10898 Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules

1 Investment Company Act Release No. 22529

(Feb. 27, 1997) (‘‘Profile 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.

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

Fund Fact Book 29–37 (36th ed. 1996) (‘‘ICI Fact

Book’’) (between 1987 and 1996, assets increased

from $769.9 billion to $3.5 trillion and the number

of funds increased from 2,317 to 6,243).

4Compare ICI, Trends in Mutual Fund Investing:

November 1996 at 3 (Dec. 1996) (ICI News No. ICI–

96–107) (fund net assets exceeded $3.5 trillion as

of Nov. 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).

5See, e.g., ‘‘The SEC and the Mutual Fund

Industry: An Enlightened Partnership,’’ Remarks by

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

General Membership Meeting at the Washington

SECURITIES AND EXCHANGE

COMMISSION

17 CFR Parts 230, 239, 270, and 274

[Release Nos. 33–7398; 34–38346; IC–

22528; S7–10–97]

RIN 3235–AE46

Registration Form Used by Open-End

Management Investment Companies

AGENCY: Securities and Exchange

Commission.

ACTION: Proposed rule.

SUMMARY: The Securities and Exchange

Commission is proposing amendments

to Form N–1A, the form used by openend investment companies to register

under the Investment Company Act of

1940 and to offer their shares under the

Securities Act of 1933. The proposed

amendments would revise disclosure

requirements for fund prospectuses.

Among other things, the proposed

amendments seek to minimize

prospectus disclosure about technical,

legal, and operational matters that

generally are common to all funds and,

in keeping with the purpose of Form N–

1A, to focus prospectus disclosure on

essential information about a particular

fund that would assist an investor in

deciding whether to invest in that fund.

The proposed amendments are intended

to improve fund prospectuses and to

promote more effective communication

of information about funds.

DATES: Comments must be received on

or before June 9, 1997.

ADDRESSES: Submit comments in

triplicate to Jonathan G. Katz, Secretary,

Securities and Exchange Commission,

450 5th Street, NW, Washington, DC

20549–6009. Comments can be

submitted electronically at the following

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

All comment letters should refer to File

No. S7–10–97; this file number should

be included on the subject line if E-mail

is used. All comments received will be

available for public inspection and

copying in the Commission’s Public

Reference Room, 450 5th Street, NW,

Washington, DC 20549–6009.

Electronically submitted comment

letters will be posted on the

Commission’s Internet Web site (http://

www.sec.gov).

FOR FURTHER INFORMATION CONTACT:

Jonathan F. Cayne, Attorney, John M.

Ganley, Senior Counsel, Markian M.W.

Melnyk, Senior Counsel, David U.

Thomas, 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 (‘‘Commission’’) is

proposing for comment amendments to

Form N–1A (17 CFR 274.11A), the

registration form used by open-end

management investment companies

(‘‘funds’’) to register under the

Investment Company Act of 1940 (15

U.S.C. 80a–1 et seq.) (‘‘Investment

Company Act’’) and to offer their shares

under the Securities Act of 1933 (15

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

The Commission also is proposing

technical amendments to rules 481 and

497 under the Securities Act (17 CFR

230.481, .497). In a companion release,

the Commission is proposing new rule

498 under the Securities Act and the

Investment Company Act, which would

permit an investor to buy a fund’s

shares based on a short-form document,

or ‘‘profile,’’ that contains a summary of

key information about the fund; each

investor purchasing fund shares based

on a profile would receive a copy of the

fund’s prospectus with the purchase

confirmation.1 In another companion

release, the Commission is proposing

new rule 35d–1 under the Investment

Company Act, which would require a

fund with a name suggesting that it

focuses on a particular type of

investment (e.g., a fund that calls itself

the ABC Stock Fund, the XYZ Bond

Fund, or the QRS U.S. Government

Fund) to invest at least 80% of its assets

in the type of investment suggested by

its name.2

Table of Contents

I. INTRODUCTION AND EXECUTIVE

SUMMARY

II. DISCUSSION

A. Part A—Information in the Prospectus

1. Item 1—Front and Back Cover Pages

2. Item 2—Risk/Return Summary:

Investments, Risks, and Performance

a. Investment Objectives and Principal

Strategies

b. Risks

3. Item 3—Risk/Return Summary: Fee

Table

a. Fee Table Example

b. Shareholder Account Fees

c. Improving and Simplifying Fee Table

Presentation

4. Item 4—Investment Strategies and Risk

Disclosure

a. Investment Objectives and

Implementation of Investment Objectives

b. Risk Disclosure

5. Item 5—Management’s Discussion of

Fund Performance

6. Item 6—Management, Organization, and

Capital Structure

a. Management and Organization

b. Capital Structure

7. Item 7—Shareholder Information

a. Purchase and Redemption

b. Tax Consequences

8. Item 8—Distribution Arrangements

a. Placement of Prospectus Disclosure

b. Rule 12b-1 Plans

c. Sales Loads

d. Multiple Class and Master-Feeder Funds

9. Item 9—Financial Highlights

Information

B. Part B—Statement of Additional

Information

C. Part C—Other Information

D. General Instructions

1. Reorganizing and Simplifying the

Instructions

2. Form N–1A Guidelines and Related Staff

Positions

E. Technical Rule Amendments

F. Transition Period

III. General Request for Comments

IV. Paperwork Reduction Act

V. Summary of Initial Regulatory Flexibility

Analysis

VI. Statutory Authority

VII. Text of Proposed Amendments

I. Introduction and Executive Summary

Over the last decade, the fund

industry has experienced enormous

growth both in total assets and in the

number of funds.3 Today, fund assets

exceed the deposits of commercial

banks.4 Coincident with the explosive

growth of fund investments, the

business operations of many funds have

become increasingly complex as funds

seek to offer investors new investment

options and a wider variety of

shareholder services. These factors,

combined with new and more

sophisticated fund investments, have

resulted in fund prospectuses that often

include long and complicated

disclosure, as funds explain their

operations, investments, and services to

investors.

Many have criticized fund

prospectuses, finding them

unintelligible, tedious, and legalistic.5
Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules 10899

Hilton Hotel, Washington, D.C. (May 19, 1995);

Simple Concept from SEC: Use Plain English in

Fund Prospectuses, L.A. Times, Mar. 2, 1995, at

D14; J. Bogle, Bogle on Mutual Funds 147 (1994);

Rothchild, The War on Gobbledygook, Time, Oct.

31, 1994, at 51; Skrzycki, Prospectuses to be in

English, Donkeys to Fly Tomorrow, Wash. Post, Oct.

21, 1994, at B1.

6A 1995 survey conducted on behalf of the

Commission and the Office of the Comptroller of

the Currency (‘‘OCC’’) found that, although fund

investors consulted the prospectus more than any

other source of information about the fund they

bought, they considered the prospectus only the

fifth-best source of information, behind employerprovided written materials, financial publications,

family or friends, and brokers. Report on the OCC/

SEC Survey of Mutual Fund Investors 12–13 (June

26, 1996). See also ICI, The Profile Prospectus: An

Assessment by Mutual Fund Shareholders 4 (1996)

(‘‘ICI Profile Survey’’) (about half of fund

shareholders surveyed had not consulted a

prospectus before making a fund investment).

7Over 30 million U.S. households own funds. ICI

Fact Book, supra note 3, at 92.

8See ‘‘Taking the Mystery Out of the

Marketplace: The SEC’s Consumer Education

Campaign,’’ Remarks by Arthur Levitt, Chairman,

SEC, at the National Press Club, Washington, D.C.

(Oct. 13, 1994); ‘‘Investor Protection: Tips from an

SEC Insider,’’ Remarks by Arthur Levitt, Chairman,

SEC, before the Investors’ Town Meeting at the

Adam’s Mark Hotel, Philadelphia, Pa. (June 11,

1996).

9As part of the improvements to prospectus

disclosure, the Commission is proposing a new rule

intended to address certain broad categories of

investment company names that are likely to

mislead investors about an investment company’s

investments and risks. The new 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 name.

10Profile Release, supra note 1.

11Securities 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).

12 Investment Company Act Release No. 13436

(Aug. 12, 1983) (48 FR 37928) (‘‘Form N–1A

Adopting Release’).

13 Investment Company Act Release No. 12927

(Dec. 27, 1982) (48 FR 813, 814) (‘‘Form N–1A

Proposing Release’).

14 Investment Company Act Release Nos. 16244

(Feb. 1, 1988) (53 FR 3192) (‘‘Fee Table Adopting

Release’’) and 19382 (Apr. 6, 1993) (58 FR 19050)

(‘‘MDFP Adopting Release’’). See also Investment

Company Act Release Nos. 21216 (July 19, 1995)

(60 FR 38454) (‘‘Money Market Fund Prospectus

Release’’) (proposing amendments designed to make

money market fund prospectuses simpler and more

informative) and 16245 (Feb. 2, 1988) (53 FR 3868)

(‘‘Performance Release’’) (adopting a uniform

formula for calculating fund performance).

15See, e.g., 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)

(‘‘Disclosure Simplification Task Force Report’’)

(recommending specific improvements in the

disclosure provided by corporate issuers).

16See Investment Company Institute (pub. avail.

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

of Investment Management (the ‘‘Division’’) 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’’). The Division also has

permitted variable annuity registrants to use

‘‘variable annuity profiles’’ together with their

prospectuses. National Association for Variable

Annuities (pub. avail. June 4, 1996).

Although the prospectus remains the

most complete source of information

about a fund, technical and

unnecessarily lengthy prospectus

disclosure often obscures important

information relating to a fund

investment and does not serve the

information needs of the majority of

fund investors.6 As millions of

Americans have turned to funds as an

investment vehicle of choice,7 investors

need to be provided with clear and

comprehensible information that will

help them evaluate and compare fund

investments.

The Commission is committed to

improving the disclosure provided to

fund investors 8 and is proposing two

major initiatives to meet this objective.

First, the Commission is proposing

changes to fund disclosure requirements

in an effort to focus prospectus

disclosure on essential information

about a particular fund that would assist

an investor in deciding whether to

invest in that fund.9 Second, in a

companion release, the Commission is

proposing a new rule to permit investors

to buy fund shares based on a fund

profile (the ‘‘profile’’) that would

provide a summary of key information

about a fund, including the fund’s

investment objectives, strategies, risks,

performance, and fees.10 Under this

proposal, investors would receive the

fund’s prospectus upon request or no

later than with delivery of the purchase

confirmation.

These two initiatives are intended to

improve fund disclosure by requiring

prospectuses to focus on information

central to investment decisions, to

provide new disclosure options for

investors, and to enhance the

comparability of information about

funds. Taken together, the proposals

seek to promote more effective

communication of information about

funds without reducing the amount of

information available to investors.

As part of its commitment to give

investors improved disclosure

documents, 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.11 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.

The Commission’s efforts to improve

fund disclosure are long-standing. In

1983, the Commission introduced an

innovative approach to prospectus

disclosure by adopting a two-part

disclosure format.12 Under this format,

the Commission intended that a fund

would provide investors with a

simplified prospectus designed to

contain essential information about the

fund that assists an investor in making

an investment decision. The

Commission contemplated that more

extensive information and detailed

discussions of matters included in the

prospectus would be available in a

Statement of Additional Information

(‘‘SAI’’) that investors could obtain

upon request. In adopting this new

format, the Commission’s goal was to

provide investors with more useful

information in ‘‘a prospectus that is

substantially shorter and simpler, so

that the prospectus clearly discloses the

fundamental characteristics of the

particular investment company. . . .’’ 13

Since 1983, the Commission has

adopted a number of other initiatives to

improve fund disclosure, including a

uniform fee table and a requirement for

management’s discussion of fund

performance (‘‘MDFP’).14 While these

changes have provided investors with

clear and helpful information about

fund expenses and performance, they

were not intended to address overall

prospectus disclosure requirements. The

Commission has concluded that a

comprehensive review and revision of

fund disclosure requirements is

necessary to improve the information

provided in fund prospectuses.15

The Commission’s consideration of

disclosure issues has included

evaluating the use of the profile as a

standardized, summary disclosure

document. The Commission, with the

cooperation of the Investment Company

Institute (‘‘ICI’’) and several large fund

groups, conducted a pilot program

permitting funds to use profiles (‘‘pilot

profiles’’) together with their

prospectuses.16 The pilot profiles (like

the profile proposed today) contain a

summary of key information about the

fund. The program’s purpose was to

determine whether investors found the

pilot profiles helpful in making

investment decisions. Focus groups

conducted on the Commission’s behalf
10900 Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules

17See ICI Profile Survey, supra note 6, at 31–32.

18 Investment Company Act Release No. 20974

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

19See, e.g., McTague, Simply Beautiful: Shorn of

Legalese, Even Prospectuses Make Sense, Barron’s,

Oct. 7, 1996, at F10 (about the recent efforts of the

John Hancock funds and other fund groups to

improve their prospectuses).

20See Form N–1A Proposing Release, supra note

13, at 814.

21Under the authority in section 10(a) of the

Securities Act (15 U.S.C. 77j(a)), the Commission is

proposing amendments to current prospectus

disclosure requirements based on its determination

that certain disclosure requirements result in

information that, while useful to some investors, is

not necessary in the public interest or for the

protection of investors to be included in the

prospectus.

22 Incorporating certain staff disclosure

requirements into the revised form is intended to

formally identify those disclosure requirements that

would apply to all funds regardless of their

particular circumstances. Among other things, the

proposed approach seeks to address disclosure

requirements that have been developed in

connection with an issue presented by a specific

fund, but applied to all funds regardless of their

particular circumstances. See Securities Act Release

No. 5906 (Feb. 15, 1978) (regarding a 1977 report

of the Advisory Committee on Corporate Disclosure,

which, among other things, recommended that,

after identifying a disclosure problem of general

significance, the Commission initiate rulemaking

and not rely for prolonged periods on ad hoc

procedures such as commenting on filings and

enforcement actions).

23Fund Names Release, supra note 2.

24The profile would be a summary prospectus

adopted under sections 10(b) of the Securities Act

(15 U.S.C. 77j(b)) and 24(g) of the Investment

Company Act (15 U.S.C. 80a-24(g)).

(‘‘Focus Groups’’) responded very

positively to the profile concept. Fund

investors participating in a survey

sponsored by the ICI also strongly

favored the pilot profiles.17

In another recent initiative, the

Commission issued a release requesting

comment on ways to improve risk

disclosure and comparability of fund

risk levels (‘‘Risk Concept Release’’).18

The Commission received over 3,700

comment letters, mostly from individual

investors. Commenters confirmed the

importance of risk disclosure to

investors when evaluating and

comparing funds and highlighted the

need to improve prospectus disclosure

of fund risks. In particular, commenters

indicated that current risk disclosure is

difficult to understand and does not

fully convey to investors the risks

associated with an investment in a fund.

The Commission remains committed

to the same goals articulated in adopting

Form N–1A. The initiatives proposed

today are intended to further these goals

and achieve clear and concise

disclosure that would assist fund

investors in making investment

decisions. Based on the Commission’s

review of current fund prospectuses and

related disclosure requirements, the

Commission has identified 5 major

objectives that form the basis for today’s

initiatives:

• Improved prospectus disclosure:

Although some funds have made significant

and commendable efforts to improve their

prospectuses,19 prospectus disclosure

relating to a fund tends to be overly complex

and difficult to follow and should be revised

to focus on essential information about the

fund to help an investor make an informed

investment decision.

• Fund names: Although a fund’s name

(like any other single piece of information

about an investment) cannot tell the whole

story about a fund investment, names may

communicate a great deal to an investor, and

investors should have greater assurance that

a fund whose name suggests that the fund

focuses on certain investments will make

those investments.

• Investor choice: Different investors prefer

different amounts of information before

making an investment decision, and

regulatory requirements should not foreclose

options that respond to prospective

investors’’ information needs.

• Standardized fund summaries: Investors

have expressed a strong preference for

summary information about funds in a

standard format; summaries should provide

investors with additional tools to help them

make better use of the extensive information

available about funds.

• Clearer risk disclosure: The risks of

investing in a fund often are not readily

apparent to investors and should be

communicated more effectively.

The proposed disclosure initiatives

address these objectives.

Improved Prospectus Disclosure

The proposed amendments would

change the disclosure requirements for

fund prospectuses. The Commission

regards the prospectus as an investor’s

primary source of information about a

fund. A prospectus, however, is not

useful to investors if it is in a form that

discourages investors from reading it.

The prospectus is intended to provide

information about matters of

fundamental importance to most

investors.20 The Commission’s

proposals are intended to update and

streamline prospectus disclosure

requirements to focus on essential

information about a particular fund and

make the prospectus less technical and

easier to read.21 This initiative is

designed to eliminate prospectus clutter

that tends to obscure information that

could help an investor make an

investment decision. The proposed

amendments would:

• Move certain disclosure about fund

organization and legal requirements from the

prospectus to the SAI to focus prospectus

disclosure on essential information about a

fund, while continuing to assure that the

information is available to those interested in

reviewing it;

• Permit a fund that is offered as an

investment alternative in a participantdirected defined contribution plan to tailor

its prospectus for use by plan participants;

• Update and incorporate certain staff

disclosure requirements into the amended

registration form and include guidance about

legal, interpretive, and operational matters in

a new ‘‘Investment Company Registration

Package,’’ which, together, would provide

more effective guidance about disclosure and

legal matters; 22 and

• Simplify current disclosure instructions

to provide clearer guidance for preparing and

filing fund registration statements.

Fund Names and Investments

In a companion release, the

Commission is proposing a new rule

under the Investment Company Act that

would address certain broad categories

of investment company names that are

likely to mislead investors about an

investment company’s investments and

risks. The rule would require a fund or

any other registered investment

company with a name that suggests a

particular investment emphasis (e.g., a

fund 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.23

Under current positions of the Division

of Investment Management (the

‘‘Division’’), these funds and investment

companies generally are subject to a

65% investment requirement. The rule

would address investment companies

with names that suggest the company

focuses its investments in a particular

country or geographic region and

investment companies with names that

indicate the company’s distributions are

exempt from income tax. In addition,

the rule would prohibit an investment

company from using a name that

suggests that the company or its shares

are guaranteed or approved by the U.S.

Government.

Investor Choice

The proposed initiatives would give

investors new disclosure options so that

they could determine the amount of

information they want to review before

investing in a fund. The proposed

profile would contain a summary of key

information about a fund and enable

investors who are comfortable with that

level of information to purchase a fund’s

shares based on the profile.24 Each

investor using the profile to make an

investment decision would receive the
Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules 10901

25The profile would include disclosure about a

fund’s investment objectives, strategies, risks and

performance, fees, investment adviser and portfolio

manager, purchase and redemption procedures, tax

implications, and the services available to

shareholders. See Profile Release, supra note .

26The Commission also considered other

information about fund risk disclosure, including

the results of an investor survey sponsored by the

ICI. See ICI, Shareholder Assessment of Risk

Disclosure Methods (1996) (‘‘ICI Risk Survey’).

27 In addition, Parts B and C of proposed Form N–

1A would include a number of technical revisions

to clarify and simplify the Form’s requirements.

28See Letters to Registrants (Jan. 11, 1990) (‘‘1990

GCL’’); (Jan. 3, 1991) (‘‘1991 GCL’’); (Jan. 17, 1992)

(‘‘1992 GCL’’); (Feb. 22, 1993) (‘‘1993 GCL’’); (Feb.

25, 1994) (‘‘1994 GCL’’); (Feb. 3, 1995) (‘‘1995

GCL’’); (Feb. 16, 1996) (‘‘1996 GCL’’). For a

discussion of the Guides and GCLs, see infra notes

255–261 and accompanying text.

29See infra Part II.D.

30Funds often organize as series funds and offer

investors an opportunity to invest in one or more

‘‘portfolios,’’ each of which has a specific

investment objective. The revised Form would

define a ‘‘fund’’ to include both the registrant and

a series of the registrant unless otherwise indicated.

31See, e.g., General Instruction G of Form N–1A.

32See Plain English Release, supra note 11.

33 Id. (proposing amendments to add new

paragraph (d) to rule 421 under the Securities Act

(17 CFR 230.421)).

34To improve the clarity of prospectus disclosure,

the Plain English Release also proposed revisions to

Regulation S–K (17 CFR 229.10 et seq.), which sets

out general disclosure requirements for corporate

issuers. Similar requirements are included in

specific rules for funds, and conforming changes to

these rules would be made in connection with this

and other fund disclosure initiatives. See proposed

amendments to rule 481(b)(1) (disclaimer about the

Commission’s approval of securities offered in a

prospectus), infra note 31.

fund’s prospectus with the confirmation

of his or her investment. Investors also

would have the option to request and

review the fund’s prospectus and other

information about the fund (e.g., the

fund’s shareholder reports and SAI)

before making an investment decision.

Standardized Fund Summaries

The proposals would require

standardized information in the profile

and in a new risk/return summary at the

beginning of all fund prospectuses. The

profile would include disclosure of 9

items in a specific order and in a

question-and-answer format designed to

help investors evaluate and compare

funds.25 The risk/return summary at the

beginning of the prospectus (also

included as the first 4 items in the

proposed profile) would highlight

information about a fund’s investment

objectives, strategies, risks and

performance, and fees, and make this

information readily available to

investors in a consistent presentation.

Clearer Risk Disclosure

The proposals seek to improve

prospectus disclosure about the risks of

investing in a particular fund. Based in

large part on comments received in

response to the Risk Concept Release,26

the proposals would improve risk

disclosure as follows:

Overall fund risks—A fund would be

required to discuss in the prospectus the

overall risks of investing in the fund. The

proposed amendments are designed to

minimize the detailed and technical

descriptions of the risks associated with

specific portfolio securities typically

included in a fund’s prospectus and to elicit

risk disclosure that relates to the particular

fund and would be more useful to investors.

Narrative risk summary—The profile and

the prospectus risk/return summary would

include a narrative risk summary. The risk

summary would provide a concise

description of a fund’s overall risks that

could be used to evaluate and compare the

risks of different funds.

Graphic presentation of risk—The profile

and prospectus risk/return summary would

include a bar chart reflecting a fund’s returns

over a ten-year period, which would

illustrate fund risks by showing changes in

the fund’s performance from year to year. To

help investors evaluate a fund’s risks and

returns relative to ‘‘the market,’’ a table

accompanying the bar chart would compare

the fund’s performance to that of a broadbased securities market index.

* * * * *

The proposed initiatives are designed

to promote more effective

communication of information about

funds without reducing the amount of

information available to investors and

other interested parties (e.g., financial

analysts and advisers). The proposals

would further Commission actions to

improve prospectus disclosure

beginning with the two-part disclosure

format adopted in 1983. Permitting

funds to use profiles would respond to

investor support for a concise disclosure

document highlighting key fund

information. The profile would

complement the revised prospectus,

which, as the primary disclosure

document, would be delivered to all

investors that purchase fund shares.

Taken together, these initiatives are

intended to better realize the

Commission’s commitment to

improving disclosure for fund investors.

II. Discussion

Release Organization. The revised

Form would retain the overall structure

of current Form N–1A. To make the

proposed requirements of revised Form

N–1A easy to follow and to highlight the

proposed changes, this release addresses

revised Items in the order that they

would appear in the Form. While some

Items in proposed Part A (the

prospectus) would not be changed

(except for technical revisions to

improve clarity), other Items would be

new or extensively revised. Certain

disclosure currently required in the

prospectus would be moved to Part B

(the SAI), where the information would

continue to be available to investors and

others who are interested in the

information.27 The proposed

amendments would incorporate certain

disclosure requirements from the

Guidelines for Form N–1A (the

‘‘Guides’’) and the Generic Comment

Letters (‘‘GCLs’’) that have been issued

over time by the Division.28

The proposed amendments also

would revise the General Instructions to

Form N–1A to update the Instructions

and make them easier to use. The

release discusses in detail the proposed

changes to the General Instructions after

discussing changes to the Form’s

disclosure requirements.29 The

proposed amendments would add

several definitions to the General

Instructions to standardize certain terms

used in the Form. In particular, a new

definition of ‘‘fund’’ would

accommodate the use of Form N–1A by

series funds.30 The General Instructions

also would address other matters

regarding the use of Form N–1A,

including disclosure relating to multiple

funds and classes, prospectuses used in

the defined contribution plan market,

and incorporation by reference.

Plain English. Investment company

registration statement forms currently

include instructions, which govern all

prospectus disclosure, directing a fund

to provide information in the prospectus

in a clear, concise, understandable

manner by, among other things,

avoiding the use of technical or legal

terms, complex language, or excessive

detail.31 The Commission’s plain

English proposals also would apply to

prospectus disclosure.32 Initially, the

proposed plain English principles

would apply to the front and back cover

pages of a fund’s prospectus and to the

summary of the prospectus, if any.33

Because the Commission issued the

plain English release before this release

proposing amendments to Form N–1A,

the proposed requirement for plain

English risk factors disclosure does not

specifically identify the proposed risk/

return summary, which is the parallel

type of disclosure for funds and is not

a summary of the prospectus. If the

proposed plain English requirements

and the proposed risk/return summary

are adopted, the Commission intends to

clarify that plain English disclosure

principles apply to the risk/return

summary.34 The Commission also

requested comment whether the plain

English disclosure principles should be

modified for fund prospectuses.
10902 Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules

35When a prospectus relates to one or more

series, both the name of the registrant and the series

would be required to appear on the back cover page.

The name of the registrant may assist investors in

obtaining additional information about a particular

series or the registrant.

36Proposed amendments to rule 481(b)(1) under

the Securities Act (17 CFR 230.481(b)(1)). Amended

rule 481(b)(1) would require disclosure to the effect

that: The Securities and Exchange Commission has

not approved or disapproved these securities or

passed upon the adequacy of this prospectus and

any representation to the contrary is a criminal

offense. The same revisions to Item 501 of

Regulation S–K (17 CFR 229.501) were recently

proposed for corporate registrants. See Plain

English Release, supra note 11. See also Disclosure

Simplification Task Force Report, supra note 15, at

18.

37See infra notes 52–58 and accompanying text.

38See Disclosure Simplification Task Force

Report, supra note 15, at 19 (recommending

elimination of many legal warnings to make the

cover page more inviting and present any necessary

legal warnings in a more readable style and format).

See also Plain English Release, supra note 11, at

3160.

39See Letter from Paul Schott Stevens, Senior

Vice President and General Counsel, ICI, to Barry

P. Barbash, Director, Division of Investment

Management, SEC, at 11 (May 20, 1996) (‘‘ICI

Survey Letter’’) (recommending that funds be

required to deliver shareholder reports within 3

days of a request); Form N–2 (17 CFR 274.11a-1)

(requiring closed-end investment companies to

include a telephone number for investors to request

a SAI and to send the SAI within 2 days of a

request).

40The disclosure would be revised to indicate,

among other things, that information about the fund

(including the SAI) is available on the

Commission’s Internet Web site. Currently, only

funds that disseminate prospectuses electronically

are required to provide disclosure about the

Commission’s Web site. See Investment Company

Act Release No. 21946 (May 9, 1996) (61 FR 24652).

41This information currently is required by Item

6(e) to be disclosed in the prospectus. To assist the

Division in responding to investor inquiries, the

proposed amendments would require a fund to

include its Investment Company Act file number on

the back cover page.

42The information in the risk/return summary

would be substantially the same as the first 4 items

of the proposed profile. See Profile Release, supra

note 1.

43Focus Group participants, for example,

expressed strong support for summary information

in a standardized format. In addition, in connection

with the profile initiative, many individual

investors have written to the Commission about the

need for concise, summary information relating to

a fund. See also Profile Prospectuses: An Idea

Whose Time Has Come, Mutual Funds Magazine,

Aug. 1996, at 11. In keeping with the goal of

providing key information in a standardized

summary, proposed General Instruction C.2(b)

would not permit a fund to include in the risk/

return summary information that is not required or

otherwise permitted.

44The criteria for determining whether a

particular strategy is a principal strategy and

disclosure about concentration policies are

discussed infra notes—and accompanying text.

45See proposed Item 5 (current Item 5A)

(requiring the MDFP to be disclosed in the

prospectus unless disclosed in the annual report).

46Commenters 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).

A. Part A—Information in the

Prospectus

1. Item 1—Front and Back Cover Pages

Form N–1A requires certain

information to appear on the outside

front cover page of a fund’s prospectus.

In an effort to ‘‘unclutter’’ the

prospectus cover page and avoid

repeating information contained in the

proposed risk/return summary at the

beginning of the prospectus, the

proposed amendments would simplify

the disclosure currently required on the

front cover page and require certain

information to be included on the

outside back cover page.

The front cover page would be

required to include a fund’s name.35 The

front cover page also would include the

disclaimer about the Commission’s

approval of the securities being offered

and the accuracy and adequacy of the

information included in the prospectus.

The wording of the disclaimer would be

simplified and the disclaimer would no

longer be required to be in large capital

letters and bold-faced type.36

The proposed amendments would not

require cover page disclosure that

would repeat information required to be

disclosed in the proposed risk/return

summary. This information would

include the identification of the type of

fund offered (or a brief statement of the

fund’s investment objectives) and

certain disclosure required for money

market funds.37 The proposed

amendments also would no longer

require a fund to provide statements

that the prospectus sets forth concise

information about the fund that a

prospective investor ought to know

before investing and should be retained

for future reference.38 These statements

do not appear to be particularly helpful

to investors.

