 
with respect to the disclosure of its portfolio holdings. We believe it 
is important for the disclosure that will be required by the amendments 
to be provided to shareholders by all funds, not just funds that are 
not considered small entities.
    We have endeavored through these 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 to December 5, 2004, to coordinate with 
the compliance date for new rule 38a-1 under the Investment Company 
Act. In addition, we have modified our proposals to include disclosure 
of arrangements by a fund to permit frequent purchases and redemptions 
in the SAI, rather than the prospectus. Small entities should benefit 
from the Commission's reasoned approach to the amendments to the same 
degree as other investment companies. Further clarification, 
consolidation, or simplification of the amendments 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. Based on our 
past experience, we believe that the disclosure required by the 
amendments will be more useful to investors if there are enumerated 
informational requirements.

VII. Statutory Authority

    The Commission is adopting amendments to Forms N-1A, N-3, N-4, and 
N-6 pursuant to authority set forth in sections 5, 6, 7, 10, and 19(a) 
of the Securities Act [15 U.S.C. 77e, 77f, 77g, 77j, and 77s(a)] and 
sections 8, 22, 24(a), 30, and 38 of the Investment Company Act [15 
U.S.C. 80a-8, 80a-22, 80a-24(a), 80a-29, and 80a-37].

List of Subjects

17 CFR Part 239

    Reporting and recordkeeping requirements, Securities.

17 CFR Part 274

    Investment companies, 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 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

0
1. The authority citation for Part 239 continues to read in part as 
follows:

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

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

0
2. The authority citation for Part 274 continues to read in part 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.
* * * * *

    Note: The text of Forms N-1A, N-3, N-4, and N-6 do not, and 
these amendments will not, appear in the Code of Federal 
Regulations.


0
3. Form N-1A (referen

[[Page 22313]]

ced in Sec. Sec.  239.15A and 274.11A) is amended by:
0
a. In Instruction 6 to Item 1(b)(1), revising the reference ``Item 
6(f)'' to read ``Item 6(g)'';
0
b. In Instruction 6 to Item 1(b)(1), revising the reference ``Item 
6(f)(3)'' to read ``Item 6(g)(3)'';
0
c. In Item 4, revising the title and adding new paragraph (d);
0
d. In Item 6, revising the Instruction to paragraph (a)(1);
0
e. In Item 6, redesignating paragraphs (e) and (f) as paragraphs (f) 
and (g), respectively;
0
f. In Item 6, adding paragraph (e);
0
g. In newly redesignated Item 6(f)(2)(i), revising the reference 
``paragraph (e)(1)'' to read ``paragraph (f)(1)'';
0
h. In newly redesignated paragraph (g) of Item 6, revising the 
introductory text;
0
i. In paragraph (a)(2) of Item 7, revising the reference ``Item 6(f)'' 
to read ``Item 6(g)'';
0
j. In Item 11, adding paragraph (f); and
0
k. In Item 17, adding paragraph (e).
    The additions and revisions read as follows:

Form N-1A

* * * * *

Item 4. Investment Objectives, Principal Investment Strategies, Related 
Risks, and Disclosure of Portfolio Holdings

* * * * *
    (d) Portfolio Holdings. State that a description of the Fund's 
policies and procedures with respect to the disclosure of the Fund's 
portfolio securities is available (i) in the Fund's SAI; and (ii) on 
the Fund's website, if applicable.
* * * * *

