Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules 10943

1 Investment Company Act Release No. 22528

(Feb. 27, 1997) (‘‘Form N–1A Release’’).

2 Investment Company Act Release No. 22530

(Feb. 27, 1997) (‘‘Fund Names Release’’). Proposed

rule 35d–1 would apply to all registered investment

companies, including funds, closed-end investment

companies, and unit investment trusts.

3See Investment Company Institute (‘‘ICI’’),

Trends in Mutual Fund Investing: November 1996

at 3 (Dec. 1996) (ICI News No. 96–107) (‘‘ICI

Trends’’) and ICI, Memorandum on Supplementary

Data at 22 (Jan. 13, 1997) (as of November 1996,

there were 6,243 funds and 148.5 million

shareholder accounts); compare ICI Trends at 1

(fund net assets exceeded $3.5 trillion as of

November 1996) with 82 Fed. Res. Bull. 12, table

1.21, at A13 (1996) (commercial bank deposits were

approximately $2.5 trillion as of Sept. 1996).

4See, e.g., ‘‘From Security to Self-Reliance:

American Investors in the 1990s,’’ Remarks by

Arthur Levitt, Chairman, SEC, before the ICI’s

General Membership Meeting, Wash., D.C. (May 22,

1996); Remarks by Steven M.H. Wallman,

Commissioner, SEC, before the ICI’s 1995

Investment Company Directors Conference and

New Directors Workshop, Wash., D.C. (Sept. 22,

1995); ‘‘Toward Better Disclosure,’’ Remarks by

Isaac C. Hunt, Jr., Commissioner, SEC, before the

American Society of Corporate Secretaries, Seattle,

Wash. (June 26, 1996). See also McTague, Simply

Beautiful: Shorn of Legalese, Even Prospectuses

Make Sense, Barron’s, Oct. 7, 1996, at F10

(concerning the recent efforts of the John Hancock

funds and other fund groups to simplify their

prospectuses).

5See Investment Company Act Release No. 20974

(Mar. 29, 1995) (60 FR 17172) (requesting comment

on ways to improve risk disclosure and

comparability of fund risk levels) (‘‘Risk Concept

Release’’); Investment Company Act Release No.

21216 (July 19, 1995) (60 FR 38454) (proposing

Continued

SECURITIES AND EXCHANGE

COMMISSION

17 CFR Part 230

[Release Nos. 33–7399; IC–22529; File No.

S7–18–96]

RIN 3235–AH03

Proposed New Disclosure Option for

Open-End Management Investment

Companies

AGENCY: Securities and Exchange

Commission.

ACTION: Proposed rule.

SUMMARY: The Securities and Exchange

Commission is proposing a new rule to

permit open-end management

investment companies to provide

investors with a ‘‘fund profile.’’ The

profile would present a summary of key

information about a fund, including the

fund’s investment strategies, risks,

performance, and fees, in a concise,

standardized format. A fund that

provides a profile would be able to offer

investors a choice of the amount of

information they wish to consider

before making an investment decision;

investors would have the option of

purchasing the fund’s shares based on

the information in the profile or

requesting and reviewing the fund’s

prospectus (and other information). An

investor deciding to purchase fund

shares based on the information in a

profile would receive the fund’s

prospectus with the confirmation of

purchase.

DATES: Comments must be received on

or before June 9, 1997.

ADDRESSES: Submit comments in

triplicate to Jonathan G. Katz, Secretary,

Securities and Exchange Commission,

450 5th Street, NW., Washington, DC

20549–6009. Comments can be

submitted electronically at the following

E-mail address: rule-comments@sec.gov.

All comment letters should refer to File

No. S7–18–96; include this file number

on the subject line if E-mail is used. All

comments received will be available for

public inspection and copying in the

Commission’s Public Reference Room,

450 5th Street, NW., Washington, DC

20549–6009. Electronically-submitted

comment letters will be posted on the

Commission’s Internet Web site (http://

www.sec.gov).

FOR FURTHER INFORMATION CONTACT:

David U. Thomas, Senior Counsel,

Markian M.W. Melnyk, Senior Counsel,

Kathleen K. Clarke, Special Counsel, or

Elizabeth R. Krentzman, Assistant

Director, (202) 942–0721, Office of

Disclosure and Investment Adviser

Regulation, Division of Investment

Management, Securities and Exchange

Commission, 450 5th Street, NW., Mail

Stop 10–2, Washington, DC 20549–

6009.

SUPPLEMENTARY INFORMATION: The

Securities and Exchange Commission

(the ‘‘Commission’’) today is proposing

for comment rule 498 (17 CFR 230.498)

under the Securities Act of 1933 (15

U.S.C. 77a et seq.) (‘‘Securities Act’’)

and the Investment Company Act of

1940 (15 U.S.C. 80a–1 et seq.)

(‘‘Investment Company Act’’). The new

rule would permit an open-end

management investment company that

registers on Form N–1A (17 CFR

274.11A) (a ‘‘fund’’) to provide at its

option a fund profile (‘‘profile’’) to

investors that contains a summary of

key information about a fund. The

Commission also is proposing

amendments to rule 497 under the

Securities Act (17 CFR 230.497) that

would require a fund to file a profile

with the Commission at least 30 days

prior to its first use. In a companion

release, the Commission is proposing

revisions to the prospectus disclosure

requirements in Form N–1A, the

registration statement used by funds.

These amendments seek to minimize

prospectus disclosure about technical,

legal, and operational matters that

generally are common to all funds and

to focus prospectus disclosure on

essential information about a particular

fund that would assist an investor in

deciding whether to invest in that

fund. 1 In another companion release,

the Commission is proposing new rule

35d–1 under the Investment Company

Act, which would, among other things,

require a fund with a name suggesting

that it focuses on a particular type of

investment (e.g., an investment

company that calls itself the ABC Stock

Fund, the XYZ Bond Fund, or the QRS

U.S. Government Fund) to invest at least

80% of its assets in the type of

investment suggested by its name. 2

TABLE OF CONTENTS

I. Executive Summary and Introduction

II. Discussion

A. General

B. Profile Disclosure

1. Cover Page

2. Risk/Return Summary

3. Other Disclosure Requirements

4. Application to Purchase Shares

C. Disclosure Safeguards

D. Filing Requirements

E. Dissemination of Profiles

F. Defined Contribution Plans

III. General Request for Comments

IV. Paperwork Reduction Act

V. Summary of Initial Regulatory Flexibility

Analysis

VI. Statutory Authority

VII. Text of Proposed Rule

I. Executive Summary and Introduction

Over the last decade, the fund

industry has grown tremendously. With

over 6,000 funds available and over 130

million shareholder accounts, fund

assets exceed the deposits of

commercial banks.3 As more Americans

turn to funds for professional

management of current and retirement

savings, funds have introduced new

investment options and shareholder

services to meet the needs of investors.

While benefitting from these

developments, investors also face an

increasingly difficult task in choosing

suitable fund investments. The

Commission, fund investors, and others

have recognized the need to improve

fund disclosure to help investors

evaluate and compare funds.4 In the

Commission’s view, the growth of the

fund industry and the diversity of fund

investors warrant a new approach to

fund disclosure that would offer more

choices in the format and amount of

information available about fund

investments.

The Commission’s commitment to

improve the information provided in

fund disclosure documents is longstanding, and the Commission has taken

a number of steps to meet this goal.5
10944 Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules

amendments designed to make money market fund

prospectuses simpler and more informative);

Investment Company Act Release No. 19382 (Apr.

6, 1993) (58 FR 19050) (simplifying financial

highlights information and requiring management’s

discussion of fund performance); Investment

Company Act Release No. 16245 (Feb. 2, 1988) (53

FR 3868) (‘‘Fund Performance Release’’) (adopting

a uniform formula for calculating fund

performance); Investment Company Act Release No.

16244 (Feb. 1, 1988) (53 FR 3182) (adopting a

uniform fee table in fund prospectuses). See also

SEC, Report of the Advisory Committee on the

Capital Formation and Regulatory Processes (July

24, 1996); SEC, Report of the Task Force on

Disclosure Simplification (1996) (recommending

specific improvements in the disclosure provided

by corporate issuers).

6Form N–1A Release, supra note 1.

7Fund Names Release, supra note 2.

8Securities Act Release No. 7380 (Jan. 14, 1997)

(62 FR 3152) (‘‘Plain English Release’’). In

conjunction with these proposals, the Commission’s

Office of Investor Assistance has issued a draft of

A Plain English Handbook: How to Create Clear

SEC Disclosure Documents to explain the plain

English principles of the proposed amendments and

other techniques for preparing clear disclosure

documents. See also ‘‘Plain English: A Work in

Progress,’’ Remarks by Isaac C. Hunt,

Commissioner, SEC, before the First Annual

Institute on Mergers and Acquisition: Corporate,

Tax, Securities, and Related Aspects, Key Biscayne,

Fla. (Feb. 6, 1997).

9See Investment Company Institute (pub. avail.

July 31, 1995) (‘‘1995 Profile Letter’’). The Division

of Investment Management has permitted the pilot

program, with some modifications, to continue for

another year. See Investment Company Institute

(pub. avail. July 29, 1996) (‘‘1996 Profile Letter’’).

10Letter from Paul Schott Stevens, Senior Vice

President and General Counsel, ICI, to Barry P.

Barbash, Director, Division of Investment

Management, SEC, at 5–6 (May 20, 1996) (‘‘ICI

Survey Letter’’) (enclosing Investment Company

Institute, The Profile Prospectus: An Assessment by

Mutual Fund Shareholders (1996) (survey of over

1,000 fund investors)).

11A number of individual investors have written

to the Commission expressing strong support for the

profile. See also Profile Prospectuses: An Idea

Whose Time Has Come, Mutual Funds Magazine,

Aug. 1996, at 11.

12See, e.g., ICI Survey Letter, supra note 10, at 4–

6.

Today, the Commission is proposing

new rule 498, which would permit a

fund to provide investors with a profile.

The profile would include a summary of

key information about a fund, including

a fund’s investment objectives,

strategies, risks, performance, fees,

investment adviser and portfolio

manager, purchase and redemption

procedures, tax implications, and the

services available to the fund’s

investors. The profile is designed to

permit investors at their option to

purchase a fund’s shares based on the

information in the profile or to request

and review the fund’s prospectus (and

other information about the fund) before

making an investment decision.

Investors deciding to purchase fund

shares based on a profile would receive

the fund’s prospectus with their

purchase confirmation.

In connection with the profile

initiative, the Commission also is

proposing, in the first of two companion

releases, changes to prospectus

disclosure requirements (‘‘Form N–1A

Release’’). This proposal seeks to focus

prospectus disclosure on essential

information about a particular fund that

would assist an investor in deciding

whether to invest in that fund.6 In the

other companion release, the

Commission is proposing a new rule

that would address investment company

names. This rule would require funds

and other registered investment

companies with names suggesting a

particular investment emphasis to

invest at least 80% of their assets in the

type of investment suggested by their

names.7 Taken together, the initiatives

proposed today are intended to allow

funds flexibility to respond to the

diverse information needs of investors,

improve and streamline prospectus

disclosure, and address fund names that

are likely to mislead investors about a

fund’s investments and risks.

