Federal Register, Volume 74 Issue 15 (Monday, January 26, 2009)

[Federal Register Volume 74, Number 15 (Monday, January 26, 2009)]
[Rules and Regulations]
[Pages 4546-4593]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-1035]

[[Page 4545]]

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Part III

Securities and Exchange Commission

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17 CFR Parts 230, 232, 239, et al.

Enhanced Disclosure and New Prospectus Delivery Option for Registered
Open-End Management Investment Companies; Final Rule

Federal Register / Vol. 74, No. 15 / Monday, January 26, 2009 / Rules
and Regulations

[[Page 4546]]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230, 232, 239, and 274

[Release Nos. 33-8998; IC-28584; File No. S7-28-07]
RIN 3235-AJ44

Enhanced Disclosure and New Prospectus Delivery Option for
Registered Open-End Management Investment Companies

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission is adopting amendments
to the form used by mutual funds to register under the Investment
Company Act of 1940 and to offer their securities under the Securities
Act of 1933 in order to enhance the disclosures that are provided to
mutual fund investors. The amendments require key information to appear
in plain English in a standardized order at the front of the mutual
fund statutory prospectus. The Commission is also adopting rule
amendments that permit a person to satisfy its mutual fund prospectus
delivery obligations under section 5(b)(2) of the Securities Act by
sending or giving the key information directly to investors in the form
of a summary prospectus and providing the statutory prospectus on an
Internet Web site. Upon an investor's request, mutual funds are also
required to send the statutory prospectus to the investor. These
amendments are intended to improve mutual fund disclosure by providing
investors with key information in plain English in a clear and concise
format, while enhancing the means of delivering more detailed
information to investors. Finally, the Commission is adopting
additional amendments that are intended to result in the disclosure of
more useful information to investors who purchase shares of exchange-
traded funds on national securities exchanges.

DATES: Effective Date: March 31, 2009.
Compliance Date: See Part III.D. of this release for information on
compliance dates.

FOR FURTHER INFORMATION CONTACT: Kieran G. Brown, Senior Counsel;
Sanjay Lamba, Senior Counsel; Devin F. Sullivan, Attorney; or Mark T.
Uyeda, Assistant Director, Office of Disclosure Regulation, at (202)
551-6784, or, with respect to exchange-traded funds, Adam B. Glazer,
Senior Counsel, Office of Regulatory Policy, at (202) 551-6792,
Division of Investment Management, Securities and Exchange Commission,
100 F Street, NE., Washington, DC 20549-5720.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission
(``Commission'') is adopting amendments to rules 159A,\1\ 482,\2\
485,\3\ 497,\4\ and 498 \5\ under the Securities Act of 1933
(``Securities Act'') and rules 304 \6\ and 401 \7\ of Regulation S-
T.\8\ The Commission is also adopting amendments to Form N-1A,\9\ the
form used by open-end management investment companies to register under
the Investment Company Act of 1940 (``Investment Company Act'') and to
offer securities under the Securities Act; Form N-4,\10\ the form used
by insurance company separate accounts organized as unit investment
trusts and offering variable annuity contracts to register under the
Investment Company Act and to offer securities under the Securities
Act; and Form N-14,\11\ the form used by registered management
investment companies and business development companies to register
under the Securities Act securities to be issued in business
combinations.
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\1\ 17 CFR 230.159A.
\2\ 17 CFR 230.482.
\3\ 17 CFR 230.485.
\4\ 17 CFR 230.497.
\5\ 17 CFR 230.498.
\6\ 17 CFR 232.304.
\7\ 17 CFR 232.401.
\8\ 17 CFR 232.10 et seq.
\9\ 17 CFR 239.15A and 274.11A.
\10\ 17 CFR 239.17b and 274.11c.
\11\ 17 CFR 239.23.
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Table of Contents

I. Executive Summary
II. Background
III. Discussion
A. Amendments to Form N-1A
1. General Instructions to Form N-1A
2. Exchange Ticker Symbols
3. Information Required in Summary Section
a. Elimination of Proposed Portfolio Holdings Requirement
b. Order of Information
c. Investment Objectives and Goals
d. Fee Table
e. Investments, Risks, and Performance
f. Management
g. Purchase and Sale of Fund Shares
h. Tax Information
i. Financial Intermediary Compensation
4. Exchange-Traded Funds
a. Purchasing and Redeeming Shares
b. Total Return
c. Premium/Discount Information
5. Conforming and Technical Amendments to Form N-1A
B. New Delivery Option for Mutual Funds
1. Use of Summary Prospectus and Satisfaction of Statutory
Prospectus Delivery Requirements
2. Content of Summary Prospectus
a. General
b. Cover Page or Beginning of Summary Prospectus
c. Updating Requirements
3. Provision of Statutory Prospectus, SAI, and Shareholder
Reports
a. Documents Required To Be Provided on the Internet
b. Formatting Requirements for Information Provided on the
Internet
c. Technological Requirements for Online Information
d. Ability To Retain Documents
e. Safe Harbor for Temporary Noncompliance
f. Requirement To Send Documents
4. Incorporation by Reference
a. Permissible Incorporation by Reference
b. Effect of Incorporation by Reference
5. Filing Requirements for the Summary Prospectus
C. Technical and Conforming Amendments
D. Compliance Date
IV. Paperwork Reduction Act
V. Cost/Benefit Analysis
VI. Consideration of Promotion of Efficiency, Competition, and
Capital Formation
VII. Final Regulatory Flexibility Analysis
VIII. Statutory Authority
Text of Final Rule and Form Amendments

I. Executive Summary

Today, the Commission is adopting an improved mutual fund
disclosure framework that it originally proposed in November 2007.\12\
This improved disclosure framework is intended to provide investors
with information that is easier to use and more readily accessible,
while retaining the comprehensive quality of the information that is
available today. The foundation of the improved disclosure framework is
the provision to all investors of streamlined and user-friendly
information that is key to an investment decision.
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\12\ Investment Company Act Release No. 28064 (Nov. 21, 2007)
[72 FR 67790 (Nov. 30, 2007)] (``Proposing Release'').
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required to send the statutory prospectus to the investor upon request.
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\13\ A ``statutory prospectus'' is a prospectus that meets the
requirements of Section 10(a) of the Securities Act [15 U.S.C.
77j(a)].
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In addition, the Commission is adopting amendments to Form N-1A
relating to exchange-traded funds (``ETFs'') that we proposed in a
separate release in March 2008.\14\ These amendments are intended to
result in the disclosure of more useful information to investors who
purchase shares of exchange-traded funds on national securities
exchanges.
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\14\ See Investment Company Act Release No. 28193 (Mar. 11,
2008) [73 FR 14618 (Mar. 18, 2008)] (``ETF Proposing Release'').
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II. Background

Millions of individual Americans invest in shares of open-end
management investment companies (``mutual funds''),\15\ relying on
mutual funds for their retirement, their children's education, and
their other basic financial needs.\16\ These investors face a difficult
task in choosing among the more than 8,000 available mutual funds.\17\
Fund prospectuses, which have been criticized by investor advocates,
representatives of the fund industry, and others as being too long and
complicated, often prove difficult for investors to use efficiently in
comparing their many choices.\18\ Current Commission rules require
mutual fund prospectuses to contain key information about investment
objectives, risks, and expenses that, while important to investors, can
be difficult for investors to extract. Prospectuses are often long,
both because they contain a wealth of detailed information, which our
rules require, and because prospectuses for multiple funds are often
combined in a single document. Too frequently, the language of
prospectuses is complex and legalistic, and the presentation formats
make little use of graphic design techniques that would contribute to
readability.
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\15\ An open-end management investment company is an investment
company, other than a unit investment trust or face-amount
certificate company, that offers for sale or has outstanding any
redeemable security of which it is the issuer. See Sections 4 and
5(a)(1) of the Investment Company Act [15 U.S.C. 80a-4 and 80a-
5(a)(1)].
\16\ Investment Company Institute, 2008 Investment Company Fact
Book, at 70 (2008) (``2008 ICI Fact Book''), available at http://www.ici.org/pdf/2008_factbook.pdf (88 million individual investors
own mutual funds).
\17\ Id. at 16 (in 2007, there were 8,752 mutual funds).
\18\ See, e.g., Don Phillips, Managing Director, Morningstar,
Inc., Transcript of U.S. Securities and Exchange Commission
Interactive Data Roundtable, at 26 (June 12, 2006), available at
http://www.sec.gov/spotlight/xbrl/xbrlofficialtranscript0606.pdf
(``June 12 Roundtable Transcript'') (stating that current prospectus
is ``bombarding investors with way more information than they can
handle and that they can intelligently assimilate''). A Webcast
archive of the June 12 Interactive Data Roundtable is available at
http://www.connectlive.com/events/secxbrl/. See also Investment
Company Institute, Understanding Preferences for Mutual Fund
Information, at 8 (Aug. 2006), available at http://ici.org/pdf/rpt_06_inv_prefs_summary.pdf (``ICI Investor Preferences Study'')
(noting that sixty percent of recent fund investors describe mutual
fund prospectuses as very or somewhat difficult to understand, and
two-thirds say prospectuses contain too much information);
Associated Press Online, Experts: Investors Face Excess Information
(May 25, 2005) (``There is broad agreement * * * that prospectuses
have too much information * * * to be useful.'' (quoting Mercer
Bullard, President, Fund Democracy, Inc.)); Thomas P. Lemke and
Gerald T. Lins, The ``Gift'' of Disclosure: A Suggested Approach for
Managed Investments, The Investment Lawyer, at 19 (Jan. 2001)
(stating that the fund prospectus ``typically contains more
information than the average investor needs'').
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Numerous commentators have suggested that investment information
that is key to an investment decision should be provided in a
streamlined document with other more detailed information provided
elsewhere.\19\ Furthermore, recent investor surveys indicate that
investors prefer to receive information in concise, user-friendly
formats.\20\
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\19\ See, e.g., Charles A. Jaffe, Improving Disclosure of Funds
Can Be Done, The Fort Worth Star-Telegram (May 7, 2006) (``Bring
back the profile prospectus, and make its use mandatory * * *. A two
page-summary of [the] key points [in the profile]--at the front of
the prospectus--would give investors the bare minimum of what they
should know out of the paperwork.''); Experts: Investors Face Excess
Information, supra note 18 (stating ``a possible middle ground in
the disclosure debate is to rely more heavily on so-called profile
documents which provide a two-page synopsis of a fund'' (attributing
statement to Mercer Bullard, President, Fund Democracy, Inc.));
Mutual Funds: A Review of the Regulatory Landscape, Hearing Before
the Subcomm. on Capital Markets, Insurance and Government Sponsored
Enterprises of the Comm. on Financial Services, U.S. House of
Representatives, 109th Cong. (May 10, 2005), at 24 (``To my mind, a
new and enhanced mutual fund prospectus should have two core
components. It should be short, addressing only the most important
factors about which typical fund investors care in making investment
decisions, and it should be supplemented by additional information
available electronically, specifically through the Internet, unless
an investor chooses to receive additional information through other
means.'' (Testimony of Barry P. Barbash, then Partner, Shearman &
Sterling LLP)); Thomas P. Lemke and Gerald T. Lins, The ``Gift'' of
Disclosure: A Suggested Approach for Managed Investments, supra note
18, at 19 (information that is important to investors includes goals
and investment policies, risks, costs, performance, and the identity
and background of the manager).
In addition, a mutual fund task force organized by the National
Association of Securities Dealers, Inc. (``NASD'') supported the use
of a ``profile plus'' document, on the Internet, that would include,
among other things, basic information about a fund's investment
strategies, risks, and total costs, with hyperlinks to additional
information in the prospectus. See NASD Mutual Fund Task Force,
Report of the Mutual Fund Task Force: Mutual Fund Distribution (Mar.
2005), available at http://www.finra.org/web/groups/rules_regs/documents/rules_regs/p013690.pdf (``NASD Mutual Fund Task Force
Report''). The name of NASD has been changed to the Financial
Industry Regulatory Authority, Inc. (``FINRA'').
\20\ See ICI Investor Preferences Study, supra note 18, at 29
(``Nearly nine in 10 recent fund investors say they prefer a summary
of the information they want to know before buying fund shares,
either alone or along with a detailed document * * *. Just 13
percent prefer to receive only a detailed document.''); Barbara
Roper and Stephen Brobeck, Consumer Federation of America, Mutual
Fund Purchase Practices, at 13-14 (June 2006), available at http://www.consumerfed.org/pdfs/mutual_fund_survey_report.pdf (survey
respondents more likely to consult a fund summary document rather
than a prospectus or other written materials).
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Similar opinions were voiced at a roundtable held by the Commission
in June 2006, at which representatives from investor groups, the mutual
fund industry, analysts, and others discussed how the Commission could
change the mutual fund disclosure framework so that investors would be
provided with better information. Significant discussion at the
roundtable concerned the importance of providing mutual fund investors
with access to key fund data in a shorter, more easily understandable
format.\21\ The participants focused on the importance of providing
mutual fund investors with shorter disclosure documents, containing key
information, with more detailed disclosure documents available to
investors and others who choose to review additional information.\22\
There was consensus among the roundtable participants that the key
information that investors need to make an investment decision includes
information about a mutual fund's investment objectives and strategies,
risks, costs, and performance.\23\
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\21\ See, e.g., Henry H. Hopkins, Vice President and Chief Legal
Counsel, T. Rowe Price Group, Inc., June 12 Roundtable Transcript,
supra note 18, at 31 (``[S]hareholders prefer receiving a concise
summary of fund information before buying.'').
\22\ See, e.g., Don Phillips, Managing Director, Morningstar,
Inc., id. at 27 (stating that mutual fund investors need two
different documents, including a simplified print document and a
tagged electronic document); Paul Schott Stevens, President and
Chief Executive Officer, Investment Company Institute, id. at 72-73
(urging the Commission to consider permitting mutual funds to
``deliver a clear, concise disclosure document * * * much like the
profile prospectus'' with a statement that additional disclosure is
available on the funds' Web site or upon request in paper).
\23\ See, e.g., Barbara Roper, Director of Investor Protection,
Consumer Federation of America, id. at 20 (noting that there is
``agreement to the point of near unanimity about the basic factors
that investors should consider when selecting a mutual fund. These
closely track the content of the original fund profile with highest
priority given to investment objectives and strategies, risks,
costs, and past performance particularly as it relates to the
volatility of past returns.''). See also Paul G. Haaga, Jr.,
Executive Vice President, Capital Research and Management Company,
id. at 90 (stating that the Commission should ``specify some minimum
amounts of information'' to provide investors with ``something along
the lines of the [fund] profile''); Henry H. Hopkins, Vice President
and Chief Legal Counsel, T. Rowe Price Group, Inc., id. at 31 (``The
profile is an excellent, well organized disclosure document whose
content requirements were substantiated by SEC-sponsored focus
groups and an industry pilot program.'').

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The roundtable participants also discussed the potential benefits
of increased Internet availability of fund disclosure documents, which
include, among other things, facilitating comparisons among funds and
replacing ``one-size-fits-all'' disclosure with disclosure that each
investor can tailor to his or her own needs.\24\ In recent years,
access to the Internet has greatly expanded,\25\ and significant
strides have been made in the speed and quality of Internet
connections.\26\ The Commission has already harnessed the power of
these technological advances to provide better access to information in
a number of areas. Recently, for example, we created a program that
permits issuers, on a voluntary basis, to submit to the Commission
financial information and, in the case of mutual funds, key prospectus
information, in an interactive data format that facilitates automated
retrieval, analysis, and comparison of the information.\27\ More
recently, we proposed rules that would require mutual funds to provide
the risk/return summary section of their prospectuses, and companies to
provide their financial statements, to the Commission in interactive
data format.\28\ In addition, we recently adopted rules that provide
all shareholders with the ability to choose whether to receive proxy
materials in paper or via the Internet.\29\
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\24\ See, e.g., Paul Schott Stevens, President and Chief
Executive Officer, Investment Company Institute, id. at 70-71
(stating that the Internet can serve as ``far more than a stand-in
for paper documents * * *. It can * * * put investors in control
when it comes to information about their investments.''); Don
Phillips, Managing Director, Morningstar, Inc., id. at 49
(discussing ``the ability to use the Internet as a tool for
comparative shopping'').
\25\ Recent surveys show that Internet use among adults is at an
all time high with approximately three quarters of Americans having
access to the Internet. See A Typology of Information and Technology
Users, Pew Internet & American Life Project, at 2 (May 2007),
available at http://www.pewinternet.org/pdfs/PIP_ICT_Typology.pdf;
Internet Penetration and Impact, Pew Internet & American Life
Project, at 3 (Apr. 2006), available at http://www.pewinternet.org/pdfs/PIP_Internet_Impact.pdf. Further, while some have noted a
``digital divide'' for certain groups, see, e.g., Susannah Fox,
Digital Divisions, Pew Internet & American Life Project, at 1 (Oct.
5, 2005) (noting that certain groups lag behind in Internet usage,
including Americans age 65 and older, African-Americans, and those
with less education), others have noted that this divide may be
diminishing for those groups. See, e.g., Mutual Fund Shareholders'
Use of the Internet, 2006, Investment Company Institute, Research
Fundamentals, at 7 (Oct. 2006), available at http://www.ici.org/stats/res/fm-v15n6.pdf (``Recent increases in Internet access among
older shareholders * * * have narrowed the generational gap
considerably. Today, shareholders age 65 or older are more than
twice as likely to have Internet access than in 2000.''); Michel
Marriott, Blacks Turn to Internet Highway, and Digital Divide Starts
to Close, The New York Times (Mar. 31, 2006), available at: http://www.nytimes.com/2006/03/31/us/31divide.html?ex=1301461200&en=6fd4e942aaaa04ad&ei=5088 (``African-
Americans are steadily gaining access to and ease with the Internet,
signaling a remarkable closing of the `digital divide' that many
experts had worried would be a crippling disadvantage in achieving
success.'').
\26\ See John B. Horrigan, Home Broadband Adoption 2007, Pew
Internet & American Life Project, at 1 (June 2007), available at
http://www.pewinternet.org/pdfs/PIP_Broadband%202007.pdf (47% of
all adult Americans had a broadband connection at home as of early
2007).
\27\ See Investment Company Act Release No. 27884 (July 11,
2007) [72 FR 39290 (July 17, 2007)] (adopting rule amendments to
enable mutual funds voluntarily to submit supplemental tagged
information contained in the risk/return summary section of their
prospectuses); Securities Act Release No. 8529 (Feb. 3, 2005) [70 FR
6556 (Feb. 8, 2005)] (adopting rule amendments to enable registrants
voluntarily to submit supplemental tagged financial information).
\28\ Investment Company Act Release No. 28298 (June 10, 2008)
[73 FR 35442 (June 23, 2008)]; Securities Act Release No. 8924 (May
30, 2008) [73 FR 32794 (June 10, 2008)].
\29\ Exchange Act Release No. 56135 (July 26, 2007) [72 FR 42222
(Aug. 1, 2007)].
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As suggested by the participants at the June 2006 roundtable,
advances in technology also offer a promising means to address the
length and complexity of mutual fund prospectuses by streamlining the
key information that is provided to investors, ensuring that access to
the full wealth of information about a fund is immediately and easily
accessible, and providing the means to present all information about a
fund online in an interactive format that facilitates comparisons of
key information, such as expenses, across different funds and different
share classes of the same fund.\30\ Technology has the potential to
replace the current one-size-fits-all mutual fund prospectus with an
approach that allows investors, their financial intermediaries, third-
party analysts, and others to tailor the wealth of available
information to their particular needs and circumstances.
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\30\ A mutual fund may issue more than one class of shares that
represent interests in the same portfolio of securities with each
class, among other things, having a different arrangement for
shareholder services or the distribution of securities, or both. See
rule 18f-3 under the Investment Company Act [17 CFR 270.18f-3].
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In November 2007, the Commission proposed an improved mutual fund
disclosure framework that was intended to address the concerns that
have been raised about mutual fund prospectuses and to make use of
technological advances to enhance the provision of information to
mutual fund investors. The Commission received approximately 155
comment submissions.\31\ The commenters generally supported the
proposals, with some commenters suggesting specific changes to the
proposals. Commission staff also arranged for investor focus group
testing of the proposed Summary Prospectus.\32\ Today, the Commission
is adopting the proposed amendments with modifications to respond to
the focus group testing and to address commenters' recommendations.
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\31\ In response to the ETF Proposing Release, the Commission
received seven comment submissions that addressed the proposed ETF
amendments to Form N-1A.
\32\ The Commission engaged a consultant to conduct focus group
interviews and a telephone survey concerning investors' views and
opinions about various disclosure documents filed by companies,
including mutual funds. During this process, investors participating
in focus groups were asked questions about a hypothetical Summary
Prospectus. Investors participating in the telephone survey were
asked questions relating to several disclosure documents, including
mutual fund prospectuses. We have placed in the comment file
(available at http://www.sec.gov/comments/s7-28-07/s72807.shtml) for
the proposed rule the following documents from the investor testing
that relate to mutual fund prospectuses and the proposed Summary
Prospectus: (1) The consultant's report concerning focus group
testing of the hypothetical Summary Prospectus and related
disclosures (``Focus Group Report''); (2) transcripts of focus
groups relating to the hypothetical Summary Prospectus and related
disclosures (``Focus Group Transcripts''); (3) disclosure examples
used in these focus groups; and (4) an excerpt from the consultant's
report concerning the telephone survey of individual investors
(``Telephone Survey Report'').
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We are adopting amendments to Form N-1A that will require every
prospectus to include a summary section at the front of the prospectus,
consisting of key information about the fund, including investment
objectives and strategies, risks, costs, and performance. This key
information is required to be presented in plain English in a
standardized order. Our intent is that this information will be
presented succinctly, in three or four pages, at the front of the
prospectus.
We are also adopting a new option for satisfying prospectus
delivery obligations with respect to mutual fund securities under the
Securities Act. Under the option, key information will be sent or given
to investors in the form of a Summary Prospectus, and the statutory
prospectus will be provided on an Internet Web site. Upon an investor's
request, funds will also be required to send the statutory prospectus
to the investor. Our intent in providing this option is that funds take
full advantage of the Internet's search and retrieval capabilities in
order to enhance the provision of information to mutual fund investors.
The disclosure framework that we are adopting has the potential to

[[Page 4549]]

revolutionize the provision of information to the millions of investors
who rely on mutual funds for their most basic financial needs. It is
intended to help investors who are overwhelmed by the choices among
thousands of available funds described in lengthy and legalistic
documents to access readily key information that is important to an
informed investment decision. At the same time, by harnessing the power
of technology to deliver information in better, more useable formats,
the disclosure framework can help those investors, their
intermediaries, third-party analysts, the financial press, and others
to locate and compare facts and data from the wealth of more detailed
disclosures that are available.

III. Discussion

A. Amendments to Form N-1A

The Commission is adopting, with modifications to address
commenters' suggestions, amendments to Form N-1A that will require the
statutory prospectus of every mutual fund to include a summary section
at the front of the prospectus consisting of key information presented
in plain English in a standardized order.\33\ Commenters and investors
participating in focus groups arranged by Commission staff generally
supported the proposed summary presentation and agreed that it will
address investors' preferences for concise, user-friendly
information.\34\ The summary section will provide investors with key
information about the fund that investors can use to evaluate and
compare the fund. This summary will be located in a standardized,
easily accessible place and will be available to all investors,
regardless of whether the fund uses a Summary Prospectus and whether
the investor is reviewing the prospectus in a paper or electronic
format.
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\33\ The Commission is also adopting amendments to Form N-1A
relating to exchange-traded funds. See discussion infra Part
III.A.4.
\34\ See, e.g., Letter of AARP (Feb. 28, 2008) (``AARP
Letter''); Letter of Capital Research and Management Company (Feb.
28, 2008) (``Capital Research Letter''); Letter of Fund Democracy,
Consumer Federation of America, and Consumer Action (Feb. 28, 2008)
(``Fund Democracy et al. Letter''); Letter of Investment Company
Institute (Feb. 28, 2008) (``ICI Letter''); Letter of Mutual Fund
Directors Forum (Feb. 28, 2008) (``MFDF Letter''); Letter of
Morningstar, Inc. (Feb. 27, 2008) (``Morningstar Letter''); Focus
Group Report, supra note 32, at 5.
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As in our proposal, the information required in the summary section
of the prospectus will be the same as that required in the new Summary
Prospectus, and it is key information that is important to an
investment decision. We believe, and commenters generally agreed,\35\
that the key information that is important to an investment decision is
the same, whether an investor is reviewing the summary section of a
statutory prospectus or a short-form disclosure document. For that
reason, we are requiring the same information in the summary section of
the statutory prospectus and in the Summary Prospectus. In each case,
our intent is that funds prepare a concise summary (on the order of
three or four pages) that will provide key information.
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\35\ See, e.g., Letter of Bo Li (Feb. 28, 2008) (``Bo Li
Letter''); Letter of Data Communiqu[eacute], Inc. (Feb. 27, 2008)
(``Data Communiqu[eacute] Letter''); Letter of Firehouse
Communications LLC (Feb. 29, 2008) (``Firehouse Letter''); Letter of
L.A. Schnase (Feb. 26, 2008) (``Schnase Letter''). But see Letter of
Kathleen K. Clarke (Mar. 4, 2008) (``Clarke Letter'').
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In addition, with the exception of some information that is common
to multiple funds, we are requiring, as proposed, that the summary
section be presented separately for each fund covered by a multiple
fund prospectus and that the information for multiple funds not be
integrated.\36\ This requirement is intended to assist investors in
finding important information regarding the particular fund in which
they are interested. Multiple fund prospectuses contribute
substantially to prospectus length and complexity, which act as
barriers to understanding. We have concluded that requiring a self-
contained summary section for each fund will significantly aid
investors' ability to use multiple fund prospectuses effectively.
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\36\ General Instruction C.3.(c)(ii) of Form N-1A.
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The Commission is committed to encouraging statutory prospectuses
that are simpler, clearer, and more useful to investors. The prospectus
summary section is intended to provide investors with streamlined
disclosure of key mutual fund information at the front of the statutory
prospectus, in a standardized order that facilitates comparisons across
funds. We are adopting the following amendments to Form N-1A in order
to implement the summary section.
1. General Instructions to Form N-1A
We are adopting, substantially as proposed, amendments to the
General Instructions to Form N-1A to address the new summary section of
the statutory prospectus. These amendments address plain English and
organizational requirements.
Plain English
We are amending, as proposed, the General Instructions to state
that the summary section of the prospectus must be provided in plain
English under rule 421(d) under the Securities Act.\37\ Rule 421(d)
requires an issuer to use plain English principles in the organization,
language, and design of the front and back cover pages, the summary,
and the risk factors sections of its prospectus.\38\ The amended
instruction will serve as a reminder that the new prospectus summary
section is subject to rule 421(d). The use of plain English principles
in the new summary section will further our goal of encouraging funds
to create useable summaries at the front of their prospectuses. The
prospectus, in its entirety, also will remain subject to the
requirement that the information be presented in a clear, concise, and
understandable manner.\39\
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\37\ General Instruction B.4.(c) of Form N-1A; rule 421(d) [17
CFR 230.421(d)].
Commenters generally supported the use of plain English in the
summary section. See, e.g., AARP Letter, supra note 34; Letter of
CFA Institute (Feb. 28, 2008) (``CFA Institute Letter''); Letter of
Committee on Federal Regulation of Securities of the American Bar
Association's Section of Business Law (Mar. 17, 2008) (``ABA
Letter''); Letter of Investment Company Institute and Securities
Industry and Financial Markets Association (Feb. 28, 2008) (``ICI
and SIFMA Letter'').
\38\ Rule 421(d) lists the following plain English principles:
(1) Short sentences; (2) definite, concrete, everyday words; (3)
active voice; (4) tabular presentation or bullet lists for complex
material, wherever possible; (5) no legal jargon or highly technical
business terms; and (6) no multiple negatives.
\39\ Pursuant to rule 421(b) [17 CFR 230.421(b)], the following
standards must be used when preparing prospectuses: (1) present
information in clear, concise sections, paragraphs, and sentences;
(2) use descriptive headings and subheadings; (3) avoid frequent
reliance on glossaries or defined terms as the primary means of
explaining information in the prospectus; and (4) avoid legal and
highly technical business terminology. We note that these standards
provide funds with flexibility, for example, in determining whether
or not to use headings in a question-and-answer format.
---------------------------------------------------------------------------

Organizational Requirements
We are also adopting amendments to the organizational requirements
of the General Instructions, with one modification to address
commenters' suggestions. The amendments will require mutual funds to
disclose the summary information in numerical order at the front of the
prospectus and not to precede this information with any information
other than the cover page or table of contents.\40\ Commenters
generally supported standardizing the order and content of the summary
section, agreeing that a standardized summary section will enhance
investor understanding and the ability to compare funds.\41\
Information included

[[Page 4550]]

in the summary section need not be repeated elsewhere in the
prospectus. While a fund may continue to include information in the
prospectus that is not required, a fund may not include any such
additional information in the summary section of the prospectus.\42\
---------------------------------------------------------------------------

\40\ General Instruction C.3.(a) to Form N-1A.
\41\ See, e.g., Letter of Evergreen Investments (Feb. 28, 2008)
(``Evergreen Letter''); Letter of Financial Services Institute (Feb.
28, 2008) (``Financial Services Institute Letter'').
\42\ General Instruction C.3.(b) of Form N-1A. See, e.g., CFA
Institute Letter, supra note 37; Letter of Great-West Retirement
Services (Feb. 28, 2008) (``Great-West Letter''); ICI Letter, supra
note 34; Letter of The Vanguard Group, Inc. (Feb. 28, 2008)
(``Vanguard Letter'') (supporting prohibition on including
information in the summary section that is not required).
---------------------------------------------------------------------------

As noted above, we are, with one exception, requiring as proposed
that a multiple fund prospectus present the summary information for
each fund sequentially and not integrate the information for more than
one fund.\43\ That is, a multiple fund prospectus will be required to
present all of the summary information for a particular fund together,
followed by all of the summary information for each additional fund.
For example, a multiple fund prospectus will not be permitted to
present the investment objectives for several funds followed by the fee
tables for several funds. A multiple fund prospectus will also be
required to identify clearly the name of the particular fund at the
beginning of the summary information for that fund.
---------------------------------------------------------------------------

\43\ General Instruction C.3.(c)(ii) of Form N-1A. See supra
note 36 and accompanying text.
---------------------------------------------------------------------------

Many commenters agreed that multiple fund prospectuses should
present the summary information for each fund separately.\44\ Some
commenters stated that requiring a separate summary for each fund will
better achieve the Commission's goal of keeping summaries short, which
should help facilitate comparisons across funds.\45\ Commenters also
stated that multiple fund prospectuses often confuse investors and make
reviewing key information for a single fund more difficult.\46\
---------------------------------------------------------------------------

\44\ See, e.g., CFA Institute Letter, supra note 37; Letter of
Coalition of Mutual Fund Investors (Feb. 13, 2008) (``CMFI
Letter''); Fund Democracy et al. Letter, supra note 34; Evergreen
Letter, supra note 41; MFDF Letter, supra note 34; Letter of the
National Association of Personal Financial Advisors (Feb. 28, 2008)
(``NAPFA Letter''); Letter of Oppenheimer Funds (Feb. 28, 2008)
(``Oppenheimer Letter'').
\45\ See, e.g., Fund Democracy et al. Letter, supra note 34;
Data Communiqu[eacute] Letter, supra note 35. See also ICI Letter,
supra note 34 (stating that some of its members believe that
requiring a separate summary for each fund will better facilitate
the Commission's goals of keeping documents short and facilitating
comparisons across funds).
\46\ See, e.g., Data Communiqu[eacute] Letter, supra note 35;
CMFI Letter, supra note 44; Oppenheimer Letter, supra note 44.
---------------------------------------------------------------------------

A number of commenters, however, expressed reservations about the
Commission's proposal to prohibit multiple fund summary sections,
requesting that the Commission permit integrated summaries for multiple
funds in at least some circumstances.\47\ Some commenters suggested
that integrated summary information would allow investors to better
compare all funds within a fund family, or at least certain categories
of funds within a fund family.\48\ Categories of funds cited included
international funds, asset allocation funds, and U.S. Treasury
Funds.\49\ In addition, some commenters argued that prohibiting
multiple fund summaries would lead to unnecessary duplication of
information and longer statutory prospectuses.\50\
---------------------------------------------------------------------------

\47\ See, e.g., Letter of AIM Investments (Feb. 27, 2008) (``AIM
Letter'') (favoring integrated summaries for target date, asset
allocation or lifestyle funds, and variable annuity funds); Capital
Research Letter, supra note 34 (favoring integrated summaries for
target date and variable annuity funds).
\48\ See, e.g., AIM Letter, supra note 47; Letter of American
Century Investments (Feb. 28, 2008) (``American Century Letter'');
Clarke Letter, supra note 35; ICI Letter, supra note 34; Letter of
Putnam Investments (Feb. 28, 2008) (``Putnam Letter''); Letter of
Russell Investments (Feb. 28, 2008) (``Russell Letter'').
\49\ See, e.g., Letter of T. Rowe Price Associates, Inc. (Feb.
28, 2008) (``T. Rowe Letter'') (favoring integrated summaries for
certain categories of funds and citing focus group research
conducted by T. Rowe Price concerning integrated versus single-fund
summaries).
\50\ See, e.g., AIM Letter, supra note 47; American Century
Letter, supra note 48; Letter of Dechert LLP (Mar. 3, 2008)
(``Dechert Letter''); Putnam Letter, supra note 48; Russell Letter,
supra note 48. See also ICI Letter, supra note 34 (members split,
with some noting that an integrated summary may be more useful to
investors in certain circumstances, in particular for groups of
funds an investor may wish to compare, and others believing that a
separate document for each fund would better accomplish goals of
keeping the document short and facilitating comparisons across
funds).
---------------------------------------------------------------------------

A number of investors in our focus groups expressed the view that
multiple fund presentations of mutual fund information could be helpful
in facilitating useful comparisons among funds.\51\ Some of these
investors stated that multiple fund presentations could be used as a
screening tool to determine which funds to research in more detail.\52\
Some investors in our focus groups, however, indicated that combining
too many funds within a single summary can result in confusing
complexity.\53\ The investors in our focus groups did not express a
consensus on a specific limit on the number of funds or page length
that would be appropriate in multiple fund presentations.
---------------------------------------------------------------------------

\51\ See Focus Group Report, supra note 32, at 9.
\52\ See Focus Group Transcripts, supra note 32, at 20.
\53\ Id. at 19 (``I thought there were too many in the [multiple
fund prospectus]. It just really makes your head spin when you have
to read all that.''), 22, 46.
---------------------------------------------------------------------------

While we believe that multiple fund presentations can, in limited
circumstances, be useful in helping investors to compare funds, we have
determined that prohibiting multiple fund summary sections is more
consistent with the goal of achieving concise, readable summaries for
investors. The requirement that summary information be separately
presented for each fund in a multiple fund prospectus is intended to
address the problem of lengthy and complex multiple fund prospectuses
in the least intrusive manner possible. Multiple fund prospectuses
contribute substantially to prospectus length and complexity, which act
as barriers to investor understanding. We have concluded that
permitting information for multiple funds to be integrated in the
summary section would undermine our goal of providing mutual fund
investors with concise and readable key information.
We note, however, that our rules do not restrict in any way the use
of multiple fund presentations in advertising and sales materials,
whether those materials are provided along with the Summary Prospectus
or separately.\54\ Funds have complete flexibility to prepare and
present comparative information to investors regarding any grouping of
multiple funds that they believe is useful, and also to provide
automated tools on their Web sites permitting investors to choose which
funds to compare. As a result, we do not believe that the prohibition
on multiple fund summaries in the statutory prospectus will impair in
any significant manner funds' ability to provide useful, comparative
information to investors.
---------------------------------------------------------------------------

\54\ See rule 482 under the Securities Act [17 CFR 230.482] and
rule 34b-1 under the Investment Company Act [17 CFR 270.34b-1]
(investment company advertising rules).
---------------------------------------------------------------------------

We are adopting one exception to the requirement that multiple fund
prospectuses not integrate the summary information for more than one
fund in order to eliminate duplicative information and reduce
prospectus length. Two commenters recommended that the Commission
permit summary information that is identical for multiple funds to be
presented once, at the end of all the individual summaries within a
multiple fund statutory prospectus.\55\ We agree with these commenters
that permitting integration of information that is likely to be uniform
for multiple funds will further our goal of concise, user-friendly
summary sections. Therefore, a multiple fund prospectus

[[Page 4551]]

will be permitted to integrate the information required by any of new
Item 6 (purchase and sale of fund shares), Item 7 (tax information),
and Item 8 (financial intermediary compensation) if it is identical for
all funds covered in the prospectus.\56\ This information is often
uniform across multiple funds unlike, for example, information about
investment objectives, costs, performance, or portfolio managers. If
the information required by any of Items 6 through 8 is integrated, the
integrated information will be required to immediately follow the
separate individual fund summaries containing the other non-integrated
information. In addition, a statement containing the following
information will be required in each individual fund summary section in
the location where the information that is integrated, and presented
later, would have appeared.
---------------------------------------------------------------------------

\55\ See Capital Research Letter, supra note 34; ICI Letter,
supra note 34.
\56\ General Instruction C.3.(c)(iii) of Form N-1A. This
exception will not be available to Summary Prospectuses delivered
pursuant to new rule 498 because a Summary Prospectus may describe
only one fund. See discussion infra Part III.B.2.a.

For important information about [purchase and sale of fund
shares,] [tax information,] and [financial intermediary
compensation], please turn to [identify section heading and page
---------------------------------------------------------------------------
number of prospectus].