Item 6. Shareholder Information

    (a) * * *
    (1) * * *
    Instruction: A Fund (other than a Money Market Fund) must provide a 
brief explanation of the circumstances under which it will use fair 
value pricing and the effects of using fair value pricing. With respect 
to any portion of a Fund's assets that are invested in one or more 
open-end management investment companies that are registered under the 
Investment Company Act, the Fund may briefly explain that the Fund's 
net asset value is calculated based upon the net asset values of the 
registered open-end management investment companies in which the Fund 
invests, and that the prospectuses for these companies explain the 
circumstances under which those companies will use fair value pricing 
and the effects of using fair value pricing.
* * * * *
    (e) Frequent Purchases and Redemptions of Fund Shares.
    (1) Describe the risks, if any, that frequent purchases and 
redemptions of Fund shares by Fund shareholders may present for other 
shareholders of the Fund.
    (2) State whether or not the Fund's board of directors has adopted 
policies and procedures with respect to frequent purchases and 
redemptions of Fund shares by Fund shareholders.
    (3) If the Fund's board of directors has not adopted any such 
policies and procedures, provide a statement of the specific basis for 
the view of the board that it is appropriate for the Fund not to have 
such policies and procedures.
    (4) If the Fund's board of directors has adopted any such policies 
and procedures, describe those policies and procedures, including:
    (i) Whether or not the Fund discourages frequent purchases and 
redemptions of Fund shares by Fund shareholders;
    (ii) Whether or not the Fund accommodates frequent purchases and 
redemptions of Fund shares by Fund shareholders; and
    (iii) Any policies and procedures of the Fund for deterring 
frequent purchases and redemptions of Fund shares by Fund shareholders, 
including any restrictions imposed by the Fund to prevent or minimize 
frequent purchases and redemptions. Describe each of these policies, 
procedures, and restrictions with specificity. Indicate whether each of 
these restrictions applies uniformly in all cases or whether the 
restriction will not be imposed under certain circumstances, including 
whether each of these restrictions applies to trades that occur through 
omnibus accounts at intermediaries, such as investment advisers, 
broker-dealers, transfer agents, third party administrators, and 
insurance companies. Describe with specificity the circumstances under 
which any restriction will not be imposed. Include a description of the 
following restrictions, if applicable:
    (A) Any restrictions on the volume or number of purchases, 
redemptions, or exchanges that a shareholder may make within a given 
time period;
    (B) Any exchange fee or redemption fee;
    (C) Any costs or administrative or other fees or charges that are 
imposed on shareholders deemed to be engaged in frequent purchases and 
redemptions of Fund shares, together with a description of the 
circumstances under which such costs, fees, or charges will be imposed;
    (D) Any minimum holding period that is imposed before an investor 
may make exchanges into another Fund;
    (E) Any restrictions imposed on exchange or purchase requests 
submitted by overnight delivery, electronically, or via facsimile or 
telephone; and
    (F) Any right of the Fund to reject, limit, delay, or impose other 
conditions on exchanges or purchases or to close or otherwise limit 
accounts based on a history of frequent purchases and redemptions of 
Fund shares, including the circumstances under which such right will be 
exercised.
    (5) If applicable, include a statement, adjacent to the disclosure 
required by paragraphs (e)(1) through (e)(4) of this Item, that the SAI 
includes a description of all arrangements with any person to permit 
frequent purchases and redemptions of Fund shares.
* * * * *
    (g) Separate Disclosure Document. A Fund may omit from the 
prospectus information about purchase and redemption procedures 
required by Items 6(b)-(d) and 7(a)(2), other than information that is 
also required by Item 6(e), and provide it in a separate document if 
the Fund:
* * * * *

Item 11. Description of the Fund and Its Investments and Risks

* * * * *
    (f) Disclosure of Portfolio Holdings.
    (1) Describe the Fund's policies and procedures with respect to the 
disclosure of the Fund's portfolio securities to any person, including:
    (i) How the policies and procedures apply to disclosure to 
different categories of persons, including individual investors, 
institutional investors, intermediaries that distribute the Fund's 
shares, third-party service providers, rating and ranking 
organizations, and affiliated persons of the Fund;
    (ii) Any conditions or restrictions placed on the use of 
information about portfolio securities that is disclosed, including any 
requirement that the information be kept confidential or prohibitions 
on trading based on the information, and any procedures to monitor the 
use of this information;
    (iii) The frequency with which information about portfolio 
securities is disclosed, and the length of the lag, if any, between the 
date of the information and the date on which the information is 
disclosed;
    (iv) Any policies and procedures with respect to the receipt of 
compensation or other consideration by the Fund, its