In a related initiative, the Commission

recently proposed rule amendments to

require the use of plain English

principles in drafting prospectuses and

to provide other guidance on improving

the readability of prospectuses.8 The

Commission intends that the plain

English initiatives serve as the standard

for all disclosure documents, and the

plain English proposals are an

important counterpart of the proposed

fund disclosure initiatives. If adopted,

the plain English requirements would

apply to fund prospectuses and the

profile.

As part of a broad review of fund

disclosure requirements, the

Commission conducted a pilot program

that permits funds to use profiles (‘‘pilot

profiles’’) with their prospectuses.9 The

Investment Company Institute (‘‘ICI’’)

and several large fund groups

participated in the pilot program. The

pilot profiles, like the profile proposed

today, provide a summary of key

information about a fund. The purpose

of the pilot program was to assess

whether investors found the pilot

profiles helpful in making investment

decisions. Focus groups conducted on

the Commission’s behalf (‘‘Focus

Groups’’) responded very positively to

the profile concept, indicating that a

profile would assist them in making

investment decisions. Fund investors

participating in a survey sponsored by

the ICI strongly supported the pilot

profiles.10 In addition, many

commenters, including individual

investors, have endorsed the profile’s

goal of providing standardized,

summary information about a fund.11

Proposed rule 498 would implement

the pilot program and give investors a

new option of purchasing fund shares

based on a profile, which would be a

summary disclosure document. Each

investor using the profile to make an

investment decision would receive the

full prospectus with the purchase

confirmation. Since a fund’s prospectus

and other information about the fund

would be available upon request, the

profile would not reduce the

information available to investors (or

securities professionals). The profile

also would not modify the protections

afforded investors under the federal

securities laws for misleading

statements in fund disclosure

documents. As an additional safeguard

against misleading statements, rule 498

would require a fund to file the profile

with the Commission before its first use,

which would allow the Commission to

monitor compliance with the profile

disclosure requirements.

The profile would meet the

Commission’s goal of improving fund

disclosure by providing:

• A new disclosure choice for

investors: Focus Group participants and

information from other sources indicate

that different investors prefer different

amounts of information before making

an investment decision. 12 The profile

would allow investors to choose the

amount and format of information they

want before making an investment

decision. An investor comfortable with

the level of information contained in a

profile could purchase fund shares

based on that information (and receive

the fund’s prospectus with the purchase

confirmation). An investor who prefers

more information before investing in a

fund could use the profile to request the

fund’s prospectus and other information

about the fund.

As a short, summary document, the

profile could be a more efficient and

less costly means of providing

information to investors. A fund would

have the flexibility to use diverse

methods to distribute a profile (e.g., by

direct mail or by electronic media). To

respond to investor interest, a fund

could make the profile available and

incur lower printing and mailing costs

than it pays when sending a prospectus

to every investor who is selecting among

a number of similar or different types of

funds. Investors, for example, could use

the profile to narrow the number of

funds being considered for investment

and request prospectuses only for those

funds about which the investor would
Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules 10945

13Focus Group participants indicated that they

would use the profile to narrow their investment

options.

14Focus Group participants identified the

standardized, summary fund information in the

profile as particularly helpful in evaluating and

comparing fund investments. See also ICI Survey

Letter, supra note 10, at 4.

15See infra note 97 and accompanying text.

16 1996 Profile Letter, supra note 9. Any fund that

has an effective registration statement and a current

prospectus would be eligible to use a profile under

rule 498.

17See Form N–1A Release, supra note 1. See also

ICI Survey Letter, supra note 10.

18Currently, a profile of a fund that offers shares

to a separate account registered on Forms N–4 (17

CFR 274.11c) or S–6 (17 CFR 239.16) must be

accompanied by the separate account’s prospectus.

See National Association for Variable Annuities

(pub. avail. June 4, 1996) (permitting variable

annuity registrants to use ‘‘variable annuity

profiles’’ together with their prospectuses).

19The profile would be subject to the font size

and other legibility requirements for prospectuses

under rule 420 of the Securities Act (17 CFR

230.420), which requires prospectuses to be in

roman type at least as large and as legible as 10-

point modern type.

20 15 U.S.C. 77j(b). See also section 24(g) of the

Investment Company Act, 15 U.S.C. 80a–24(g). The

Commission has long-encouraged summary

prospectuses under section 10(b) to supply

investors with a condensed statement of the more

important information included in the prospectus.

In 1956, the Commission adopted a rule permitting

the use of a summary prospectus under section

10(b), which was extended to investment

companies in 1972. See Securities Act Release No.

3722 (Nov. 23, 1956) (adopting rule 434A (17 CFR

230.434A) to permit the use of a summary

prospectus); Securities Act Release No. 5248 (May

9, 1972) (37 FR 10071) (extending rule 434A to

investment companies); Securities Act Release No.

6383 (Mar. 3, 1982) [47 FR 11380] (renumbering

rule 434A as rule 431 [17 CFR 230.431). Rule 498

is intended to replace the summary prospectuses

that funds are permitted to use under rule 431, and

the Commission is proposing to revise rule 431 to

clarify that it is not applicable to funds. In keeping

with this approach, the Commission is proposing to

eliminate the ‘‘Instructions as to Summary

Prospectuses’’ that accompany Form N–1A. See

Form N–1A Release, supra note 1.

21The profile generally would provide a summary

of the material elements in the prospectus, while

the prospectus would provide a fuller description

of each of these items. The prospectus, for example,

would disclose the amount of any rule 12b–1 fees

charged by a fund in the fee table and would

include a narrative discussion about the fund’s rule

12b–1 fees. In contrast, the profile as a summary

disclosure document would disclose the amount of

the fund’s rule 12b–1 fees as part of the fee table

disclosure. Similarly, a prospectus would identify

each sub-adviser, if any, that manages a fund’s

portfolio while, in certain cases, a profile could

disclose the number of sub-advisers managing the

fund’s portfolio without identifying each subadviser. See Form N–1A Release, supra note 1, and

infra notes 58 and 65 and accompanying text.

22Proposed rule 498(b). In addition, a fund would

not be allowed to use footnotes or to include crossreferences within the profile or to other

information, unless specifically required or

permitted.

23Rule 421 under the Securities Act (17 CFR

230.421).

24 In addition, an Instruction to rule 498 would

advise a fund to present profile disclosure clearly

and concisely, without using excessive details, legal

or technical terms, complex language, or long

sentences and paragraphs.

like additional information before

making a final investment decision. 13

• Standardized fund summaries:

Investors and others have expressed a

strong preference for summary

information about a fund in a

standardized format. 14 The profile

would meet this goal by requiring

concise disclosure of 9 items of key

information in a specific order and a

question-and-answer format. These

items would include a risk/return

summary (also proposed to be required

at the beginning of all fund

prospectuses), which would summarize

the fund’s investment objectives,

strategies, risks, performance, and fees.

Disclosure about a fund’s risks would

include a concise narrative description

of the fund’s overall risks and a bar

chart that would illustrate graphically

the fund’s past risks by showing

changes in the fund’s returns from year

to year. A table accompanying the bar

chart would compare the average annual

returns of the fund to those of a broadbased securities market index so that

investors could evaluate the fund’s

performance and risks relative to the

market.

Requiring profiles to present

information in a standardized format

should help investors identify key

information about a fund and make

comparisons among different funds.

Rule 498 also would allow a fund to

adapt the profile for use by investors in

participant-directed defined

contribution plans, who could use the

summary information to evaluate and

compare the investment alternatives

offered by a plan. 15

II. Discussion

A. General

The proposed requirements for the

profile would be based on the current

no-action letter of the Commission’s

Division of Investment Management

(‘‘Division’’) permitting the pilot

profiles (‘‘1996 Profile Letter’’).16 Rule

498 would modify certain requirements

in the 1996 Profile Letter in light of both

the Commission’s experience with the

pilot program and its broad

consideration of fund disclosure

requirements.17 As in the pilot program,

use of the profile would be limited to

funds because the profile appears to be

particularly well-suited to the structure

and operation of funds and the way

fund shares are marketed. Based on,

among other things, the Commission’s

experience with the use of the profile by

funds, the Commission may consider in

the future extending rule 498 to other

types of investment companies,

including separate accounts and unit

investment trusts.18 The Commission

requests comment whether and why the

profile as proposed for funds would be

appropriate for other types of

investment companies.

Rule 498 would require 9 items of

information to appear in a specific

sequence and in a question-and-answer

format. Standardizing the order of

profile disclosure is designed to help

investors locate information and

compare the profiles of various funds.19

The proposed question-and-answer

format, frequently used by many funds,

is intended to help communicate the

required information effectively. The

Commission is not proposing to limit

funds to specific questions, and rule 498

would give funds the flexibility to

substitute substantially similar

questions to those included in the rule.

The Commission requests comment on

the proposed question-and-answer

format and whether rule 498 instead

should permit funds to choose the type

of heading for the prescribed disclosure

topics.

The profile would be a summary

prospectus within the meaning of

section 10(b) of the Securities Act.20 As

a summary disclosure document, the

profile is intended to provide a concise,

standardized summary of key

information disclosed in a fund’s

prospectus.21 Rule 498 would identify

the subjects to be covered and provide

guidance about the degree of detail that

is appropriate for a summary document.

Rule 498 would require funds to include

only the information specified by the

rule.22 The 9 items of required

disclosure in the profile are intended to

summarize key information in a fund’s

prospectus. As a result, a fund would

not be able to use a profile when

material information relating to its

particular circumstances is not

addressed by the instructions for the 9

items of required disclosure. The

Commission believes that the goal of

achieving a short, summary disclosure

document that investors can use to

evaluate and compare funds would not

be met unless the rule establishes

certain limits on the information

included in a profile. The Commission

requests comment on the types of

disclosure proposed to be required in

the 9 items and whether other or

additional items would be appropriate.

The Commission’s plain English

proposal, which would modify the

general rule under the Securities Act

addressing prospectus disclosure,23

would apply to the profile.24 While the

release proposing the plain English
10946 Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules

25 1995 Profile Letter, supra note 9, at 2.

26See General Instruction C of proposed Form N–

1A, supra note 1, for guidance on disclosing

information for more than one fund in the same

prospectus.

27Proposed rule 498. The cover page also would

include the date of the profile. See infra note 84 and

accompanying text regarding the proposed dating

requirements. If the profile is distributed

electronically or as part of another document (e.g.,

when the profile is printed in a magazine), rule 498

would require cover page information to appear at

the beginning of the profile.

28 In identifying the document as a ‘‘profile,’’ a

fund would be instructed not to use the term

‘‘prospectus.’’ Proposed rule 498(c)(1)(ii).