As proposed, the instructions will permit a fund with multiple
share classes, each with its own cost structure, to present the summary
information separately for each class, to integrate the information for
multiple classes, or to use another presentation that is consistent
with disclosing the summary information in a standard order at the
beginning of the prospectus.\57\ Commenters generally supported, or did
not express a view with respect to, allowing multiple class summary
sections; and some commenters noted that such sections would assist
investors in choosing the class most appropriate for their
circumstances.\58\ We are not requiring the integration of information
for multiple classes of a fund, which two commenters argued was
important to facilitate cost comparisons.\59\ We are retaining
flexibility in this area because we believe that whether a multiple
class presentation is helpful or overwhelming depends on the particular
circumstances. We note, however, that our ongoing interactive data
initiative is intended, among other things, to facilitate cost
comparisons by investors across multiple classes of a single fund, as
well as across different funds.\60\
---------------------------------------------------------------------------

\57\ General Instruction C.3.(c)(ii) of Form N-1A.
\58\ See, e.g., Clarke Letter, supra note 35; Data
Communiqu[eacute] Letter, supra note 35; Great-West Letter, supra
note 42; Oppenheimer Letter, supra note 44.
\59\ See, e.g., Fund Democracy et al. Letter, supra note 34;
Letter of Brock Hastie (Jan. 8, 2008) (``Hastie Letter'').
\60\ See supra note 28 and accompanying text.
---------------------------------------------------------------------------

Page Limits
As proposed, we are not imposing page limits on the summary
section. We emphasize, however, that it is our intent that funds
prepare a concise summary (on the order of three or four pages) that
will provide key information. Commenters differed regarding whether the
Commission should impose page limits on the summary.
Several commenters supported page limits. One commenter expressed
concern that, in the absence of a page limit, the summary section would
tend to expand over time, which would undermine its usefulness.\61\
Another commenter noted that, absent page limits, lengths of summary
sections would vary widely, hindering investors' ability to compare
funds.\62\
---------------------------------------------------------------------------

\61\ See Letter of Independent Directors Council (Feb. 15, 2008)
(``IDC Letter'').
\62\ See Firehouse Letter, supra note 35. See also Letter of
Jeffrey C. Keil (Jan. 9, 2008) (``Keil Letter'') (suggesting that
summaries might garner more investor attention if limited to two or
three pages).
---------------------------------------------------------------------------

While we share these commenters' concerns, especially with respect
to the possibility of summary sections getting longer over time, we
believe that these concerns are outweighed by the concerns of other
commenters that page limits could constrain appropriate disclosure and
lead funds to omit material information.\63\ We also agree with a
commenter who noted that the prohibition of multiple fund summary
sections should help to limit their length.\64\
---------------------------------------------------------------------------

\63\ See, e.g., Letter of Janus Capital Group (Feb. 28, 2008)
(``Janus Letter''); CMFI Letter, supra note 44.
\64\ See Data Communiqu[eacute] Letter, supra note 35.
---------------------------------------------------------------------------

Elimination of Separate Purchase and Redemption Document
As proposed, we are eliminating the provisions of Form N-1A that
permit a fund to omit detailed information about purchase and
redemption procedures from the prospectus and to provide this
information in a separate document that is incorporated into and
delivered with the prospectus, as well as a similar provision in the
requirements for the statement of additional information (``SAI'').\65\
We have concluded that this option is unnecessary in light of the new
Summary Prospectus which could be used, at a fund's option, along with
any additional sales materials, including a document describing
purchase and redemption procedures.\66\ The elimination of these
provisions does not otherwise alter the information about purchase and
redemption procedures that must appear in the fund's prospectus and
SAI, and this information will continue to be required in those
documents.
---------------------------------------------------------------------------

\65\ Instruction 6 to current Item 1(b) of Form N-1A; current
Item 6(g) of Form N-1A; Instruction to current Item 18(a) of Form N-
1A.
\66\ See discussion infra Part III.B.1. Most commenters did not
address this proposed change. But see Clarke Letter, supra note 35
(supporting change); Schnase Letter, supra note 35 (opposing
change).
---------------------------------------------------------------------------

Variable Contract and Retirement Plan Funds
Finally, we are modifying the proposal to permit funds that are
used as investment options for retirement plans and variable insurance
contracts to modify or omit certain information required in the new
summary section. This modification addresses commenters' concerns that
certain information is not relevant to those funds.\67\ Specifically,
we are amending the General Instructions to Form N-1A to permit funds
that are used as investment options for retirement plans and variable
insurance contracts to modify or omit the information required by new
summary section Item 6 (purchase and sale of fund shares).\68\ Existing
Form N-1A permits funds that are used as investment options for
retirement plans and variable insurance contracts to modify or omit
certain information regarding the purchase and sale of fund shares that
is not relevant in these contexts.\69\ The amendment we are making
extends the same treatment to the purchase and sale information in the
new summary section.
---------------------------------------------------------------------------

\67\ See Letter of EQ Advisors Trust/AXA Premier VIP Trust (Feb.
28, 2008) (``EQ/AXA Letter''); Letter of Committee of Annuity
Insurers (Feb. 28, 2008) (``CAI Letter'').
\68\ General Instruction C.3.(d)(i) of Form N-1A.
\69\ General Instruction C.3.(d)(i) of existing Form N-1A. We
note that Item 7 of the summary section, which requires tax
information that may not be relevant in the context of retirement
plans and variable insurance contracts, expressly states that the
disclosures are only required to be made, as applicable.
---------------------------------------------------------------------------

2. Exchange Ticker Symbols
We requested comment on whether we should require or permit a fund
to include its ticker symbol in the summary, or on the front or back
cover page of the statutory prospectus or SAI or elsewhere. Many
commenters suggested that the Commission should require or permit funds
to disclose their exchange ticker symbols.\70\ We agree

[[Page 4552]]

with these commenters that requiring exchange ticker symbols to be
included in fund disclosure documents would make it easier for
investors to find information about particular funds and share classes
of funds. Accordingly, we are requiring that a fund include its
exchange ticker symbol on the cover pages of the statutory prospectus
and SAI.\71\ Specifically, a fund will be required to disclose the
exchange ticker symbol of the fund's shares or, if the prospectus or
SAI relate to one or more classes of the fund's shares, adjacent to
each such class, the exchange ticker symbol of that class.
---------------------------------------------------------------------------

\70\ See, e.g., CMFI Letter, supra note 44; Data
Communiqu[eacute] Letter, supra note 35; Firehouse Letter, supra
note 35; Hastie Letter, supra note 59; Letter of William E. Kent
(Dec. 26, 2007) (``Kent Letter''); NAPFA Letter, supra note 44;
Letter of Art Ticknor (Feb. 6, 2008) (``Ticknor Letter'').
\71\ Item 1(a)(2) of Form N-1A; Item 14(a)(2) of Form N-1A.
Exchange ticker symbols will also be required on the cover page, or
at the beginning of, the Summary Prospectus. Rule 498(b)(1)(ii).
---------------------------------------------------------------------------

3. Information Required in Summary Section
We are adopting the required content of the summary section
substantially as proposed, except that, having considered commenters'
concerns and the views of investors expressed in focus groups, we have
determined not to require disclosure of a fund's portfolio holdings.
The summary section of a mutual fund statutory prospectus will consist
of the following information: (1) Investment objectives; (2) costs; (3)
principal investment strategies, risks, and performance; (4) investment
advisers and portfolio managers; (5) brief purchase and sale and tax
information; and (6) financial intermediary compensation. These items
will appear in the same order that we proposed. We have modified the
requirements for some items to address comments and views expressed in
the focus groups.
a. Elimination of Proposed Portfolio Holdings Requirement
The Commission has determined not to require the summary section to
include the list of the fund's 10 largest holdings which we
proposed.\72\ As proposed, the top 10 holdings list would have been
updated in the statutory prospectus on an annual basis and in the
Summary Prospectus on a quarterly basis.\73\
---------------------------------------------------------------------------

\72\ Proposed Item 5 of Form N-1A.
\73\ Section 10(a)(3) of the Securities Act [15 U.S.C.
77j(a)(3)] generally requires that when a prospectus is used more
than nine months after the effective date of the registration
statement, the information in the prospectus must be as of a date
not more than sixteen months prior to such use. The effect of this
provision is to require mutual funds to update their prospectuses
annually to reflect current cost, performance, and other financial
information. See proposed rule 498(b)(2)(iii) (proposed Summary
Prospectus quarterly updating requirement).
---------------------------------------------------------------------------

Commenters were split regarding whether the top 10 portfolio
holdings should be required in the summary section. We are persuaded by
the commenters who pointed out the limited utility of the proposed top
10 holdings list.\74\ Commenters expressed the view that top 10
holdings information may mislead investors because the top 10 holdings
may not accurately represent a fund's overall holdings \75\ and because
the top 10 holdings information may become stale.\76\ Commenters also
pointed out that portfolio holdings information is already widely
available through other sources, such as shareholder reports and other
Commission filings,\77\ as well as fund Web sites and sales
materials.\78\
---------------------------------------------------------------------------

\74\ See, e.g., AIM Letter, supra note 47; Letter of Cornell
Securities Law Clinic (Feb. 28, 2008) (``Cornell Law Clinic
Letter''); Evergreen Letter, supra note 41; Letter of Foreside
Compliance Services, LLC (Feb. 28, 2008) (``Foreside Letter'');
Oppenheimer Letter, supra note 44; Russell Letter, supra note 48.
Other commenters supported including the top 10 portfolio
holdings in the summary section. See, e.g., CMFI Letter, supra note
44; Data Communiqu[eacute] Letter, supra note 35; Firehouse Letter,
supra note 35; Letter of Jill Gross (Feb. 28, 2008); Letter of
Richard K. Hopkins (Feb. 15, 2008) (``Hopkins Letter''); Letter of
Richard McCormick (Feb. 11, 2008) (``McCormick Letter''); Letter of
William Mahavier (Feb. 10, 2008) (``Mahavier Letter''); Letter of
Dan Meador (Feb. 12, 2008); NAPFA Letter, supra note 44; Letter of
Bruce R. Bent (Feb. 28, 2008) (``Bent Letter'').
\75\ See, e.g., Dechert Letter, supra note 50 (top 10 holdings
information could mislead investors of a diversified fund where top
10 holdings represent a relatively small percentage of the fund's
holdings); ICI Letter, supra note 34 (noting that a fund's top 10
holdings may be misleading for funds in a master-feeder structure,
funds of funds, fixed income funds, index funds, money market funds,
exchange-traded funds, and new funds); Letter of New York City Bar
(Feb. 25, 2008) (``NYC Bar Letter'') (arguing that for certain types
of funds, such as money market funds, fixed income funds, and index
funds, top 10 holdings information may be misleading); Letter of
Leslie L. Ogg (Feb. 1, 2008) (``Ogg Letter'') (noting that top 10
holdings information can be misleading for multi-manager funds,
funds of funds, long-short funds, and funds using derivative
instruments).
\76\ See, e.g., AIM Letter, supra note 47; CAI Letter, supra
note 67; Capital Research Letter, supra note 34; Clarke Letter,
supra note 35; Dechert Letter, supra note 50; ICI Letter, supra note
34; IDC Letter, supra note 61; Janus Letter, supra note 63; NYC Bar
Letter, supra note 75; Oppenheimer Letter, supra note 44; Russell
Letter, supra note 48.
\77\ Form N-CSR [17 CFR 249.331; 17 CFR 274.128] (form used by
investment companies semi-annually to file certified shareholder
reports); Form N-Q [17 CFR 249.332; 17 CFR 274.130] (form used by
investment companies to file schedule of portfolio holdings for
first and third quarters).
\78\ See, e.g., AIM Letter, supra note 47; EQ/AXA Letter, supra
note 67; Evergreen Letter, supra note 41; Russell Letter, supra note
48; T. Rowe Letter, supra note 49.
---------------------------------------------------------------------------

We continue to believe that information concerning a fund's
portfolio holdings may provide investors with a greater understanding
of a fund's stated investment objectives and strategies and may assist
investors in making more informed asset allocation decisions. In light
of the limited utility of top 10 holdings information, however, and the
widespread availability of portfolio holdings information from other
sources, we have determined not to require this information in the
summary section. Some commenters and investors in our focus groups
suggested that we instead require disclosure about the current
allocation of a fund's portfolio by asset type, such as a pie chart
that would graphically display this information.\79\ We have determined
not to require this information because we have concluded that it is
subject to the same concerns about staleness as top 10 holdings
information and because of the widespread availability of portfolio
holdings information from other sources. Nonetheless, where a fund's
asset allocation strategy is a principal investment strategy of the
fund, the fund should clearly disclose this strategy,\80\ and we would
encourage the use of graphical representations as a potentially helpful
communications tool.
---------------------------------------------------------------------------

\79\ See, e.g., Cornell Law Clinic Letter, supra note 74;
Oppenheimer Letter, supra note 44; Focus Group Report, supra note
32, at 6.
\80\ Items 4(a) and 9 of Form N-1A (requiring disclosure of
principal investment strategies).
---------------------------------------------------------------------------

In reaching our determination with respect to portfolio holdings
information, we carefully considered the views of investors expressed
in our focus groups. Many investors in the focus groups expressed
significant interest in portfolio holdings information.\81\ At the same
time, like the commenters, a number of the investors participating in
our focus groups pointed out that top 10 portfolio holdings information
changes frequently and can quickly become outdated, and some
participants acknowledged that the top 10 holdings information can
sometimes account for a relatively small portion of a fund's
holdings.\82\ We concluded that investors' interest in this information
is outweighed by its potential to mislead and confuse in the context of
the summary section of a prospectus. Because this information is widely
available through other sources, we are persuaded that investors'
interest in this information can be satisfied through these other
sources.
---------------------------------------------------------------------------

\81\ Focus Group Report, supra note 32, at 7; Focus Group
Transcripts, supra note 32, at 12.
\82\ Focus Group Report, supra note 32, at 7; Focus Group
Transcripts, supra note 32, at 13-14, 78.
---------------------------------------------------------------------------

b. Order of Information
We are adopting the order of the information required in the
summary

[[Page 4553]]

section, as proposed. This includes moving the fee table forward from
its current location, which follows information about investment
strategies, risks, and past performance. We continue to believe that
the change to the location of the fee table will enhance the prominence
of this information, which is important to address continuing concerns
about investor understanding of mutual fund costs.\83\ Several
commenters agreed that relocation of the fee table will place fee
information in a more prominent location and encourage investors to
give greater attention to costs and cost comparisons.\84\ While several
commenters suggested alternative orders for the information in the
summary section, there was no consensus by commenters regarding any
alternative.\85\
---------------------------------------------------------------------------

\83\ See Barbara Roper, Director of Investor Protection,
Consumer Federation of America, June 12 Roundtable Transcript, supra
note 18, at 21; James J. Choi, David Laibson, & Brigitte C. Madrian,
National Bureau of Economic Research, Why Does the Law of One Price
Fail? An Experiment on Index Mutual Funds, at 6 (May 2006),
available at http://www.nber.org/papers/w12261.pdf.; Focus Group
Transcripts, supra note 32, at 6 (``[The hypothetical summary
prospectus] shows the fee right up there, what they charge, so that
would appeal to me.'').
\84\ See, e.g., Letter of Roy J. Biegel (Feb. 14, 2008)
(``Biegel Letter''); CFA Institute Letter, supra note 37; Foreside
Letter, supra note 74; Letter of Fund Democracy and Consumer
Federation of America (Apr. 17, 2008); NAPFA Letter, supra note 44;
Letter of Charles Sikorovsky (Feb. 29, 2008) (``Sikorovsky
Letter''). See also Focus Group Transcripts, supra note 32, at 10
(investors expressed view that fund costs are important); Letter of
Investment Company Institute (Mar. 14, 2008) (``ICI Survey'')
(finding that 95% of respondents believed that fees are important).
\85\ See, e.g., Letter of Ward C. Bourn (Feb. 27, 2008); Capital
Research Letter, supra note 34; Evergreen Letter, supra note 41;
Financial Services Institute Letter, supra note 41; Vanguard Letter,
supra note 42.
---------------------------------------------------------------------------

A number of commenters, largely from the fund industry, opposed
relocating the fee table. These commenters argued that moving the fee
table forward inappropriately overemphasizes costs over other more
important information and that the fee table should not come between
investment objectives and principal investment strategies and
risks.\86\ Some of these commenters argued that the fee table should
not be moved forward, because it is important for investors to first
and foremost understand a fund and its risks, and that a fund's
objectives, strategies, and risks provide necessary context for fees.
Some commenters also argued that moving the fee table forward is
unnecessary because the short length of the summary section will make
the fee table sufficiently prominent.
---------------------------------------------------------------------------

\86\ See, e.g., AIM Letter, supra note 47; Evergreen Letter,
supra note 41; Letter of Fidelity Investments (Feb. 28, 2008)
(``Fidelity Letter''); ICI Letter, supra note 34; Oppenheimer
Letter, supra note 44; Russell Letter, supra note 48; T. Rowe
Letter, supra note 49.
---------------------------------------------------------------------------

We are not persuaded by these commenters. We continue to believe,
along with a number of commenters, that placement of the fee table in a
more prominent location will encourage investors to give greater
attention to costs. The fee table and example are designed to help
investors understand the costs of investing in a fund and compare those
costs with the costs of other funds. Placing the fee table and example
at the front of the summary section reflects the importance of costs to
an investment decision.\87\ Moving the fee table forward also
eliminates the possibility that the fee table could be obscured by
other information.\88\
---------------------------------------------------------------------------

\87\ For example, a 1% increase in annual fees reduces an
investor's return by approximately 18% over 20 years.
\88\ See Sikorovsky Letter, supra note 84 (stating that if an
investment manager can in any way ``hide'' fees from an investor,
the document has failed to fulfill its function).
---------------------------------------------------------------------------

c. Investment Objectives and Goals
We are adopting, as proposed, the requirement that the summary
section begin with disclosure of a fund's investment objectives or
goals, which commenters generally supported.\89\ As proposed, a fund
also will be permitted to identify its type or category (e.g., that it
is a money market fund or balanced fund).\90\
---------------------------------------------------------------------------

\89\ See, e.g., AARP Letter, supra note 34; Firehouse Letter,
supra note 35; ICI and SIFMA Letter, supra note 37; Letter of
Christine A. Nelson (Feb. 12, 2008); Schnase Letter, supra note 35.
See also ICI Survey, supra note 84 (providing survey results that
found investment objectives was one of the most important pieces of
information to investors).
\90\ Item 2 of Form N-1A.
---------------------------------------------------------------------------

d. Fee Table
We are adopting, with modifications to address commenters' concerns
and views expressed by investors in the focus groups, the fee table and
example. The fee table and example disclose the costs of investing and
immediately follow the fund's investment objectives.\91\
---------------------------------------------------------------------------

\91\ Item 3 of Form N-1A.
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Breakpoint Discounts
We are requiring, substantially as proposed, that mutual funds that
offer discounts on front-end sales charges for volume purchases (so-
called ``breakpoint discounts'') include brief narrative disclosure
alerting investors to the availability of those discounts.\92\
Commenters generally supported the disclosure about breakpoint
discounts, although many commenters, as well as focus group investors,
provided suggestions for revising the narrative proposed.\93\ We are
modifying the proposal in two ways to address these comments.
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\92\ Item 3 of Form N-1A; Instruction 1(b) to Item 3 of Form N-
1A.
\93\ See, e.g., AIM Letter, supra note 47; CFA Institute Letter,
supra note 37; Fund Democracy et al. Letter, supra note 34; Letter
of Manuela A. De Leon (Feb. 7, 2008); ICI Letter, supra note 34;
Keil Letter, supra note 62; NAPFA Letter, supra note 44; Oppenheimer
Letter, supra note 44; Russell Letter, supra note 48; Focus Group
Report, supra note 32, at 8.
---------------------------------------------------------------------------

First, we are adding to the required narrative a description of
where investors can find additional information regarding breakpoint
discounts.\94\ Specifically, the narrative will be required to state
that further information is available from the investor's financial
professional, as well as identify the section heading and page number
of the fund's prospectus and SAI where more information can be found.
This information is intended to address the views of both commenters
and investors in the focus groups that it would be helpful for more
detailed information about breakpoint discounts to be readily available
to investors.\95\
---------------------------------------------------------------------------

\94\ Item 3 of Form N-1A.
\95\ See, e.g., CMFI Letter, supra note 44 (summary should
indicate where additional information about breakpoint discounts is
available); NAPFA Letter, supra note 44 (same); Focus Group
Transcripts, supra note 32, at 17 (participant observes that ``I'll
go to the long-form and look that up and then make my decision.'').
---------------------------------------------------------------------------

Second, we are clarifying the instruction that the dollar level at
which investors may qualify for breakpoint discounts that is required
to be disclosed in the new item is the minimum level of investment
required to qualify for a discount as disclosed in the table required
by current Item 7(a)(1) of Form N-1A.\96\ This change makes clear that
the required dollar threshold to be disclosed is the same as disclosure
that is already required in Form N-1A. This change, together with the
added narrative about additional information, addresses commenters'
concerns that the breakpoints disclosure does not capture the
complexity and variety of policies regarding breakpoint discounts.\97\
---------------------------------------------------------------------------

\96\ Instruction 1(b) to Item 3 of Form N-1A. Item 7 of Form N-
1A is being renumbered as Item 12 in this rulemaking.
\97\ See, e.g., AIM Letter, supra note 47; ICI Letter, supra
note 34; Russell Letter, supra note 48; Letter of Securities
Industry and Financial Markets Association (Feb. 28, 2008) (``SIFMA
Letter'').
---------------------------------------------------------------------------

Parenthetical to ``Annual Fund Operating Expenses''
We are adopting, substantially as proposed, revisions to the
heading ``Annual Fund Operating Expenses'' in the fee table.
Specifically, we are revising the parenthetical following the

[[Page 4554]]

heading to read ``expenses that you pay each year as a percentage of
the value of your investment'' in place of ``expenses that are deducted
from Fund assets.'' \98\ In recent years, we have taken significant
steps to address concerns that investors do not understand that they
pay costs every year when they invest in mutual funds, including
requiring disclosure of these costs in shareholder reports.\99\ Our
revision further addresses those concerns by making clear that the
expenses in question are paid by investors as a percentage of the value
of their investments in the fund.
---------------------------------------------------------------------------

\98\ Item 3 of Form N-1A.
\99\ Item 27(d)(1) of Form N-1A; Investment Company Act Release
No. 26372 (Feb. 27, 2004) [69 FR 11244 (Mar. 9, 2004)] (adopting
disclosure of costs in shareholder reports). See also General
Accounting Office Report on Mutual Fund Fees: Additional Disclosure
Could Encourage Price Competition, at 66-81 (June 2000), available
at http://www.gao.gov/archive/2000/gg00126.pdf (discussing lack of
investor awareness of the fees they pay and investor focus on mutual
fund sales charges rather than recurring fees).
---------------------------------------------------------------------------

Many commenters supported the Commission's proposed revision.\100\
We have deleted the word ``ongoing'' from the beginning of the
parenthetical language to address commenters' concerns that this term
incorrectly suggests that fund operating expenses are the same each
year.\101\ We are not modifying the parenthetical to address the views
of some industry commenters that the statement incorrectly implies that
shareholders directly pay fund expenses, when in fact expenses are paid
out of fund assets.\102\ The purpose of the revision is to make clear
to investors that they, in fact, bear these expenses, and the proposed
language conveys this fact. Our conclusion is supported by commenters
representing investor groups.\103\
---------------------------------------------------------------------------

\100\ See, e.g., CFA Institute Letter, supra note 37; Clarke
Letter, supra note 35; Fund Democracy et al. Letter, supra note 34.
\101\ See, e.g., CFA Institute Letter, supra note 37; Clarke
Letter, supra note 35; Fund Democracy et al. Letter, supra note 34;
Evergreen Letter, supra note 41; Letter of Fenimore Asset Management
(Feb. 28, 2008); Fidelity Letter, supra note 86; MFDF Letter, supra
note 34; Oppenheimer Letter, supra note 44; T. Rowe Letter, supra
note 49.
\102\ See, e.g., Evergreen Letter, supra note 41; ICI Letter,
supra note 34; Oppenheimer Letter, supra note 44; Putnam Letter,
supra note 48; Russell Letter, supra note 48; T. Rowe Letter, supra
note 49.
\103\ See Fund Democracy et al. Letter, supra note 34.
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Portfolio Turnover Rate
We are adopting, with two modifications, the requirement that
funds, other than money market funds, include brief disclosure
regarding portfolio turnover immediately following the fee table
example.\104\ A fund will be required to disclose its portfolio
turnover rate for the most recent fiscal year as a percentage of the
average value of its portfolio. This numerical disclosure will be
accompanied by a brief explanation of the effect of portfolio turnover
on transaction costs and fund performance. Some concerns have been
expressed in recent years regarding the degree to which investors
understand the effect of portfolio turnover, and the resulting
transaction costs, on fund expenses and performance.\105\ The
requirement to provide brief portfolio turnover disclosure in the
summary section of the prospectus is intended to address these
concerns, and the proposed disclosure received support from a
significant number of commenters.\106\ Because we believe that it is
important to address investors' lack of understanding of the effect of
portfolio turnover and transaction costs on fund expenses and
performance, we disagree with commenters opposing the disclosure of
portfolio turnover rate on the grounds that such information is too
complicated or unnecessary for the summary section.\107\
---------------------------------------------------------------------------

\104\ Instruction 5 to Item 3 of Form N-1A.
\105\ See Investment Company Act Release No. 26313 (Dec. 18,
2003) [68 FR 74820 (Dec. 24, 2003)] (request for comment regarding
ways to improve disclosure of transaction costs); Report of the
Mutual Fund Task Force on Soft Dollars and Portfolio Transaction
Costs (Nov. 11, 2004), available at http://www.finra.org/web/groups/rules_regs/documents/rules_regs/p012356.pdf.
\106\ See, e.g., Biegel Letter, supra note 84; CFA Institute
Letter, supra note 37; CMFI Letter, supra note 44; Fund Democracy et
al. Letter, supra note 34; IDC Letter, supra note 61; Mahavier
Letter, supra note 74; NAPFA Letter, supra note 44; Schnase Letter,
supra note 35; Vanguard Letter, supra note 42. See also ICI Letter,
supra note 34 (stating that it does not oppose the disclosure).
\107\ See, e.g., American Century Letter, supra note 48; Capital
Research Letter, supra note 34; Clarke Letter, supra note 35;
Evergreen Letter, supra note 41; Foreside Letter, supra note 74;
McCormick Letter, supra note 74; Oppenheimer Letter, supra note 44;
Russell Letter, supra note 48.
---------------------------------------------------------------------------

We are modifying the proposed required explanation of the effect of
portfolio turnover to require that the explanation also address the
adverse tax consequences that may result from a higher portfolio
turnover rate when fund shares are held in a taxable account. We agree
with commenters who suggested that adverse tax consequences, as well as
higher transaction costs, should be expressly addressed by the
explanation.\108\ We are also making a technical revision to the final
sentence of the proposed required explanation.\109\
---------------------------------------------------------------------------

\108\ See Fund Democracy et al. Letter, supra note 34; Letter
from Representative Donald A. Manzullo (Feb. 26, 2008) (``Manzullo
Letter'').
\109\ Item 3 of Form N-1A. We are deleting the reference to
portfolio turnover rate as a percentage of the average value of the
fund's ``whole'' portfolio in the explanation to reflect the fact
that the rate is calculated without reference to securities whose
maturities at the time of acquisition are one year or less. See
Instruction 4(d)(ii) to current Item 8(a) of Form N-1A (describing
how to calculate portfolio turnover rate; current Item 8 is being
renumbered as Item 13).
---------------------------------------------------------------------------

We have determined not to adopt two significant suggestions that
were made by commenters: First, that we require the impact of
transaction costs to be reflected in a fund's expense ratio in the fee
table and, second, that we require disclosure of portfolio turnover
rates over a period greater than one year. While we believe that both
of these suggestions have considerable merit, we have concluded that it
is not feasible to implement either at the present time as discussed
further below.
Several commenters expressed the view that the Commission should
require that transaction costs be reflected in a fund's expense ratio
in the fee table and that this disclosure would be more meaningful to
investors than the rate of portfolio turnover.\110\ The comments on
this rulemaking, however, do not provide an adequate basis for
prescribing a specific and accurate methodology for reflecting
transaction costs in a fund's expense ratio.\111\ We do agree with the
commenters that portfolio turnover rate is an imperfect measure of
portfolio transaction costs. While a higher portfolio turnover rate
tends to result in higher transaction costs and a lower portfolio
turnover rate tends to result in lower transaction costs, there is not
necessarily a direct correlation between portfolio turnover rate and
portfolio transaction costs. Nonetheless, in the absence of a basis for
prescribing a better measure, we believe that portfolio turnover rate,
though imperfect, is an appropriate indicator of transaction costs for
purposes of the summary section.
---------------------------------------------------------------------------

\110\ See, e.g., Fund Democracy et al. Letter, supra note 34;
Letter from Representative George Miller, Senator Edward M. Kennedy,
Representative Robert E. Andrews, Senator Tom Harkin, and Senator
Herb Kohl (Mar. 13, 2008) (``Miller Letter'').
\111\ In addition, in 2003 the Commission issued a concept
release that sought public comment on a number of issues related to
the disclosure of mutual fund transaction costs. See Investment
Company Act Release No. 26313, supra note 105, 68 FR at 74820. While
most commenters who responded to the concept release felt that there
should be greater transparency of mutual fund transaction costs,
there was a wide range of opinions on what should be disclosed.
---------------------------------------------------------------------------

A number of commenters argued that disclosing a portfolio turnover
rate over a one-year period would not yield a representative portfolio
turnover rate because portfolio turnover rates vary significantly over
time depending on a variety of factors, including the need to meet
redemption requests, unexpected cash inflows due to sharp swings in

[[Page 4555]]

markets, or the occurrence of a significant event not likely to repeat
in future years, such as a fund merger or a new portfolio manager
restructuring the fund's holdings.\112\ These commenters suggested that
the Commission address this concern by, for example, requiring funds to
disclose year-by-year turnover rates for a longer period (e.g., 5-10
years) or an average turnover rate over a longer period of time (e.g.,
five years).\113\ We believe that requiring year-by-year turnover rates
for multiple years in the summary section would not further our goal of
providing concise, user-friendly disclosure, particularly in light of
the fact that there is not necessarily a direct correlation between
portfolio turnover and transaction costs. We note that portfolio
turnover rates for each of the past five years are already required
elsewhere in the prospectus.\114\ We do not believe that there is a
sufficient basis in the comments to require disclosure of an average
turnover rate over a longer period of time (e.g., five years). Doing so
would require us to address a number of questions that have not been
subject to adequate comment in this rulemaking, including devising a
calculation methodology and addressing questions of comparability
across funds that have been in existence for different periods of time.
---------------------------------------------------------------------------

\112\ See, e.g., CMFI Letter, supra note 44; Firehouse Letter,
supra note 35; IDC Letter, supra note 61.
\113\ See, e.g., CMFI Letter, supra note 44; Mahavier Letter,
supra note 74.
\114\ Item 13(a) of Form N-1A.
---------------------------------------------------------------------------

Expense Reimbursement and Fee Waiver Arrangements
Finally, we are adopting, with modifications to address commenters'
recommendations, the proposed amendments to the requirement that a fund
disclose in its fee table gross operating expenses that do not reflect
the effect of expense reimbursement or fee waiver arrangements, which
result in reduced expenses being paid by the fund.\115\ The adopted
amendments will permit a fund to place two additional captions directly
below the ``Total Annual Fund Operating Expenses'' caption in cases
where there are expense reimbursement or fee waiver arrangements that
will reduce any fund operating expenses for no less than one year from
the effective date of the fund's registration statement.\116\ We have
eliminated the proposed requirement that the reimbursement or waiver
arrangement has reduced operating expenses in the past, as suggested by
two commenters, because this is irrelevant to the impact that the
arrangements will have in the future.\117\ The purpose of the permitted
line items is to show investors how the arrangements will affect
expenses in the future and not how they have affected expenses in the
past.\118\
---------------------------------------------------------------------------

\115\ Instruction 3(d)(i) and 6(a) to Item 3 of Form N-1A. In an
expense reimbursement arrangement, the adviser reimburses the fund
for expenses incurred. Under a fee waiver arrangement, the adviser
agrees to waive a portion of its fees in order to limit fund
expenses.
\116\ Instruction 3(e) to Item 3 of Form N-1A. A fund may not
include the additional captions if the expense reimbursement or fee
waiver arrangement may be terminated without agreement of the fund's
board of directors (e.g., unilaterally by the fund's investment
adviser) during the one-year period. If a fee waiver or expense
reimbursement arrangement, in fact, terminates less than a year
after the effective date of a fund's registration statement, the
fund generally would be required to supplement or ``sticker'' its
prospectus to reflect the termination. The ``sticker'' would be
filed with the Commission in accordance with rule 497 under the
Securities Act.
\117\ Instruction 3(e) to Item 3. We are also making a similar
change in the instructions to the fee table example. Instruction
4(a) to Item 3. See, e.g., Dechert Letter, supra note 50; Evergreen
Letter, supra note 41.
\118\ Because expense reimbursement and fee waiver arrangements
of new funds will be disclosed in the same manner as existing funds
as a result of the elimination of the proposed requirement described
in the text, we are eliminating current Instruction 5(b) (renumbered
as Instruction 6(b) in the Proposing Release) to Item 3 of Form N-
1A, which pertains to new funds, rather than adopting the proposed
revision to the Instruction.
---------------------------------------------------------------------------

One caption will show the amount of the expense reimbursement or
fee waiver, and a second caption will show the fund's net expenses
after subtracting the fee reimbursement or expense waiver from the
total fund operating expenses. Funds that disclose these arrangements
will also be required to disclose the period for which the expense
reimbursement or fee waiver arrangement is expected to continue,
including the expected termination date, and briefly describe who can
terminate the arrangement and under what circumstances. We are adding
an express requirement that the expected termination date of the
arrangement be disclosed in order to address a commenter's concern that
investors should be informed in cases where the commitment on a fee
waiver becomes shorter than one year.\119\
---------------------------------------------------------------------------

\119\ See, e.g., Fund Democracy et al. Letter, supra note 34.
---------------------------------------------------------------------------

In computing the fee table example, a fund will be permitted to
reflect any expense reimbursement or fee waiver arrangements that will
reduce any operating expenses for no less than one year from the
effective date of the fund's registration statement.\120\ This
adjustment may be reflected only in the periods for which the expense
reimbursement or fee waiver arrangement is expected to continue. For
example, if such an arrangement were expected to continue for one year,
then, in the computation of 10-year expenses in the fee table example,
the arrangement could only be reflected in the first of the 10
years.\121\
---------------------------------------------------------------------------

\120\ Instruction 4(a) to Item 3 of Form N-1A. We have modified
this instruction from the proposal to eliminate the requirement that
the arrangement has reduced fund operating expenses during the most
recently completed calendar year. This modification is consistent
with the modification that is described at notes 117 and 118 and the
accompanying text.
We are also adopting, as proposed, a technical amendment to the
instructions to the expense example to eliminate language permitting
funds to reflect the impact of the amortization of initial
organization expenses in the expense example numbers. Id. This
language is unnecessary because initial organization expenses must
be expensed as incurred and may no longer be capitalized. See
American Institute of Certified Public Accountants, Statement of
Position 98-5, Reporting on the Costs of Start-Up Activities (Apr.
3, 1998).
\121\ A fund may not reflect the arrangement in any period
during which the arrangement may be terminated without agreement of
the fund's board of directors (e.g., unilaterally by the fund's
investment adviser).
---------------------------------------------------------------------------

Commenters made several suggestions with respect to cost disclosure
that we have determined not to implement at this time. First, a number
of commenters suggested that the fee table in the summary section
should simply disclose the total fees and expenses and should omit
certain line item breakdowns of expenses that are currently required in
the statutory prospectus.\122\ Commenters argued that a more
abbreviated presentation, such as a fund's total expense ratio, is
preferable because they argued that the current breakdown of fees is
not crucial information to an investor's investment decision.\123\ We
believe that this idea deserves further consideration, and we will
consider it for possible future rulemaking.
---------------------------------------------------------------------------

\122\ See, e.g., Capital Research Letter, supra note 34;
Evergreen Letter, supra note 41; Fund Democracy et al. Letter, supra
note 34.
\123\ See Fund Democracy et al. Letter, supra note 34.
---------------------------------------------------------------------------

Second, some commenters suggested that we consider alternative
terms to describe sales loads or rule 12b-1 fees \124\ because the
terms are not easily understood by most investors.\125\ We have
concluded that it is more appropriate to consider these changes in the
context of a full reconsideration of

[[Page 4556]]

sales charges and rule 12b-1 rather than in the current
rulemaking.\126\
---------------------------------------------------------------------------

\124\ ``Rule 12b-1 fees'' or ``12b-1 fees'' are fees paid out of
fund assets pursuant to a distribution plan adopted under rule 12b-1
under the Investment Company Act [17 CFR 270.12b-1].
\125\ See, e.g., Miller Letter, supra note 110; CFA Institute
Letter, supra note 37; Manzullo Letter, supra note 108; Letter of
Investor Rights Clinic at Pace University School of Law (Feb. 28,
2008) (``Pace Letter'').
\126\ The Commission last year hosted a roundtable that brought
together representatives from mutual funds, financial services
companies, and investor advocacy groups to discuss issues relating
to rule 12b-1. See Commission Roundtable on Rule 12b-1 (Jun. 19,
2007) available at http://www.sec.gov/spotlight/rule12b-1.htm.
Following the roundtable, we sought public comment on these topics
and have received almost 1,500 comment letters.
---------------------------------------------------------------------------

Finally, some commenters suggested that the fee table require some
form of comparison of the fund's fees to a relevant benchmark based on
the fees of similar funds.\127\ The Commission shares the commenters'
view that the ability to compare fees across mutual funds is extremely
important to investors. To facilitate this comparison, we have designed
the summary section to provide investors with key information in a
standardized order. We also note that the Commission's ongoing
interactive data initiative is intended to provide investors and other
users with the tools necessary to facilitate comparisons of fee
information. The Commission recently proposed rules that would, if
adopted, require mutual funds to file the information in their fee
tables in an interactive data format that would facilitate automated
analysis of the information and comparison to other funds.\128\ The
interactive data format would allow users of fee table information to
download cost and performance information directly into spreadsheets
and analyze it using commercial off-the-shelf software.
---------------------------------------------------------------------------

\127\ See, e.g., AARP Letter, supra note 34; Fund Democracy et
al. Letter, supra note 34; Letter of Gary M. Keenan (Feb. 14, 2008).
\128\ See Investment Company Act Release No. 28298, supra note
28, 73 FR at 35442.
---------------------------------------------------------------------------

e. Investments, Risks, and Performance
Following the fee table and example, we are requiring,
substantially as proposed, that a fund disclose its principal
investment strategies and risks.\129\ This includes the current bar
chart and table illustrating the variability of returns and showing the
fund's past performance.
---------------------------------------------------------------------------

\129\ Item 4 of Form N-1A. To conform to other changes we are
adopting to Form N-1A, the Instructions to Item 4 contain technical
revisions that (1) amend cross-references to other Items in Form N-
1A; and (2) eliminate language related to the presentation of
performance information for more than one fund, given the
requirement that information for each fund be presented separately.
Instructions 2(e) and 3 to Item 4(b)(2) of Form N-1A.
---------------------------------------------------------------------------

We are modifying the narrative that is required to accompany the
bar chart and performance table in one respect to address the views
expressed by both focus group investors and commenters. A fund that
makes updated performance information available on a Web site or at a
toll-free (or collect) telephone number will be required to include a
statement explaining this and providing the Web site address and/or
telephone number.\130\ A number of investors in focus groups expressed
the view that the availability of updated performance information,
particularly at a Web site, would be helpful.\131\ In addition, many
industry commenters noted that funds routinely make updated performance
information available to investors either by Internet Web site or by
telephone and suggested that the summary section direct investors to
this information.\132\ Particularly in light of our determination not
to require quarterly updating of the Summary Prospectus, which is
discussed below,\133\ we believe that it will be helpful to investors
for the summary section to indicate where updated performance
information may be found.
---------------------------------------------------------------------------

\130\ Item 4(b)(2)(i) of Form N-1A.
\131\ See Focus Group Report, supra note 32, at 11; see, e.g.,
Focus Group Transcripts, supra note 32, at 49, 78.
\132\ See, e.g., AIM Letter, supra note 47; American Century
Letter, supra note 48; Capital Research Letter, supra note 34;
Fidelity Letter, supra note 86; ICI Letter, supra note 34; Janus
Letter, supra note 63; Oppenheimer Letter, supra note 44; Putnam
Letter, supra note 48; Russell Letter, supra note 48; T. Rowe
Letter, supra note 49.
\133\ See discussion infra Part III.B.2.c.
---------------------------------------------------------------------------

We are not modifying the required bar chart and performance table
to add additional comparative information as suggested by several
commenters.\134\ Currently, funds are required to include an
appropriate broad-based securities market index in the performance
table.\135\ We have determined not to require additional comparative
performance information at this time because we are concerned that it
would tend to undermine our goal of a concise, user-friendly summary of
key information by contributing to the length and complexity of the
summary section. Further, as with cost information,\136\ we believe
that it is preferable for investors and other users of the prospectus
to be given the flexibility to make a variety of performance benchmark
comparisons. Our ongoing interactive data initiative is intended to
provide the tools necessary to facilitate dynamic comparisons of this
type, and we note that the information in the bar chart and performance
table is covered by our recently proposed rules that would, if adopted,
require mutual funds to file information in an interactive data
format.\137\
---------------------------------------------------------------------------

\134\ See, e.g., Letter of Scott Hastings (Feb. 11, 2008)
(suggesting comparative disclosure of the portfolio manager's stated
benchmark); Morningstar Letter, supra note 34 (same).
\135\ Current Item 2(c)(2)(iii) of Form N-1A; Instruction 5 to
current Item 22(b)(7) of Form N-1A. A fund is also permitted to
include information for one or more other indexes. Instruction 6 to
current Item 22(b)(7) of Form N-1A. If an additional index is
included, a fund is required to disclose information about the
additional index in the narrative explanation accompanying the bar
chart and table (e.g., by stating that the information shows how the
fund's performance compares with the returns of an index of funds
with similar investment objectives).
\136\ See supra note 127 and accompanying text.
\137\ See Investment Company Act Release No. 28298, supra note
28, 73 FR at 35442.
---------------------------------------------------------------------------

f. Management
We are adopting, as proposed, the requirement that the summary
section include the name of each investment adviser and sub-adviser of
the fund, followed by the name, title, and length of service of the
fund's portfolio managers.\138\ A fund will not be required to identify
a sub-adviser whose sole responsibility is limited to day-to-day
management of cash instruments unless the fund is a money market fund
or other fund with a principal investment strategy of regularly holding
cash instruments.\139\ Also, a fund having three or more sub-advisers,
each of which manages a portion of the fund's portfolio, will not be
required to identify each sub-adviser, except that the fund will be
required to identify any sub-adviser that is (or is reasonably expected
to be) responsible for the management of a significant portion of the
fund's net assets. For this purpose, a significant portion of a fund's
net assets generally will be deemed to be 30% or more of the fund's net
assets.\140\ The portfolio managers required to be listed will be the
same ones with respect to which information is currently required in
the prospectus.\141\
---------------------------------------------------------------------------

\138\ Item 5 of Form N-1A. Additional disclosures regarding
investment advisers and portfolio managers that are currently
required in the prospectus will continue to be required, but not in
the summary section. Item 10(a) of Form N-1A.
\139\ Instruction 1 to Item 5(a) of Form N-1A. A fund will
continue to be required to provide the name, address, and experience
of all sub-advisers elsewhere in the prospectus. Item 10(a)(1)(i) of
Form N-1A.
\140\ Instruction 2 to Item 5(a) of Form N-1A.
\141\ Item 10(a)(2) of Form N-1A.
---------------------------------------------------------------------------

Several commenters opposed requiring funds to disclose portfolio
managers.\142\ Two of these commenters argued that the identity and
length of service of portfolio managers do not rise to the level of
importance necessary to warrant inclusion in the summary.\143\ However,
the Commission continues to believe, along with other

[[Page 4557]]

commenters,\144\ that investors in a fund should be provided basic
information about the individuals who significantly affect the fund's
investment operations.
---------------------------------------------------------------------------

\142\ See, e.g., Capital Research Letter, supra note 34; ICI
Letter, supra note 34; Vanguard Letter, supra note 42.
\143\ See ICI Letter, supra note 34; Russell Letter, supra note
48.
\144\ See, e.g., AARP Letter, supra note 34; Evergreen Letter,
supra note 41; Financial Services Institute Letter, supra note 41.
See also Focus Group Transcripts, supra note 32, at 11; id. at 30-31
(importance of fund managers); ICI Survey, supra note 84, at 8 (61%
of respondents believed that the name of the portfolio manager was
very important or somewhat important).
---------------------------------------------------------------------------

Some commenters noted that funds are often managed by teams and
that disclosing the individuals making up such teams would make the
summary section too long and would not add substantive disclosure.\145\
We note that, as is currently the case, disclosure will be required
only with respect to the members of a management team who are jointly
and primarily responsible for the day-to-day management of the fund's
portfolio.\146\ We agree with other commenters that investors have the
same interest in the identity of the individuals who are primarily
responsible for management, regardless of whether a fund is managed by
an individual portfolio manager or a team.\147\
---------------------------------------------------------------------------

\145\ See, e.g., Capital Research Letter, supra note 34; Clarke
Letter, supra note 35; Ogg Letter, supra note 75.
\146\ Instruction 2 to Item 5(b) of Form N-1A. In addition, if
more than five persons are jointly and primarily responsible for the
day-to-day management of a fund's portfolio, the fund need only
provide the required information for the five persons with the most
significant responsibility.
\147\ See Evergreen Letter, supra note 41; Keil Letter, supra
note 62.
---------------------------------------------------------------------------

g. Purchase and Sale of Fund Shares
We are adopting, with modifications to address exchange-traded
funds,\148\ the proposed requirement that the summary section disclose
the fund's minimum initial or subsequent investment requirements and
the fact that the fund's shares are redeemable, and identify the
procedures for redeeming shares (e.g., on any business day by written
request, telephone, or wire transfer).\149\ Commenters generally did
not express a view with respect to this requirement.\150\
---------------------------------------------------------------------------

\148\ See discussion infra Part III.A.4. We are also making a
technical amendment to current Item 6(b) of Form N-1A (which is
being renumbered as Item 11(b)) to remove the requirement to
disclose a fund's minimum initial or subsequent investment
requirements because we have added this requirement to Item 6(a) of
the summary section.
\149\ Item 6 of Form N-1A. We are modifying the proposal to
permit funds that are used as investment options for retirement
plans and variable insurance contracts to modify or omit this
information. See supra note 68 and accompanying text.
\150\ Three commenters supported the proposal. See Letter of
Alison W. Beirlein (Feb. 26, 2008); Foreside Letter, supra note 74;
Schnase Letter, supra note 35. Three commenters opposed the
proposal. See Bent Letter, supra note 74; Clarke Letter, supra note
35; Letter of MFS Investment Management (Feb. 28, 2008) (``MFS
Letter'').
---------------------------------------------------------------------------

h. Tax Information
We are adopting, as proposed, the requirements for tax information
in the summary section. A fund will be required to state, as
applicable, that it intends to make distributions that may be taxed as
ordinary income or capital gains or that the fund intends to distribute
tax-exempt income. A fund that holds itself out as investing in
securities generating tax-exempt income will be required to provide, as
applicable, a general statement to the effect that a portion of the
fund's distributions may be subject to federal income tax.\151\
Commenters generally expressed no views on these requirements.\152\
---------------------------------------------------------------------------

\151\ Item 7 of Form N-1A.
\152\ One commenter opposed mandating the tax information. See
Clarke Letter, supra note 35.
---------------------------------------------------------------------------

i. Financial Intermediary Compensation
The Commission is adopting the proposed requirement that the
summary section of the prospectus conclude with disclosure regarding
financial intermediary compensation. Commenters generally supported
this requirement,\153\ and we are modifying the requirement in two ways
to address views expressed during investor focus groups and the
concerns of commenters. Specifically, we are requiring the following
statement, which could be modified provided that the modified statement
contains comparable information: \154\

\153\ See, e.g., Data Communiqu[eacute] Letter, supra note 35;
Firehouse Letter, supra note 35; Fund Democracy et al. Letter, supra
note 34; ICI Letter, supra note 34; Keil Letter, supra note 62;
NAPFA Letter, supra note 44; Schnase Letter, supra note 35; SIFMA
Letter, supra note 97; Letter of USAA Investment Management Company
(Feb. 28, 2008) (``USAA Letter''); Vanguard Letter, supra note 42;
Letter of Wachovia Securities, LLC (Aug. 29, 2008). But see Letter
of Capital Research and Management Company (Aug. 29, 2008) (opposing
the financial intermediary disclosure requirement).
\154\ Item 8 of Form N-1A.
---------------------------------------------------------------------------

Payments to Broker-Dealers and Other Financial Intermediaries

If you purchase the Fund through a broker-dealer or other
financial intermediary (such as a bank), the Fund and its related
companies may pay the intermediary for the sale of Fund shares and
related services. These payments may create a conflict of interest
by influencing the broker-dealer or other intermediary and your
salesperson to recommend the Fund over another investment. Ask your
salesperson or visit your financial intermediary's Web site for more
information.