The proposed amendments would

consolidate disclosure regarding the

availability of additional information

about a fund on the back cover page of

the fund’s prospectus. The back cover

page would include disclosure about the

availability and date of the SAI, which

would be revised to require a telephone

number that investors could use to

obtain the SAI without charge. To

ensure prompt delivery of the SAI to

those investors who request it, a new

Instruction would require a fund to send

the SAI within 3 days of the receipt of

a request.39 The back cover page would

include information (if applicable)

regarding the incorporation by reference

of a fund’s SAI or financial information

from the annual report into the

prospectus and disclosure that other

information about the fund has been

filed with, and is available from, the

Commission.40 The back cover page also

would include disclosure about how a

shareholder can make inquires about the

fund.41

2. Item 2—Risk/Return Summary:

Investments, Risks, and Performance

The proposed amendments would

require at the beginning of every

prospectus a risk/return summary that

would provide key information about a

fund’s investment objectives, principal

strategies, risks, performance, and fees.

This information would be required to

appear in a specific sequence and to be

presented in a question-and-answer

format.42 The proposed question-andanswer format, frequently used by many

funds, is intended to help communicate

the required information effectively.

The Commission requests comment on

this format and whether funds instead

should be permitted to choose the type

of heading for the prescribed disclosure

topics.

The risk/return summary, like the

profile, is intended to respond to

investors’ strong preference for

summary information about a fund in a

standardized format.43 Since the profile

would be optional, the proposed risk/

return summary in the prospectus

would provide all investors with key

information about a fund in a

standardized, easily accessible place

that could be used to evaluate and

compare fund investments.

a. Investment Objectives and

Principal Strategies

The proposed amendments would

require a fund to disclose in the risk/

return summary its investment

objectives and to summarize, based on

the information provided in the

prospectus, how the fund intends to

achieve those objectives. The summary

would be required to identify the fund’s

principal investment strategies,

including the particular 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.44

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 the MDFP,

which discusses a fund’s strategies that

materially affected the fund’s

performance during the most recent

fiscal year.45 The Division’s review of

and experience with MDFP disclosure

indicates that the annual report may be

a valuable resource for investors.46 The
Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules 10903

47 If applicable, a fund could indicate that its

annual and semi-annual reports are available on its

Internet site or by E-mail. 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.

48As proposed, the back cover page of the

prospectus would include more general disclosure

about the availability of additional information.

49See infra notes 133–138 and accompanying

text. The proposed amendments also would require

a fund to disclose, if applicable, that it is nondiversified. See section 5(b) of the Investment

Company Act (15 U.S.C. 80a–5(b)) (regarding

diversified and non-diversified funds). To help

investors understand this disclosure, a nondiversified fund would be required to describe the

effects and to summarize the risks of nondiversification.

50 Information about whether a fund is

appropriate for particular types of investors is

designed to help investors evaluate and compare

funds based on their investment goals and

individual circumstances. In the pilot profiles, this

information is presented under a separate caption

relating to the appropriateness of an investment for

certain investors. Because this information is

closely related to the risks of investing in a fund,

the proposed amendments would integrate this

disclosure into the risk section of the risk/return

summary.

51The 1996 Profile Letter, in contrast, permits

disclosure about the rewards of investing in a fund

only if presented separately from disclosure about

the fund’s risks. 1996 Profile Letter, supra note 16,

at 2.

52 Item 1(a)(vi).

53 Item 1(a)(vii). This disclosure is not required if

the fund limits its investments in a single issuer to

no more than 5% of the fund’s assets.

54See Investment Company Act Release Nos.

17589 (July 17, 1990) (55 FR 30239, 30247) and

18005 (Feb. 20, 1991) (56 FR 8113, 8123) (proposing

and adopting revisions to rules relating to money

market funds).

55Unlike other money market funds, a single state

money market fund is not subject to the issuer

diversification requirements of rule 2a–7 (17 CFR

270.2a–7). In March 1996, the Commission adopted

amendments to rule 2a–7 that would require a

single state money market fund, with respect to

75% of its assets, to invest no more than 5% of its

assets in securities of a single issuer. Investment

Company Act Release No. 21837 (Mar. 21, 1996) (61

FR 13956). The Commission has suspended the

compliance date for these amendments pending the

adoption of technical changes to amended rule 2a–

7. Investment Company Act Release Nos. 22135

(Aug. 13, 1996) (61 FR 42786) and 22283 (Dec. 10,

1996) (61 FR 66621).

56 1994 GCL, supra note 28, at II.B; Letter to

Registrants from Barbara J. Green, Deputy Director,

Division of Investment Management, SEC (May 13,

1993) (‘‘Division Bank Letter’’).

57See Division Bank Letter, supra note 56. See

also Testimony of Ricki Helfer, Chairman, FDIC, on

FDIC Survey of Nondeposit Investment Sales at

FDIC-Insured Institutions Before the Subcomm. on

Capital Markets, Securities, and Government

Sponsored Enterprises of the House Comm. on

Banking and Financial Services, 104th Cong., 2d

Sess. (June 26, 1996) (citing surveys in October

1995 and April 1996 indicating that approximately

one-third of bank customers either thought that, or

did not know whether, funds sold through banks

were insured).

proposed amendments would require

the risk/return summary to contain

disclosure to the following effect:

Additional information about the fund’s

investments is available in the fund’s annual

and semi-annual reports to shareholders. In

particular, the fund’s annual report discusses

the relevant market conditions and

investment strategies used by the fund’s

investment adviser that materially affected

the fund’s performance during the last fiscal

year. You may obtain these reports at no cost

by calling llllllll.47

The proposed amendments would

require this disclosure to appear in the

context of information about a fund’s

investments. The Commission requests

comment on this approach. For

example, would disclosure about the

availability of additional information

about the fund (e.g., the fund’s

shareholder reports, SAI, or any other

information) be more helpful to

investors if the disclosure was presented

under a separate caption in the risk/

return summary or on the back cover

page of the prospectus? Should this

disclosure include an explanation about

the various types of information

available to investors? 48

b. Risks

Narrative Risk Disclosure. The

proposed amendments would require a

fund to summarize the principal risks of

investing in the fund based on the

information provided in the prospectus.

More than 75% of the individual

investors commenting on the Risk

Concept Release specifically favored

requiring a risk summary in fund

prospectuses. This disclosure would be

required to focus on the risks to which

the fund’s particular portfolio as a

whole is subject and the circumstances

reasonably likely to affect adversely the

fund’s net asset value, yield, and total

return.49 The risk section of the risk/

return summary also would include

disclosure about the risk of losing

money 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 and time horizon).50 A

fund, at its option, 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.51

Special Risk Disclosure Requirements.

Certain types of funds are required to

provide special disclosure on the cover

page of their prospectuses. Form N–1A

requires a money market fund to

disclose on the cover page of its

prospectus that an investment in the

fund is neither insured nor guaranteed

by the U.S. Government, and that there

can be no assurance that the fund will

be able to maintain a stable net asset

value of $1.00 per share.52 The Form

requires a tax-exempt money market

fund that concentrates its investments

in a particular state (a ‘‘single state

money market fund’’) to disclose that

the fund may invest a significant

percentage of its assets in a single issuer

and that investing in the fund may be

riskier than investing in other types of

money market funds.53 The disclosure

required for all money market funds is

intended to alert investors that investing

in a money market fund is not without

risk.54 The disclosure required for single

state money market funds seeks to

inform investors about the particular

risks associated with a single state

money market fund and to distinguish

these funds from other money market

funds.55 In addition, a fund that is

advised by or sold through a bank is

required to disclose on the cover page

of its prospectus that the fund’s shares

are not deposits or obligations of, nor

guaranteed or endorsed by, the bank,

and that the shares are not insured by

the Federal Deposit Insurance

Corporation (‘‘FDIC’’) or any other

government agency.56 This disclosure is

intended to alert investors that funds

advised by or sold through banks are not

federally insured.57

The proposed amendments would

move the required disclosure for all

money market funds, single state money

market funds, and funds advised by or

sold through banks to the risk section of

the risk/return summary. Since this

disclosure relates directly to a particular

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

prospectus cover page and avoid

repeating information on the cover page

and in the risk section of the risk/return

summary.

The proposed amendments would

revise the wording of the current

disclosure required for all money

market funds and funds advised by or

sold through banks. The proposed

amendments would simplify the

disclosure that fund shares are not

federally insured as follows:

An investment in the fund is not insured

or guaranteed by the FDIC or any other

government agency.

The proposed amendments also would

simplify the technical disclosure that a

money market fund may not be able to

maintain a stable net asset value. The

revised disclosure would state:

Although the fund seeks to preserve the

value of your investment at $1.00 per share,
10904 Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules

58The proposed disclosure, which would be

required to be given by a money market fund in

place of the proposed general risk disclosure about

losing money, seeks to strike a balance between the

potential to lose money in a money market fund

and the relative risk of losing money in a money

market fund as compared to other types of funds.

59Among other things, rule 2a–7 requires a

money market fund to invest in securities that are

rated in one of the two highest categories by a

nationally recognized statistical rating organization

(or, if unrated, to be of comparable quality) and

have a maturity of 13 months or less. Rules 2a–7

(a)(9) and (c)(3).

60Proposed Item 2(c)(2).

61Risk Concept Release, supra note 18. See also

ICI Risk Survey, supra note 26, at 21, 37 (51% of

survey participants indicated they were very

confident about using a bar chart to compare the

risks of different funds and 49% of survey

participants indicated they were very confident in

using a bar chart to assess the risks of a single fund).

In addition, all commenters responding to the

Commission’s initiative to simplify money market

fund prospectuses supported the proposal to

replace the financial highlights information in

money market fund prospectuses with a ten-year

bar chart reflecting a money market fund’s returns.

See Summary of Comment Letters on Proposed

Amendments to the Rules Regulating Money Market

Fund Prospectuses Made in Response to Investment

Company Act Release No. 21216, at 2 (File No. S7–

21–95) (‘‘Money Market Prospectus Comment

Summary’’).

62The 1996 Profile Letter, in contrast, requires the

bar chart and table to appear under a caption

relating to a fund’s past performance. 1996 Profile

Letter, supra note 16, at 2.

it is possible to lose money by investing in

the fund.58

The Commission requests comment

whether the disclosure required for all

money market funds, single state money

market funds, and funds advised by or

sold through banks should be moved

from the prospectus cover page to the

risk/return summary. If the disclosure is

moved from the cover page, should it be

highlighted in a typographically

distinctive manner (e.g., boldface or

italics)? The Commission also requests

comment on the wording of the

proposed disclosure. In addition, the

Commission requests comment whether

the disclosure for single state money

market funds should continue to be

required. The disclosure, for example,

may exaggerate the risks of a single state

money market fund since these funds,

like all money market funds, may

purchase only those portfolio

instruments that meet the credit quality

and maturity requirements of rule

2a–7.59

Risk/Return Bar Chart and Table. The

proposed amendments would require a

bar chart showing a fund’s annual

returns for each of the last 10 calendar

years and a table comparing the fund’s

average annual returns for the last one,

five, and ten fiscal years to those of a

broad-based securities market index.60

The bar chart would illustrate

graphically a fund’s past risks by

showing changes in the fund’s returns

over time. The information in the table

would enable investors to evaluate a

fund’s performance and risks relative to

‘‘the market.’’ Over 75% of individual

investors responding to the Risk

Concept Release favored a bar chart

presentation of fund risks.61 Focus

Group participants found both a bar

chart and tabular presentation of fund

performance helpful in evaluating and

comparing fund investments,

particularly when the table included

return information for a broad-based

index.

The proposed amendments would

require the bar chart and table to be

included in the risk section of the risk/

return summary under a subheading

that refers to both risk and

performance.62 To help investors use the

information in the bar chart and table,

the proposed amendments would

require a fund to explain how the

information illustrates the fund’s risks

and performance.

An example of the risk/return bar

chart and table is set forth below:

BILLING CODE 8010–01–P
Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules 10905

BILLING CODE 8010–01–C
10906 Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules

63Funds generally file Form N–1A electronically

on the Commission’s electronic data gathering

analysis and retrieval system (‘‘EDGAR’’). Although

EDGAR currently does not reproduce graphic

images like the bar chart, the EDGAR rules require

a fair and accurate narrative description or tabular

presentation in the place of any omitted material.

Rule 304(a) of Regulation S–T (17 CFR 232.304(a)).

The Commission anticipates future modifications

that would permit EDGAR to reflect graphic images

on electronically-filed documents.

64A fund also would be required to present the

corresponding numerical return next to each bar.

The proposed amendments would require a fund 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). The proposed amendments 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.

65 Instruction 1(a) to proposed Item 2(c)(2). See

also Instruction 3 to proposed Item 9(a) (regarding

the calculation of total returns provided in financial

highlights information).

66As a consequence, the fund’s average annual

returns in the table would reflect the payment of

sales loads (if any).

67 Instruction 1(a) to proposed Item 2(c)(2)

(requiring similar disclosure if a fund charges

account fees).

68See, e.g., Remarks by Steven M.H. Wallman,

Commissioner, SEC, before the ICI’s 1995

Investment Company Directors Conference and

New Directors Workshop, Washington, DC. (Sept.

22, 1995) (discussing circumstances when a bar

chart’s presentation of fund risks may be confusing

to investors, such as when bar charts use different

scales).

69While the proposed amendments would not

impose a specific limit on the number of funds

included in a bar chart, the presentation of the bar

chart would be subject to the general requirement

that information in the prospectus be set forth in

a clear and understandable manner. See proposed

General Instruction C.1(a).

70See 1995 Profile Letter, supra note 16

(permitting the pilot profiles to include disclosure

for a single fund or series of a fund). 71 Instruction 3(a) to proposed Item 2(c)(2).

Bar Chart Return Information. 63 The

proposed amendments would require

the bar chart to reflect annual returns for

a fund’s last 10 calendar years. 64

Requiring calendar year returns is

intended to help investors compare the

risks of different funds over similar time

periods.

A fund would calculate the annual

returns in the bar chart by using the

same method required for calculating

annual returns in the financial

highlights information included in fund

prospectuses. 65 Like the returns in the

financial highlights information, the

returns in the bar chart would not

reflect sales loads. 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. 66 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. The proposed amendments

would require a fund that charges sales

loads 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. 67

The Commission requests comment

on the proposed bar chart. In particular,

the Commission requests comment

whether the bar chart communicates

information about fund risks effectively

or whether the bar chart has limitations

that detract from its usefulness. 68 The

Commission requests comment whether

the bar chart should include return

information for additional or different

time periods. For example, should the

bar chart reflect return information for

shorter time periods (e.g., calendar

quarters) or longer time periods (e.g., for

the life of the fund when more than 10

years)? The Commission also requests

comment whether the return

information in the bar chart should

include sales loads and, specifically,

how sales loads could be accurately and

fairly reflected.

Bar Chart Presentation for More than

One Fund. The proposed amendments

would not limit the number of funds for

which return information could be

included in a single bar chart. While the

proposed approach would give funds

flexibility in preparing the bar chart,

including return information in a single

bar chart for a number of funds could

make the graphic presentation of the bar

chart complex and difficult to follow. 69

Bar charts included in the pilot profiles

reflect information for only one fund. 70

In addition, Focus Group participants

found prototype bar charts that included

information for 6 funds (i.e., 6 bars per

year) to be confusing. The Commission

requests comment whether the number

of funds that could be included in a

single bar chart should be limited to one

fund or to some other number of funds

(e.g., 2, 4, or no more than 6 funds). This

approach could enhance the clarity of

the bar chart presentation. Limiting the

number of funds that could be included

in a single bar chart, however, could

require a prospectus offering several

funds to include more than one chart,

which, in turn, could complicate bar

chart disclosure and lengthen the

prospectus.

Multiple Class Funds. In contrast to

the proposed approach with respect to

the bar chart presentation for funds, the

proposed amendments would require a

multiple class fund to include annual

return information in the bar chart for

only one class. 71 Unlike individual

funds, classes represent interests in the

same investment portfolio, and the

returns of each class differ only to the

extent the classes do not have the same

expenses. Including return information

for all classes appears to be unnecessary

to illustrate the risks of investing in the

fund. In addition, the proposed

amendments would require the table

accompanying the bar chart to provide

return information for each class so that

investors would be able to identify and

compare the performance of the classes

offered in the prospectus.

The proposed amendments would

require the bar chart to reflect annual

return information for the class offered

in the prospectus 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.

When two or more classes 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

most recent calendar 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 prospectus.

The proposed requirements may

result in including returns in the bar

chart for a class that has lower annual

operating expenses (and better

performance) than other classes offered

in the prospectus. The Commission

considered several other approaches,

including requiring a fund to show

returns in the bar chart for the class

with the highest annual operating

expenses. The Commission has not

proposed these alternatives because

they would make the bar chart

requirements too complex and difficult

to apply. In addition, the bar chart

primarily is designed to show

graphically the risks of investing in a

fund and not the costs of investing in

the fund. The Commission requests

comment whether the bar chart

presentation for multiple class funds

should be limited to one class. If so,

should the selection of the class be

made on a basis other than that

proposed?

Tabular Presentation of Fund and

Index Returns. The proposed

amendments would require the table

accompanying the bar chart to present

the fund’s average annual returns for the
Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules 10907

72The proposed amendments would require a

money market fund to provide 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 telephone number that

investors can use without charge to obtain current

yield information.

73A fund’s average annual returns would be

calculated using the same method required to

calculate fund performance included in

advertisements, which reflects the payment of sales

loads and recurring shareholder account fees.

Instruction 2(a) to proposed Item 2(c)(2)

(incorporating the requirements of proposed Item

21). See also proposed Item 5 (requiring sales loads

and recurring shareholder account fees to be

reflected in the return information shown in the

MDFP line graph). Consistent with the preparation

of the MDFP line graph, if a fund has not had the

same adviser for the last 10 years, the fund would

be permitted to begin the bar chart and performance

information in the table on the date the new adviser

began to provide advisory services to the fund so

long as certain conditions are met.

74See MDFP Adopting Release, supra note 14, at

19054. Consistent with the preparation of the MDFP

line graph, if a fund changes indexes, the fund

would be required to explain the reasons for the

change and provide information for both the newly

selected and the former index.

75See Instruction 5 to proposed Item 5(b)

(defining ‘‘appropriate broad-based securities

market index’). See also 1996 Profile Letter, supra

note 16, at 3 (permitting a fund, at its option, to

compare its returns to those of an appropriate

broad-based securities market index).

76 If an additional index is included, the fund

would be required to discuss the additional index

in the narrative explanation accompanying the bar

chart and table. Instruction 2(b) to proposed Item

2(c)(2).

77Other commenters have suggested different

ways to provide comparative return information.

See Letter from John C. Bogle, Chairman of the

Board, The Vanguard Group, to Jonathan G. Katz,

Secretary, SEC, at 3 (July 28, 1995) (File No. S7–

10–95) (recommending disclosure of fund and

market index returns on a quarterly basis over a 10-

year period); Letter from Daniel Pierce, Chairman of

Board, Scudder, Stevens & Clark, Inc., to Jonathan

G. Katz, Secretary, SEC, at 2 (July 28, 1995)

(recommending that a fund’s returns be compared

to both a benchmark index (e.g., the S&P 500) and

a risk-free measure (e.g., the yield on 3-month U.S.

Treasury bills)); ICI Survey Letter, supra note 39, at

8–9 (recommending that a fund be permitted to

show either a broad-based market index or an

appropriate index of fund performance).

78Focus Group participants did not express a

preference as to the placement of this information

in the bar chart or accompanying table.

79See Fee Table Adopting Release, supra note 14,

at 3194.

80 Id. (also noting that the Example provides

information about the cost of a fund investment).

81Like the current Form, the proposed

amendments would require a fund that charges

sales loads on reinvested dividends to disclose that

these loads are not reflected in the Example and

that, if the loads were included, the expenses

reflected in the Example would be higher.

Instruction 4(d) to proposed Item 3 would require

this disclosure to follow the Example to avoid

informing investors about what is not included in

the Example before they have an opportunity to

review what is included.

82See proposed Item 3. Instruction 4(a) to

proposed Item 3 also would permit a fund to adjust

the expenses included in the Example to reflect the

completion of the amortization period for expenses

associated with the initial organization of the fund.

See Money Market Fund Prospectus Release, supra

note 14, at 38458 (proposing this change).

83See Letter from John C. Bogle, Chairman of the

Board, The Vanguard Group, to Barry P. Barbash,

Director, Division of Investment Management, SEC

(Sept. 16, 1996) (suggesting that few investors have

as little as $1,000 invested in a given fund, and that

the average fund investment typically amounts to

$10,000–25,000, with the median investment

probably in the range of $6,000–7,000).

last one, five, and ten fiscal years (or for

the life of the fund, if shorter) 72 and to

compare that information to the returns

of a broad-based securities market

index. 73 Requiring comparative return

information for a broad-based securities

market index would provide investors

with a basis for evaluating a fund’s

performance and risks relative to the

market. 74 The proposed approach also

would be consistent with the line graph

presentation of fund performance

required in MDFP disclosure. 75

Consistent with the requirements for

preparing the MDFP line graph, the

proposed amendments would allow a

fund to include return information for

other indexes, including a ‘‘peer group’’

index of comparable funds. 76 Focus

Group participants indicated that

comparing fund returns to a broad-based

securities market index and a peer

group index could be useful in

evaluating and comparing fund

investments. 77

The Commission believes that a

comparison of a fund’s performance to

a broad-based securities market index

can assist investors in evaluating the

risk of a fund investment. The proposed

amendments would include this

information in the table accompanying

the bar chart to minimize the

complexity of the graphic presentation

of a fund’s risks and returns. The

Commission recognizes that other

presentations could improve fund risk

disclosure and requests comment on

alternative approaches. 78 Specifically,

the Commission requests comment on

requiring the annual returns of a broadbased securities market index (and any

optional peer group or other index) to

appear in the bar chart instead of the

table. By providing investors with a

graphic illustration of the relationship

between the returns of the fund and the

index(es), this approach could help

investors evaluate the comparative risk

of the fund and the index(es). Including

additional bars or lines for index

comparisons in the bar chart, however,

could complicate the chart (especially if

the chart included return information

for more than one fund) and make it

difficult for investors to follow.

As an alternative to, or in addition to

the bar chart, the Commission requests

comment on requiring a fund to show

its highest and lowest annual returns (or

‘‘range’’ of returns) over a ten-year or

other period compared with the same

information for a broad-based market

index (and any optional peer group or

other index). This information, which

could be presented as a separate table or

included in the proposed table showing

a fund’s average annual returns, could

help investors assess fund risks.

3. Item 3—Risk/Return Summary: Fee

Table

Form N–1A would continue to require

a fee table in the prospectus, which

summarizes the sales loads and

expenses associated with an investment

in a fund. The fee table seeks to provide

uniformity, simplicity, and

comparability in fee disclosure. 79

Consistent with this objective, the

Commission is proposing several

amendments designed to improve fee

table disclosure.

a. Fee Table Example

Form N–1A requires an ‘‘Example’’ to

accompany the fee table that discloses

the cumulative amount of fund

expenses over one, three, five, and ten

year periods based on a hypothetical

investment of $1,000 and an annual 5%

return. The Example primarily is

intended to provide information about

the cost of investing in one fund that

can be compared with similar

information about another fund. 80

Focus Group participants, however, had

difficulty understanding and using the

information in the Example.

The proposed amendments seek to

improve the Example by requiring a

fund to provide a specific narrative

description that explains the purpose of

the information presented. The revised

Form would require a narrative

explanation to the following effect:

This Example is intended to help you

compare the cost of investing in the fund to

the cost of investing in other mutual funds. 81

To further assist investors in

understanding the Example, the

proposed amendments would revise the

description of how the Example is

calculated. 82

The proposed amendments also

would increase the initial hypothetical

investment in the Example from $1,000

to $10,000. The increase is intended to

reflect a typical fund investment (many

funds have minimum investments

exceeding $1,000) and more closely

approximate the amount of expenses

that may be paid over time. 83 Using the

$10,000 figure in the Example also

would be consistent with the $10,000
10908 Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules

84See proposed Item 5(b).

85 Instruction 10 to Item 2(a).

86Certain funds charge shareholder account fees

as a percentage of assets invested. A small number

of funds charge account fees based on the fund’s

average net assets.

87 Instruction 2(d) to proposed Item 3. This

Instruction would address when account fees must

be included in the fee table. For example, account

fees would be required in the fee table even if a

fund waived the fees for certain shareholders, such

as employees of the fund’s investment adviser and

investors with large account balances. In certain

circumstances, case-by-case determinations would

continue to be made regarding the inclusion (or

exclusion) of account fees from the fee table based

on the number and type of shareholders subject to

the fee and the services provided.

88 If an account fee is charged only to accounts

that do not meet a certain threshold (e.g., accounts

under $2,500) or if an account fee is non-recurring

(e.g., it is paid to open or close an account), a fund

would be permitted to disclose the threshold or the

type of fee imposed in a parenthetical to the caption

or in a footnote to the fee table.

In computing the expenses shown in the

Example, Instruction 4(d) to proposed Item 3 would

allow the allocation of account fees when they are

charged to invest in more than one fund. See Money

Market Fund Prospectus Release, supra note 14, at

38461 (proposing this change). In addition, a fund

that charges account fees based on a minimum

investment requirement would be permitted to

prorate its account fees for purposes of the Example

if the fund’s minimum account requirement

exceeds $10,000 (the proposed hypothetical

investment). For instance, adjusting an account fee

of $100 to $50 would be appropriate to avoid

overstating the fee in the Example when the fund’s

minimum investment requirement is $20,000.

89 Instruction 1 to Item 2(a).

90See ICI Survey Letter, supra note 39 (changing

the caption from ‘‘sales load’’ to ‘‘sales charge,’’

without using the term ‘‘load’).

91 17 CFR 270.12b-1.

92Focus Group participants indicated that the

term ‘‘marketing fees’’ would help them understand

the expenses included in the line item.

93See ICI Survey Letter, supra note 39 (enclosing

a prototype profile that includes similar

explanatory information).

94 Instructions 5 and 7 to Item 2(a).

95 Instructions 2(a)(i) and 2(c) to proposed Item 3.

The GCLs require a fund to disclose wire

redemption charges in a footnote to the fee table.

1991 GCL, supra note 28, at II.G. Given the small

amount of these fees (typically $5 to $10 per

redemption) and since these fees are charged only

when shareholders elect to receive redemption

proceeds by wire, the proposed amendments would

not require disclosure of wire redemption charges

in the fee table. A fund may include this disclosure

in a footnote to the table or together with other

prospectus disclosure regarding redemption

procedures.

96 Instruction 13 to Item 2(a).

97 Instruction 3(e) to proposed Item 3. See Money

Market Fund Prospectus Release, supra note 14, at

38458 (proposing this clarification).

98 Instruction 10(b) to Item 2(a).

hypothetical initial account value used

in the MDFP line graph. 84

The Commission requests comment

on the proposed amendments. The

Commission also requests comment

whether the Example communicates

useful information to investors and,

specifically, whether the Example

should continue to be required. The

Commission requests comment about

other ways to provide information that

investors can use to compare the costs

of fund investments.

b. Shareholder Account Fees

Instructions to the fee table require a

fund to include, under the caption

‘‘Other Expenses,’’ fees that are charged

to all shareholder accounts. 85 Funds

that have account fees (e.g., account

maintenance fees) typically charge these

fees as a fixed dollar amount and

disclose the fees in a separate line item

to the fee table. 86 Because account fees

are paid directly by shareholders and

are not fund operating expenses, the

proposed amendments would create a

new line item in the shareholder

transaction section of the fee table that

would describe the type of account fees

charged by a fund. 87 Like the fee table

requirements applicable to sales loads,

the proposed amendments would

require a fund to show the maximum

account fee imposed. 88

c. Improving and Simplifying Fee Table

Presentation

Fee Table Narrative. Form N–1A

requires a fund to provide a narrative

description following the fee table

explaining the purpose of the table. 89

To help investors use the information

presented, the proposed amendments

would require the narrative explanation

to appear before (rather than after) the

fee table and to include disclosure to the

following effect:

This table describes the fees and expenses

you may pay in connection with an

investment in the fund.

New Fee Table Headings and

Captions. The fee table is divided into

two sections: ‘‘Shareholder Transaction

Expenses’’ and ‘‘Annual Fund Operating

Expenses.’’ Captions beneath the two

general headings list the fees that make

up transaction and operating expenses.

The general heading for the shareholder

transaction section of the fee table refers

to shareholder transaction ‘‘expenses’’

and captions underneath this heading

refer to sales ‘‘loads’’ and redemption

and exchange ‘‘fees.’’ The proposed

amendments would revise the

shareholder transaction section so that

the general heading and captions

consistently refer to ‘‘fees.’’ As a result

of this change, captions relating to sales

loads would refer to ‘‘sales fees.’’ Since

some investors are familiar with the

term ‘‘load’’ and many funds use the

term ‘‘no load’’ in marketing materials,

however, these captions would include

the term ‘‘load’’ in parentheses (e.g.,

‘‘Maximum Sales Fee (Load) Imposed

on Purchases’).90

The proposed amendments also

would revise the caption ‘‘12b-1 Fees,’’

which includes any distribution and

other expenses a fund pays under a rule

12b-1 plan.91 The proposed

amendments would change the caption

to ‘‘Marketing (12b-1) Fees.’’ 92 Retaining

the designation ‘‘12b-1’’ would enable

investors familiar with rule 12b-1 plans

to identify those fees in the fee table.