29See 1996 Profile Letter, supra note 9, at 1

(requiring a similar legend). A fund would be

required to provide a toll-free or collect telephone

number for investors to request the prospectus or

other information. If applicable, a fund could

indicate that the prospectus is available on its

Internet site or by E-mail. When an application to

purchase the fund’s shares accompanies the profile,

rule 498 would require the application to present

with equal prominence the option to invest in the

fund based on the information included in the

profile or request the prospectus before making an

investment decision. See infra text accompanying

note 72. The profile disclosure about the fund’s

investment strategies also would inform investors

about the availability of additional information in

the fund’s shareholder reports. See infra note 37

and accompanying text.

30Proposed rule 498(b). In addition to the 3-day

mailing requirement for prospectuses, rule 498

would require a fund to send within 3 business

days of a request its annual or semi-annual

shareholder report and Statement of Additional

Information (‘‘SAI’). The Commission staff also

would examine a fund’s compliance with this

requirement and the Commission would bring an

enforcement action in an appropriate case for

failing to comply with this requirement.

31See Items 2 and 3 of proposed Form N–1A. See

also General Instruction C.2.(a) of proposed Form

N–1A.

32Form N–1A Release, supra note 1.

33Proposed rule 498 (incorporating Item 2(a) of

proposed Form N–1A). In providing this disclosure,

a fund could refer to its investment objectives as

investment goals.

34The criteria for determining whether a

particular strategy is a principal strategy and

disclosure about concentration policies are

discussed in the Form N–1A Release, supra note 1.

amendments was issued before this

release and does not refer specifically to

the profile, the Commission intends that

the plain English requirements apply to

all disclosure in the profile. If the

proposed profile and the plain English

requirements are adopted, the

Commission intends to apply the plain

English requirements specifically to the

profile.

Under rule 498, a profile could

describe more than one fund. The pilot

profile, in contrast, contains information

about a single fund.25 The Commission’s

assessment of the pilot program and the

Focus Groups conducted on the

Commission’s behalf indicate that a

profile that describes more than one

fund can achieve the goal of providing

a summary disclosure document that

assists investors in evaluating and

comparing funds.26 In particular,

describing more than one fund in a

profile can be a useful means of

providing investors with investment

alternatives offered by a fund group.

The Commission recognizes, however,

that too much information could make

the profile lengthy, complex, and

difficult to understand. Therefore, the

Commission requests comment whether

the number of funds described in a

profile should be limited to one fund or

some other number of funds to assure

clear and concise disclosure.

B. Profile Disclosure

1. Cover Page

Rule 498 would require the cover

page of the profile to include certain

basic information about the fund and to

disclose that the profile is a summary

disclosure document.27 The cover page

would include the fund’s name and, at

a fund’s option, could disclose the

fund’s investment objectives or the type

of fund offered (e.g., that the fund is a

growth fund or invests its assets in a

particular country). The profile cover

page also would identify the disclosure

document as a ‘profile’28 and include a

legend explaining the profile’s purpose.

The profile legend is intended to make

it clear that investors may obtain the

fund’s prospectus and other information

about the fund before making an

investment decision. In keeping with

this objective, rule 498 would require a

fund to provide the following legend:

This Profile summarizes key information

about the Fund that is included in the Fund’s

prospectus. If you would like more

information before you invest, you may

obtain the Fund’s prospectus and other

information about the Fund at no cost by

calling llllll.29

The Commission requests comment on

the substance and wording of this

legend. As an alternative, the

Commission requests comment whether

the legend should state the following:

This Profile summarizes key information

about the Fund that is included in the Fund’s

prospectus. The prospectus includes

additional material information about the

Fund that you may want to consider before

you invest. You may obtain the Fund’s

prospectus and other information about the

Fund at no cost by calling llllll.

The Commission requests comment

whether this statement would better

inform an investor of the profile’s nature

as a summary document and the

availability of a fuller description about

the fund and its operations in the

prospectus.

To assure that investors receive

additional information promptly, rule

498 would require a fund to send the

prospectus within 3 business days of a

request. The Commission views

compliance with this requirement as an

essential component of the profile

initiative and the goal of promoting

effective communication of information

about funds. The Commission’s Office

of Compliance Inspections and

Examinations would examine a fund’s

compliance with the 3-day requirement

and the Commission would bring an

enforcement action in an appropriate

case for failing to comply with the

requirement. 30

2. Risk/Return Summary

The first 4 items of the profile would

be substantially identical to the

disclosure required in the proposed

risk/return summary at the beginning of

fund prospectuses. 31 The Form N–1A

Release discusses these disclosure

requirements in detail and requests

specific comment about certain

requirements. Commenters, therefore,

also should review the discussion of the

risk/return summary in the Form N–1A

Release. 32 The Commission expects that

if the requirements for the risk/return

summary change in response to

comments or otherwise, conforming

amendments would be made to both

rule 498 and Form N–1A.

The proposed first 4 items in the

profile would require disclosure in

response to the following questions:

• What are the fund’s goals?

To assist investors in identifying

funds that meet their general investment

needs, rule 498 would require a fund to

disclose its investment objectives. 33 A

fund, at its option, also could disclose

the type of fund offered.

• What are the fund’s main investment

strategies?

Rule 498 would require a fund to

summarize, based on the information

provided in the fund’s prospectus, how

the fund intends to achieve its

investment objectives. The summary

would be required to identify the fund’s

principal investment strategies,

including the particular type or types of

securities in which the fund invests or

will invest principally, and any policy

of the fund to concentrate in an industry

or group of industries.34

A fund also would be required to

inform investors about the availability

of additional information about the

fund’s investments in the fund’s

shareholder reports. Fund annual

reports typically include management’s

discussion of fund performance

(‘‘MDFP’’), which describes a fund’s

strategies that materially affected the

fund’s returns during the most recent
Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules 10947

35See Item 5 of proposed Form N–1A.

36Commenters also have cited the annual report

as a source of valuable information. See Voss

Sanders, Dear Shareholder, Morningstar Mutual

Funds, Apr. 26, 1996, at 1 (commenting on

improved annual report disclosure).

37 If applicable, a fund could indicate that its

annual and semi-annual reports are available on its

Internet site or by E-mail request. In addition, a

fund that provides its MDFP in the prospectus or

a money market fund (which is not required to

prepare a MDFP) would omit the second sentence

of this disclosure.

38The 1996 Profile Letter, supra note 9, at 1,

contemplates that information about the availability

of a fund’s shareholder reports appear at the

beginning of the profile.

39Proposed rule 498(c)(2)(iii) (incorporating Item

2(c) of proposed Form N–1A). See also Form N–1A

Release, supra note 1 (regarding fund risk

disclosure proposed to be required in the

prospectus).

40 In recognition of the relative safety of money

market funds, a money market fund would be

required to state that: Although the fund seeks to

preserve the value of your investment at $1.00 per

share, it is possible to lose money by investing in

the fund.

41The 1996 Profile Letter, supra note 9, at 2,

requires information about the appropriateness of

the fund for particular types of investors to be

presented under a separate caption. Because this

information is closely related to the risks of

investing in a fund, rule 498 would integrate this

disclosure into the discussion of a fund’s risks.

42The 1996 Profile Letter, supra note 9, at 2,

permits disclosure about the rewards of investing in

a fund only if presented separately from disclosure

about the fund’s risks.

43See Item 1(a)(vi) and (vii) of Form N–1A; Letter

to Registrants from Carolyn B. Lewis, Assistant

Director, Division of Investment Management, SEC,

at II.B (Feb. 25, 1994).

44See Investment Company Act section 5(b) (15

U.S.C. 80a–5(b)) (regarding diversified and nondiversified funds).

45The 1996 Profile Letter, supra note , at 2,

requires a fund to disclose without further

explanation that it is non-diversified.

46Proposed rule 498 (incorporating Item 2(c) of

proposed Form N–1A).

47The 1996 Profile Letter, supra note , at 2–3,

requires the bar chart and table to appear under a

caption relating to a fund’s past performance. To

help investors use the information in the bar chart

and table, the proposed rule would require a fund

to explain how the information illustrates the

fund’s risks and performance. Item 2 of proposed

Form N–1A would provide the following example

of this explanation: This information illustrates the

fund’s risks and performance by showing changes

in the fund’s performance from year to year and by

showing how the fund’s average annual returns for

one, five, and ten years compare to those of a broad

measure of market performance. A fund also would

be required to disclose that how the fund has

performed in the past is not necessarily an

indication of how the fund will perform in the

future.

48See Risk Concept Release, supra note .

49The proposed rule would require the bar chart

of a fund in operation for fewer than 10 years to

include annual returns for the life of the fund. In

addition, a fund would be required to have at least

one calendar year of returns before including the

bar chart. A fund that includes a single bar in the

bar chart or a fund that does not include the bar

chart because the fund does not have annual returns

for a full calendar year would be required to

modify, as appropriate, the narrative explanation

accompanying the bar chart and table (e.g., by

stating that the information shows the fund’s risks

and performance by comparing the fund’s

performance to a broad measure of market

performance). See Item 2 of proposed Form N–1A.

fiscal year.35 The Division’s review of

and experience with MDFP disclosure

indicate that the annual report may be

a valuable resource for investors.36 The

proposed rule would require the section

of the profile relating to a fund’s

investment strategies to contain

disclosure to the following effect:

Additional information about the fund’s

investments is available in the fund’s annual

and semi-annual reports to shareholders. In

particular, the fund’s annual report discusses

the relevant market conditions and

investment strategies used by the fund’s

adviser that materially affected the fund’s

performance during the last fiscal year. You

may obtain these reports at no cost by calling

llllll.37

This disclosure would be required to

appear in the context of information

about a fund’s investments.38 The

Commission requests comment on this

approach. For example, would it be

more helpful to investors if the profile

included under a separate caption an

explanation of the various types of

additional information available to

investors (e.g., the fund’s shareholder

reports and SAI)?

• What are the main risks of investing

in the fund?

Narrative Disclosure. Rule 498 would

require a fund to summarize the

principal risks of investing in the fund

based on the risk disclosure provided in

the fund’s prospectus.39 The risk section

of the profile would provide an

overview of the risks to which the

fund’s particular portfolio as a whole is

expected to be subject and the

circumstances reasonably likely to affect

adversely the fund’s net asset value and

performance. The risk section also

would include disclosure about the risk

of losing money 40 and identify the types

of investors for whom the fund may be

an appropriate or inappropriate

investment (based on, for example, an

investor’s risk tolerance or time

horizon). Information about whether the

fund is appropriate for particular types

of investors is designed to help

investors evaluate and compare funds

based on their investment objectives

and individual circumstances.41 A fund,

at its option, also could discuss in the

risk section the potential rewards of

investing in the fund as long as the

discussion provides a balanced

presentation of the fund’s risks and

rewards.42

Special Disclosure Requirements. A

money market fund and a fund advised

by or sold through a bank would be

required to disclose in the risk section

of the profile that an investment in the

fund is not insured or guaranteed by the

Federal Deposit Insurance Corporation

or any other government agency. A taxexempt money market fund that

concentrates its investments in a

particular state would be required to

disclose that investing in the fund may

be riskier than investing in other types

of money market funds, since the fund

may invest a significant portion of its

assets in a single issuer.