This disclosure will be new to fund prospectuses and is intended to
identify the existence of compensation arrangements with selling
broker-dealers or other financial intermediaries, alert investors to
the potential conflicts of interest arising from these arrangements,
and direct investors to their salesperson or the financial
intermediary's Web site for further information. It is intended to
address, in part, concerns that mutual fund investors lack adequate
information about certain distribution-related costs that create
conflicts for broker-dealers and their associated persons.\155\
---------------------------------------------------------------------------

\155\ The Commission has recognized these concerns in a separate
initiative in which the Commission proposed to require, among other
things, disclosure of mutual fund distribution-related costs and
conflicts of interest by selling broker-dealers and other financial
intermediaries at the point of sale. Securities Act Release No. 8544
(Feb. 28, 2005) [70 FR 10521 (Mar. 4, 2005)]; Securities Act Release
No. 8358 (Jan. 29, 2004) [69 FR 6438 (Feb. 10, 2004)]. One commenter
to that proposal recommended use of a short-form ``profile plus''
disclosure document that would include, among other things, basic
information about such potential conflicts of interest. See Letter
of NASD (Mar. 31, 2005) available at http://www.sec.gov/rules/proposed/s70604/nasd033005.pdf. We intend to consider additional
steps to enhance investor access to information prior to making an
investment decision. See infra notes 200 and 201 and accompanying
text.
---------------------------------------------------------------------------

We have added a provision permitting a fund to omit the financial
intermediary disclosure if neither the fund nor any of its related
companies pay financial intermediaries for the sale of fund shares or
related services.\156\ This addresses the concerns of a number of
commenters who expressed the view that the Commission should not
require the narrative disclosure from funds to which the disclosure
does not apply.\157\ According to one commenter, such funds include,
for example, no-load funds and funds sold directly to investors.\158\
---------------------------------------------------------------------------

\156\ Item 8 of Form N-1A.
\157\ See, e.g., CAI Letter, supra note 67; ICI Letter, supra
note 34; Oppenheimer Letter, supra note 44; T. Rowe Letter, supra
note 49; USAA Letter, supra note 153; Vanguard Letter, supra note
42. We note that Item 8 permits a fund to modify the narrative
statement provided that the modified statement contains comparable
information. For example, a fund that is offered as an underlying
investment option for a variable annuity contract could modify the
narrative statement to reflect payments made to the sponsoring
insurance company for distribution and other services.
\158\ See ICI Letter, supra note 34. We note, however, that no-
load funds and directly-sold funds will be required to include the
narrative disclosure in certain circumstances. For example, the
disclosure will be required if a no-load fund pays servicing fees to
a fund supermarket.
---------------------------------------------------------------------------

We have also modified the proposed statement to clarify that
payments to a broker-dealer or other financial intermediary may create
a conflict of interest by influencing the broker-dealer or other
intermediary to recommend a

[[Page 4558]]

fund over another investment. This modification, made in response to
investor comments from our focus groups, is intended to increase
awareness of potential conflicts of interest.\159\ We are, therefore,
revising the narrative to expressly notify investors that a conflict of
interest may exist with respect to the broker-dealer's recommendation.
---------------------------------------------------------------------------

\159\ See Focus Group Report, supra note 32, at 8 (stating that
participants felt that new investors may not be aware of the
potential conflict of interest); Focus Group Transcripts, supra note
32, at 16, 41.
---------------------------------------------------------------------------

We have determined not to add a requirement that the disclosure
include standardized language enumerating the types of compensation
that may be provided to financial intermediaries, as suggested by one
commenter.\160\ Rather, we are adopting a statement that will alert
investors generally to the payment of compensation and the potential
conflicts arising from that payment. An investor could then obtain
further detail from his or her salesperson or the intermediary's Web
site. As discussed further below, we intend to consider additional
steps in the future that would further enhance investors' access to
information about broker and intermediary compensation and conflicts of
interest.
---------------------------------------------------------------------------

\160\ 160 See NAPFA Letter, supra note 44 (requesting
standardized language describing possible forms of compensation,
such as surrender fees, payment for shelf space, commissions paid
for fund transactions, principal mark-ups and mark-downs, fees
derived from bid-ask spreads, and payments for marketing support
and/or education of registered representatives).
---------------------------------------------------------------------------

4. Exchange-Traded Funds
In March of this year, the Commission proposed several amendments
to Form N-1A to accommodate the use of the form by ETFs.\161\ Most ETFs
are organized and registered as open-end funds. Unlike traditional
mutual funds, however, they sell and redeem individual shares (``ETF
shares'') only in large aggregations called ``creation units'' to
certain financial institutions. ETFs register offerings and sales of
ETF shares under the Securities Act and list their shares for trading
under the Securities Exchange Act of 1934 (``Exchange Act'').\162\ As
with any listed security, investors trade ETF shares at market prices.
---------------------------------------------------------------------------

\161\ See ETF Proposing Release, supra note 14, 73 FR at 14618.
\162\ For a description of how ETFs operate, see id. at 14620-
21. ETFs currently operate pursuant to exemptive orders granted by
the Commission. The final amendments define an ETF as a fund or
class of a fund, the shares of which are traded on a national
securities exchange, and that has formed and operates pursuant to an
exemptive order granted by the Commission or in reliance on an
exemptive rule adopted by the Commission. General Instruction A of
Form N-1A. The final ETF definition in Form N-1A eliminates from the
proposed definition the cross-reference to proposed rule 6c-11,
which, if adopted, would codify many of the exemptive orders granted
to ETFs. See ETF Proposing Release, supra note 14, 73 FR at 14621-
30. We have made this technical change to the ETF definition because
the Commission has not adopted proposed rule 6c-11.
---------------------------------------------------------------------------

The proposed amendments for ETF prospectuses were designed to meet
the needs of investors (including retail investors) who purchase ETF
shares in secondary market transactions rather than financial
institutions that purchase creation units directly from the ETF. The
proposed amendments for ETF prospectuses also addressed the need to
modify the summary section of ETF prospectuses to include the amended
ETF disclosures. Today, we are adopting the proposed amendments for ETF
prospectuses with changes to respond to issues raised by commenters on
the summary prospectus proposing release and the ETF proposing
release.\163\
---------------------------------------------------------------------------

\163\ The amendments we proposed in the ETF Proposing Release
incorporated most of the comments from Barclays Global Fund Advisors
(``BGFA'') in response to the Proposing Release. See Letter of BGFA
(Feb. 28, 2008) (``BGFA Letter''). BGFA also requested guidance on
how disclosure requirements in future exemptive orders will be
integrated into the summary section of the prospectus. We are unable
to provide guidance in this release because we do not know what
additional disclosure requirements, if any, would be required for
ETFs that form and operate pursuant to future exemptive orders.
Additional disclosure requirements, if any, will be included in
those exemptive orders.
---------------------------------------------------------------------------

a. Purchasing and Redeeming Shares
We are amending Form N-1A to eliminate the requirement that ETF
prospectuses disclose information on how to buy and redeem shares
directly from the ETF because it is not relevant to investors who are
secondary market purchasers of ETF shares.\164\ We proposed to require
ETF prospectuses to state the number of shares contained in a creation
unit (i.e., the aggregate number of shares an ETF will issue or that is
necessary to redeem from the ETF), that individual shares can only be
bought and sold on the secondary market through a broker-dealer, and
that shareholders may pay more than net asset value (``NAV'') when they
buy ETF shares and receive less than NAV when they sell shares because
shares are bought and sold at current market prices.\165\ We also
proposed to amend the fee table disclosure in Form N-1A to exclude fees
and expenses for purchases or redemptions of creation units and instead
to modify the narrative explanation preceding the example in the fee
table to state that investors in ETF shares may pay brokerage
commissions that are not reflected in the example.\166\ Commenters who
addressed the proposed amendments generally supported this
approach.\167\ We are adopting the amendments largely as proposed, with
minor changes to conform to the final amendments to the summary
section.\168\ ETFs still will be required to include disclosure on how
creation units are offered to the public in the SAI.\169\
---------------------------------------------------------------------------

\164\ Item 6(c)(ii) of Form N-1A.
\165\ See proposed Item 6(h)(3) and (4) of current Form N-1A;
proposed Instruction 3 to Item 6(h) of current Form N-1A.
\166\ Proposed Instruction 1(e)(i) to current Item 3 of Form N-
1A. One commenter to the ETF Proposing Release requested that we
require ETFs to include spread costs in the fee table. See Letter of
BGFA (May 16, 2008) (File No. S7-07-08) (``BGFA Letter on ETF
Proposing Release''). This information is required to be disclosed
pursuant to rule 11Ac1-5(b) of the Exchange Act [17 CFR 240.11Ac1-
5(b)] and is publicly available to investors and the market, which
considers the effect of spreads. We did not follow the commenter's
suggestion because we believe that disclosure regarding additional
spreads in an ETF prospectus, particularly in the summary section,
would not be meaningful to most investors and may be confusing.
\167\ See, e.g., BGFA Letter on ETF Proposing Release, supra
note 166, Letter of Investment Company Institute (May 19, 2008)
(File No. S7-07-08) (``ICI Letter on ETF Proposing Release'').
\168\ Item 6(c)(i) of Form N-1A; Instruction 1(e)(i) to Item 3
of Form N-1A. Item 6(c)(i)(B) requires disclosure that ETF shares
may trade at a price greater than NAV (premium) or less than NAV
(discount). The final amendments, like the proposed amendments, also
will require each ETF to identify the exchange ticker symbol(s) and
principal U.S. market(s) on which the shares are traded. Item
1(a)(2) of Form N-1A; rule 498(b)(1)(ii) 17 CFR 230.498(b)(1)(ii).
We also are adopting a conforming amendment to the expense example
in ETF annual and semi-annual reports. Instruction 1(e)(i) to Item
27(d) of Form N-1A.
\169\ Item 23(a) of Form N-1A. Consistent with our proposal, we
are not amending this disclosure to include information on creation
unit redemption, which Item 11 requires and which we are eliminating
for ETFs. See Item 11(g) of Form N-1A.
---------------------------------------------------------------------------

Consistent with our proposal, the alternative disclosures in Items
3 and 6 of Form N-1A will not be available to ETFs with creation units
of less than 25,000 shares.\170\ Although only certain financial
institutions purchase and redeem creation units directly from an ETF,
individual or retail investors may be more likely to transact in
creation units through one of these financial institutions if the
creation unit size is less than 25,000 shares.\171\ Because there is
greater potential for retail

[[Page 4559]]

investors to transact (indirectly) in creation units as they decrease
in size, we are requiring any ETF that sells and redeems its shares in
creation units of 25,000 or less to include in its prospectus
information on how to purchase and redeem creation units and the costs
associated with those transactions.\172\
---------------------------------------------------------------------------

\170\ Instruction (1)(e)(ii) to Item 3 of Form N-1A; Item
6(c)(ii) of Form N-1A. We also are adopting a conforming amendment
to the expense example in ETF annual and semi-annual reports.
Instruction 1(e)(ii) to Item 27(d) of Form N-1A.
\171\ ETFs directly sell and redeem creation units only to
investors (``authorized participants''), usually brokerage houses,
with which the ETF has a contractual agreement. See, e.g.,
Investment Company Act Release No. 27963 (Aug. 31, 2007) [72 FR
51475 (Sept. 7, 2007)]. The authorized participant may act as a
principal in the transaction or as agent for another, typically an
institutional investor.
\172\ We have not, as one commenter to the ETF Proposing Release
suggested, used a dollar value of a creation unit as the threshold
for disclosure. See ICI Letter on ETF Proposing Release, supra note
167. We do not want to establish a threshold that may change (and as
a consequence require amended disclosure) as a result of
fluctuations in portfolio value rather than direct action by the
ETF. We also disagree with one commenter who opined that the
proposed threshold would create a de facto minimum of 25,000 shares
for creation units and suggested that the threshold for exemptions
from disclosure be set at 1,000 shares. See Letter of James J. Angel
(May 16, 2008) (File No. S7-07-08). Other commenters, including ETF
sponsors, explained they supported the proposed exemption from
disclosure on the purchase and redemption of creation units because
the information would confuse retail investors rather than because
the disclosures were particularly costly or burdensome. See BGFA
Letter on ETF Proposing Release, supra note 166; ICI Letter on ETF
Proposing Release, supra note 167; Letter of Xshares Advisors LLC
(May 20, 2008) (File No. S7-07-08) (``Xshares Letter''). Thus, it
seems unlikely that an exemption from these disclosures would
outweigh the other factors an ETF considers in determining the
appropriate size of a creation unit, and we have not reduced the
threshold for the exemption. See ICI Letter on ETF Proposing
Release, supra note 167 (``[T]he appropriate size of a creation unit
may vary depending on a number of factors, such as the type and
availability of component securities, the expected uses of the
product, and the likely Authorized Participants.'').
---------------------------------------------------------------------------

b. Total Return
At the suggestion of commenters, we are not adopting our proposal
that ETFs include disclosure of market price returns in addition to
returns based on NAV.\173\ Like any other fund that files Form N-1A, an
ETF must disclose returns based on NAV.\174\ All commenters who
addressed this proposal opposed it.\175\ They disagreed that these
returns would be more relevant to an investor's experience in the ETF
than returns based on NAV because market price (which we proposed to
define as closing price) is not tied to an investor's particular
purchase price.\176\ One commenter suggested that while NAV also does
not represent any single investor's experience, it provides a better
metric of performance than market price.\177\ After consideration of
these comments, we agree with these commenters that market price
returns would not more closely represent the experience of any
particular investor and may confuse investors, particularly when
disclosed next to NAV returns.\178\ We therefore are not requiring ETFs
to disclose market price returns in Form N-1A.\179\
---------------------------------------------------------------------------

\173\ See ETF Proposing Release, supra note 14, 73 FR at 14623
n. 163 and preceding, accompanying, and following text.
\174\ See Item 13(a) of Form N-1A.
\175\ See ICI Letter on ETF Proposing Release, supra note 167;
BGFA Letter on ETF Proposing Release, supra note 166; Xshares
Letter, supra note 171.
\176\ See ICI Letter on ETF Proposing Release, supra note 167;
Xshares Letter, supra note 172.
\177\ ICI Letter on ETF Proposing Release, supra note 167
(``[NAV] provides a consistent metric calculated as of the same time
each day in accordance with the fund's valuation policies and
procedures, and is not subject to the influence of outlier bids or
offers.'').
\178\ See id.; BGFA Letter on ETF Proposing Release, supra note
166.
\179\ Similarly, we are not adopting our proposed conforming
amendments to the total return information in ETF annual reports.
See ETF Proposing Release, supra note 14, 73 FR at 14633 nn. 171-172
and accompanying text.
---------------------------------------------------------------------------

We also are not adopting our proposal that would have required an
index-based ETF to compare its performance to its underlying index
rather than a benchmark index.\180\ Commenters on the ETF proposing
release stated that we should not change the disclosure requirement for
index-based ETFs without changing the requirement for all index
funds.\181\ We agree that the proposed change should be considered with
respect to all index funds, not just index-based ETFs, and therefore,
we are not adopting this amendment but may consider future
rulemaking.\182\
---------------------------------------------------------------------------

\180\ See ETF Proposing Release, supra note 14, 73 FR 14633 at
nn. 173-174.
\181\ See, e.g., ICI Letter on ETF Proposing Release, supra note
167; Xshares Letter, supra note 171.
\182\ We also are not, as one commenter suggested, eliminating
the required disclosure concerning portfolio turnover information
for index-based ETFs. See BGFA Letter, supra note 166. Although most
ETFs may sell and redeem their creation units in kind (i.e., for a
basket of assets), they still engage in portfolio transactions in
order to conform the portfolio to changes in the index. We believe
that information regarding portfolio turnover also may be relevant
to an investor who is comparing an investment in an index-based ETF
to an investment in an open-end index fund.
---------------------------------------------------------------------------

c. Premium/Discount Information
We are adopting, as proposed, the amendments to the form to require
each ETF to disclose to investors information about the extent and
frequency with which market prices of fund shares have tracked the
fund's NAV.\183\ Each ETF will be required to disclose in its
prospectus the number of trading days during the most recently
completed calendar year and quarters since that year on which the
market price of the ETF shares was greater than the fund's NAV and the
number of days it was less than the fund's NAV (premium/discount
information).\184\ This disclosure is designed to alert investors to
the relationship between NAV and the market price of the ETF's shares,
and that investors may purchase or sell ETF shares at prices that do
not correspond to NAV. In addition, this disclosure will provide
historical information regarding the frequency of these deviations.
---------------------------------------------------------------------------

\183\ Item 11(g)(2) of Form N-1A. See ETF Proposing Release,
supra note 14, 73 FR at 14632 nn. 166-169 and accompanying and
following text. ETFs currently are required to disclose on their
Internet Web sites the prior business day's last determined NAV, the
market closing price of the fund's shares or the midpoint of the
bid-ask spread at the time of the calculation of NAV (``bid-ask
price''), and the premium/discount of that price to NAV. See, e.g.,
WisdomTree Investments, Inc. et al., Investment Company Act Release
Nos. 27324 (May 18, 2006) [71 FR 29995 (May 24, 2006)] (notice) and
27391 (June 12, 2006) (order); PowerShares Exchange Traded Fund
Trust et al., Investment Company Act Release Nos. 25961 (Mar. 4,
2003) [68 FR 11598 (Mar. 11, 2003)] (notice) and 25985 (Mar. 28,
2003) (order).
\184\ Consistent with our proposal, the final amendments require
ETFs to present premiums or discounts as a percentage of NAV.
Instruction 2 to Item 11(g)(2) of Form N-1A. See ETF Proposing
Release, supra note 14, 73 FR at 14632 nn. 166-169 and accompanying
and following text. ETFs also will have to explain that shareholders
may pay more than NAV when purchasing shares and receive less than
NAV when selling, because shares are bought and sold at market
prices. Instruction 3 to Item 11(g)(2) of Form N-1A. Consistent with
the proposal, the final amendments require ETFs to include a table
with premium/discount information in their annual reports for the
five recently completed fiscal years. Item 27(b)(7)(iv) of Form N-
1A. We are including instructions similar to those in Item 11 to
assist funds in meeting this disclosure obligation. Instructions to
Item 27(b)(7)(iv) of Form N-1A.
---------------------------------------------------------------------------

Commenters on the ETF proposing release were divided as to whether
this specific premium/discount information would be useful to
investors, although all who commented suggested the information need
only be provided on the ETF's Web site.\185\ Based on these comments,
it appears that specific premium/discount information may not be
generally useful to all ETF investors. For that reason, an ETF may omit
the disclosure of specific premium/discount information in its
prospectus or annual report if the fund provides the information on its
Internet Web site and discloses in the prospectus or annual report an
Internet address where

[[Page 4560]]

investors can locate the information.\186\ Because ETFs may choose to
provide this disclosure on their Web sites instead of in their
prospectuses, we have added a requirement that the prospectus disclose
that ETF shares may trade at a premium or discount.\187\ This approach
is designed to require disclosure of the information, but avoid
duplicative disclosures that may result in additional regulatory
burdens. Commenters who addressed the issue strongly supported
permitting ETFs to include historical premium/discount information on
their Web sites instead of in their prospectuses and annual
reports.\188\ Our amendments allow ETFs to choose the most cost-
effective method of providing this disclosure to their investors.
---------------------------------------------------------------------------

\185\ See Xshares Letter, supra note 172 (``[W]e believe that
the disclosure of [premium/discount] information is useful to
investors and support this requirement.''); Letter of NYSE Arca (May
28, 2008) (File No. S7-07-08) (asserting generally that disclosure
of premium/discount information required on the Web site, together
with other available index or portfolio information provides
necessary information to investors to assess ETF pricing against the
underlying index or portfolio). But see BGFA Letter on ETF Proposing
Release, supra note 166 (``[T]he concept of premium/discount may not
be an instructive way of thinking about ETF share prices in the
secondary market * * * BGFA's Internet Web site experience suggests
investors do not value this information highly.''); ICI Letter on
ETF Proposing Release, supra note 167 (premium/discount information
is not particularly useful and investors do not regularly seek it).
\186\ Item 11(g)(2) of Form N-1A; Item 27(b)(7)(iv) of Form N-
1A. Although the time period required in the disclosure is different
in the prospectus and annual report, ETFs will be able to omit both
disclosures by providing on their Internet Web sites only the
premium/discount information required by Item 11(g)(2) (the most
recently completed fiscal year and quarters since that year). Id. In
order to rely on the exemptive orders that permit them to operate,
ETFs also must disclose on their Web sites each day the premium and
discount of the market closing price or the bid/ask price against
the NAV as a percentage of NAV. See supra note 183. Investors in
ETFs that choose not to disclose the required premium/discount
information in their prospectuses or annual reports would be able to
review historic and daily premium/discount information on the ETF's
Web site.
\187\ Item 6(c)(i)(B) of Form N-1A.
\188\ See, e.g., BGFA Letter on ETF Proposing Release, supra
note 166 (``Duplicative disclosure strikes us as unnecessary and
burdensome * * *. Because data in a prospectus speaks of the
prospectus date and therefore does not include the most recent
information, we believe Internet Web site disclosure is preferable
to prospectus disclosure. Accordingly, we believe that it would be
sufficient to reference the availability of the information on the
Internet Web site in a prospectus.'').
---------------------------------------------------------------------------

For purposes of calculating premium/discount information, we are
adopting, with a modification, the proposed definition of ``market
price.'' \189\ Commenters objected to our proposed definition of market
price as the closing price because of stale pricing concerns.\190\
These commenters suggested that ETFs instead be permitted to use the
mid-point between the highest bid and the lowest offer at the time the
fund's NAV is calculated.\191\ To address these concerns, the final
amendments define the term ``market price'' to mean the closing price
on the principal market on which ETF shares trade or within the range
between the highest offer and the lowest bid if that price more
accurately reflects the current market value of the fund's shares at
the time the Fund calculates its NAV.\192\
---------------------------------------------------------------------------

\189\ General Instruction A of Form N-1A. See ETF Proposing
Release, supra note 14, 73 FR at 14632 nn. 164-165 and accompanying
text for a discussion of the proposed definition of ``market
price.''
\190\ See, e.g., Letter of Chapman and Cutler LLP (May 19, 2008)
(File No. S7-07-08) (``Chapman Letter''); ICI Letter on ETF
Proposing Release, supra note 167 (noting that the closing price may
be less accurate because the last trade occurred at a much earlier
time than the NAV calculation).
\191\ See, e.g., Chapman Letter, supra note 190; ICI Letter on
ETF Proposing Release, supra note 167. See also, e.g., Claymore
Exchange-Traded Fund Trust, Investment Company Act Release No. 27469
(Aug. 28, 2006) [71 FR 51869 (Aug. 31, 2006)] (exemptive order
permitting ETF to operate in which ETF has used the mid-point price,
rather than the closing price, in circumstances when closing price
may be less accurate because the last trade occurred at a much
earlier point in the day than NAV calculation). One commenter also
noted that the principal trading market for an ETF may shift during
the trading day and, therefore, that the rule should use the market
price on the various principal U.S. markets on which the ETF shares
trade during a regular trading session. See Chapman Letter, supra
note 190. We have not incorporated this suggestion in our
amendments. We note that rules of the national securities exchanges
use the term ``principal market.'' See, e.g., NYSE Arca Rule
6.1(b)(27) (in its rule that applies to options trading on the
exchange, defining ``primary market'' in respect of an underlying
stock or ETF share to mean ``the principal market in which the
underlying stock or [ETF share] is traded.''). We have included the
term ``trading'' to be clear that the term does not refer to the
principal listing market. In addition, expanding the rule to various
principal trading markets may be confusing and could create the
potential that funds will seek the market that provides the best
bid/offer.
\192\ Definition of ``Market Price'' in General Instruction A of
Form N-1A (``Market Price'' refers to the last reported sale price
at which ETF shares trade on the principal U.S. market on which the
fund's shares are traded during a regular trading session or, if it
more accurately reflects the current market value of the fund's
shares at the time the fund uses to calculate its NAV, a price
within the range of the highest bid and lowest offer on the
principal U.S. market on which the fund's shares are traded during a
regular trading session.''). See Codification of Financial Reporting
Policies, Section 404.03.b.ii, ``Valuation of Securities--Securities
Listed or Traded on a National Securities Exchange,'' reprinted in
SEC Accounting Rules (CCH) ] 38,221, at 38.424-25. See also Fair
Value Measurements, Statement of Financial Accounting Standards No.
157, Sec. 24 (Fin. Accounting Standards Bd. 2006).
---------------------------------------------------------------------------

5. Conforming and Technical Amendments to Form N-1A
The foregoing amendments to Form N-1A require adding new items to
the form and revising and renumbering certain existing items. We are
adopting conforming amendments to Form N-1A, consistent with these
revisions and renumbering, in order to update the table of contents and
the various references to Form N-1A items contained within the form. We
are also adopting technical amendments to Form N-1A to update the
Commission's telephone number and address.\193\
---------------------------------------------------------------------------

\193\ Cover page to Form N-1A; Item 1(b)(3) of Form N-1A.
---------------------------------------------------------------------------

B. New Delivery Option for Mutual Funds

1. Use of Summary Prospectus and Satisfaction of Statutory Prospectus
Delivery Requirements
The Commission is adopting, with modifications to address
commenters' concerns, the proposal to replace rule 498 \194\ with a new
rule that permits the obligation under the Securities Act to deliver a
statutory prospectus with respect to mutual fund securities to be
satisfied by sending or giving a Summary Prospectus and providing the
statutory prospectus online. In addition, the new rule will require a
fund to send the statutory prospectus in paper or by e-mail upon
request. The Summary Prospectus is required to contain the key
information that is included in the new summary section of the
statutory prospectus in the same order that is required in the
statutory prospectus.
---------------------------------------------------------------------------

\194\ As adopted in 1998, rule 498 permits mutual funds to offer
investors a disclosure document called a ``profile,'' which
summarizes key information about the fund. An investor deciding to
purchase fund shares based on the information in a profile is
required to receive the fund's statutory prospectus with the
security or confirmation of purchase. Investment Company Act Release
No. 23065 (Mar. 13, 1998) [63 FR 13968 (Mar. 23, 1998)]. The
amendments we are adopting today result in the elimination of the
profile.
---------------------------------------------------------------------------

The new rule is intended to create a disclosure regime that is
tailored to the unique needs of mutual fund investors in a manner that
provides ready access to the information that investors need, want, and
choose to review in connection with a mutual fund purchase decision.
The rule provides for a layered approach to disclosure in which key
information is sent or given to the investor and more detailed
information is provided online and, upon request, is sent in paper or
by e-mail. This is intended to provide investors with better ability to
choose the amount and type of information to review, as well as the
format in which to review it (online or paper). In addition, the
provision of a Summary Prospectus containing key information about the
fund, coupled with online provision of more detailed information,
should aid investors in comparing funds.\195\ In short, we believe that
the new rule will result in funds providing investors with more useable
information than they receive today in a format that investors are more
likely to use and

[[Page 4561]]

understand. Under the new rule, an investor could choose to receive the
statutory prospectus in the same paper format that would be provided
under our prior rules.
---------------------------------------------------------------------------

\195\ A recent survey indicated that 90% of investors surveyed
had access to the Internet. See Telephone Survey Report, supra note
32, at 115. It also indicated over half (56%) rely on the Internet
to some extent (ranging from ``a little'' to ``completely'') in
making investment decisions. Id. at 116. The survey report further
indicated that 53% of respondents who own mutual funds accessed
investment information via the Internet. Id. at 6.
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The new rule provides that any obligation under Section 5(b)(2) of
the Securities Act \196\ to have a statutory prospectus precede or
accompany the carrying or delivery of a mutual fund security in an
offering registered on Form N-1A is satisfied if (1) a Summary
Prospectus is sent or given no later than the time of the carrying or
delivery of the fund security;\197\ (2) the Summary Prospectus is not
bound together with any materials, except as described below; (3) the
Summary Prospectus that is sent or given satisfies the rule's
requirements at the time of the carrying or delivery of the fund
security; and (4) the conditions set forth in the rule, which require a
fund to provide the Summary Prospectus, statutory prospectus, and other
information on the Internet in the manner specified in the rule, are
satisfied.\198\ As discussed in more detail below, we have changed the
proposed condition that the Summary Prospectus be given ``greater
prominence'' than accompanying materials into a requirement of the
rule, rather than a condition to satisfaction of delivery obligations
under section 5(b)(2) of the Securities Act. We have also clarified
that any particular Summary Prospectus is not required to be given
``greater prominence'' than any other Summary Prospectuses or statutory
prospectuses. As adopted, we are also permitting the Summary
Prospectuses and statutory prospectuses of multiple underlying funds of
a variable insurance contract to be bound with each other and with the
statutory prospectus for the contract.
---------------------------------------------------------------------------

\196\ 15 U.S.C. 77e(b)(2).
\197\ A fund could rely upon existing Commission guidance, which
typically requires affirmative consent from individual investors, to
send or give a Summary Prospectus by electronic means. See
Securities Act Release No. 7233 (Oct. 6, 1995) [60 FR 53458 (Oct.
13, 1995)]; Securities Act Release No. 7856 (Apr. 28, 2000) [65 FR
25843 (May 4, 2000)]. If, prior to the effective date of this rule,
an investor had consented in accordance with existing Commission
guidance to receive future versions of one or more funds' statutory
prospectuses by electronic means, we would not object if a fund or
financial intermediary relies on that consent to send or give the
Summary Prospectuses of those funds by electronic means to that
investor, provided that the consent is not otherwise revoked.
\198\ Rule 498(c).
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Section 5(b)(2) of the Securities Act makes it unlawful to deliver
a security for purposes of sale or for delivery after sale ``unless
accompanied or preceded'' by a statutory prospectus. Under the rule,
delivery of the statutory prospectus for purposes of section 5(b)(2) is
accomplished by sending or giving a Summary Prospectus and by providing
the statutory prospectus and other required information online. Failure
to comply with the rule's requirements for sending or giving a Summary
Prospectus and providing the statutory prospectus and other information
online would mean that the rule could not be relied on to meet the
section 5(b)(2) prospectus delivery obligation. Absent satisfaction of
the section 5(b)(2) obligation by other available means,\199\ a Section
5(b)(2) violation would result. The rule also requires a fund to send
the statutory prospectus upon request. This requirement is not a
condition to reliance on the rule, and failure to send the requested
statutory prospectus will result in a violation of the rule (as opposed
to a violation of section 5(b)(2)).
---------------------------------------------------------------------------

\199\ These include paper delivery of a statutory prospectus or
electronic delivery of a statutory prospectus in reliance upon
existing Commission guidance. See supra note 197 for existing
Commission guidance on electronic delivery. We note that it would be
permissible to satisfy Section 5(b)(2) obligations by relying on
rule 498 to send or give a Summary Prospectus to some investors,
while providing a statutory prospectus to others. For example, it
would be permissible to rely on rule 498 to send or give the Summary
Prospectus to existing investors who purchase additional shares
while providing the statutory prospectus to new investors. It would
also be permissible for a life insurance company to satisfy Section
5(b)(2) obligations with respect to a variable insurance contract by
relying on rule 498 to send or give a Summary Prospectus with
respect to some underlying funds, while providing a statutory
prospectus with respect to other underlying funds, for example,
where some underlying funds maintain a Summary Prospectus while
others do not.
---------------------------------------------------------------------------

Section 5(b)(2) does not require delivery of the statutory
prospectus prior to delivery of the security or confirmation of the
transaction. As a result, mutual fund investors too often receive the
statutory prospectus after the purchase transaction when the investment
decision is complete. The rules we are adopting will, in practice,
require any fund that is relying on the Summary Prospectus to meet its
obligations under section 5(b)(2) to post both its Summary Prospectus
and statutory prospectus on the Internet at all times. This will result
in significantly enhanced access by investors to information about the
fund prior to the time of making an investment decision. Several
commenters observed that it would be helpful if investors could review
a Summary Prospectus prior to making an investment decision.\200\ We
intend to consider additional steps in the future that would further
enhance investors' access to the Summary Prospectus, other information
about the fund, and enhanced information about broker and intermediary
compensation and conflicts of interest before the investment decision.
For example, we continue to consider appropriate disclosures at the
point of sale by financial intermediaries, including whether there
should be an obligation to direct investors to the online availability
of the Summary Prospectus and offer investors a copy of the Summary
Prospectus.\201\
---------------------------------------------------------------------------

\200\ See, e.g., AARP Letter, supra note 34; Fund Democracy et
al. Letter, supra note 34.
\201\ See supra note 155. To the extent that we conclude that
such an obligation on the part of financial intermediaries is
appropriate, we would also consider similar obligations in the case
of funds that are sold directly to investors.
---------------------------------------------------------------------------

The rule we are adopting also provides that a communication
relating to an offering registered on Form N-1A that is sent or given
after the effective date of a mutual fund's registration statement
(other than a prospectus permitted or required under Section 10 of the
Securities Act) shall not be deemed a prospectus under Section 2(a)(10)
of the Securities Act if (1) it is proved that prior to or at the same
time with the communication a Summary Prospectus was sent or given to
the person to whom the communication was made; (2) the Summary
Prospectus is not bound together with any materials, except as
described below; (3) the Summary Prospectus that was sent or given
satisfies the rule's requirements at the time of the communication; and
(4) the conditions set forth in the rule, which require a fund to
provide the Summary Prospectus, statutory prospectus, and other
information on the Internet in the manner specified in the rule, are
satisfied.\202\ This provision is similar to section 2(a)(10)(a) of the
Securities Act, which provides that a communication sent or given after
the effective date of the registration statement (other than a
prospectus permitted under subsection (b) of Section 10) shall not be
deemed a prospectus if it is proved that prior to or at the same time
with the communication a written prospectus meeting the requirements
for a statutory prospectus at the time of the communication was sent or
given to the person to whom the communication was made.\203\ Pursuant
to this provision, communications that would otherwise be considered
``prospectuses'' subject to the liability provisions of section
12(a)(2) of the Securities Act are not

[[Page 4562]]

deemed prospectuses and are not subject to section 12(a)(2) if they are
preceded or accompanied by the statutory prospectus.\204\ Similarly,
under the new rule, communications that are preceded or accompanied by
a Summary Prospectus are not deemed to be prospectuses and are not
subject to section 12(a)(2) if all the conditions of the rule are met.
These communications remain subject to the general antifraud provisions
of the federal securities laws.\205\
---------------------------------------------------------------------------

\202\ Rule 498(d). This provision is limited to a mutual fund
Summary Prospectus that satisfies the terms of the proposed rule and
does not apply in the case of any issuer other than a mutual fund.
\203\ 15 U.S.C. 77b(a)(10)(a).
\204\ 15 U.S.C. 77l(a)(2). Section 12(a)(2) of the Securities
Act imposes liability for materially false or misleading statements
in a prospectus or oral communication, subject to a reasonable care
defense.
\205\ See, e.g., Section 17(a) of the Securities Act [15 U.S.C.
77q(a)]; Section 10(b) of the Exchange Act [15 U.S.C. 78j(b)];
Section 34(b) of the Investment Company Act [15 U.S.C. 80a-33(b)].
---------------------------------------------------------------------------

Commenters generally supported the proposal, noting that investors
will be more likely to read and understand the Summary Prospectus than
the statutory prospectus and that use of the Summary Prospectus will
help investors to focus on what is most important in making investment
decisions with respect to a particular fund.\206\ One commenter noted
that its own research has shown that most investors do not find the
statutory prospectus to be a particularly useful document and do not
rely heavily on it in making a fund selection. The commenter agreed
that it makes little sense to continue to require delivery of a
document to all investors that most say they do not value.\207\ A
second commenter noted that the proposal ``reflects the strikingly
broad consensus that investors would be best served by simplified,
streamlined disclosure of essential fund information'' and is supported
by research conducted by the Commission and others.\208\ Similarly,
investors in our focus groups generally expressed favorable views of
the Summary Prospectus, noting its usefulness as a screening tool to
identify funds that they might wish to research further.\209\
Commenters also approved of the proposal's use of the power of the
Internet and advances in technology to deliver information to
investors.\210\
---------------------------------------------------------------------------

\206\ See, e.g., AARP Letter, supra note 34; CMFI Letter, supra
note 44; Fund Democracy et al. Letter, supra note 34; ICI Letter,
supra note 34; MFDF Letter, supra note 34.
\207\ See Fund Democracy et al. Letter, supra note 34.
\208\ See ICI Letter, supra note 34.
\209\ Focus Group Report, supra note 32, at 5-6 (quoting
participants as stating, ``I think it cuts to the important factors
of performance, cost, objectives. I like it;'' ``It's a two-minute
read. If I want more information, I can ask for it;'' ``I think that
this [short-form prospectus] you'd read and if you're interested and
then you've got questions and you want to go more in-depth and go to
the long one;'' ``I think both [the long and short-form
prospectuses] have their place. I think it would be foolish to give
up the long-form for (the short[-]form) and I think it would be
foolish not to have the short-form and insist on a long-form. They
both have their place.'').
\210\ See, e.g., AARP Letter, supra note 34; CMFI Letter, supra
note 44; ICI Letter, supra note 34; Oppenheimer Letter, supra note
44.
---------------------------------------------------------------------------

Two commenters argued that use of the Summary Prospectus should be
mandatory, including one who noted that inconsistent use of the Summary
Prospectus could create confusion and would make comparison of funds
more difficult for investors.\211\ We have determined not to mandate
use of the Summary Prospectus at this time. We believe that further
public comment on this important step is necessary, and we intend to
review the use of the Summary Prospectus by investors in funds that
voluntarily adopt the Summary Prospectus and reconsider whether the
Summary Prospectus should be mandated in the future.
---------------------------------------------------------------------------

\211\ See Letter of Kevin Possin and Ann Lavine (Feb. 7, 2008);
Vanguard Letter, supra note 42.
---------------------------------------------------------------------------

