[Federal Register Volume 69, Number 155 (Thursday, August 12, 2004)]
[Rules and Regulations]
[Pages 49805-49807]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-18449]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 239 and 274

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


Shareholder Reports and Quarterly Portfolio Disclosure of 
Registered Management Investment Companies; Technical Amendment

AGENCY: Securities and Exchange Commission.

ACTION: Final rule; Technical amendment to a form.

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SUMMARY: The Securities and Exchange Commission is adopting a technical

[[Page 49806]]

amendment to Item 21(d)(1) of Form N-1A, which was published in the 
Federal Register on Tuesday, March 9, 2004 (69 FR 11244). The amendment 
corrects an instruction to the requirement for a registered open-end 
management investment company to include in its shareholder reports 
disclosure of fund expenses borne by shareholders during the reporting 
period.

EFFECTIVE DATE: August 12, 2004.

FOR FURTHER INFORMATION CONTACT: John Faust, Attorney, 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:

I. Background

    The Securities and Exchange Commission (``Commission'') recently 
issued a release adopting amendments to Form N-1A that require 
registered open-end management investment companies to disclose in 
their reports to shareholders fund expenses borne by shareholders 
during the reporting period (``Adopting Release'').\1\ The amendments 
require shareholder reports to include: (1) The cost in dollars 
associated with an investment of $1,000, based on the fund's actual 
expenses and return for the period; and (2) the cost in dollars 
associated with an investment of $1,000, based on the fund's actual 
expenses for the period and an assumed return of 5 percent per year. 
The requirements for the expense examples include an instruction to 
round all dollar figures to the nearest dollar.\2\
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    \1\ Investment Company Act Release No. 26372 (Feb. 27, 2004) [69 
FR 11244 (Mar. 9, 2004] (``Adopting Release'').
    Form N-1A is the registration form used by open-end management 
investment companies to register under the Investment Company Act of 
1940 and to offer their shares under the Securities Act of 1933.
    \2\ Instruction 1(a) to Item 21(d)(1) of Form N-1A.
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    The purpose of the expense examples is to increase investors' 
understanding of the fees that they pay on an ongoing basis for 
investing in a fund, and to facilitate comparison of ongoing expenses 
among funds.\3\ In adopting the requirement for the expense examples, 
we required the examples to be based on an initial investment of 
$1,000, rather than $10,000 as proposed, but did not reconsider the 
rounding instruction.\4\ Subsequent to the adoption of the rule, we 
have become aware that, in some cases, rounding expenses paid on a 
$1,000 investment to the nearest dollar may result in insufficiently 
precise expense figures. Such figures would not facilitate investors' 
ability to estimate their own expenses and to compare the costs of 
different funds. This will tend to affect funds with relatively low 
expense ratios disproportionately. For example, an investor in a fund 
with an annual expense ratio of 0.10% would pay $0.51 in expenses for a 
$1,000 initial investment over a half-year period (assuming a 5% annual 
return for the period). An investor in a fund with an annual expense 
ratio of 0.29% would pay $1.47 in expenses for a $1,000 investment over 
a half-year period (assuming a 5% annual return for the period). 
However, under the requirements we adopted, these two funds would both 
show rounded expenses of $1.00, even though the expense ratio for the 
second fund is almost three times as large as that of the first fund. 
In addition, an investor who used this $1.00 expense figure to estimate 
his or her own expenses for an investment in either of the two funds 
would significantly underestimate or overestimate expenses. For 
example, an investor with a $25,000 initial investment in each of the 
two funds would calculate his or her expenses to be $25.00 ($25,000/
$1,000 x $1.00) for each fund, while a calculation based on expense 
figures rounded to the nearest cent would result in estimates of $12.75 
($25,000/$1,000 x $0.51) and $36.75 ($25,000/$1,000 x $1.47), 
respectively.
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    \3\ Adopting Release, supra note 1, 69 FR at 11246.
    \4\ See Adopting Release, supra note 1, 69 FR at 11247.
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    The Commission is adopting a technical amendment to Instruction 
1(a) of Item 21(d)(1) of Form N-1A to require funds to round all 
figures in the table of expense examples to the nearest cent. In light 
of the change to the initial investment amount, we have concluded that 
it is appropriate to require rounding to the nearest cent, rather than 
the nearest dollar.

II. Certain Findings

    Under the Administrative Procedure Act (``APA''), notice of 
proposed rulemaking is not required when the agency, for good cause, 
finds ``that notice and public procedure thereon are impracticable, 
unnecessary, or contrary to the public interest.''\5\ The Commission is 
making a technical amendment to Form N-1A to effect the intent of the 
Commission as expressed in both the proposing and adopting releases. 
This amendment will make a minor change in the presentation of the 
expense example in shareholder reports, which will have no effect on 
the burden on funds of performing the calculation required. For the 
foregoing reasons, the Commission finds that publishing the changes for 
comment is unnecessary.\6\
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    \5\ 5 U.S.C. 553(b).
    \6\ For similar reasons, the amendments do not require analysis 
under the Regulatory Flexibility Act or analysis of major status 
under the Small Business Regulatory Enforcement Fairness Act. See 5 
U.S.C. 601(2) (for purposes of Regulatory Flexibility Act analyses, 
the term ``rule'' means any rule for which the agency publishes a 
general notice of proposed rulemaking); 5 U.S.C. 804(3)(C) (for 
purposes of congressional review of agency rulemaking, the term 
``rule'' does not include any rule of agency organization, 
procedure, or practice that does not substantially affect the rights 
or obligations of non-agency parties).
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    The APA also generally requires that an agency publish an adopted 
rule in the Federal Register 30 days before it becomes effective.\7\ 
However, an agency may forgo the 30-day requirement if it finds good 
cause for doing so.\8\ For the same reasons that the notice and comment 
period is not required, the Commission finds good cause for the 
amendment to take effect immediately. The Adopting Release required all 
fund reports to shareholders for periods ending on or after July 9, 
2004, to comply with the amendments in that release, including the 
requirement for expense examples.\9\ Therefore, any such shareholder 
report transmitted on or after the date of this release must also 
comply with this amendment.
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    \7\ 5 U.S.C. 553(d).
    \8\ Id.
    \9\ See Adopting Release, supra note 1, 69 FR at 11254.
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III. Statutory Authority

    The Commission is adopting amendments to Form N-1A pursuant to 
authority set forth in sections 5, 6, 7, 10, 19(a), and 28 of the 
Securities Act of 1933 [15 U.S.C. 77e, 77f, 77g, 77j, 77s(a), and 77z-
3]; sections 10(b), 13, 15(d), and 23(a) of the Securities Exchange Act 
of 1934 [15 U.S.C. 78j(b), 78m, 78o(d), and 78w(a)]; and sections 6(c), 
8, 24(a), 30, and 38 of the Investment Company Act of 1940 [15 U.S.C. 
80a-6(c), 80a-8, 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 Form Amendment

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

[[Page 49807]]

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

0
1. The general authority citation for Part 239 continues to read 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 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.
* * * * *

0
3. Instruction 1(a) to Item 21(d)(1) of Form N-1A (referenced in 
Sec. Sec.  239.15A and 274.11A) is amended to read as follows:


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

Form N-1A

* * * * *

Item 21. Financial Statements

* * * * *
    (d) * * *
    (1) * * *

Instructions.

    1. General.
    (a) Round all figures in the table to the nearest cent.
* * * * *

    Dated: August 9, 2004.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-18449 Filed 8-11-04; 8:45 am]
BILLING CODE 8010-01-P