Similar disclosure for these funds

currently is required to appear on the

cover page of their prospectuses.43

Consistent with the proposed risk/

return summary in the prospectus, rule

498 would require this disclosure to

appear in the risk section of the profile.

Since the disclosure relates directly to a

fund’s risks, it would appear to be more

meaningful to investors when presented

in the context of information about the

fund’s risks. The proposed approach

also would help streamline the profile

cover page and avoid repeating

information on the cover page and in

the risk section of the profile.

Rule 498 would require a fund to

disclose in the risk section of the profile

(if applicable) that it is nondiversified.44 To help investors

understand this disclosure, rule 498

would require a non-diversified fund to

describe the effects of nondiversification (e.g., that, compared to

diversified funds, the fund may invest a

greater percentage of its assets in a

particular issuer) and to summarize the

risks of this practice.45

Risk/Return Bar Chart and Table.

Rule 498 would require the risk section

of the profile to include a bar chart

showing a fund’s calendar year returns

and a table comparing the fund’s

average annual returns to those of a

broad-based securities market index.46

The proposed rule would require the bar

chart and table to be included in the risk

section of the profile under a

subheading that refers to both risk and

performance.47 Over 75% of individual

investors responding to a Commission

release requesting comment about ways

to improve risk disclosure favored a bar

chart presentation of fund risks.48 Focus

Group participants found both the bar

chart and a tabular presentation of fund

performance (particularly when the

table included return information for a

broad-based securities market index)

helpful in evaluating and comparing

fund investments.

The bar chart would present a fund’s

returns for each of the last 10 calendar

years and would illustrate graphically a

fund’s past risks by showing changes in

the fund’s returns over time.49 The table

would present the fund’s average annual
10948 Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules

50A money market fund would be required to

include its 7-day yield in the table. A non-money

market fund would be permitted to disclose its

yield, and any fund (including a money market

fund) would be permitted to disclose its taxequivalent yield. When yield information is

disclosed, a fund would be required to include a

toll-free (or collect) telephone number that investors

can use to obtain current yield information.

51See 1996 Profile Letter, supra note , at 3

(permitting a fund, at its option, to compare its

returns to those of an appropriate broad-based

securities market index).

52The annual returns in the bar chart would be

calculated using the same method required by Item

9 of proposed Form N–1A to calculate annual

returns in the financial highlights information

included in fund prospectuses. As in the case of

annual returns in the financial highlights

information, the returns in the bar chart would not

reflect sales loads or account fees. The average

annual returns included in the table would be

calculated using the same method required by Item

21 of proposed Form N–1A to calculate fund

performance included in advertisements, which

reflects the payment of sales loads and recurring

shareholder account fees. See also Item 5 of

proposed Form N–1A (requiring sales loads and

recurring shareholder account fees to be reflected in

the return information shown in the line graph in

the MDFP).

53Similar disclosure would be required if a fund

charges account fees.

54 In addition, the table accompanying the bar

chart would provide return information for each

class offered in the profile.

55When two or more classes included in the

profile have returns for at least 10 years or returns

for the same period but fewer than 10 years, the

fund would be required to provide annual returns

for the class with the greatest net assets as of the

end of the fund’s most recent fiscal year. Focusing

on the class with the greatest net assets is intended

to provide returns in the bar chart for a

‘‘representative’’ class offered in the profile.

56Proposed rule 498 (incorporating Item 3 of

proposed Form N–1A). See also Item 2(a) of Form

N–1A.

57See Form N–1A Release, supra note (proposing

amendments to improve fee table disclosure).

58Proposed rule 498. Consistent with Item 6(a)(2)

of proposed Form N–1A, rule 498 would not require

information about the portfolio manager of a money

market fund or an index fund.

59See also ICI Survey Letter, supra note , at 9

(recommending that the profile include this

information).

60See Instruction 3 to Item 6(a)(2) of proposed

Form N–1A.

61The 1996 Profile Letter, supra note , at 3,

permits a fund to disclose that 3 or more persons

manage the fund’s portfolio, without regard to the

percentage of the portfolio managed by any one

person.

returns for the last one, five, and ten

fiscal years (or for the life of the fund,

if shorter) and would provide

comparable return information for a

broad-based securities market index.50

Requiring comparative return

information for a broad-based market

index would provide investors with a

basis for evaluating a fund’s

performance and risks relative to the

market.51 The proposed approach also

would be consistent with the line graph

presentation of fund performance

required in MDFP disclosure. Rule 498

would permit a fund to include return

information for other indexes, including

a ‘‘peer group’’ index of comparable

funds.

While the average annual return

information for the fund in the table

would reflect the payment of any sales

loads charged by the fund, the return

information in the bar chart would not

reflect sales loads.52 Sales loads can be

accurately and fairly reflected in return

information of the type contained in the

table by deducting sales loads at the

beginning (or end) of particular periods

from a hypothetical initial fund

investment. Reflecting sales loads in the

bar chart, however, may be

impracticable. In addition, reflecting the

payment of sales loads may be less

important in the bar chart than in the

table, since the bar chart is intended

primarily to depict fund risks

graphically. A fund that charges sales

loads would be required to disclose that

sales loads are not reflected in the bar

chart and that, if the loads were

included, returns would be less than

those shown.53

Rule 498 would require a multiple

class fund to include return information

in the bar chart for only one class.

Because the returns of each class differ

only to the extent the classes do not

have the same expenses, including

return information in the bar chart for

all classes appears to be unnecessary to

illustrate the risks of investing in the

fund.54 Rule 498 would require the bar

chart to reflect annual return

information for the class offered in the

profile that has returns for the longest

period over the last 10 years. This

approach is intended to provide the

greatest amount of information about

changes in the fund’s returns.55

Rule 498 would require a fund to

provide in the table its average annual

returns and those of a broad-based

securities market index as of the end of

the most recent calendar quarter prior to

the profile’s first use. A fund would be

required to update this information for

each succeeding calendar quarter as

soon as reasonably practicable following

the completion of the quarter. To avoid

having to reprint the profile, a fund

would be permitted to update

performance information by using, for

example, a sticker or stamp reflecting

the updated information.

• What are the fund’s fees and

expenses?

Consistent with current prospectus

disclosure, the profile would include a

fee table summarizing a fund’s fees and

expenses, including any sales loads

charged in connection with an

investment in the fund.56 Fees and

expenses directly affect a fund’s

performance and can be important

elements of an investment decision for

fund investors. The fee table is designed

to help investors understand the costs of

investing in a fund and compare those

costs with the costs of other funds.57

Other Disclosure Requirements

Rule 498 would require the profile to

include disclosure about additional key

aspects of a fund investment in response

to the following questions:

• Who are the fund’s investment

adviser and portfolio manager?

Rule 498 would require a fund to

identify its investment adviser and the

person or persons primarily responsible

for the day-to-day management of the

fund’s portfolio (‘‘portfolio manager’’).58

Rule 498 also would require information

about the length of time the portfolio

manager has managed the fund and a

summary of the portfolio manager’s

business experience for the last 5 years.

Focus Group participants indicated that

information about a fund’s portfolio

manager was important in evaluating

and comparing fund investments.59

When several persons act together to

manage a fund’s portfolio, profile

disclosure, like the portfolio manager

disclosure required in fund

prospectuses, would indicate that a

committee has primary responsibility

for the fund’s portfolio management.60

When 3 or more persons each manage

a portion of the portfolio, rule 498

would permit a fund to identify the

number of persons managing the

portfolio without naming each manager,

except that, if a portfolio manager

manages 40% or more of the fund’s

portfolio, information about that

manager would be require to be

disclosed.61 When portions of a fund’s

portfolio are managed by several

persons, the fund’s risks and returns

generally are less dependent on the

activities of a particular person.

Focusing profile disclosure on the

number of a fund’s portfolio managers

would inform investors about the shared

responsibility for the fund’s portfolio

management without adding

unnecessary length to the profile. In

addition, requiring information about

any portfolio manager who manages

40% or more of a fund’s portfolio would

assure that disclosure would be

provided when a portfolio manager has
Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules 10949

62See section 2(a)(20) (15 U.S.C. 80a–2(a)(20))

(defining ‘‘investment adviser’’ to include a subadviser).

63 In contrast, the 1996 Profile Letter, supra note

9, at 3, requires disclosure about a sub-adviser only

if it manages a material portion of a fund’s portfolio.

64 Information about a fund’s cash management

practices generally would not be disclosed in the

section of the profile that discusses the fund’s main

investment strategies. See Form N–1A Release,

supra note (prospectus disclosure would focus on

a fund’s principal strategies, which generally would

not include the fund’s cash management practices).

65See 1996 Profile Letter, supra note , at 3

(permitting a fund to provide disclosure to the

effect that 3 or more sub-advisers manage the fund’s

portfolio without regard to the percentage of the

portfolio managed by any one sub-adviser). To

further limit the scope of this exception, a subadviser solely responsible for managing a fund’s

cash positions would not be counted in determining

whether 3 or more sub-advisers manage the fund’s

portfolio.

66Proposed rule 498, (vii).

67To help investors understand the meaning of

the term ‘‘sales load,’’ proposed Form N–1A would

require the fee table and narrative discussion of

sales loads in the prospectus to refer to ‘‘sales fees

(loads).’’ This approach also would apply to profile

disclosure.

68Fund prospectuses, for example, often include

detailed information about automatic investment

programs, telephone and wire redemption requests,

rights of accumulation and letters of intent that can

be used to reduce sales loads, and sales load

waivers for particular classes of investors and

transactions. See also Form N–1A Release, supra

note 1 (proposing to modify certain prospectus

disclosure requirements to focus prospectus

disclosure on the amount of the sales load charged

in connection with a fund investment).

69Proposed rule 498(c)(2)(iii). If a fund, as a result

of its investment objectives or strategies, expects its

distributions primarily to consist of ordinary

income (or short-term capital gains that are taxed

as ordinary income) or capital gains, the fund

would be required to provide disclosure to that

effect.

70Rule 498 would give a tax-exempt fund the

option of providing specific disclosure about its

taxable distributions or a general statement that a

portion of its distributions may be taxable. A fund

choosing to disclose specific information would be

required to provide the disclosure required by Item

7(d)(2)(ii) of proposed Form N–1A (i.e., The fund

would be required to state, as applicable, that: (1)

the fund may invest a portion of its assets in

securities that generate income that is not exempt

from federal or state income tax; (2) income exempt

from federal income tax may be subject to state and

local income tax; (3) any capital gains distributed

by the fund may be taxable; and (4) a portion of the

tax-exempt income distributed by the fund may be

treated as a tax preference item for purposes of

determining whether the shareholder is subject to

the federal alternative minimum tax).