The Commission requests comment

whether another caption (e.g.,

‘‘Distribution (12b-1) Fees’’) would be

more appropriate.

To help explain the difference

between the fees paid by shareholders

and expenses paid by the fund, the

proposed amendments would require

the following parentheticals after each

heading: ‘‘Shareholder Fees (fees paid

directly from your account)’’ and

‘‘Annual Fund Operating Expenses

(expenses that are deducted from the

fund’s assets).’’ 93

Fee Schedules. Instructions to the fee

table permit a fund to include a tabular

presentation within the fee table that

shows a range of deferred sales loads

over time and a range of exchange

fees.94 Since the presentation of a table

within the larger fee table tends to

complicate the fee disclosure and may

discourage investors from reviewing the

information presented, the proposed

amendments would no longer permit

this disclosure in the fee table. Like the

current Form, the proposed

amendments would continue to permit

a fund to explain the range of deferred

sales loads or exchange fees in a

footnote.95

Expense Reimbursement and Fee

Waiver Arrangements. Instructions to

the fee table require a fund that has an

expense reimbursement or fee waiver

arrangement to reflect the arrangement

in the fee table if the reimbursement or

waiver will continue.96 The proposed

amendments would clarify that a fund

is required to reflect expense

reimbursement and fee waiver

arrangements without regard to whether

the arrangement has been guaranteed for

a full fiscal year.97 This approach is

intended to assure that investors are

informed about decreases in expense

reimbursement and fee waiver

arrangements that could affect the

fund’s performance.

Other Expenses. Instructions to the

fee table permit a fund to subdivide the

line item for ‘‘Other Expenses’’ into 3

subcategories of its own choosing.98

Since some funds identify the fees that

make up this line item by adding a

parenthetical following the ‘‘Other

Expenses’’ caption, the proposed

amendments would permit a fund to
Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules 10909

99 Instruction 3(c)(iii) to proposed Item 3.

100See Money Market Fund Prospectus Release,

supra note 14, at 38456 (giving examples of lengthy

and technical disclosure about portfolio holdings

frequently found in money market fund

prospectuses).

101The ICI has recommended that prospectus

disclosure focus primarily on a fund’s broad

investment objectives, practices, and associated

risks, and not on particular types of securities in

which the fund invests. See, e.g., Letter from Paul

Schott Stevens, General Counsel, ICI, to Jonathan G.

Katz, Secretary, SEC, at 4–6 (July 28, 1995) (‘‘1995

ICI Risk Comment Letter’); Letter from Amy B.R.

Lancellotta, Associate Counsel, ICI, to C. Gladwyn

Goins, Associate Director, Division of Investment

Management, SEC, at 7 (Mar. 7, 1995) (‘‘1995 ICI

Disclosure Letter’).

102See, e.g., 1 T. Lemke, G. Lins & A.T. Smith III,

Regulation of Investment Companies § 1.01, at 1–1

(1996).

103See Form N–1A Proposing Release, supra note

13, at 815; Form N–1A Adopting Release, supra

note 12, at 39729. See also Money Market Fund

Prospectus Release, supra note 14 (proposing

amendments that would permit money market

funds to include in their prospectuses ‘‘basic,

general statements about their investment objectives

and portfolio composition’’).

104Proposed Item 4(a). A fund may refer to its

investment objectives as investment goals. If a

fund’s investment objectives can be changed

without a shareholder vote, the proposed

amendments would continue to require disclosure

of this fact in the prospectus. Although not required

by Form N–1A, some funds disclose in the

prospectus that their investment objectives may not

be changed without a shareholder vote. Since

investors generally do not expect fund investment

objectives to change, this disclosure does not

appear to help investors evaluate and compare

funds. This disclosure would be moved to the SAI

and proposed Item 12(c)(1)(vii) would require a

fund to disclose when its investment objectives may

not be changed without a shareholder vote.

105 Item 4(a)(ii)(B)(1).

106 Item 4(a)(ii)(D).

107 Item 4(b)(ii). Item 4(b)(i) directs a fund not to

disclose so-called ‘‘negative’’ practices (i.e.,

practices in which a fund may not or does not

intend to engage). Instruction 3 to proposed Item

4(b)(1) would retain this limitation by providing

that a negative strategy is not a principal strategy.

Avoiding disclosure about negative strategies

should help keep prospectus disclosure focused on

what the fund will do to achieve its investment

objectives, rather than on what the fund will not do.

108A fund, within a short period of time, may

increase its holdings of a particular type of security

from less than 5% of its assets to more than 5%,

which, under the current Form, requires a different

level of disclosure about the security. To avoid

having to amend their prospectuses in response to

changes in portfolio holdings, many funds include

information in their prospectuses about any

security or strategy that might at some point place

more than 5% of the fund’s assets at risk.

109Proposed Item 4(b)(1). A bond fund, for

example, typically would discuss the maturities,

durations, ratings, and issuers of the bonds in

which the fund principally invests.

110 Instruction 1 to proposed Item 4(b)(1) would

define a strategy to include any policy, practice, or

technique used to achieve a fund’s investment

objectives.

111 Instruction 2 to proposed Item 4(b)(1).

112Proposed Item 12(b).

identify the expenses that comprise this

line item either under separate

subcaptions or in a parenthetical

following the ‘‘Other Expenses’’

caption.99 When subcaptions are

provided, the proposed amendments

would clarify that the subcaptions must

identify the 3 largest expenses that

comprise ‘‘Other Expenses.’’

4. Item 4—Investment Strategies and

Risk Disclosure

Prospectus disclosure about fund

investments and risks typically consists

of descriptions of each type of security

in which a fund may invest and the

risks associated with those securities.

The investments described often

include instruments, such as illiquid

securities, repurchase agreements, and

options and futures contracts, that do

not have a significant role in achieving

a fund’s investment objectives.

Disclosing information about each type

of security in which a fund might invest

does not appear to help investors

evaluate how the fund’s portfolio will

be managed or the risks of investing in

the fund. This disclosure also adds

substantial length and complexity to

fund prospectuses, contributing to

investor perceptions that prospectuses

are too complicated and discouraging

investors from reading a fund’s

prospectus.100

The Commission believes that

prospectus disclosure would be more

useful to investors if it emphasized the

principal investment strategies of a fund

and the principal risks of investing in

the fund, rather than the characteristics

and risks of each type of instrument in

which the fund may invest.101 Since

funds are intended to offer investors

professional investment management,102

the focus of investment disclosure

should be on the fund’s investment

objectives and the principal means used

by the fund’s adviser to achieve those

objectives. Consistent with this view,

the proposed amendments seek to

encourage prospectus disclosure that

would help investors understand how a

fund’s portfolio will be managed. The

proposed amendments are designed to

be consistent with, and to implement

more effectively, the Commission’s

intention in adopting Form N–1A that

the prospectus should describe a fund’s

‘‘fundamental characteristics.’’ 103

a. Investment Objectives and

Implementation of Investment

Objectives

To assist investors in identifying

funds that meet their investment needs,

the proposed amendments, like the

current Form, would require prospectus

disclosure of a fund’s investment

objectives.104 The proposed

amendments, however, would change

the disclosure requirements regarding

how a fund intends to achieve its

investment objectives. Form N–1A

currently requires a fund to disclose the

types of securities in which it invests or

will invest principally as well as any

‘‘special investment practices and

techniques’’ that will be used in

connection with investing in those

securities.105 Form N–1A also requires

disclosure about ‘‘significant investment

policies or techniques’’ that a fund

intends to use, subject to certain

limitations.106

One of those limitations directs a fund

to limit prospectus disclosure about

practices that place no more than 5% of

a fund’s assets at risk.107 Many funds

disclose in their prospectuses

information about securities and

investment practices that do not and

may not ever place more than 5% of a

fund’s assets at risk, often to retain the

flexibility to exceed the 5% threshold in

the future.108

The proposed amendments would

eliminate the 5% standard. Instead, the

revised Form would require a fund to

disclose in the prospectus the principal

strategies to be used to achieve its

investment objectives, including the

particular type or types of securities in

which the fund will invest

principally.109 This approach is

designed to shift prospectus disclosure

away from an inventory of the various

investments a fund may make and to

focus disclosure on a fund’s overall

portfolio management. Whether a

particular strategy (including a strategy

to invest in a particular type of security)

would constitute a principal strategy

that must be disclosed in the fund’s

prospectus would depend upon the

strategy’s anticipated importance in

achieving the fund’s investment

objectives and how the strategy affects

the fund’s potential risks and returns.110

In determining what is a principal

strategy, a fund would consider, among

other things, the amount of assets

expected to be committed to the

strategy, the amount of assets expected

to be placed at risk by the strategy, and

the likelihood of losing some or all of

those assets.111 The proposed

amendments would require disclosure

about non-principal strategies to appear

in the SAI.112

Focusing disclosure requirements on

a fund’s principal strategies is intended

to improve prospectus disclosure by

eliminating the need for disclosure

about securities and strategies that do

not have an important role in achieving

the fund’s investment objectives. Under

the revised Form, for example, it

generally would be unnecessary to

include in the prospectus disclosure

about a fund’s cash management
10910 Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules

113Similarly, in most cases, a fund would be able

to move to the SAI disclosure about hedging

strategies that limit downside risk, securities

lending, purchasing securities on a ‘‘when-issued’’

basis, short selling ‘‘against the box’’ to defer

recognition of gains or losses, and investing in

illiquid or restricted securities, since these

strategies typically are not principal strategies.

114Proposed Item 4(b)(2). The prospectus of a

value-oriented fund might state, for example, that

the fund’s adviser selects stocks it considers to be

undervalued by recognized measures of economic

value such as earnings, cash flow, and book value.

A growth and income fund might state that it

invests in the stock of issuers whose earnings have

increased from year to year and issuers that have

paid dividends continuously for a certain period of

time.

115Because proposed Item 4(b)(2) would require

the prospectus to explain in general terms how the

fund’s adviser decides what securities to buy and

sell, a fund (or its adviser) would not be required

to provide proprietary information about its

investment strategies.

116Proposed Item 4(b)(3).

117 1994 GCL, supra note 28, at II.E.

118Proposed Item 4(e). See also Fund Names

Release, supra note 2 (permitting a fund with a

name suggesting that the fund focuses on a

particular type of investment to make other

investments while assuming a temporary defensive

position).

119 In light of these considerations, the revised

Form, unlike the 1994 GCL, supra note 28, would

not require a fund to disclose the types of securities

in which it may invest while taking a temporary

defensive position.

120 Guide 5.

121Proposed Item 4(b)(4). A fund that expects its

portfolio turnover rate to be less than 100% would

continue to be required to disclose the anticipated

rate of its portfolio turnover in the SAI. As under

the current requirements, a money market fund

would not be required to discuss portfolio turnover

in either the prospectus or the SAI. See MDFP

Adopting Release, supra note 14, at 19051 n.3.

122 Information about a fund’s portfolio turnover

rate in previous fiscal years is disclosed in the

financial highlights table. See proposed Item 9.

123Like any other fund, a ‘‘balanced’’ fund would

discuss its anticipated turnover rate with respect to

its entire portfolio. Guide 5, in contrast, requires a

balanced fund to discuss portfolio turnover

separately for the stock and bond portions of the

fund’s portfolio.

124Prospectuses, for example, state that high

portfolio turnover rates will likely result in higher

transaction costs and may increase taxable gains.

125See 15 U.S.C. 80a–4, –5.

126 Item 4(a)(i)(B).

127Proposed Item 12(a).

practices (e.g., entering into overnight

repurchase agreements) since these

practices are not typically among a

fund’s principal strategies.113

To further focus prospectus disclosure

on a fund’s principal strategies, the

proposed amendments would require

the prospectus to explain in general

terms how the fund’s adviser decides

what securities to buy and sell.114 This

disclosure is intended to provide

investors with general information

about the fund’s investment approach

and how the fund’s portfolio will be

managed. The information might

describe, for example, whether an

equity fund emphasizes value or

growth, or blends the two approaches,

or whether the fund invests in stocks

based on a ‘‘top-down’’ analysis of

economic trends or a ‘‘bottom-up’’

analysis that focuses on the financial

condition and competitiveness of

individual companies.115

Concentration. Form N–1A requires a

fund to disclose in its prospectus any

policy to concentrate (i.e., invest 25% or

more of its total assets) in a particular

industry or group of industries. The

proposed amendments would retain this

requirement since concentrating in an

industry or group of industries is likely

to be a principal strategy in achieving a

fund’s investment objectives.116 The

proposed amendments also would

continue to require a single state money

market fund to discuss its concentration

in securities issued by a particular state

or by issuers located within a state.

Temporary Defensive Positions. Many

funds adopt policies permitting them to

take ‘‘temporary defensive positions’’ to

avoid losses in response to adverse

market, economic, political, or other

conditions. When a fund assumes a

temporary defensive position, the fund

may depart from its usual investment

strategies without a shareholder vote or

specific notice to shareholders. The

GCLs require a fund to disclose, if

applicable, certain information about

the possibility of taking temporary

defensive positions.117

The proposed amendments would

continue to require disclosure about

temporary defensive positions to alert

investors of potential changes in a

fund’s investments.118 In particular, the

proposed amendments would require a

fund to disclose the percentage of its

assets that may be committed to

temporary defensive positions (e.g., up

to 100% of the fund’s assets), the risks,

if any, associated with the positions,

and the likely effect of these positions

on the fund’s performance. The

Commission requests comment on

requiring this information given the

temporary nature of defensive positions

and the proposed approach of focusing

prospectus disclosure on a fund’s

principal strategies.119

Portfolio Turnover. The Guides

require a fund that has had in the past

year, or anticipates having, a portfolio

turnover rate of approximately 100% or

more to disclose in the prospectus any

tax and brokerage consequences that

will result from the fund’s ‘‘high’’

portfolio turnover rate.120 The proposed

amendments would require prospectus

disclosure only when a fund anticipates

having a portfolio turnover rate of 100%

or more in the coming year.121 This

approach is designed to focus

prospectus disclosure on a fund’s

expected portfolio practices, not past

practices.122

The proposed amendments would

require disclosure of the fund’s

anticipated portfolio turnover rate and

what that rate means (e.g., that a

portfolio turnover rate of 200% is

equivalent to the fund buying and

selling all of the securities in its

portfolio twice in the course of a

year).123 Disclosing the anticipated

turnover rate and explaining its

meaning are intended to enable

investors to evaluate how actively a

fund buys and sells portfolio securities

and to compare the anticipated portfolio

turnover rates of different funds.

The proposed amendments also

would require a fund to explain the tax

consequences to shareholders of the

fund’s high portfolio turnover rate. In

addition, the proposed amendments

would require a fund to explain how

trading costs associated with the fund’s

high portfolio turnover may affect the

fund’s performance.

The Commission requests comment

on the proposed requirements. In

particular, the Commission requests

comment whether a fund with a

portfolio turnover rate of 100% should

be viewed as having a high portfolio

turnover rate. An informal review by the

Division of fund portfolio turnover rates

suggests that nearly half of all funds

have portfolio turnover rates exceeding

100%. The Commission also requests

comment whether specific information

about portfolio turnover should be

required in connection with prospectus

disclosure about a fund’s investment

strategies. In response to current

disclosure requirements, for example,

funds often make generic statements

that do not appear to help investors

evaluate and compare fund

investments.124

Classification and Subclassification.

All funds that register on Form N–1A

are classified as management companies

and subclassified as open-end

companies under sections 4 and 5 of the

Investment Company Act.125 Funds may

be further subclassified as diversified or

non-diversified under section 5. Form

N–1A requires a fund to disclose its

classification and subclassifications in

the prospectus.126

The proposed amendments would

move to the SAI disclosure about a

fund’s legal status as an open-end

management company.127 This

information is technical and repetitive

of information required to be disclosed

in the prospectus. A fund’s

classification as a management company

is communicated to investors through
Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules 10911

128Proposed Item 4(d).

129 15 U.S.C. 80a-8. Section 8 also requires a fund

to disclose in the registration statement its policies

on concentration and portfolio turnover, see supra

note 121 and accompanying text, and any other

policies that the fund deems fundamental or that

may not be changed without shareholder approval.

130See, e.g., section 18(f) (15 U.S.C. 80a-18(f))

(limiting a fund’s ability to issue senior securities

and borrow money); section 12(c) (15 U.S.C. 80a12(c)) (limiting the underwriting practices of a

diversified fund).

131See Items 4(a)(ii)(C), 4(b); Guides 3, 14.

132Proposed Item 12(c). If a policy specified in

section 8 is a principal strategy, Instruction 4 to

proposed Item 4(b)(1) would require the fund to

disclose the policy in the prospectus.

133Proposed Item 4(c). See supra note 101. The

requirement that a fund disclose the risks to which

its particular portfolio as a whole is subject is

intended to elicit risk disclosure specific to that

fund. In meeting this requirement, a growth fund,

for example, would have to disclose the risks of the

growth stocks in which the fund invests as opposed

to describing the general risks of equity securities.

134 ICI Risk Survey, supra note 26, at 21, 37.

135Risk Concept Release, supra note 18, at 17176.

Standard deviation measures the volatility of a

fund’s total return; beta measures the sensitivity of

a fund’s total return to the market’s performance;

and duration measures the sensitivity of a bond

fund’s return to changes in interest rates. Id. at

17174–76.

136See, e.g., 1995 ICI Risk Comment Letter, supra

note 101, at 10–16 (questioning, among other

things, the feasibility of developing a single, allencompassing measure of fund risks and whether

quantitative information would be understood and

accurately used by fund investors).

137See also P. Bernstein, Against the Gods: The

Remarkable Story of Risk 269–303 (1996)

(suggesting it is inaccurate to assume that investors

evaluate investments based on risk and return and

that investors’ attitudes towards risk may overrule

a decision that may be appropriate based on

quantitative measures).

138 ICI Risk Survey, supra note 26, at 14–18 (e.g.,

45% of respondents who had used duration, 44%

of those who used standard deviation, and 23% of

those who used beta reported using these measures

to estimate future performance).

disclosure about the fund’s investment

adviser and portfolio management. A

fund’s open-end status is communicated

through disclosure about the

redeemability of the fund’s shares.

The proposed amendments also

would move to the SAI disclosure that

a fund is diversified under section 5.

Since most funds are diversified, this

information (which often includes a

technical description of the

diversification requirements under the

Investment Company Act) does not

appear to provide investors with useful

information about a particular fund. A

non-diversified fund would continue to

be required to disclose its nondiversified status in the prospectus.128

To avoid technical disclosure, the

proposed amendments would require a

non-diversified fund to describe the

effects of non-diversification (e.g., by

indicating that, compared to diversified

funds, the fund may invest a greater

percentage of its assets in a particular

issuer) and to disclose the risks of

investing in the fund.

Section 8 Policies. Section 8 requires

a fund to disclose in its registration

statement the fund’s policies with

respect to borrowing money, issuing

senior securities, underwriting

securities issued by other persons,

investing in real estate or commodities,

and making loans.129 Most funds do not

engage in these practices to a significant

extent, because the Investment

Company Act limits their use by

funds.130 Although they are not required

to do so, some funds disclose in the

prospectus their policies with respect to

the practices identified under section

8.131 To provide a clearer directive to

disclose this information in the SAI, the

proposed amendments specifically

would require disclosure about these

policies in the SAI.132

b. Risk Disclosure

Risk disclosure in fund prospectuses

typically consists of detailed, and often

technical, descriptions of the risks

associated with particular securities in

which a fund may invest. Just as

disclosure about each type of security in

which a fund may invest does not

appear to effectively communicate how

the fund’s portfolio will be managed,

disclosure about the risks associated

with each type of security in which the

fund may invest does not appear to

effectively communicate the overall

risks of investing in the fund. Disclosing

the risks of each portfolio investment,

rather than the overall risks of investing

in a fund, does not appear to help

investors evaluate a particular fund or

compare the risks of different funds.

Consistent with the proposal to shift

prospectus disclosure away from an

inventory of the various securities that

may be held by a fund, the proposed

amendments would revise Form N–1A

to shift prospectus disclosure away from

the risks associated with specific

securities. The revised Form would

require a fund to disclose the risks to

which the fund’s particular portfolio as

a whole is expected to be subject.133 As

part of this disclosure, a fund would be

required to discuss the circumstances

that are reasonably likely to affect

adversely the fund’s net asset value,

yield, or total return.

The proposed approach is intended to

improve fund risk disclosure.

Comments from both individual

investors and members of the fund

industry responding to the Risk Concept

Release strongly supported improving

narrative discussions of fund risks. In a

survey of fund investors sponsored by

the ICI (‘‘ICI Risk Survey’’), respondents

were asked to consider various methods

that could be used to describe risk and

expressed the greatest overall

confidence about using narrative

information.134

The Risk Concept Release requested

comment whether quantitative risk

measures, such as standard deviation,

beta, and duration, would help investors

evaluate and compare fund risks.135

While more than half of the individual

commenters and some industry

members expressed a desire for some

form of quantitative risk information,

commenters did not broadly support

any one risk measure. In addition, a

number of commenters strongly

opposed requiring disclosure of

quantitative risk information.136 These

commenters, among other things,

questioned the value of quantitative risk

measures, suggesting that investors have

too wide a range of investment goals

and ideas of what ‘‘risk’’ means to be

well-served by a single quantitative risk

measure.137 The ICI Risk Survey

suggests that investors who use

quantitative measures may not

understand the measures well enough to

use them for the special purposes for

which they were designed.138

Based on these and other

considerations, the Commission is not

proposing at this time to require funds

to use quantitative risk measures. The

proposed prospectus risk/return

summary and the proposed

amendments to the narrative discussion

of risk within the prospectus are

designed to improve fund risk

disclosure, without raising the issues

associated with Commission-mandated

quantitative information. The

Commission’s determination not to

require quantitative risk information is

not intended to suggest, however, that

this information is not useful to some

investors. Funds that wish to include

quantitative risk disclosure in their

prospectuses may continue to do so.

Item 5—Management’s Discussion of

Fund Performance

The proposed amendments would

continue to require a fund to provide its

MDFP and the related line graph

comparing the fund’s returns to a broadbased securities market index in either

the prospectus or the annual report. The

Division’s review of and experience

with MDFP disclosure indicates that the

discussion of fund performance and the

line graph have been successful in

providing fund shareholders with

useful, comparative information about a

fund’s performance. Other than

technical and conforming changes, the

proposed amendments would not

modify these disclosure requirements.
10912 Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules

139National Securities Markets Improvement Act

of 1996, Pub. L. No. 104–290 (1996) (the ‘‘1996

Securities Act’’), section 206(f) (amending section

30 of the Investment Company Act (15 U.S.C. 80a–

29)] to add new paragraph (f)).

140 In the past, the concept of ‘‘integrated’’

disclosure for funds has addressed eliminating

duplicative registration requirements under the

Investment Company Act and the Securities Act.

See Investment Company Act Release No. 10378

(Aug. 28, 1978) (43 FR 39548) (‘‘Integrated

Registration Statement Release’’) (adopting

integrated registration statements for funds and

closed-end investment companies by replacing

separate registration statement forms under the

Investment Company Act and Securities Act). New

‘‘integrated’’ disclosure initiatives for funds could

expand the concept of integrated disclosure to

include an approach similar to that adopted for

corporate issuers, which integrates registration

statement disclosure requirements with periodic

reports. See Securities Act Release Nos. 6235 (Sept.

2, 1980) (45 FR 63693) and 6383 (Mar. 3, 1982) (47

FR 11386) (proposing and adopting new forms for

the offering of securities under the Securities Act).

141Proposed Items 6(a)(1), (2).

142See section 2(a)(20) (15 U.S.C. 80a–2(a)(20))

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

143 Item 9. The legal proceedings disclosure is

intended to be substantially the same as Item 103

of Regulation S–K under the Securities Act (17 CFR

229.103) and would be modified to conform to Item

103. See Investment Company Act Release No.

19155 (Nov. 30, 1992) (57 FR 56862) (modifying

Form N–2 to conform to Item 103).

144 Item 5(a).

145Proposed Item 13(a).

146These responsibilities include, among other

things: (i) Evaluating and approving the fund’s

investment advisory and principal underwriting

contracts (sections 15 (a), (c) (15 U.S.C. 80a–15 (a),

(c))) and the use of fund assets to pay for the

distribution of fund shares (rule 12b–1); (ii)

selecting the fund’s independent public

accountants (section 32(a)(1) (15 U.S.C. 80a–

31(a)(1))); and (iii) reviewing and approving

transactions with affiliates under various rules (e.g.,

rule 10f–3 (17 CFR 270.10f–3); rule 17a–7 (17 CFR

270.17a–7); rule 17e–1 (17 CFR 270.17e–1)).

Directors have fiduciary duties to the fund and its

shareholders under section 36(a) of the Investment

Company Act (15 U.S.C. 80a–35(a)) and under state

law. See 3 W. Fletcher, Cyclopedia of the Law of

Private Corporations § 838 (rev. perm. ed. 1994);

Hanson Trust PLC v. ML SCM Acquisition, Inc., 781

F.2d 264, 275 (2d Cir. 1986). See also Burks v.

Lasker, 441 U.S. 471 (1979) (upholding the

authority of independent directors to take actions

under state law to the extent not inconsistent with

the policies of the Investment Company Act and the

Investment Advisers Act of 1940 (15 U.S.C. 80b–1

et seq.) (the ‘‘Advisers Act’)).

147Section 10(a) of the Investment Company Act

(15 U.S.C. 80a–10(a)) requires that at least 40% of

a fund’s board of directors consist of individuals

who are not ‘‘interested persons,’’ as defined in

section 2(a)(19) (15 U.S.C. 80a–2(a)(19)).

148 Items 5(b)(i) and 6(b).

Funds typically include the MDFP in

their annual reports, rather than in their

prospectuses, which may be, in part,

due to the relevance of the MDFP to

other current financial information

appearing in annual reports. As a result

of recent legislation, the Commission

has more flexibility to specify the

content of annual reports and to require

additional disclosure in annual and

semi-annual reports as necessary or

appropriate in the public interest or for

the protection of investors.139 The

Commission is not proposing to modify

fund shareholder report disclosure

requirements in this release, but

recognizes that revisions to shareholder

report requirements could further

enhance the disclosure provided to fund

investors. The Division currently is

evaluating whether funds should be

required to include the MDFP in the

annual report. The Division also is

considering whether certain disclosure

required by Form N–1A would be more

useful to investors in shareholder

reports. An ‘‘integrated’’ approach to

registration and reporting requirements

could improve the overall information

about a fund available to investors.140

Shareholder reports, for example, could

disclose information about a fund’s

investments and operations for a current

period (such as information about the

fund’s portfolio turnover or the tax

consequences of investing in the fund).

Fund prospectuses could disclose more

general information about the fund’s

intended investments and operations

(such as its investment objectives,

anticipated risks, and fees). The

Commission requests comment on

specific prospectus disclosure that

could be more appropriately disclosed

in a fund’s shareholder reports.

Item 6—Management, Organization, and

Capital Structure

a. Management and Organization

The proposed amendments would

streamline the current disclosure

requirements concerning a fund’s

management and organization.

Consistent with the intent of Form N–

1A to provide investors with essential

information about a fund, the revised

Form would require prospectus

disclosure about the fund’s investment

adviser, the advisory fee paid by the

fund, and the person or persons

primarily responsible for the day-to-day

management of the fund’s portfolio.141

As in the current Form, the revised

Form would require prospectus

disclosure of fees paid to any subadviser.142 The Commission requests

comment whether information about

individual sub-advisory fees helps

investors evaluate and compare fund

investments or whether this disclosure

obscures the aggregate investment

advisory fee associated with investing in

a particular fund. The Commission

requests specific comment whether a

fund should be required to disclose only

the fund’s aggregate investment

advisory fee.

The revised Form would continue to

require prospectus disclosure of any

material pending legal proceedings

involving the fund, investment adviser,

or principal underwriter, which would

be incorporated in the management and

organization Item because the disclosure

is related to the other management

information required to be disclosed.143

The proposed amendments would

modify or move to the SAI other

disclosure requirements relating to the

management and organization of a fund

because this information generally is

common to all funds and does not

appear to assist an investor in

evaluating a particular fund or

comparing different funds.

Board of Directors. Form N–1A

requires a fund’s prospectus to include

a brief description of the responsibilities

of the fund’s board of directors under

the applicable laws of the jurisdiction

where the fund is organized.144 The

proposed amendments would move this

disclosure to the SAI.145 The

responsibilities of fund directors are

governed by the Investment Company

Act and state law.146 The summary,

generic disclosure typically provided in

fund prospectuses about the

responsibilities of directors does not

appear to assist an investor in deciding

whether to invest in a particular fund.

The Commission requests comment

whether disclosure in the prospectus of

the names, experience, and

compensation of a fund’s directors,

along with an address, telephone

number, or other means to contact the

directors would be more useful to

investors. The Commission also requests

comment whether this information

should be given only for a fund’s

independent directors, accompanied by

disclosure of the number of

independent directors in relation to the

number of directors on the fund’s

board.147 The Commission requests

specific comment whether information

about a fund’s directors is essential

information that should be required to

be disclosed in the prospectus to assist

investors in deciding whether to invest

in a fund. The Commission also requests

specific comment whether information

about the compensation paid to

directors warrants prospectus disclosure

in light of the relatively small portion of

a fund’s total expenses represented by

director compensation.