As noted above, we are modifying the rule's conditions in three
respects to address the concerns of commenters. First, we have
eliminated the condition that the Summary Prospectus be given greater
prominence than any accompanying materials \212\ and instead made it a
rule requirement.\213\ Second, we have modified this requirement to
clarify that a Summary Prospectus need not be given ``greater
prominence'' than other Summary Prospectuses or statutory prospectuses
that accompany the Summary Prospectus. Third, we have revised the
condition that would have prohibited the Summary Prospectus from being
bound together with any other materials \214\ to permit a Summary
Prospectus for a fund that is available as an investment option in a
variable annuity or variable life insurance contract to be bound
together with the statutory prospectus for the contract and Summary
Prospectuses and statutory prospectuses for other investment options
available under the contract.\215\
---------------------------------------------------------------------------

\212\ Proposed rule 498(c)(1) and (d)(1).
\213\ Rule 498(f)(2).
\214\ Proposed rule 498(c)(1) and (d)(1).
\215\ Rule 498(c)(2) and (d)(2).
---------------------------------------------------------------------------

We have made the ``greater prominence'' standard a rule requirement
instead of a condition to satisfaction of section 5(b)(2)
obligations.\216\ While we continue to believe that the ``greater
prominence'' requirement is important to prevent the Summary Prospectus
from being obscured by accompanying sales and other materials and to
highlight for investors the concise, balanced presentation of the
Summary Prospectus,\217\ we are persuaded by commenters that the
consequences of failure to meet the condition--a Section 5 violation--
is not needed to achieve our goal.\218\ Therefore, we are adopting
commenters' suggestion that satisfaction of the ``greater prominence''
standard be a rule requirement.\219\ As adopted, the ``greater
prominence'' requirement is not a condition to reliance on the rule to
satisfy a fund's or intermediary's delivery obligations under section
5(b)(2) of the Securities Act or the provision that a communication
shall not be deemed a prospectus under section 2(a)(10) of the
Securities Act. A person that complies with the conditions to the rule
will not violate section 5(b)(2) if the ``greater prominence'' standard
is not satisfied. This failure will, however, constitute a violation of
the Commission's rules. Generally, we believe that the ``greater
prominence'' requirement would be satisfied if the placement of the
Summary Prospectus is more prominent than accompanying materials, e.g.,
the Summary Prospectus is on top of a group of paper documents that are
provided together.\220\
---------------------------------------------------------------------------

\216\ Rule 498(f)(2).
\217\ See, e.g., Pace Letter, supra note 125 (expressing support
for the ``greater prominence'' requirement).
\218\ See, e.g., ABA Letter, supra note 37; ICI Letter, supra
note 34; NYC Bar Letter, supra note 75.
\219\ See, e.g., ABA Letter, supra note 37; ICI Letter, supra
note 34; Oppenheimer Letter, supra note 44.
\220\ In response to a commenter's concerns, we are making a
technical change to the ``greater prominence'' requirement to
clarify that any particular Summary Prospectus need not be given
``greater prominence'' than any other Summary Prospectuses or
statutory prospectuses that accompany the Summary Prospectus. See
ICI Letter, supra note 34.
---------------------------------------------------------------------------

We are adopting the condition that prohibits a Summary Prospectus
from being bound together with any other materials. Although commenters
were split on the proposed binding prohibition, with some supporting
the requirement and others opposed or seeking modifications,\221\ we
continue

[[Page 4563]]

to believe that it is important to prevent the Summary Prospectus from
being obscured by accompanying sales and other materials and to
highlight for investors the concise, balanced presentation of the
Summary Prospectus. We are, however, persuaded that it is appropriate
to permit binding the statutory prospectus of a variable insurance
contract with the Summary Prospectuses and statutory prospectuses of
its underlying funds.\222\ This will permit satisfaction of prospectus
delivery requirements for both a variable insurance contract and its
underlying funds in one consolidated package and does not involve any
risk of the prospectuses being obscured by sales or other materials.
Specifically, under rule 498, a Summary Prospectus for a fund that is
available as an investment option in a variable annuity or variable
life insurance contract may be bound together with the statutory
prospectus for the contract and Summary Prospectuses and statutory
prospectuses for other investment options available in the contract,
provided that: (i) All of the funds to which the Summary Prospectuses
and statutory prospectuses that are bound together relate are available
to the person to whom such documents are sent or given; and (ii) a
table of contents identifying each Summary Prospectus and statutory
prospectus that is bound together, and the page number on which it is
found, is included at the beginning or immediately following a cover
page of the bound materials. These conditions are intended to ensure
that investors are not inundated with prospectuses that are not
relevant to the contract they are considering and to ensure that
investors can readily locate the particular prospectuses in which they
are interested.
---------------------------------------------------------------------------

\221\ See, e.g., Pace Letter, supra note 125 (supporting binding
prohibition); T. Rowe Letter, supra note 49 (supporting a binding
prohibition instead of a ``greater prominence'' requirement); ICI
Letter, supra note 34 (arguing that rule should prohibit Summary
Prospectuses from being bound together with sales materials, or
alternatively that there be certain specific carve-outs to permit
binding of funds' privacy notices and to permit the binding together
of Summary Prospectuses for certain similar types of funds); Letter
of Charles Schwab & Co., Inc., and Charles Schwab Investment
Management, Inc. (Feb. 28, 2008) (``Schwab Letter'') (requesting
carve-out to permit binding of funds' privacy policies); Data
Communiqu[eacute] Letter, supra note 35 (opposing binding
prohibition); Dechert Letter, supra note 50 (opposing binding
prohibition); Schnase Letter, supra note 35 (opposing binding
prohibition).
\222\ See, e.g., CAI Letter, supra note 67; Dechert Letter,
supra note 50; EQ/AXA Letter, supra note 67; Fidelity Letter, supra
note 86; ICI Letter, supra note 34; Vanguard Letter, supra note 42.
---------------------------------------------------------------------------

2. Content of Summary Prospectus
Rule 498 sets forth the content requirements that a Summary
Prospectus must satisfy.\223\ A Summary Prospectus meeting the
requirements of the rule will be deemed to be a prospectus that is
authorized under section 10(b) of the Securities Act and section 24(g)
of the Investment Company Act for the purposes of section 5(b)(1) of
the Securities Act.\224\ A Summary Prospectus meeting these content
requirements could be used to offer securities of the fund pursuant to
section 5(b)(1) even if the other conditions of the rule were not
satisfied. The failure to satisfy these other conditions will, however,
preclude the use of the Summary Prospectus for the other purposes
described in rule 498, including for purposes of satisfying, in part, a
fund's obligation under section 5(b)(2) to deliver a statutory
prospectus. In these circumstances, the section 5(b)(2) obligation to
deliver a fund's statutory prospectus will have to be met by means
other than the new rule or a section 5(b)(2) violation will result.
---------------------------------------------------------------------------

\223\ Rule 498(b). Rule 498(a) defines terms used in the rule.
\224\ Rule 498(b). Section 10(b) of the Securities Act [15
U.S.C. 77j(b)] authorizes the Commission to adopt rules permitting
the use of a prospectus for the purposes of Section 5(b)(1) [15
U.S.C. 77e(b)(1)] that summarizes information contained in the
statutory prospectus. Section 24(g) of the Investment Company Act
[15 U.S.C. 80a-24(g)] authorizes the Commission to permit the use of
a prospectus under Section 10(b) of the Securities Act to include
information the substance of which is not included in the statutory
prospectus.
---------------------------------------------------------------------------

a. General
We are adopting, with one clarification, the requirement that the
Summary Prospectus include the same information as required in the
summary section of the statutory prospectus in the same order required
in the statutory prospectus.\225\ This key information about investment
objectives, costs, and risks forms the body of the Summary Prospectus.
---------------------------------------------------------------------------

\225\ Rule 498(b)(2) (Summary Prospectus to include information
required or permitted by Items 2 through 8 of Form N-1A). We are
adopting, as proposed, the provision that permits a fund to omit
from the Summary Prospectus an explanation of the reasons for any
change in the securities market index used for comparison purposes
in the performance presentation. Rule 498(b)(2). Cf. Instruction
2(c) to Item 4(b)(2) of Form N-1A (requiring this explanation in
summary section of statutory prospectus).
---------------------------------------------------------------------------

We are adopting a new requirement to clarify that if a fund relies
on rule 498 to meet its statutory prospectus delivery obligations, the
information contained in the Summary Prospectus must be the same as the
information contained in the summary section of the fund's statutory
prospectus, except as expressly permitted by rule 498.\226\ That is, a
fund may not provide different, such as more or less expansive,
information in its Summary Prospectus than it provides in its statutory
prospectus. If, pursuant to rule 497, a mutual fund files a ``sticker''
to its statutory prospectus that changes any information in the summary
section, the Summary Prospectus should either be ``stickered'' or
amended to reflect the information in the statutory prospectus
``sticker.'' This new requirement is intended to clarify our intent in
adopting the same content requirements for the Summary Prospectus and
the summary section of the statutory prospectus.
---------------------------------------------------------------------------

\226\ Rule 498(f)(4). Rule 498(b)(2) expressly permits a Summary
Prospectus to omit certain information relating to a change in the
securities market index used for comparison purposes. See supra note
225.
---------------------------------------------------------------------------

The Summary Prospectus will not be permitted to omit any of the
required information or to include additional information except as
described below. A document that omits information required in a
Summary Prospectus or includes additional information not permitted by
the rule will not be a Summary Prospectus under the rule and may not be
used under the rule for any purpose, including meeting the obligation
to deliver a fund's statutory prospectus.\227\ We are adopting these
requirements, as proposed, because we believe that uniformity of
content in Summary Prospectuses will provide better comparability,
which will help investors to make a more informed investment decision,
a conclusion which was supported by a number of commenters.\228\ While
some commenters argued that the rule should provide funds with
flexibility to customize the content of the Summary Prospectus,\229\ we
are not persuaded because customization would significantly impair
investors' ability to compare information across funds. We note that,
provided the content and order requirements of the rule are met, funds
have almost complete flexibility with respect to design issues,
including layout, graphics, and color.\230\
---------------------------------------------------------------------------

\227\ A Summary Prospectus that omits certain information
required by the rule or includes additional information not
permitted by the rule could be deemed to be a prospectus under
Section 10(b) of the Securities Act for purposes of Section 5(b)(1)
of the Securities Act pursuant to rule 482 under the Securities Act
[17 CFR 230.482] if the conditions of that rule are met.
\228\ See, e.g., Letter of Brown & Associates LLC and Self
Audit, Inc. (Feb. 27, 2008) (``Self Audit Letter''); CMFI Letter,
supra note 44; Data Communiqu[eacute] Letter, supra note 35;
Evergreen Letter, supra note 41; Firehouse Letter, supra note 35;
Great-West Letter, supra note 42; ICI Letter, supra note 34; Keil
Letter, supra note 62; Letter of NewRiver, Inc. (Feb. 28, 2008)
(``NewRiver Letter''); Oppenheimer Letter, supra note 44; Pace
Letter, supra note 125; Schnase Letter, supra note 35.
\229\ See, e.g., Clarke Letter, supra note 35; Hastie Letter,
supra note 59; Letter of Stephen A. Keen (Feb. 28, 2008); Ogg
Letter, supra note 75.
\230\ See, e.g., AARP Letter, supra note 34 (Commission ``should
set broad parameters for compliance with the required substance,
format and presentation of the summary prospectus, but also allow
funds to use their creativity in designing a form that is truly
investor friendly.''); Data Communiqu[eacute] Letter, supra note 35
(favoring similar content, but stating that the Commission should
allow for layout and graphical differences).
Summary Prospectuses are subject to the font size and legibility
requirements for prospectuses that are set forth in rule 420 under
the Securities Act [17 CFR 230.420]. Rule 420 generally requires,
among other things, that printed prospectuses be in roman type at
least as large and as legible as 10-point modern type.

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[[Page 4564]]

We are adopting, as proposed, the requirement that a Summary
Prospectus describe only one fund, but may describe multiple classes of
a single fund.\231\ This requirement is similar to the requirements for
the summary section of the statutory prospectus.\232\ Like those
requirements, it is intended to result in a presentation of key fund
information that is concise and easy to read.
---------------------------------------------------------------------------

\231\ Rule 498(b)(4).
\232\ See discussion supra introductory text to Part III.A. and
``Organizational Requirements'' in Part III.A.1.
---------------------------------------------------------------------------

One commenter suggested that the Commission permit funds to satisfy
their obligation to deliver a statutory prospectus to their existing
shareholders by delivering a document directing shareholders' attention
to material changes that have occurred during the covered period.\233\
The commenter argued that such an approach would focus shareholders'
attention on the factors that are most likely to affect their
continuing evaluation of the fund and impose lower costs than delivery
of the Summary Prospectus. We are not adopting this suggestion at this
time. We are concerned that creation of an additional document to be
used only for existing shareholders could impose significant costs on
funds and their shareholders. Moreover, as noted earlier, we recently
proposed to require mutual funds to submit in interactive data format
information contained in the risk/return summary section of their
statutory prospectuses.\234\ We are continuing to consider that
proposal and believe that, if adopted, this requirement would help
investors, intermediaries, and others to readily identify any changes
in this information.
---------------------------------------------------------------------------

\233\ See Fund Democracy et al. Letter, supra note 34. Section
10(a)(3) of the Securities Act [15 U.S.C. 77j(a)(3)] generally
requires that when a prospectus is used more than nine months after
the effective date of the registration statement, the information in
the prospectus must be as of a date not more than sixteen months
prior to such use. The effect of this provision is to require mutual
funds to update their statutory prospectuses annually to reflect
current cost, performance, and other financial information. Many
funds deliver updated statutory prospectuses annually to their
existing shareholders in order to meet their prospectus delivery
obligations with respect to additional purchases by those
shareholders.
\234\ Investment Company Act Release No. 28298, supra note 28,
73 FR at 35443.
---------------------------------------------------------------------------

b. Cover Page or Beginning of Summary Prospectus
We are adopting, as proposed, the requirements for the cover page
or beginning of the Summary Prospectus, with the addition of a
requirement to include the exchange ticker symbols of the fund's
securities.\235\ The Summary Prospectus will be required to include the
following information on the cover page or at the beginning of the
Summary Prospectus:
---------------------------------------------------------------------------

\235\ This requirement is discussed in Part III.A.2.
---------------------------------------------------------------------------

The fund's name and the share classes to which the Summary
Prospectus relates;
The exchange ticker symbol of the fund's securities or, if
the Summary Prospectus relates to one or more classes of the fund's
securities, adjacent to each such class, the exchange ticker symbol of
such class of the fund's securities;
A statement identifying the document as a ``Summary
Prospectus''; and
The approximate date of the Summary Prospectus's first
use.
In addition, the cover page or beginning of the Summary Prospectus
is required to include the following legend:

Before you invest, you may want to review the Fund's prospectus,
which contains more information about the Fund and its risks. You
can find the Fund's prospectus and other information about the Fund
online at [--------]. You can also get this information at no cost
by calling [--------] or by sending an e-mail request to [--------
].\236\
---------------------------------------------------------------------------

\236\ Rule 498(b)(1).

In addition, the legend may include a statement to the effect that the
Summary Prospectus is intended for use in connection with a defined
contribution plan that meets the requirements for qualification under
section 401(k) of the Internal Revenue Code, a tax-deferred arrangement
under section 403(b) or 457 of the Internal Revenue Code, or a variable
contract as defined in section 817(d) of the Internal Revenue Code and
is not intended for use by other investors.\237\
---------------------------------------------------------------------------

\237\ Rule 498(b)(1)(v)(B).
---------------------------------------------------------------------------

The legend is required to provide an Internet address, toll free
(or collect) telephone number, and e-mail address that investors can
use to obtain the statutory prospectus and other information.\238\ The
legend is also permitted to indicate that the statutory prospectus and
other information are available from a financial intermediary (such as
a broker-dealer or bank) through which shares of the fund may be
purchased or sold.\239\ The Internet address at which the statutory
prospectus and other information are available is not permitted to be
the address of the Commission's Electronic Data Gathering, Analysis,
and Retrieval System (``EDGAR'').\240\ The address is required to be
specific enough to lead investors directly to the statutory prospectus
and other required information, rather than to the home page or other
section of the Web site on which the materials are posted.\241\ The Web
site could be a central site with prominent links to each required
document.\242\
---------------------------------------------------------------------------

\238\ Rule 498(b)(1)(v)(A).
\239\ The Web site and other contact information provided may be
the Web site and contact information of a financial intermediary.
\240\ Cf. rule 14a-16(b)(3) under the Exchange Act [17 CFR
240.14a-16(b)(3)] (similar requirement in rules relating to Internet
availability of proxy materials).
\241\ For a description of the information required to be
available at the Web site and a discussion of the manner in which
such information must be available, see the discussion in Part
III.B.3. below.
\242\ One commenter suggested removing the word ``prominent''
from the phrase ``a central site with prominent links'' because it
calls into question whether a fund complex could have one Web page
with numerous links or a drop-down menu allowing users to navigate
to disclosure documents for each of the funds. See ICI Letter, supra
note 34. We have decided to retain the prominence requirement
because we believe that it is important to effective delivery that
investors be able to easily find the links to the particular
documents in which they are interested. Cf. Exchange Act Release No.
55146 (Jan. 22, 2007) [72 FR 4148, 4153-54 n. 79 (Jan. 29, 2007)]
(use of central site with prominent links in electronic delivery of
proxy materials). We note, however, that there is no requirement
that the links be more prominent than other information. In
addition, the requirement for prominent links to the relevant
documents could be satisfied by a central site that lists each fund
in alphabetical order with, in table format, links to each fund's
Summary Prospectus, statutory prospectus, SAI, and annual and semi-
annual shareholder report or similar means, such as a drop-down menu
allowing users to easily navigate the documents for each of the
funds.
---------------------------------------------------------------------------

We are not modifying the proposal in response to commenters who
suggested that the legend provide more guidance regarding the types of
information available,\243\ because we believe that investors will be
less likely to read a longer legend describing multiple documents and
that the legend, as adopted, is sufficient to alert investors to the
existence and location of additional information about the fund.
Moreover, as discussed below in Part III.B.4.a., a Summary Prospectus
that incorporates information by reference is required to include more
specific disclosure identifying the documents from which the
information is incorporated. We also are not modifying the proposal in
response to a commenter who suggested that the legend make clearer that
the Summary Prospectus is only a part of the full statutory
prospectus.\244\ We believe that the

[[Page 4565]]

combination of the legend and the requirement to identify the Summary
Prospectus as a ``Summary Prospectus'' will provide clear notice to
investors that more information is contained in the statutory
prospectus.
---------------------------------------------------------------------------

\243\ See, e.g., CMFI Letter, supra note 44; Foreside Letter,
supra note 74; MFS Letter, supra note 150.
\244\ See, e.g., Schnase Letter, supra note 35 (state that
investors may want to review the fund's ``full prospectus'' or
``complete prospectus'' to adequately distinguish it from the
Summary Prospectus).
---------------------------------------------------------------------------

c. Updating Requirements
We are not adopting the proposed requirement that performance
information in the Summary Prospectus be updated quarterly and related
provisions of the proposed rule.\245\ We are persuaded by commenters
who expressed concerns about potential investor confusion, focus on
short-term performance, and the costs and operational difficulties
associated with implementing quarterly updating.\246\ As adopted, the
rule will require a fund that makes updated performance information
available on a Web site or at a toll-free (or collect) telephone number
to include a statement explaining this and providing the Web site
address and/or telephone number.\247\
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\245\ Proposed rule 498(b)(2)(ii) (quarterly updating
requirement); proposed rule 498(e) (provisions related to quarterly
updating requirement). The proposal also would have required
quarterly updating of a fund's top 10 portfolio holdings. Proposed
rule 498(b)(2)(iii). As discussed above, we have determined not to
require inclusion of a fund's top 10 portfolio holdings in the
summary section of the statutory prospectus or in the Summary
Prospectus. See discussion supra Part III.A.3.a.
\246\ See, e.g., AIM Letter, supra note 47; American Century
Letter, supra note 48; CAI Letter, supra note 67; Capital Research
Letter, supra note 34; Clarke Letter, supra note 35; Dechert Letter,
supra note 50; EQ/AXA Letter, supra note 67; Evergreen Letter, supra
note 41; Fidelity Letter, supra note 86; Financial Services
Institute Letter, supra note 41; Letter of Financial Services
Roundtable (Feb. 28, 2008) (``Financial Services Roundtable
Letter''); Firehouse Letter, supra note 35; Letter of Fluent
Technologies (Mar. 14, 2008) (``Fluent Letter''); Foreside Letter,
supra note 74; Great-West Letter, supra note 42; ICI Letter, supra
note 34; IDC Letter, supra note 61; MFS Letter, supra note 150; NYC
Bar Letter, supra note 75; Oppenheimer Letter, supra note 44; Putnam
Letter, supra note 48; Letter of RiverSource Funds (Feb. 25, 2008)
(``RiverSource Letter''); Russell Letter, supra note 48; Schwab
Letter, supra note 221; SIFMA Letter, supra note 97; Letter of
Stradley Ronon Stevens & Young, LLP (Feb. 28, 2008) (``Stradley
Letter''); T. Rowe Letter, supra note 49; USAA Letter, supra note
153; Vanguard Letter, supra note 42.
\247\ Item 4(b)(2)(i) of Form N-1A. This requirement is
discussed more fully in Part III.A.3.e.
---------------------------------------------------------------------------

Some commenters noted that investors may be confused if different
information is contained in the summary section of the statutory
prospectus (which the proposal did not require to be updated on a
quarterly basis) and the Summary Prospectus.\248\ A number of
commenters also expressed concern that the proposed quarterly updating
requirement signals a troubling shift toward focusing on short-term
performance information, rather than encouraging investors to consider
long-term performance.\249\ Commenters also noted that updated
performance information is already widely available on the Internet and
from other sources.\250\ Many commenters suggested as an alternative
that the Commission require annual updating of the Summary Prospectus,
with prominent disclosure in the document describing how investors can
access updated performance information (i.e., through a Web site
address or toll-free telephone number).\251\ Investors participating in
our focus groups also indicated that they would be willing to obtain
updated fund information online.\252\
---------------------------------------------------------------------------

\248\ See, e.g., Capital Research Letter, supra note 34; Dechert
Letter, supra note 50; ICI Letter, supra note 34; NYC Bar Letter,
supra note 75; Oppenheimer Letter, supra note 44; Russell Letter,
supra note 48; SIFMA Letter, supra note 97; Stradley Letter, supra
note 246; T. Rowe Letter, supra note 49.
\249\ See, e.g., AIM Letter, supra note 47; American Century
Letter, supra note 48; Capital Research Letter, supra note 34;
Dechert Letter, supra note 50; Fluent Letter, supra note 246; ICI
Letter, supra note 34; Oppenheimer Letter, supra note 44; Russell
Letter, supra note 48.
\250\ See, e.g., ICI Letter, supra note 34, Vanguard Letter,
supra note 42.
\251\ See, e.g., AIM Letter, supra note 47; American Century
Letter, supra note 48; Capital Research Letter, supra note 34;
Clarke Letter, supra note 35; Fidelity Letter, supra note 86;
Financial Services Institute Letter, supra note 41; Firehouse
Letter, supra note 35; Financial Services Roundtable Letter, supra
note 246; IDC Letter, supra note 61; Janus Letter, supra note 63;
MFS Letter, supra note 150; Oppenheimer Letter, supra note 44;
Putnam Letter, supra note 48; Russell Letter, supra note 48; Schwab
Letter, supra note 221; T. Rowe Letter, supra note 49.
\252\ See Focus Group Report, supra note 32, at 11; Focus Group
Transcripts, supra note 32, at 25-26; id. at 49 (``I get my
information from the Web anyway. So, what the prospectus says is
less important in terms of recent performance. Because there's no
way that they can tell me what's been going on that recently.'');
id. at 78 (``You can go to the library and be on the Web and it
doesn't cost you anything, except 15 minutes.''); id. (``And if it
says, `This is not necessarily the latest, current, go to this Web
site and you'll get the full comparison,' that would be acceptable *
* *.'').
---------------------------------------------------------------------------

In addition, many commenters from the fund industry also stated
that the costs and operational difficulties associated with
implementing the quarterly updating requirement would discourage funds
from using the Summary Prospectus.\253\ The commenters noted that
updating of Summary Prospectuses would likely require an entirely new
process that would be more complex than the one used for existing
quarterly fund fact sheets. Moreover, these commenters noted that a
quarterly updating requirement would essentially require them to move
to an ``on demand'' printing model for distribution of Summary
Prospectuses, which would entail changes in business practices, new or
amended vendor contracts, and, for a few fund families, significant
initial outlays that could substantially delay implementation of the
Summary Prospectus.\254\ Financial intermediaries similarly expressed
concern about ``the ability of even large intermediaries to maintain
and track a hard copy inventory of prospectuses which change multiple
times per year.'' \255\ Some commenters also noted that updated
performance information is already widely available from other
sources.\256\
---------------------------------------------------------------------------

\253\ See, e.g., AIM Letter, supra note 47; American Century
Letter, supra note 48; Capital Research Letter, supra note 34;
Clarke Letter, supra note 35; Dechert Letter, supra note 50; EQ/AXA
Letter, supra note 67; Evergreen Letter, supra note 41; Financial
Services Roundtable Letter, supra note 246; Fluent Letter, supra
note 246; Great-West Letter, supra note 42; ICI Letter, supra note
34; IDC Letter, supra note 61; MFS Letter, supra note 150;
Oppenheimer Letter, supra note 44; RiverSource Letter, supra note
246; Russell Letter, supra note 48; Letter of Saturna Capital
Corporation (Jan. 14, 2008); Schwab Letter, supra note 221; T. Rowe
Letter, supra note 49. The Investment Company Institute, a national
association of United States investment companies, conducted a
survey of its member firms and noted that up to 70 percent of funds
would face substantial cost and operational burdens in complying
with a quarterly updating requirement and that these burdens would
likely lead funds to elect not to use the Summary Prospectus. ICI
Letter, supra note 34.
\254\ See, e.g., ICI Letter, supra note 34.
\255\ See, e.g., SIFMA Letter, supra note 97.
\256\ See, e.g., ICI Letter, supra note 34, Vanguard Letter,
supra note 42.
---------------------------------------------------------------------------

On the other hand, a small number of commenters supported the
proposed quarterly updating requirement.\257\ One such commenter argued
that quarterly updating would enhance the public's perception of the
Summary Prospectus and the information provided. The commenter noted
that funds presently provide such updated information in their sales
materials; that displaying annually updated performance information in
the statutory prospectus and quarterly updated information in the
Summary Prospectus would not necessarily confuse investors; and that
although funds post updated information online throughout the year,
investors without access to the Internet would be greatly disadvantaged
if the Commission did not require quarterly updating of the paper
Summary Prospectus.\258\
---------------------------------------------------------------------------

\257\ See, e.g., CMFI Letter, supra note 44; Data
Communiqu[eacute] Letter, supra note 35; Keil Letter, supra note 62;
NAPFA Letter, supra note 44.
\258\ See Data Communiqu[eacute] Letter, supra note 35.
---------------------------------------------------------------------------

We have determined not to require quarterly updating of performance
information in the Summary Prospectus because we are persuaded that
this requirement could confuse investors and would discourage funds
from using

[[Page 4566]]

the Summary Prospectus and thereby undermine our goal of encouraging
concise, user-friendly disclosure to investors. We have concluded that
the benefits to be derived from quarterly updating do not outweigh this
significant disincentive to use of the Summary Prospectus because
updated performance information is widely available in fund sales
materials, on fund Web sites, and from third-party sources. As noted
above, investors in our focus groups indicated that they would be
willing to obtain updated information online. As a result, we are
requiring a fund that makes updated performance information available
on a Web site or at a toll-free (or collect) telephone number to
include a statement explaining this and providing the Web site address
and/or telephone number.\259\ This approach will eliminate any
potential investor confusion that could arise as a result of a fund's
Summary Prospectus containing more updated information than the fund's
statutory prospectus.
---------------------------------------------------------------------------

\259\ Item 4(b)(2)(i) of Form N-1A. This requirement is
discussed more fully in Part III.A.3.e.
---------------------------------------------------------------------------

3. Provision of Statutory Prospectus, SAI, and Shareholder Reports
We are adopting, with certain modifications to address the concerns
of commenters, the requirement that, in addition to sending or giving a
Summary Prospectus, a person relying on rule 498 to meet its statutory
prospectus delivery obligations must provide the statutory prospectus
on the Internet, together with other information, in the manner
specified by the rule.\260\ We are also adopting, as proposed, the
requirement to send the statutory prospectus to any investor requesting
a copy. We believe that requiring the statutory prospectus to be
provided in two ways, by posting on an Internet Web site and by sending
the information directly to any investor requesting a copy, maximizes
both the accessibility and usability of the information, as indicated
by the preference of commenters and investors participating in our
focus groups for access to both online and paper resources.\261\
Sending the information directly to an investor is not, however, a
condition of reliance on the rule.
---------------------------------------------------------------------------

\260\ Rule 498(c)(4), (d)(4), and (e).
\261\ See AARP Letter, supra note 34 (supporting the proposal
and noting that ``timely access to hard copy, print disclosure must
remain an option that is easy to exercise for investors choosing to
do so''); Miller Letter, supra note 110 (``ensure a simple process
for obtaining mutual fund information in paper format in order to
maximize accessibility''); Focus Group Report, supra note 32, at 12
(noting that some participants preferred to read lengthy documents
on the computer screen, while others indicated that they prefer
paper documents); Focus Group Transcripts, supra note 32, at 28
(``not everybody has [a] computer, so there has to be
alternatives''); id. at 50 and 78 (quoting most investors as
preferring to receive fund information online but also quoting some
investors who prefer to obtain at least some fund information on
paper).
---------------------------------------------------------------------------

a. Documents Required To Be Provided on the Internet
Under the rule, the statutory prospectus and other information are
required to be provided through the Internet as follows. The fund's
current Summary Prospectus, statutory prospectus, SAI, and most recent
annual and semi-annual reports to shareholders are required to be
accessible, free of charge, at the Web site address specified on the
cover page or at the beginning of the Summary Prospectus.\262\ These
documents are required to be accessible on or before the time that the
Summary Prospectus is sent or given and current versions of the
documents are required to remain on the Web site through the date that
is at least 90 days after (i) in the case of reliance on the rule to
satisfy the obligation to have a statutory prospectus precede or
accompany the carrying or delivery of a mutual fund security, the date
that the mutual fund security is carried or delivered, or (ii) in the
case of reliance on the rule to deem a communication with respect to a
mutual fund security not to be a prospectus under Section 2(a)(10) of
the Securities Act, the date that the communication is sent or
given.\263\ This requirement is designed to ensure continuous access to
the information from the time the Summary Prospectus is sent or given
until at least 90 days after the date of delivery of a security or
communication in reliance on rule 498.
---------------------------------------------------------------------------

\262\ The cost to access the Internet itself (e.g., monthly
subscription to an Internet service provider) and related costs,
such as the cost of printer ink, are not considered costs for
purposes of determining whether information is accessible, free of
charge.
\263\ Rule 498(e)(1).
---------------------------------------------------------------------------

A number of commenters expressed concern regarding the meaning of
the term ``current'' and asked whether funds would be required to
maintain stale information online.\264\ In response to these
commenters' concerns, we note that the ``current'' standard does not
require a fund to maintain online an outdated version of a document
that was current at the time the Summary Prospectus was sent or given,
but that has subsequently been updated. Rather, the ``current''
standard requires a fund to maintain updated versions of the required
documents online.
---------------------------------------------------------------------------

\264\ See, e.g., AIM Letter, supra note 47; ICI Letter, supra
note 34.
---------------------------------------------------------------------------

Several commenters argued that a person relying on the rule should
not be required to provide the fund's SAI on the Web site.\265\ We have
not adopted this suggestion. As discussed above, the rule provides for
a layered approach to disclosure in which key information is sent or
given to the investor and more detailed information is provided online
and, upon request, is sent in paper or by e-mail. The approach of rule
498 is two-fold, both to encourage funds to provide a concise, user-
friendly Summary Prospectus to investors and to enhance investor access
to more detailed information. Requiring the SAI to be provided online
furthers the latter goal.\266\
---------------------------------------------------------------------------

\265\ See, e.g., Fidelity Letter, supra note 86; USAA Letter,
supra note 153.
\266\ See, e.g., CMFI Letter, supra note 44 (noting that the
proposal to require that the SAI be made available through a Web
site ``will make it much easier for investors to review this
document and become more knowledgeable about fund operations and
management'').
---------------------------------------------------------------------------

b. Formatting Requirements for Information Provided on the Internet
We are adopting, with modifications to reflect commenters'
concerns, the proposed formatting requirements for the information that
is required to be provided online. The proposed rule would have
required, as a condition to reliance on the rule to satisfy a person's
delivery obligations under section 5(b)(2) of the Securities Act and
the provision that a communication shall not be deemed a prospectus
under section 2(a)(10) of the Securities Act, that the information on
the Internet be presented in a format that is convenient for both
reading online and printing on paper.\267\ In lieu of this condition,
we are adopting a condition requiring that the information on the
Internet be presented in a format that is human-readable and capable of
being printed on paper in human-readable format.\268\ We are also
adopting a requirement that the information be in a format that is
convenient for both reading online and printing on paper, but this
requirement is not a condition to reliance on the rule to satisfy a
person's delivery obligations under section 5(b)(2) of the Securities
Act or the provision that a communication shall not be deemed a
prospectus under section 2(a)(10) of the Securities Act. A person that
complies

[[Page 4567]]

with the conditions to the rule will not violate section 5(b)(2) if the
``convenient for both reading online and printing on paper'' standard
is not satisfied, but this failure will constitute a violation of the
Commission's rules.\269\
---------------------------------------------------------------------------

\267\ Proposed rule 498(f)(2)(i). Cf. Rule 14a-16(c) under the
Exchange Act [17 CFR 240.14a-16(c)] (requiring materials to be
presented in a format convenient for both reading online and
printing in paper when delivering proxy materials electronically).
\268\ Rule 498(e)(2)(i).
\269\ Rule 498(f)(3) and (5). This is similar to the ``greater
prominence'' requirement discussed in Part III.B.1. above.
---------------------------------------------------------------------------

The condition that we are adopting, that information on the
Internet be presented in a format that is human-readable and capable of
being printed on paper in human-readable format, is a more objective
standard than the proposed ``convenient'' condition. Commenters
expressed concern about applying the proposed standard as a condition
to satisfying section 5 obligations.\270\ The adopted condition simply
makes clear that posted information must be presented in human-readable
text, rather than machine-readable software code, when accessed through
an Internet browser and that it must be printable in human-readable
text. This condition does not impose any further requirements relating
to user-friendliness of the presentation.
---------------------------------------------------------------------------

\270\ See, e.g., ABA Letter, supra note 37; ICI Letter, supra
note 34; NYC Bar Letter, supra note 75.
---------------------------------------------------------------------------

We are, however, retaining the standard that posted information be
``convenient for both reading online and printing on paper'' as a rule
requirement. This implements the suggestion of commenters who
criticized the ``convenient'' standard as a condition and suggested
that it could, instead, be made a rule requirement.\271\ This standard
was designed to ensure that the information provided over the Internet
is user-friendly, both online and when printed. It imposes on the
online information a standard of usability that is comparable to the
readability of a paper document. While we continue to believe that this
standard is important to the enhanced disclosure framework we are
adopting, we are persuaded by commenters that the consequence of
failure to meet a condition--a Section 5 violation--is not needed to
achieve our goal.
---------------------------------------------------------------------------

\271\ See, e.g., ABA Letter, supra note 37; ICI Letter, supra
note 34.
---------------------------------------------------------------------------

We are not, at this time, specifying that any particular format,
such as HTML or PDF, would constitute a convenient format for both
reading online and printing on paper.\272\ We are concerned that the
Commission's endorsement of any particular format could result in the
use of that format to the exclusion of other formats that are in
existence today or that may be developed in the future and that are
more user-friendly. Moreover, whether a particular format is convenient
for reading online and printing depends on a number of factors and must
be decided on a case-by-case basis. These factors include the manner in
which the online version renders charts, tables, and other graphics;
the extent to which the fund utilizes search and other capabilities of
the Internet to enhance investors' access to information and provides
access to any software necessary to view the online version; and the
time required to download the online materials.\273\
---------------------------------------------------------------------------

\272\ See, e.g., ABA Letter, supra note 37 (arguing that the
adopting release should state that a PDF format would constitute a
``convenient'' format for purposes of rule 498).
\273\ See Investment Company Act Release No. 27671 (Jan. 22,
2007) [72 FR 4148, 4154 (Jan. 29, 2007)]; Exchange Act Release No.
56135, supra note 29, 72 FR at 42224 n. 35 (guidance concerning
``convenient for both reading online and printing on paper''
standard in context of electronic delivery of proxies).
---------------------------------------------------------------------------

c. Technological Requirements for Online Information
We are adopting the proposed requirements for linking within the
statutory prospectus and SAI and for linking between the Summary
Prospectus, on the one hand, and the statutory prospectus and SAI, on
the other. These requirements are intended to result in online
information that is in a better and more useable format than the same
information when provided in paper. The requirements were generally
supported by commenters in concept, although, as discussed below, many
expressed concern regarding specific requirements under the
proposal.\274\ We are making several modifications to the requirements
to address technical considerations raised by commenters.\275\
---------------------------------------------------------------------------

\274\ See, e.g., CMFI Letter, supra note 44; Data
Communiqu[eacute] Letter, supra note 35; ICI Letter, supra note 34;
MFDF Letter, supra note 34.
\275\ We are not adopting the suggestion of one commenter that
the Commission delay, or not apply, linking requirements with
respect to funds that are offered through variable insurance
contracts. See CAI Letter, supra note 67. While we recognize that
there may be operational challenges associated with the offering of
multiple funds from several fund families through a variable
insurance contract, the linking requirements are an essential
condition to permitting a person to satisfy its prospectus delivery
obligations by sending or giving a Summary Prospectus.
---------------------------------------------------------------------------

Linking Within the Statutory Prospectus and SAI
We are adopting a requirement that persons accessing the statutory
prospectus or SAI online be able to move directly back and forth
between each section heading in a table of contents of the document and
the section of the document referenced in that section heading. In the
case of the statutory prospectus, the linked table of contents must be
either the table of contents required by rule 481(c) \276\ or a table
of contents that contains the same section headings as the required
table of contents.\277\ This requirement allows an investor or other
user to move directly between a table of contents of the prospectus or
SAI and the related sections of that document, by a single mouse click
and without the need to flip through multiple pages of a paper
document.
---------------------------------------------------------------------------

\276\ 17 CFR 230.481(c).
\277\ Rule 498(e)(2)(ii).
---------------------------------------------------------------------------

This requirement includes two modifications from the proposed
requirement. First, we are clarifying that the linked table of contents
may be outside the document, e.g., in a separate frame or panel of the
computer screen and need not be the table of contents that is contained
within the document itself, as long as the linked table of contents for
the statutory prospectus conforms to the table of contents that is
required by our rules to be contained within the document itself. This
modification is intended to provide flexibility to use linking
technologies other than hyperlinking within the document itself.
Permitted technologies would include, for example, the use of
``bookmarks'' that replicate the document's table of contents, but are
displayed in a separate panel from the document itself.\278\ We have
accomplished this clarification by modifying the language of the
proposed requirement \279\ to refer to ``a table of contents of '' the
relevant document rather than ``the table of contents in'' the relevant
document and by requiring that, in the case of the statutory
prospectus, the linked table of contents either be the table of
contents required by rule 481(c) or contain the same section headings
as the table of contents required by that rule. Second, we are revising
the rule language to clarify that the links must permit movement
directly back and forth between each section heading in a table of
contents and the particular section of the document referenced in that
section heading.\280\
---------------------------------------------------------------------------

\278\ See, e.g., ICI Letter, supra note 34 (arguing that
proposal should be revised to permit the use of bookmarks);
Oppenheimer Letter, supra note 44 (same).
\279\ Proposed rule 498(f)(2)(ii).
\280\ See Oppenheimer Letter, supra note 44 (noting that the
proposal could be read to require a viewer to be able to move from
each section heading in the table of contents to each and every
section of the document referenced in the table).
---------------------------------------------------------------------------

Linking Between Documents
We are also adopting a requirement for funds to comply with one of
two options: That persons accessing the

[[Page 4568]]

Summary Prospectus be able to move directly back and forth between
either (i) each section of the Summary Prospectus and any section of
the statutory prospectus and SAI that provides additional detail
concerning that section of the Summary Prospectus; or (ii) links
located at both the beginning and end of the Summary Prospectus, or
that remain continuously visible to persons accessing the Summary
Prospectus, and tables of contents of both the statutory prospectus and
the SAI that meet the linking requirements described in the preceding
section.\281\ This requirement allows an investor to move back and
forth between related sections of the Summary Prospectus, on the one
hand, and the statutory prospectus and SAI, on the other, either
directly through a single mouse click or indirectly by means of a table
of contents of the prospectus or SAI, in which case two mouse clicks
would be required.
---------------------------------------------------------------------------

\281\ Rule 498(e)(2)(iii). It is our intention that the ability
to move between multiple windows that remain open simultaneously
constitutes ``back and forth'' movement under this provision.
---------------------------------------------------------------------------

We are adopting, as proposed, the first option, which permits
movement between related sections of the Summary Prospectus, on the one
hand, and the statutory prospectus and SAI, on the other, directly
through a single mouse click.\282\ Although a number of commenters
suggested that this option is unlikely to be used as a result of the
number of links that would be required to be maintained,\283\ we
believe that the option should remain available because the ability to
single-click between related sections has the potential to result in an
extremely user-friendly presentation.
---------------------------------------------------------------------------