71Proposed rule 498(c)(2)(ix). Some funds using

pilot profiles disclosed services relating to the

purchase and redemption of the fund’s shares (e.g.,

telephone redemption procedures) in the purchase

and redemption sections of the profile, while other

funds disclosed this information in the section of

the profile relating to the services offered by the

fund. Rule 498 would continue to give a fund the

flexibility to disclose, as appropriate, information

about its services in the purchase, redemption, or

fund services sections of the profile. To keep profile

disclosure concise, rule 498 would not permit

information discussed in the purchase and

redemption sections to be repeated in the section

relating to fund services.

72Proposed rule 498(c)(3). Rule 482 under the

Securities Act (17 CFR 230.482) prohibits a fund

from including an application to purchase the

fund’s shares in an advertisement. This prohibition

was based on concerns that an application would

be inconsistent with the purpose of rule 482, which

was to provide certain information about a fund and

a means of requesting a fund’s prospectus. See

Fund Performance Release, supra note 5. In 1993,

the Commission proposed to amend rule 482 to

permit advertisements containing significantly

Continued

significant responsibilities with respect

to the fund’s portfolio.

A fund would be required to identify

a sub-adviser (if any) subject to two

exceptions.62 First, rule 498 would not

require a fund to identify a sub-adviser

whose sole responsibility for the fund is

limited to routine cash management.63

Responsibility for routine cash

management generally is incidental to a

fund’s investment objectives and

unlikely to affect the fund’s overall

portfolio management and risks.64

Second, consistent with the proposed

approach for portfolio manager

disclosure, rule 498 would permit a

fund with 3 or more sub-advisers, each

of which manages a portion of the

fund’s portfolio to disclose the number

of sub-advisers without giving the name

of each sub-adviser, except that the

identity of any sub-adviser that manages

40% or more of the fund’s portfolio

would be required to be disclosed.65

The Commission requests comment

on the proposed approach when 3 or

more portfolio managers or sub-advisers

each manage a portion of a fund’s

portfolio. The Commission requests

specific comment on the proposed

exceptions for providing information

about any portfolio manager and the

identity of any sub-adviser that manages

40% or more of a fund’s portfolio. In

particular, the Commission requests

comment whether a lower or higher

percentage would be appropriate. The

Commission also requests comment on

alternatives that would simplify this

disclosure while continuing to provide

information about a portfolio manager

or sub-adviser that has significant

responsibilities for management of a

fund’s portfolio.

• How do I buy the fund’s shares? How

do I sell the fund’s shares?

Rule 498 would require a fund to

describe in the profile under two

separate questions how to purchase and

how to redeem the fund’s shares.66 The

purchase section of the profile would

include information on minimum

investment requirements (e.g., initial

and minimum account balances) and,

when applicable, any breakpoints in or

waivers of sales loads.67

Apart from the general requirement to

provide summary information and

concise disclosure, rule 498 would not

limit the extent of purchase and

redemption information included in a

profile. Funds participating in the pilot

program disclosed this information

concisely when the profile accompanied

the prospectus. When a profile is used

without the prospectus, however, a fund

may find it necessary to disclose more

extensive information about purchase

and redemption procedures and, in

particular, sales load breakpoints and

waivers.68 Including detailed purchase,

redemption, and sales load information

in the profile would appear to be

inconsistent with the profile’s purpose

as a summary disclosure document. For

this reason, the Commission requests

comment whether rule 498 should

impose any restrictions on the

disclosure of purchase and redemption

information. Commenters favoring

limiting this disclosure are asked to

provide specific suggestions for

requirements that would serve to limit

the disclosure while providing

information that would assist fund

investors in making investment

decisions. Should the rule, for example,

require a fund to summarize sales load

information by showing the highest and

lowest sales load breakpoints?

• How are the fund’s distributions made

and taxed?

Rule 498 would require the profile to

describe how frequently a fund intends

to make distributions and what

reinvestment options (if any) are

available to investors. Rule 498 also

would require a fund other than a taxexempt fund to state, as applicable, that

the fund intends to make distributions

that may be taxed as ordinary income

and capital gains.69 A tax-exempt fund

would be required to state that it

intends to distribute tax-exempt income

and to disclose, as applicable, that a

portion of its distributions may be

taxable.70

• What other services are available from

the fund?

Rule 498 would require the profile to

summarize or list the services available

to the fund’s investors (e.g., any

exchange privileges or automated

information services).71 Funds

increasingly offer a wide variety of

shareholder services. Information about

the services offered by a particular fund

may be useful to investors and help

investors compare the services offered

by different funds.

Application to Purchase Shares

Rule 498 would permit a fund to

include an application with the profile

to purchase the fund’s shares.72 To make
10950 Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules

more information about a fund and a purchase

application. Investment Company Act Release No.

19342 (Mar. 5, 1993) (58 FR 16141). Unlike the

proposed amendments to rule 482, rule 498 would

require a profile to present a summary of key

information about a fund in a standardized format

and is being proposed by the Commission in

conjunction with proposed amendments to Form

N–1A that are designed to improve the disclosure

provided in fund prospectuses. In connection with

proposed rule 498, the Commission is proposing to

amend rule 482 to clarify that it would not apply

to profiles.

73Section 10(b) of the Securities Act permits the

use of a summary prospectus (which provides

information the substance of which is included in

the prospectus) to communicate information for

purposes of an offer under section 5(b)(1) of the

Securities Act (15 U.S.C. 77e(b)(1)). Section 5(b)(2)

of the Securities Act (15 U.S.C. 77e(b)(2)) requires,

as a condition of selling a security, the delivery to

investors of a prospectus that meets the

requirements of section 10(a) of the Securities Act

(15 U.S.C. 77j(a)). To meet this requirement, rule

498 would require a fund to provide its section

10(a) prospectus in response to an investor’s request

or, as required by section 5(b)(2), to provide the

prospectus prior to or with the purchase

confirmation. Recent legislation added new section

24(g) to the Investment Company Act authorizing

the Commission to adopt rules permitting a fund to

use a summary prospectus that includes

information the substance of which is not included

in the prospectus. National Securities Markets

Improvement Act of 1996, Pub. L. No. 104–290

(1996), section 204 (amending section 24 to add

new paragraph (g)).

74 15 U.S.C. 77l(a)(2); 15 U.S.C. 77q(a).

75 15 U.S.C. 78j(b); 17 CFR 240.10b–5. See also

Fund Performance Release, supra note 5, at 3878

(for anti-fraud purposes, disclosure in a section

10(a) prospectus will not cure a false or misleading

advertisement (or ‘‘omitting prospectus’’ under

section 10(b) of the Securities Act) permitted under

rule 482).

76This administrative remedy supplements the

Commission’s stop order authority under section 8

of the Securities Act (15 U.S.C. 77h). Section 10(b)

of the Securities Act specifically excludes summary

prospectuses from section 11 of the Securities Act

(15 U.S.C. 77k), which imposes strict liability for

misleading statements in a prospectus. Congress

adopted this exception to encourage the use of

summary prospectuses. The exception was justified

on the basis that the Commission’s review of

summary prospectuses would disclose deficiencies

that could be corrected, and that the section 10(a)

prospectus has to be delivered at or before the time

a buyer receives the securities. See I L. Loss & J.

Seligman, Securities Regulation 480 & n.214 (3d ed.

1989) (citing S. Rep. 1036, 83d Cong., 2d Sess. 17–

18 (1954) and H.R. Rep. 1542, 83d Cong., 2d Sess.

26 (1954)). If a misleading statement is included in

both the prospectus and a profile, section 11 would

apply to the sale of the fund’s securities. See id.

77Proposed rule 498(b). See General Instruction D

to proposed Form N–1A (permitting the SAI to be

incorporated by reference in the prospectus, and

other documents filed with the Commission to be

incorporated by reference in the SAI and other parts

of the Form N–1A registration statement).

78See White v. Melton, 757 F. Supp. 267, 271

(S.D.N.Y. 1991). See also Investment Company Act

Release No. 13436 (Aug. 12, 1983) (48 FR 37928,

37930).

79See also supra note 30 and accompanying text

(a fund would be required to send the prospectus

within 3 business days of a request).

80Rule 498 would require a fund to file the profile

under rule 497, which sets out general filing

requirements for fund prospectuses. New paragraph

(k) to rule 497 would include the profile filing

requirements. If the profile is revised during the 30-

day period, a fund would be required to file a

definitive copy of the profile within 5 business days

of its use so that the Commission has a filed copy

that is the same as the profile given to investors.

81The Commission has determined that it is not

necessary or appropriate in the public interest or for

the protection of investors to require that the profile

be filed as part of a registration statement. Filing the

profile as part of a registration statement would

impose unnecessary burdens, would restrict the

flexible use of the profile, and would not add to the

Commission’s ability to monitor the disclosure in

the profile.

82Non-substantive changes to a profile would not

require a filing before use of the profile, although

a copy would be required to be filed within 5 days

of use.

83Proposed rule 498(c)(1)(iii).

84A profile, for example, showing January 1, 1998

as its date of first use could include a parenthetical

below the January date indicating that the profile

has been ‘‘updated as of March 31, 1998.’’

85Rule 101(a)(1)(i) of Regulation S–T (17 CFR

232.101(a)(1)(i)) requires prospectuses filed

pursuant to the Securities Act to be submitted in

electronic format.

it clear that investors may review the

prospectus before investing, rule 498

would require the application to present

with equal prominence the options of

investing in the fund based on the

information in the profile or requesting

the fund’s prospectus before making an

investment decision.

Disclosure Safeguards

The federal securities laws

specifically contemplate the use of a

summary prospectus, such as the

profile, for offering securities.73 As a

consequence, existing protections under

the federal securities laws would apply

to false or misleading statements in a

profile. The general provisions of

sections 12(a)(2) and 17(a) of the

Securities Act, which impose civil and

criminal liability upon any person who

offers or sells securities based on false

or misleading statements, would apply

to a profile as a summary prospectus.74

The anti-fraud provisions of section

10(b) of the Securities Exchange Act of

1934 and rule 10b–5 under that Act also

would apply.75 Section 10(b) of the

Securities Act also authorizes the

Commission to suspend the use of a

summary prospectus if it includes false

or misleading statements.76

Rule 498 would not permit a profile

to incorporate by reference the

information included in the fund’s

prospectus or any other disclosure

document filed with the Commission.77

The profile is designed to summarize

prospectus information in a selfcontained format that would assist an

investor in making an investment

decision or in deciding to request

additional information. Permitting a

fund to incorporate by reference into the

profile information included in the

prospectus would mean that

information in the prospectus would be

considered to be part of the profile

disclosure.78 This result would not be

consistent with the purpose of the

profile, which is to offer investors the

option to make an investment in a fund

based solely on the information in the

profile.