Controlling Persons. Form N–1A

requires disclosure of the name of any

person that controls the fund’s

investment adviser and the name of any

person that controls the fund.148 The

proposed amendments would no longer
Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules 10913

149See, e.g., section 17 (15 U.S.C. 80a–17) and

rules 17a–6, 17d–1 (17 CFR 270.17a–6, .17d–1).

150See supra note 146.

151 Items 14(a), 15(a)(1). In addition, information

about any person who owns 10% or more of a

fund’s voting stock is required to be disclosed in a

proxy statement seeking shareholder approval of

the fund’s investment adviser, which provides more

timely information about the possibility that a

person could influence the approval of the advisory

contract. Item 22(c)(4) of Schedule 14A (17 CFR

240.14a–101) under the Securities Exchange Act of

1934 (15 U.S.C. 78a et seq.) (the ‘‘Securities

Exchange Act’).

152 Item 5(g).

153Some funds, for example, state that an

affiliated broker may effect portfolio transactions for

the fund on an exchange or board of trade, if the

commissions, fees, or other remuneration received

by the affiliated broker are reasonable and fair

compared to the commissions, fees, or other

remuneration paid to other brokers or futures

commission merchants in connection with

comparable transactions involving similar securities

being purchased or sold on an exchange or board

of trade during a comparable period of time. With

respect to allocation of brokerage transactions,

funds typically disclose that they may consider

sales of fund shares as a factor in selecting brokers

to execute portfolio transactions.

154 Item 16. The Commission has undertaken

initiatives designed to improve disclosure about

fund brokerage transactions by requiring certain

expenses paid by directed brokerage to be treated

as an expense in a fund’s financial statements and

fee table and by requiring average commission rates

to be disclosed in the financial highlights

information. Investment Company Act Release No.

21221 (July 21, 1995) (60 FR 38918).

155 Item 4(a).

156See SEC, Division of Investment Management,

Protecting Investors: A Half Century of Investment

Company Regulation, Investment Company

Governance 275 (May 1992) (reporting that in 1991

over 84% of funds were organized as Maryland

corporations or Massachusetts business trusts)

(citing Lipper Analytical Services, The ‘‘Form’’

Used by Mutual Funds to Organize State by State

(Mar. 1991) (survey prepared for the ICI)).

157Proposed Item 11(a). Information about a

fund’s operating history (including information

about the lack of an operating history for a newly

organized fund) would continue to be provided in

the bar chart, performance table, and the fee table

in the risk/return summary, and in the financial

highlights information.

158 15 U.S.C. 80a–7(d). See proposed Item 6(b).

159 Item 5(f).

160 Item 15.

161For funds organized as business trusts under

Massachusetts law, prospectuses sometimes include

disclosure that, under Massachusetts law, fund

shareholders may, under certain limited

circumstances, be held personally liable as partners

for the fund’s obligations. In adopting Form N–1A,

the Commission stated that disclosure of possible

contingent shareholder liability under this form of

organization should not be required if a fund

believes that, because of arrangements to protect

shareholders, the likelihood of loss or expense to

shareholders is remote. Form N–1A Adopting

Release, supra note 12, at 37933–34. See 3 T.

Frankel, The Regulation of Money Managers 79

(1980) (for funds organized as Massachusetts

business trusts, personal liability generally is

considered remote). The Division’s review of fund

prospectuses indicates that certain funds include

disclosure about Massachusetts business trusts and

state that shareholder liability is remote. Funds

should continue to evaluate whether this disclosure

is necessary.

162 Item 6 (a), (c).

163Section 18(i) (15 U.S.C. 80a–18(i))].

164See, e.g., section 15(a) (approval of investment

advisory contract); section 16(a) (15 U.S.C. 80a–

16(a)) (election of directors); section 13(a) (15 U.S.C.

80a–13(a)) (changes in fundamental investment

policies). See also section 2(a)(42) (15 U.S.C. 80a–

2(a)(42)) (defining ‘‘voting security’’ and a ‘‘vote of

a majority of the outstanding voting securities’’ for

purposes of the Investment Company Act); rules

18f–2, 18f–3 (17 CFR 270.18f–2, –3) (specifying

certain voting rights with respect to series funds

and multiple class funds, respectively).

165Proposed Item 17(a).

166 Item 3(b).

167Section 18(f)(1) (requiring, for example, asset

coverage of at least 300% for bank borrowings).

require this information in the

prospectus. Transactions between

controlling persons and a fund are

subject to restrictions under the

Investment Company Act.149 When

transactions with controlling persons

are permitted, a fund’s board of

directors is responsible for reviewing

and approving the arrangements.150

Disclosure about controlling persons of

the investment adviser and the fund

would continue to be available in the

SAI.151

Affiliated Brokers. Form N–1A

requires a fund to state, if applicable,

that the fund engages in brokerage

transactions with affiliated persons and

allocates brokerage transactions based

on the sale of fund shares.152 The

proposed amendments would no longer

require this disclosure in the

prospectus. The information called for

by the Form typically results in

disclosure that restates applicable legal

requirements.153 This type of generic

disclosure does not appear to assist

investors in deciding whether to invest

in a particular fund. Payment of

commissions to affiliated brokers is

governed by section 17(e) of the

Investment Company Act and rule 17e–

1. In addition, the SAI requires

disclosure about affiliated brokers and

how brokers are selected to effect the

fund’s portfolio transactions.154

Form of Organization. Form N–1A

requires disclosure about a fund’s form

of organization (along with the date) and

state of incorporation.155 Since most

funds are organized in one of a few

states as corporations or business trusts

that seek to provide limited liability to

their shareholders,156 disclosure about a

fund’s organization does not appear to

help investors evaluate a particular fund

or compare different funds. The

proposed amendments would move this

disclosure to the SAI,157 unless a fund

is organized outside the United States

and registered under the Investment

Company Act pursuant to section

7(d).158

Expenses. Form N–1A requires a fund

to provide a statement about its

expenses.159 The proposed amendments

would no longer require this disclosure

since it duplicates information about the

fund’s expenses required in the fee

table. Expense information also would

continue to be available in the fund’s

financial statements and SAI.160

b. Capital Structure

Form N–1A requires certain

information to be disclosed in the

prospectus about a fund’s shares and

capital structure. The proposed

amendments would reorganize and

revise these disclosure requirements

consistent with the intent of Form N–1A

to focus prospectus disclosure on

essential information about a particular

fund that would assist an investor in

deciding whether to invest in that fund.

Transferability, Material Obligations,

and Potential Liabilities. Form N–1A

requires disclosure about any limits on

the transferability of, and material

obligations or potential liabilities

associated with, a fund’s shares. Funds

rarely restrict share transferability and

generally are organized as corporations

or business trusts to provide limited

liability to their shareholders. If,

however, any restrictions or special

liabilities applied to the purchase of a

fund’s shares, information about the

restrictions or liabilities would appear

to help an investor decide whether to

invest in the fund. As a consequence,

the proposed amendments would

continue to require this information in

the prospectus.161 The Commission

requests comment on the types and

likelihood of restrictions and liabilities

imposed on fund shares and on what

disclosure, if any, should be required.

Shareholder Voting Rights. Form N–

1A requires a fund to discuss

shareholder voting rights and disclose if

the rights of shareholders can be

modified by other than a majority

vote.162 Because the Investment

Company Act requires all fund shares to

have equal voting rights 163 and

prescribes the vote required for

significant matters,164 voting rights

disclosure typically is generic and does

not appear to assist investors in

evaluating and comparing funds. The

proposed amendments would move this

disclosure to the SAI.165

Senior Securities. Form N–1A

requires disclosure about any class of

senior securities issued by a fund.166

The proposed amendments would

delete this requirement. Senior

securities issued by funds are limited to

borrowings, which are subject to

significant legal restrictions under the

Investment Company Act 167 and
10914 Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules

168The financial statement requirements in

Regulation S–X specify that a fund disclose in its

balance sheet any amounts payable to banks and

others for borrowings. Rule 6–04 of Regulation S–

X (17 CFR 210.6–04).

169 Item 6(d).

170 Information about purchase and redemption

procedures typically takes up a number of pages in

fund prospectuses and may contribute to the

perception that prospectuses are too long and

complicated. At the same time, this disclosure (e.g.,

information on dividend reinvestment plans,

automatic investment programs, and checkwriting

privileges) appears to be included in prospectuses

in response to investor interest in the information.

171 Item 7(b)(i).

172 Item 19(b). A fund’s securities are required to

be valued based on market quotations or, in the

absence of market quotations, at fair value as

determined by the board of directors. See section

2(a)(41) (15 U.S.C. 80a–2(a)(41)) (defining ‘‘value’’).

See also rule 2a–7 (regarding the amortized cost

method of valuation for money market funds).

173See Guide 28; proposed Item 7(a)(2). The

Instruction to proposed Item 7(a)(2) would

incorporate the disclosure required by Guide 28

concerning funds with portfolio securities listed on

foreign exchanges that trade on weekends and U.S.

holidays. If a fund does not price on days when

foreign securities are traded, the Instruction would

require the fund to disclose in the prospectus that

the net asset value of the fund’s shares may change

on days when shareholders cannot purchase or

redeem fund shares.

174See section 2(a)(41) (15 U.S.C. 80a–2(a)(41))

and rule 2a–4 (17 CFR 270.2a–4).

175 Item 7(a).

176Proposed Item 15(b).

177Fund investors often effect purchases and

redemptions through financial intermediaries (such

as broker-dealers and banks) without the

involvement of the fund’s underwriter. When

information about the underwriter is necessary to

effect purchase and redemption requests, a fund

would disclose this information in the prospectus

in connection with the description of how to

purchase and redeem the fund’s shares.

178See supra note .

179 Item 5(d).

180 Item 5(e).

181Proposed Item 15(h). In addition, Item 5(b)(ii)

requires a statement, if applicable, that the

investment adviser is responsible for overall

management of the fund’s business. This disclosure

would be provided in the SAI in response to

proposed Item 15(c)(1).

182Rule 6–07 of Regulation S-X (17 CFR 210.6–

07); Instruction 3(c) to proposed Item 3.

183 1990 GCL, supra note 28, at II.D.

184Proposed Item 7(b)(7).

185 Item 6(g). Form N–1A provides guidance about

the tax disclosure to be provided in the prospectus,

indicating, among other things, that if a fund

intends to qualify under Subchapter M of the

Internal Revenue Code (I.R.C. 851 et seq.), the fund

should state that it will distribute all of its net

income and gains to shareholders and that these

distributions are taxable.

required to be disclosed in a fund’s

financial statements.168

Fund Classes. Form N–1A requires

disclosure about ‘‘other classes’’ of fund

shares (excluding borrowings that are

not senior securities).169 The proposed

amendments would delete this

requirement. Funds are not permitted to

issue other classes of shares except for

series funds under section 18f–2 and

related rule 18f–2, and multiple class

funds under rule 18f–3. When a series

or class is offered in the prospectus,

disclosure about the series or class

would be required to be given.

7. Item 7—Shareholder Information

Form N–1A requires prospectus

disclosure about a fund’s purchase and

redemption procedures, dividends and

distributions, and the tax consequences

of investing in the fund. While most of

these disclosure requirements would

remain substantially the same, the

proposed amendments would make

certain revisions, particularly with

respect to tax disclosure, to focus this

disclosure on essential information

about a fund.170

a. Purchase and Redemption

Pricing of Fund Shares. Form N–1A

requires a fund to explain that the price

of fund shares is based on the fund’s net

asset value and to identify the methods

used to value the fund’s assets.171 The

proposed amendments would no longer

require this information in the

prospectus because it does not appear to

assist investors in deciding whether to

invest in a particular fund. The pricing

of fund shares and the valuation of

portfolio securities are technical, subject

to legal requirements, and disclosed in

the SAI.172

The proposed amendments would

continue to require a fund to state when

calculations of net asset value are made

and that the price at which a purchase

is effected is based on the next

calculation of net asset value after the

order is placed. A fund also would

continue to be required to identify in a

general manner any national holidays

when shares will not be priced and to

identify specifically any additional local

or regional holidays when the fund will

be closed.173

Although not specifically required,

many funds disclose in their

prospectuses how net asset value is

determined. Funds, for example, often

disclose that net asset value equals

assets minus liabilities divided by the

number of outstanding shares.174

Although this disclosure tends to be

generic because the calculation of net

asset value is the same for all funds, the

Commission requests comment whether

disclosure about what constitutes net

asset value would be helpful to

investors.

Principal Underwriter. Form N–1A

requires a fund to disclose the name and

address of the fund’s principal

underwriter, and whether any affiliated

person of the principal underwriter is

an affiliated person of the fund.175 This

information would be moved to the SAI

because it does not appear to provide

investors with essential information that

would assist them in deciding whether

to invest in a particular fund.176 The

name and address of the underwriter

typically are not necessary for investors

to purchase and redeem a fund’s

shares.177 The fund’s board of directors

is responsible for approving the fund’s

contract with the principal underwriter.

Conflicts of interest that could influence

transactions between a principal

underwriter and a fund are governed by

legal protections in the Investment

Company Act.178

Service Providers. Form N–1A

requires a fund to disclose the identity

of any person (other than the investment

adviser) who provides significant

administrative or business management

services for the fund (e.g., an

administrator), including a description

of, and the fees paid for, the services.179

The Form also requires the name and

address of the fund’s transfer agent and

dividend paying agent.180 The proposed

amendments would move this

disclosure to the SAI.181 While a fund

could include in the prospectus

information about its service providers

in describing the fund’s purchase and

redemption procedures, disclosure

about persons that perform

administrative or ‘‘back-office’’

functions unrelated to the purchase and

sale of fund shares does not appear to

assist investors in evaluating and

comparing fund investments. The fund’s

investment adviser or board of directors

is responsible for overseeing the fund’s

contractual arrangements with service

providers and their costs to the fund. In

addition, the costs incurred for services

provided to the fund are included in the

prospectus fee table and in the fund’s

financial statements.182

Account Transfers. The GCLs require

certain information about transfers of

shares held in street name accounts.183

This disclosure would be retained in a

simplified form in the prospectus. In

particular, the proposed amendments

would require a fund to disclose any

restrictions on, or costs associated with,

transferring shares held in street name

to inform investors holding shares in

street name about these restrictions and

costs.184

b. Tax Consequences

General Tax Disclosure. Form N–1A

requires a fund to describe in its

prospectus the tax consequences of an

investment in the fund.185 Prospectus

tax disclosure often includes lengthy

information about the tax treatment of

the fund and, in some cases, the tax

treatment of specific securities held by
Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules 10915

186Many prospectuses, for example, include

information about the conditions a fund must meet

to qualify for pass-through tax treatment under

Subchapter M and, when applicable, the tax

treatment of private activity bonds, foreign currency

contracts, and other fund investments. In addition,

tax disclosure frequently includes technical jargon

by referring, for example, to a fund’s status as a

‘‘regulated investment company’’ and the fund’s

payment of ‘‘spillback distributions’’ and ‘‘net

investment income.’’ See proposed General

Instruction C.1(a), which would continue to instruct

a fund not to use technical or legal terminology in

the prospectus.

187Proposed Item 19(a). The proposed

amendments would eliminate the requirement that

a fund disclose in the SAI any special tax

consequences resulting from offering more than one

class of capital stock or being a series fund, since

the tax consequences of investing in a multiple

class or series fund are no different from those of

investing in a single class or single series. While in

the past a series fund could offset the gains of one

portfolio against the losses of another, a series fund

no longer may offset the gains and losses of its

various portfolios. See I.R.C. 851(h)(1) (treating each

portfolio of a series fund as a separate entity for tax

purposes).

188To qualify for pass-through tax treatment

under Subchapter M, a fund must, among other

things: derive at least 90% of its gross income from

certain specified sources; derive less than 30% of

its gross income from the sale of securities and

certain other specified investments held for less

than 3 months; meet certain diversification

requirements; and distribute at least 90% of its

taxable income (which does not include capital

gains) and net tax-exempt income for the year. See

I.R.C. 512(a)(5), 851.

189 In the rare case of a fund that does not expect

to qualify for pass-through tax treatment under

Subchapter M, proposed Item 7(d)(3) would require

the fund to explain in the prospectus the tax

consequences of not qualifying (e.g., by disclosing

that income and gains realized by the fund would

be subject to double taxation—that is, both the fund

and shareholders could be subject to tax liability).

This disclosure would distinguish the fund from

other funds and help investors appreciate the tax

consequences of investing in the fund. Similarly, a

fund that expects to pay an excise tax under the

Internal Revenue Code with respect to its

distributions would be required to disclose in the

prospectus the consequences of paying the tax. See

I.R.C. 4982.

190Proposed Item 7(d).

191The proposed disclosure requirement would

apply to funds that have investment objectives or

strategies that make it possible to anticipate the tax

consequences of the fund’s distributions (e.g., funds

described as ‘‘tax-managed,’’ ‘‘tax-sensitive,’’ or

‘‘tax-advantaged’’ often have investment strategies

to maximize long-term capital gains and minimize

ordinary income; conversely, money-market funds

have investment objectives and strategies to

maximize ordinary income).

192See Item 6(g)(iii) (consistent with this

requirement).

193The proposed amendments also would require

a tax-exempt fund to amend the general tax

disclosures discussed above to reflect that the fund

intends to distribute tax-exempt income.

194A fund that holds itself out as a tax-exempt

fund can invest up to 20% of its assets in securities

that generate taxable income. See Investment

Company Act Release No. 9785 (May 31, 1977) (42

FR 29130); Guide 1. See also Fund Names Release,

supra note .

195See Guide 30 (requiring substantially the same

disclosure); Letter from Mary Joan Hoene, Associate

Director, SEC, to Matthew P. Fink, Senior Vice

President and General Counsel, ICI (Nov. 3, 1987)

(if a fund uses a name that implies its distributions

will be exempt from federal income tax, it may not

consider any investments in municipal obligations

that pay interest subject to the alternative minimum

tax as part of the 80% of the fund’s assets that must

be invested in tax-exempt securities).

196A summary of a fund’s fees and expenses,

which includes information about rule 12b–1 fees

and sales loads, is contained in the fee table.

197Proposed General Instruction C.2(a). Proposed

Item 8 would consolidate prospectus disclosure

requirements for rule 12b–1 fees, sales loads, and

multiple class and master-feeder funds. Consistent

with the proposed amendments to the fee table

requirements, rule 12b–1 fees and sales loads would

be referred to as ‘‘marketing (12b–1) fees’’ and

‘‘sales fees (loads)’’ in the narrative discussion of a

fund’s distribution arrangements in the prospectus.

a fund.186 This disclosure tends to

obscure information about the tax

treatment of a fund’s distributions and

the direct tax consequences to investors

of investing in the fund.

The proposed amendments would

revise the tax disclosure required in

fund prospectuses. In particular, the

proposed amendments would require

information about a fund’s qualification

under Subchapter M of the Internal

Revenue Code to appear in the SAI.187

Subchapter M confers pass-through tax

treatment for funds that meet certain

conditions.188 Disclosure about

Subchapter M, which relates to the tax

treatment of the fund, does not appear

to help investors evaluate the tax

consequences of investing in the fund.

In addition, because virtually all funds

qualify for pass-through tax treatment,

disclosure about the conditions of, or a

fund’s qualification under, Subchapter

M does not appear to help investors

evaluate or compare fund

investments.189

To focus prospectus disclosure on the

tax consequences of investing in a

particular fund, the proposed

amendments would require a

description of the tax consequences to

shareholders of buying, holding,

exchanging, and selling the fund’s

shares.190 The proposed amendments

would require a fund to state, as

applicable, that the fund intends to

make distributions that may be taxed as

ordinary income and capital gains. 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 long-term capital gains, the fund

would be required to provide disclosure

to that effect. Providing specific

disclosure about the anticipated tax

consequences of a fund’s distributions

could help investors decide whether to

invest in a particular fund and to

compare fund investments.191 The

proposed amendments also would

require a fund to state that it will

provide each shareholder by a specified

date (typically, January 31 of each year)

with specific information about the

amount of ordinary income and capital

gains, if any, distributed during the

prior calendar year.192

The proposed amendments would

require a fund to disclose that its

distributions will be taxable whether

received in cash or reinvested in

additional shares. The proposed

amendments also would require a fund

offering exchange privileges to disclose

that exchanging shares of one fund for

shares of another fund will be treated as

a sale and that any gain from the

transaction may be subject to federal

income tax. Disclosure about the tax

treatment of reinvested dividends and

share exchanges would alert investors

that reinvested distributions and

exchange transactions are subject to tax.

Special Tax Disclosure for TaxExempt Funds. The proposed

amendments would require a taxexempt fund to inform investors of the

special tax consequences associated

with investing in the fund.193 Because

investors may be unaware that a portion

of the distributions received from a taxexempt fund may be subject to federal,

state, or local income taxes, the

proposed amendments would require a

tax-exempt fund to disclose, 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; 194

(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.195

Item 8—Distribution Arrangements

a. Placement of Prospectus Disclosure

Rule 12b–1 fees and sales loads

directly affect an investor’s return on a

fund investment, and information about

these charges is important to many

investors. Currently, narrative

explanations about a fund’s distribution

arrangements may appear in different

places in the prospectus, making it

difficult for investors to review and

compare additional information about

rule 12b–1 fees and sales loads.196 The

proposed amendments would require

information about distribution

arrangements to appear together in the

prospectus.197 This approach would

help investors locate information

designed to assist them in evaluating a
10916 Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules

198 Item 7(e), (f).

199See Updegrave, Fund Investors Need to Go

Back to School, Money, Feb. 1996, at 98, 100 (of

approximately 1,400 investors surveyed by Money

magazine and The Vanguard Funds Group, only

22% knew that rule 12b–1 fees are charged against

fund assets to pay for distribution of fund shares).

Based on information compiled by the Division

from Form N–SAR (17 CFR 274.101) filings,

approximately 50% of funds charge rule 12b–1 fees.

200Rule 2830(d)(4) of the NASD Conduct Rules

(NASD Manual (CCH) 4624) (requiring a fund with

a rule 12b–1 plan to disclose adjacent to the fee

table that ‘‘long-term shareholders may pay more

than the economic equivalent of the maximum

front-end sales charges permitted by (NASD

rules)’’). Rule 2830(d)(2) of the NASD Conduct

Rules (NASD Manual (CCH) 4623) limits aggregate

front-end, deferred, and asset-based sales charges to

6.25% of total new gross sales for funds that pay

service fees and to 7.25% of total new gross sales

for funds that do not pay service fees. Because these

aggregate caps apply on a fund-wide basis, over

time an individual investor may pay fees exceeding

the applicable cap. The NASD disclosure is

intended to address this issue. See Securities

Exchange Act Release No. 30897 (July 7, 1992) [57

FR 30985, 30987].

201 If the proposed disclosure requirement is

adopted, the Commission intends to discuss with

the NASD its disclosure requirement so that similar

disclosure is not required to be repeated in the

prospectus. More generally, the Commission

intends to discuss with the NASD other prospectus

disclosure requirements imposed by NASD rules

with the goal of incorporating these requirements,

when appropriate, in applicable Commission rules

or forms. In addition to streamlining disclosure

requirements, this approach would give the

Commission an opportunity to reassess NASD

disclosure requirements in light of the

Commission’s broad initiatives to improve fund

disclosure.

202See Rule 2830(b)(9) of the NASD Conduct

Rules (NASD Manual (CCH) 4622) (defining

‘‘service fees’’ as payments for personal service and/

or the maintenance of shareholder accounts). Rule

2830(d)(5) of the NASD Conduct Rules (NASD

Manual (CCH) 4624) limits service fees to .25% of

a fund’s average annual net assets. See also Item

7(e) (requiring prospectus disclosure about the

amount or rate of any trail fees paid out of fund

assets to dealers or other persons that provide

investors with advice concerning the purchase, sale,

or holding of fund shares).

203 Guide 29.

204A fund that engages in joint distribution

activities must disclose that its rule 12b–1 fees may

be used to finance another fund’s distribution

activities and how it allocates costs between funds.

205A fund must disclose both the amount of

unreimbursed expenses and the amount as a

percentage of the fund’s net assets, and indicate

whether it is obligated to pay the expenses. In

addition, under Generally Accepted Accounting

Principles, the amount of any unreimbursed

expenses under a rule 12b–1 plan is provided in the

fund’s financial statements. For a fund that has

agreed to pay unreimbursed expenses if its rule

12b–1 plan is terminated, any unreimbursed

expenses appear as a liability on the fund’s

financial statements. See Financial Accounting

Standards Board, Statement of Financial

Accounting Standards No. 5 — Accounting for

Contingencies (Mar. 1975); American Institute of

Certified Public Accountants, Statement of Position

95–3, at 5–8 (July 28, 1995).

206Fund prospectuses typically include lengthy

and generic descriptions of rule 12b–1 plans and

related distribution activities. Prospectus

disclosure, for example, consists of statements that

distribution fees will be used to compensate brokerdealers and other financial intermediaries for

providing distribution assistance and

administrative, accounting, and other services to

fund shareholders and to promote sales of fund

shares through the printing and distribution of

prospectuses, sales literature, and advertising

materials. Some prospectuses include detailed

descriptions of the requirements of rule 12b–1.

207See rule 12b–1(e) (permitting a fund’s directors

to implement or continue a rule 12b–1 plan only

if they conclude that there is a reasonable

likelihood that the plan will benefit the fund and

its shareholders). See also rule 12b–1(d) (requiring

directors to request and evaluate information

reasonably necessary to make an informed decision

about whether to adopt or continue a rule 12b–1

plan); rule 12b–1(a)(3)(ii) (requiring a rule 12b–1

plan to provide that directors review, at least

quarterly, the amount and purposes of expenditures

under the plan).

208See supra note 200. The Commission

previously expressed concerns about the carryover

of a large amount of unreimbursed expenses under

a rule 12b–1 plan. Investment Company Act Release

No. 16431 (June 13, 1988) (53 FR 23258, 23267)

(proposing amendments to rule 12b–1). These

concerns generally have been addressed by the

NASD sales charge rule.

particular fund and comparing fund

investments.

b. Rule 12b–1 Plans

Prospectus Disclosure. Form N–1A

requires detailed prospectus disclosure

about rule 12b–1 plans.198 The technical

nature of this disclosure tends to

obscure information about the amount

of fees paid under a fund’s rule 12b–1

plan. Although distribution fees are

charged on an on-going basis in lieu of,

or in addition to, sales loads, investors

may not appreciate the continuing

nature of distribution fees or that

distribution fees cumulatively could

exceed other types of sales charges.199

The proposed amendments would

revise disclosure requirements for rule

12b–1 plans to focus prospectus

disclosure on the fees paid under these

plans. Focusing disclosure on fee

information, rather than on technical,

legal matters relating to a fund’s rule

12b–1 plan, would appear to provide

greater assistance to an investor in

deciding whether to invest in the fund.

In particular, the prospectus of a fund

with a rule 12b–1 plan would be

required to state the amount of the fee

and provide disclosure to the following

effect:

• The fund has a rule 12b–1 plan that

allows the fund to pay fees for the sale and

distribution of its shares; and

• Since these fees are paid out of the

fund’s assets on an on-going basis, over time

these fees will increase the cost of your

investment and may cost you more than

paying other types of sales loads.

The proposed requirement to disclose

that, over time rule 12b–1 fees will

increase investment costs and may

exceed other types of sales loads is

intended to help an investor appreciate

the continuing effect of rule 12b–1 fees

on an investment in a fund. Similar, but

more complex, disclosure is required by

rules of the National Association of

Securities Dealers, Inc. (‘‘NASD’).200 The

proposed amendments seek to simplify

the disclosure so that it may be more

readily understood by investors. The

Commission requests comment on the

proposed disclosure and whether the

disclosure should appear with the

narrative explanation about rule 12b–1

fees or in connection with the fee table

disclosure of these fees.201

A fund may pay ‘‘service fees’’ alone

or combined with fees for the sale and

distribution of its shares.202 If a fund

pays service fees under a rule 12b–1

plan, the fund would reflect the

payment of service fees in its rule 12b–

1 disclosure. When service fees are paid

outside of a rule 12b–1 plan, the fund

would be required to disclose the

amount and purpose of the fee in

connection with information in the

prospectus about any sales loads and

rule 12b–1 fees charged by the fund.

Additional Information. Form N–1A

requires a fund with a rule 12b–1 plan

to describe the plan briefly and list the

principal activities for which payments

under the plan will be made. A fund

also must disclose the relationship

between amounts paid to and expenses

incurred by the distributor (i.e., whether

the plan reimburses the distributor only

for expenses incurred or compensates

the distributor regardless of its

expenses).203 The Form requires

additional disclosure if the fund engages

in joint distribution activities with

another fund 204 or if the fund’s

underwriter has incurred unreimbursed

expenses under the fund’s 12b–1

plan.205

The proposed amendments would

move this disclosure to the SAI. The

information adds unnecessary

complexity to rule 12b–1 disclosure

and, as a consequence, tends to obscure

the amount and purpose of rule 12b–1

fees, which does not appear to help

investors evaluate and compare fund

investments.206 Rule 12b–1 establishes

requirements for a rule 12b–1 plan. In

particular, a fund’s board of directors

must approve the rule 12b–1 plan and

related fees.207 NASD rules provide

additional protection by limiting rule

12b–1 fees (including the payment of

unreimbursed expenses) to a percentage

of the fund’s new gross sales.208

c. Sales Loads

Form N–1A requires disclosure in the

prospectus about the amount of any

sales load charged on an investment in

a fund and when a sales load may be

reduced or eliminated (e.g., for larger
Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules 10917

209 Item 7(b), (c). See section 22(d) [15 U.S.C. 80a–

22(d)] (prohibiting the sale of fund shares other

than at the current public offering price described

in the prospectus) and rule 22d–1 (17 CFR 270.22d–

1) (requiring disclosure about sales load breakpoints

and waivers).