[[Page 22314]]

investment adviser, or any other party in connection with the 
disclosure of information about portfolio securities;
    (v) The individuals or categories of individuals who may authorize 
disclosure of the Fund's portfolio securities (e.g., executive officers 
of the Fund);
    (vi) The procedures that the Fund uses to ensure that disclosure of 
information about portfolio securities is in the best interests of Fund 
shareholders, including procedures to address conflicts between the 
interests of Fund shareholders, on the one hand, and those of the 
Fund's investment adviser; principal underwriter; or any affiliated 
person of the Fund, its investment adviser, or its principal 
underwriter, on the other; and
    (vii) The manner in which the board of directors exercises 
oversight of disclosure of the Fund's portfolio securities.
    Instruction: Include any policies and procedures of the Fund's 
investment adviser, or any other third party, that the Fund uses, or 
that are used on the Fund's behalf, with respect to the disclosure of 
the Fund's portfolio securities to any person.
    (2) Describe any ongoing arrangements to make available information 
about the Fund's portfolio securities to any person, including the 
identity of the persons who receive information pursuant to such 
arrangements. Describe any compensation or other consideration received 
by the Fund, its investment adviser, or any other party in connection 
with each such arrangement, and provide the information described by 
paragraphs (f)(1)(ii), (iii), and (v) of this Item with respect to such 
arrangements.
    Instructions:
    1. The consideration required to be disclosed by Item 11(f)(2) 
includes any agreement to maintain assets in the Fund or in other 
investment companies or accounts managed by the investment adviser or 
by any affiliated person of the investment adviser.
    2. The Fund is not required to describe an ongoing arrangement to 
make available information about the Fund's portfolio securities 
pursuant to this Item, if, not later than the time that the Fund makes 
the portfolio securities information available to any person pursuant 
to the arrangement, the Fund discloses the information in a publicly 
available filing with the Commission that is required to include the 
information.
    3. The Fund is not required to describe an ongoing arrangement to 
make available information about the Fund's portfolio securities 
pursuant to this Item if:
    (a) the Fund makes the portfolio securities information available 
to any person pursuant to the arrangement no earlier than the day next 
following the day on which the Fund makes the information available on 
its website in the manner specified in its prospectus pursuant to 
paragraph (b); and
    (b) the Fund has disclosed in its current prospectus that the 
portfolio securities information will be available on its website, 
including (1) the nature of the information that will be available, 
including both the date as of which the information will be current 
(e.g., month-end) and the scope of the information (e.g., complete 
portfolio holdings, Fund's largest 20 holdings); (2) the date when the 
information will first become available and the period for which the 
information will remain available, which shall end no earlier than the 
date on which the Fund files its Form N-CSR or Form N-Q with the 
Commission for the period that includes the date as of which the 
website information is current; and (3) the location on the Fund's 
website where either the information or a prominent hyperlink (or 
series of prominent hyperlinks) to where the information will be 
available.
* * * * *

Item 17. Purchase, Redemption, and Pricing of Shares

* * * * *
    (e) Arrangements Permitting Frequent Purchases and Redemptions of 
Fund Shares. Describe any arrangements with any person to permit 
frequent purchases and redemptions of Fund shares, including the 
identity of the persons permitted to engage in frequent purchases and 
redemptions pursuant to such arrangements, and any compensation or 
other consideration received by the Fund, its investment adviser, or 
any other party pursuant to such arrangements.
    Instructions:
    1. The consideration required to be disclosed by Item 17(e) 
includes any agreement to maintain assets in the Fund or in other 
investment companies or accounts managed by the investment adviser or 
by any affiliated person of the investment adviser.
    2. If the Fund has an arrangement to permit frequent purchases and 
redemptions by a group of individuals, such as the participants in a 
defined contribution plan that meets the requirements for qualification 
under Section 401(k) of the Internal Revenue Code (26 U.S.C. 401(k)), 
the Fund may identify the group rather than identifying each individual 
group member.
* * * * *

0
4. Form N-3 (referenced in Sec. Sec.  239.17a and 274.11b) is amended 
by:
0
a. In Item 5, adding paragraph (f);
0
b. In Item 8, adding paragraph (e);
0
c. In Item 11, adding an Instruction to paragraph (c);
0
d. In Item 19, adding paragraph (e); and
0
e. In Item 23, adding paragraph (f).
    The additions read as follows:

Form N-3

* * * * *

Item 5. General Description of Registrant and Insurance Company

* * * * *
    (f) State that a description of the Registrant's policies and 
procedures with respect to the disclosure of the Registrant's portfolio 
securities is available (A) in the Registrant's Statement of Additional 
Information; and (B) on the Registrant's website, if applicable.
* * * * *