Although investors would be able to

purchase a fund’s shares based on the

summary information contained in a

profile, the prospectus would remain

the primary disclosure document under

the federal securities laws. To inform

investors about the availability of the

prospectus, the profile would be

required to include a legend on the

cover page stating that more information

is available in the prospectus, and the

application accompanying the profile

would be required to give equal

prominence to the options of requesting

a prospectus or investing in the fund. A

fund would be required to deliver its

prospectus either in response to an

investor’s request or with the purchase

confirmation.79

D. Filing Requirements

Rule 498 would require a fund to file

the profile with the Commission at least

30 days before its first use.80 The preuse filing requirement would allow the

Commission to monitor compliance

with rule 498’s disclosure requirements

and reduce the possibility of misleading

information in a profile.81 Subsequently,

a fund would have to file any profile

containing substantive changes to a

previously filed profile 30 days before

use.82 No filing would be required for a

previously filed profile that is revised

only to update return information. The

Commission requests comment on the

proposed filing requirements, including

whether the pre-use filing period of 30

days should be shorter or longer.

Rule 498 would require the profile

filed with the Commission to be dated

approximately as of the date of its first

use.83 Rule 498 also would require a

fund to add the date of the most recent

performance information included in

the profile.84 This requirement would

alert investors to the updated

performance information in the profile,

while assisting the Commission staff in

responding to inquiries by identifying

the date of the profile filed with the

Commission.

The profile would be filed

electronically on the Commission’s

electronic data gathering analysis and

retrieval system (‘‘EDGAR’’).85 The

availability of the profile on EDGAR
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86The Commission anticipates future

modifications that would permit EDGAR to reflect

graphic images in electronically filed documents.

87Rule 304(a) of Regulation S–T (17 CFR

232.304(a)). Immaterial differences between

delivered and electronically filed documents, such

as pagination, color, type size, or corporate logo,

need not be described.

88Proposed rule 497(k)(5).

89See Investment Company Act Release No.

21399 (Oct. 6, 1995) (60 FR 53458, 53460 & n.20)

(‘‘Electronic Distribution Release’’) (providing

guidance on the electronic delivery of documents,

including prospectuses, shareholder reports, and

proxies, under the Securities Act, the Securities

Exchange Act of 1934 (15 U.S.C. 78a et seq.), and

the Investment Company Act); Investment

Company Act Release No. 21945 (May 9, 1996) (61

FR 24644) (addressing the use of electronic media

by broker-dealers, transfer agents, and investment

advisers); Investment Company Act Release No.

21946 (May 9, 1996) (61 FR 24652) (‘‘Release

21946’’) (adopting technical amendments to rules

premised on the delivery of paper documents).

90Electronic Distribution Release, supra note 89,

at 53460 & n.20. Some media, particularly broadcast

media, may be inappropriate for disseminating the

profile because they may not communicate the

profile information effectively (e.g., the bar chart

may not be effectively conveyed by a radio

broadcast) or provide a meaningful opportunity for

retaining the information (e.g., a short television

commercial).

91Release 21946, supra note 89, at 24653. A

document, whether delivered electronically or on

paper, must contain all required information and,

if the order of information has been specified, must

present the information in substantially the

prescribed order. Electronic Distribution Release,

supra note 89, at 53460 n.20.

92See section 2(a)(10)(a) of the Securities Act (15

U.S.C. 77b(a)(10)(a)) (excluding sales literature from

the definition of a ‘‘prospectus’’ (and from the filing

requirements under the Securities Act) if a section

10(a) prospectus (but not a summary prospectus

under section 10(b)) precedes or accompanies the

sales literature).

93Electronic media include, for example,

electronic bulletin boards, E-mail, facsimiles,

Internet sites, audiotapes, and videotapes.

Electronic Distribution Release, supra note 89, at

53458 n.9.

94A fund could provide a hyperlink to the

prospectus from the profile. A hyperlink in a

document (which, for example, may be an

underlined word or phrase) permits a viewer to

‘‘jump’’ to another document (or part of the same

document) with a mouse click. The words

‘‘investment strategies’’ in the profile, for example,

could be set up as a hyperlink to the discussion of

investment strategies in the prospectus. Using

hyperlinks would promote the profile’s role as a

gateway for fund investors to obtain additional

information in the prospectus and other documents.

95Cf. Electronic Distribution Release, supra note

89, at 53465–66 (example (39)) (‘‘If the fund can

identify the application form as coming from the

electronic system that contains both the application

and the prospectus, electronic delivery of the

prospectus can be inferred.’’).

96 In 1995, the Division issued a no-action letter

confirming that certain informational materials

about a fund offered as an investment option in a

plan could be treated as an omitting prospectus

under rule 482 of the Securities Act. Fidelity

Institutional Retirement Services Company, Inc.

(pub. avail. Apr. 5, 1995). The informational

materials, which were intended to be distributed to

plan participants, disclosed only information

included in the fund’s prospectus (i.e., the fund’s

investment objectives, policies and risks, expenses,

past performance, and distribution practices) and

contained a legend informing participants of the

availability of the fund’s prospectus.

97See 29 U.S.C. 1104(c). The most prevalent type

of defined contribution plan is the 401(k) plan (26

U.S.C. 401(k)), which allows an employee to defer

receipt and taxation of a portion of his or her salary

and permits an employer to match a percentage of

the employee’s contributions. A 401(k) plan

typically provides for individual accounts and

permits a participant to exercise control over the

assets in his or her account. These plans often

provide several investment options, frequently

including one or more funds. See Investment

Company Institute, Mutual Fund Fact Book 87 (36th

ed. 1996) (at the end of 1995, more than $161

billion, or 31%, of 401(k) assets were invested in

funds). Section 404(c) of the Employee Retirement

Income Security Act of 1974 and related rule

404c–1 (29 CFR 2550.404c–1) exempt fiduciaries of

a 401(k) plan from liability for investment losses if

a plan participant exercises control over the assets

in his or her account. A participant is deemed to

‘‘exercise control’’ if, among other things, the plan

offers at least 3 investment alternatives and a

participant is provided or has the opportunity to

obtain sufficient information to make informed

decisions about the plan’s investment alternatives.

would permit public access to fund

information in profiles. Although

EDGAR does not currently reproduce

graphic images (such as the profile bar

chart),86 the EDGAR rules require a fair

and accurate narrative description or

tabular representation in the place of

any omitted material.87 To assist the

Commission’s review of the content,

use, and effectiveness of the profile,

including the bar chart, a fund would be

required to file 2 copies of the profile in

the primary form intended to be

distributed to investors (e.g., paper or

electronic media).88 This requirement

would expire 2 years after the effective

date of rule 498 because the

Commission expects that the format and

use of the profile would become largely

routine and standardized by that time,

and the pre-use filing of the profile on

EDGAR would be sufficient to monitor

compliance with the profile disclosure

requirements.

E. Dissemination of Profiles

Rapidly changing technology,

particularly the electronic distribution

of information, has enhanced investors’

access to securities-related information.

The Commission has recognized these

developments by allowing funds (and

other registrants) maximum flexibility

in the choice and use of distribution

media.89 In keeping with this approach,

rule 498 would not limit a fund’s use of

any particular medium for

disseminating the profile. A profile

could be made available through direct

mail and mass print (e.g., magazines and

newspapers), broadcast, and electronic

media. Permitting broad dissemination

of the profile would be consistent with

and further the purposes for which the

profile is designed—to provide

information about a fund in a

standardized and readily accessible

format.

As in the case of other disclosure

documents, the general requirements of

the federal securities laws would

impose certain limitations on the

distribution of a profile. The means of

distributing the profile would be

required to communicate the

information in the profile effectively

and to enable an investor to review the

disclosed information. 90 Each version of

a profile (e.g., electronic or paper)

would be required to contain all of the

information required by rule 498.91 In

addition, while the profile may be

delivered without a prospectus, a profile

accompanied by sales literature cannot

be delivered without the prospectus.92

Electronic media, such as the Internet,

may be particularly well-suited for the

delivery of the profile to investors.93

Including the profile together with the

prospectus (and other information) at a

fund’s Internet site also may be a more

efficient method for funds to

disseminate disclosure documents.

Electronic availability of both the profile

and prospectus could mean that

investors could easily invest in a fund

and access the fund’s prospectus for

more information.94 An investor’s use of

an electronic application in the profile

would create a presumption of delivery

of the prospectus if both the profile and

the prospectus are available at the same

electronic site.95 A fund that does not

electronically disseminate the profile

and prospectus together could not rely

on this presumption and would be

required to provide a copy of the

prospectus with the purchase

confirmation.

F. Defined Contribution Plans

Investors in participant-directed

defined contribution plans (‘‘plans’’)

may find a profile helpful in evaluating

and comparing the funds offered as

investment alternatives in a plan.96

Certain information required by rule

498, however, appears to be

unnecessary for plan participants

because of the way these plans are

structured and regulated. The

requirements of the Employee

Retirement Income Security Act of 1974

and the Internal Revenue Code, and the

terms of individual plans govern, among

other things, participant investments

and plan distributions (including the tax

consequences of distributions).97

To enable a fund to use a profile that

is tailored for use by plan participants,

rule 498 would permit a profile to omit

information relating to the purchase and
10952 Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules

98Proposed rule 498.

99The enrollment form would not be required to

be filed with the Commission because the form

would be the responsibility of the company offering

the plan and prepared in accordance with the plan’s

requirements and applicable law.

100 General Instruction C of proposed Form N–1A

would include similar revisions to prospectus

disclosure requirements to allow funds to omit

certain information from prospectuses that are

limited to use in the retirement plan market. Form

N–1A Release, supra note 1.

sale of fund shares, fund distributions,

and tax consequences.98 In addition,

since some fund services (e.g., exchange

privileges) may not apply to plan

participants, rule 498 would permit a

fund to omit this information. Rule 498

would permit a fund to include the

plan’s enrollment form in lieu of the

application form because the plan

effects purchases and sales of a fund’s

shares on behalf of plan participants.99

The cover page of the profile would

disclose, as required by rule 498, that a

fund’s prospectus and other disclosure

documents are available upon

request.100 The Commission requests

comment whether other information

required by rule 498 may not be useful

for plan participants and could be

omitted when a profile is used in

connection with a plan.

General Request for Comments

The Commission requests that any

interested persons submit comments on

proposed rule 498 and other proposed

amendments that are the subject of this

release, suggest additional changes

(including changes to related rules and

forms that the Commission is not

proposing to amend), or submit

comments on other matters that might

affect the proposed changes.

Commenters suggesting alternative

approaches are encouraged to submit

proposed rule or form text. For purposes

of the Small Business Regulatory

Enforcement Fairness Act of 1996 (5

U.S.C. 801 et seq.), the Commission also

is requesting information regarding the

potential impact of the proposed rule on

the economy on an annual basis.

Commenters should provide empirical

data to support their views.

IV. Paperwork Reduction Act

Proposed rule 498 contains

‘‘collection of information’’

requirements within the meaning of the

Paperwork Reduction Act of 1995 (44

U.S.C. 3501 et seq.), and the

Commission has submitted the

proposed rule to the Office of

Management and Budget (‘‘OMB’’) for

review in accordance with 44 U.S.C.

3507(d) and 5 CFR 1320.11. The title for

the collection of information is ‘‘Profiles

for Open-End Management Investment

Companies.’’ Responses to the

collection of information will not be

kept confidential. 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 control number.