\282\ Rule 498(e)(2)(iii)(A); proposed rule 498(f)(2)(iii)(A).
\283\ See, e.g., AIM Letter, supra note 47; Capital Research
Letter, supra note 34; ICI Letter, supra note 34; Janus Letter,
supra note 63; MFS Letter, supra note 150; Oppenheimer Letter, supra
note 44; T. Rowe Letter, supra note 49.
---------------------------------------------------------------------------

We are, however, modifying the second proposed option, which
involves linking between the Summary Prospectus and tables of contents
of the statutory prospectus and SAI, in order to reduce the number of
links that would be required.\284\ As proposed, this option would have
required links between each section of the Summary Prospectus and
tables of contents in the statutory prospectus and SAI. This would
potentially have required two links in each section of the Summary
Prospectus (one for the statutory prospectus and one for the SAI). As
adopted, this option will require either links located at both the
beginning and end of the Summary Prospectus, or links that remain
continuously visible to persons accessing the Summary Prospectus,
perhaps in a separate panel or frame.\285\ The number of links will be
reduced, but their placement, either at the beginning and end of the
Summary Prospectus or continuously visible, will ensure that they are
prominent and readily accessible to investors. This modification
responds to commenters' concerns that multiple links within the Summary
Prospectus could result in a cluttered presentation, create mistaken
expectations that the Summary Prospectus links would lead directly to
related information rather than to tables of contents of the statutory
prospectus and SAI, and would be expensive to maintain.\286\
---------------------------------------------------------------------------

\284\ We are also making a technical modification to the rule to
clarify that a linked table of contents must meet the requirements
described in the preceding section, i.e., it must permit direct
movement between each section heading in the table of contents and
the section of the document referenced in that section heading and,
in the case of the statutory prospectus, it must be the table of
contents required by rule 481(c) or contain the same section
headings as that table of contents. See rule 498(e)(2)(iii)(B)
(requiring linked table of contents to meet requirements of
paragraph (e)(2)(ii) of rule 498).
\285\ Rule 498(e)(2)(iii)(B).
\286\ See, e.g., Financial Services Roundtable Letter, supra
note 246; ICI Letter, supra note 34; Janus Letter, supra note 63;
MFS Letter, supra note 150; Oppenheimer Letter, supra note 44; Self
Audit Letter, supra note 228.
---------------------------------------------------------------------------

Interactive Data
Some commenters urged the Commission to make greater use of
technology to permit investors to access the specific information they
need and to facilitate automated comparisons of data across multiple
funds.\287\ The Commission agrees with these commenters that technology
holds great promise for enabling mutual fund investors to make better
use of existing information to understand and compare funds. To that
end, we note that the Commission has already proposed to require a
significant portion of the information that is contained in the summary
section of the statutory prospectus and the Summary Prospectus to be
filed in interactive data format, which is intended to facilitate
automated analysis and comparison of this information.\288\
Accordingly, while we are taking a number of steps in the current
rulemaking to make greater use of technology, we are considering
additional steps, along the lines suggested by the commenters, in the
context of the pending interactive data rulemaking. In addition, we
recently undertook an initiative to fundamentally reexamine how we can
make greater use of technology to deliver information to investors more
effectively.\289\
---------------------------------------------------------------------------

\287\ See, e.g., Fund Democracy et al. Letter, supra note 34;
Letter of Dominic Jones (Feb. 27, 2008) (``Jones Letter'').
\288\ See Investment Company Act Release No. 28298, supra note
28, 73 FR at 35449.
\289\ See SEC Announces `21st Century Disclosure' Initiative to
Fundamentally Rethink the Way Companies Report and Investors Acquire
Information, Securities and Exchange Commission Press Release, June
24, 2008, available at http://www.sec.gov/news/press/2008/2008-119.htm.
---------------------------------------------------------------------------

d. Ability To Retain Documents
We are adopting the proposed requirement that persons accessing the
Web site must be able to permanently retain, through downloading or
otherwise, free of charge, an electronic version of the Summary
Prospectus, statutory prospectus, SAI, and shareholder reports in a
format that, like the online version, (i) is human-readable and capable
of being printed on paper in human-readable format; and (ii) permits
persons accessing the downloaded statutory prospectus or SAI to move
directly back and forth between each section heading in a table of
contents of that document and the section of the document referenced in
that section heading.\290\ The permanently retained document is not
required to be in a format that allows an investor to move back and
forth between the Summary Prospectus and the statutory prospectus and
SAI because of technical difficulties associated with maintaining links
between multiple downloaded documents.
---------------------------------------------------------------------------

\290\ Rule 498(e)(3). This requirement is identical to our
proposal, except that the standards of clauses (i) and (ii) have
been modified to reflect the parallel modifications that we made
with respect to requirements for the online version. See discussion
supra Part III.B.3.b. and c. Persons accessing the materials must
also be able to permanently retain, free of charge, an electronic
version of the materials in a format, or formats, that are
convenient for both reading online and printing on paper. This is a
rule requirement and not a condition to satisfy a person's statutory
prospectus delivery obligations under Section 5. Rule 498(f)(3)(ii).
See discussion supra Part III.B.3.b.
---------------------------------------------------------------------------

Commenters generally expressed support for this proposal.\291\ Two
commenters suggested that rule 498 expressly provide that once a user
saves a document, a fund is not responsible for maintaining the links
that it contains to other documents and that failure to maintain a link
will not provide a basis for liability.\292\ We have determined that
such a provision is unnecessary because we are not requiring downloaded
documents to retain any links to other documents. In addition, as
described

[[Page 4569]]

above in Part III.B.3.c., we have revised the requirements for online
linking between documents to permit the links to be external to the
documents, in which case they would not even appear in the online
versions of the documents.
---------------------------------------------------------------------------

\291\ See, e.g., Data Communiqu[eacute] Letter, supra note 35;
ICI Letter, supra note 34; Jones Letter, supra note 287; Schnase
Letter, supra note 35; T. Rowe Letter, supra note 49.
\292\ See ICI Letter, supra note 34; T. Rowe Letter, supra note
49.
---------------------------------------------------------------------------

e. Safe Harbor for Temporary Noncompliance
As discussed above, compliance with all of the conditions in rule
498 regarding Internet posting (other than the convenient for reading
and printing standard) is required in order to meet prospectus delivery
obligations under section 5(b)(2) of the Securities Act. Failure to
comply with any of these conditions will be a violation of section
5(b)(2) unless the fund's statutory prospectus is delivered by means
other than reliance on the rule. The Commission recognizes, however,
that there may be times when, due to events beyond a fund's control,
such as system outages or other technological issues, natural
disasters, acts of terrorism, or pandemic illnesses, a fund is
temporarily not in compliance with the Internet posting requirements of
the rule. For that reason, we are adopting the proposed safe harbor
provision stating that the conditions regarding Internet availability
of a fund's Summary Prospectus, statutory prospectus, SAI, and
shareholder reports will be deemed to be met, notwithstanding the fact
that those materials are not available for a time in the manner
required, provided that the fund has reasonable procedures in place to
ensure that those materials are available in the required manner. In
addition, a fund is required to take prompt action to ensure that those
materials become available in the manner required, as soon as
practicable following the earlier of the time at which the fund knows
or reasonably should have known that the documents are not available in
the manner required.\293\ The safe harbor, by its terms, is expressly
applicable to the format, linking, and permanent retention conditions
of the rule, in addition to the conditions requiring that the documents
be available online.\294\
---------------------------------------------------------------------------

\293\ Rule 498(e)(4). This safe harbor is not available to a
fund that repeatedly fails to comply with the rule's Internet
posting requirements or that is not in compliance with the
requirements over a prolonged period.
\294\ Rule 498(e)(4) (safe harbor applies to conditions set
forth in paragraphs (e)(1), (2), and (3) of rule 498).
---------------------------------------------------------------------------

f. Requirement To Send Documents
We are adopting the proposed requirement that a fund (or financial
intermediary through which shares of the fund may be purchased or sold)
send, at no cost to the requestor and by U.S. first class mail or other
reasonably prompt means, a paper copy of the fund's statutory
prospectus, SAI, and most recent annual and semi-annual shareholder
report to any person requesting such a copy within three business days
after receiving a request for a paper copy. We are also adopting, with
one modification, the proposed requirement that a fund (or financial
intermediary through which shares of the fund may be purchased or sold)
send, at no cost to the requestor and by e-mail, an electronic copy of
the fund's statutory prospectus, SAI, and most recent annual and semi-
annual shareholder report to any person requesting such a copy within
three business days after receiving a request for an electronic
copy.\295\ These requirements are intended to ensure that every
investor in a fund taking advantage of the new prospectus delivery
framework is permitted to choose whether to review a fund's information
on the Internet or whether to receive that information directly, either
in paper or through an e-mail. As a result of these requirements, each
investor will have prompt access to the required information in the
form that he or she prefers.
---------------------------------------------------------------------------

\295\ Rule 498(f)(1).
---------------------------------------------------------------------------

We are modifying the proposal, as suggested by one commenter,\296\
to clarify that the requirement to send an electronic copy of a
document by e-mail may be satisfied by sending a direct link to the
document on the Internet, provided that a current version of the
document is directly accessible through the link from the time that the
e-mail is sent through the date that is six months after the date that
the e-mail is sent and the e-mail explains both how long the link will
remain useable and that, if the recipient desires to retain a copy of
the document, he or she should access and save the document.\297\ We
believe that six months is a reasonable period of time to require the
documents to be available and will provide sufficient time for an
investor who has requested a copy to access and, if desired, download
the information. We also note that an investor may at any time request
to receive a paper copy of the documents.
---------------------------------------------------------------------------

\296\ See ICI Letter, supra note 34.
\297\ Rule 498(f)(1). We intend that ``current'' means the
updated version of a document, not an outdated version that was
current at the time the e-mail was sent. This is similar to the
meaning of ``current'' discussed above in Part III.B.3.a.
---------------------------------------------------------------------------

As in the proposal, the requirement that a fund send a paper or
electronic copy of the statutory prospectus, SAI, and most recent
annual and semi-annual shareholder reports to a person requesting such
a copy is not a condition to reliance on the rule to satisfy a fund's
delivery obligations under section 5(b)(2) of the Securities Act or the
provision that a communication shall not be deemed a prospectus under
section 2(a)(10) of the Securities Act. A person that complies with all
other aspects of rule 498 will not violate section 5(b)(2) of the
Securities Act if the fund (or financial intermediary) fails to send
the required paper or electronic copy of the statutory prospectus, SAI,
and most recent shareholder reports. This failure will, however,
constitute a violation of the Commission's rules.\298\
---------------------------------------------------------------------------

\298\ Rule 498(f)(5).
---------------------------------------------------------------------------

4. Incorporation by Reference
a. Permissible Incorporation by Reference
We are adopting, with modifications, the proposal to permit a fund
to incorporate by reference into the Summary Prospectus information
contained in its statutory prospectus, SAI, and shareholder
reports.\299\ The proposal would have permitted a fund to incorporate
by reference information from the fund's most recent report to
shareholders. As adopted, rule 498 permits a fund to incorporate by
reference any information from the fund's reports to shareholders that
the fund has incorporated by reference into its statutory prospectus.
This modification addresses commenters' concerns that the proposal was
overbroad \300\ by limiting incorporation from shareholder reports to
information that has been incorporated into the fund's statutory
prospectus and, as a result, is subject to liability under section 11
of the Securities Act.\301\ The modification also addresses other
commenters' concerns that funds be permitted to incorporate by
reference information from both the most recent annual shareholder
report and most recent semi-annual shareholder report \302\ and will
permit the Summary Prospectus to incorporate from shareholder reports
precisely the same information that the statutory prospectus may
incorporate today.

[[Page 4570]]

Incorporation by reference is subject to the conditions described
below.
---------------------------------------------------------------------------

\299\ Rule 498(b)(3).
\300\ See Fund Democracy et al. Letter, supra note 34 (arguing
there is no basis to extend incorporation by reference to annual
report); Letter of Prof. Joseph A. Franco (Feb. 28, 2008)
(incorporation by reference should be limited to the statutory
prospectus).
\301\ 15 U.S.C. 77k.
\302\ See ICI Letter, supra note 34.
---------------------------------------------------------------------------

A fund may not incorporate by reference into a Summary Prospectus
information from any source other than those described above.\303\ In
addition, a fund may not incorporate by reference into the Summary
Prospectus any of the information described above that is required to
be included in the Summary Prospectus.\304\ Information may be
incorporated by reference into the Summary Prospectus only by reference
to the specific document that contains the information, and not by
reference to another document that incorporates the information by
reference.\305\ Thus, if a fund's statutory prospectus incorporates the
fund's SAI by reference, the fund's Summary Prospectus could not
incorporate information in the SAI simply by referencing the statutory
prospectus but would be required to reference the SAI directly.\306\
---------------------------------------------------------------------------

\303\ Rule 498(b)(3)(i) and (ii).
\304\ Rule 498(b)(3)(ii)(B).
\305\ Rule 498(b)(3)(ii)(C).
\306\ Cf. Item 10(d) of Regulation S-K [17 CFR 229.10(d)]
(``Except where a registrant or issuer is expressly required to
incorporate a document or documents by reference * * * reference may
not be made to any document which incorporates another document by
reference if the pertinent portion of the document containing the
information or financial statements to be incorporated by reference
includes an incorporation by reference to another document.'').
General Instruction D.2. of Form N-1A makes Item 10(d) of Regulation
S-K applicable to incorporation by reference into a fund's statutory
prospectus.
---------------------------------------------------------------------------

Incorporation by reference of information from a fund's statutory
prospectus, SAI, and shareholder reports is permitted only if the fund
satisfies the conditions described above in Part III.B.3., which
prescribe the means by which the incorporated information is provided
to investors.\307\ In addition, if a fund incorporates information by
reference, the Summary Prospectus legend must specify the type of
document (e.g., statutory prospectus) from which the information is
incorporated and the date of the document. If a fund incorporates by
reference a part of a document, the Summary Prospectus legend must
clearly identify the part by page, paragraph, caption, or
otherwise.\308\ These document identification requirements have been
modified from the proposal, which would have required that the legend
clearly identify documents that are incorporated by reference,
including the date of the documents, in order to make the requirements
more precise.\309\ The legend is also required to explain that any
information that is incorporated from the SAI or shareholder reports
may be obtained, free of charge, in the same manner as the statutory
prospectus.\310\
---------------------------------------------------------------------------

\307\ Rule 498(b)(3)(ii)(A) and (e). We note that the safe
harbor described in Part III.B.3.e. stating that, under certain
circumstances, the conditions regarding Internet availability of a
fund's Summary Prospectus, statutory prospectus, SAI, and
shareholder reports will be deemed to be met, notwithstanding the
fact that those materials are not available for a time in the manner
required, also applies to permit incorporation by reference in those
circumstances. Rule 498(e)(4).
\308\ Rule 498(b)(1)(v)(B). This requirement is similar to the
requirements of rule 411(d) under the Securities Act [17 CFR
230.411(d)], which requires that information incorporated by
reference ``be clearly identified in the reference by page,
paragraph, caption or otherwise.''
\309\ See, e.g., ICI Letter, supra note 34; NYC Bar Letter,
supra note 75.
\310\ Rule 498(b)(1)(v)(B) and (b)(3)(ii)(A).
---------------------------------------------------------------------------

A fund that fails to comply with any of the above conditions may
not incorporate information by reference into its Summary Prospectus. A
fund that provides the incorporated information to investors by
complying with all of the conditions, including the conditions for
providing the incorporated information through the Internet, is not
also required to send or give the incorporated information together
with the Summary Prospectus.\311\
---------------------------------------------------------------------------

\311\ Rule 498(b)(3)(i). Cf. General Instruction D.1.(b) of Form
N-1A (permitting a fund to incorporate by reference any or all of
the SAI into the statutory prospectus without delivering the SAI
with the prospectus).
---------------------------------------------------------------------------

A significant number of commenters expressed support for the
Commission's proposal to permit incorporation by reference of
information from other fund documents into the Summary Prospectus.\312\
Commenters stated that, by permitting incorporation by reference, the
proposal significantly addresses liability issues that resulted in
funds' unwillingness to use the fund profile and will encourage wider
use of the Summary Prospectus.\313\
---------------------------------------------------------------------------

\312\ See, e.g., ABA Letter, supra note 37; CFA Institute
Letter, supra note 37; Letter of Citigroup Global Markets Inc. (Feb.
26, 2008) (``Citigroup Letter''); Dechert Letter, supra note 50; ICI
Letter, supra note 34; MFDF Letter, supra note 34; NYC Bar Letter,
supra note 75; Oppenheimer Letter, supra note 44; Schnase Letter,
supra note 35; SIFMA Letter, supra note 97; T. Rowe Letter, supra
note 49.
\313\ See, e.g., ABA Letter, supra note 37; Citigroup Letter,
supra note 312; ICI Letter, supra note 34; MFDF Letter, supra note
34; SIFMA Letter, supra note 97. See also AARP Letter, supra note 34
(``Various explanations have emerged as to why the fund profile did
not take hold, including the rapid development of the Internet as a
resource for mutual fund investors and liability concerns related to
the profile. The proposal under consideration today addresses both
issues, and as such, paves the way for more widespread use of the
summary documents.'').
---------------------------------------------------------------------------

A joint comment letter from three consumer and investor groups,
however, stated that the Commission did not adequately address serious
questions accompanying incorporation by reference in the proposing
release.\314\ These commenters argued, first, that the Commission did
not adequately explain any purpose for permitting incorporation by
reference other than the limitation of funds' liability. Second, the
commenters argued that the Commission's proposal would relieve issuers
of legal responsibility for misleading disclosure under sections
12(a)(2) and 17(a)(2) of the Securities Act and that the proposing
release had not discussed whether the benefits of having a Summary
Prospectus that satisfies prospectus delivery obligations is worth the
cost of relieving funds of this legal responsibility or whether such a
tradeoff is appropriate.
---------------------------------------------------------------------------

\314\ See Fund Democracy et al. Letter, supra note 34. Another
commenter opposed incorporation by reference into the Summary
Prospectus, but noted that if incorporation by reference is
permitted, the incorporated documents should be available on the
Internet, linked with other documents, downloadable in printable
form with retained links, and distributed upon request, similar to
our proposal. See Data Communiqu[eacute] Letter, supra note 35.
---------------------------------------------------------------------------

With respect to the commenters' first concern, our purpose in
permitting incorporation by reference into the Summary Prospectus is to
further our goal of creating an improved mutual fund disclosure
framework for the benefit of investors. We have concluded, and the
comments and recent investor research support our conclusion, that
investors will benefit greatly from receiving a shorter document, such
as the Summary Prospectus. We have also concluded, based on both the
comments and our experience with the fund profile that, to a
significant extent, investors will not realize these benefits unless we
permit incorporation by reference because many funds are unlikely to
use the Summary Prospectus if incorporation by reference is prohibited.
With respect to the commenters' second concern, we do not agree that
permitting incorporation by reference will relieve funds of legal
responsibility for misleading disclosure. Therefore, we believe that it
is appropriate to permit incorporation by reference in order to realize
for investors the considerable benefits that the Summary Prospectus
will afford. We discuss our analysis more fully below.
Incorporation by Reference Is Necessary To Improve Disclosure Framework
We have concluded that investors will benefit greatly from
receiving the Summary Prospectus containing key information that they
will be more likely to read and understand than the statutory
prospectus, with the ability to access more detailed information either

[[Page 4571]]

immediately in a user-friendly format online or, within a matter of
days, in paper. Nearly all of the commenters, including those who
opposed incorporation by reference, agreed with this conclusion.\315\
This conclusion is also supported by our recent telephone survey of
investors, which found that many mutual fund investors do not read
statutory prospectuses because they are long, complicated, and hard to
understand.\316\
---------------------------------------------------------------------------

\315\ See AARP Letter, supra note 34 (stating that it is AARP's
view that the Commission's initiative provides a real opportunity to
deliver practical disclosure that consumers can use to make informed
mutual fund purchase decisions); CMFI Letter, supra note 44 (stating
that the new disclosure regime would help investors focus on what is
most important in making investment decisions with respect to any
particular fund and that the Summary Prospectus is much more likely
to be reviewed by investors); Data Communiqu[eacute] Letter, supra
note 35 (acknowledging the improvements that will result from
improved access and ease of comparability of relevant information in
a concise format); Fund Democracy et al. Letter, supra note 34
(supporting Summary Prospectus proposal overall and agreeing that
``a short form alternative to a lengthy statutory prospectus can
both improve the quality and usefulness of fund disclosure and
reduce fund expenses''); ICI Survey, supra note 84 (stating that
respondents to a survey it conducted overwhelmingly agreed that the
Summary Prospectus is about the right length, makes it easier to
compare funds, contains enough information (as long as more detailed
information is available online or upon request), and is a document
that they would be more likely to use than the current long-form
prospectus); Letter of William D. McAllister (Nov. 27, 2007)
(stating that current disclosure statements are definitely
unreadable for the average citizen investor and that the
simplification proposed is needed and appreciated); Letter of Kyle
N. Orlowski (March 10, 2008) (stating that the proposal would make
an ``apples to apples'' comparison between funds much easier).
\316\ See Telephone Survey Report, supra note 32, at 56, 58
(finding that nearly two-thirds of investors rarely (28%), very
rarely (15%), or never (21%) read mutual fund statutory prospectuses
that they receive, and that of those two-thirds, over half said that
the reason they do not read them was because statutory prospectuses
are too complicated or hard to understand (37%) or because statutory
prospectuses are too long and wordy (19%)).
---------------------------------------------------------------------------

The views expressed by investors in our focus groups also support
our conclusion that investors will derive significant benefits from the
Summary Prospectus, coupled with ready access to more detailed
information in whatever format they choose, paper or electronic.\317\
By using multiple means to provide information and by using technology
to provide information in a layered format that permits users to move
from key information to more detailed information, the new rule is
intended to facilitate each investor's ability to effectively choose to
review the particular information in which he or she is interested.
Each investor in a fund taking advantage of the new prospectus delivery
regime can choose the particular means of receiving information that he
or she prefers because all of the information is required to be sent
promptly to any requesting investor in paper or electronically. Thus,
the Summary Prospectus disclosure framework will permit each and every
investor to choose both the information he or she wants to review and
the format in which he or she wants to review it.
---------------------------------------------------------------------------

\317\ See Focus Group Report, supra note 32, at 5-6 (noting that
participants made numerous negative comments about the length of the
long-form prospectus and that many participants liked the short-form
prospectus and thought that it could be used as a screening tool to
identify mutual funds in which they might be sufficiently interested
to do some additional review); Focus Group Transcripts, supra note
32, at 63 (``It's a two-minute read. If I want more information, I
can ask for it.''); id. at 38 (``I think both [the long-form
prospectus and short-form prospectus] have their place. I think it
would be foolish to give up the long-form for `this' and I think it
would be foolish not to have the short-form and insist on a long-
form. They both have their place.'').
---------------------------------------------------------------------------

We also believe that significantly more funds and intermediaries
will utilize the Summary Prospectus if we permit funds to incorporate
by reference information from the funds' statutory prospectus, SAI, and
shareholder reports. Numerous commenters stated that, by permitting
incorporation by reference, the proposal significantly addresses
liability issues that resulted in funds' unwillingness to use the fund
profile and will encourage wider use of the Summary Prospectus.\318\
Our own experience with the fund profile over the past 10 years
confirms that very few funds have adopted it.\319\ We believe that one
of the principal reasons for the profile's low adoption rate is concern
about potential liability for omitting facts from the profile that are
contained in the statutory prospectus or SAI.\320\ While we acknowledge
that an additional contributing factor was the requirement that funds
using the profile also provide a statutory prospectus with the
confirmation,\321\ we do not believe that elimination of this
requirement alone, without permitting incorporation by reference, would
result in widespread use of the Summary Prospectus by funds.
---------------------------------------------------------------------------

\318\ See letters cited supra note 313.
\319\ Profiles were filed for less than 200 funds during
calendar year 2007. During 2007, there were almost 9,000 mutual
funds in existence. See 2008 ICI Fact Book, supra note 16, at 15.
\320\ See letters cited supra note 313. See also Tom Leswing,
Profile Prospectus Rule Expected Soon, Ignites (Mar. 28, 2007)
(panelists at the ICI Mutual Funds and Investment Management
Conference expressed concern about liability for using a short-form
prospectus and noted that concern about liability was the main
reason that few funds use the profile); NASD Mutual Fund Task Force
Report, supra note 19, at 5 (``To date, few mutual funds have used
the fund profile in the retail market. One concern that has been
voiced about the fund profile is that it could expose funds to
unforeseen liability. For example, by summarizing disclosure that
appeared in the full prospectus, some fear that the fund profile
could be deemed to have omitted material information.'').
\321\ See Fund Democracy et al. Letter, supra note 34.
---------------------------------------------------------------------------

Thus, permitting incorporation by reference into the Summary
Prospectus is essential to accomplishing the Commission's important
goal of encouraging use of a disclosure document that provides key
information that investors are more likely to read and understand than
the statutory prospectus. Commenters and investor testing consistently
affirm the importance of the goal and of the Summary Prospectus in
achieving the goal. Commenters on the current proposal, and our
experience with the profile, confirm that we cannot accomplish the goal
without permitting incorporation by reference.
Investor Protection
We have also concluded that permitting incorporation by reference
will not relieve funds of any legal responsibility for misleading
disclosure under sections 12(a)(2) and 17(a)(2) of the Securities
Act.\322\ As a result, we have concluded that it is appropriate to
permit incorporation by reference in order to realize for investors the
considerable benefits that the Summary Prospectus will afford.
---------------------------------------------------------------------------

\322\ We also note that rule 498 does not reduce, or otherwise
affect, liability under Section 11 of the Securities Act. This is
discussed in Part III.B.5.
---------------------------------------------------------------------------

The Summary Prospectus, together with information incorporated
therein by reference, is subject to liability under sections 12(a)(2)
and 17(a)(2) of the Securities Act, and nothing in rule 498 removes, or
diminishes, that liability. Under Section 12(a)(2) of the Securities
Act, sellers have liability to purchasers for offers or sales by means
of a prospectus or oral communication that includes an untrue statement
of material fact or omits to state a material fact that makes the
statements made, based on the circumstances under which they were made,
not misleading. Section 17(a)(2) of the Securities Act is a general
antifraud provision which makes it unlawful for any person in the offer
and sale of a security to obtain money or property by means of any
untrue statement of a material fact or any omission to state a material
fact necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading.
We are permitting incorporation by reference of the statutory
prospectus,

[[Page 4572]]

SAI, and information from the shareholder reports that is incorporated
into the statutory prospectus in order to reflect, as a legal matter,
the practical reality that, under the conditions of rule 498, the
information incorporated into the Summary Prospectus will be provided
at the same time as the Summary Prospectus though by different
means.\323\ Funds and other sellers will be liable under sections
12(a)(2) and 17(a)(2) for information incorporated by reference into
the statutory prospectus. Investors who choose to review the statutory
prospectus, SAI, and shareholder reports in paper will have the same
ability to do so that they do today. In addition, rule 498 requires
that all information contained in the Summary Prospectus, statutory
prospectus, SAI, and shareholder reports be immediately available to
investors online in a user-friendly format.\324\ By using multiple
means to provide this information and using technology to provide
information in a layered format, the new rule is intended to facilitate
investors' ability to easily access and review the particular
information in which they are interested. Indeed, each investor in a
fund taking advantage of the new prospectus delivery regime can choose
the particular means of receiving information because all of the
information is required to be promptly sent to any requesting investor
in paper or electronically. The Summary Prospectus disclosure regime
enhances the accessibility of the information that is available to
investors and increases their options for how to receive the
information; it does not take away any information or any option for
the method by which information is received.
---------------------------------------------------------------------------

\323\ Thus, rule 498(b)(3)(iii) expressly provides that
incorporated information is, for purposes of rule 159 (and therefore
for purposes of Sections 12(a)(2) and 17(a)(2) of the Securities
Act), conveyed not later than the time the Summary Prospectus is
received. See discussion infra Part III.B.4.b.
\324\ The provisions that we are adopting requiring linking
within and between documents and that the documents be in a format
that is convenient for both reading online and printing on paper are
intended to contribute to a user-friendly online presentation. Rule
498(e)(2)(ii), (e)(2)(iii), and (f)(3).
---------------------------------------------------------------------------

Our determination to permit incorporation by reference of
information into the Summary Prospectus is different from the
determination we made with respect to the profile and is made in light
of technological advances that have occurred during the intervening
years. When the Commission adopted the profile more than 10 years ago,
it did not permit incorporation by reference of the statutory
prospectus into the profile and stated its belief that allowing this
incorporation would be inconsistent with the purpose of the profile and
not in the public interest.\325\ The Commission noted that the profile
was designed to provide summary information about a fund in a self-
contained format and that permitting incorporation by reference of the
statutory prospectus would be inconsistent with the profile being a
self-contained document.\326\
---------------------------------------------------------------------------

\325\ Investment Company Act Release No. 23065, supra note 194,
63 FR at 13971.
\326\ Id.
---------------------------------------------------------------------------

By contrast, the Summary Prospectus is not a self-contained
document, but rather one element in a layered disclosure regime that is
intended to provide investors with better, more useable access to the
information in the statutory prospectus, SAI, and shareholder reports
than they have today. The expansion in Internet access and the strides
in the speed and quality of Internet connections since the profile rule
was adopted in 1998 have made this possible.\327\ As a result of these
considerations and for the other reasons discussed above, we believe
that it is consistent with the purpose of the Summary Prospectus and in
the public interest to permit incorporation by reference of information
from the statutory prospectus, SAI, and shareholder reports into the
Summary Prospectus, subject to the conditions to incorporation by
reference contained in rule 498.
---------------------------------------------------------------------------

\327\ See, e.g., AARP Letter, supra note 34 (noting that ``the
growth of the Internet as an information source has dramatically
improved investors' access to mutual fund information''); CFA
Institute Letter, supra note 37 (``In a time of electronic
accessibility, this approach is in keeping with movement taken by
the SEC through other proposals to streamline the process and reduce
expenses to investment companies, while preserving investor
protections.''). In 1998, one study indicated that over one-third of
Americans over the age of 16 used the Internet. Associated Press
Online, One-Third of Americans Use Internet (Aug. 25, 1998). As
noted above, our recent telephone survey indicates that 90% of
investors have Internet access. Telephone Survey Report, supra note
32, at 115. See also 2008 ICI Fact Book, supra note 16, at 80-81
(noting that more than nine in 10 U.S. households owning mutual
funds have Internet access, up from two-thirds in 2000; 69 percent
of mutual fund shareholders age 65 or older have Internet access, up
from 30 percent in 2000; and about eight in 10 mutual fund
shareholders with Internet access go online for financial purposes,
such as to check their bank or investment accounts, obtain
investment information, or buy or sell investments). Moreover, very
few American homes had broadband connections in 1998. See Robert J.
Samuelson, Broadband's Faded Promise, The Washington Post, at A35
(Dec. 12, 2001) (noting that almost no American homes had broadband
in 1998). In contrast, as of early 2007, nearly half of all adult
Americans had a broadband connection at home. See supra note 26. See
also Jesse Noyes, Broadband signals death of dial-up, The Boston
Herald, at 028 (Aug. 7, 2005) (noting that dial-up speeds have
remained constant at 56K since 1998 and cannot go higher, while
broadband speeds have grown from 1 megabyte per second to 100
megabytes a second in the past six years).
---------------------------------------------------------------------------

b. Effect of Incorporation by Reference
We are adopting, as proposed, the provision of rule 498 stating
that, for purposes of rule 159 under the Securities Act,\328\
information is conveyed to a person not later than the time that a
Summary Prospectus is received by the person if the information is
incorporated by reference into the Summary Prospectus in accordance
with rule 498. This provision addresses the question of when
information that is incorporated into the Summary Prospectus under rule
498 is conveyed for purposes of sections 12(a)(2) and 17(a)(2) of the
Securities Act. Commenters who addressed this provision generally
supported the position that all information that is properly
incorporated by reference into the Summary Prospectus is conveyed to an
investor for purposes of these sections.\329\
---------------------------------------------------------------------------

\328\ 17 CFR 230.159.
\329\ See, e.g., ABA Letter, supra note 37; Dechert Letter,
supra note 50; ICI Letter, supra note 34; Schnase Letter, supra note
35; T. Rowe Letter, supra note 49. As discussed more fully in Part
III.B.4.a., several commenters disagreed with the Commission's
determination to permit incorporation by reference.
---------------------------------------------------------------------------

As we have previously stated, we interpret section 12(a)(2) and
section 17(a)(2) to mean that, for purposes of assessing whether at the
time of sale (including a contract of sale) a prospectus or oral
communication or statement includes or represents a material
misstatement or omits to state a material fact necessary in order to
make the prospectus, oral communication, or statement, in light of the
circumstances under which it was made, not misleading, information
conveyed to the investor only after the time of sale (including a
contract of sale) should not be taken into account.\330\ In furtherance
of this interpretation, we adopted rule 159 under sections 12(a)(2) and
17(a)(2). Consistent with our interpretation, rule 159 provides that,
for purposes of sections 12(a)(2) and 17(a)(2) only, and without
affecting any other rights under those sections, for purposes of
determining at the time of sale (including the time of the contract of
sale) whether a prospectus, oral statement, or a statement \331\
includes an untrue statement of material fact or omits to state a
material fact necessary

[[Page 4573]]

in order to make the statements, in light of the circumstances under
which they were made, not misleading,\332\ any information conveyed to
the purchaser only after the time of sale will not be taken into
account.
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\330\ See Securities Act Release No. 8591 (Jul. 19, 2005) [70 FR
44722, 44766 (Aug. 3, 2005)].
\331\ These include a prospectus or oral statement in the case
of Section 12(a)(2), or a statement to which Section 17(a)(2) is
applicable.
\332\ Or, in the case of Section 17(a)(2), any omission to state
a material fact necessary in order to make the statements made, in
light of the circumstances under which they were made, not
misleading.
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Rule 498 provides that, for purposes of rule 159 (and therefore for
purposes of sections 12(a)(2) and 17(a)(2)), information is conveyed to
a person not later than the time that a Summary Prospectus is received
by the person if the information is incorporated by reference into the
Summary Prospectus in accordance with the rule.\333\ For purposes of
sections 12(a)(2) and 17(a)(2), whether or not information has been
conveyed to an investor at or prior to the time of the contract of sale
is a facts and circumstances determination.\334\ We have designed the
requirements of rule 498 specifically so that the facts and
circumstances surrounding receipt by a person of the Summary Prospectus
will, in fact, result in the effective conveyance to that person of any
information that is incorporated by reference into the Summary
Prospectus in compliance with the conditions of the rule. For that
reason, rule 498 expressly states that, for purposes of rule 159,
information incorporated into a Summary Prospectus is conveyed not
later than the time that the Summary Prospectus is received.\335\ The
relevant facts and circumstances required by rule 498 include actual
receipt of the Summary Prospectus; incorporation by reference of the
information into the Summary Prospectus and clear disclosure of how the
incorporated information may be obtained free of charge; and continuous
Internet availability of the incorporated information in formats that
permit permanent retention, are human-readable and capable of being
printed on paper in human-readable format, and meet the document
linking requirements of the rule.\336\
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\333\ Rule 498(b)(3)(iii).
\334\ See Securities Act Release No. 8591, supra note 330, 70 FR
at 44766. Such information could include information in the issuer's
registration statement and prospectuses for the offering in
question, the issuer's Exchange Act reports incorporated by
reference therein, or information otherwise disseminated by means
reasonably designed to convey such information to investors. Such
information also could include information directly communicated to
investors.
\335\ Whether or not any or all of the incorporated information
was conveyed to an investor prior to the time that the Summary
Prospectus was received will be a facts and circumstances
determination.
\336\ Cf. Investment Company Act Release No. 13436 (Aug. 12,
1983) [48 FR 37928, 37930 (Aug. 22, 1983)] (discussing incorporation
by reference of the SAI into the statutory prospectus); see also
White v. Melton, 757 F. Supp. 267, 272 (S.D.N.Y. 1991) (addressing
effect of incorporation by reference of the SAI into the statutory
prospectus).
---------------------------------------------------------------------------

We are not adopting the suggestion of two commenters that rule 498
state that information is conveyed to a person not later than the time
that the Summary Prospectus is conveyed to the person, rather than
received by the person.\337\ We are unable to conclude that, in all
circumstances, information incorporated into a Summary Prospectus has
been conveyed to an investor before the investor has received the
Summary Prospectus.
---------------------------------------------------------------------------

\337\ See ICI Letter, supra note 34; Schnase Letter, supra note
35.
---------------------------------------------------------------------------

Rule 498 addresses one particular set of facts and circumstances
under rule 159 and does not address any other situations. For purposes
of sections 12(a)(2) and 17(a)(2), whether or not information has been
conveyed to an investor at or prior to the time of the contract of sale
remains a facts and circumstances determination. Rule 498 does not
address any facts and circumstances relating to operating companies or
any other issuers that are not mutual funds, nor does it address any
information other than information incorporated by reference into a
mutual fund Summary Prospectus in accordance with the new rule.
The Commission believes that a person that provides investors with
a mutual fund Summary Prospectus in good faith compliance with rule 498
will be able to rely on section 19(a) of the Securities Act \338\
against a claim that the Summary Prospectus did not include information
that is disclosed in the fund's statutory prospectus, whether or not
the fund incorporates the statutory prospectus by reference into the
Summary Prospectus.\339\ Section 19(a) protects a defendant from
liability for actions taken in good faith in conformity with any rule
of the Commission.\340\
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\338\ 15 U.S.C. 77s(a).
\339\ Cf. Investment Company Act Release No. 23065, supra note
194, 63 FR at 13972 (similar Commission statement in context of
profile).
\340\ See also Section 38(c) of the Investment Company Act [15
U.S.C. 80a-37(c)] (similar provision under Investment Company Act).
---------------------------------------------------------------------------

5. Filing Requirements for the Summary Prospectus
We are requiring each Summary Prospectus to be filed with the
Commission on EDGAR no later than the date that it is first used,
rather than, as proposed, the fifth business day after the date that it
is first used.\341\ We agree with commenters who suggested that the
Summary Prospectus should be filed with the Commission and be available
on the Commission's Web site earlier than the fifth business day after
it is first used.\342\ In addition, we do not believe that the proposed
five-day lag between first use of a Summary Prospectus and filing is
necessary, given that we are requiring that the Summary Prospectus be
updated only once a year, at the same time that a fund files its
updated statutory prospectus. A Summary Prospectus that is filed on
EDGAR will be publicly available; however, a fund may not rely on this
availability to satisfy the requirements to post the document online
discussed in Part III.B.3. above.
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\341\ Rule 497(k). As proposed, we are deleting the reference to
the profile from rule 497(a) [17 CFR 230.497(a)].
\342\ See Bo Li Letter, supra note 35; NewRiver Letter, supra
note 228. Two commenters supported the Commission's proposal to
require each Summary Prospectus to be filed with the Commission no
later than the fifth business day after first use. See ICI Letter,
supra note 34; Schnase Letter, supra note 35.
---------------------------------------------------------------------------

Section 10(b) of the Securities Act provides that a prospectus
permitted under that section shall, unless provided otherwise by
Commission rule, be filed as part of the registration statement but
shall not be deemed part of the registration statement for the purposes
of section 11 of the Securities Act.\343\ In accordance with Section
10(b), a Summary Prospectus will be filed as part of the registration
statement, but will not be deemed a part of the registration statement
for purposes of section 11 of the Securities Act.
---------------------------------------------------------------------------

\343\ 15 U.S.C. 77j(b) and 77k.
---------------------------------------------------------------------------

A joint comment letter from three consumer and investor groups
expressed concerns that the Summary Prospectus would not be subject to
section 11 liability, suggesting that this would result in a diminution
of funds' liability under that section.\344\ We emphasize that the
registration statement of a fund that uses the Summary Prospectus will
remain subject to liability under section 11, as is the case today. All
of the information that may be included in, or incorporated by
reference into, a fund's Summary Prospectus is also required to be
included in the fund's registration statement. Thus, as described more
fully in the following paragraph, all information included in, or
incorporated by reference into, the Summary Prospectus will be subject
to

[[Page 4574]]

liability under section 11 of the Securities Act.
---------------------------------------------------------------------------

\344\ See Fund Democracy et al. Letter, supra note 34. Under
Section 11 of the Securities Act [15 U.S.C. 77k], purchasers of an
issuer's securities have private rights of action for untrue
statements of material facts or omissions of material facts required
to be included in the registration statement or necessary to make
the statements in the registration statement not misleading.
---------------------------------------------------------------------------

As described in Part III.B.2.a., we are adopting a new requirement
to clarify that the information contained in a Summary Prospectus that
is used to satisfy prospectus delivery obligations must be the same as
the information contained in the summary section of the fund's
statutory prospectus. This information is, and will remain, subject to
section 11 liability because the fund's prospectus, in its entirety, is
subject to Section 11 liability. In addition, information may be
incorporated by reference into a Summary Prospectus only if it is
contained in the fund's statutory prospectus, SAI, or has been
incorporated into the statutory prospectus from the shareholder
reports. That is, information that may be incorporated by reference
into the Summary Prospectus is already a part of the fund's
registration statement and, as a result, is subject in its entirety to
liability under section 11. Thus, while section 10(b) of the Securities
Act prescribes that the Summary Prospectus will not itself be deemed a
part of the registration statement for purposes of section 11, all of
the information in the Summary Prospectus will be subject to liability
under section 11, either because the information is the same as
information contained in the statutory prospectus or because the
information is incorporated by reference from the registration
statement.
We also note that a Summary Prospectus is subject to the stop order
and other administrative provisions of section 8 of the Securities
Act.\345\ This is in addition to the Commission's power under section
10(b) of the Securities Act to prevent or suspend the use of the
Summary Prospectus, regardless of whether or not it has been
filed.\346\
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\345\ 15 U.S.C. 77h; H.R. Rep. 1542, 83d Cong., 2d Sess., 1954
U.S.C.C.A.N. 2973, 2982 (1954) (noting that the Commission's
authority to suspend the use of a defective summary prospectus under
Section 10(b) ``is intended to supplement the stop-order powers of
the Commission under [S]ection 8'').
\346\ 15 U.S.C. 77j(b).
---------------------------------------------------------------------------

C. Technical and Conforming Amendments

We are adopting the following conforming amendments to rule 482
under the Securities Act, the investment company advertising rule, to
reflect the Summary Prospectus and the elimination of the voluntary
profile.
The scope section of rule 482 is revised to clarify that
the rule does not apply to a Summary Prospectus or to a communication
that, pursuant to rule 498, is not deemed a ``prospectus'' under
section 2(a)(10) of the Securities Act.\347\
---------------------------------------------------------------------------

\347\ Rule 482(a).
---------------------------------------------------------------------------

For funds using the Summary Prospectus, the legend
required in a rule 482 advertisement regarding the availability of the
statutory prospectus will be required to include references to the
Summary Prospectus.\348\
---------------------------------------------------------------------------

\348\ Rule 482(b)(1).
---------------------------------------------------------------------------

The provision addressing the use of rule 482
advertisements together with a profile that includes an application to
purchase shares is deleted as unnecessary.\349\
---------------------------------------------------------------------------

\349\ Rule 482(c).
---------------------------------------------------------------------------

We are also adopting amendments to various cross-references to Form
N-1A in our rules and forms to reflect changes that we are adopting to
Form N-1A. These include cross-references in rule 485 under the
Securities Act, rules 304 and 401 of Regulation S-T, Form N-4 under the
Securities Act and the Investment Company Act, and Form N-14 under the
Securities Act. We are also revising rule 159A under the Securities Act
to refer to a Summary Prospectus rather than a profile.