Item 8. General Description of Variable Annuity Contracts

* * * * *
    (e)(i) Describe the risks, if any, that frequent transfers of 
contract value among sub-accounts of the Registrant may present for 
other contractowners and other persons (e.g., participants, annuitants, 
or beneficiaries) who have material rights under the variable annuity 
contracts.
    (ii) State whether or not the Registrant's board of managers has 
adopted policies and procedures with respect to frequent transfers of 
contract value among sub-accounts of the Registrant.
    (iii) If the Registrant's board of managers has not adopted any 
such policies and procedures, provide a statement of the specific basis 
for the view of the board that it is appropriate for the Registrant not 
to have such policies and procedures.
    (iv) If the Registrant's board of managers has adopted any such 
policies and procedures, describe those policies and procedures, 
including:
    (A) whether or not the Registrant discourages frequent transfers of 
contract value among sub-accounts of the Registrant;
    (B) whether or not the Registrant accommodates frequent transfers 
of contract value among sub-accounts of the Registrant; and
    (C) any policies and procedures of the Registrant for deterring 
frequent

[[Page 22315]]

transfers of contract value among sub-accounts of the Registrant, 
including any restrictions imposed by the Registrant to prevent or 
minimize frequent transfers. Describe each of these policies, 
procedures, and restrictions with specificity. Indicate whether each of 
these restrictions applies uniformly in all cases or whether the 
restriction will not be imposed under certain circumstances, including 
whether each of these restrictions applies to trades that occur through 
omnibus accounts at intermediaries, such as investment advisers, 
broker-dealers, transfer agents, and third party administrators. 
Describe with specificity the circumstances under which any restriction 
will not be imposed. Include a description of the following 
restrictions, if applicable:
    (1) any restrictions on the volume or number of transfers that may 
be made within a given time period;
    (2) any transfer fee;
    (3) any costs or administrative or other fees or charges that are 
imposed on persons deemed to be engaged in frequent transfers of 
contract value among sub-accounts of the Registrant, together with a 
description of the circumstances under which such costs, fees, or 
charges will be imposed;
    (4) any minimum holding period that is imposed before a transfer 
may be made from a sub-account into another sub-account of the 
Registrant;
    (5) any restrictions imposed on transfer requests submitted by 
overnight delivery, electronically, or via facsimile or telephone; and
    (6) any right of the Registrant to reject, limit, delay, or impose 
other conditions on transfers or to terminate or otherwise limit 
contracts based on a history of frequent transfers among sub-accounts, 
including the circumstances under which such right will be exercised.
    (v) If applicable, include a statement, adjacent to the disclosure 
required by paragraphs (e)(i) through (e)(iv) of this Item, that the 
Statement of Additional Information includes a description of all 
arrangements with any person to permit frequent transfers of contract 
value among sub-accounts of the Registrant.
* * * * *

Item 11. Purchases and Contract Value

* * * * *
    (c) * * *
    Instruction: A Registrant (other than a money market fund or sub-
account) must provide a brief explanation of the circumstances under 
which it will use fair value pricing and the effects of using fair 
value pricing. With respect to any portion of a Registrant's assets 
that are invested in one or more open-end management investment 
companies that are registered under the Investment Company Act, the 
Registrant may briefly explain that the Registrant's net asset value is 
calculated based upon the net asset values of the registered open-end 
management investment companies in which the Registrant invests, and 
that the prospectuses for these companies explain the circumstances 
under which those companies will use fair value pricing and the effects 
of using fair value pricing.
* * * * *