Section 10(a) of the Securities Act

describes the type of information

required in a prospectus used to offer

securities for sale under section 5(b)(1)

of the Securities Act. Sections 10(b) of

the Securities Act and 24(g) of the

Investment Company Act permit the

Commission to allow the use of a

prospectus by a fund that omits or

summarizes information required by

section 10(a). The Commission is

proposing the profile as a summary

prospectus under this authority.

Under proposed rule 498, the profile

would present a summary of key

information about a fund, including the

fund’s investment strategies, risks,

performance, and fees, in a concise,

standardized format. Investors would

have the option of purchasing a fund’s

shares based on information in the

profile or reviewing the fund’s

prospectus (and other information)

before investing.

Under rule 498, use of the profile is

permissive, but the rule is mandatory

for those funds that elect to use a

profile. The Commission expects funds

would not choose to prepare and use a

profile for every investment portfolio

(‘‘portfolio’’) they offer. In addition, a

prospectus, and if used, a profile, may

offer the securities of several portfolios.

If a fund chooses to use a profile, it

would be filed before its first use.

Subsequent filings may be necessary if

there are significant changes to the

profile.

The Commission estimates that there

are approximately 180 new registration

statements filed by funds annually and

that approximately 300 investment

portfolios are included in initial

registrations. The Commission estimates

that funds would elect to use a profile

for approximately one-third of these

portfolios and a profile would include

information for approximately two

portfolios. Based on these estimates, the

preparation and filing of profiles under

rule 498 for these funds would represent

a total annual burden of 1,250 hours (50

profiles x 25 hours per profile). The

Commission estimates that there are

approximately 2,700 registered openend investment companies that have

effective registration statements on Form

N–1A representing approximately 7,500

portfolios. The Commission estimates

that these funds would elect to use a

profile for approximately one-third of

these portfolios and that a profile would

include approximately two portfolios.

Based on these estimates, the total

annual burden for preparing, filing, and

updating a profile would be 12,500

hours (1,250 profiles x 10 hours per

profile) for funds with effective

registration statements. For these two

categories of filers (i.e., funds filing new

registration statements and funds with

effective registration statements), the

total annual burden of preparing, filing,

and updating profiles is 13,750 hours.

Under 44 U.S.C. 3506(c)(2)(B), the

Commission solicits comment to: (i)

evaluate whether the proposed

collection of information is necessary

for the proper performance of the

Commission’s function, including

whether the information shall have

practical utility; (ii) evaluate the

accuracy of the Commission’s estimate

of the burden of the proposed collection

of information; (iii) enhance the quality,

utility, and clarity of the information to

be collected; and (iv) minimize the

burden of the collection of information

on those who are to respond, including

through the use of automated collection

techniques or other forms of information

technology.

Persons desiring to submit comments

on the collection of information

requirements should direct them to the

OMB, Attention: Desk Officer for the

Securities and Exchange Commission,

Office of Information and Regulatory

Affairs, Washington, D.C. 20503, and

should also send a copy of their

comments to Jonathan G. Katz,

Secretary, Securities and Exchange

Commission, 450 5th St., NW., Mail

Stop 6–9, Washington, DC 20549–6009,

with a reference to S7–18–96. The OMB

is required to make a decision

concerning the collection of information

between 30 and 60 days after

publication, so a comment to OMB is

best assured of having its full effect if

the OMB receives it within 30 days of

publication.

Summary of Initial Regulatory

Flexibility Analysis

The Commission has prepared an

Initial Regulatory Flexibility Analysis

(‘‘Analysis’’) in accordance with 5

U.S.C. 603 regarding proposed rule 498.

The Analysis explains that the proposal

would permit a fund to provide

prospective investors with a profile,

which would be a summary prospectus

under section 10(b) of the Securities Act

and section 24(g) of the Investment

Company Act. The Analysis explains

that a profile would include a summary

of key information about a fund and

give investors the option of purchasing

the fund’s shares based on the

information in the profile or requesting
Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules 10953

the fund’s prospectus before making an

investment decision. The Analysis also

explains that the profile is intended to

provide a standardized summary of 9

items of information about a fund in a

specific order and in a question-andanswer format designed to help

investors evaluate and compare funds.

The Analysis discusses the impact of

the proposed rule on small entities,

which are defined, for the purposes of

the Securities Act and Investment

Company Act, as investment companies

with net assets of $50 million or less as

of the end of the most recent fiscal year

(17 CFR 230.157(b) and 270.0–10). The

Commission estimates that there are

approximately 620 small entity

investment companies, and that

approximately one-third (207) could

choose to use proposed rule 498. As

explained in more detail in the

Analysis, the Commission estimates that

the total hour burden on small entities

to prepare, file, and update the profile

annually would be approximately 2,420

hours. While the profile would include

a summary of information about the

fund included in the prospectus, the

disclosure requirements for the profile

and the prospectus are designed for

different purposes. The Commission

believes that there are no other

duplicative, overlapping, or conflicting

federal rules.

The Analysis explains that proposed

rule 498 would not be significantly

burdensome for small entities because

use of the profile is optional and the

profile is intended to be a standardized

summary of information required to be

disclosed in a fund’s prospectus. In

addition, some investors may use

profiles instead of prospectuses to

narrow their choices among funds,

which would reduce printing and

distribution costs. Lower printing and

distribution costs could benefit small

entities as much or more than large

funds.

As stated in the Analysis, the

Commission considered several

alternatives to proposed rule 498,

including, among others, establishing

different compliance or reporting

requirements for small entities or

exempting them from all or part of the

proposed rule. Because use of the

profile would be optional, and the

profile, if used, would contain the same

disclosure that other funds are required

to include in the profile, the

Commission believes that the proposed

rule would not impose additional

burdens on small entities and separate

treatment for small entities would be

inconsistent with the protection of

investors.

The Commission encourages the

submission of comments on the

Analysis, including specific comment

on (i) the number of small entities that

would be affected by the proposed rule

and (ii) the discussion of the impact of

the proposed rule on small entities.

Comments will be considered in the

preparation of the Final Regulatory

Flexibility Analysis if the proposed rule

is adopted. A copy of the Analysis may

be obtained by contacting Markian M.W.

Melnyk, Senior Counsel, Securities and

Exchange Commission, 450 5th Street,

NW., Mail Stop 10–2, Washington, DC.

20549–6009.

VI. Statutory Authority

The Commission is proposing rule

498 under sections 5, 7, 8, 10, and 19(a)

of the Securities Act (15 U.S.C. 77e, 77g,

77h, 77j, and 77s(a)) and sections 8, 22,

24(g), 30, and 38 of the Investment

Company Act (15 U.S.C. 80a–8, 80a–22,

80a–24(g), 80a–29, and 80a–37). The

authority citations for the rule precede

the text of the amendments.

VII. Text of Proposed Rule

List of Subjects in 17 CFR Part 230

Investment companies, Reporting and

recordkeeping requirement, Securities.

For the reasons set out in the

preamble, the Commission proposes to

amend Chapter II, Title 17 of the Code

of Federal Regulations as follows:

PART 230—GENERAL RULES AND

REGULATIONS, SECURITIES ACT OF

1933

1. The authority citation for part 230

continues to read in part as follows:

Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j,

77s, 77sss, 78c, 77d, 78l, 78m, 78n, 78o, 78w,

78ll(d), 79t, 80a–8, 80a–29, 80a–30, and 80a–

37, unless otherwise noted.

* * * * *

2. Amend § 230.431 to revise the

introductory text of paragraph (a) to

read as follows:

§ 230.431 Summary prospectuses.

(a) A summary prospectus prepared

and filed (except a summary prospectus

filed by an open-end management

investment company registered under

the Investment Company Act of 1940) as

part of a registration statement in

accordance with this section shall be

deemed to be a prospectus permitted

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)) if the

form used for registration of the

securities to be offered provides for the

use of a summary prospectus and the

following conditions are met:

* * * * *

3. Amend § 230.482 to revise the

introductory text of paragraph (a) to

read as follows:

§ 230.482 Advertising by an investment

company as satisfying requirements of

section 10.

(a) An advertisement shall be deemed

to be a prospectus under section 10(b)

of the Act (15 U.S.C. 77j(b)) for the

purpose of section 5(b)(1) of the Act (15

U.S.C. 77e(b)(1)), unless the

advertisement is a profile under

§ 230.498 or is excepted from the

definition of prospectus by section 2(10)

of the Act (15 U.S.C. 77b(10)) and

related § 230.134, if:

* * * * *

4. Amend § 230.497 to revise

paragraph (a) and to add paragraph (k)

to read as follows:

§ 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 § 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:

(1) An investment company

advertisement under § 230.482 shall be

filed under this paragraph (but not as

part of the registration statement) unless

filed under paragraph (i) of this section;

and

(2) A profile under § 230.498 shall be

filed in accordance with paragraph (k)

of this section and not as part of the

registration statement.

* * * * *

(k)(1) A form of profile under

§ 230.498 shall not be used unless:

(i) The form of profile is filed with the

Commission at least 30 days before the

date it is first sent or given to any

person. No additional filing is required

during the 30-day period for changes

(substantive or otherwise) to a form of

profile filed under this paragraph if

copies of the changes are submitted to

the Commission under paragraph (k)(5)

of this section.

(ii) A form of profile that has a

substantive change from or an addition

to the information in the last form of

profile filed under paragraph (k)(1)(i) of

this section or under this paragraph

(except a profile that is changed to

update quarterly return information) is

filed with the Commission at least 30

days before the date it is sent or given

to any person. No additional filing is

required during the 30-day period for
10954 Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules

changes (substantive or otherwise) to a

form of profile filed under this

paragraph if copies of the changes are

submitted to the Commission under

paragraph (k)(5) of this section.

(2) The form of profile filed under

paragraph (k)(1)(ii) of this section can be

used on the later of 30 days after the

date of filing or, if the changes or

additions reflect changes to a prospectus

included in a post-effective amendment

filed to update a registration statement

under § 230.485, the date the posteffective amendment becomes effective.

(3) File with the Commission a

definitive form of a profile that varies

from the profile filed under paragraph

(k)(1) of this section no later than the

fifth business day after the date it is

used.

(4) Any form of profile that does not

contain substantive changes from or

additions to a definitive profile that was

filed under paragraph (k)(3) of this

section does not need to be filed with

the Commission before use if it is filed

no later than the fifth business day after

the date it is used. A form of profile in

which the only changes are updated

quarterly return information does not

need to be filed with the Commission.

(5) Send two additional copies of a

form of profile filed electronically under

paragraph (k)(3) of this section to the

Commission, in the primary form

intended to be used for distribution to

investors (e.g., paper, electronic media),

by mail or other means reasonably

calculated to result in receipt by the

Commission, no later than the fifth

business day after the date the profile is

first sent or given to any person. Send

copies to the following address:

Assistant Director, Office of Disclosure

and Review, Division of Investment

Management, U.S. Securities and

Exchange Commission, 450 5th St. NW.,

Mail Stop 10–2, Washington, DC 20549–

6009. Note prominently that the

submission is made under

§ 230.497(k)(5) of Regulation C. If the

profile is distributed primarily on the

Internet, supply, in lieu of copies, the

electronic address (‘‘URL’’) of the profile

pages(s) in an exhibit to the electronic

filing under this paragraph (k). This

additional filing requirement shall

expire on March 10, 1999.