210The proposed amendments would clarify that

a fund is required to disclose any sales loads

imposed on shares purchased with reinvested

dividends or other distributions. The proposed

amendments also would codify the requirement in

Guide 28 to explain in the prospectus that the term

‘‘offering price’’ includes a front-end load.

211Proposed Item 15(f).

212Rule 2310 of the NASD Conduct Rules (NASD

Manual (CCH) 4261). When the Commission

proposed amendments to rule 6c–10 (17 CFR

270.6c–10) in 1995, it requested comment whether

reallowances to dealers in connection with deferred

sales loads should be disclosed in fund

prospectuses. Investment Company Act Release No.

20917 (Mar. 2, 1995) (60 FR 11890, 11894). In

adopting amended rule 6c–10, the Commission

deferred consideration of reallowances because the

NASD is studying dealer compensation practices.

Investment Company Act Release No. 22202 (Sept.

9, 1996) (61 FR 49011, 49016). Consistent with this

approach, the proposed amendments would not

revise the SAI disclosure of dealer reallowances to

include deferred sales loads.

213For example, sales loads may be waived for

investment advisory employees who are already

knowledgeable about the fund, which may render

marketing and other services unnecessary.

214Proposed Item 13(e).

215Proposed Item 18(b).

216Form N–14 under the Securities Act (17 CFR

239.23), which is used by funds to register

securities issued in a merger or other reorganization

and as the proxy statement for the transaction,

requires disclosure about material information

concerning the transaction. See Item 4(a) of Form

N–14. See also Item 14(a)(3) of Schedule 14A under

the Securities Exchange Act (requiring the same

information in proxy statements).

217 Item 7(b). Prospectus disclosure is not required

if the fees are ‘‘adequately disclosed’’ in a wrapper

to the prospectus.

218 In some cases, fees charged by a third party,

in effect, represent fees of the fund (e.g., when the

fees are charged to all shareholders to invest in the

fund) and would be required to be disclosed in the

prospectus.

219For fee disclosure requirements applicable to

banks, broker-dealers and investment advisers, see

Board of Governors of the Federal Reserve System,

FDIC, Office of the Comptroller of the Currency,

and Office of Thrift Supervision, Interagency

Statement on Retail Sales of Nondeposit Products,

6 Fed. Banking L. Rep. (CCH) ¶ 70–113, at 82,598

(Feb. 15, 1994); rule 2230 of the NASD Conduct

Rules (NASD Manual (CCH) 4211); rule 204–3(a)

under the Advisers Act (17 CFR 275.204–3(a)) and

Item 1 of Form ADV, Part II (17 CFR 279.1).

220 General Instruction I; Item 6(h); Guide 34.

221Potential changes in fund operations and

investments also are not unique to a feeder fund.

With any fund investment, changes may occur that

significantly affect the nature of the fund. The

interests of all fund shareholders, including those

of feeder funds, are represented by a board of

directors. In addition, as with all shareholders, a

feeder fund’s shareholders would receive notice of

and have an opportunity to vote on fundamental

changes relating to the master fund’s operations and

investments.

222 Item 3(a); General Instruction G to Form N–1A.

223Proposed Item 9; proposed General Instruction

C.2(a).

investments).209 The proposed

amendments would continue to require

most of this disclosure to appear in the

prospectus.210 The proposed

amendments, however, would modify

certain requirements that call for

detailed and technical information

about sales loads because the disclosure

tends to obscure information about the

amount of the sales load charged by a

fund and does not appear to help

investors evaluate and compare fund

investments.

Dealer Reallowances. A fund is

required to include a table in the

prospectus showing any front-end load

as a percentage of both the offering price

and the net amount invested for each

breakpoint, and any amounts reallowed

to dealers as a percentage of the offering

price. The proposed amendments would

move disclosure about dealer

reallowances to the SAI 211 because it

adds unnecessary complexity to sales

load disclosure and does not appear to

provide helpful information to

investors. NASD rules address concerns

about financial incentives brokers may

have in recommending that customers

buy or hold fund shares. These rules

require a broker who recommends

investments to a customer to have

reasonable grounds for believing that

the recommendation is suitable for that

customer.212

Waivers and Sales Load Breakpoints.

Sales loads often are waived when fund

directors and other affiliated persons of

the fund (e.g., employees of the fund’s

adviser) purchase the fund’s shares. 213

Form N–1A requires a fund to provide

information about these arrangements in

the prospectus. The proposed

amendments would move this

disclosure to the SAI because the

disclosure concerns arrangements that

are not available to the majority of

investors and, as a consequence, adds

unnecessary length to fund

prospectuses. 214

The proposed amendments also

would move to the SAI disclosure about

sales load breakpoints and waivers in

connection with a merger or other

reorganization. 215 This information does

not appear to be important to investors

unless and until a reorganization is

announced. Because fund

reorganizations generally require

shareholder approval, this information

would be provided to investors in proxy

materials at a time when it would be

more meaningful to them. 216

Third-Party Fees. Form N–1A requires

a fund to disclose in the prospectus any

fees charged by a bank, broker-dealer or

other person in connection with the

purchase of the fund’s shares, if the fees

are charged with the fund’s

knowledge. 217 The proposed

amendments would no longer require

this disclosure, since these fees are not

charged by the fund. 218 Investors are

informed of (and pay) the fees as part of

their relationship with, and the services

provided by, the third party. 219

d. Multiple Class and Master-Feeder

Funds

Form N–1A requires certain

information to be included in the

prospectus about the different

distribution and service arrangements of

multiple class and master-feeder

funds. 220 Consistent with the proposed

approach for sales loads and rule 12b1 fees, the proposed amendments would

require this information to appear in

one place in the prospectus. The

proposed amendments also would

simplify prospectus disclosure

requirements for master-feeder funds by

eliminating the requirement that a

feeder fund discuss the possibility and

consequences of no longer investing in

the master fund (e.g., if the master fund

changes its investment objectives to be

inconsistent with those of the feeder

fund). Since master-feeder arrangements

typically are designed to accommodate

feeder funds, the possibility of a feeder

fund not investing in the master fund is

likely to be remote. 221

Item 9.—Financial Highlights

Information

Condensed Financial Information.

The financial highlights information

currently required at the beginning of

the prospectus provides summary

financial information about a fund,

including the fund’s total return for

each of the last 10 fiscal years. 222 The

proposed amendments would retain the

table, but no longer require this

information to appear at the front of the

prospectus. 223 Requiring detailed

financial information at the beginning of

a fund’s prospectus may unnecessarily

impede a fund’s ability to present

prospectus disclosure in an effective

format.

Form N–1A requires a brief

explanation of the nature and source of

the information included in the

financial highlights table as well as a

statement that the auditor’s report is

available upon request. To meet this

requirement, funds generally disclose

that the table presents financial

information and how shareholders can

obtain the auditor’s report. The

proposed amendments seek to assist

investors in using the financial

highlights information by requiring a

narrative explanation to the following

effect:
10918 Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules

224Since the financial highlights information is

required to be audited for the latest 5 years, the

standardized narrative would continue to refer to

the auditor’s report and its location.

225See, e.g., Money Market Fund Prospectus

Release, supra note 14, at 38458.

226 In connection with the proposal to simplify

money market fund prospectuses, the Commission

proposed to replace the financial highlights table

with a 10-year bar graph of fund returns. See Money

Market Fund Prospectus Release, supra note 14, at

38455. The summary financial information does not

appear to be useful for money market funds because

these funds typically do not have changes in net

assets or realized capital gains.

227 Item 3(c); 17 CFR 230.482(a).

228See 1996 Securities Act supra note 139, at

section 204.

229Proposed Item 21. For a money market fund,

SAI disclosure would include, when applicable, the

calculation of the fund’s 7-day tax-equivalent yield

and tax-effective yield. See Money Market

Prospectus Release, supra note 14, at 38458.

230See proposed General Instruction C.1(b)

(current General Instruction G). See also supra

notes 39 and 47 accompanying text.

231 Items 24 to 32.

232The proposed amendments also would

eliminate the ‘‘Instructions as to Summary

Prospectuses’’ that follow Part C. To the

Commission’s knowledge, no fund has used a

summary prospectus under these instructions and

the proposed profile would give funds the

flexibility, at their option, to provide a summary

disclosure document to investors. See Profile

Release, supra note 1.

233 Item 24(b)(14) (also requiring information

about the costs and fees charged under the plans).

234See 29 U.S.C. 1104(c); I.R.C. 401–409. The

Commission adopted this requirement in 1978,

when the use of funds as vehicles for retirement

planning was relatively new. Integrated Registration

Statement Release, supra note 140, at 39553, 39557.

235 Item 24(b)(16).

236See Money Market Fund Prospectus Release,

supra note 14, at 38458 (proposing to eliminate this

requirement). The Commission required funds to

file these calculations in connection with the

standardization of performance information used in

fund advertisements to assure that funds would

follow the formula correctly. Performance Release,

supra note 14, at 3876.

The proposed amendments also would eliminate

the requirement in Item 23(b)(3) to file voting trust

agreements, because funds are not permitted to use

these agreements under section 20(b) (15 U.S.C.

80a–20(b)). The undertaking required by Item 32(c)

relating to the delivery of a fund’s annual reports

would be deleted because the requirement would be

incorporated in proposed Item 5.

237 Item 32(b).

The financial highlights table is intended

to help you understand the fund’s financial

performance for the past 10 years (or, if

shorter, for the period of the fund’s

operations). Certain information reflects

financial results for a single fund share. The

total returns in the table represent the rate an

investor would have earned [or lost] on an

investment in the fund for the period

indicated (assuming reinvestment of all

dividends and distributions). This

information has been audited by llll,

whose report, along with the fund’s financial

statements, is included in (the SAI or annual

report), which is available upon request. 224

The financial highlights disclosure

requires performance information for a

partial year to be annualized. The

proposed amendments would require

performance information for a period of

less than a year to be stated without

annualization. As previously indicated,

the Commission is concerned that

annualization of performance

information may result in a performance

figure that could mislead investors. 225

Apart from certain other technical and

conforming changes, the proposed

amendments would not revise the

requirements for financial highlights

disclosure. The Commission recognizes,

however, that additional changes may

further improve the financial highlights

information, which often takes up a full

page or more in the prospectus. The

Commission intends to revisit this

disclosure in a separate rulemaking

initiative that would revise fund

financial statement requirements

generally and requests specific comment

on simplifying and updating the

financial highlights information. In

particular, the Commission requests

comment on reducing the number of

captions to simplify the table and

decreasing the period for which

information is required from 10 years to

5 years. Because the proposed

amendments would require a bar chart

illustrating a fund’s returns for a 10-year

period, the Commission requests

comment whether the financial

highlights information should be moved

to the SAI, eliminated for certain or all

funds, 226 or provided in other

disclosure, such as in a fund’s Form N–

SAR filings.

Calculation of Performance Data.

Form N–1A requires a brief explanation

in the prospectus of how the fund

calculates performance data if it

includes performance information in

advertisements permitted under rule

482 of the Securities Act. 227 This

disclosure was required because an

advertisement under rule 482 is an

omitting prospectus under section 10(b)

of the Securities Act and, as an omitting

prospectus, was required to contain

information ‘‘the substance of which’’ is

contained in the prospectus. The

proposed amendments would eliminate

this disclosure requirement. Recent

legislation added section 24(g) to the

Investment Company Act, which

authorizes the Commission to adopt

rules permitting a fund to use a

summary or omitting prospectus that

includes information the substance of

which is not included in the

prospectus. 228 In the near future, the

Commission intends to propose to

amend rule 482 to eliminate the

‘‘substance of which’’ requirement,

which would make the disclosure of

performance data unnecessary.

Disclosure about how performance is

calculated does not appear to assist

investors in deciding whether to invest

in a particular fund and would continue

to be available in the SAI. 229

Part B—Statement of Additional

Information

The SAI provides a more detailed

discussion of matters described in the

prospectus as well as additional

information about a fund. 230 The

proposed amendments would make a

number of technical and conforming

revisions to the SAI disclosure

requirements to reflect the proposed

changes in the prospectus disclosure

requirements. After completion of the

prospectus initiative, the Commission

intends to review the SAI requirements

and propose amendments to simplify

and update SAI disclosure.

Part C—Other Information

Part C of Form N–1A contains

information in support of a fund’s

registration statement that is not

included in the prospectus or the

SAI. 231 The proposed amendments

would revise Part C to eliminate

unnecessary filing requirements. 232 As

amended, Part C would no longer

require a fund to file model retirement

plans that are used to offer the fund’s

shares 233 because funds routinely offer

their shares in connection with

retirement plans and the terms and

other aspects of these plans are

governed by the Employee Retirement

Income Security Act of 1974 (‘‘ERISA’’)

and by the Internal Revenue Code. 234

Amended Part C also would no longer

require a fund to file a schedule

showing how it calculates performance

data, 235 since these calculations have

become routine and the Commission

staff can verify a fund’s performance

calculations during a fund

examination.236

Part C requires a newly organized

fund to provide an undertaking to file a

post-effective amendment to its

registration statement containing

updated financial statements within 4 to

6 months of the effective date of the

registration statement. 237 The purpose

of this requirement is to assure the

availability of financial information

reflecting the fund’s operations and

investment of the fund’s assets in

accordance with its investment

objectives and strategies. The Division

has provided limited relief with respect

to the timing of filing the updated

financial information in two

circumstances: (i) When a fund defers

commencement of operations after the
Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules 10919

238 1994 GCL, supra note 28, at V.

239Proposed Item 22(a)(2). A conforming change

would be made to rule 485(b)(1)(iv) under the

Securities Act (17 CFR 230.485(b)(1)(iv)), which

currently includes a reference to the undertaking

required by Item 32(b) of Part C.

240Certain information would be deleted as

unnecessary (e.g., current Instruction H (Electronic

Filers) would be deleted since this Instruction

includes only a cross-reference to Item 24(b)(17),

which requires a financial data schedule to

accompany an electronic filing as an exhibit).

241Form N–1A generally calls for disclosure about

the ‘‘Registrant’’ (meaning the investment company

registered under the Investment Company Act),

although the Form sometimes refers to a series.

Because the Form may be filed for one or more

series of a registered investment company, the

current references may cause confusion about the

entity for which disclosure is required.

242 General Instruction A would define a ‘‘MasterFeeder Fund’’ and a ‘‘Multiple Class Fund,’’ which

currently are defined in Instruction I. The proposed

amendments also would define a ‘‘Money Market

Fund’’ as a fund that holds itself out as a money

market fund and meets the maturity, quality, and

diversification requirements of rule 2a-7.

243See, e.g., Item 1(b) (permitting other

information to be included on the cover page of the

prospectus). Similarly, specific Instructions in Part

A that call for brief and concise prospectus

disclosure would be deleted, since Instruction C

would include this requirement for purposes of all

prospectus disclosure.

244See supra notes 39–40, 45, and 224 and

accompanying text.

245See John Hancock Funds, Inc. (pub. avail. June

28, 1996).

246A fund, for example, may decide that using a

horizontal rather than vertical presentation for the

fee table would provide the most effective

presentation of the required fee information. In

responding to the proposed risk/return summary

requirements, a fund may find that different formats

communicate the required information effectively.

Depending on the number and type of funds offered

in the prospectus, for example, a fund may find it

useful to group the required information for all

funds together under each caption or to present the

information sequentially for each fund. See id.

(using a two-page disclosure format for each of 7

funds offered in a single prospectus).

effective date of its registration

statement; and (ii) when the 4 to 6

month period following the effective

date of the registration statement ends

near the date of the financial statements

to be used in the fund’s next annual or

semi-annual report. 238 The proposed

amendments would codify the

requirement to file updated financial

information. 239 The proposed

amendments would permit a fund to file

a post-effective amendment within 4 to

6 months from the date the fund

commences operations. The

amendments also would give a fund up

to 8 months to file updated financial

statements that are included in the

fund’s semi-annual or annual report, if

the post-effective amendment is filed

within 30 days of the date of the latest

balance sheet included in the annual or

semi-annual report. The Commission

requests comment whether the

requirement to provide updated

financial information should be

retained. In particular, because the

financial information may reflect a

fund’s operations for a very short period

of time, is this information useful to

investors?

D. General Instructions

1. Reorganizing and Simplifying the

Instructions

The General Instructions to Form N–

1A provide guidance on the use and

content of the Form. The proposed

amendments would update and

reorganize the General Instructions to

make the Instructions easier to use. 240

The revised General Instructions would

consist of: (1) Definitions; (2) Filing and

Use of Form N–1A; (3) Preparation of

the Registration Statement; and (4)

Incorporation by Reference.

Definitions. Proposed General

Instruction A would define certain

terms generally used in Form N–1A.

The definitions would provide greater

clarity and avoid repeated references

throughout the Form (for example, to

the Investment Company Act). The

proposed amendments would specify

that all sections and rules used in Form

N–1A refer to sections and rules under

the Investment Company Act, unless

otherwise indicated, and that all terms

defined in the Investment Company Act

and related rules have the same

meaning in Form N–1A, unless

otherwise defined.

The proposed amendments would

add several definitions to standardize

certain terms, which would be

capitalized throughout the Form. The

term ‘‘Fund’’ would be defined as a

registrant or a series of the registrant. 241

General Instruction A also would define

‘‘Registrant’’ and ‘‘Series’’ and these

terms would be used when information

is specifically required for a registrant or

a series. 242

Filing and Use of Form N–1A;

Preparation of the Registration

Statement. Proposed General Instruction

B would incorporate a more userfriendly, question-and-answer format

regarding the filing and use of Form N–

1A and would replace current

Instructions A through D and F.

Proposed General Instruction C would

provide streamlined requirements for

preparing the registration statement and

would replace Instruction G. The new

Instruction would continue to

emphasize the need to provide clear and

concise prospectus disclosure and

permit a fund to include in its

prospectus or SAI additional

information that is not misleading and

that does not, because of its nature,

quantity, or manner of presentation,

obscure the information required to be

included. Instructions to the Form

permitting information to be added to

the prospectus and SAI would be

deleted, with Instruction C providing

this guidance for purposes of all fund

disclosure. 243

Instruction C also would instruct a

fund to avoid referring to the SAI or

shareholder reports in the prospectus,

unless specifically required by the

Form. 244 Repeated cross-references to

the SAI and shareholder reports appear

to add unnecessary length and

complexity to fund prospectuses and

detract from the purpose of prospectus

disclosure, which is to provide essential

information that enables fund investors

to make informed investment decisions.

Instruction C would allow crossreferences to be used within the

prospectus when the cross-reference

would assist investors in understanding

the information presented and would

not add complexity to prospectus

disclosure. The Commission requests

comment on the proposed approach to

cross-references.

Instruction C would provide guidance

on the use of Form N–1A by more than

one fund and a multiple class fund.

Fund prospectuses frequently contain

information for multiple series and

classes that offer investors different

investment alternatives and distribution

arrangements. Because this practice was

not common in 1983 when Form N–1A

was adopted, certain Form requirements

may have the unintended effect of

making prospectus disclosure for

multiple funds and classes more

complex than necessary. 245 When

information is presented clearly,

prospectuses offering more than one

fund may make it easier for investors to

compare funds and may be more

efficient for funds and investors by

eliminating the need to provide

investors with multiple prospectuses

containing repetitive information.

Instruction C generally would give

funds the flexibility to organize

information about multiple funds and

classes in an effective manner based on

their particular circumstances as long as

the presentation is consistent with the

goal of providing clear and concise

information about a fund. 246

Instruction C would permit a fund

that is offered as an investment

alternative in a participant-directed

defined contribution plan qualified

under the Internal Revenue Code

(‘‘plan’’) to modify its prospectus for use
10920 Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules

247See Profile Release, supra note 1 (permitting

a profile to be modified for use by plan

participants).

248See supra note 234.

249E.g., eligible plans under section 457 of the

Internal Revenue Code sponsored by a state, a

political subdivision of a state, or certain

nongovernmental tax-exempt organizations.

250Form N–1A Adopting Release, supra note 12,

at 37930.

251 Id. See White v. Melton, 757 F. Supp. 267

(S.D.N.Y. 1991) (citing the Form N–1A Adopting

Release, supra note 12, as authority for the

principle that certain matters are required to appear

in the prospectus and others may be appropriately

disclosed in the SAI, which may be incorporated by

reference into the prospectus).

252See Form N–1A Proposing Release, supra note

13, at 818 (suggesting that prohibiting incorporation

by reference of the SAI into the prospectus or,

alternatively, requiring delivery of the SAI with the

prospectus, would ‘‘vitiate the Commission’s

attempt to provide shorter, simpler prospectuses’’).

253The proposed amendments would make

technical revisions to Instruction D to simplify its

requirements. The specific instruction regarding

incorporation by reference of condensed financial

information from reports to shareholders in General

Instruction E would be incorporated in proposed

Item 9 (condensed financial information). The

instruction allowing incorporation of financial

information in response to Item 23 of Form N–1A

from reports to shareholders would be deleted as

unnecessary because the Form does not limit

incorporation of information into the SAI. The

requirement that a shareholder report incorporated

by reference into the SAI be delivered with the SAI

would be added to the SAI cover page

requirements.

254Section 19(a) of the Securities Act [15 U.S.C.

77q(a)] protects a fund from liability under the

Securities Act for actions taken in good faith in

conformity with Commission rules. The proposed

amendments to Form N–1A are designed to provide

better guidance to funds for purposes of section

19(a). See Form N–1A Adopting Release, supra note

12, at 37930.

255Form N–1A Adopting Release, supra note 12,

at 37938 (stating that publication of the Guides was

not intended to elevate their status beyond that of

staff guidance). The Commission initially adopted

guidelines in 1972 to assist funds in preparing and

filing registration statements. Investment Company

Act Release Nos. 7220, 7221 (June 9, 1972) (37 FR

12790) (‘‘Guides Releases’’).

256See supra note 28.

257See, e.g., Guide 9 (Short Sales) (for short sales,

funds no longer are required to maintain amounts

in segregated accounts at a level that, with the

amount deposited with the broker as collateral, is

at least equal to the market value of the securities

at the time they are sold short, see Robertson

Stephens Investment Trust (pub. avail. Aug. 24,

1995)); Guide 30 (Tax Consequences) (each series is

now treated as a separate entity for tax purposes

and may not, as suggested by the Guide, offset gains

of one series against losses of another); supra note

28, 1990 GCL at I.B (undertakings), 1991 GCL at

II.A.2 (country, international, and global funds),

and 1992 GCL at II.F (segregated accounts).

258See, e.g., Guides 8 (Senior Securities, Reverse

Repurchase Agreements, Firm Commitment

Agreements and Standby Commitment

Agreements), 9 (Short Sales), 15 (Qualification for

Treatment Under Subchapter M of the Internal

Revenue Code), and 28 (Valuation of Securities

Being Offered); supra note 28, 1994 GCL at III.C

(redemption fees) and 1995 GCL at II.A (MDFP

disclosure).

259See supra section II.A.4.

by plan participants.247 Certain

prospectus disclosure appears to be

unnecessary for plan participants

because of the way plans are structured

and regulated. The requirements of

ERISA 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).248 A prospectus used to

offer fund shares to plan participants

would be permitted to omit the

information required by proposed Items

7 (shareholder information) and 8

(distribution arrangements). The

Commission requests comment whether

it would be appropriate to omit or

modify other disclosure requirements

for prospectuses provided to plan

participants. The Commission also

requests comment whether the

flexibility to omit certain disclosure

requirements should be expanded to

non-qualified participant-directed

defined contribution plans.249

Incorporation by Reference. By

adopting a two-part disclosure format

for Form N–1A, the Commission

intended Part A of the registration

statement to provide investors with a

simplified prospectus that, standing

alone, would meet the requirements of

section 10(a) of the Securities Act.250

Part B, the SAI (which is available to

investors upon request), includes

additional information that the

Commission has determined may be

useful to some investors, but is not

necessary in the public interest or for

the protection of investors to be in the

prospectus.251 Form N–1A currently

permits, but does not require, a fund to

incorporate the SAI by reference into

the prospectus. The two-part disclosure

format has been widely used by funds,

and the Commission has found that the

current approach to incorporation by

reference supports the intended purpose

of Form N–1A and should be

retained.252

Proposed General Instruction D would

address incorporation by reference and

replace current Instruction E. 253

Instruction D would continue to permit,

but not require, a fund to incorporate

the SAI by reference into the

prospectus. The revised Instruction

would clarify that incorporating

information by reference from the SAI is

not permitted as a response to

information required to be included in

the prospectus. Permitting the SAI to be

incorporated by reference into the

prospectus was meant to allow funds to

add material the Commission

determined not to require in the

prospectus, not to permit funds to

subtract required information from the

prospectus and place it in the SAI. The

proposed amendments to Form N–1A

also seek to provide funds with clearer

directions for allocating disclosure

between the prospectus and the SAI. 254

2. Form N–1A Guidelines and Related

Staff Positions

The Guides were prepared by the

Division and published by the

Commission when it adopted Form N–

1A in 1983.255 The Guides, which

generally restate Division positions that

may affect fund disclosure, were

intended to assist funds in preparing

and filing their registration statements.

Additional Division positions on

disclosure matters are included in the

GCLs.256

Although certain Guides have been

revised and new ones added in

connection with the adoption of various

rules, the Guides collectively have not

been reviewed since 1983. Certain

Division positions in the Guides and

GCLs have become outdated.257 Other

Guides and GCLs explain or restate legal

requirements and may encourage

generic disclosure about fund

operations that does not appear to help

investors evaluate and compare

funds.258 In addition, the presentation of

information in 35 Guides and 7 GCLs is

not organized in the most useful or

effective manner.

To address these issues, the proposed

amendments would incorporate certain

disclosure requirements from the

Guides and GCLs. Other disclosure

requirements in the Guides and the

GCLs would not be incorporated in the

revised Form because, among other

things, they are outdated or result in

disclosure about technical, legal, and

operational matters generally common

to all funds. In addition, certain

requirements calling for specific

disclosure about individual fund

investments would not be incorporated

in the revised Form because they have

tended to standardize disclosure about

certain securities without regard to how

a particular fund intends to use the

securities in achieving its investment

objectives. The proposed amendments

seek to provide investors with

information about how a fund’s

particular portfolio will be managed and

elicit disclosure tailored to a fund’s

particular investment objectives and

strategies.259

Information in the Guides and GCLs

about legal requirements (including

information about fund organization

and operations), interpretive positions,

and descriptions of filing procedures

would be updated and reorganized in a

new Investment Company Registration
Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules 10921

260Similar guidance currently is available in the

Investment Adviser Registration Package. Because

the Registration Package would provide guidance

on the preparation of Form N–1A, the Guides

would not be republished with Form N–1A, and the

GCLs no longer would apply. The Commission also

is proposing to rescind the Guides Releases, supra

note 255.

261The Registration Package would include

requirements discussed in the GCLs relating to

closed-end investment companies and unit

investment trusts, and other matters not relevant to

Form N–1A (e.g., proxy disclosure). Information

traditionally addressed in the GCLs would be

considered when the Registration Package is

updated, unless the nature of the information

warrants immediate dissemination. The

Registration Package would serve as a ‘‘small entity

compliance guide,’’ which the Commission is

required to publish under the Small Business

Regulatory Enforcement Fairness Act (5 U.S.C.S.

601 note (Supp. July 1996)).

262See supra note 36 (proposing to amend rule

481(b)(1) to require a simplified cover page legend

that neither fund shares nor the prospectus have

been approved by the Commission). Disclosure

Simplification Task Force Report, supra note 15, at

18.

263 Disclosure Simplification Task Force Report,

supra note 15, at 90. See, e.g., rule 481(c) (17 CFR

230.481(c)) (requiring a table of contents in fund

prospectuses). The Commission has adopted

amendments to Item 501(b) of Regulation S–K (17

CFR 229.501(b)) to eliminate the cross-reference

sheet requirement for companies other than funds.

Securities Act Release No. 7300 (June 14, 1996) (61

FR 30397, 30398) (‘‘Release 7300’’).

264 17 CFR 230.495.

265Release 7300, supra note 263, at 30400. This

change would make available to paper filers the

additional signature options currently permitted for

corporate issuers filing electronically.

266Proposed revisions to rule 8b-11 (17 CFR

270.8b-11). The proposed amendments also would

update a Note appearing before rule 480 (17 CFR

230.480), which explains the applicability of certain

rules in Regulation C to funds.