Item 19. Investment Objectives and Policies

* * * * *
    (e)(i) Describe the Registrant's policies and procedures with 
respect to the disclosure of the Registrant's portfolio securities to 
any person, including:
    (A) how the policies and procedures apply to disclosure to 
different categories of persons, including contractowners, 
participants, annuitants, beneficiaries, institutional investors, 
intermediaries that distribute the Registrant's contracts, third-party 
service providers, rating and ranking organizations, and affiliated 
persons of the Registrant;
    (B) any conditions or restrictions placed on the use of information 
about portfolio securities that is disclosed, including any requirement 
that the information be kept confidential or prohibitions on trading 
based on the information, and any procedures to monitor the use of this 
information;
    (C) the frequency with which information about portfolio securities 
is disclosed, and the length of the lag, if any, between the date of 
the information and the date on which the information is disclosed;
    (D) any policies and procedures with respect to the receipt of 
compensation or other consideration by the Registrant, its investment 
adviser, the Insurance Company, or any other party in connection with 
the disclosure of information about portfolio securities;
    (E) the individuals or categories of individuals who may authorize 
disclosure of the Registrant's portfolio securities (e.g., executive 
officers of the Registrant's investment adviser);
    (F) the procedures that the Registrant uses to ensure that 
disclosure of information about portfolio securities is in the best 
interests of contractowners, participants, annuitants, and 
beneficiaries, including procedures to address conflicts between the 
interests of such persons, on the one hand, and those of the 
Registrant's investment adviser or principal underwriter; the Insurance 
Company; or any affiliated person of the Registrant, its investment 
adviser or principal underwriter, or the Insurance Company, on the 
other; and
    (G) the manner in which the board of managers exercises oversight 
of disclosure of the Registrant's portfolio securities.
    Instruction: Include any policies and procedures of the 
Registrant's investment adviser, or any other third party, that the 
Registrant uses, or that are used on the Registrant's behalf, with 
respect to the disclosure of the Registrant's portfolio securities to 
any person.
    (ii) Describe any ongoing arrangements to make available 
information about the Registrant's portfolio securities to any person, 
including the identity of the persons who receive information pursuant 
to such arrangements. Describe any compensation or other consideration 
received by the Registrant, its investment adviser, the Insurance 
Company, or any other party in connection with each such arrangement, 
and provide the information described by paragraphs (e)(i)(B), (C), and 
(E) of this Item with respect to such arrangements.
    Instructions:
    1. The consideration required to be disclosed by Item 19(e)(ii) 
includes any agreement to maintain assets in the Registrant or in other 
investment companies or accounts managed or sponsored by the investment 
adviser, the Insurance Company, or any affiliated person of the 
investment adviser or the Insurance Company.
    2. The Registrant is not required to describe an ongoing 
arrangement to make available information about the Registrant's 
portfolio securities pursuant to this Item, if, not later than the time 
that the Registrant makes the portfolio securities information 
available to any person pursuant to the arrangement, the Registrant 
discloses the information in a publicly available filing with the 
Commission that is required to include the information.
    3. The Registrant is not required to describe an ongoing 
arrangement to make available information about the Registrant's 
portfolio securities pursuant to this Item if:
    a. the Registrant makes the portfolio securities information 
available to any person pursuant to the arrangement no earlier than the 
next day following the day on which the Registrant makes the 
information available on its website in the manner specified in its 
prospectus pursuant to paragraph b.; and
    b. the Registrant has disclosed in its current prospectus that the 
portfolio securities information will be available

[[Page 22316]]

on its website, including (1) the nature of the information that will 
be available, including both the date as of which the information will 
be current (e.g., month-end) and the scope of the information (e.g., 
complete portfolio holdings, Registrant's largest 20 holdings); (2) the 
date when the information will first become available and the period 
for which the information will remain available, which shall end no 
earlier than the date on which the Registrant files its Form N-CSR or 
Form N-Q with the Commission for the period that includes the date as 
of which the website information is current; and (3) the location on 
the Registrant's website where either the information or a prominent 
hyperlink (or series of prominent hyperlinks) to the information will 
be available.
* * * * *

Item 23. Purchase and Pricing of Securities Being Offered

* * * * *
    (f) Describe any arrangements with any person to permit frequent 
transfers of contract value among sub-accounts of the Registrant, 
including the identity of the persons permitted to engage in frequent 
transfers pursuant to such arrangements, and any compensation or other 
consideration received by the Registrant, its investment adviser, the 
Insurance Company, or any other party pursuant to such arrangements.
    Instructions:
    1. The consideration required to be disclosed by Item 23(f) 
includes any agreement to maintain assets in the Registrant or in other 
investment companies or accounts managed or sponsored by the investment 
adviser, the Insurance Company, or any affiliated person of the 
investment adviser or the Insurance Company.
    2. If the Registrant has an arrangement to permit frequent 
transfers of contract value among sub-accounts of the Registrant by a 
group of individuals, such as the participants in a defined 
contribution plan that meets the requirements for qualification under 
Section 401(k) of the Internal Revenue Code (26 U.S.C. 401(k)), the 
Registrant may identify the group rather than identifying each 
individual group member.
* * * * *