5. Add § 230.498 to read as follows:

§ 230.498 Profiles for Certain Open-End

Management Investment Companies.

(a) Definitions. A Fund means an

open-end management investment

company, or any series of the company,

that has or is included in an effective

registration statement on Form N–1A

(§§ 274.11A and 239.15A of this

chapter) and that has a current

prospectus under section 10(a) of the

Act (15 U.S.C. 77j(a)).

(2) A Profile means 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 purpose of

section 5(b)(1) of the Act (15 U.S.C.

77e(b)(1)).

(b) General profile requirements. A

Fund may provide a Profile to investors,

which may contain an application that

investors may use to purchase the

Fund’s shares, if:

(1) The Profile contains only the

information required or permitted by

paragraph (c) of this section and does

not incorporate any information by

reference to another document.

(2) The Fund responds within 3

business days to a request for its

prospectus, annual or semi-annual

report, or Statement of Additional

Information by first-class mail or other

means designed to assure equally

prompt delivery.

Instructions to paragraph (b).

1. The Profile is intended to be a

standardized summary of key information in

the Fund’s prospectus. Additional

information is available in the prospectus

and in the Fund’s annual and semi-annual

shareholder reports and Statement of

Additional Information. Do not include

cross-references to this (or other) additional

information or use footnotes in the Profile,

unless specifically required or permitted.

2. Provide clear and concise information in

the Profile. Avoid excessive detail, technical

or legal terms, complex language, and long

sentences and paragraphs.

3. File the Profile with the Commission as

required by § 230.497(k).

(c) Specific profile requirements. (1)

Include on the cover page of the Profile

or at the beginning of the Profile if the

Profile is distributed electronically or as

part of another document:

(i) The Fund’s name and, at the

Fund’s option, the Fund’s investment

objectives or the type of fund offered or

both;

(ii) A statement identifying the

document as a ‘‘Profile,’’ without using

the term ‘‘prospectus’’;

(iii) The approximate date of the

Profile’s first use and, if applicable, the

date of the most recent updated

performance information included in

the Profile;

(iv) The following legend:

This Profile summarizes key information

about the Fund that is included in the Fund’s

prospectus. If you would like more

information before you invest, you may

obtain the Fund’s prospectus and other

information about the Fund at no cost by

calling llllll.

Instruction to paragraph (c)(1)(iv).

Provide a toll-free (or collect)

telephone number that investors can use

to obtain the prospectus or other

information. If applicable, the Fund may

indicate that the prospectus is available

on its Internet site or by E-mail request.

(2) Provide the information required

by paragraphs (c)(2) (i) through (ix) of

this section in the order indicated and

in the same or substantially similar

question-and-answer format shown:

(i) What are the Fund’s goals? Provide

the information about the Fund’s

investment objectives under Item 2(a) of

Form N–1A.

(ii) What are the Fund’s main

investment strategies? Provide the

information about the Fund’s principal

investment strategies under Item 2(b) of

Form N–1A.

(iii) What are the main risks of

investing in the Fund? Provide the

narrative disclosure, bar chart, and table

under Item 2(c) of Form N–1A. Provide

the Fund’s average annual returns and,

if applicable, yield as of the end of the

most recent calendar quarter prior to the

Profile’s first use and update the

information as of the end of each

succeeding calendar quarter as soon as

practicable after the completion of the

quarter.

(iv) What are the Fund’s fees and

expenses? Include the fee table under

Item 3 of Form N–1A.

(v) Who are the Fund’s investment

adviser and portfolio manager? (A)

Identify the Fund’s investment adviser

and any sub-adviser, unless the subadviser’s responsibility is limited to

routine cash management. When 3 or

more sub-advisers each manage a

portion of the Fund’s portfolio (other

than cash positions), the Fund may

disclose the number of sub-advisers

managing the portfolio, without

identifying each sub-adviser, except that

the identity of any sub-adviser that

manages 40% or more of the Fund’s

portfolio must be disclosed.

(B) Using the Instructions to Item

6(a)(2) of Form N–1A, state the name

and length of service of the person or

persons employed by or associated with

the Fund’s investment adviser (or the

Fund) who are primarily responsible for

the day-to-day management of the

Fund’s portfolio and summarize each

person’s business experience for the last

5 years. When 3 or more persons each

manage a portion of the Fund’s

portfolio, the Fund may disclose the

number of persons managing the

portfolio, without identifying each

person, except that the information

required by this paragraph must be

disclosed for any person that manages

40% or more of the Fund’s portfolio.
Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules 10955

1 Investment Company Act Release No. 22528

(Feb. 27, 1997) (‘‘Form N–1A Release’’).

(vi) How do I buy the Fund’s shares?

Provide information about how to

purchase the Fund’s shares, including

any minimum investment requirements.

If applicable, disclose any breakpoints

in or waivers of sales loads (referring to

sales loads as ‘‘sales fees (loads)’).

(vii) How do I sell the Fund’s shares?

Provide information about how to

redeem the Fund’s shares.

(viii) How are the Fund’s distributions

made and taxed? Describe how

frequently the Fund intends to make

distributions and what reinvestment

options (if any) are available to

investors. State, as applicable, that the

Fund intends to make distributions that

may be taxed as ordinary income and

capital gains or that the Fund intends to

distribute tax-exempt income. If a Fund,

as a result of its investment objectives

or strategies, expects its distributions

primarily to consist of ordinary income

(or short-term capital gains that are

taxed as ordinary income) or capital

gains, provide disclosure to that effect.

For a Fund that holds itself out as

investing in securities generating taxexempt income, provide, as applicable,

the information required by Item

7(d)(2)(ii) of Form N–1A or a general

statement to the effect that a portion of

the Fund’s distributions may be subject

to tax.

(ix) What other services are available

from the Fund? Summarize or list the

services available to the Fund’s

shareholders (e.g., any exchange

privileges or automated information

services), unless otherwise disclosed in

response to paragraphs (c)(2) (i) through

(viii) of this section.

(3) The Profile may include an

application that a prospective investor

can use to purchase the Fund’s shares

if the application presents with equal

prominence the option to invest in the

Fund or request the Fund’s prospectus.

(4) A Profile of a Fund available as an

investment option for participants in a

defined contribution plan that meets the

requirements for qualification under the

Internal Revenue Code of 1986 may

omit the information required by

paragraphs (c)(2) (vi) through (ix) of this

section. In lieu of the application

permitted by paragraph (c)(3) of this

section, the Fund may include the

plan’s enrollment form, which does not

have to be filed with the Commission.

By the Commission.

Dated: February 27, 1997.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–5376 Filed 3–7–97; 8:45 am]

BILLING CODE 8010–01–P

17 CFR Part 270

[Release No. IC–22530; File No. S7–11–97]

RIN 3235–AH11

Investment Company Names

AGENCY: Securities and Exchange

Commission.

ACTION: Proposed rule.

SUMMARY: The Securities and Exchange

Commission is proposing a new rule

under the Investment Company Act of

1940 that would require a registered

investment company with a name

suggesting that the company focuses on

a particular type of investment (e.g., an

investment company that calls itself the

ABC Stock Fund, the XYZ Bond Fund,

or the QRS U.S. Government Fund) to

invest at least 80% of its assets in the

type of investment suggested by its

name. Under current positions of the

Commission’s Division of Investment

Management, these investment

companies generally must invest only

65% of their assets in the types of

investments suggested by their names.

The proposed rule also would address

names that suggest an investment

company focuses its investments in a

particular country or geographic region,

names that indicate a company’s

distributions are exempt from income

tax, and names that suggest a company

or its shares are guaranteed or approved

by the U.S. government. The new rule

is intended to address certain broad

categories of investment company

names that are likely to mislead

investors about an investment

company’s investments and risks.

DATES: Comments must be received on

or before June 9, 1997.

ADDRESSES: Comments should be

submitted in triplicate to Jonathan G.

Katz, Secretary, Securities and Exchange

Commission, 450 5th Street, NW.,

Washington, DC. 20549–6009.

Comments also may be submitted

electronically at the following E-mail

address: rule-comments@sec.gov. All

comment letters should refer to File No.

S7–11–97; this file number should be

included on the subject line if E-mail is

used. All comments received will be

available for public inspection and

copying in the Commission’s Public

Reference Room, 450 5th Street, NW.,

Washington, DC. 20549–6009.

Electronically-submitted comment

letters will be posted on the

Commission’s Internet site (http://

www.sec.gov).

FOR FURTHER INFORMATION CONTACT:

David U. Thomas, Senior Counsel, or

Elizabeth R. Krentzman, Assistant

Director, (202) 942–0721, Office of

Disclosure and Investment Adviser

Regulation, Division of Investment

Management, Securities and Exchange

Commission, 450 5th Street, NW., Mail

Stop 10–2, Washington, DC. 20549–

6009.

SUPPLEMENTARY INFORMATION: The

Securities and Exchange Commission

today is proposing for comment new

rule 35d–1 (17 CFR 270.35d–1) under

the Investment Company Act of 1940

(15 U.S.C. 80a–1 et seq.) (the

‘‘Investment Company Act’’). The new

rule would apply to all registered

investment companies and would

require an investment company with a

name that suggests that the company

focuses on a particular type of

investment to invest at least 80% of its

assets in the type of investment

suggested by its name. In addition, the

rule would apply an 80% investment

requirement to investment companies

with names that suggest the company

focuses its investments in a particular

country (e.g., the ABC Japan Fund) or

geographic region (e.g., the ABC Latin

America Fund) and investment

companies with names that indicate the

company’s distributions are exempt

from federal income tax (e.g., the XYZ

Tax-Exempt Fund) or exempt from both

federal and state income tax (e.g., the

XYZ New York Tax-Exempt Fund). The

rule also would prohibit an investment

company from using a name that

suggests that the company or its shares

are guaranteed or approved by the U.S.

government.

In separate companion releases, the

Commission is proposing two initiatives

designed to improve the disclosure

provided to investors by open-end

management investment companies

(‘‘funds’’). First, the Commission is

proposing significant amendments to

the prospectus disclosure requirements

of Form N–1A (17 CFR 274.11A), the

registration statement used by funds.1

These amendments seek to minimize

prospectus disclosure about technical,

legal, and operational matters that

generally are common to all funds and

to focus prospectus disclosure on

essential information about a particular

fund that would assist an investor in

deciding whether to invest in that fund.

Second, the Commission is proposing

new rule 498 under the Securities Act

of 1933 (15 U.S.C. 77a et seq.) and the

Investment Company Act, which would

permit an investor to buy a fund’s

shares based on a summary document,

or ‘‘profile,’’ that contains key