Package (‘‘Registration Package’).260 The

Registration Package would be made

available to all funds and updated on a

regular basis.261

E. Technical Rule Amendments

The Commission is proposing several

technical rule amendments, primarily to

implement the recommendations of the

Commission’s Task Force on Disclosure

Simplification (‘‘Task Force’’) that apply

to funds.262 The Task Force has

recommended eliminating the crossreference sheet requirements in

registration statements because similar

information is available in the table of

contents required in the prospectus.263

To implement this recommendation for

funds, the proposed amendments would

delete the cross-reference sheet

requirements in rules 481, 495, and 497

under the Securities Act.264 The Task

Force also has recommended, and the

Commission has adopted, modified

signature requirements to allow

corporate issuers to include typed,

duplicated, or faxed signatures on paper

filings if a manual signature is retained

by a registrant for a period of 5 years.265

The proposed amendments would

revise signature requirements for funds

in accordance with this

recommendation.266

F. Transition Period

If the Commission adopts the

proposed amendments to Form N–1A,

the revised Form would replace current

Form N–1A. The Commission expects to

provide for a transition period after the

effective date of revised Form N–1A to

give funds sufficient time to prepare

their registration statements under the

proposed amendments. A fund filing a

new registration statement would be

required to comply with the proposed

amendments 6 months after the effective

date of the amendments. A fund with an

effective registration statement would be

required to comply with the

amendments at the time of the next

annual update of its registration

statement, but no later than 16 months

after the effective date of the proposed

amendments. A fund also, at its option,

could comply with the revised Form at

any time after the effective date of the

amendments. The Commission requests

comment on the proposed transition

period.

III. General Request for Comments

The Commission requests that any

interested persons submit comments on

the proposed amendments that are the

subject of this release, suggest

additional changes (including changes

to related provisions of rules and forms

that the Commission is not proposing to

amend), or submit comments on other

matters that might affect the proposed

amendments. 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

The proposed Form 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

amendments 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 ‘‘Form

N–1A Under the Investment Company

Act of 1940 and the Securities Act of

1933, Registration Statement of OpenEnd Management Investment

Companies.’’

A registration statement on Form N–

1A must contain information the

Commission has determined to be

necessary or appropriate in the public

interest or for the protection of

investors. The proposed amendments to

Form N–1A seek to minimize

prospectus disclosure about technical,

legal, and operational matters that

generally are common to all funds and

to focus disclosure on essential

information about a particular fund that

would assist an investor in deciding

whether to invest in that fund.

The proposed amendments would

move certain disclosure about fund

organization and legal requirements

under the Investment Company Act to

the SAI, simplify and clarify the

instructions for completing the Form,

and improve risk disclosure by

requiring a discussion of the overall

risks of investing in a fund, a narrative

risk summary, and a graphic

presentation of risk. Other technical

amendments are proposed that would

not impose any additional

recordkeeping or reporting burden on

funds.

The Commission estimates that there

are approximately 2,700 registered

open-end investment companies that

file registration statements on Form N–

1A, representing approximately 7,500

investment portfolios (‘‘portfolios’’). The

Commission estimates, based on the

current number of registration

statements filed on Form N–1A, that

approximately 4,649 registration

statements, including post-effective

amendments, would be filed on Form

N–1A annually for a total burden of

990,000 hours. This represents a

decrease of 2,205,824 hours, which is

primarily to eliminate the Form N–1A

burden hour estimates related to

preparing financial statements because

that burden is reflected in the burden

hours attributable to annual and semiannual reports required under rule 30d–

1. The information collection

requirements imposed by Form N–1A

are mandatory. 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.

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

Commission solicits comment to: (i)

Evaluate whether the proposed

collection of information is necessary
10922 Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules

for the proper performance of the

functions of the Commission, 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 collection of information on

those who are to respond, including

through the use of automated collection

techniques or other forms of information

technology.

Those who want to submit comments

on the collection of information

requirements should direct their

comments to the OMB, Attention: Desk

Officer for the Securities and Exchange

Commission, Office of Information and

Regulatory Affairs, Washington, DC

20503, and also should send a copy of

their comments to Jonathan G. Katz,

Secretary, Securities and Exchange

Commission, 450 5th Street, NW.,

Washington, DC 20549–6009 with

reference to File No. S7–10–97. The

OMB is required to make a decision

concerning the collections 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.

V. 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 the proposed

amendments to Form N–1A. The

Analysis explains that the proposed

amendments would revise disclosure

requirements for fund prospectuses 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.

The Analysis also explains that the

proposed amendments are intended to

improve fund prospectuses and to

promote more effective communication

of information about funds.

The Analysis discusses the impact of

the proposed rule on small entities,

which are defined, for the purposes of

the Securities Act and the 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

approximately 2,700 registered openend management investment companies

are subject to the requirements of Form

N–1A and of these, approximately 620

(23%) are investment companies that

would be small entities.

The Analysis explains that the

proposed amendments would not

impose any substantial additional

compliance burdens for small entities

because most of the changes do not

require new information, although,

initially, the changes would require

small entities to revise their

prospectuses to present the information

in the amended format. The proposed

amendments primarily would clarify

and simplify the instructions for

completing Form N–1A, shift

information from the prospectus to the

SAI, and require new formats for certain

information. On balance, the

Commission believes that preparing and

updating the revised Form should take

the same amount of time (or possibly

less time) as preparing and updating the

current Form.

As stated in the Analysis, the

Commission considered several

alternatives to the amendments

proposed for Form N–1A, including,

among others, establishing different

compliance or reporting requirements

for small entities or exempting them

from all or part of the proposed rule.

Because the amendments to Form N–1A

are intended to improve prospectus

disclosure for all investors, whether

they invest in funds that are small

entities or others, the Commission

believes that separate treatment for

small entities is 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

amendments and (ii) the discussion of

the impact of the proposed amendments

on small entities. Comments will be

considered in the preparation of the

Final Regulatory Flexibility Analysis if

the proposed amendments are adopted.

You may obtain a copy of the Analysis

from John M. Ganley, Senior Counsel,

Securities and Exchange Commission,

450 5th Street, NW., Mail Stop 10–2,

Washington, DC 20549–6009.

VI. Statutory Authority

The amendments to the Commission’s

rules and forms are being proposed

pursuant to 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

amendments to the rules precede the

text of the amendments.

VII. Text of Proposed Amendments

List of Subjects in 17 CFR Parts 230,

239, 270, and 274

Advertising, Investment companies,

Reporting and recordkeeping

requirements, 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

The authority citation for Part 230 is

revised to read in part as follows:

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

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

78ll(d), 78t, 80a–8, 80a–24, 80a–29, 80a–30,

and 80a–37, unless otherwise noted.

* * * * *

Revise the note immediately

preceding § 230.480 to read as follows:

Note: The rules in this section of

Regulation C (§§ 230.480 to 230.488 and

§§ 230.495 to 230.498) apply only to

investment companies and business

development companies. Section 230.489

applies to certain entities excepted from the

definition of investment company by rules

under the Investment Company Act of 1940.

The rules in the rest of Regulation C

(§§ 230.400 to 230.479 and §§ 230.490 to

230.494), unless the context specifically

indicates otherwise, also apply to investment

companies and business development

companies. See § 230.400.

Amend § 230.481 to revise the section

heading and paragraphs (a) and (b)(1) to

read as follows:

§ 230.481 Information required in

prospectuses.

* * * * *

(a) The facing page of every

registration statement must indicate the

approximate date of proposed sale to the

public.

(b) * * *

(1) Disclosure in a legend that

indicates that the Commission has not

approved the securities or passed upon

the adequacy of disclosure in the

prospectus and that any representation

to the contrary is a criminal offense. The

legend may be in one of the following

formats or other clear and concise

language:

The Securities and Exchange Commission

has not approved or disapproved these

securities or passed upon the adequacy of

this prospectus. Any representation to the

contrary is a criminal offense.; or

The Securities and Exchange Commission

has not approved or disapproved these

securities or determined if this prospectus is

truthful or complete. Any representation to

the contrary is a criminal offense.; and

* * * * *
Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules 10923

Amend § 230.485 to revise paragraph

(b)(1)(iv) to read as follows:

§ 230.485 Effective date of post-effective

amendments filed by certain registered

investment companies.

* * * * *

(b) * * *

(1) * * *

(iv) Filing financial statements after

the effective date of the registration

statement under Item 22(a)(2) of Form

N–1A (17 CFR 239.15A or 274.11A);

* * * * *

§ 230.495 [Amended]

5. Amend § 230.495 to remove the

words ‘‘cross-reference sheet;’’ from

paragraph (a).

§ 230.497 [Amended]

6. Amend § 230.497 to remove the

words ‘‘, together with 5 copies of a

cross reference sheet similar to that

previously filed, if changed’’ from

paragraph (d) and ‘‘, together with five

copies of a cross-reference sheet similar

to that previously filed, if changed’’

from paragraph (e).

PART 270—RULES AND

REGULATIONS, INVESTMENT

COMPANY ACT OF 1940

The authority citation for part 270

continues to read, in part, as follows:

Authority: 15 U.S.C. 80a-1 et seq., 80a-37,

80a-39 unless otherwise noted;

* * * * *

8. Amend § 270.8b-11 to remove the

word ‘‘manually’’ from paragraph (c)

and to revise paragraph (e) to read as

follows:

§ 270.8b-11 Number of copies; signatures;

binding.

* * * * *

(e) Signatures. Where the Act or the

rules thereunder, including paragraph

(c) of this section, require a document

filed with or furnished to the

Commission to be signed, the document

should be manually signed, or signed

using either typed signatures or

duplicated or facsimile versions of

manual signatures. When typed,

duplicated or facsimile signatures are

used, each signatory to the filing shall

manually sign a signature page or other

document authenticating,

acknowledging, or otherwise adopting

his or her signature that appears in the

filing. Execute each such document

before or at the time the filing is made

and retain for a period of five years.

Upon request, the registrant shall

furnish to the Commission or its staff a

copy of any or all documents retained

pursuant to this section.

PART 239—FORMS PRESCRIBED

UNDER THE SECURITIES ACT OF 1933

9. The authority citation for part 239

is revised to read, in part, as follows:

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

77sss, 78c, 78l, 78m, 78n, 78o(d), 78w(a),

78ll(d), 79e, 79f, 79g, 79j, 79l, 79m, 79n, 79q,

79t, 80a-8, 80a-24, 80a-29, 80a-30 and 80a-37,

unless otherwise noted.

* * * * *

PART 274—FORMS PRESCRIBED

UNDER THE INVESTMENT COMPANY

ACT OF 1940

10. The authority citation for part 274

continues to read as follows:

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

78c(b), 78l, 78m, 78n, 78o(d), 80a-8, 80a-24,

and 80a-29, unless otherwise noted.

11. Revise Form N–1A (referenced in

§§ 239.15A and 274.11A) (including the

Guidelines to the Form) to read as

follows:

Note: The text of Form N–1A does not and

this amendment will not appear in the Code

of Federal Regulations.

OMB Approval

OMB Number:

Expires:

Estimated average burden

hours per response

Securities and Exchange Commission

Washington, D.C. 20549

FORM N–1A

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF

1933.......................................................[ ]

Pre-Effective Amendment No.ll [ ]

Post-Effective Amendment No. ll [ ]

and/or

REGISTRATION STATEMENT

UNDER THE INVESTMENT

COMPANY ACT OF 1940 ....................[ ]

Amendment No. ll..................................[ ]

(Check appropriate box or boxes.)

lllllllllllllllllllll

(Exact Name of Registrant as Specified in

Charter)

lllllllllllllllllllll

(Address of Principal Executive Offices)

(Zip Code)

Registrant’s Telephone Number, including

Area Code lllllllllllllll

(Name and Address of Agent for Service)

Approximate Date of Proposed Public Offering lllllllllllllllllll

It is proposed that this filing will become

effective (check appropriate box)

[ ] immediately upon filing pursuant to

paragraph (b)

[ ] on (date) pursuant to paragraph (b)

[ ] 60 days after filing pursuant to paragraph

(a)(1)

[ ] on (date) pursuant to paragraph (a)(1)

[ ] 75 days after filing pursuant to paragraph

(a)(2)

[ ] on (date) pursuant to paragraph (a)(2) of

rule 485.

If appropriate, check the following

box:

[ ] This post-effective amendment

designates a new effective date for a

previously filed post-effective

amendment.

Calculation of Registration Fee Under the Securities Act of 1933

Title of Securities Being

Registered Amount Being Registered Proposed Maximum Offering Price Per Unit

Proposed Maximum Aggregate Offering PriceAmount of Registration

Fee

Omit from the facing sheet reference

to the other Act if the Registration

Statement or amendment is filed under

only one of the Acts. Include the

‘‘Approximate Date of Proposed Public

Offering’’ and the table showing the

calculation of the registration fee only

where shares are being registered under

the Securities Act of 1933. Registrants

that are registering an indefinite number

of shares under the Securities Act of

1933 in accordance with the provisions

of rule 24f-2 under the Investment

Company Act of 1940 (17 CFR 270.24f2) should include the declaration

required by rule 24f-2(a)(1) on the facing

sheet, in lieu of the table showing the

calculation of the registration fee under

the Securities Act of 1933 or in

combination with the calculation as

appropriate.

No response to the collection of

information contained in this form is

required unless the form displays a

currently valid OMB control number.

Contents of Form N–1A

General Instructions

A. Definitions

B. Filing and Use of Form N–1A
10924 Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules

C. Preparation of the Registration

Statement

D. Incorporation by Reference

Part A Information Required in a Prospectus

Item 1. Front and Back Cover Pages

Item 2. Risk/Return Summary:

Investments, Risks, and Performance

Item 3. Risk/Return Summary: Fee Table

Item 4. Investment Objectives, Principal

Strategies, and Related Risks

Item 5. Management’s Discussion of Fund

Performance

Item 6. Management, Organization, and

Capital Structure

Item 7. Shareholder Information

Item 8. Distribution Arrangements

Item 9. Financial Highlights Information

Part B Information Required in a Statement

of Additional Information

Item 10. Cover Page and Table of Contents

Item 11. Fund History

Item 12. Description of the Fund and Its

Investments and Risks

Item 13. Management of the Fund

Item 14. Control Persons and Principal

Holders of Securities

Item 15. Investment Advisory and Other

Services

Item 16. Brokerage Allocation and Other

Practices

Item 17. Capital Stock and Other Securities

Item 18. Purchase, Redemption, and

Pricing of Shares

Item 19. Taxation of the Fund

Item 20. Underwriters

Item 21. Calculation of Performance Data

Item 22. Financial Statements

Part C Other Information

Item 23. Exhibits

Item 24. Persons Controlled by or Under

Common Control with the Fund

Item 25. Number of Holders of Securities

Item 26. Indemnification

Item 27. Business and Other Connections

of the Investment Adviser

Item 28. Principal Underwriters

Item 29. Location of Accounts and Records

Item 30. Management Services

Item 31. Undertakings

Signatures

General Instructions

A. Definitions

References to sections and rules in

this Form N–1A are under the

Investment Company Act of 1940 (15

U.S.C. 80a–1, et seq.) (the ‘‘Investment

Company Act’’) unless otherwise

indicated. Terms used in this Form N–

1A have the same meaning as in the

Investment Company Act or the related

rules unless otherwise indicated. As

used in this Form N–1A, the terms set

forth below have the following

meanings:

‘‘Fund’’ means the Registrant, or if the

Registrant offers more than one Series,

a separate Series of the Registrant. When

a form item specifically applies to a

Registrant or a Series, those terms will

be used.

‘‘Master-Feeder Fund’’ means a twotiered arrangement in which one or

more Funds (each a ‘‘Feeder Fund’’)

holds shares of a single Fund (the

‘‘Master Fund’’) as its only securities in

accordance with section 12(d)(1)(E) (15

U.S.C. 80a–12(d)(1)(E)).

‘‘Money Market Fund’’ means a Fund

that holds itself out as money market

fund and meets the maturity, quality,

and diversification requirements of rule

2a–7 (17 CFR 270.2a–7).

‘‘Multiple Class Fund’’ means a Fund

that issues more than one class of

shares, each of which represents

interests in the same portfolio of

securities under rule 18f–3 (17 CFR

270.18f–3) or an order exempting the

Fund from sections 18(f), 18(g), and

18(i) (15 U.S.C. 80a–18(f), 18(g), and

18(i)).

‘‘Registrant’’ means an open-end

management investment company

registered under the Investment

Company Act.

‘‘SAI’’ means the Statement of

Additional Information required by Part

B of this Form.

‘‘Securities Act’’ means the Securities

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

‘‘Securities Exchange Act’’ means the

Securities Exchange Act of 1934 (15

U.S.C. 78a et seq.).

‘‘Series’’ means a series of shares

offered by a Registrant that represents

undivided interests in a portfolio of

investments and that is preferred over

all other series of shares in respect of

assets specifically allocated to that

series in accordance with rule 18f–2(a)

(17 CFR 270.18f–2(a)).

B. Filing and Use of Form N–1A

1. What is Form N–1A used for?

Form N–1A is used by Funds, except

insurance company separate accounts

and small business investment

companies licensed under the United

States Small Business Administration,

to file:

(a) An initial registration statement

under the Investment Company Act and

amendments to the registration

statement, including amendments

required by rule 8b–16 under the

Investment Company Act (17 CFR

270.8b–16);

(b) An initial registration statement

under the Securities Act and

amendments to the registration

statement, including amendments

required by section 10(a)(3) of the

Securities Act (15 U.S.C. 77j(a)(3)); or

(c) Any combination of the filings in

paragraph (a) or (b).

2. What does the registration statement

consist of?

(a) For registration statements or

amendments filed under both the

Investment Company Act and the

Securities Act or only under the

Securities Act (except as set forth in (c)

below), the registration statement

consists of the facing sheet of the Form,

Parts A, B, and C, and the required

signatures.

(b) For registration statements or

amendments filed only under the

Investment Company Act, the

registration statement consists of the

facing sheet of the Form, responses to

all Items of Parts A (except Items 1, 2,

3, 5, and 9), B, and C (except Items 23(e)

and (i)–(k)), and the required signatures.

(c) For amendments to registration

statements filed under the Securities

Act solely for the purpose of registering

additional securities, the registration

statement consists of the facing sheet of

the Form, the required signatures, and if

the amendment is filed pursuant to

section 24(e) (15 U.S.C. 80a–24(e)) of the

Investment Company Act, a response to

Item 23(i).

3. What are the filing fees for Form N–

1A?

(a) A Fund must pay a registration fee,

calculated in accordance with section

6(b) of the Securities Act (15 U.S.C.

77f(b)) and rule 24f–2 under the

Investment Company Act, to register

securities under that Act.

(b) No filing fees are required to

register under the Investment Company

Act.

4. What rules apply to the filing of a

registration statement on Form N–1A?

(a) For registration statements and

amendments filed under both the

Investment Company Act and the

Securities Act or only under the

Securities Act, the general rules

regarding the filing of registration

statements in Regulation C under the

Securities Act (17 CFR 230.400–

230.497) apply to the filing of Form N–

1A. Specific requirements concerning

Funds are set forth in rules 480–485 and

495–497 of Regulation C.

(b) For registration statements and

amendments filed only under the

Investment Company Act, the general

rules in rules 8b–1—8b–32 (17 CFR

270.8b–1—270.8b–32) apply to the

filing of Form N–1A.

(c) Regulation S–T (17 CFR 232.10–

232.903) applies to all filings on the

Commission’s Electronic Data

Gathering, Analysis, and Retrieval

system (‘‘EDGAR’’).
Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules 10925

C. Preparation of the Registration

Statement

1. Form N–1A is divided into three

parts:

(a) Part A. Part A sets forth the

information that must be included in a

Fund’s prospectus under section 10(a)

of the Securities Act. The purpose of the

prospectus is to provide essential

information about the Fund in a way

that will assist investors in making

informed decisions about whether to

purchase the securities being offered.

Because investors who rely on the

prospectus may not be sophisticated in

legal or financial matters, provide the

information in the prospectus in a clear,

concise, and understandable manner.

For example, using excessive detail,

technical or legal terminology, complex

language, and lengthy sentences and

paragraphs may make the prospectus

difficult for many investors to

understand and detract from its

usefulness. In responding to the Items in

Part A:

(i) Respond as simply and directly as

reasonably possible and include only as

much information as is necessary to an

understanding of the fundamental and

particular characteristics of the Fund.

Brevity is especially important in

describing practices or aspects of the

Fund’s operations that do not differ

materially from those of other

investment companies.

(ii) Avoid detailed descriptions of

practices that are required or otherwise

affected by legal requirements.

(iii) Avoid, except when specifically

required, cross-references to the SAI or

shareholder reports in connection with

disclosure provided in the prospectus.

The Fund may provide cross-references

within the prospectus when the use of

cross-references assists investors in

understanding the information

presented and does not add complexity

to the prospectus.

(b) Part B. Part B sets forth the

information that must be included in a

Fund’s SAI. The purpose of the SAI is

to provide additional information about

the Fund that the Commission has

concluded is not necessary or

appropriate in the public interest or for

the protection of investors to be in the

prospectus, but that some investors may

find useful. Part B affords the Fund an

opportunity to expand discussions of

the matters described in the prospectus

by including additional information that

the Fund believes may be of interest to

some investors. The Fund should not

duplicate in the SAI information that is

provided in the prospectus, unless

necessary to make the SAI

comprehensible as a document

independent of the prospectus.

(c) Part C. Part C sets forth other

information that must be included in a

Fund’s registration statement.

2. Additional Matters:

(a) Organization of Information. A

Fund should organize the information

in the prospectus and SAI to make it

easy for investors to understand.

Disclose the information required by

Items 2 and 3 (the Risk/Return

Summary) in numerical order at the

front of the prospectus. Do not precede

these Items by any other Item except the

Cover Page (Item 1) and the table of

contents required by rule 481(c) under

the Securities Act (17 CFR 230.481(c)).

Disclose the information required by

Item 8 (Distribution Arrangements) in

one place in the prospectus.

(b) Other Information. Except for the

Risk/Return Summary, a Fund may

include other information in the

prospectus or the SAI, including, for

example, charts, graphs or tables, so

long as the information is not

incomplete, inaccurate, or misleading

and does not, because of its nature,

quantity, or manner of presentation,

obscure or impede understanding of the

information that is required to be

included. The Risk/Return Summary

may not include disclosure other than

that required or permitted by Items 2

and 3.

(c) Use of Form N–1A by More Than

One Registrant or Series or by a Multiple

Class Fund. Form N–1A may be used by

one or more Registrants, Series, or

classes of a Multiple Class Fund.

(i) When disclosure is provided for

more than one Fund or class of shares,

disclosure should be presented in a

format designed to communicate the

information effectively. To meet this

requirement, Funds may order or group

the response to any Item in any manner

that organizes the information into

readable and comprehensible segments

and is consistent with the intent of the

prospectus to provide clear and concise

information about the Funds or classes.

Funds are encouraged to use, as

appropriate, tables, side-by-side

comparisons, captions, bullet points, or

other organizational techniques in

presenting disclosure for multiple

Funds or classes.

(ii) Paragraph (a) requires Funds to

disclose the information required by

Items 2 and 3 in numerical order at the

front of the prospectus and not to

precede the Items by other information.

As a general matter, multiple Funds or

Multiple Class Funds may depart from

that requirement if necessary to present

the required information clearly and

effectively (although the order of

information required by each Item must

remain the same). For example, the

prospectus may present all the Item 2

information for several Funds followed

by all the Item 3 information for the

Funds, or may present Items 2 and 3 for

each of several Funds sequentially.

Other presentations also would be

acceptable if they are consistent with

the Form’s intent to disclose the

information required by Items 2 and 3

in a standard order at the beginning of

the prospectus.

(d) Defined Contribution Plans. Form

N–1A may be used by a Fund that is

offered as an investment alternative in

a participant-directed defined

contribution plan that meets the

requirements for qualification under the

Internal Revenue Code. A Fund may

omit the information required by Items

7 and 8 of this Form from a Fund’s

prospectus that is used to offer Fund

shares to plan participants.

(e) Dates. The requirements for dating

the prospectus under rule 423 under the

Securities Act (17 CFR 230.423) apply

equally to dating the SAI. The SAI

should be made available at the same

time the prospectus becomes available

for purposes of rules 430 and 460 under

the Securities Act (17 CFR 230.430 and

230.460).

(f) Sales Literature. Sales literature

may be included in the prospectus so

long as the amount of this information

does not add substantial length to the

prospectus or its placement does not

obscure essential disclosure.

D. Incorporation by Reference

1. Specific rules for incorporation by

reference in Form N–1A:

(a) A Fund may not incorporate by

reference into a prospectus information

that Part A of this Form requires to be

included in a prospectus, except as

specifically permitted by Part A of the

Form.

(b) A Fund may incorporate by

reference any or all of the SAI into the

prospectus (but not to provide any

information required by Part A to be in

the prospectus) without delivering the

SAI with the prospectus.

(c) A Fund may incorporate by

reference into the SAI or Other

Information sections information that

Parts B and C of this Form require to be

included in the SAI or Other

Information sections of a Fund’s

registration statement.

2. General Requirements:

All incorporation by reference must

comply with the requirements of this

Form and the Commission’s rules on
10926 Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules

incorporation by reference including:

rule 10(d) of Regulation S-K under the

Securities Act (17 CFR 229.10(d))

(general rules on incorporation by

reference, which, among other things,

prohibit, unless specifically required by

this Form, incorporating by reference a

document that includes incorporation

by reference to another document, and

limits incorporation to documents filed

within the last 5 years, with certain

exceptions); rule 411 under the

Securities Act (17 CFR 230.411) (general

rules on incorporation by reference in a

prospectus); rule 303 of Regulation S–T

(17 CFR 232.303) (specific requirements

for electronically filed documents); and

rules 0–4, 8b–23 and 8b–32 under the

Investment Company Act (17 CFR

270.0–4, 270.8b–23 and 270.8b–32)

(additional rules on incorporation by

reference for Funds).

PART A INFORMATION REQUIRED

IN A PROSPECTUS

Item 1. Front and Back Cover Pages

(a) Front Cover Page. Include the

following information on the outside

front cover page of the prospectus:

(1) The Fund’s name.

(2) The date of the prospectus.

(3) The statement required by rule

481(b)(1) under the Securities Act.

(b) Back Cover Page. Include the

following information on the outside

back cover page of the prospectus:

(1) The Fund’s name, the Registrant’s

Investment Company Act file number,

and if the Fund is a Series, also provide

the Registrant’s name.

(2) The date of the SAI and a

statement that the SAI includes

additional information about the Fund

that is available, without charge, upon

request. Also explain how shareholder

inquiries can be made. Provide a tollfree (or collect) telephone number to

call to request the SAI, the Fund’s

annual report if required by Item 5, or

other information required to be

provided to investors, and to make

shareholder inquiries.

Instructions.

1. If applicable, a Fund may indicate

that this information is available on its

Internet site and by E-mail request.

2. When a request for the SAI is

received, the Fund should send the SAI,

by first-class mail or other means

designed to ensure equally prompt

delivery, within 3 business days of

receipt of the request.

(3) A statement whether and from

where information is incorporated by

reference into the prospectus as

permitted by General Instruction D and,

unless delivered with the prospectus,

explain that the Fund will provide

information incorporated by reference

without charge, upon request

(referencing the telephone number

provided in response to paragraph

(b)(2)).

Instruction. The information about

incorporation by reference can be

combined with the statement required

under paragraph (b)(2).

(4) A statement that information about

the Fund (including the SAI) can be

reviewed and copied at the

Commission’s Public Reference Room in

Washington, D.C. Also state that

information on the operation of the

public reference room may be obtained

by calling the Commission at 1–800-

SEC–0330. State that reports and other

information about the Fund are

available on the Commission’s Internet

site at http://www.sec.gov and that

copies of this information may be

obtained, upon payment of a

duplicating fee by writing the Public

Reference Section of the Commission,

Washington, D.C. 20549–6009.

Item 2. Risk/Return Summary:

Investments, Risks, and Performance

Include the following information in the

same order and in the same or

substantially similar question-andanswer format:

(a) What are the Fund’s goals?

Disclose the Fund’s investment

objectives. A Fund also may identify its

type or category (e.g., that it is a Money

Market Fund or balanced fund).

(b) What are the Fund’s main

investment strategies?

(1) Based on the information given in

response to Item 4(a), summarize how

the Fund intends to achieve its

investment objectives by identifying the

Fund’s principal investment strategies

(including the type or types of securities

in which the Fund invests or will invest

principally) and any policy to

concentrate in securities of issuers in a

particular industry or group of

industries.

(2) Provide disclosure to the following

effect: Additional information about the

Fund’s investments is available in the

Fund’s annual and semi-annual reports

to shareholders. In particular, the

Fund’s annual report discusses the

relevant market conditions and

investment strategies used by the Fund’s

investment adviser that materially

affected the Fund’s performance during

the last fiscal year. You may obtain

these reports at no cost by calling

(llll).

Instructions

1. Provide a toll-free (or collect)

telephone number for investors to

request the annual or semi-annual

reports. If applicable, a Fund may

indicate that its annual or semi-annual

reports are available on its Internet site

and by E-mail request.

2. For a Fund that provides the

information required by Item 5

(Management’s Discussion of Fund

Performance) in its prospectus (and not

the annual report) or for a Money

Market Fund, do not provide the

disclosure required by the second

sentence of paragraph (b)(2).

3. When a request for an annual or

semi-annual report is received, the Fund

should send the applicable report, by

first-class mail or other means designed

to ensure equally prompt delivery,

within 3 business days of the request.

(c) What are the main risks of

investing in the Fund?

(1) Narrative Risk Disclosure.

(i) Based on the information given in

response to Item 4(c), summarize the

principal risks of investing in the Fund,

including the risks to which the Fund’s

portfolio as a whole is subject and the

circumstances reasonably likely to affect

adversely the Fund’s net asset value,

yield, and total return. Unless the Fund

is a Money Market Fund, disclose that

loss of money is a risk of investing in

the Fund. If the Fund is a Money Market

Fund, see paragraph (c)(1)(iii) below.

