[Federal Register Volume 62, Number 46 (Monday, March 10, 1997)]
[Proposed Rules]
[Pages 10943-10955]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-5376]



[[Page 10943]]

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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.

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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: <a href="/cdn-cgi/l/email-protection#e290978e87cf818d8f8f878c9691a2918781cc858d94"><span class="__cf_email__" data-cfemail="4331362f266e202c2e2e262d3730033026206d242c35">[email protected]</span></a>. 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. <SUP>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. <SUP>2
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    \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.
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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.<SUP>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.<SUP>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.
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    \3\ See 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).
    \4\ See, 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).
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    The Commission's commitment to improve the information provided in 
fund disclosure documents is long-standing, and the Commission has 
taken a number of steps to meet this goal.<SUP>5

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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.
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    \5\ See 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 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).
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    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.<SUP>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.<SUP>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.
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    \6\ Form N-1A Release, supra note 1.
    \7\ Fund Names Release, supra note 2.
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    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.<SUP>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.
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    \8\ Securities 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).
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    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.<SUP>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.<SUP>10 In 
addition, many commenters, including individual investors, have 
endorsed the profile's goal of providing standardized, summary 
information about a fund.<SUP>11
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    \9\ See 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'').
    \10\ Letter 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)).
    \11\ A 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.
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    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:
    <bullet> 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. <SUP>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.
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    \12\ See, e.g., ICI Survey Letter, supra note 10, at 4-6.
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    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

[[Page 10945]]

like additional information before making a final investment decision. 
<SUP>13
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    \13\ Focus Group participants indicated that they would use the 
profile to narrow their investment options.
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    <bullet> Standardized fund summaries: Investors and others have 
expressed a strong preference for summary information about a fund in a 
standardized format. <SUP>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.
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    \14\ Focus 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.
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    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 
broad-based 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. <SUP>15
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    \15\ See infra note 97 and accompanying text.
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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'').<SUP>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.<SUP>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.<SUP>18 The Commission requests comment whether and why the 
profile as proposed for funds would be appropriate for other types of 
investment companies.
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    \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.
    \17\ See Form N-1A Release, supra note 1. See also ICI Survey 
Letter, supra note 10.
    \18\ Currently, 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).
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    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.<SUP>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.
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    \19\ The 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.
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    The profile would be a summary prospectus within the meaning of 
section 10(b) of the Securities Act.<SUP>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.<SUP>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.<SUP>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.
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    \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.
    \21\ The 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 sub-adviser. See Form N-1A 
Release, supra note 1, and infra notes 58 and 65 and accompanying 
text.
    \22\ Proposed rule 498(b). In addition, a fund would not be 
allowed to use footnotes or to include cross-references within the 
profile or to other information, unless specifically required or 
permitted.
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    The Commission's plain English proposal, which would modify the 
general rule under the Securities Act addressing prospectus 
disclosure,<SUP>23 would apply to the profile.<SUP>24 While the release 
proposing the plain English

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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.
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    \23\ Rule 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.
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    Under rule 498, a profile could describe more than one fund. The 
pilot profile, in contrast, contains information about a single 
fund.<SUP>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.<SUP>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.
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    \25\ 1995 Profile Letter, supra note 9, at 2.
    \26\ See 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.
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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.<SUP>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'<SUP>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:

    \27\ Proposed 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).
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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 
____________.<SUP>29
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    \29\ See 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.
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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 ____________.

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. <SUP>30
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    \30\ Proposed 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.
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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. <SUP>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. 
<SUP>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.
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    \31\ See Items 2 and 3 of proposed Form N-1A. See also General 
Instruction C.2.(a) of proposed Form N-1A.
    \32\ Form N-1A Release, supra note 1.
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    The proposed first 4 items in the profile would require disclosure 
in response to the following questions:
<bullet> 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. <SUP>33 A fund, at its option, also could 
disclose the type of fund offered.
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    \33\ Proposed 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.
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<bullet> 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.<SUP>34
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    \34\ The 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.
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    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

[[Page 10947]]

fiscal year.<SUP>35 The Division's review of and experience with MDFP 
disclosure indicate that the annual report may be a valuable resource 
for investors.<SUP>36 The proposed rule would require the section of 
the profile relating to a fund's investment strategies to contain 
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disclosure to the following effect:

    \35\ See Item 5 of proposed Form N-1A.
    \36\ Commenters 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).
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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 
____________.<SUP>37

    \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.
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    This disclosure would be required to appear in the context of 
information about a fund's investments.<SUP>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)?
---------------------------------------------------------------------------

    \38\ The 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.
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<bullet> 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.<SUP>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 <SUP>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.<SUP>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.<SUP>42
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    \39\ Proposed 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.
    \41\ The 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.
    \42\ The 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.
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    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 tax-exempt 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.<SUP>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.
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    \43\ See 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).
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    Rule 498 would require a fund to disclose in the risk section of 
the profile (if applicable) that it is non-diversified.<SUP>44 To help 
investors understand this disclosure, rule 498 would require a non-
diversified fund to describe the effects of non-diversification (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.<SUP>45
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    \44\ See Investment Company Act section 5(b) (15 U.S.C. 80a-
5(b)) (regarding diversified and non-diversified funds).
    \45\ The 1996 Profile Letter, supra note , at 2, requires a fund 
to disclose without further explanation that it is non-diversified.
---------------------------------------------------------------------------

    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.<SUP>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.<SUP>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.<SUP>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.
---------------------------------------------------------------------------

    \46\ Proposed rule 498 (incorporating Item 2(c) of proposed Form 
N-1A).
    \47\ The 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.
    \48\ See Risk Concept Release, supra note .
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    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.<SUP>49 The table 
would present the fund's average annual

[[Page 10948]]

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.<SUP>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.<SUP>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.
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    \49\ The 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.
    \50\ A 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 tax-equivalent 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.
    \51\ See 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).
---------------------------------------------------------------------------

    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.<SUP>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.<SUP>53
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    \52\ The 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).
    \53\ Similar disclosure would be required if a fund charges 
account fees.
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    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.<SUP>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.<SUP>55
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    \54\ In addition, the table accompanying the bar chart would 
provide return information for each class offered in the profile.
    \55\ When 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.
---------------------------------------------------------------------------

    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.
<bullet> 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.<SUP>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.<SUP>57
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    \56\ Proposed rule 498 (incorporating Item 3 of proposed Form N-
1A). See also Item 2(a) of Form N-1A.
    \57\ See Form N-1A Release, supra note (proposing amendments to 
improve fee table disclosure).
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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:
<bullet> 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'').<SUP>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.<SUP>59
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    \58\ Proposed 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.
    \59\ See also ICI Survey Letter, supra note , at 9 (recommending 
that the profile include this information).
---------------------------------------------------------------------------

    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.<SUP>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.<SUP>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

[[Page 10949]]

significant responsibilities with respect to the fund's portfolio.
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    \60\ See Instruction 3 to Item 6(a)(2) of proposed Form N-1A.
    \61\ The 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.
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    A fund would be required to identify a sub-adviser (if any) subject 
to two exceptions.<SUP>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.<SUP>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.<SUP>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.<SUP>65
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    \62\ See section 2(a)(20) (15 U.S.C. 80a-2(a)(20)) (defining 
``investment adviser'' to include a sub-adviser).
    \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).
    \65\ See 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 sub-adviser 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.
---------------------------------------------------------------------------

    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.
<bullet> 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.<SUP>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.<SUP>67
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    \66\ Proposed rule 498, (vii).
    \67\ To 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.
---------------------------------------------------------------------------

    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.<SUP>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?
---------------------------------------------------------------------------

    \68\ Fund 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).
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<bullet> 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 tax-exempt fund to state, as applicable, that the fund 
intends to make distributions that may be taxed as ordinary income and 
capital gains.<SUP>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.<SUP>70
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    \69\ Proposed 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.
    \70\ Rule 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).
---------------------------------------------------------------------------

<bullet> 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).<SUP>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.
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    \71\ Proposed 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.
---------------------------------------------------------------------------

Application to Purchase Shares
    Rule 498 would permit a fund to include an application with the 
profile to purchase the fund's shares.<SUP>72 To make

[[Page 10950]]

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.
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    \72\ Proposed 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 
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.
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Disclosure Safeguards