D. Compliance Date

As discussed in the proposing release, the Commission is providing
for a transition period after the effective date of the amendments to
Form N-1A that gives funds sufficient time to update their prospectuses
or to prepare new registration statements under the revised Form N-1A
requirements. The effective date of the amendments is March 31, 2009.
All initial registration statements on Form N-1A, and all post-
effective amendments that are annual updates to effective registration
statements on this form, filed on or after January 1, 2010, must comply
with the amendments to Form N-1A. All post-effective amendments that
add a new series, filed on or after January 1, 2010, must comply with
the amendments with respect to the new series. The final compliance
date for filing amendments to effective registration statements to
comply with the new Form N-1A requirements is January 1, 2011. Based on
the comments, we believe that this will provide adequate time for funds
to compile and review the information that must be disclosed.\350\ A
fund may, at its option, prepare documents in accordance with the
requirements of Form N-1A, as amended, at any time after the effective
date of the amendments. A person may not rely on rule 498 to satisfy
its obligations to deliver a mutual fund's statutory prospectus unless
the fund is also in compliance with the amendments to Form N-1A.
---------------------------------------------------------------------------

\350\ A number of commenters expressed the view that a one-year
transition period was needed to make the required disclosure changes
and implement the business process changes associated with use of
the Summary Prospectus. See e.g., ICI Letter, supra note 34; Janus
Letter, supra note 63; Oppenheimer Letter, supra note 44.
---------------------------------------------------------------------------

Post-effective amendments to existing registration statements filed
to comply with the amendments to Form N-1A should be filed under
Securities Act rule 485(a).\351\ However, in appropriate circumstances,
we will consider requests by existing funds to file these post-
effective amendments pursuant to Securities Act rule
485(b)(1)(vii).\352\ Appropriate circumstances may include, for
example, situations where a fund complex has previously filed under
rule 485(a) post-effective amendments for a number of funds that
implement the new requirements, and the staff determines not to review
additional such filings by the fund complex in light of the staff's
experience with the previously filed amendments.
---------------------------------------------------------------------------

\351\ A post-effective amendment filed under rule 485(a) [17 CFR
230.485(a)] generally becomes effective either 60 days or 75 days
after filing, unless the effective date is accelerated by the
Commission. A post-effective amendment filed under rule 485(b) may
become effective immediately upon filing. A post-effective amendment
may be filed under rule 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) generally must be filed
pursuant to rule 485(a).
\352\ Under rule 485(b)(1)(vii), the Commission may approve the
filing of a post-effective amendment to a registration statement
under rule 485(b) for a purpose other than those specifically
enumerated in the rule. The Commission's staff has been delegated
the authority to approve registrants' requests under rule
485(b)(1)(vii). 17 CFR 200.30-5(b-3)(1).
---------------------------------------------------------------------------

IV. Paperwork Reduction Act

Certain provisions of the amendments contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\353\ 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'' (OMB Control No. 3235-0307) and (2)
``Summary Prospectus for Open-End Management Investment Companies''
(OMB Control No. 3235-0637). We published notice soliciting comments on
the collection of information requirements in the release proposing the
amendments \354\ and submitted the proposed collections of information
to the Office of Management and Budget

[[Page 4575]]

(``OMB'') for review and approval in accordance with 44 U.S.C. 3507(d)
and 5 CFR 1320.11. Four commenters specifically addressed the
collection of information requirements and we have revised the proposed
rule amendments in response to those comments.\355\ We have also
revised the estimated reporting and cost burdens of the rule amendments
to address these comments, as discussed below.
---------------------------------------------------------------------------

\353\ 44 U.S.C. 3501 et seq.
\354\ See Proposing Release, supra note 12, 72 FR at 67809.
\355\ See American Century Letter, supra note 48; Capital
Research Letter, supra note 34; Janus Letter, supra note 63; ICI
Letter, supra note 34.
---------------------------------------------------------------------------

Form N-1A under the Securities Act and the Investment Company Act
\356\ is used by mutual funds to register under the Investment Company
Act and to offer their securities under the Securities Act. Rule 498
under the Securities Act will be used by mutual funds that choose to
send or give a Summary Prospectus to investors.\357\ 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. Because we have modified our proposals as described
above, we are revising the burden estimate for Form N-1A and rule 498.
We have submitted a revised request for both to OMB.
---------------------------------------------------------------------------

\356\ 17 CFR 239.15A; 17 CFR 274.11A.
\357\ A request has been submitted to OMB to remove the
collection of information for the fund profile, which is being
eliminated, under current rule 498.
---------------------------------------------------------------------------

We are adopting an improved mutual fund disclosure framework that
we originally proposed in November 2007.\358\ This improved disclosure
framework is intended to provide investors with information that is
easier to use and more readily accessible, while retaining the
comprehensive quality of the information that is available today. The
foundation of the improved disclosure framework is the provision to all
investors of streamlined and user-friendly information that is key to
an investment decision.
---------------------------------------------------------------------------

\358\ See Proposing Release, supra note 12, 72 FR at 67990.
---------------------------------------------------------------------------

To implement the new disclosure framework, we are adopting
amendments to Form N-1A that will require every prospectus to include a
summary section at the front of the prospectus, consisting of key
information about the fund, including investment objectives and
strategies, risks, costs, and performance. We are also adopting a new
option for satisfying prospectus delivery obligations with respect to
mutual fund securities under the Securities Act. Under the option, key
information will be sent or given to investors in the form of a Summary
Prospectus, and the statutory prospectus will be provided on an
Internet Web site. Funds that select this option will also be required
to send the statutory prospectus to the investor upon request.
We are also adopting technical and conforming amendments to rules
159A and 482 under the Securities Act that reflect the Summary
Prospectus and the elimination of the voluntary profile, along with
amendments that update the cross references to Form N-1A contained in
rule 485 under the Securities Act, rules 304 and 401 of Regulation S-T,
Form N-4 under the Securities Act and the Investment Company Act, and
Form N-14 under the Securities Act. These technical and conforming
amendments do not constitute a collection of information because we are
not altering the legal requirements of these rules and forms.
Finally, amendments to rule 497 provide the requirements for filing
Summary Prospectuses with the Commission. These amendments do not
constitute a separate collection of information under rule 497 because
the burden required by these amendments is part of the collection of
information under rule 498.

A. Form N-1A

Form N-1A, including the amendments, contains collection of
information requirements. The likely respondents to this information
collection are open-end management investment companies registered or
registering with the Commission. Compliance with the disclosure
requirements of Form N-1A is mandatory. Responses to the disclosure
requirements are not confidential.
Much of the information that is required in the summary section of
the prospectus under the amendments has previously been required in a
fund's prospectus. However, the amendments require new information
regarding the exchange ticker symbol and the compensation received by
financial intermediaries. In addition, except for some information
common to multiple funds, the summary section must be presented
separately for each fund covered by a multiple fund prospectus. As a
result, the amendments to Form N-1A may require additional burden hours
to compile, review, and present the required information in a separate
summary section for each fund. We estimate that the amendments will
increase the hour burden per portfolio per filing of an initial
registration statement or the initial creation of a post-effective
amendment to a registration statement by approximately 17 hours.
In the proposing release, we estimated that the proposed amendments
would increase the hour burden per portfolio per filing of an initial
registration statement or the initial creation of a post-effective
amendment to a registration statement by approximately 16 hours.\359\
We received two comments on this estimate.\360\ One commenter
anticipated approximately 19,000 hours for its 75 funds, or over 253
hours per portfolio, to initially comply with the proposed
amendments.\361\ Another commenter, who conducted a survey of mutual
fund complexes, estimated that the amendments would increase the hour
burden per portfolio by 17 hours.\362\ Recognizing that the commenter
surveyed a broad cross-section of the mutual fund industry, and having
reviewed the specific questions it asked respondents, we have
incorporated this estimate in our analysis.\363\
---------------------------------------------------------------------------

\359\ Proposing Release, supra note 12, 72 FR at 67808.
\360\ See Janus Letter, supra note 63; ICI Letter, supra note
34.
\361\ Janus Letter, supra note 63. The commenter did not,
however, indicate what percentage of the 19,000 hours it would
dedicate to compliance with the proposed amendments to Form N-1A and
what percentage it would dedicate to compliance with proposed rule
498.
\362\ ICI Letter, supra note 34. The commenter estimated that
the 42 fund complexes it surveyed offer 3,122 funds, accounting for
nearly 60 percent of total mutual fund industry assets as of
December 2007.
\363\ Although the final rule eliminates disclosure of portfolio
holdings in the summary section, we believe that the 17 hours
estimated by the commenter based on its survey remains reasonable.
---------------------------------------------------------------------------

We estimate, as we did in the proposing release, that subsequent
post-effective amendments to a registration statement will require, on
average, approximately 4 burden hours per portfolio to update and
review the information.\364\ We received one comment, which estimated
that ongoing compliance with the proposed amendments to Form N-1A would
require an average of 9 hours per fund.\365\ However, we believe that
the commenter based this estimate on responses to an ambiguous survey
question.\366\ We believe that respondents may have interpreted this
question to ask how many hours it would take them to update and review
all information each year to comply with Form N-1A rather than only how
many additional hours it would take

[[Page 4576]]

them each year to update and review information to comply with the
amended items in Form N-1A.\367\ For this reason, we are not adjusting
our original burden hour estimate.
---------------------------------------------------------------------------

\364\ See Proposing Release, supra note 12, 72 FR at 67808.
\365\ See ICI Letter, supra note 34.
\366\ See id. (asking survey respondents, ``How much time (in
hours) would you estimate that it would take to update and review
the information each year for Form N-1A on an on-going basis for all
of your funds?'' (bold in original)).
\367\ The respondents estimated that initial compliance with the
Form N-1A amendments, including the creation of separate summaries
for funds in a multiple fund prospectus, would require an average of
17 hours per fund, whereas ongoing compliance would average 9 hours
per fund. See ICI Letter, supra note 34. Once such summary sections
have been created, we do not believe that an update of such
information on an annual basis should require more than half the
time it takes to initially compile, review, and present that
information in the summary section.
---------------------------------------------------------------------------

Because the PRA estimates represent the average burden over a
three-year period, we estimate the average hour burden for one
portfolio to comply with the amendments to be approximately 8
hours.\368\ We estimate that 8,752 portfolios file initial registration
statements and post-effective amendments on Form N-1A.\369\ Thus, the
incremental hour burden resulting from the amendments relating to the
summary section disclosure would be 70,016 hours.\370\ The total annual
hour burden for all funds for preparation and filing of registration
statements and post-effective amendments to Form N-1A would be
approximately 1,645,200 hours.\371\
---------------------------------------------------------------------------

\368\ (17 hours in the first year + 4 hours in the second year +
4 hours in the third year) / 3 years = approximately 8 hours.
\369\ See 2008 ICI Fact Book, supra note 16, at 15. In the
Proposing Release, based on information in the 2007 version of the
ICI Fact Book, we assumed that there were 8,726 portfolios. See
Proposing Release, supra note 12, 72 FR at 67990 n. 14.
\370\ 8 hours x 8,752 portfolios.
\371\ 70,016 hours + 1,575,184 hours. Currently, the approved
annual hour burden for preparing and filing registration statements
on Form N-1A is 1,575,184 hours.
---------------------------------------------------------------------------

B. Rule 498

Rule 498 contains collection of information requirements. The
likely respondents to this information collection are open-end
management investment companies registered or registering with the
Commission. Under rule 498, use of the Summary Prospectus is voluntary,
but the rule's requirements regarding provision of the statutory
prospectus are mandatory for funds that elect to send or give a Summary
Prospectus in reliance upon rule 498. The information provided under
rule 498 will not be kept confidential.
We estimate that for those funds that choose to use the Summary
Prospectus, initial compliance with the requirements for the Summary
Prospectus will require approximately 23 burden hours per portfolio. We
originally assumed in the proposing release that rule 498 would not
impose any substantial new information collection requirements with
respect to the initial preparation of a Summary Prospectus beyond those
discussed above in connection with the collection of information for
Form N-1A.\372\ One commenter suggested that initial compliance with
requirements for the Summary Prospectus and the other provisions of
rule 498 would require approximately 23 burden hours per
portfolio.\373\ The commenter pointed out that initial compliance with
the requirements for the Summary Prospectus would include, among other
things, a document design process to create the Summary Prospectus;
technology requirements for posting documents on funds' Web sites and
providing hyperlinks within and between certain documents; and
communication with distribution channels regarding the use of the
Summary Prospectus.\374\ Recognizing that we may have underestimated
the costs associated with initial compliance with rule 498 and that the
commenter based its estimate on a survey of a broad cross-section of
the mutual fund industry, we have added an estimate of 23 burden hours
necessary for initial compliance with rule 498.
---------------------------------------------------------------------------

\372\ See Proposing Release, supra note 12, 72 FR at 67809.
\373\ See ICI Letter, supra note 34.
\374\ See id.
---------------------------------------------------------------------------

In addition to initial compliance, we estimate, as we did in the
proposing release, that rule 498 will impose a \1/2\ hour burden per
portfolio annually associated with the compilation of the additional
information required on a cover page or at the beginning of the Summary
Prospectus.\375\ Rule 498 also imposes annual hour burdens associated
with the posting of a fund's Summary Prospectus, statutory prospectus,
SAI, and most recent report to shareholders on an Internet Web
site.\376\ We estimate that the average hour burden for one portfolio
to comply with the Internet Web site posting requirements will be
approximately one hour annually.\377\
---------------------------------------------------------------------------

\375\ See Proposing Release, supra note 12, 72 FR at 67809.
\376\ Rule 498, as proposed, also would have imposed an annual
hour burden associated with updating the Summary Prospectus every
quarter. In the Proposing Release, we estimated that quarterly
updating would impose approximately 3 burden hours per quarter per
portfolio, or 9 hours annually for each of the three subsequent
quarters. See Proposing Release, supra note 12, 72 FR at 67809.
However, we are not including quarterly updating requirements in the
final rule.
\377\ See Proposing Release, supra note 12, 72 FR at 67809. We
have reduced this figure from the 4 hour estimate we made in the
Proposing Release because we have not included quarterly updating
requirements in the final rule. We originally estimated that
Internet Web site posting would require approximately 1 hour per
quarter, but without quarterly updating, we estimate that it will
require 1 hour annually.
We received four comments on our original estimates of the
burden of ongoing compliance. See American Century Letter, supra
note 48; Capital Research Letter, supra note 34; Janus Letter, supra
note 63; ICI Letter, supra note 34. One commenter estimated that
filing Summary Prospectuses for its funds would require
approximately 1150 hours per quarter, or 11 hours per fund. See
American Century Letter, supra note 48. The second commenter
estimated that the proposed quarterly updating requirement would
require its 75 funds to spend approximately 5,300 burden hours. See
Janus Letter, supra note 63. The third commenter estimated that it
would spend an additional 4,400 hours per year to comply with the
proposed quarterly updating requirements. See Capital Research
Letter, supra note 34. Based on a survey of mutual funds, the fourth
commenter stated that ongoing compliance with rule 498, as proposed,
would require approximately 10 hours per fund per update. See ICI
Letter, supra note 34. All three commenters, however, based their
estimates on the proposal's requirement of quarterly updating of top
10 portfolio holdings and performance information. Because we are
not requiring quarterly updating of performance information and we
are not requiring any disclosure of top 10 portfolio holdings, we
are not making further adjustments to our estimates.
---------------------------------------------------------------------------

Because the PRA estimates represent the average burden over a
three-year period, we estimate the average hour burden for one
portfolio to comply with the amendments to be approximately 9
hours.\378\ The Summary Prospectus is voluntary, so the percentage of
funds that will choose to provide it is uncertain. Given the potential
benefits of the amendments to funds, we assume that 80% of all funds
will choose to send or give the Summary Prospectus.\379\ Assuming 80%
of all funds file a Summary Prospectus, the total annual hour burden
for filing and updating Summary Prospectuses and posting the required
disclosure documents to an Internet Web site pursuant to rule 498 would
be approximately 63,014 hours.\380\
---------------------------------------------------------------------------

\378\ (23 hours in the first year + 1.5 hours in the second year
+ 1.5 hours in the third year) / 3 years = approximately 9 hours.
\379\ See Proposing Release, supra note 12, 72 FR at 67809. In
the Proposing Release, we assumed that 75% of all funds would choose
to send or give a Summary Prospectus. However, one commenter
estimated that 80% of funds would elect to use the Summary
Prospectus if the Commission eliminated quarterly updating
requirements from the final rule. See ICI Letter, supra note 34.
Having eliminated quarterly updating from the final rule and
recognizing that the commenter had surveyed a major cross-section of
the mutual fund industry, we have adopted the commenter's estimate
that 80% of funds will likely choose to send or give a Summary
Prospectus.
\380\ 9 hours x 8,752 portfolios x .80.
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C. ETF-Related Amendments

We are amending Form N-1A to provide more useful information to
investors who purchase and sell ETF shares on national securities
exchanges.
The amendments permit an ETF to exclude certain information from
its

[[Page 4577]]

prospectus that is not pertinent to investors purchasing individual ETF
shares on secondary markets. Specifically, an ETF that has creation
units of 25,000 shares or more may exclude from its prospectus: (i)
Information on how to purchase and redeem shares of the ETF; \381\ and
(ii) fee table fees and expenses for purchases and redemptions of
creation units.\382\ Based on conversations with industry
representatives, Commission staff estimated in the ETF proposing
release that these amendments would decrease the information collection
burdens of an ETF that has creation units of 25,000 shares or more by
an average of 1.4 hours per fund per filing of an initial registration
statement or post-effective amendment to a registration statement. We
requested comment on this estimate in the ETF proposing release. No
commenters addressed this estimate and we continue to believe that it
is appropriate.
---------------------------------------------------------------------------

\381\ Item 6(c)(2) of Form N-1A.
\382\ Instruction 1(e)(ii) to Item 3 of Form N-1A.
---------------------------------------------------------------------------

The amendments also require disclosures designed to include
important information for purchasers of individual ETF shares, as
described below. An ETF will have to modify the narrative explanation
preceding the example in the fee table in its prospectus and periodic
reports to state that fund shares are sold on the secondary market
rather than redeemed at the end of the periods indicated, and that
investors in ETF shares may be required to pay brokerage commissions
that are not reflected in the fee table.\383\ We believe that the added
information collection burdens associated with this statement, if any,
would be negligible.
---------------------------------------------------------------------------

\383\ Instruction 1(e)(i) to Item 3 of Form N-1A; Instruction
1(e)(i) to Item 27(d) of Form N-1A. The amendments also require each
ETF to identify the principal U.S. market on which its shares are
traded and include a statement to the effect that ETF shares are
bought and sold on national securities exchanges. We believe that
the added information collection burdens associated with these very
brief and specific statements, if any, would be negligible.
---------------------------------------------------------------------------

The proposed amendments would have required each ETF to include a
separate line item for returns based on the market price of ETF shares
in the average annual total returns table in Item 2 of the Form,\384\
and to calculate total return at market prices in addition to returns
at NAV for their financial highlights tables.\385\ At the suggestion of
commenters, we have not adopted these requirements.
---------------------------------------------------------------------------

\384\ Proposed Instruction 5(a) to Item 2(c)(2) of Form N-1A.
\385\ Proposed Instruction 3(f) to Item 8(a) of Form N-1A.
---------------------------------------------------------------------------

The proposed amendments would have required ETFs to include
premium/discount information in both the prospectus and annual report
of each ETF. Based on commenters' suggestions, the final amendments
permit ETFs to omit the historical premium/discount disclosure in those
documents if the ETF includes premium/discount information on its
Internet Web site and discloses in the prospectus and annual report an
Internet address where investors can locate the information.\386\
Commission staff estimated in the ETF proposing release that each ETF
currently spends an average of 0.5 hours per filing of an initial
registration statement or a post-effective amendment to a registration
statement to include this disclosure.\387\ The staff further estimated
that each ETF also would spend 0.5 hours per annual report to include
this disclosure. We requested comment on these estimates in the ETF
proposing release. No commenters addressed these estimates and we
continue to believe that they are appropriate for ETFs that choose to
include the information in the prospectus and annual report.
---------------------------------------------------------------------------

\386\ Item 11(g)(2) of Form N-1A; Item 27(b)(7)(iv) of Form N-
1A. Although the time period required in the disclosure is different
in the prospectus and annual report, ETFs will be able to omit both
disclosures by providing on their Internet Web site only the
premium/discount information required by Item 11(g)(2) (the most
recently completed fiscal year and quarters since that year). Id.
\387\ This estimate is based on discussions with representatives
of ETFs, which include premium/discount information as required by
their exemptive orders.
---------------------------------------------------------------------------

Based on Commission filings, Commission staff estimates that on an
annual basis, ETFs file initial registration statements covering 98 ETF
portfolios, and post-effective amendments covering 1,441 ETF portfolios
on Form N-1A. Based on staff estimates, we estimate that the amendments
will not increase the hour burden per ETF per filing on an initial
registration or post-effective amendment to a registration statement.
We estimate that the amendments will add approximately 0.5 hours, which
staff estimates will be offset by a reduction of 1.4 hours (elimination
of description of creation units and associated fees). Although the
total annual hour burden for ETFs to prepare and file initial
registration statements and post-effective amendments may decrease
slightly, we are not decreasing our overall estimates to reflect the
incremental decrease in order to be conservative in our estimates of
the collection of information burdens.

V. Cost/Benefit Analysis

The Commission is sensitive to the costs and benefits imposed by
its rules. We are adopting amendments to Form N-1A that will require
every prospectus to include a summary section at the front of the
prospectus, consisting of key information about the fund, including
investment objectives and strategies, risks, costs, and performance.
The key information is required to be presented in plain English in a
standardized order. Our intent is that this information will be
presented succinctly, in three or four pages, at the front of the
prospectus.
We are also adopting a new option for satisfying prospectus
delivery obligations with respect to mutual fund securities under the
Securities Act. Under the option, key information will be sent or given
to investors in the form of a Summary Prospectus, and the statutory
prospectus will be provided on an Internet Web site. Upon an investor's
request, funds will also be required to send the statutory prospectus
to the investor. Our intent in providing this option is that funds take
full advantage of the Internet's search and retrieval capabilities in
order to enhance the provision of information to mutual fund investors.
The disclosure framework that we are adopting has the potential to
revolutionize the provision of information to the millions of investors
who rely on mutual funds for their most basic financial needs. It is
intended to help investors who are overwhelmed by the choices among
thousands of available funds described in lengthy and legalistic
documents to readily access key information that is important to an
informed investment decision. At the same time, by harnessing the power
of technology to deliver information in better, more useable formats,
the disclosure framework can help those investors, their
intermediaries, third-party analysts, the financial press, and others
to locate and compare facts and data from the wealth of more detailed
disclosures that are available.
In the proposing release, we requested public comment and specific
data regarding the costs and benefits of the amendments. As discussed
below, we received five comments directly addressing our quantitative
cost/benefit analysis.\388\ We also received numerous comments
pertinent to qualitative aspects of our analysis.\389\
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\388\ See Data Communiqu[eacute] Letter, supra note 35; ICI
Letter, supra note 34; MFS Letter, supra note 150; NewRiver Letter,
supra note 228; Memorandum from the Division of Investment
Management regarding August 25, 2008 meeting with representatives of
RR Donnelley & Sons Co. and Prospectus Central, LLC (Aug. 26, 2008)
(``RR Donnelley Memorandum'').
\389\ See, e.g., AARP Letter, supra note 34; CFA Institute
Letter, supra note 37; CMFI Letter, supra note 44; Fund Democracy et
al. Letter, supra note 34; ICI Letter, supra note 34; MFDF Letter,
supra note 34; NAPFA Letter, supra note 44.

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

[[Page 4578]]

A. Benefits

1. Form N-1A
Possible benefits of the amendments include enhanced disclosure of
information needed to make informed investment decisions about mutual
funds, more rapid dissemination of information over the Internet, and
reduced printing and mailing costs.
Millions of individual Americans invest in shares of mutual funds,
relying on mutual funds for their retirements, their children's
educations, and their other basic financial needs.\390\ These investors
face a difficult task in choosing among the more than 8,000 available
mutual funds.\391\ Fund prospectuses, which have been criticized by
investor advocates, representatives of the fund industry, and others as
long and complicated, often prove difficult for investors to use
efficiently in comparing their many choices. Current Commission rules
require mutual fund prospectuses to contain key information about
investment objectives, risks, and expenses that, while important to
investors, can be difficult for investors to extract. Prospectuses are
often long, both because they contain a wealth of detailed information
and because prospectuses for multiple funds are often combined in a
single document. Too frequently, the language of prospectuses is
complex and legalistic, and the presentation formats make little use of
graphic design techniques that would contribute to readability.
---------------------------------------------------------------------------

\390\ See supra note 16.
\391\ See 2008 ICI Fact Book, supra note 16, at 15.
---------------------------------------------------------------------------

The amendments require investment information that is key to an
investment decision to be provided in a streamlined document with other
more detailed information provided elsewhere. The provision of this
information to investors in concise, user-friendly formats will allow
investors to compare information across funds and may assist them in
making better informed portfolio allocation decisions in line with
their investment goals.
The amendments also will provide the additional benefits of
increased Internet availability of fund information, by providing
layered disclosure that allows investors to move back and forth between
the information within the Summary Prospectus and more detailed
information within other disclosure documents. These benefits include,
among other things, facilitating comparisons among funds and replacing
one-size-fits-all disclosure with disclosure that each investor can
tailor to his or her own needs. In recent years, access to the Internet
has greatly expanded, \392\ and significant strides have been made in
the speed and quality of Internet connections.\393\ Advances in
technology offer a promising means to address the length and complexity
of mutual fund prospectuses by streamlining the key information that is
provided to investors, ensuring that access to the full wealth of
information about a fund is immediately and easily accessible, and
providing the means to present all information about a fund online in a
format that facilitates comparisons of key information, such as
expenses, across different funds and different share classes of the
same fund. Technology has the potential to replace the current one-
size-fits-all mutual fund prospectus with an approach that allows
investors, their financial intermediaries, third-party analysts, and
others to tailor the wealth of available information to their
particular needs and circumstances.
---------------------------------------------------------------------------

\392\ See supra note 25.
\393\ See supra note 26.
---------------------------------------------------------------------------

Significant technological advances have increased both the market's
demand for more timely disclosure and the ability of funds to capture,
process, and disseminate information. The amendments will enable funds
to take greater advantage of the Internet to more rapidly communicate
and deliver information to investors. Accordingly, investor demand for
information could be satisfied through relatively inexpensive mass
dissemination of the information through electronic means. We
anticipate that demand for the information in the statutory prospectus
and SAI will increase as access to that information becomes easier
through the use of layered disclosure that allows investors, their
financial intermediaries, third-party analysts, and others to tailor
the wealth of available information to their particular needs and
circumstances.
Nearly all of the comments we received, including comments from
consumer groups and industry representatives, agreed with our
conclusion that investors will benefit greatly from receiving the
Summary Prospectus containing key information that investors will be
more likely to read and understand, with the ability to access more
detailed information either immediately in a user-friendly format
online or, within a matter of days, in paper.\394\ This conclusion is
also supported by our recent telephone survey of investors, which found
that many mutual fund investors do not read statutory prospectuses
because they are long, complicated, and hard to understand.\395\ In
addition, the views expressed by investors in our focus groups also
support our conclusion that investors will derive significant benefits
from the Summary Prospectus, coupled with ready access to more detailed
information in whatever format they choose.\396\
---------------------------------------------------------------------------

\394\ See, e.g., Fund Democracy et al. Letter, supra note 34;
ICI Letter, supra note 34; see also supra notes 315-317 and
accompanying text (discussing the qualitative benefits of the
amendments).
\395\ Telephone Survey Report, supra note 32, at 56, 58.
\396\ See Focus Group Report, supra note 32, at 5-6. See also
Focus Group Transcripts, supra note 32, at 63 (``It's a two-minute
read. If I want more information, I can ask for it.''); Id. at 38
(``I think both [the long-form prospectus and short-form prospectus]
have their place. I think it would be foolish to give up the long-
form for `this' and I think it would be foolish not to have the
short-form and insist on a long-form. They both have their
place.'').
---------------------------------------------------------------------------

In addition to benefiting investors, the Summary Prospectus also
will provide quantifiable cost savings to funds. We believe that funds
will benefit from being able to send or give a Summary Prospectus
rather than having to print and send statutory prospectuses to all
investors and prospective investors. We expect that funds will
experience cost savings with respect to both annual mailings to their
current shareholders and mailings made in connection with a purchase of
fund shares. We estimate that funds distribute approximately
300,000,000 statutory prospectuses annually to their current
shareholders \397\ and another 64,500,000 in connection with fund
purchases.\398\

[[Page 4579]]

We received two comments related to the estimated number of statutory
prospectuses that are distributed.\399\
---------------------------------------------------------------------------

\397\ See 2008 ICI Fact Book, supra note 16, at 110 (estimating
298,966,000 shareholder accounts at the end of 2007). In the
Proposing Release, we used an estimate of 290,000,000 statutory
prospectuses, which was based on the 2007 version of the ICI Fact
Book estimate of the number of shareholder accounts at the end of
2006. See Proposing Release, supra note 12, 72 FR at 67810.
Often, a fund will mail a statutory prospectus to each of its
shareholders annually in addition to mailing a statutory prospectus
in connection with a purchase of fund shares. We recognize that:
some shareholders may currently receive their fund documents
electronically; some households where more than one fund investor
resides will only receive one copy of the statutory prospectus per
household; some accounts may hold more than one fund; and not all
funds send out statutory prospectuses annually. Therefore, the
actual number of prospectuses mailed annually may be higher or lower
than our estimate.
\398\ Our estimate of the number of statutory prospectuses sent
out to fulfill a fund's prospectus delivery obligation upon purchase
is based on information provided by Broadridge Financial Solutions,
Inc. (``Broadridge'') prior to issuing the Proposing Release. See
Memorandum from the Division of Investment Management regarding
October 25, 2007 meeting with Broadridge representatives (Nov. 28,
2007) (``Broadridge Memorandum'').
\399\ One commenter stated that our estimates of the numbers of
statutory prospectuses distributed to existing shareholders and
investors purchasing shares in the Proposing Release are reasonable
because they fall within the range between the commenter's lowest
possible estimates (230,000,000 for annual fulfillment and
58,000,000 for purchase fulfillment) and the commenter's highest
possible estimates (373,000,000 for annual fulfillment and
95,000,000 for purchase fulfillment). See ICI Letter, supra note 34.
A second commenter estimated that the number of statutory
prospectuses distributed to existing shareholders is 231,981,600 and
the number distributed to investors purchasing fund shares is
72,494,250, based on its experience preparing distributions of
statutory prospectuses and shareholder reports for mutual funds. See
Data Communiqu[eacute] Letter, supra note 35.
---------------------------------------------------------------------------

We estimate that the cost savings for annual mailings will be
approximately $126,000,000 \400\ and that the cost savings for purchase
mailings will be approximately $80,496,000.\401\ These cost savings
would be reduced by the costs of sending the statutory prospectus to
those investors who request it. We estimate that approximately 2% of
the investors who own shares in the 80% of funds that likely will
choose to send or give the Summary Prospectus will request that a
statutory prospectus be mailed to them.\402\ We estimate that the cost
of mailing statutory prospectuses to existing investors would be
$12,288,000.\403\ We further estimate that approximately 3% investors
purchasing shares in the 80% of funds that likely will choose to send
or give the Summary Prospectus will request that a statutory prospectus
be sent to them.\404\ We estimate that the cost of sending statutory
prospectuses requested by investors making purchases of fund shares
would be approximately $3,962,880.\405\ Therefore, we estimate the
annual cost savings will be approximately $190,245,120,\406\ or
approximately $21,737 per portfolio.\407\
---------------------------------------------------------------------------

\400\ Our annual estimates are derived from information we
received from Broadridge. See Broadridge Memorandum, supra note 398.
Broadridge estimated that the average cost of a statutory prospectus
printed in a full production run is $0.27 and that the average cost
to mail a statutory prospectus by bulk mail is $0.255. Id. The cost
savings with respect to annual mailings were calculated by
multiplying the costs of printing and mailing a statutory prospectus
by the 300,000,000 statutory prospectuses mailed annually reduced to
reflect our estimate that 80% of funds will elect to send Summary
Prospectuses (($0.27 for the printing of a statutory prospectus +
$0.255 for the mailing of a statutory prospectus) x 300,000,000
statutory prospectuses x 80% of funds).
\401\ For purposes of our estimate, we used Broadridge's
printing cost estimate of $0.35 that is blended to reflect full
production printing runs and digital print on demand documents. Id.
This blended rate reflects the fact that a fund may run out of
statutory prospectuses produced in a full production run and may
have to print additional statutory prospectuses on demand.
Broadridge also estimated that the average cost to mail a statutory
prospectus by first class mail is $1.21. Id. The cost savings with
respect to purchase mailings were calculated by multiplying the
costs of printing and mailing a statutory prospectus by 64,500,000
statutory prospectuses mailed in connection with a fund purchase
reduced to reflect our estimate that 80% of funds will elect to send
Summary Prospectuses (($0.35 for the printing of a statutory
prospectus + $1.21 for the mailing of a statutory prospectus) x
64,500,000 statutory prospectuses x 80% of funds).
\402\ We originally did not project that existing investors
would request hard copies of the statutory prospectus. However, one
commenter stated that at most 2% of existing investors would likely
request hard copies, based on information from Broadridge indicating
investor requests for written materials under the Commission's
notice and access e-proxy model have averaged around 2%. See ICI
Letter, supra note 34. We believe that it is reasonable to estimate
a similar percentage of existing investors will request hard copies
of the statutory prospectus.
\403\ For purposes of this estimate, we used the digital print
on demand rate of $1.35 and the average first class mail rate of
$1.21. See Broadridge Memorandum, supra note 398 (estimating postage
costs of $1.21); ICI Letter, supra note 34 (estimating a digital
print on demand rate of $1.35). In the Proposing Release, we
estimated a blended print rate of $0.35 for prospectuses sent to
requesting investors. See Proposing Release, supra note 12, 72 FR at
67810 n. 162. However, one commenter stated that this estimate is
too low because it largely reflects economies of scale from high
volume offset printing that are not realistic given the likely low
number of investor requests for hard copies of the statutory
prospectus. See ICI Letter, supra note 34. Therefore, we have
adopted the commenter's digital print rate estimate of $1.35.
The costs were calculated by multiplying the costs of printing
and mailing a statutory prospectus by the 300,000,000 prospectuses
sent out annually to existing shareholders reduced to reflect our
estimate that 80% of funds will elect to adopt the new disclosure
option and 2% of investors will request a statutory prospectus be
mailed to them (($1.35 for the printing of a statutory prospectus +
$1.21 for the mailing of a statutory prospectus) x 300,000,000
statutory prospectuses x 80% of funds x 2% of investors).
\404\ In the Proposing Release, we originally estimated that 10%
of such investors would likely request hard copies of the statutory
prospectus. However, one commenter stated that 2% of both existing
investors and investors purchasing fund shares would request hard
copies of the statutory prospectus. See ICI Letter, supra note 34.
While we agree with the commenter that we may have initially
underestimated the percentage of existing investors and
overestimated the percentage of purchasing investors that would
request hard copies, we do not believe that the same percentage of
both groups would request hard copies. Investors making initial fund
purchases would potentially have a greater interest in receiving
hard copies of statutory prospectuses than investors that have owned
fund shares for some time. For this reason, we have lowered our
original estimate that 10% of investors purchasing fund shares would
request hard copies, but have lowered it less than the commenter
suggested.
\405\ For purposes of this estimate, we used the digital print
on demand rate of $1.35 and the average first class mail rate of
$1.21. See supra note 403. The costs were calculated by multiplying
the costs of printing and mailing a statutory prospectus by the
64,500,000 prospectuses sent out in response to fund purchases
reduced to reflect our estimate that 80% of funds will elect to send
Summary Prospectuses and 3% of investors will request a statutory
prospectus be mailed to them (($1.35 for the printing of a statutory
prospectus + $1.21 for the mailing of a statutory prospectus) x
64,500,000 statutory prospectuses x 80% of funds x 3% of investors).
\406\ ($126,000,000 cost savings for annual mailings +
$80,496,000 cost savings for purchase mailings) - ($12,288,000 cost
of sending requested statutory prospectuses to existing investors +
$3,962,880 cost of sending requested statutory prospectuses to
investors purchasing funds).
A study of industry participants estimated cost savings of
approximately $300,000,000 per year. See Forrester Consulting Study
commissioned on behalf of NewRiver, Inc., The Short-Form Prospectus,
at 6 (Oct. 2007), available at http://www1.newriver.com/upload_files/ForresterConsulting_NewRiver_ShortForm_Prospectus_10_25_2007.pdf.
\407\ $190,245,120 / 8,752 portfolios.
Although we believe that not all funds will choose to use the
Summary Prospectus, we believe it is appropriate to estimate the
amendments' effect across the entire mutual fund industry.
Therefore, we have estimated the average cost savings per portfolio
industry-wide rather than estimate the cost savings per portfolio
only for those portfolios using the Summary Prospectus.
---------------------------------------------------------------------------

We received four comments bearing on the cost savings of the new
delivery option.\408\ Of those, only two commenters provided actual
estimates of the total savings that would be generated by the new
delivery option.\409\ Insofar as these two commenters' total savings
estimates differed from our $190,245,120 figure, they did so largely
because the commenters assumed different per unit printing and postage
costs. However, assuming (1) that 80% of funds will choose to send or
give the Summary Prospectus, (2) that funds distribute approximately
300,000,000

[[Page 4580]]

statutory prospectuses to existing investors annually and distribute
approximately 64,500,000 statutory prospectuses to purchasing investors
annually, and (3) that 2% of existing investors in funds using the new
delivery option and 3% of investors purchasing shares in such funds
request hard copies of the statutory prospectus, the commenters'
differing per unit printing and postage cost estimates would not
produce total cost savings estimates that differ significantly from our
estimate.\410\
---------------------------------------------------------------------------

\408\ See Data Communiqu[eacute] Letter, supra note 35; ICI
letter, supra note 34; MFS Letter, supra note 150; RR Donnelley
Memorandum, supra note 388.
\409\ See Data Communiqu[eacute] Letter, supra note 35
(estimating $220,254,203 in annual cost savings) ICI Letter, supra
note 34 (estimating $236,000,000 in annual cost savings).
The two commenters also provided the printing and postage cost
estimates they used to arrive at their total cost savings estimates.
See Data Communiqu[eacute] Letter, supra note 35 (estimating per
unit printing and postage costs for annual fulfillment of $0.25 and
$0.392 respectively, per unit printing and postage costs for
purchase fulfillment of $0.25 and $0.654 respectively, and a blended
per unit printing and postage cost for delivery of hard copies of
the statutory prospectus to requesting investors of $0.50); ICI
Letter, supra note 34 (estimating per unit printing and postage
costs for annual fulfillment of $0.26 and $0.255 respectively, per
unit printing and postage costs for purchase fulfillment of $0.26
and $1.39 respectively, and per unit printing and postage costs for
delivery of hard copies of the statutory prospectus to requesting
investors of $1.35 and $1.39 respectively).
Of the two commenters that did not provide total cost savings
estimates, one commenter estimated that it currently pays an average
of $0.15 per piece for offset printing of a statutory prospectus.
MFS Letter, supra note 150. The other commenter estimated that a
fund with a print volume of 30,000 64-page statutory prospectuses
could save 6.3% by using a four-page Summary Prospectus and that a
fund with a print volume of 100,000 64-page statutory prospectuses
could save 22.2%, assuming that 10% of investors still request hard
copies of the statutory prospectus. RR Donnelley Memorandum, supra
note 388.
\410\ One commenter also did not account for the fact that less
than 100% of funds would adopt the new delivery option in its
calculation of quantified benefits. See ICI Letter, supra note 34.
---------------------------------------------------------------------------