Instruction. A Fund also may discuss

the potential rewards of investing in the

Fund so long as the discussion provides

a balanced presentation of the Fund’s

risks and rewards.

(ii) Describe the characteristics of an

investor for whom the Fund may be an

appropriate or inappropriate investment

(e.g., based on the investor’s time

horizon, willingness to tolerate

fluctuations in principal, or on the tax

consequences of investing in the Fund).

(iii) If the Fund is a Money Market

Fund, state that: ‘‘An investment in the

Fund is not insured or guaranteed by

the Federal Deposit Insurance

Corporation or any other government

agency. 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.’’ If a

Money Market Fund is a single state

fund under rule 2a-7, disclose that

investing in the Fund is riskier than

investing in other types of Money

Market Funds, because the Fund may

invest a significant portion of its assets

in a single issuer.

Instruction. A Fund may omit the

disclosure required by the last sentence

of paragraph (c)(1)(iii) if the Fund limits

its investments in a single issuer to no

more than 5% of the Fund’s assets in a

single issuer.
Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules 10927

(iv) If the Fund is not a Money Market

Fund but is advised by or sold through

a bank, state that: ‘‘An investment in the

Fund is not insured or guaranteed by

the Federal Deposit Insurance

Corporation or any other government

agency.’’

(v) If applicable, state that the Fund

is non-diversified, describe the effect of

non-diversification (e.g., disclose that,

compared to other funds, the Fund may

invest a greater percentage of its assets

in a particular issuer), and summarize

the risks of investing in a nondiversified fund.

(2) Risk/Return Bar Chart and Table.

(i) Include the bar chart and table

required by paragraphs (c)(2)(ii) and (iii)

of this section under a subheading that

refers to both risk and performance.

Explain how the information illustrates

the Fund’s risks and performance (e.g.,

by stating that the 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 1, 5, and 10 years

compare to those of a broad measure of

market performance). Provide a

statement to the effect that how the

Fund has performed in the past is not

necessarily an indication of how the

Fund will perform in the future.

(ii) If the Fund has annual total

returns for at least one calendar year,

provide a bar chart showing the Fund’s

annual total returns for each of the last

10 calendar years (or for the life of the

Fund if less than 10 years), but only for

periods subsequent to the effective date

of the Fund’s registration statement.

Present each return in numerical form

next to each bar.

(iii) Accompany the bar chart with a

table showing the Fund’s average

annual total returns for 1, 5, and 10 year

periods ending on the date of the most

recently completed fiscal year (or for the

life of the Fund, if shorter) and the

returns of an appropriate broad-based

securities market index as defined in

Instruction 5 to Item 5(b) for the same

periods. For a Money Market Fund,

provide the Fund’s 7-day yield ending

on the date of the most recently

completed fiscal year and a toll-free (or

collect) telephone number that investors

can use to obtain the Fund’s current 7-

day yield.

Instructions.

1. Bar Chart.

(a) Provide annual returns beginning

with the latest calendar year, but only

for periods subsequent to the effective

date of the Fund’s registration

statement. Calculate annual returns

using the Instructions to Item 9(a),

except base the calculations on calendar

years. If the Fund charges sales loads or

account fees, state that sales fees (loads)

or account fees are not reflected in the

bar chart and that, if these fees were

included, returns would be less than

those shown.

(b) For a Fund that provides annual

total returns for only one calendar year

or for a Fund that does not include the

bar chart because it does not have

annual total returns for a full calendar

year, modify, as appropriate, the

narrative explanation required by

paragraph (c)(2)(i) (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).

2. Table.

(a) Calculate the Fund’s average

annual total returns under Item 21(b)(1)

and a Money Market Fund’s 7-day yield

under Item 21(a).

(b) In addition to the required broadbased securities market index, a Fund

may include information for one or

more additional indexes as permitted by

Instruction 6 to Item 5(b). If an

additional index is included, disclose

information about the additional index

in the narrative explanation

accompanying the bar chart and table

(e.g., by stating that the information

shows how the Fund’s performance

compares to the returns of an index of

funds with similar investment

objectives).

(c) If the Fund selects a different

index from an index used in a table for

the immediately preceding period,

explain the reason(s) for the change and

provide information for both the newly

selected and the former index.

(d) A Fund (other than a Money

Market Fund) may include the Fund’s

yield calculated under Item 21(b)(2).

Any Fund may include its taxequivalent yield calculated under Item

21. If a Fund’s yield is included,

provide a toll-free (or collect) telephone

number that investors can use to obtain

current yield information.

3. Multiple Class Funds.

(a) When a Multiple Class Fund offers

more than one class of shares in the

prospectus, provide annual total returns

in the bar chart for the class that has

annual total return information for the

longest period of time over the last 10

years. When the prospectus offers two

or more classes that have annual total

returns for at least 10 years or annual

total returns for the same time period

but less than 10 years, provide returns

for the class with the greatest net assets

as of the end of the Fund’s most recent

calendar year. Identify the class of

shares for which returns are shown.

(b) Provide average annual total

returns in the table for each class offered

in the prospectus.

4. Change in Investment Adviser. If

the Fund has not had the same adviser

during the last 10 calendar years, the

Fund may begin the bar chart and the

performance information in the table on

the date that the current adviser began

to provide advisory services to the Fund

subject to the conditions in Instruction

11 of Item 5(b).

Item 3. Risk/Return Summary: Fee Table

Include the following information in

the same question-and-answer format

required by Item 2 (unless the Fund

offers its shares exclusively to one or

more separate accounts):

What are the Fund’s fees and

expenses?

This table describes the fees and

expenses you may pay in connection

with an investment in the Fund.

Shareholder Fees (fees paid directly

from your account)

Maximum Sales Fee (Load) Imposed

on Purchases (as a percentage of

offering price) ...............................lll%

Maximum Deferred Sales Fee (Load)

(as a percentage of ll)...............lll%

Maximum Sales Fee (Load) Imposed

on Reinvested Dividends [and

other Distributions] (as a

percentage of ll) .......................lll%

Redemption Fee (as a percentage of

amount redeemed, if applicable)

...................................................... lll%

Exchange Fee ......................................lll%

Maximum Account Fee......................lll%

Annual Fund Operating Expenses

(expenses that are deducted from Fund

assets)

Management Fees ...............................lll%

Marketing (12b–1) Fees ......................lll%

Other Expenses...................................lll%

llllll%

llllll%

llllll%

Total Annual Fund Operating

Expenses.......................................lll%

Example

This Example is intended to help you

compare the cost of investing in the

Fund to the cost of investing in other

mutual funds.

The Example assumes that you invest

$10,000 in the Fund for the time periods

indicated and then redeem all your

shares at the end of those periods. The

Example also assumes a 5% return on

your investment each year and that the

Fund’s operating expenses remain the

same. Although your actual costs may

be higher or lower, based on these

assumptions your costs would be:
10928 Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules

1 year

$llll

3 years

$llll

5 years

$llll

10 years

$llll

You would pay the following

expenses if you did not redeem your

shares:

1 year

$llll

3 years

$llll

5 years

$llll

10 years

$llll

The Example does not reflect sales

fees (loads) on reinvested dividends

[and other distributions]. If these fees

were included, your costs would be

higher.

Instructions.

1. General.

(a) Round all dollar figures to the

nearest dollar and all percentages to the

nearest hundredth of one percent.

(b) Include the narrative explanations

in the order indicated. A Fund may

modify the narrative explanations if the

explanation contains comparable

information to that shown.

(c) Include the caption ‘‘Maximum

Account Fees’’ only if the Fund charges

these fees. A Fund may omit other

captions if the Fund does not charge the

fees or expenses covered by the

captions.

(d)(i) If the Fund is a Feeder Fund,

reflect the aggregate expenses of the

Feeder Fund and the Master Fund in a

single fee table using the captions

provided. In a footnote to the fee table,

state that the table and Example reflect

the expenses of both the Feeder and

Master Funds.

(ii) If the prospectus offers more than

one class of a Multiple Class Fund or

more than one Feeder Fund that invests

in the same Master Fund, provide a

separate response for each class or

Feeder Fund.

2. Shareholder Fees (Loads).

(a)(i) ‘‘Maximum Deferred Sales Fee

(Load)’’ includes the maximum total

deferred sales load payable upon

redemption, in installments, or both,

expressed as a percentage of the amount

or amounts stated in response to Item

8(a), except that, for a sales load based

on net asset value at the time of

purchase, show the sales load as a

percentage of the offering price at the

time of purchase. If applicable, a Fund

may include in a footnote to the table

a tabular presentation showing the

amount of deferred sales loads over time

or a narrative explanation of the loads

(e.g., ll% in the first year after

purchase, declining to ll% in the

ll year and eliminated thereafter).

(ii) If more than one type of sales load

is charged (e.g., a deferred sales load

and a front-end sales load), the first

caption in the table should read

‘‘Maximum Sales Fee (Load)’’ and show

the maximum cumulative percentage.

Show the percentage amounts and the

terms of each sales charge comprising

that figure on separate lines below.

(iii) If a sales load is imposed on

shares purchased with reinvested

capital gains distributions or returns of

capital, include the bracketed words in

the third caption.

(b) ‘‘Redemption Fee’’ includes a fee

charged for any redemption of the

Fund’s shares, but does not include a

deferred sales load charged upon

redemption.

(c) ‘‘Exchange Fee’’ includes the

maximum fee charged for any exchange

or transfer of interest from the Fund to

another fund. If applicable, the Fund

may include in a footnote to the table

a tabular presentation of the range of

exchange fees or a narrative explanation

of the fees.

(d) ‘‘Maximum Account Fees.’’ If all

shareholders are charged an account fee,

include a caption describing the

maximum account fee (e.g., ‘‘Maximum

Account Maintenance Fee’’ or

‘‘Maximum Cash Management Fee’’).

State the maximum annual account fee

as either a fixed dollar amount or a

percentage of assets and include in a

parenthetical to the caption the basis on

which any percentage is calculated. If

an account fee is charged only to

accounts that do not meet a certain

threshold (e.g., accounts under $2,500),

the Fund may include the threshold in

a parenthetical to the caption or

footnote to the table. The Fund may

include an explanation of any nonrecurring account fee in a parenthetical

to the caption or in a footnote to the

table. For purposes of this Instruction,

all shareholders are deemed to pay an

account fee:

(i) Despite waiver of the fee for certain

shareholders, such as employees of the

Fund’s investment adviser and investors

with large account balances; and

(ii) Unless any shareholder not

wishing to use the services covered by

the fee may avoid the fee and a

significant number of shareholders do,

in fact, avoid the fee.

3. Annual Fund Operating Expenses.

(a) ‘‘Management Fees’’ include

investment advisory fees (including any

fees based on the Fund’s performance),

any other management fees payable to

the investment adviser or its affiliates,

and administrative fees payable to the

investment adviser or its affiliates not

included as ‘‘Other Expenses.’’

(b) ‘‘Marketing (12b–1) Fees’’ include

all distribution or other expenses

incurred during the most recent fiscal

year under a plan adopted pursuant to

rule 12b–1 (17 CFR 270.12b–1). Disclose

the amount of any distribution or

similar expenses deducted from the

Fund’s assets other than pursuant to a

rule 12b–1 plan under an appropriate

caption or a subcaption of ‘‘Other

Expenses.’’

(c)(i) ‘‘Other Expenses’’ include all

expenses not otherwise disclosed in the

table that are deducted from the Fund’s

assets or charged to all shareholder

accounts. The amount of expenses

deducted from the Fund’s assets are the

amounts shown as expenses in the

Fund’s statement of operations

(including increases resulting from

complying with paragraph 2(g) of rule

6–07 of Regulation S–X (17 CFR 210.6–

07).

(ii) ‘‘Other Expenses’’ do not include

extraordinary expenses as determined

by using generally accepted accounting

principles (see Accounting Principles

Board Opinion No. 30). If extraordinary

expenses were incurred that materially

affected the Fund’s ‘‘Other Expenses,’’

disclose in a footnote to the table what

‘‘Other Expenses’’ would have been had

the extraordinary expenses been

included.

(iii) The Fund may subdivide this

caption into no more than three

subcaptions that identify the largest

expense or expenses comprising ‘‘Other

Expenses,’’ but must include a total of

all ‘‘Other Expenses.’’ Alternatively, the
Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules 10929

Fund may include the components of

‘‘Other Expenses’’ in a parenthetical to

the caption.

(d) (i) Base the percentages of

‘‘Annual Fund Operating Expenses’’ on

amounts incurred during the most

recent fiscal year. If the Fund has

changed its fiscal year and as a result,

the most recent fiscal year is less than

three months, use the fiscal year prior

to the most recent fiscal year as the basis

for determining ‘‘Annual Fund

Operating Expenses.’’

(ii) If there have been any changes in

‘‘Annual Fund Operating Expenses’’

that would materially affect the

information disclosed in the table:

(A) Restate the expense information

using the current fees as if they had

been in effect during the previous fiscal

year; and

(B) In a footnote to the table, disclose

that the expense information in the table

has been restated to reflect current fees.

(iii) A change in ‘‘Annual Fund

Operating Expenses’’ means either an

increase or a decrease in expenses that

occurred during the most recent fiscal

year or that is expected to occur during

the current fiscal year. It includes the

elimination of any expense

reimbursement or fee waiver

arrangement, in which case include in

the table the expenses that would have

been incurred had there been no

reimbursement or waiver. A change in

‘‘Annual Fund Operating Expenses’’

does not include:

(A) Circumstances when expenses

decrease in relation to the Fund’s size

so as to make any reimbursement or

waiver arrangement inoperative; or

(B) A decrease in operating expenses

as a percentage of assets due to

economies of scale or breakpoints in a

fee arrangement resulting from an

increase in the Fund’s assets.

(e) If there were expense

reimbursement or fee waiver

arrangements that reduced any Fund

operating expenses and will continue to

reduce them in the current fiscal year

(regardless of whether the arrangement

has been guaranteed):

(i) Revise the appropriate caption by

adding ‘‘After Expense

Reimbursements’’ or a similar phrase;

(ii) State the amount of actual

expenses incurred (i.e., net of the

amount reimbursed or waived); and

(iii) Disclose in a footnote to the table

the amount the expenses or fees would

have been absent the reimbursement or

waiver.

4. Example.

(a) Assume that the percentage

amounts listed under ‘‘Annual Fund

Operating Expenses’’ remain the same

in each year of the 1, 3, 5, and 10 year

periods, except that an adjustment may

be made to reflect reduced annual

expenses resulting from completion of

the amortization of initial organization

expenses.

(b) For any breakpoint in any fee,

assume that the amount of the Fund’s

assets remains constant as of the level

at the end of the most recently

completed fiscal year.

(c) Assume reinvestment of all

dividends and distributions.

(d) Reflect recurring and nonrecurring fees charged to all investors

other than any exchange fees or any

sales loads on shares purchased with

reinvested dividends or other

distributions. If the Fund charges sales

loads on reinvested dividends or other

distributions, include the narrative

explanation following the Example and

include the bracketed words when sales

loads are charged on reinvested capital

gains distributions or returns of capital.

Reflect any shareholder account fees

collected by dividing the total amount

of the fees collected during the most

recent fiscal year by all Funds whose

shareholders are subject to the fees by

the total average net assets of the Funds.

Add the resulting percentage to

‘‘Annual Fund Operating Expenses’’ and

assume that it remains the same in each

of the 1, 3, 5, and 10 year periods. A

Fund that charges account fees based on

a minimum account requirement

exceeding $10,000 may adjust its

account fees based on the amount of the

fee in relation to the Fund’s minimum

account requirement.

(e) Reflect any deferred sales load by

assuming redemption of the entire

account at the end of the year in which

the load is due. In the case of a deferred

sales load that is based on the Fund’s

net asset value at the time of payment,

assume that the net asset value at the

end of each year includes the 5%

annual return for that and each

preceding year.

(f) Include the second 1, 3, 5, and 10

year periods and related narrative

explanation only if a sales load or other

fee is charged upon redemption.

5. New Funds. A new Fund is a Fund

that does not include in Form N–1A

financial statements reporting operating

results or that includes financial

statements for the Fund’s initial fiscal

year reporting operating results for a

period of less than 10 months. The

following Instructions apply to new

Funds.

(a) Base the percentages expressed in

‘‘Annual Fund Operating Expenses’’ on

payments that will be made, estimating

amounts of ‘‘Other Expenses’’ (after any

expense reimbursement or waiver).

Disclose in a footnote to the table that

‘‘Other Expenses’’ are based on

estimated amounts for the current fiscal

year.

(b) If expense reimbursement or

waiver arrangements are expected to

reduce any Fund operating expense or

the estimate of ‘‘Other Expenses’’

(regardless of whether the arrangement

has been guaranteed):

(i) Revise the appropriate caption by

adding ‘‘After Expense

Reimbursements’’ or a similar phrase;

(ii) State the amount of actual

expenses expected to be incurred or the

actual estimate (i.e., net of the amount

expected to be reimbursed or waived);

and

(iii) Disclose in a footnote to the table

what the expenses (or estimates) would

have been absent the reimbursement or

waiver.

(c) Complete only the one and three

year period portions of the Example and

estimate any shareholder account fees

collected.

Item 4. Investment Objectives, Principal

Strategies, and Related Risks

(a) Investment Objectives. State the

Fund’s investment objectives and, if

applicable, state that those objectives

may be changed without shareholder

approval.

(b) Implementation of Investment

Objectives. Describe how the Fund

intends to achieve its investment

objectives. As part of the discussion:

(1) Describe the Fund’s principal

strategies, including the particular type

or types of securities in which the Fund

principally invests or will invest.

Instructions.

1. A strategy includes any policy,

practice, or technique used by the Fund

to achieve the Fund’s investment

objectives.

2. Whether a particular strategy,

including a strategy to invest in a

particular type of security, is a principal

strategy depends on the strategy’s

anticipated importance in achieving the

Fund’s investment objectives, and how

the strategy affects the Fund’s potential

risks and returns. In determining what

is a principal strategy, consider, among

other things, the amount of the Fund’s

assets expected to be committed to the

practice, the amount of the Fund’s

assets expected to be placed at risk by

the practice, and the likelihood of losing

some or all of those assets.

3. A negative strategy (e.g., a strategy

not to invest in a particular type of

security or not to borrow money) is not

a principal strategy.

4. Disclose any policy specified in

Item 12(c)(1) that is a principal strategy.

A Fund, at its option, may disclose that
10930 Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules

the policy may not be changed without

shareholder approval.

(2) Explain in general terms how the

Fund’s adviser decides what securities

to buy and sell (e.g., for an equity fund,

discuss the factors that the adviser

considers in deciding to buy the stock

of one company rather than another,

and how the adviser decides when to

sell that stock).

(3) Disclose any policy to concentrate

(i.e., invest 25% or more of the Fund’s

total assets) in securities of issuers in a

particular industry or group of

industries. For a Money Market Fund

that is a single state fund as defined in

rule 2a–7, discuss the Fund’s

concentration in securities issued by a

particular state (or particular

subdivision of the state) or by issuers

located within the state (or subdivision).

(4) For a Fund (other than a Money

Market Fund) that expects its portfolio

turnover rate to equal or exceed 100%

in the coming year:

(i) Disclose the anticipated rate of the

Fund’s portfolio turnover for the coming

year and explain what that rate means

(e.g., that a turnover rate of 200% is

equivalent to the Fund buying and

selling all of the securities in its

portfolio twice in the course of a year).

(ii) Explain the tax consequences to

shareholders of the Fund’s portfolio

turnover, and how trading costs

associated with the Fund’s portfolio

turnover may affect the Fund’s

performance.

(c) Risks. Disclose the principal risks

of investing in the Fund, including 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, yield, or total

return.

(d) Non-Diversified Funds. If

applicable, state that the Fund is nondiversified, describe the effect of nondiversification (e.g., disclose that,

compared to other funds, the Fund may

invest a greater percentage of its assets

in a particular issuer) and disclose the

risks of investing in a non-diversified

fund.

(e) Temporary Defensive Positions.

Disclose, if applicable, that the Fund, to

avoid losses in response to adverse

market, economic, political, or other

conditions, may take temporary

defensive positions that depart from the

Fund’s principal strategies. Indicate the

percentage of the Fund’s assets that may

be committed to temporary defensive

positions, the risks, if any, associated

with these positions and the likely effect

of these positions on the Fund’s

performance.

Item 5. Management’s Discussion of

Fund Performance

Disclose the following information

unless the Fund is a Money Market

Fund or the information is included in

the Fund’s latest annual report to

shareholders under rule 30d–1 (17 CFR

270.30d–1) and the Fund provides a

copy of the annual report, upon request

and without charge, to each person to

whom a prospectus is delivered.

(a) Discuss the factors that materially

affected the Fund’s performance during

the most recently completed fiscal year,

including the relevant market

conditions and the investment strategies

and techniques used by the Fund’s

investment adviser.

(b)(1) Provide a line graph comparing

the initial and subsequent account

values at the end of each of the most

recently completed 10 fiscal years of the

Fund (or for the life of the Fund, if

shorter) but only for periods subsequent

to the effective date of the Fund’s

registration statement. Assume a

$10,000 initial investment at the

beginning of the first fiscal year in an

appropriate broad-based securities

market index for the same period.

(2) In a table placed within or next to

the graph, provide the Fund’s average

annual total returns for the 1, 5, and 10

year periods as of the end of the last day

of the most recent fiscal year computed

in accordance with Item 21(b)(1).

Include a statement accompanying the

graph that past performance does not

predict future performance.

Instructions.

1. Line Graph Computation.

(a) Assume that the initial investment

was made at the offering price last

calculated on the business day before

the first day of the first fiscal year.

(b) Base subsequent account values on

the net asset value of the Fund last

calculated on the last business day of

the first and each subsequent fiscal year.

(c) Calculate the final account value

by assuming the account was closed and

redemption was at the price last

calculated on the last business day of

the most recent fiscal year.

(d) Base the line graph on the Fund’s

required minimum initial investment if

that amount exceeds $10,000.

2. Sales Load. Reflect any sales load

(or any other fees charged at the time of

purchasing shares or opening an

account) by beginning the line graph at

the amount that actually would be

invested (i.e., assume that the maximum

sales load (and other charges deducted

from payments) is deducted from the

initial $10,000 investment). For a Fund

that charges a contingent deferred sales

load, assume the deduction of the

maximum deferred sales load (or other

charges) that would be applicable for a

complete redemption that received the

price last calculated on the last business

day of the most recent fiscal year. For

any other deferred sales load, assume

the deduction in the amount(s) and at

the time(s) the load actually would have

been deducted.

3. Dividends and Distributions.

Assume all of the Fund’s dividends and

distributions are reinvested on the

reinvestment dates during the period,

and reflect any sales load charged upon

reinvestment of dividends or

distributions or both.

4. Account Fees. Reflect recurring fees

that are charged to all accounts.

(a) For any account fees that vary with

the size of the account, assume a

$10,000 account size.

(b) Reflect, as appropriate, any

recurring fees charged to shareholder

accounts that are paid other than by

redemption of the Fund’s shares.

(c) Reflect an annual account fee that

applies to more than one Fund by

allocating the fee in the following

manner: divide the total amount of

account fees collected during the year

by the Funds’ total average net assets,

multiply the resulting percentage by the

average account value for each Fund

and reduce the value of each

hypothetical account at the end of each

fiscal year during which the fee was

charged.

5. Appropriate Index. For purposes of

this Item, an ‘‘appropriate broad-based

securities market index’’ is one that is

administered by an organization that is

not an affiliated person of the Fund, its

investment adviser or principal

underwriter, unless the index is widely

recognized and used. Adjust the index

to reflect the reinvestment of dividends

on securities in the index, but do not

reflect the expenses of the Fund.

6. Additional Indexes. In addition to

the required broad-based index

comparison, a Fund is encouraged to

compare its performance to other more

narrowly based indexes that reflect the

market sectors in which the Fund

invests. A Fund also may compare its

performance to an additional broadbased index, or to a non-securities index

(e.g., the Consumer Price Index), so long

as the comparison is not misleading.

7. Change in Index. If the Fund uses

a different index from the one used for

the immediately preceding fiscal year,

explain the reason(s) for the change and

compare the Fund’s annual change in

the value of an investment in the

hypothetical account with the new and

former indexes.

8. Other Periods. The line graph may

cover earlier fiscal years and may
Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules 10931

compare the ending values of interim

periods (e.g., monthly or quarterly

ending values), so long as those periods

are after the effective date of the Fund’s

registration statement.

9. Scale. The axis of the graph

measuring dollar amounts may use

either a linear or a logarithmic scale.

10. New Funds. A Fund is not

required to include the information

specified by this Item in its prospectus

(or annual report), unless Form N–1A

(or the annual report) contains audited

financial statements covering a period of

at least 6 months.

11. Change in Investment Adviser. If

the Fund has not had the same

investment adviser for the previous 10

fiscal years, the Fund may begin the line

graph on the date the current adviser

began to provide advisory services to

the Fund so long as:

(a) Neither the current adviser nor any

affiliate is or has been in ‘‘control’’ of

the previous adviser under section

2(a)(9) (15 U.S.C. 80a–2(a)(9));

(b) The current adviser employs no

officer(s) of the previous adviser or

employees of the previous adviser who

were responsible for providing

investment advisory or portfolio

management services to the Fund; and

(c) The graph is accompanied by a

statement explaining that previous

periods during which the Fund was

advised by another investment adviser

are not shown.

(c) Discuss the effect of any policy or

practice of maintaining a specified level

of distributions to shareholders on the

Fund’s investment strategies and per

share net asset value during the last

fiscal year and the extent to which the

Fund’s distribution policy resulted in

distributions of capital.

Item 6. Management, Organization, and

Capital Structure

(a) Management.

(1) Investment Adviser.

(i) Provide the name and address of

each investment adviser. Describe the

investment adviser’s experience as an

investment adviser and the advisory

services it provides to the Fund.

(ii) Describe each investment adviser’s

compensation as follows:

(A) If the Fund has operated for a full

fiscal year, state the fee paid to the

adviser for the most recent fiscal year as

a percentage of average net assets. If the

Fund has not operated for a full fiscal

year, state what the adviser’s fee will be

as a percentage of average net assets,

including any breakpoints.

(B) If the adviser’s fee is not based on

a percentage of average net assets (e.g.,

the adviser receives a performancebased fee), describe the basis of the

adviser’s compensation.

Instructions.

1. If the Fund changed advisers

during the fiscal year, describe the

compensation and the dates of service

for each adviser.

2. Explain any changes in the basis of

computing the adviser’s compensation

during the fiscal year.

(2) Portfolio Manager. State the name,

title, 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 each person’s

business experience during the past 5

years.

Instructions.

1. This requirement does not apply to

a Money Market Fund or to a Fund that

has an investment objective to replicate

the performance of an index.

2. Information is required only about

the person(s) who serves as the Fund’s

portfolio manager even though the

manager may be subject to the oversight,

approval, or ratification of a committee.

3. Indicate that a committee makes

investment decisions for the Fund if the

organizational arrangements of the

adviser (or the Fund, if internally

managed) require all investment

decisions to be made by a committee

and no person(s) is primarily

responsible for making

recommendations to that committee.

(3) Legal Proceedings. Describe any

material pending legal proceedings,

other than ordinary routine litigation

incidental to the business, to which the

Fund or the Fund’s investment adviser

or principal underwriter is a party.

Include the name of the court in which

the proceedings are pending, the date

instituted, the principal parties

involved, a description of the factual

basis alleged to underlie the proceeding,

and the relief sought. Include similar

information as to any proceedings

instituted, or known to be

contemplated, by a governmental

authority.

Instruction. For purposes of this

requirement, legal proceedings are

material only to the extent that they are

likely to have a material adverse effect

on the Fund or the ability of the

investment adviser or principal

underwriter to perform its contract with

the Fund.

(b) Fund Organization. If the Fund is

organized outside the United States,

disclose the country where the Fund is

organized.

(c) Capital Stock. Disclose any:

(1) Restrictions on the right freely to

retain or dispose of the Fund’s shares;

and

(2) Material obligations or potential

liabilities associated with owning the

Fund’s shares (not including investment

risks).

Item 7. Shareholder Information

(a) Purchase of Fund Shares. Describe

the procedures for purchasing the

Fund’s shares, including:

(1) A statement as to when

calculations of net asset value are made

and that the price at which a purchase

is effected is based on the next

calculation of net asset value after the

order is placed.

(2) A statement identifying in a

general manner any national holidays

when shares will not be priced and

specifying any additional local or

regional holidays when the Fund will be

closed.

Instruction. If the Fund has portfolio

securities primarily listed on foreign

exchanges that trade on weekends or

other days when the Fund does not

price its shares, disclose that the net

asset value of the Fund’s shares may

change on days when shareholders will

not be able to purchase or redeem the

Fund’s shares.

(3) Any minimum initial or

subsequent investment.

(b) Redemption of Fund Shares.

Describe the procedures for redeeming

the Fund’s shares, including:

(1) Any restrictions on redemptions.

(2) Any redemption charges,

including how these charges will be

collected and under what circumstances

the charges will be waived.

(3) An explanation if the Fund, under

normal circumstances, intends to

redeem in kind.

Instruction. If applicable, a Fund may

describe redemption procedures under

rule 18f–1.