    The federal securities laws specifically contemplate the use of a 
summary prospectus, such as the profile, for offering 
securities.<SUP>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.<SUP>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.<SUP>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.<SUP>76
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    \73\ Section 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).
    \76\ This 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.
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    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.<SUP>77 The profile is designed to 
summarize prospectus information in a self-contained 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.<SUP>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.
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    \77\ Proposed 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).
    \78\ See 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).
---------------------------------------------------------------------------

    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.<SUP>79
---------------------------------------------------------------------------

    \79\ See also supra note 30 and accompanying text (a fund would 
be required to send the prospectus within 3 business days of a 
request).
---------------------------------------------------------------------------

D. Filing Requirements

    Rule 498 would require a fund to file the profile with the 
Commission at least 30 days before its first use.<SUP>80 The pre-use 
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.<SUP>81 Subsequently, a fund would 
have to file any profile containing substantive changes to a previously 
filed profile 30 days before use.<SUP>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.
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    \80\ Rule 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.
    \81\ The 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.
    \82\ Non-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.
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    Rule 498 would require the profile filed with the Commission to be 
dated approximately as of the date of its first use.<SUP>83 Rule 498 
also would require a fund to add the date of the most recent 
performance information included in the profile.<SUP>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.
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    \83\ Proposed rule 498(c)(1)(iii).
    \84\ A 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.''
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    The profile would be filed electronically on the Commission's 
electronic data gathering analysis and retrieval system 
(``EDGAR'').<SUP>85 The availability of the profile on EDGAR

[[Page 10951]]

would permit public access to fund information in profiles. Although 
EDGAR does not currently reproduce graphic images (such as the profile 
bar chart),<SUP>86 the EDGAR rules require a fair and accurate 
narrative description or tabular representation in the place of any 
omitted material.<SUP>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).<SUP>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.
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    \85\ Rule 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.
    \86\ The Commission anticipates future modifications that would 
permit EDGAR to reflect graphic images in electronically filed 
documents.
    \87\ Rule 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.
    \88\ Proposed rule 497(k)(5).
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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.<SUP>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.
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    \89\ See 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).
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    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. <SUP>90 Each version of a profile (e.g., electronic or 
paper) would be required to contain all of the information required by 
rule 498.<SUP>91 In addition, while the profile may be delivered 
without a prospectus, a profile accompanied by sales literature cannot 
be delivered without the prospectus.<SUP>92
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    \90\ Electronic 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).
    \91\ Release 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.
    \92\ See 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).
---------------------------------------------------------------------------

    Electronic media, such as the Internet, may be particularly well-
suited for the delivery of the profile to investors.<SUP>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.<SUP>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.<SUP>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.
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    \93\ Electronic 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.
    \94\ A 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.
    \95\ Cf. 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.'').
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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.<SUP>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).<SUP>97
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    \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.
    \97\ See 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.
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    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

[[Page 10952]]

sale of fund shares, fund distributions, and tax consequences.<SUP>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.<SUP>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.<SUP>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.
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    \98\ Proposed rule 498.
    \99\ The 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.
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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 open-end 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

[[Page 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-and-answer 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 Sec. 230.431 to revise the introductory text of paragraph 
(a) to read as follows:


Sec. 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 Sec. 230.482 to revise the introductory text of paragraph 
(a) to read as follows:


Sec. 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 Sec. 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 
Sec. 230.134, if:
* * * * *
    4. Amend Sec. 230.497 to revise paragraph (a) and to add paragraph 
(k) to read as follows:


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

    (a) Five copies of every form of prospectus sent or given to any 
person prior to the effective date of the registration statement that 
varies from the form or forms of prospectus included in the 
registration statement filed pursuant to Sec. 230.402(a) shall be filed 
as part of the registration statement not later than the date that form 
of prospectus is first sent or given to any person, except that:
    (1) An investment company advertisement under Sec. 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 Sec. 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 Sec. 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

[[Page 10954]]

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 Sec. 230.485, the date the post-effective 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 Sec. 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 Sec. 230.498 to read as follows:


Sec. 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 (Secs. 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 
Sec. 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 
____________.

    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 sub-adviser'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.

[[Page 10955]]

    (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 tax-exempt 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


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