0
5. Form N-4 (referenced in Sec. Sec.  239.17b and 274.11c) is amended 
by:
0
a. In Item 7, adding paragraph (e); and
0
b. In Item 19, adding paragraph (c).
    The additions read as follows:

Form N-4

* * * * *

Item 7. General Description of Variable Annuity Contracts

* * * * *
    (e)(i) Describe the risks, if any, that frequent transfers of 
contract value among sub-accounts of the Registrant may present for 
other contractowners and other persons (e.g., participants, annuitants, 
or beneficiaries) who have material rights under the variable annuity 
contracts.
    (ii) State whether or not the Registrant or depositor has policies 
and procedures with respect to frequent transfers of contract value 
among sub-accounts of the Registrant.
    (iii) If neither the Registrant nor the depositor has any such 
policies and procedures, provide a statement of the specific basis for 
the view of the depositor that it is appropriate for the Registrant and 
depositor not to have such policies and procedures.
    (iv) If the Registrant or depositor has any such policies and 
procedures, describe those policies and procedures, including:
    (A) whether or not the Registrant or depositor discourages frequent 
transfers of contract value among sub-accounts of the Registrant;
    (B) whether or not the Registrant or depositor accommodates 
frequent transfers of contract value among sub-accounts of the 
Registrant; and
    (C) any policies and procedures of the Registrant or depositor for 
deterring frequent transfers of contract value among sub-accounts of 
the Registrant, including any restrictions imposed by the Registrant or 
depositor to prevent or minimize frequent transfers. Describe each of 
these policies, procedures, and restrictions with specificity. Indicate 
whether each of these restrictions applies uniformly in all cases or 
whether the restriction will not be imposed under certain 
circumstances, including whether each of these restrictions applies to 
trades that occur through omnibus accounts at intermediaries, such as 
investment advisers, broker-dealers, transfer agents, and third party 
administrators. Describe with specificity the circumstances under which 
any restriction will not be imposed. Include a description of the 
following restrictions, if applicable:
    (1) any restrictions on the volume or number of transfers that may 
be made within a given time period;
    (2) any transfer fee;
    (3) any costs or administrative or other fees or charges that are 
imposed on persons deemed to be engaged in frequent transfers of 
contract value among sub-accounts of the Registrant, together with a 
description of the circumstances under which such costs, fees, or 
charges will be imposed;
    (4) any minimum holding period that is imposed before a transfer 
may be made from a sub-account into another sub-account of the 
Registrant;
    (5) any restrictions imposed on transfer requests submitted by 
overnight delivery, electronically, or via facsimile or telephone; and
    (6) any right of the Registrant or depositor to reject, limit, 
delay, or impose other conditions on transfers or to terminate or 
otherwise limit contracts based on a history of frequent transfers 
among sub-accounts, including the circumstances under which such right 
will be exercised.
    (v) If applicable, include a statement, adjacent to the disclosure 
required by paragraphs (e)(i) through (e)(iv) of this Item, that the 
Statement of Additional Information includes a description of all 
arrangements with any person to permit frequent transfers of contract 
value among sub-accounts of the Registrant.
* * * * *

Item 19. Purchase of Securities Being Offered

* * * * *
    (c) Describe any arrangements with any person to permit frequent 
transfers of contract value among sub-accounts of the Registrant, 
including the identity of the persons permitted to engage in frequent 
transfers pursuant to such arrangements, and any compensation or other 
consideration received by the Registrant, the depositor, or any other 
party pursuant to such arrangements.
    Instructions:
    1. The consideration required to be disclosed by Item 19(c) 
includes any agreement to maintain assets in the Registrant or in other 
investment companies or accounts managed or sponsored by the depositor, 
any investment adviser of a portfolio company, or any affiliated person 
of the depositor or of any such investment adviser.
    2. If the Registrant has an arrangement to permit frequent 
transfers of contract value among sub-accounts of the Registrant by a 
group of individuals, such as the participants in a defined 
contribution plan that meets the requirements for qualification under 
Section 401(k) of the Internal Revenue Code (26 U.S.C. 401(k)), the 
Registrant may identify the group rather than identifying each 
individual group member.
* * * * *

0
6. Form N-6 (referenced in Sec. Sec.  239.17c and 274.11d) is amended 
by:
0
a. In Item 6, adding paragraph (f); and