We expect that funds will face the highest level of uncertainty
about the extent of investors' continued use of printed statutory
prospectuses in the first year after adoption of the amendments. We
expect that, as funds gain familiarity with the extent of continued use
of printed prospectuses and as shareholders increasingly turn to the
Internet for fund information, the number of requested paper copies
will decline, as will funds' tendency to print more copies than
ultimately are requested.
2. ETF-Related Disclosures
As noted above, in March of this year, the Commission proposed
several amendments to Form N-1A to accommodate the use of the form by
ETFs, and we are adopting those amendments today, with some changes to
respond to issues raised by commenters. As noted in the ETF proposing
release, many of the exemptive orders that permit an ETF to operate
exempt broker-dealers from the obligation to deliver prospectuses in
secondary market transactions. The exemptive orders permit a broker-
dealer instead to deliver a product description containing basic
information about the ETF and its shares. We understand that many, if
not most, broker-dealers transmit a prospectus to purchasers and do not
rely on the exemption in our orders. In light of this practice, we are
adopting amendments to Form N-1A designed to meet the needs of
investors (including retail investors) who purchase ETF shares in the
secondary market rather than financial institutions that purchase
creation units directly from the ETF.
We expect that one benefit of the amendments will be to provide ETF
investors purchasing shares in the secondary market with information on
the investment that they currently may not receive in a product
description, such as the fund's fee table and the name and length of
service of the portfolio manager. Another benefit of the amendments
will be to provide ETF investors purchasing shares in the secondary
market with prospectus disclosure that is specifically tailored to
ETFs. We expect this would provide ETF investors with information that
will allow them to understand more easily an investment in an ETF. This
information also may be helpful to investors in making portfolio
allocation decisions.
Our amendments are designed to simplify prospectus and periodic
report disclosure in two ways. First, the amendments allow ETFs to
exclude from the prospectus information on how to purchase and redeem
creation units, including information on fees and expenses associated
with creation unit sales or purchases. Current ETF prospectuses and
periodic reports include detailed information on how to purchase and
redeem creation units. The fee table and example include information on
transaction fees payable only by creation unit purchasers. Our
amendments permit ETFs with creation units of at least 25,000 shares to
exclude this information because it is not relevant (and may be
potentially confusing) to investors purchasing in secondary market
transactions.\411\ This provision should simplify ETF prospectuses
without compromising the disclosure provided to investors who purchase
ETF shares in secondary market transactions.
---------------------------------------------------------------------------

\411\ See supra Part III.A.4.
---------------------------------------------------------------------------

Second, our exemptive orders require ETFs to include in their
prospectuses and annual reports premium/discount information to alert
investors of the extent and frequency with which market prices deviated
from the fund's NAV. ETFs may omit this disclosure if they provide the
information on their Internet Web sites and provide an Internet address
where investors may locate the information. ETFs have generally
included this information in a supplemental section of the prospectus
and annual report.\412\ The amendments incorporate this disclosure in
the shareholder information section (Item 11 of Form N-1A) of the
prospectus and the management's discussion of fund performance in the
annual reports (Item 27(b)(7) of Form N-1A). We anticipate that this
may benefit ETF investors by simplifying the prospectuses and annual
reports of ETFs while codifying important disclosures mandated by our
ETF exemptive orders. ETFs also may benefit because they may choose to
disclose this information in the most cost efficient way--either in the
prospectus and the annual report, or on their Web sites.
---------------------------------------------------------------------------

\412\ See, e.g., iShares MSCI Series, Prospectus 62-65 (Jan. 1,
2007); iShares MSCI Series, 2006 Shareholders Annual Report 130-136
(Aug. 31, 2006).
---------------------------------------------------------------------------

B. Costs

1. Form N-1A
While the amendments will result in significant cost savings for
funds, we believe that there will be costs associated with them. These
include the costs for funds to compile and review the new information
required by our amendments and to post the required disclosure
documents on an Internet Web site. These costs may include both
internal costs (for attorneys and other non-legal staff, such as
computer programmers, to prepare and review the required disclosure)
and external costs (for printing and mailing of the Summary
Prospectus). We estimate that the external costs for printing and
mailing of the Summary Prospectus will be approximately $106,200,000
\413\ or approximately $12,134 per portfolio.\414\
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\413\ This estimate assumes printing and postage costs for
annual fulfillment of $0.08 and $0.255 per unit respectively and
printing and postage costs for purchase fulfillment of $0.08 and
$0.42 per unit respectively. We increased our estimate of postage
costs for purchase fulfillment from $0.41 in the Proposing Release
to $0.42 to reflect the current rate for first class mail. Our
estimate is derived as follows: [(($0.08 to offset print a Summary
Prospectus + $0.255 for bulk mail) x 300,000,000 prospectuses
estimated to be sent out annually) + (($0.08 to offset print a
Summary Prospectus + $0.42 for first class mail) x 64,500,000
prospectuses estimated to be sent out in response to a fund
purchase)] x 80% of funds.
In the Proposing Release, we estimated printing costs of $0.11
per unit for on-demand printing in black and white. See Proposing
Release, supra note 12, 72 FR at 67811 n. 168. However, we have
changed our estimate of per unit printing costs based on comments we
received and based on our decision not to include a quarterly
updating requirement in the final rule. Instead of using the
original $0.11 per unit figure for on-demand printing in black and
white, we now estimate printing costs of $0.08 per unit, a figure
representing offset printing of a blend of color and black and
white. See ICI Letter, supra note 34.
\414\ $106,200,000 / 8,752 portfolios.
Our new cost/benefit analysis retains our original postage costs
of $0.255 per unit for annual fulfillment and $0.41 per unit for
purchase fulfillment. Two commenters assumed the same postage costs
in their cost/benefit analyses. See ICI Letter, supra note 34;
NewRiver Letter, supra note 228. Another commenter's estimates of
postage costs were close to ours ($0.233 per unit for annual
fulfillment and $0.484 per unit for purchase fulfillment). See Data
Communiqu[eacute] Letter, supra note 35. By contrast, a fourth
commenter estimated postage costs of $0.241 per Summary Prospectus,
without differentiating between annual and purchase fulfillment
costs. See RR Donnelley Memorandum, supra note 388. However, we did
not adjust our postage cost estimates based on this comment because
the other three commenters largely agreed with our original postage
cost estimates.
Although we believe that not all funds will choose to use the
Summary Prospectus, we believe it is appropriate to estimate the
amendments' effect across the entire mutual fund industry.
Therefore, we have estimated the average external costs per
portfolio industry-wide rather than estimate the costs per portfolio
only for those portfolios using the Summary Prospectus.

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[[Page 4581]]

We received four comments regarding our estimates of per unit print
costs for the Summary Prospectus.\415\ Of the four commenters, only one
accounted for the likelihood that some funds would print Summary
Prospectuses in color.\416\ In discussing its estimates, the commenter
reported that 47% of funds it surveyed expected to use color for the
Summary Prospectus. Therefore the commenter's per unit print cost
estimates represent a blend of 47% color and 53% black and white.
Assuming that the Commission would require quarterly updating of the
Summary Prospectus, the commenter estimated a per unit printing cost of
$0.17 for annual fulfillment and $0.26 for purchase fulfillment.\417\
However, the commenter also estimated that without quarterly updating,
most funds would print Summary Prospectuses by offset methods, and
therefore estimated a per unit print cost of $0.08 per unit for both
annual and purchase fulfillment.\418\
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\415\ Data Communiqu[eacute] Letter, supra note 35 (estimating
$0.07 per unit for offset printing in black and white); ICI Letter,
supra note 34 (estimating $0.17 per unit for annual fulfillment and
$0.26 per unit for purchase fulfillment, with both figures
representing a blend of offset printing and print on demand as well
as a blend of color and black and white printing); MFS Letter, supra
note 150 (estimating $0.10 per unit for print on demand, but not
indicating whether that figure includes any color printing);
NewRiver Letter, supra note 228 (estimating $0.10 per unit for print
on demand, but not indicating whether that figure includes any color
printing).
\416\ See ICI Letter, supra note 34.
\417\ Given our assumptions that 80% of funds will adopt the
Summary Prospectus, that funds distribute 300 million prospectuses
for purposes of annual fulfillment, and that they distribute 64.5
million prospectuses for purchase fulfillment each year, the
commenter's per unit postage and mailing cost estimates would lead
to total postage and mailing costs of $136,572,000 annually [(($0.17
for a blend of offset/print on demand and color/black and white
printing + $0.255 for bulk mail) x 300,000,000 prospectuses
estimated to be sent out annually) + (($0.26 for print on demand of
a blend of color/black and white printing + $0.41 for first class
mail) x 64,500,000 prospectuses estimated to be sent out in response
to a fund purchase)] x 80% of funds.
\418\ See Memorandum from the Division of Investment Management
regarding September 29, 2008 telephone conversation with
representatives of the Investment Company Institute (October 6,
2008).
---------------------------------------------------------------------------

We accept the commenter's assertion that roughly half of funds will
print their Summary Prospectuses in color and half will print in black
and white because their estimate was based on a survey of a broad
cross-section of the mutual fund industry. Additionally, with the
elimination of quarterly updating requirements in the final rule, we
believe that most funds will likely print Summary Prospectuses for
annual and purchase fulfillment at the same time, giving most funds
sufficient print volume to make offset printing methods
economical.\419\ Therefore, we have revised our estimates of per unit
print costs for annual and purchase fulfillment to $0.08 per unit.
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\419\ We recognize that some funds may not have sufficient
numbers of investors and purchasers to warrant printing Summary
Prospectuses by offset method. ICI, however, estimated that absent a
quarterly updating requirement, nearly 90% of funds would print
Summary Prospectuses by offset methods. See id.
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For purposes of the PRA, we have estimated that the new disclosure
requirements, assuming 80% of funds choose to send or give a Summary
Prospectus, would add: (1) 70,016 hours to the annual burden of
preparing Form N-1A; and (2) 63,014 hours to the annual burden of
preparing and using a Summary Prospectus, including complying with
Internet posting requirements, under rule 498. We estimate that this
additional burden would equal total internal costs of $37,248,400
annually \420\ or approximately $4,256 per portfolio.\421\
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\420\ This cost increase is estimated by multiplying the total
annual hour burden (133,030 hours) by the rounded estimated hourly
wage rate of $280. The estimated wage figure is based on published
rates for compliance attorneys and senior programmers, modified to
account for an 1,800-hour work-year and multiplied by 5.35 to
account for bonuses, firm size, employee benefits, and overhead,
yielding effective hourly rates of $270 and $289, respectively. See
Securities Industry and Financial Markets Association's Report on
Management & Professional Earnings in the Securities Industry 2007.
The estimated wage rate is further based on the estimate that
attorneys and programmers would divide time equally, resulting in a
rounded weighted wage rate of $280 (($270 x .50) + ($289 x .50)).
In the Proposing Release, we estimated an hourly wage rate of
$252.50, which was based on the Report on Management & Professional
Earnings in the Securities Industry 2006. See Proposing Release,
supra note 12, 72 FR at 67811 n. 170.
\421\ $37,248,400 / 8,752 portfolios.
In the Proposing Release, we estimated the costs per fund
choosing to use the Summary Prospectus. See Proposing Release, supra
note 12, 72 FR 67811 n. 166. We have revised this calculation to
produce an average cost per portfolio industry-wide.
---------------------------------------------------------------------------

The amendments also may result in costs associated with investors
printing fund documents posted online. We estimate that approximately
\1/2\% of existing investors and 3% of investors purchasing shares will
print statutory prospectuses at an estimated cost of $2.03 per
statutory prospectus.\422\ Based on these assumptions, the amendments
are estimated to produce annual investor printing costs of
$5,578,440.\423\
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\422\ Our estimate of potential printing costs is based on data
provided by Lexecon Inc. in response to Investment Company Act
Release No. 27182 (Dec. 8, 2005) [70 FR 74598 (Dec. 15, 2005)]. See
Lexecon Inc. Letter (Feb. 13, 2006). To calculate printing costs, we
estimate that 100% of prospectuses are printed in black and white at
a cost of $0.035 per page for ink and that the average prospectus
length is approximately 45 pages at a cost of $0.010 per page for
the paper (($0.035 for ink + $0.010 for paper) x 45 pages).
In the Proposing Release, we estimated that approximately 5% of
investors making fund purchases would print statutory prospectuses.
See Proposing Release, supra note 12, 72 FR at 67811. However, we
received a comment estimating that 2% of both existing investors and
investors purchasing fund shares would print the statutory
prospectus. See ICI Letter, supra note 34. While we agree with the
commenter that we may have initially underestimated the percentage
of existing investors and overestimated the percentage of investors
purchasing fund shares that would print the statutory prospectus, we
do not believe that the same percentage of both groups of investors
would print statutory prospectuses. Rather, we believe that
investors making initial fund purchases would have greater interest
in printing statutory prospectuses than investors who already own
fund shares. Thus, we have lowered our original estimate of
investors purchasing shares who print the statutory prospectus to 3%
and estimate that approximately \1/2\% of existing investors will
print statutory prospectuses.
\423\ (300,000,000 x \1/2\% of printing investors) + (64,500,000
x 3% of printing investors) x 80% of funds x $2.03.
---------------------------------------------------------------------------

We received one comment letter arguing that the use of the Summary
Prospectus under rule 498 may impose costs on investors by relieving
funds of liability for misleading disclosure.\424\ For the reasons
discussed in Parts III.B.4.a. and III.B.5., we do not believe that the
amendments, as adopted, will entail such costs.
---------------------------------------------------------------------------

\424\ Fund Democracy et al. Letter, supra note 34.
---------------------------------------------------------------------------

2. ETF-Related Disclosures
The primary goal of our amendments relating to ETF disclosures is
to provide investors in ETF shares with more valuable information
regarding an investment in an ETF. We do not expect that the amendments
will result in significant additional costs to ETFs.\425\ As noted
above, the N-1A amendments generally codify disclosure requirements in
existing ETF exemptive orders.
---------------------------------------------------------------------------

\425\ Existing ETFs would face a one-time ``learning cost'' to
determine the difference between the current Form N-1A requirements
as modified by their exemptive orders and the amendments we are
adopting today. We do not anticipate that this cost will be
significant given the similarity of the amendments to the conditions
in existing exemptive orders.
---------------------------------------------------------------------------

In addition to codifying disclosure requirements of existing
exemptive orders, we are adopting a few new disclosure requirements in
Form N-1A. The disclosure amendments require each ETF to identify the
principal U.S. market on which its shares are traded \426\ and include
statements to the effect that (i) ETF shares are bought and sold on

[[Page 4582]]

national securities exchanges; \427\ (ii) because the price of shares
is based on market price, shares may trade at a premium or discount to
NAV; \428\ and (iii) ETF investors may be required to pay brokerage
commissions.\429\ Including these additional statements should present
minimal, if any, printing costs. Any additional costs incurred by an
ETF in complying with these additional disclosures should be offset by
the cost-savings of the amendments, which would allow most, if not all,
ETFs to exclude creation unit purchase and redemption information in
their prospectuses.\430\
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\426\ Item 1(a)(2) of Form N-1A.; rule 498(b)(1)(ii).
\427\ Item 6(c)(i)(A) of Form N-1A.
\428\ Item 6(c)(i)(B) of Form N-1A.
\429\ Instruction 1(e)(i) to Item 3 of Form N-1A. We also are
adopting a conforming amendment to the expense example in ETF annual
and semi-annual reports. Instruction 1(e)(i) to Item 27(d) of Form
N-1A.
\430\ See Instruction 1(e)(ii) to Item 3 of Form N-1A; Items
6(c)(ii); 11(g)(1) of Form N-1A. For purposes of our Paperwork
Reduction Act analysis, we have estimated that these amendments will
not change the current Form N-1A compliance costs. See supra Part
IV.C.
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VI. Consideration of Promotion of Efficiency, Competition, and Capital
Formation

Section 2(c) of the Investment Company Act \431\ and section 2(b)
of the Securities Act \432\ require the Commission, when engaging in
rulemaking that requires it to consider or determine whether an action
is necessary or appropriate in the public interest, to consider, in
addition to the protection of investors, whether the action will
promote efficiency, competition, and capital formation. We requested,
but did not receive, any comments directly addressing whether the
proposed amendments, if adopted, would promote efficiency, competition,
and capital formation, or comments on any anti-competitive effects of
the proposed amendments.\433\
---------------------------------------------------------------------------

\431\ 15 U.S.C. 80a-2(c).
\432\ 15 U.S.C. 77b(b).
\433\ See Proposing Release, supra note 12, 72 FR at 67812.
---------------------------------------------------------------------------

The amendments we are adopting are intended to provide enhanced
disclosure regarding mutual funds. These changes may improve
efficiency. The enhanced disclosure requirements may enable
shareholders to make more informed investment decisions by focusing
attention on key information, which could promote efficiency. We
anticipate that the amendments will increase efficiency at mutual funds
by providing an alternative to the printing and mailing of paper copies
of statutory prospectuses.
We anticipate that improving investors' ability to make informed
investment decisions may also lead to increased competitiveness of the
U.S. capital markets. The ability of investors to directly locate the
information they seek regarding a fund or funds through the use of the
Internet may result in more investment in the U.S. capital markets. In
addition, we believe that the amendments may enhance competition and
efficiency because they will reduce fund printing and mailing costs.
Funds could, for example, use these savings to conduct additional
investment research or to pass cost savings on to investors. We also
believe that the amendments will enhance competition among funds
because they will facilitate investor comparisons of mutual fund
information, including important cost and fee disclosures.
We anticipate that this increased market efficiency also may
promote capital formation by improving the flow of information between
funds and their investors. Specifically, we believe that the amendments
will: (1) Facilitate greater availability of information to investors
and the market with regard to all funds; (2) build upon the increased
importance of electronic dissemination of information, including the
use of the Internet; and (3) promote the capital formation process.

VII. Final Regulatory Flexibility Analysis

This Final Regulatory Flexibility Analysis has been prepared in
accordance with the Regulatory Flexibility Act.\434\ It relates to the
Commission's amendments to Form N-1A under the Securities Act and the
Investment Company Act and to new rule 498 under the Securities Act.
---------------------------------------------------------------------------

\434\ 5 U.S.C. 603 et seq.
---------------------------------------------------------------------------

A. Need for the Rule

We are adopting an improved mutual fund disclosure framework that
is intended to provide investors with information that is easier to use
and more readily accessible, while retaining the comprehensive quality
of the information that is available today. The foundation of the
improved disclosure framework is the provision to all investors of
streamlined and user-friendly information that is key to an investment
decision.
In addition, the amendments to Form N-1A that specifically apply to
ETFs are intended to accommodate the form for use by ETFs and are
designed to provide more useful information to investors who purchase
and sell ETF shares on national securities exchanges.

B. Significant Issues Raised by Public Comment

In the proposing release, we requested comment on the number of
small entity issuers that may be affected, the existence or nature of
the potential impact and how to quantify the impact of the amendments.
Commenters generally supported the proposal.\435\ One commenter,
however, stated that the proposal would simply add another costly
burden to small fund families.\436\ While we believe there will be some
costs associated with the amendments, we have tried to minimize those
costs. Nearly all of the information that is required in the summary
section of the prospectus under the amendments has previously been
required in a fund's prospectus. We eliminated the proposed quarterly
updating requirement in response to commenters' concerns. In addition,
we have made use of the Summary Prospectus voluntary, meaning that a
fund can choose whether or not to adopt it considering its costs and
benefits to the fund and its investors.
---------------------------------------------------------------------------

\435\ See supra note 206 and accompanying text.
\436\ See McCormick Letter, supra note 74. The commenter made
specific suggestions for improving mutual fund disclosure, such as
consolidating the statutory prospectus and SAI and eliminating the
semi-annual reports and quarterly filings on Form N-Q, that were
beyond the scope of this particular rulemaking.
---------------------------------------------------------------------------

In the initial regulatory flexibility analysis for the ETF
proposing release, we requested comment on any aspect of the IRFA,
including the number of small entities likely to rely on the proposed
amendments to Form N-1A, the likely impact of the proposed amendments
on small entities, and the nature of any impact on small entities. We
also requested empirical data supporting the extent of any impact on
small entities. We received no comments on that analysis.

C. Small Entities Subject to the Rule

For purposes of the Regulatory Flexibility Act, an investment
company is a small entity if it, together with other investment
companies in the same group of related investment companies, has net
assets of $50 million or less as of the end of its most recent fiscal
year.\437\ Approximately 127 mutual funds registered on Form N-1A meet
this definition.\438\ Of the approximately 593 registered open-end
investment companies that are ETFs, only one is a small entity.\439\
---------------------------------------------------------------------------

\437\ 17 CFR 270.0-10.
\438\ This estimate is based on analysis by the Division of
Investment Management staff of publicly available data.
\439\ For purposes of this analysis, any series or portfolio of
an ETF is considered a separate ETF. Therefore, there are 593
portfolios or series of registered open-end investment companies
operating as ETFs. For purposes of determining whether a fund is a
small entity under the Regulatory Flexibility Act, however, the
assets of funds (including each portfolio and series of a fund) in
the same group of related investment companies are aggregated.

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[[Page 4583]]

D. Reporting, Recordkeeping, and Other Compliance Requirements

The amendments we are adopting require all funds, including funds
that are small entities, to provide key information in a summary
section of their statutory prospectuses. In addition, the amendments
provide a new option that will permit a person to satisfy its mutual
fund prospectus delivery obligations under the Securities Act. Under
the option, key information will be sent or given to investors in the
form of a Summary Prospectus, and the statutory prospectus will be
provided on an Internet Web site. Upon an investor's request, funds are
required to send the statutory prospectus to the investor. No funds are
required to send or give a Summary Prospectus. However, for purposes of
the PRA, we estimate that 80% of all funds will choose to send or give
a Summary Prospectus pursuant to rule 498 both to enhance investor
access to information about a fund and to take advantage of the cost
savings that a fund may realize. If a fund elects the new delivery
regime for prospectuses, it is required to prepare, file, and send or
give a Summary Prospectus to investors. The required disclosure in the
Summary Prospectus is information that generally is readily available
to funds. A fund is required to post the statutory prospectus along
with other required documents to an Internet Web site and provide
either a paper or an e-mail copy of its statutory prospectus to
requesting shareholders.
For purposes of the Paperwork Reduction Act, we have estimated that
the new disclosure requirements would increase the hour burden of
filings on Form N-1A by 70,016 hours annually and for rule 498 by
63,014 hours annually. We estimate that this additional burden would
increase total internal costs per portfolio, including those that are
small entities, by approximately $4,256 per portfolio annually.\440\ We
also estimate that the external costs for printing and mailing of the
Summary Prospectus will be approximately $12,075 per portfolio.\441\
However, we estimate that the benefit of decreased printing and other
costs will decrease total external costs per portfolio, including those
that are small entities, by approximately $21,737 per portfolio
annually.\442\
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\440\ These figures are based on an estimated hourly wage rate
of $280. See supra note 420. We note that this estimate includes a
one-time burden of 17 hours to create the summary section of the
statutory prospectus and a one-time burden of 23 hours to create the
Summary Prospectus.
\441\ See supra note 414 and accompanying text.
\442\ See supra note 407 and accompanying text.
---------------------------------------------------------------------------

The amendments to Form N-1A that specifically apply to ETFs will
impose reporting requirements on open-end funds that operate as ETFs.
The amendments require an ETF to disclose in its prospectus and annual
reports the number of trading days on which the market price of an
ETF's shares was greater than its NAV and the number of days it was
less than its NAV (premium/discount information) unless the ETF
discloses this information on its Web site and provides an Internet
address where an investor can locate the information.\443\ The
amendments also require the ETF to disclose in its prospectus (in
addition to its exchange ticker trading symbol), the principal U.S.
market(s) on which its shares are traded.\444\
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\443\ Item 11(g)(2) of Form N-1A (requiring premium/discount
information in the prospectus to span the most recently completed
calendar year and quarters since that year); Item 27(b)(7)(iv) of
Form N-1A (requiring premium/discount information disclosed in
annual reports to span five fiscal years). The ETF is required to
present premiums or discounts as a percentage of NAV and to explain
that shareholders may pay more than NAV when purchasing shares and
receive less than NAV when selling, because shares are bought and
sold at market prices. Instructions 2, 3 to Item 11(g)(2) of Form N-
1A; Instructions 2, 3 to Item 27(b)(7)(iv).
\444\ Item 1(a)(2) of Form N-1A; rule 498(b)(1)(ii).
---------------------------------------------------------------------------

The amendments to Form N-1A also eliminate some disclosure
requirements for ETFs with creation units of 25,000 or more shares and
replace them with fewer disclosures. Under the amendments, those ETFs
do not have to: (i) Disclose information on how to buy and redeem
shares of ETF; \445\ (ii) include in its fee table in its prospectus or
annual and semi-annual reports fees and expenses for purchases or sales
of creation units; \446\ or (iii) disclose procedures for the purchase
and redemption of fund shares.\447\
---------------------------------------------------------------------------

\445\ Item 6(c)(ii) of Form N-1A. Instead ETF prospectuses could
simply state that individual fund shares can only be bought and sold
on the secondary market through a broker-dealer. Item 6(c)(i)(A) of
Form N-1A.
\446\ Instruction 1(e)(ii) to Item 3 of Form N-1A; Instruction
1(e)(ii) to Item 27(d) of Form N-1A. An ETF will instead modify the
narrative explanation preceding the example in the fee table to
state that investors may be required to pay brokerage commissions
that are not reflected in the fee table. Instruction 1(e)(i) to Item
3 of Form N-1A; Instruction 1(e)(i) to Item 27(d) of Form N-1A.
\447\ Item 11(g)(1) of Form N-1A.
---------------------------------------------------------------------------

The amendments to Form N-1A are designed to accommodate the form
for use by ETFs and to meet the needs of investors (including retail
investors) who purchase ETF shares in secondary market transactions
rather than institutional investors purchasing creation units directly
from the ETF. We anticipate that the amendments will have a negligible
impact (if any) on the disclosure burdens on ETFs while providing
necessary information to ETF investors. We do not believe that the
amendments to Form N-1A will disproportionately impact small funds.

E. Agency Action To Minimize the 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 amendments, the Commission considered the following
alternatives: (1) The establishment of differing compliance or
reporting requirements or timetables that take into account the
resources available to small entities; (2) the clarification,
consolidation, or simplification of compliance and reporting
requirements under the amendments for small entities; (3) the use of
performance rather than design standards; and (4) an exemption from
coverage of the 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. We believe that the amendments to Form N-1A
will provide investors with enhanced disclosure regarding funds. This
enhanced disclosure will allow investors to better assess their
investment decisions. The ETF amendments to Form N-1A are designed to
accommodate the form for use by ETFs and to meet the needs of investors
(including retail investors) who purchase ETF shares in secondary
market transactions rather than financial institutions purchasing
creation units directly from the ETF. Different disclosure requirements
for funds that are small entities may create the risk that investors in
these funds would be less able to evaluate funds and less able to
compare different funds, thereby lessening the ability of investors to
make informed choices among funds. We believe it is important for the
disclosure that is required by the amendments to Form N-1A to be
provided to investors in all funds, not just funds that are not
considered small entities.
Rule 498 provides a new option that permits a person to satisfy its
mutual fund prospectus delivery obligations under the Securities Act.
Under the

[[Page 4584]]

option, key information is to be sent or given to investors in the form
of a Summary Prospectus, and the statutory prospectus is to be provided
on an Internet Web site. Upon an investor's request, funds are required
to send the statutory prospectus to the investor. Because the rule is
optional, an exemption from the rule for small entities would deprive
small entities of the potential benefits of the rule.
We have endeavored through the amendments to minimize the
regulatory burden on all funds, including small entities, while meeting
our regulatory objectives. Small entities should benefit from the
Commission's reasoned approach to the amendments to the same degree as
other funds. We also have endeavored to clarify, consolidate, and
simplify disclosure for all funds, including those that are small
entities. 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.

VIII. Statutory Authority

The Commission is adopting amendments to Form N-1A and Form N-4
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, 24(a), 24(g), 30, and 38 of the Investment Company Act [15
U.S.C. 80a-8, 80a-24(a), 80a-24(g), 80a-29, and 80a-37]. The Commission
is adopting amendments to Form N-14 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)]. The Commission is adopting amendments to
rules 159A, 482, 485, 497, and 498 under the Securities Act and to
rules 304 and 401 of Regulation S-T pursuant to authority set forth in
sections 5, 6, 7, 10, 19, and 28 of the Securities Act [15 U.S.C. 77e,
77f, 77g, 77j, 77s, and 77z-3] and sections 8, 24(a), 24(g), 30, and 38
of the Investment Company Act [15 U.S.C. 80a-8, 80a-24(a), 80a-24(g),
80a-29, and 80a-37].

List of Subjects

17 CFR Parts 230 and 274

Investment companies, Reporting and recordkeeping requirements,
Securities.

17 CFR Parts 232 and 239

Reporting and recordkeeping requirements, Securities.

Text of Final Rule and Form Amendments

0
For the reasons set out in the preamble, the Commission amends Title
17, Chapter II, of the Code of Federal Regulations as follows.

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

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1. The authority citation for part 230 continues to read in part as
follows:

Authority: 15 U.S.C. 77b, 77c, 77d, 77f, 77g, 77h, 77j, 77r,
77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78t, 78w,
78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-30, and 80a-37,
unless otherwise noted.
* * * * *

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2. Section 230.159A is amended by removing the word ``profile'' in
paragraph (a)(2) and adding in its place ``summary prospectus''.

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3. Section 230.482 is amended by:
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a. Revising paragraph (a) before the note; and
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b. Revising paragraphs (b)(1) and (c).
The revisions read as follows:

Sec. 230.482 Advertising by an investment company as satisfying
requirements of section 10.

(a) Scope of rule. This section applies to an advertisement or
other sales material (advertisement) with respect to securities of an
investment company registered under the Investment Company Act of 1940
(15 U.S.C. 80a-1 et seq.) (1940 Act), or a business development
company, that is selling or proposing to sell its securities pursuant
to a registration statement that has been filed under the Act. This
section does not apply to an advertisement that is excepted from the
definition of prospectus by section 2(a)(10) of the Act (15 U.S.C.
77b(a)(10)) or Sec. 230.498(d) or to a summary prospectus under Sec.
230.498. An advertisement that complies with this section, which may
include information the substance of which is not included in the
prospectus specified in section 10(a) of the Act (15 U.S.C 77j(a)),
will be deemed to be a prospectus under section 10(b) of the Act (15
U.S.C. 77j(b)) for the purposes of section 5(b)(1) of the Act (15
U.S.C. 77e(b)(1)).
* * * * *
(b) * * *
(1) Availability of additional information. An advertisement must
include a statement that advises an investor to consider the investment
objectives, risks, and charges and expenses of the investment company
carefully before investing; explains that the prospectus and, if
available, the summary prospectus contain this and other information
about the investment company; identifies a source from which an
investor may obtain a prospectus and, if available, a summary
prospectus; and states that the prospectus and, if available, the
summary prospectus should be read carefully before investing.
* * * * *
(c) Use of applications. An advertisement that complies with this
section may not contain or be accompanied by any application by which a
prospective investor may invest in the investment company, except that
a prospectus meeting the requirements of section 10(a) of the Act (15
U.S.C. 77j(a)) by which a unit investment trust offers variable annuity
or variable life insurance contracts may contain a contract application
although the prospectus includes, or is accompanied by, information
about an investment company in which the unit investment trust invests
that, pursuant to this section, is deemed a prospectus under section
10(b) of the Act (15 U.S.C. 77j(b)).
* * * * *

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4. Section 230.485 is amended by removing the reference ``Items 5 or
6(a)(2) of Form N-1A'' in paragraph (b)(1)(iv) and adding in its place
``Item 5(b) or 10(a)(2) of Form N-1A''.

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5. Section 230.497 is amended by revising paragraphs (a) and (k) to
read as follows:

Sec. 230.497 Filing of investment company prospectuses--number of
copies.

(a) Five copies of every form of prospectus sent or given to any
person prior to the effective date of the registration statement that
varies from the form or forms of prospectus included in the
registration statement filed pursuant to Sec. 230.402(a) shall be
filed as part of the registration statement not later than the date
that form of prospectus is first sent or given to any person, except
that an investment company advertisement under Sec. 230.482 shall be
filed under this paragraph (a) (but not as part of the registration
statement) unless filed under paragraph (i) of this section.
* * * * *
(k) Summary Prospectus filing requirements. This paragraph (k), and
not the other provisions of Sec. 230.497, shall govern the filing of
summary prospectuses under Sec. 230.498. Each definitive form of a
summary prospectus

[[Page 4585]]

under Sec. 230.498 shall be filed with the Commission no later than
the date that it is first used.

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6. Revise Sec. 230.498 to read as follows:

Sec. 230.498 Summary Prospectuses for open-end management investment
companies.

(a) Definitions. For purposes of this section:
(1) Class means a class of shares issued by a Fund that has more
than one class that represent interests in the same portfolio of
securities under Sec. 270.18f-3 of this chapter or under an order
exempting the Fund from sections 18(f), 18(g), and 18(i) of the
Investment Company Act (15 U.S.C. 80a-18(f), 80a-18(g), and 80a-18(i)).
(2) Exchange-Traded Fund means a Fund or a Class, the shares of
which are traded on a national securities exchange, and that has formed
and operates pursuant to an exemptive order granted by the Commission
or in reliance on an exemptive rule adopted by the Commission.
(3) Fund means an open-end management investment company, or any
Series of such a company, that has, or is included in, an effective
registration statement on Form N-1A (Sec. Sec. 239.15A and 274.11A of
this chapter) and that has a current prospectus that satisfies the
requirements of section 10(a) of the Act (15 U.S.C. 77j(a)).
(4) Series means shares offered by a Fund that represent undivided
interests in a portfolio of investments and that are preferred over all
other series of shares for assets specifically allocated to that series
in accordance with Sec. 270.18f-2(a) of this chapter.
(5) Statement of Additional Information means the statement of
additional information required by Part B of Form N-1A.
(6) Statutory Prospectus means a prospectus that satisfies the
requirements of section 10(a) of the Act.
(7) Summary Prospectus means the summary prospectus described in
paragraph (b) of this section.
(b) General requirements for Summary Prospectus. This paragraph
describes the requirements for a Fund's Summary Prospectus. A Summary
Prospectus that complies with this paragraph (b) will be deemed to be a
prospectus that is authorized under section 10(b) of the Act (15 U.S.C.
77j(b)) and section 24(g) of the Investment Company Act (15 U.S.C. 80a-
24(g)) for the purposes of section 5(b)(1) of the Act (15 U.S.C.
77e(b)(1)).
(1) Cover page or beginning of Summary Prospectus. Include on the
cover page of the Summary Prospectus or at the beginning of the Summary
Prospectus:
(i) The Fund's name and the Class or Classes, if any, to which the
Summary Prospectus relates.
(ii) The exchange ticker symbol of the Fund's shares or, if the
Summary Prospectus relates to one or more Classes of the Fund's shares,
adjacent to each such Class, the exchange ticker symbol of such Class
of the Fund's shares. If the Fund is an Exchange-Traded Fund, also
identify the principal U.S. market or markets on which the Fund shares
are traded.
(iii) A statement identifying the document as a ``Summary
Prospectus.''
(iv) The approximate date of the Summary Prospectus's first use.
(v) The following legend:
Before you invest, you may want to review the Fund's prospectus,
which contains more information about the Fund and its risks. You can
find the Fund's prospectus and other information about the Fund online
at [--------]. You can also get this information at no cost by calling
[--------] or by sending an e-mail request to [--------].
(A) The legend must provide an Internet address, other than the
address of the Commission's electronic filing system; toll free (or
collect) telephone number; and e-mail address that investors can use to
obtain the Statutory Prospectus and other information. The Internet Web
site address must be specific enough to lead investors directly to the
Statutory Prospectus and other materials that are required to be
accessible under paragraph (e)(1) of this section, rather than to the
home page or other section of the Web site on which the materials are
posted. The Web site could be a central site with prominent links to
each document. The legend may indicate, if applicable, that the
Statutory Prospectus and other information are available from a
financial intermediary (such as a broker-dealer or bank) through which
shares of the Fund may be purchased or sold.
(B) If a Fund incorporates any information by reference into the
Summary Prospectus, the legend must identify the type of document
(e.g., Statutory Prospectus) from which the information is incorporated
and the date of the document. If a Fund incorporates by reference a
part of a document, the legend must clearly identify the part by page,
paragraph, caption, or otherwise. If information is incorporated from a
source other than the Statutory Prospectus, the legend must explain
that the incorporated information may be obtained, free of charge, in
the same manner as the Statutory Prospectus. A Fund may modify the
legend to include a statement to the effect that the Summary Prospectus
is intended for use in connection with 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)), a tax-deferred arrangement
under section 403(b) or 457 of the Internal Revenue Code (26 U.S.C.
403(b) or 457), or a variable contract as defined in section 817(d) of
the Internal Revenue Code (26 U.S.C. 817(d)), as applicable, and is not
intended for use by other investors.
(2) Contents of the Summary Prospectus. Except as otherwise
provided in this paragraph (b), provide the information required or
permitted by Items 2 through 8 of Form N-1A, and only that information,
in the order required by the form. A Summary Prospectus may omit the
explanation and information required by Instruction 2(c) to Item
4(b)(2) of Form N-1A.
(3) Incorporation by reference.
(i) Except as provided by paragraph (b)(3)(ii) of this section,
information may not be incorporated by reference into a Summary
Prospectus. Information that is incorporated by reference into a
Summary Prospectus in accordance with paragraph (b)(3)(ii) of this
section need not be sent or given with the Summary Prospectus.
(ii) A Fund may incorporate by reference into a Summary Prospectus
any or all of the information contained in the Fund's Statutory
Prospectus and Statement of Additional Information, and any information
from the Fund's reports to shareholders under Sec. 270.30e-1 that the
Fund has incorporated by reference into the Fund's Statutory
Prospectus, provided that:
(A) The conditions of paragraphs (b)(1)(v)(B) and (e) of this
section are met;
(B) A Fund may not incorporate by reference into a Summary
Prospectus information that paragraphs (b)(1) and (2) of this section
require to be included in the Summary Prospectus; and
(C) Information that is permitted to be incorporated by reference
into the Summary Prospectus may be incorporated by reference into the
Summary Prospectus only by reference to the specific document that
contains the information, not by reference to another document that
incorporates such information by reference.
(iii) For purposes of Sec. 230.159, information is conveyed to a
person not later than the time that a Summary Prospectus is received by
the person if the information is incorporated by reference into the
Summary Prospectus

[[Page 4586]]

in accordance with paragraph (b)(3)(ii) of this section.
(4) Multiple Funds and Classes. A Summary Prospectus may describe
only one Fund, but may describe more than one Class of a Fund.
(c) Transfer of the security. Any obligation under section 5(b)(2)
of the Act (15 U.S.C. 77e(b)(2)) to have a Statutory Prospectus precede
or accompany the carrying or delivery of a Fund security in an offering
registered on Form N-1A is satisfied if:
(1) A Summary Prospectus is sent or given no later than the time of
the carrying or delivery of the Fund security;
(2) The Summary Prospectus is not bound together with any
materials, except that a Summary Prospectus for a Fund that is
available as an investment option in a variable annuity or variable
life insurance contract may be bound together with the Statutory
Prospectus for the contract and Summary Prospectuses and Statutory
Prospectuses for other investment options available in the contract,
provided that:
(i) All of the Funds to which the Summary Prospectuses and
Statutory Prospectuses that are bound together relate are available to
the person to whom such documents are sent or given; and
(ii) A table of contents identifying each Summary Prospectus and
Statutory Prospectus that is bound together, and the page number on
which it is found, is included at the beginning or immediately
following a cover page of the bound materials;
(3) The Summary Prospectus that is sent or given satisfies the
requirements of paragraph (b) of this section at the time of the
carrying or delivery of the Fund security; and
(4) The conditions set forth in paragraph (e) of this section are
satisfied.
(d) Sending communications. A communication relating to an offering
registered on Form N-1A sent or given after the effective date of a
Fund's registration statement (other than a prospectus permitted or
required under section 10 of the Act) shall not be deemed a prospectus
under section 2(a)(10) of the Act (15 U.S.C. 77b(a)(10)) if:
(1) It is proved that prior to or at the same time with such
communication a Summary Prospectus was sent or given to the person to
whom the communication was made;
(2) The Summary Prospectus is not bound together with any
materials, except as permitted by paragraph (c)(2) of this section;
(3) The Summary Prospectus that was sent or given satisfies the
requirements of paragraph (b) of this section at the time of such
communication; and
(4) The conditions set forth in paragraph (e) of this section are
satisfied.
(e) Availability of Fund's Statutory Prospectus and certain other
Fund documents.
(1) The Fund's current Summary Prospectus, Statutory Prospectus,
Statement of Additional Information, and most recent annual and semi-
annual reports to shareholders under Sec. 270.30e-1 are publicly
accessible, free of charge, at the Web site address specified on the
cover page or at the beginning of the Summary Prospectus on or before
the time that the Summary Prospectus is sent or given and current
versions of those documents remain on the Web site through the date
that is at least 90 days after:
(i) In the case of reliance on paragraph (c) of this section, the
date that the Fund security is carried or delivered; or
(ii) In the case of reliance on paragraph (d) of this section, the
date that the communication is sent or given.
(2) The materials that are accessible in accordance with paragraph
(e)(1) of this section must be presented on the Web site in a format,
or formats, that:
(i) Are human-readable and capable of being printed on paper in
human-readable format;
(ii) Permit persons accessing the Statutory Prospectus or Statement
of Additional Information to move directly back and forth between each
section heading in a table of contents of such document and the section
of the document referenced in that section heading; provided that, in
the case of the Statutory Prospectus, the table of contents is either
required by Sec. 230.481(c) or contains the same section headings as
the table of contents required by Sec. 230.481(c); and
(iii) Permit persons accessing the Summary Prospectus to move
directly back and forth between:
(A) Each section of the Summary Prospectus and any section of the
Statutory Prospectus and Statement of Additional Information that
provides additional detail concerning that section of the Summary
Prospectus; or
(B) Links located at both the beginning and end of the Summary
Prospectus, or that remain continuously visible to persons accessing
the Summary Prospectus, and tables of contents of both the Statutory
Prospectus and the Statement of Additional Information that meet the
requirements of paragraph (e)(2)(ii) of this section.
(3) Persons accessing the materials specified in paragraph (e)(1)
of this section must be able to permanently retain, free of charge, an
electronic version of such materials in a format, or formats, that meet
each of the requirements of paragraphs (e)(2)(i) and (ii) of this
section.
(4) The conditions set forth in paragraphs (e)(1), (e)(2), and
(e)(3) of this section shall be deemed to be met, notwithstanding the
fact that the materials specified in paragraph (e)(1) of this section
are not available for a time in the manner required by paragraphs
(e)(1), (e)(2), and (e)(3) of this section, provided that:
(i) The Fund has reasonable procedures in place to ensure that the
specified materials are available in the manner required by paragraphs
(e)(1), (e)(2), and (e)(3) of this section; and
(ii) The Fund takes prompt action to ensure that the specified
documents become available in the manner required by paragraphs (e)(1),
(e)(2), and (e)(3) of this section, as soon as practicable following
the earlier of the time at which it knows or reasonably should have
known that the documents are not available in the manner required by
paragraphs (e)(1), (e)(2), and (e)(3) of this section.
(f) Other requirements.
(1) Delivery upon request. If paragraph (c) or (d) of this section
is relied on with respect to a Fund, the Fund (or a financial
intermediary through which shares of the Fund may be purchased or sold)
must send, at no cost to the requestor and by U.S. first class mail or
other reasonably prompt means, a paper copy of the Fund's Statutory
Prospectus, Statement of Additional Information, and most recent annual
and semi-annual reports to shareholders to any person requesting such a
copy within three business days after receiving a request for a paper
copy. If paragraph (c) or (d) of this section is relied on with respect
to a Fund, the Fund (or a financial intermediary through which shares
of the Fund may be purchased or sold) must send, at no cost to the
requestor and by e-mail, an electronic copy of the Fund's Statutory
Prospectus, Statement of Additional Information, and most recent annual
and semi-annual reports to shareholders to any person requesting such a
copy within three business days after receiving a request for an
electronic copy. The requirement to send an electronic copy of a
document by e-mail may be satisfied by sending a direct link to the
document on the Internet; provided that a current version of the
document is directly accessible through the link from the time that the
e-mail is sent through

[[Page 4587]]

the date that is six months after the date that the e-mail is sent and
the e-mail explains both how long the link will remain useable and
that, if the recipient desires to retain a copy of the document, he or
she should access and save the document.
(2) Greater prominence. If paragraph (c) or (d) of this section is
relied on with respect to a Fund, the Fund's Summary Prospectus shall
be given greater prominence than any materials, with the exception of
other Summary Prospectuses or Statutory Prospectuses, that accompany
the Fund's Summary Prospectus.
(3) Convenient for reading and printing. If paragraph (c) or (d) of
this section is relied on with respect to a Fund:
(i) The materials that are accessible in accordance with paragraph
(e)(1) of this section must be presented on the Web site in a format,
or formats, that are convenient for both reading online and printing on
paper; and
(ii) Persons accessing the materials that are accessible in
accordance with paragraph (e)(1) of this section must be able to
permanently retain, free of charge, an electronic version of such
materials in a format, or formats, that are convenient for both reading
online and printing on paper.
(4) Information in Summary Prospectus must be the same as
information in Statutory Prospectus. If paragraph (c) or (d) of this
section is relied on with respect to a Fund, the information provided
in response to Items 2 through 8 of Form N-1A in the Fund's Summary
Prospectus must be the same as the information provided in response to
Items 2 through 8 of Form N-1A in the Fund's Statutory Prospectus
except as expressly permitted by paragraph (b)(2) of this section.
(5) Compliance with paragraph (f) not a condition to reliance on
paragraphs (c) and (d). Compliance with this paragraph (f) is not a
condition to the ability to rely on paragraph (c) or (d) of this
section with respect to a Fund, and failure to comply with paragraph
(f) does not negate the ability to rely on paragraph (c) or (d).