[[Page 22317]]

0
b. In Item 19, adding paragraph (d).
    The additions read as follows:

Form N-6

* * * * *

Item 6. General Description of Contracts

* * * * *
    (f) Frequent Transfers Among Sub-Accounts of the Registrant.
    (1) Describe the risks, if any, that frequent transfers of Contract 
value among sub-accounts of the Registrant may present for other 
Contractowners and other persons (e.g., the insured or beneficiaries) 
who have material rights under the Contract.
    (2) State whether or not the Registrant or Depositor has policies 
and procedures with respect to frequent transfers of Contract value 
among sub-accounts of the Registrant.
    (3) If neither the Registrant nor the Depositor has any such 
policies and procedures, provide a statement of the specific basis for 
the view of the Depositor that it is appropriate for the Registrant and 
Depositor not to have such policies and procedures.
    (4) If the Registrant or Depositor has any such policies and 
procedures, describe those policies and procedures, including:
    (i) whether or not the Registrant or Depositor discourages frequent 
transfers of Contract value among sub-accounts of the Registrant;
    (ii) whether or not the Registrant or Depositor accommodates 
frequent transfers of Contract value among sub-accounts of the 
Registrant; and
    (iii) any policies and procedures of the Registrant or Depositor 
for deterring frequent transfers of Contract value among sub-accounts 
of the Registrant, including any restrictions imposed by the Registrant 
or Depositor to prevent or minimize frequent transfers. Describe each 
of these policies, procedures, and restrictions with specificity. 
Indicate whether each of these restrictions applies uniformly in all 
cases or whether the restriction will not be imposed under certain 
circumstances, including whether each of these restrictions applies to 
trades that occur through omnibus accounts at intermediaries, such as 
investment advisers, broker-dealers, transfer agents, and third party 
administrators. Describe with specificity the circumstances under which 
any restriction will not be imposed. Include a description of the 
following restrictions, if applicable:
    (A) any restrictions on the volume or number of transfers that may 
be made within a given time period;
    (B) any transfer fee;
    (C) any costs or administrative or other fees or charges that are 
imposed on persons deemed to be engaged in frequent transfers of 
Contract value among sub-accounts of the Registrant, together with a 
description of the circumstances under which such costs, fees, or 
charges will be imposed;
    (D) any minimum holding period that is imposed before a transfer 
may be made from a sub-account into another sub-account of the 
Registrant;
    (E) any restrictions imposed on transfer requests submitted by 
overnight delivery, electronically, or via facsimile or telephone; and
    (F) any right of the Registrant or Depositor to reject, limit, 
delay, or impose other conditions on transfers or to terminate or 
otherwise limit Contracts based on a history of frequent transfers 
among sub-accounts, including the circumstances under which such right 
will be exercised.
    (5) If applicable, include a statement, adjacent to the disclosure 
required by paragraphs (f)(1) through (f)(4) of this Item, that the 
Statement of Additional Information includes a description of all 
arrangements with any person to permit frequent transfers of Contract 
value among sub-accounts of the Registrant.
* * * * *

Item 19. Additional Information About Operation of Contracts and 
Registrant

* * * * *
    (d) Describe any arrangements with any person to permit frequent 
transfers of Contract value among sub-accounts of the Registrant, 
including the identity of the persons permitted to engage in frequent 
transfers pursuant to such arrangements, and any compensation or other 
consideration received by the Registrant, the Depositor, or any other 
party pursuant to such arrangements.
    Instructions:
    1. The consideration required to be disclosed by Item 19(d) 
includes any agreement to maintain assets in the Registrant or in other 
investment companies or accounts managed or sponsored by the Depositor, 
any investment adviser of a Portfolio Company, or any affiliated person 
of the Depositor or of any such investment adviser.
    2. If the Registrant has an arrangement to permit frequent 
transfers of Contract value among sub-accounts of the Registrant by a 
group of individuals, such as the participants in a defined 
contribution plan that meets the requirements for qualification under 
Section 401(k) of the Internal Revenue Code (26 U.S.C. 401(k)), the 
Registrant may identify the group rather than identifying each 
individual group member.
* * * * *

    Dated: April 16, 2004.

    By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-9150 Filed 4-22-04; 8:45 am]
BILLING CODE 8010-01-P