PART 232--REGULATION S-T--GENERAL RULES AND REGULATIONS FOR
ELECTRONIC FILINGS

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7. The authority citation for part 232 continues to read in part as
follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s(a), 77z-3,
77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll, 80a-6(c),
80a-8, 80a-29, 80a-30, 80a-37, and 7201 et seq.; and 18 U.S.C. 1350.
* * * * *

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8. Section 232.304 is amended by removing the references ``Item 22 of
Form N-1A'' in paragraphs (d) and (e) and adding in their place ``Item
27 of Form N-1A''.
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9. Section 232.401 is amended by:

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a. Removing the reference ``Item 8(a) of Form N-1A'' in paragraph
(b)(1)(iii) and adding in its place ``Item 13(a) of Form N-1A''; and
0
b. Removing the reference ``Items 2 and 3 of Form N-1A'' in paragraph
(b)(1)(iv) and adding in its place ``Items 2, 3, and 4 of Form N-1A''.

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

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10. The general authority citation for part 239 is revised to read as
follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3,
77sss, 78c, 78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll, 78mm, 80a-
2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24, 80a-26, 80a-29,
80a-30, and 80a-37, unless otherwise noted.

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11. Form N-14 (referenced in Sec. 239.23) is amended by:
0
a. Revising paragraph (a) in Item 5;
0
b. Revising the reference ``Items 10 through 22 of Form N-1A'' in Item
12(a) to read ``Items 14 through 27 of Form N-1A''; and
0
c. Revising the reference ``Items 10 through 13 and 15 through 22 of
Form N-1A'' in Item 13(a) to read ``Items 14 through 17 and 19 through
27 of Form N-1A''.
The revision to paragraph (a) of Item 5 reads as follows:

Note: The text of Form N-14 does not, and these amendments will
not, appear in the Code of Federal Regulations.

Form N-14

* * * * *

Item 5. Information About the Registrant

* * * * *
(a) If the registrant is an open-end management investment company,
furnish the information required by Items 2 through 8, 9(a), 9(b), and
10 through 13 of Form N-1A under the 1940 Act;
* * * * *

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

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12. 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.
* * * * *

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13. Form N-1A (referenced in Sec. Sec. 239.15A and 274.11A) is amended
by:
0
a. Revising the Cover Page by replacing the address reference ``450 5th
Street, NW., Washington, D.C. 20549-6009'' with ``100 F Street, NE,
Washington, DC 20549-1090'';
0
b. Revising the Table of Contents;
0
c. Revising the General Instructions as follows:
0
i. Adding the definitions ``Exchange-Traded Fund'' and ``Market Price''
in alphabetical order to paragraph A;
0
ii. Revising the phrase ``(except Items 1, 2, 3, and 8), B, and C
(except Items 23(e) and (i)-(k))'' in paragraph B.2.(b) to read
``(except Items 1, 2, 3, 4, and 13), B, and C (except Items 28(e) and
(i)-(k))'';
0
iii. Revising paragraphs B.4.(c), C.3.(a), C.3.(b), and C.3.(c);
0
iv. Revising the reference ``Items 6(b)-(d) and 7(a)(2)-(5)'' in
paragraph C.3.(d)(i) to read ``Items 6, 11(b)-(d), and 12(a)(2)-(5)'';
and
0
v. Revising the reference ``Items 2(c)(2)(iii)(B) and (C) and
2(c)(2)(iv)'' in paragraph C.3.(d)(iii) to read ``Items 4(b)(2)(iii)(B)
and (C) and 4(b)(2)(iv)'';
0
d. Revising Item 1 as follows:
0
i. Revising paragraph (a)(1);
0
ii. Adding new paragraph (a)(2) and redesignating paragraphs (a)(2) and
(a)(3) as paragraphs (a)(3) and (a)(4);
0
iii. Removing Instruction 6 to Item 1(b)(1);
0
iv. In Item 1(b)(3), revising the telephone number ``1-202-942-8090''
to read ``1-202-551-8090''; and
0
v. In Item 1(b)(3), revising the zip code ``20549-0102'' to read
``20549-1520'';
0
e. Redesignating Items 2, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16,
17, 18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, and 30 as Items 4,
9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26,
27, 28, 29, 30, 31, 32, 33, 34, and 35, respectively;
0
f. Adding new Item 2;
0
g. Revising Item 3 as follows:
0
i. Adding a sentence after the sentence following the heading ``Fees
and expenses of the Fund'';
0
ii. Revising the heading ``Annual Fund Operating Expenses (expenses
that are deducted from Fund assets)'';
0
iii. Adding a new paragraph after the ``Example'' with the heading
``Portfolio Turnover'';
0
iv. Revising Instruction 1(b);
0
v. Adding new Instruction 1(e);
0
vi. In Instruction 2(a)(i), revising the reference ``Item 7(a)'' to
read ``Item 12(a)'';

[[Page 4588]]

0
vii. Revising Instruction 3(e);
0
viii. In Instruction 3(f)(iii), revising the references ``Item 8(a)''
to read ``Item 13(a)'';
0
ix. In Instruction 3(f)(vii), revising the reference ``Item 8'' to read
``Item 13'';
0
x. Revising Instruction 4(a);
0
xi. Redesignating Instruction 5 as Instruction 6 and adding new
Instruction 5; and
0
xii. In newly redesignated Instruction 6, removing paragraph (b) and
redesignating paragraph (c) as paragraph (b);
0
h. Revising newly redesignated Item 4 as follows:
0
i. Removing paragraph (a) and redesignating paragraphs (b) and (c) as
paragraphs (a) and (b);
0
ii. In newly redesignated Item 4(a), revising the reference ``Item
4(b)'' to read ``Item 9(b)'';
0
iii. In newly redesignated Item 4(b)(1)(i), revising the reference
``Item 4(c)'' to read ``Item 9(c)'';
0
iv. In the Instruction to newly redesignated Item 4(b)(1)(iii),
revising the reference ``Items 2(c)(1)(ii) and (iii)'' to read ``Items
4(b)(1)(ii) and (iii)'';
0
v. Revising newly redesignated Item 4(b)(2)(i);
0
vi. In newly redesignated Item 4(b)(2)(iii), revising the reference
``Item 22(b)(7)'' to read ``Item 27(b)(7)'';
0
vii. In newly redesignated Item 4(b)(2)(iv), revising the reference
``paragraph 2(c)(2)(iii)'' to read ``paragraph 4(b)(2)(iii)'';
0
viii. In Instruction 1(a) to newly redesignated Item 4(b)(2), revising
the reference ``Item 8(a)'' to read ``Item 13(a)'';
0
ix. In Instruction 1(b) to newly redesignated Item 4(b)(2), revising
the reference ``paragraph (c)(2)(i)'' to read ``paragraph (b)(2)(i)'';
0
x. In Instruction 2(a) to newly redesignated Item 4(b)(2), revising the
references ``Item 21(a)'', ``Item 21(b)(1)'', and ``Items 21(b)(2) and
(3)'' to read ``Item 26(a)'', ``Item 26(b)(1)'', and ``Items 26(b)(2)
and (3)'', respectively;
0
xi. In Instruction 2(b) to newly redesignated Item 4(b)(2), revising
the reference ``Item 22(b)(7)'' to read ``Item 27(b)(7)'';
0
xii. In Instruction 2(d) to newly redesignated Item 4(b)(2), revising
the references ``Item 21(b)(2)'' and ``Item 21'' to read ``Item
26(b)(2)'' and ``Item 26'', respectively;
0
xiii. In newly redesignated Item 4(b)(2), revising Instructions 2(e),
3(a), 3(b), and 3(c);
0
xiv. In Instruction 3(c)(ii)(D) to newly redesignated Item 4(b)(2),
revising the reference ``paragraphs 2(c)(2)(iii)(B) and (C)'' to read
``paragraphs 4(b)(2)(iii)(B) and (C)'';
0
xv. In Instruction 3(c)(iii) to newly redesignated Item 4(b)(2),
revising the reference ``paragraphs 2(c)(2)(iii)(A), (B), and (C)'' to
read ``paragraphs 4(b)(2)(iii)(A), (B), and (C)''; and
0
xvi. In Instruction 4 to newly redesignated Item 4(b)(2), revising the
reference ``Item 22(b)(7)'' to read ``Item 27(b)(7)'';
0
i. Adding new Items 5, 6, 7, and 8;
0
j. In Instruction 5 to newly redesignated Item 9(b)(1), revising the
reference ``Item 11(c)(1)'' to read ``Item 16(c)(1)'';
0
k. Revising newly redesignated Item 10 as follows:
0
i. Revising paragraph (a)(1)(i);
0
ii. Revising paragraph (a)(2); and
0
iii. Removing the Instructions to newly redesignated Item 10(a)(2);
0
l. Revising newly redesignated Item 11 as follows:
0
i. Revising paragraph (a)(1);
0
ii Revising paragraph (b); and
0
iii. Revising paragraph (g);
0
m. Revising newly redesignated Item 12 as follows:
0
i. In Instruction 1 to newly redesignated Item 12(a)(2), revising the
reference ``Item 7'' to read ``Item 12'';
0
ii. In Instruction 2 to newly redesignated Item 12(a)(2), revising the
references ``Item 7'' and ``Items 12(d) and 17(b)'' to read ``Item 12''
and ``Items 17(d) and 22(b)'', respectively;
0
iii. In newly redesignated Item 12(a)(5), revising the reference ``Item
17(a)'' to read ``Item 22(a)''; and
0
iv. In the Instruction to newly redesignated Item 12(a)(5), revising
the references ``Item 7'' to read ``Item 12'';
0
n. Revising newly redesignated Item 14 as follows:
0
i. Revising paragraph (a)(1); and
0
ii. Adding new paragraph (a)(2) and redesignating paragraphs (a)(2) and
(a)(3) as paragraphs (a)(3) and (a)(4);
0
o. Revising newly redesignated Item 16 as follows:
0
i. In newly redesignated Item 16(d), revising the reference ``Item
4(b)'' to read ``Item 9(b)'';
0
ii. In newly redesignated Item 16(e), revising the reference ``Item 8''
to read ``Item 13''; and
0
iii. In Instruction 1 to newly redesignated Item 16(f)(2), revising the
reference ``Item 11(f)(2)'' to read ``Item 16(f)(2)'';
0
p. In newly redesignated Item 17, revising the references ``Item 12''
to read ``Item 17'';
0
q. In newly redesignated Items 20(a), 20(b), and 20(c), revising the
references ``Item 5(a)(2)'' to read ``Item 5(b)'';
0
r. Revising newly redesignated Item 23 as follows:
0
i. Removing the Instruction to newly redesignated Item 23(a);
0
ii. In Instruction 4 to newly redesignated Item 23(c), revising the
reference ``Item 22'' to read ``Item 27''; and
0
iii. In Instruction 1 to newly redesignated Item 23(e), revising the
reference ``Item 17(e)'' to read ``Item 23(e)'';
0
s. In Instruction 1 to newly redesignated Item 25(c), revising the
references ``Item 7(b)(2)'', ``Item 14(d)'', and ``Item 30'' to read
``Item 12(b)(2)'', ``Item 19(d)'', and ``Item 34'', respectively;
0
t. Revising newly redesignated Item 27 as follows:
0
i. In newly redesignated Item 27(a), revising the reference ``Item
17(c)'' to read ``Item 23(c)'';
0
ii. In newly redesignated Item 27(b)(2), revising the reference ``Item
8(a)'' to read ``Item 13(a)'';
0
iii. In newly redesignated Item 27(b)(5), revising the reference ``Item
12(a)(1)'' to read ``Item 17(a)(1)'';
0
iv. In newly redesignated Item 27(b)(7)(ii)(B), revising the reference
``Item 21(b)(1)'' to read ``Item 26(b)(1)'';
0
v. In newly redesignated Item 27(b)(7), adding new paragraph (iv);
0
vi. In Instruction 10 to newly redesignated Item 27(b)(7), revising the
reference ``Instruction 5 to Item 3'' to read ``Instruction 6 to Item
3'';
0
vii. In the Instruction to newly redesignated Item 27(c)(1), revising
the references ``Item 22(b)(1)'' and ``Item 22(c)(1)'' to read ``Item
27(b)(1)'' and ``Item 27(c)(1)'', respectively;
0
viii. In newly redesignated Item 27(c)(2), revising the reference
``Item 8(a)'' to read ``Item 13(a)'';
0
ix. In Instruction 1(c) to newly redesignated Item 27(d)(1), revising
the reference ``Item 8(a)'' to read ``Item 13(a)'';
0
x. In newly redesignated Item 27(d)(1), adding Instruction 1(e);
0
xi. In Instruction 2(a)(ii) to newly redesignated Item 27(d)(1),
revising the reference ``Item 22(d)(1)'' to read ``Item 27(d)(1)''; and
0
xii. In the Instruction to newly redesignated Item 27(d)(4), revising
the reference ``Item 12(f)'' to read ``Item 17(f)'';
0
u. In newly redesignated Item 28(k), revising the reference ``Item 22''
to read ``Item 27'';
0
v. Revising newly redesignated Item 32 as follows:
0
i. In newly redesignated Item 32(b), revising the reference ``Item 20''
to read ``Item 25'';
0
ii. In Instruction 2 to newly redesignated Item 32(c), revising the
reference ``Item 20(c)'' to read ``Item 25(c)''; and

[[Page 4589]]

0
w. In Instruction 1 to newly redesignated Item 34, revising the
reference ``Item 14'' to read ``Item 19''.
The additions and revisions are to read as follows:

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

Form N-1A

* * * * *

Contents of Form N-1A

General Instructions

A. Definitions
B. Filing and Use of Form N-1A
C. Preparation of the Registration Statement
D. Incorporation by Reference
Part A: Information Required in a Prospectus
Item 1. Front and Back Cover Pages
Item 2. Risk/Return Summary: Investment Objectives/Goals
Item 3. Risk/Return Summary: Fee Table
Item 4. Risk/Return Summary: Investments, Risks, and Performance
Item 5. Management
Item 6. Purchase and Sale of Fund Shares
Item 7. Tax Information
Item 8. Financial Intermediary Compensation
Item 9. Investment Objectives, Principal Investment Strategies,
Related Risks, and Disclosure of Portfolio Holdings
Item 10. Management, Organization, and Capital Structure
Item 11. Shareholder Information
Item 12. Distribution Arrangements
Item 13. Financial Highlights Information
Part B: Information Required in a Statement of Additional
Information
Item 14. Cover Page and Table of Contents
Item 15. Fund History
Item 16. Description of the Fund and Its Investments and Risks
Item 17. Management of the Fund
Item 18. Control Persons and Principal Holders of Securities
Item 19. Investment Advisory and Other Services
Item 20. Portfolio Managers
Item 21. Brokerage Allocation and Other Practices
Item 22. Capital Stock and Other Securities
Item 23. Purchase, Redemption, and Pricing of Shares
Item 24. Taxation of the Fund
Item 25. Underwriters
Item 26. Calculation of Performance Data
Item 27. Financial Statements
Part C: Other Information
Item 28. Exhibits
Item 29. Persons Controlled by or Under Common Control With the
Fund
Item 30. Indemnification
Item 31. Business and Other Connections of the Investment
Adviser
Item 32. Principal Underwriters
Item 33. Location of Accounts and Records
Item 34. Management Services
Item 35. Undertakings
Signatures

General Instructions

A. Definitions

* * * * *
``Exchange-Traded Fund'' means a Fund or Class, the shares of which
are traded on a national securities exchange, and that has formed and
operates pursuant to an exemptive order granted by the Commission or in
reliance on an exemptive rule adopted by the Commission.
* * * * *
``Market Price'' refers to the last reported sale price at which
Exchange-Traded Fund shares trade on the principal U.S. market on which
the Fund's shares are traded during a regular trading session or, if it
more accurately reflects the current market value of the Fund's shares
at the time the Fund uses to calculate its net asset value, a price
within the range of the highest bid and lowest offer on the principal
U.S. market on which the Fund's shares are traded during a regular
trading session.
* * * * *

B. Filing and Use of Form N-1A

* * * * *
4. * * *
(c) The plain English requirements of rule 421 under the Securities
Act [17 CFR 230.421] apply to prospectus disclosure in Part A of Form
N-1A. The information required by Items 2 through 8 must be provided in
plain English under rule 421(d) under the Securities Act.
* * * * *

C. Preparation of the Registration Statement

* * * * *
3. * * *
(a) Organization of Information. Organize the information in the
prospectus and SAI to make it easy for investors to understand.
Notwithstanding rule 421(a) under the Securities Act regarding the
order of information required in a prospectus, disclose the information
required by Items 2 through 8 in numerical order at the front of the
prospectus. Do not precede these Items with any other Item except the
Cover Page (Item 1) or a table of contents meeting the requirements of
rule 481(c) under the Securities Act. Information that is included in
response to Items 2 through 8 need not be repeated elsewhere in the
prospectus. Disclose the information required by Item 12 (Distribution
Arrangements) in one place in the prospectus.
(b) Other Information. A Fund may include, except in response to
Items 2 through 8, information in the prospectus or the SAI that is not
otherwise required. For example, a Fund may include charts, graphs, or
tables so long as the information is not incomplete, inaccurate, or
misleading and does not, because of its nature, quantity, or manner of
presentation, obscure or impede understanding of the information that
is required to be included. Items 2 through 8 may not include
disclosure other than that required or permitted by those Items.
(c) Use of Form N-1A by More Than One Registrant, Series, or Class.
Form N-1A may be used by one or more Registrants, Series, or Classes.
(i) When disclosure is provided for more than one Fund or Class,
the disclosure should be presented in a format designed to communicate
the information effectively. Except as required by paragraph (c)(ii)
for Items 2 through 8, Funds may order or group the response to any
Item in any manner that organizes the information into readable and
comprehensible segments and is consistent with the intent of the
prospectus to provide clear and concise information about the Funds or
Classes. Funds are encouraged to use, as appropriate, tables, side-by-
side comparisons, captions, bullet points, or other organizational
techniques when presenting disclosure for multiple Funds or Classes.
(ii) Paragraph (a) requires Funds to disclose the information
required by Items 2 through 8 in numerical order at the front of the
prospectus and not to precede Items 2 through 8 with other information.
Except as permitted by paragraph (c)(iii), a prospectus that contains
information about more than one Fund must present all of the
information required by Items 2 through 8 for each Fund sequentially
and may not integrate the information for more than one Fund together.
That is, a prospectus must present all of the information for a
particular Fund that is required by Items 2 through 8 together,
followed by all of the information for each additional Fund, and may
not, for example, present all of the Item 2 (Risk/Return Summary:
Investment Objectives/Goals) information for several Funds followed by
all of the Item 3 (Risk/Return Summary: Fee Table) information for
several Funds. If a prospectus contains information about multiple
Funds, clearly identify the name of the relevant Fund at the beginning
of the information for the Fund that is required by Items 2 through 8.
A Multiple Class Fund may present the information required by Items 2
through 8 separately for each Class or may integrate the information
for

[[Page 4590]]

multiple Classes, although the order of the information must be as
prescribed in Items 2 through 8. For example, the prospectus may
present all of the Item 2 (Risk/Return Summary: Investment Objectives/
Goals) information for several Classes followed by all of the Item 3
(Risk/Return Summary: Fee Table) information for the Classes, or may
present Items 2 and 3 for each of several Classes sequentially. Other
presentations of multiple Class information also would be acceptable if
they are consistent with the Form's intent to disclose the information
required by Items 2 through 8 in a standard order at the beginning of
the prospectus. For a Multiple Class Fund, clearly identify the
relevant Classes at the beginning of the Items 2 through 8 information
for those Classes.
(iii) A prospectus that contains information about more than one
Fund may integrate the information required by any of Items 6 through 8
for all of the Funds together, provided that the information contained
in any Item that is integrated is identical for all Funds covered in
the prospectus. If the information required by any of Items 6 through 8
is integrated pursuant to this paragraph, the integrated information
should be presented immediately following the separate presentations of
Item 2 through 8 information for individual Funds. In addition, include
a statement containing the following information in each Fund's
separate presentation of Item 2 through 8 information, in the location
where the integrated information is omitted: ``For important
information about [purchase and sale of fund shares,] [tax
information,] and [financial intermediary compensation], please turn to
[identify section heading and page number of prospectus].''
* * * * *
Part A: Information Required in a Prospectus
Item 1. Front and Back Cover Pages
(a) Front Cover Page. Include the following information, in plain
English under rule 421(d) under the Securities Act, on the outside
front cover page of the prospectus:
(1) The Fund's name and the Class or Classes, if any, to which the
prospectus relates.
(2) The exchange ticker symbol of the Fund's shares or, if the
prospectus relates to one or more Classes of the Fund's shares,
adjacent to each such Class, the exchange ticker symbol of such Class
of the Fund's shares. If the Fund is an Exchange-Traded Fund, also
identify the principal U.S. market or markets on which the Fund shares
are traded.
* * * * *
Item 2. Risk/Return Summary: Investment Objectives/Goals
Disclose the Fund's investment objectives or goals. A Fund also may
identify its type or category (e.g., that it is a Money Market Fund or
a balanced fund).
Item 3. Risk/Return Summary: Fee Table
* * * * *
Fees and Expenses of the Fund
* * * You may qualify for sales charge discounts if you and your
family invest, or agree to invest in the future, at least $[----] in
[name of fund family] funds. More information about these and other
discounts is available from your financial professional and in
[identify section heading and page number] of the Fund's prospectus and
[identify section heading and page number] of the Fund's statement of
additional information.
* * * * *
Annual Fund Operating Expenses (expenses that you pay each year as
a percentage of the value of your investment)
* * * * *

Example

* * * * *

Portfolio Turnover

The Fund pays transaction costs, such as commissions, when it
buys and sells securities (or ``turns over'' its portfolio). A
higher portfolio turnover rate may indicate higher transaction costs
and may result in higher taxes when Fund shares are held in a
taxable account. These costs, which are not reflected in annual fund
operating expenses or in the example, affect the Fund's performance.
During the most recent fiscal year, the Fund's portfolio turnover
rate was --% of the average value of its portfolio.

Instructions.
1. General.
(a) * * *
(b) Include the narrative explanations in the order indicated. A
Fund may modify the narrative explanations if the explanation contains
comparable information to that shown. The narrative explanation
regarding sales charge discounts is only required by a Fund that offers
such discounts and should specify the minimum level of investment
required to qualify for a discount as disclosed in the table required
by Item 12(a)(1).
* * * * *
(e) If the Fund is an Exchange-Traded Fund,
(i) Modify the narrative explanation to state that investors may
pay brokerage commissions on their purchases and sales of Exchange-
Traded Fund shares, which are not reflected in the example; and
(ii) If the Fund issues or redeems shares in creation units of not
less than 25,000 shares each, exclude any fees charged for the purchase
and redemption of the Fund's creation units.
* * * * *
3. Annual Fund Operating Expenses.
(a) * * *
(e) If there are expense reimbursement or fee waiver arrangements
that will reduce any Fund operating expenses for no less than one year
from the effective date of the Fund's registration statement, a Fund
may add two captions to the table: One caption showing the amount of
the expense reimbursement or fee waiver, and a second caption showing
the Fund's net expenses after subtracting the fee reimbursement or
expense waiver from the total fund operating expenses. The Fund should
place these additional captions directly below the ``Total Annual Fund
Operating Expenses'' caption of the table and should use appropriate
descriptive captions, such as ``Fee Waiver [and/or Expense
Reimbursement]'' and ``Total Annual Fund Operating Expenses After Fee
Waiver [and/or Expense Reimbursement],'' respectively. If the Fund
provides this disclosure, also disclose the period for which the
expense reimbursement or fee waiver arrangement is expected to
continue, including the expected termination date, and briefly describe
who can terminate the arrangement and under what circumstances.
* * * * *
4. Example.
(a) Assume that the percentage amounts listed under ``Total Annual
Fund Operating Expenses'' remain the same in each year of the 1-, 3-,
5-, and 10-year periods, except that an adjustment may be made to
reflect any expense reimbursement or fee waiver arrangements that will
reduce any Fund operating expenses for no less than one year from the
effective date of the Fund's registration statement. An adjustment to
reflect any expense reimbursement or fee waiver arrangement may be
reflected only in the period(s) for which the expense reimbursement or
fee waiver arrangement is expected to continue.
* * * * *
5. Portfolio Turnover. Disclose the portfolio turnover rate
provided in response to Item 13(a) for the most

[[Page 4591]]

recent fiscal year (or for such shorter period as the Fund has been in
operation). Disclose the period for which the information is provided
if less than a full fiscal year. A Fund that is a Money Market Fund may
omit the portfolio turnover information required by this Item.
* * * * *
Item 4. Risk/Return Summary: Investments, Risks, and Performance
* * * * *
(b) Principal risks of investing in the Fund.
* * * * *
(2) Risk/Return Bar Chart and Table.
(i) Include the bar chart and table required by paragraphs
(b)(2)(ii) and (iii) of this section. Provide a brief explanation of
how the information illustrates the variability of the Fund's returns
(e.g., by stating that the information provides some indication of the
risks of investing in the Fund by showing changes in the Fund's
performance from year to year and by showing how the Fund's average
annual returns for 1, 5, and 10 years compare with those of a broad
measure of market performance). Provide a statement to the effect that
the Fund's past performance (before and after taxes) is not necessarily
an indication of how the Fund will perform in the future. If
applicable, include a statement explaining that updated performance
information is available and providing a Web site address and/or toll-
free (or collect) telephone number where the updated information may be
obtained.
* * * * *
Instructions.
* * * * *
2. Table.
* * * * *
(e) Returns required by paragraphs 4(b)(2)(iii)(A), (B), and (C)
for a Fund or Series must be adjacent to one another and appear in that
order. The returns for a broad-based securities market index, as
required by paragraph 4(b)(2)(iii), must precede or follow all of the
returns for a Fund or Series rather than be interspersed with the
returns of the Fund or Series.
3. Multiple Class Funds.
(a) When a Multiple Class Fund presents information for more than
one Class together in response to Item 4(b)(2), provide annual total
returns in the bar chart for only one of those Classes. The Fund can
select which Class to include (e.g., the oldest Class, the Class with
the greatest net assets) if the Fund:
(i) Selects the Class with 10 or more years of annual returns if
other Classes have fewer than 10 years of annual returns;
(ii) Selects the Class with the longest period of annual returns
when the Classes all have fewer than 10 years of returns; and
(iii) If the Fund provides annual total returns in the bar chart
for a Class that is different from the Class selected for the most
immediately preceding period, explain in a footnote to the bar chart
the reasons for the selection of a different Class.
(b) When a Multiple Class Fund offers a new Class in a prospectus
and separately presents information for the new Class in response to
Item 4(b)(2), include the bar chart with annual total returns for any
other existing Class for the first year that the Class is offered.
Explain in a footnote that the returns are for a Class that is not
presented that would have substantially similar annual returns because
the shares are invested in the same portfolio of securities and the
annual returns would differ only to the extent that the Classes do not
have the same expenses. Include return information for the other Class
reflected in the bar chart in the performance table.
(c) When a Multiple Class Fund presents information for more than
one Class together in response to Item 4(b)(2):
(i) Provide the returns required by paragraph 4(b)(2)(iii)(A) of
this Item for each of the Classes;
(ii) Provide the returns required by paragraphs 4(b)(2)(iii)(B) and
(C) of this Item for only one of those Classes. The Fund may select the
Class for which it provides the returns required by paragraphs
4(b)(2)(iii)(B) and (C) of this Item, provided that the Fund:
* * * * *
Item 5. Management
(a) Investment Adviser(s). Provide the name of each investment
adviser of the Fund, including sub-advisers.
Instructions.
1. A Fund need not identify a sub-adviser whose sole responsibility
for the Fund is limited to day-to-day management of the Fund's holdings
of cash and cash equivalent instruments, unless the Fund is a Money
Market Fund or other Fund with a principal investment strategy of
regularly holding cash and cash equivalent instruments.
2. A Fund having three or more sub-advisers, each of which manages
a portion of the Fund's portfolio, need not identify each such sub-
adviser, except that the Fund must identify any sub-adviser that is (or
is reasonably expected to be) responsible for the management of a
significant portion of the Fund's net assets. For purposes of this
paragraph, a significant portion of a Fund's net assets generally will
be deemed to be 30% or more of the Fund's net assets.
(b) Portfolio Manager(s). State the name, title, and length of
service of the person or persons employed by or associated with the
Fund or an investment adviser of the Fund who are primarily responsible
for the day-to-day management of the Fund's portfolio (``Portfolio
Manager'').
Instructions.
1. This requirement does not apply to a Money Market Fund.
2. If a committee, team, or other group of persons associated with
the Fund or an investment adviser of the Fund is jointly and primarily
responsible for the day-to-day management of the Fund's portfolio,
information in response to this Item is required for each member of
such committee, team, or other group. If more than five persons are
jointly and primarily responsible for the day-to-day management of the
Fund's portfolio, the Fund need only provide information for the five
persons with the most significant responsibility for the day-to-day
management of the Fund's portfolio.
Item 6. Purchase and Sale of Fund Shares
(a) Purchase of Fund Shares. Disclose the Fund's minimum initial or
subsequent investment requirements.
(b) Sale of Fund Shares. Also disclose that the Fund's shares are
redeemable and briefly identify the procedures for redeeming shares
(e.g., on any business day by written request, telephone, or wire
transfer).
(c) Exchange-Traded Funds. If the Fund is an Exchange-Traded Fund,
(i) Specify the number of shares that the Fund will issue (or
redeem) in exchange for the deposit or delivery of basket assets (i.e.,
the securities or other assets the Fund specifies each day in name and
number as the securities or assets in exchange for which it will issue
or in return for which it will redeem Fund shares) and explain that:
(A) Individual Fund shares may only be purchased and sold on a
national securities exchange through a broker-dealer; and
(B) The price of Fund shares is based on market price, and because
Exchange-Traded Fund shares trade at market prices rather than net
asset value, shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount); and
(ii) If the Fund issues shares in creation units of not less than
25,000 shares each, the Fund may omit the information required by Items
6(a) and 6(b).

[[Page 4592]]

Item 7. Tax Information
State, as applicable, that the Fund intends to make distributions
that may be taxed as ordinary income or capital gains or that the Fund
intends to distribute tax-exempt income. For a Fund that holds itself
out as investing in securities generating tax-exempt income, provide,
as applicable, a general statement to the effect that a portion of the
Fund's distributions may be subject to federal income tax.
Item 8. Financial Intermediary Compensation
Include the following statement. A Fund may modify the statement if
the modified statement contains comparable information. A Fund may omit
the statement if neither the Fund nor any of its related companies pay
financial intermediaries for the sale of Fund shares or related
services.
Payments to Broker-Dealers and Other Financial Intermediaries.
If you purchase the Fund through a broker-dealer or other financial
intermediary (such as a bank), the Fund and its related companies may
pay the intermediary for the sale of Fund shares and related services.
These payments may create a conflict of interest by influencing the
broker-dealer or other intermediary and your salesperson to recommend
the Fund over another investment. Ask your salesperson or visit your
financial intermediary's Web site for more information.
* * * * *
Item 10. Management, Organization, and Capital Structure
(a) Management.
(1) Investment Adviser.
(i) Provide the name and address of each investment adviser of the
Fund, including sub-advisers. Describe the investment adviser's
experience as an investment adviser and the advisory services that it
provides to the Fund.
* * * * *
(2) Portfolio Manager. For each Portfolio Manager identified in
response to Item 5(b), state the Portfolio Manager's business
experience during the past 5 years. Include a statement, adjacent to
the foregoing disclosure, that the SAI provides additional information
about the Portfolio Manager's(s') compensation, other accounts managed
by the Portfolio Manager(s), and the Portfolio Manager's(s') ownership
of securities in the Fund. If a Portfolio Manager is a member of a
committee, team, or other group of persons associated with the Fund or
an investment adviser of the Fund that is jointly and primarily
responsible for the day-to-day management of the Fund's portfolio,
provide a brief description of the person's role on the committee,
team, or other group (e.g., lead member), including a description of
any limitations on the person's role and the relationship between the
person's role and the roles of other persons who have responsibility
for the day-to-day management of the Fund's portfolio.
* * * * *
Item 11. Shareholder Information
(a) * * *
(1) An explanation that the price of Fund shares is based on the
Fund's net asset value and the method used to value Fund shares (market
price, fair value, or amortized cost); except that if the Fund is an
Exchange-Traded Fund, an explanation that the price of Fund shares is
based on market price.
* * * * *
(b) Purchase of Fund Shares. Describe the procedures for purchasing
the Fund's shares.
* * * * *
(g) Exchange-Traded Funds. If the Fund is an Exchange-Traded Fund:
(1) The Fund may omit from the prospectus the information required
by Items 11(a)(2), (b), and (c) if the Fund issues or redeems Fund
shares in creation units of not less than 25,000 shares each; and
(2) Provide a table showing the number of days the Market Price of
the Fund shares was greater than the Fund's net asset value and the
number of days it was less than the Fund's net asset value (i.e.,
premium or discount) for the most recently completed calendar year, and
the most recently completed calendar quarters since that year (or the
life of the Fund, if shorter). The Fund may omit this table if the Fund
provides an Internet address at the Fund's Web site, which is publicly
accessible, free of charge, that investors can use to obtain the
premium/discount information required in this Item.
Instructions.
1. Provide the information in tabular form.
2. Express the information as a percentage of the net asset value
of the Fund, using separate columns for the number of days the Market
Price was greater than the Fund's net asset value and the number of
days it was less than the Fund's net asset value. Round all percentages
to the nearest hundredth of one percent.
3. Adjacent to the table, provide a brief explanation that:
Shareholders may pay more than net asset value when they buy Fund
shares and receive less than net asset value when they sell those
shares, because shares are bought and sold at current market prices.
4. Include a statement that the data presented represents past
performance and cannot be used to predict future results.
* * * * *
Item 14. Cover Page and Table of Contents
(a) Front Cover Page. Include the following information on the
outside front cover page of the SAI:
(1) The Fund's name and the Class or Classes, if any, to which the
SAI relates. If the Fund is a Series, also provide the Registrant's
name.
(2) The exchange ticker symbol of the Fund's securities or, if the
SAI relates to one or more Classes of the Fund's securities, adjacent
to each such Class, the exchange ticker symbol of such Class of the
Fund's securities. If the Fund is an Exchange-Traded Fund, also
identify the principal U.S. market or markets on which the Fund shares
are traded.
* * * * *
Item 27. Financial Statements
* * * * *
(b) Annual Report. * * *
* * * * *
(7) Management's Discussion of Fund Performance. * * *
* * * * *
(iv) Provide a table showing the number of days the Market Price of
the Fund shares was greater than the Fund's net asset value and the
number of days it was less than the Fund's net asset value (i.e.,
premium or discount) for the most recently completed five fiscal years
(or the life of the Fund, if shorter). The Fund may omit this table
from the annual report if the Fund provides an Internet address at the
Fund's Web site, which is publicly accessible, free of charge, that
investors can use to obtain the premium/discount information required
in Item 11(g)(2).
Instructions.
1. Provide the information in tabular form.
2. Express the information as a percentage of the net asset value
of the Exchange-Traded Fund, using separate columns for the number of
days the Market Price was greater than the Fund's net asset value and
the number of days it was less than the Fund's net asset value. Round
all percentages to the nearest hundredth of one percent.
3. Adjacent to the table, provide a brief explanation that:
Shareholders may pay more than net asset value when they buy Fund
shares and receive less than net asset value when they sell

[[Page 4593]]

those shares, because shares are bought and sold at current market
prices.
4. Include a statement that the data presented represents past
performance and cannot be used to predict future results.
* * * * *
(d) Annual and Semi-Annual Reports. * * *
(1) Expense Example. * * *
* * * * *
Instructions.
1. General.
* * * * *
(e) If the Fund is an Exchange-Traded Fund:
(i) Modify the narrative explanation to state that investors may
pay brokerage commissions on their purchases and sales of Exchange-
Traded Fund shares, which are not reflected in the example; and
(ii) If the Fund issues or redeems shares in creation units of not
less than 25,000 shares each, exclude any fees charged for the purchase
and redemption of the Fund's creation units.
* * * * *
14. Form N-4 (referenced in Sec. Sec. 239.17b and 274.11c) is
amended by revising the reference ``Item 22(b)(ii) of Form N-1A'' to
read ``Item 27(b)(ii) of Form N-1A'' and by revising the reference
``Item 22(b)(ii) equation'' to read ``Item 27(b)(ii) equation'' in
Instruction 3 to Item 20(b)(ii).

Note: The text of Form N-4 does not, and these amendments will
not, appear in the Code of Federal Regulations.

Dated: January 13, 2009.

By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-1035 Filed 1-23-09; 8:45 am]
BILLING CODE 8011-01-P