(4) Any procedure that a shareholder

can use to sell shares to the Fund or its

underwriter through a broker-dealer

noting any charges that may be imposed

for such service.

Instruction. The specific fees for such

service need not be disclosed.

(5) The circumstances, if any, under

which the Fund may redeem shares

involuntarily in accounts below a

certain number or value of shares.

(6) The circumstances, if any, under

which the Fund may delay honoring a

request for redemption for a certain time

after a shareholder’s investment.

(7) Any restrictions on, or costs

associated with, transferring shares held

in street name accounts.

(c) Dividends and Distributions.

Describe the Fund’s policy with respect
10932 Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules

to dividends and distributions,

including any options shareholders may

have as to the receipt of dividends and

distributions.

(d) Tax Consequences.

(1) Describe the tax consequences to

shareholders of buying, holding,

exchanging and selling the Fund’s

shares, including, as applicable, that:

(i) The Fund intends to make

distributions that may be taxed as

ordinary income and capital gains. If the

Fund, as a result of its investment

objectives or strategies, expects its

distributions to consist primarily of

ordinary income (or short-term gains

that are taxed as ordinary income) or

capital gains, provide disclosure to that

effect.

(ii) The Fund will provide each

shareholder by [specify a date] with

specific information about the amount

of ordinary income and capital gains

distributed to the shareholder during

the prior calendar year.

(iii) The Fund’s distributions, whether

received in cash or reinvested in

additional shares of the Fund, may be

subject to federal income tax.

(iv) An exchange of the Fund’s shares

for shares of another fund will be

treated as a sale of the Fund’s shares

and any gain on the transaction may be

subject to federal income tax.

(2) For a Fund that holds itself out as

investing in securities generating taxexempt income:

(i) Modify the disclosure required by

paragraph (d)(1) to reflect that the Fund

intends to distribute tax-exempt income.

(ii) Also disclose, as applicable, that:

(A) The Fund may invest a portion of

its assets in securities that generate

income that is not exempt from federal

or state income tax;

(B) Income exempt from federal tax

may be subject to state and local income

tax;

(C) Any capital gains distributed by

the Fund may be taxable; and

(D) A portion of the tax-exempt

income received from the Fund may be

treated as a tax preference item for

purposes of determining whether a

shareholder is subject to the federal

alternative minimum tax.

(3) If the Fund does not expect to

qualify as a regulated investment

company under Subchapter M of the

Internal Revenue Code (I.R.C. 851 et

seq.), explain the tax consequences of

not qualifying. If the Fund expects to

pay an excise tax under the Internal

Revenue Code (I.R.C. 4982) with respect

to its distributions, explain the

consequences of paying the excise tax.

Item 8. Distribution Arrangements

(a) Sales Loads.

(1) Describe any sales loads, including

deferred sales loads, charged to

purchasers of the Fund’s shares. Include

in a table any front-end sales load (and

each breakpoint in the load, if any) as

a percentage of both the offering price

and the net amount invested.

Instructions.

1. In providing the information

required by this paragraph, refer to sales

loads as ‘‘sales fees (loads).’’

2. If the Fund charges a front-end

load, explain that the term ‘‘offering

price’’ includes the front-end load.

3. Disclose, if applicable, that sales

loads are imposed on shares, or amounts

representing shares, that are purchased

with reinvested dividends or other

distributions.

4. Discuss, if applicable, how deferred

sales loads are charged and calculated,

including:

(a) Whether the specified percentage

of the load is based on the offering

price, or the lesser of the offering price

or net asset value at the time the load

is paid.

(b) The amount of the load as a

percentage of both the offering price and

the net amount invested.

(c) A description of how the load is

calculated (e.g., in the case of a partial

redemption, whether or not the load is

calculated as if shares or amounts

representing shares not subject to a load

are redeemed first, and other shares or

amounts representing shares are then

redeemed in the order purchased).

(d) If applicable, the method of paying

an installment load (e.g., by withholding

of dividend payments, involuntary

redemptions, or separate billing of a

shareholder’s account).

(2) Unless disclosed in response to

paragraph (a)(1) or in the SAI, describe

any other arrangements that result in

breakpoints in, or elimination of, sales

loads (e.g., letters of intent,

accumulation plans, dividend

reinvestment plans, withdrawal plans,

exchange privileges, employee benefit

plans, and redemption reinvestment

plans). Identify each class of individuals

or transactions to which the

arrangements apply and state each

different breakpoint as a percentage of

both the offering price and the amount

invested.

(b) Rule 12b–1 Fees and Service Fees.

(1) If the Fund has adopted a plan

under rule 12b–1, state the amount of

the fee payable under the plan and

provide disclosure to the following

effect:

(i) The Fund has adopted a plan

under rule 12b–1 that allows the Fund

to pay marketing fees for the sale and

distribution of its shares; and

(ii) Because these fees are paid out of

the Fund’s assets on an on-going basis,

over time these fees will increase the

cost of your investment and may cost

you more than paying other types of

sales loads.

Instructions.

1. If the Fund pays service fees under

its rule 12b–1 plan, modify this

disclosure to reflect the payment of

these fees (e.g., by indicating that the

Fund pays marketing and other fees for

the sale of its shares and for services

provided to shareholders). For purposes

of this paragraph, service fees have the

same meaning given that term under

rule 2830(b)(9) of the NASD Conduct

Rules (NASD Manual (CCH) 4622).

2. In providing the information

required by this paragraph, refer to rule

12b–1 fees as ‘‘marketing fees.’’

(2) If the Fund pays service fees other

than pursuant to a plan under rule 12b–

1, disclose the amount of the fee and

indicate that the fees are used to provide

services to shareholders.

(c) Multiple Class and Master-Feeder

Funds.

(1) Describe the main features of the

structure of the Multiple Class Fund or

Master-Feeder Fund.

(2) If more than one class of a

Multiple Class Fund is offered in the

prospectus, provide the information

required by paragraphs (a) and (b) for

each of those classes.

(3) If a Multiple Class Fund offers in

the prospectus shares that provide for

conversions or exchanges from one class

to another class, provide the

information required by paragraphs (a)

and (b) for both the shares offered and

the class into which the shares may be

converted or exchanged.

(4) If a Multiple Class Fund publicly

offers any other classes of its shares in

another prospectus, or if any publicly

offered feeder fund that invests in the

same Master Fund as the Fund is offered

in another prospectus, include the

following disclosure:

(i) That the Fund has other classes or

that other funds invest in the same

Master Fund (using the same names for

classes and feeder funds as elsewhere in

the prospectus);

(ii) That those classes or feeder funds

may have different sales fees (loads) and

other expenses, which may affect

performance;

(iii) A telephone number investors

may call to obtain more information

concerning the other classes or feeder

funds available to them through their

sales representative; and

(iv) That investors may obtain

information concerning those classes or

feeder funds from (as applicable) their

sales representative or any other person,
Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules 10933

such as the principal underwriter, a

broker-dealer or bank, which is offering

or making available to them the shares

offered in the prospectus.

Item 9. Financial Highlights Information

(a) Provide the following information

for the Fund, or for the Fund and its

subsidiaries, audited for at least the

latest 5 years and consolidated as

required in Regulation S–X (17 CFR

210).

Financial Highlights

The financial highlights table is

intended to help you understand the

Fund’s financial performance for the

past 10 years [or, if shorter, the period

of the Fund’s operations]. Certain

information reflects financial results for

a single Fund share. The total returns in

the table represent the rate an investor

would have earned [or lost] on an

investment in the Fund (assuming

reinvestment of all dividends and

distributions). This information has

been audited by llll, whose report,

along with the Fund’s financial

statements, are included in [the SAI or

annual report], which is available upon

request.

Net Asset Value, Beginning of Period

Income From Investment Operations

Net Investment Income

Net Gains or Losses on Securities (both

realized and unrealized)

Total From Investment Operations

Less Distributions

Dividends (from net investment income)

Distributions (from capital gains)

Returns of Capital

Total Distributions

Net Asset Value, End of Period

Total Return

Ratios/Supplemental Data

Net Assets, End of Period

Ratio of Expenses to Average Net Assets

Ratio of Net Income to Average Net

Assets

Portfolio Turnover Rate

Average Commission Rate Paid

Instructions.

1. General.

(a) Present the information in

comparative columnar form for each of

the last 10 fiscal years of the Fund (or

for such shorter period as the Fund has

been in operation), but only for periods

subsequent to the effective date of the

Fund’s registration statement. Also

present the information for the period

between the end of the latest fiscal year

and the date of the latest balance sheet

or statement of assets and liabilities.

When the period for which the Fund

provides financial highlights is less than

a full fiscal year, the ratios in the table

may be annualized. If applicable,

disclose that the ratios are annualized in

a note to the table.

(b) List per share amounts at least to

the nearest cent. If the offering price is

expressed in tenths of a cent or more,

then state the amounts in the table in

tenths of a cent. Present the information

using a consistent number of decimal

places.

(c) Include the narrative explanation

before the financial information. A Fund

may modify the explanation if the

explanation contains comparable

information to that shown.

2. Per Share Operating Performance.

(a) Derive net investment income data

by adding (deducting) the increase

(decrease) per share in undistributed net

investment income for the period to

(from) dividends from net investment

income per share for the period. The

increase (decrease) per share may be

derived by comparing the per share

figures obtained by dividing

undistributed net investment income at

the beginning and end of the period by

the number of shares outstanding on

those dates. Other methods of

computing net investment income may

be acceptable. Provide an explanation in

a note to the table of any other method

used to compute net investment income.

(b) The amount shown at the Net

Gains or Losses on Securities caption is

the balancing figure derived from the

other amounts in the statement. The

amount shown at this caption for a

share outstanding throughout the year

may not agree with the change in the

aggregate gains and losses in the

portfolio securities for the year because

of the timing of sales and repurchases of

Fund’s shares in relation to fluctuating

market values for the portfolio.

(c) For any distributions made from

sources other than net investment

income and capital gains, state the per

share amounts separately at the Returns

of Capital caption and note the nature

of the distributions.

3. Total Return.

(a) Assume an initial investment

made at the net asset value calculated

on the last business day before the first

day of each period shown.

(b) Do not reflect sales loads or

account fees in the initial investment,

but, if the Fund charges sales load or

account fees, note that they are not

reflected in total return.

(c) Reflect any sales load charged

upon reinvestment of dividends or

distributions.

(d) Assume a redemption at the price

calculated on the last business day of

each period shown.

(e) For a period less than a full fiscal

year, state the total return for the period

and disclose that total return is not

annualized in a note to the table.

4. Ratios/Supplemental Data.

(a) Calculate ‘‘average net assets’’

based on the value of the net assets

determined no less frequently than the

end of each month.

(b) Calculate the Ratio of Expenses to

Average Net Assets using the amount of

expenses shown in the Fund’s statement

of operations for the relevant fiscal

period, including increases resulting

from complying with paragraph 2(g) of

rule 6–07 of Regulation S–X and

reductions resulting from complying

with paragraphs 2(a) and (f) of rule 6–

07 regarding fee waivers and

reimbursements. If a change in the

methodology for determining the ratio

of expenses to average net assets results

from applying paragraph 2(g) of rule 6–

07, explain in a note that the ratio

reflects fees paid with brokerage

commissions and fees reduced in

connection with specific agreements

only for periods ending after September

1, 1995.

(c) A Fund that is a Money Market

Fund may omit the Portfolio Turnover

Rate.

(d) Calculate the Portfolio Turnover

Rate as follows:

(i) Divide the lesser of amounts of

purchases or sales of portfolio securities

for the fiscal year by the monthly

average of the value of the portfolio

securities owned by the Fund during the

fiscal year. Calculate the monthly

average by totaling the values of

portfolio securities as of the beginning

and end of the first month of the fiscal

year and as of the end of each of the

succeeding 11 months and dividing the

sum by 13.

(ii) Exclude from both the numerator

and the denominator amounts relating

to all securities, including options,

whose maturities or expiration dates at

the time of acquisition were one year or

less. Include all long-term securities,

including long-term U.S. Government

securities. Purchases include any cash

paid upon the conversion of one

portfolio security into another and the

cost of rights or warrants. Sales include

net proceeds of the sale of rights and

warrants and net proceeds of portfolio

securities that have been called or for

which payment has been made through

redemption or maturity.

(iii) If the Fund acquired the assets of

another investment company or of a

personal holding company in exchange

for its own shares during the fiscal year
10934 Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules

in a purchase-of-assets transaction,

exclude the value of securities acquired

from purchases and securities sold from

sales to realign the Fund’s portfolio.

Adjust the denominator of the portfolio

turnover computation to reflect these

excluded purchases and sales and

disclose them in a footnote.

(iv) Include in purchases and sales

any short sales that the Fund intends to

maintain for more than one year and put

and call options with expiration dates

more than one year from the date of

acquisition. Include proceeds from a

short sale in the value of the portfolio

securities sold during the period;

include the cost of covering a short sale

in the value of portfolio securities

purchased during the period. Include

premiums paid to purchase options in

the value of portfolio securities

purchased during the reporting period;

include premiums received from the

sale of options in the value of the

portfolio securities sold during the

period.

5. Average Commission Rate Paid.

(a) A Fund that invests not more than

10% of the value of its average net

assets in equity securities on which

commissions are charged on trades may

omit Average Commission Rate Paid.

Calculate average net assets by totaling

the amounts invested at the beginning

and end of the first quarter of the fiscal

year and at the end of each succeeding

quarter and dividing the sum by 5.

(b) Calculate the average commission

rate paid by dividing the total dollar

amount of commissions paid during the

fiscal year by the total number of shares

purchased and sold during the fiscal

year for which commissions were

charged. Carry the amount of the

average commission rate paid to no

fewer than four decimal places. Convert

commissions paid in foreign currency

into U.S. dollars using consistently

either the prevailing exchange rate on

the date of the transaction or average

exchange rate over the period the

transactions took place. Do not include

markups, mark-downs, or spreads paid

on shares traded on a principal basis

unless they are disclosed on

confirmations prepared in accordance

with rule 10b–10 under the Securities

Exchange Act (17 CFR 240.10b–10).

(b) A Fund may incorporate by

reference the Financial Highlights

Information from a report to

shareholders under rule 30d–1 into the

prospectus in response to this Item if

the Fund delivers the shareholder report

with the prospectus, or if the report has

been previously delivered (e.g., to a

current shareholder), the Fund includes

the statement required by Item 1(b)(3).

PART B INFORMATION REQUIRED

IN A STATEMENT OF ADDITIONAL

INFORMATION

Item 10. Cover Page and Table of

Contents

(a) Front Cover Page. Include the

following information on the outside

front cover page of the SAI:

(1) The Fund’s name and, if the Fund

is a Series, also provide the Registrant’s

name.

(2) A statement or statements:

(i) That the SAI is not a prospectus;

(ii) That the SAI should be read in

conjunction with the prospectus;

(iii) How the prospectus may be

obtained; and

(iv) Whether and from where

information is incorporated by reference

into the SAI, as permitted by General

Instruction D.

Instruction. Any information

incorporated by reference into the SAI

must be delivered with the SAI unless

the information has been previously

delivered in a shareholder report (e.g.,

to a current shareholder), and the Fund

states that the shareholder report is

available, without charge, upon request.

Provide a toll-free (or collect) telephone

number to call to request the report.

(3) The date of the SAI and of the

prospectus to which the SAI relates.

(b) Table of Contents. Include under

appropriate captions (and subcaptions)

a list of the contents of the SAI and,

when useful, provide cross-references to

related disclosure in the prospectus.

Item 11. Fund History

(a) Provide the date and form of

organization of the Fund and the name

of the state or other jurisdiction where

the Fund is organized.

(b) If the Fund has engaged in a

business other than that of an

investment company during the past 5

years, state the nature of the other

business and give the approximate date

on which the Fund commenced

business as an investment company. If

the Fund’s name was changed during

that period, state its former name and

the approximate date on which it was

changed. Briefly describe the nature and

results of any change in the Fund’s

business or name that occurred in

connection with any bankruptcy,

receivership, or similar proceeding, or

any other material reorganization,

readjustment or succession.

Item 12. Description of the Fund and Its

Investments and Risks

(a) Classification. State that the Fund

is an open-end, management investment

company and indicate, if applicable,

that the Fund is diversified.

(b) Investment Strategies and Risks.

Describe any strategies, including a

strategy to invest in a particular type of

security, used by the Fund’s investment

adviser that are not principal strategies

and the risks of those strategies.

(c) Fund Policies.

(1) Describe the Fund’s policy with

respect to each of the following:

(i) Issuing senior securities;

(ii) Borrowing money, including the

purpose for which the proceeds will be

used;

(iii) Underwriting securities of other

issuers;

(iv) Concentrating investments in a

particular industry or group of

industries;

(v) Purchasing or selling real estate or

commodities;

(vi) Making loans; and

(vii) Any other policy that the Fund

deems fundamental or that may not be

changed without shareholder approval,

including, if applicable, the Fund’s

investment objective.

Instruction. If the Fund reserves

freedom of action with respect to any

practice specified in paragraph (c)(1),

state the maximum percentage of assets

to be devoted to the practice and

disclose the risks of the practice.

(2) State whether shareholder

approval is necessary to change any

policy specified in paragraph (c)(1). If

so, describe the vote required to obtain

this approval.

(d) Temporary Defensive Position.

Disclose, if applicable, the types of

investments a Fund may make while

assuming a temporary defensive

position.

(e) Portfolio Turnover.

(1) If a Fund expects its portfolio

turnover rate to be less than 100% for

the coming year, disclose the

anticipated rate of portfolio turnover for

the coming year.

(2) Explain any significant variation

in the Fund’s portfolio turnover rates

over the most recent two fiscal years or

any anticipated variation in the

portfolio turnover rate from that

reported for the last fiscal year in

response to Item 9.

Instruction. This paragraph does not

apply to a Money Market Fund.

Item 13. Management of the Fund

(a) Board of Directors. Briefly describe

the responsibilities of the board of

directors with respect to the Fund’s

management.

Instruction. A Fund may respond to

this paragraph by providing a general

statement as to the responsibilities of

the board of directors with respect to the

Fund’s management under the

applicable laws where the Fund is

organized.
Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules 10935

(b) Management Information. Provide

the information required by the

following table for each director and

officer of the Fund, and, if the Fund has

an advisory board, for each member of

the board. Explain in a footnote to the

table any family relationship between

persons listed.

(1)

Name, Address, and

Age

(2)

Position(s)

Held with

Fund

(3)

Principal Occupation(s)

During Past 5

Years

Instructions.

1. For purposes of this paragraph, the

term ‘‘officer’’ means the president,

vice-president, secretary, treasurer,

controller, and any other officers who

perform policy-making functions for the

Fund. The term ‘‘family relationship’’

means any relationship by blood,

marriage, or adoption, not more remote

than first cousin.

2. State the principal business of any

corporation or other organization listed

under column (3) unless the principal

business is implicit in its name.

3. Identify members of any executive

or investment committee, and provide a

concise statement of the duties and

functions of each committee.

4. Indicate with an asterisk the

directors who are interested persons.

(c) For each individual listed in

column (1) of the table required by

paragraph (b), describe any positions

held with affiliated persons or principal

underwriters of the Fund.

Instruction. When an individual holds

the same position(s) with two or more

registered investment companies that

are part of a ‘‘Fund Complex’’ as that

term is defined in Item 22(a) of

Schedule 14A under the Securities

Exchange Act (17 CFR 240.14a-101), the

Fund may, rather than listing each

investment company, identify the Fund

Complex and provide the number of

positions held.

(d) Compensation. For all directors of

the Fund and for all members of any

advisory board who receive

compensation from the Fund, and for

each of the three highest paid executive

officers or any affiliated person of the

Fund who received aggregate

compensation from the Fund for the

most recently completed fiscal year

exceeding $60,000 (‘‘Compensated

Persons’’):

(1) Provide the information required

by the following table:

COMPENSATION TABLE

(1)

Name of Person, Position

(2)

Aggregate Compensation

From Fund

(3)

Pension or Retirement

Benefits Accrued As Part

of Fund Expenses

(4)

Estimated Annual Benefits

Upon Retirement

(5)

Total Compensation From

Fund and Fund Complex

Paid to Directors

Instructions.

1. For column (1), indicate, as

necessary, the capacity in which the

remuneration is received. For

Compensated Persons that are directors

of the Fund, compensation is amounts

received for service as a director.

2. If the Fund has not completed its

first full year since its organization,

provide the information for the current

fiscal year, estimating future payments

that would be made under an existing

agreement or understanding. Disclose in

a footnote to the Compensation Table

the period for which the information is

given.

3. Include in column (2) amounts

deferred at the election of the

Compensated Person, whether under a

plan established under section 401(k) of

the Internal Revenue Code (I.R.C.

401(k)) or otherwise, for the fiscal year

in which earned. Disclose in a footnote

to the Compensation Table the total

amount of deferred compensation

(including interest) payable to or

accrued for any Compensated Person.

4. Include in columns (3) and (4) all

pension or retirement benefits proposed

to be paid under any existing plan in the

event of retirement at normal retirement

date, directly or indirectly, by the Fund,

any of its subsidiaries, or other

investment companies in the Fund

Complex. Omit column (4) when

retirement benefits are not

determinable.

5. For any defined benefit or actuarial

plan under which benefits are

determined primarily by final

compensation (or average final

compensation) and years of service,

provide the information required in

column (4) in a separate table showing

estimated annual benefits payable upon

retirement (including amounts

attributable to any defined benefit

supplementary or excess pension award

plans) in specified compensation and

years of service classifications. Also

provide the estimated credited years of

service for each Compensated Person.

6. Include in column (5) only

aggregate compensation paid to a

director for service on the board and all

other boards of investment companies

in a Fund Complex specifying the

number of any other investment

companies.

(2) Describe briefly the material

provisions of any pension, retirement,

or other plan or any arrangement, other

than fee arrangements disclosed in

paragraph (d)(1), under which the

Compensated Persons are or may be

compensated for services provided,

including amounts paid, if any, to the

Compensated Person under these

arrangements during the most recently

completed fiscal year. Specifically

include the criteria used to determine

amounts payable under the plan, the

length of service or vesting period

required by the plan, the retirement age

or other event that gives rise to payment

under the plan, and whether the

payment of benefits is secured or

funded by the Fund.

(e) Sales Loads. Disclose any

arrangements that result in breakpoints

in, or elimination of, sales loads for

directors and other affiliated persons of

the Fund. Identify each class of

individuals and transactions to which

the arrangements apply and state each

different breakpoint as a percentage of

both the offering price and the net

amount invested of the Fund’s shares.

Explain, as applicable, the reasons for

the difference in the price at which

securities are offered generally to the

public, and the prices at which

securities are offered to directors and

other affiliated persons of the Fund.

Item 14. Control Persons and Principal

Holders of Securities

Provide the following information as

of a specified date no more than 30 days

prior to the date of filing the registration

statement or an amendment.

(a) Control Persons. State the name

and address of each person who

controls the Fund and explain the effect

of that control on the voting rights of

other security holders. For each control

person, state the percentage of the

Fund’s voting securities owned or any

other basis of control. If the control

person is a company, give the

jurisdiction under the laws of which it
10936 Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules

is organized. List all parents of the

control person.

Instruction. For the purposes of this

paragraph, ‘‘control’’ means (i) the

beneficial ownership, either directly or

through one or more controlled

companies, of more than 25% of the

voting securities of a company; (ii) the

acknowledgement or assertion by either

the controlled or controlling party of the

existence of control; or (iii) an

adjudication under section 2(a)(9),

which has become final, that control

exists.

(b) Principal Holders. State the name,

address, and percentage of ownership of

each person who owns of record or is

known by the Fund to own of record or

beneficially 5% or more of any class of

the Fund’s outstanding equity

securities.

Instructions.

1. Calculate the percentages based on

the amount of securities outstanding.

2. If securities are being registered

under or in connection with a plan of

acquisition, reorganization,

readjustment or succession, indicate, as

far as practicable, the ownership that

would result from consummation of the

plan based on present holdings and

commitments.

3. Indicate whether the securities are

owned of record, beneficially, or both.

Show the respective percentage owned

in each manner.

(c) Management Ownership. State the

percentage of the Fund’s equity

securities owned by all officers,

directors, and members of any advisory

board of the Fund as a group. If the

amount owned by directors and officers

as a group is less than 1% of the class,

provide a statement to that effect.

Item 15. Investment Advisory and Other

Services

(a) Investment Advisers. Disclose the

following information with respect to

each investment adviser:

(1) The name of any person who

controls the adviser, the basis of the

person’s control, and the general nature

of the person’s business. Also disclose,

if material, the business history of any

organization that controls the adviser.

(2) The name of any affiliated person

of the Fund, who also is an affiliated

person of the adviser and a list of all

capacities in which the person is

affiliated with the Fund and with the

adviser.

Instruction. If an affiliated person of

the Fund alone or together with others

controls the adviser, state that fact. It is

not necessary to provide the amount or

percentage of the outstanding voting

securities owned by the controlling

person.

(3) The method of calculating the

advisory fee payable by the Fund

including:

(i) The total dollar amounts the Fund

paid to the adviser under the investment

advisory contract for the last three fiscal

years;

(ii) If applicable, any credits that

reduced the advisory fee for any of the

last three fiscal years; and

(iii) Any expense limitation provision.

Instructions.

1. If the advisory fee payable by the

Fund varies depending on the Fund’s

investment performance in relation to a

standard, set forth the standard along

with a fee schedule in tabular form. The

Fund may include examples showing

the fees the adviser would earn at

various levels of performance as long as

the examples include calculations

showing the maximum and minimum

fee percentages that could be earned

under the contract.

2. State separately each type of credit

or offset.

3. When a Fund is subject to more

than one expense limitation provision,

describe only the most restrictive

provision.

4. For a Series or Multiple Class Fund,

describe the methods of allocation and

payment of advisory fees for each Series

or class.

(b) Principal Underwriter. State the

name and principal business address of

any principal underwriter for the Fund.

Disclose, if applicable, that an affiliated

person of the Fund is an affiliated

person of the principal underwriter and

identify the affiliated person.

(c) Services Provided by the

Investment Adviser and Fund Expenses

Paid by Third Parties.

(1) Describe all services performed for

or on behalf of the Fund supplied or

paid for wholly or in substantial part by

the investment adviser.

(2) Describe all fees, expenses, and

costs of the Fund that are to be paid by

persons other than the investment

adviser or the Fund, and identify those

persons.

(d) Service Agreements. Summarize

the substantive provisions of any other

management-related service contract

that may be of interest to a purchaser of

the Fund’s securities, under which

services are provided to the Fund,

indicating the parties to the contract,

and the total dollars paid and by whom

for the past three years.

Instructions.

1. The term ‘‘management-related

service contract’’ includes any contract

with the Fund to keep, prepare, or file

accounts, books, records, or other

documents required under federal or

state law, or to provide any similar

services with respect to the daily

administration of the Fund, but does not

include the following:

(a) Any contract with the Fund to

provide investment advice;

(b) Any agreement with the Fund to

perform as custodian, transfer agent, or

dividend-paying agent for the Fund; and

(c) Any contract with the Fund for

outside legal or auditing services, or

contract for personal employment

entered into with the Fund in the

ordinary course of business.

2. No information need be given in

response to this paragraph with respect

to the service of mailing proxies or

periodic reports to the Fund’s

shareholders.

3. In summarizing the substantive

provisions of any management-related

service contract, include the following:

(a) The name of the person providing

the service;

(b) The direct or indirect

relationships, if any, of the person with

the Fund, its investment adviser or its

principal underwriter; and

(c) The nature of the services

provided, and the basis of the

compensation paid for the services for

the last three fiscal years.

(e) Other Investment Advice. If any

person (other than a director, officer,

member of an advisory board, employee,

or investment adviser of the Fund),

through any understanding, whether

formal or informal, regularly advises the

Fund or the Fund’s investment adviser

with respect to the Fund’s investing in,

purchasing, or selling securities or other

property, or has the authority to

determine what securities or other

property should be purchased or sold by

the Fund, and receives direct or indirect

remuneration, provide the following

information:

(1) The person’s name;

(2) A description of the nature of the

arrangement, and the advice or

information provided; and

(3) Any remuneration (including, for

example, participation, directly or

indirectly, in commissions or other

compensation paid in connection with

transactions in the Fund’s portfolio

securities) paid for the advice or

information, and a statement as to how

the remuneration was paid and by

whom it was paid for the last three

fiscal years.

Instruction. Do not include

information for the following:

(a) Persons who advised the

investment adviser or the Fund solely

through uniform publications

distributed to subscribers;

(b) Persons who provided the

investment adviser or the Fund with

only statistical and other factual
Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules 10937

information, advice about economic

factors and trends, or advice as to

occasional transactions in specific

securities, but without generally

advising about the purchase or sale of

securities by the Fund;

(c) A company that is excluded from

the definition of ‘‘investment adviser’’

of an investment company under

section 2(a)(20)(iii) (15 U.S.C. 80a–

2(a)(20)(iii));

(d) Any person the character and

amount of whose compensation for

these services must be approved by a

court; or

(e) Other persons as the Commission

has by rule or order determined not to

be an ‘‘investment adviser’’ of an

investment company.

(f) Dealer Reallowances. Disclose any

front-end sales load reallowed to dealers

as a percentage of the offering price of

the Fund’s shares.

(g) Rule 12b–1 Plans. If the Fund has

adopted a plan under rule 12b–1,

describe the material aspects of the

plan, and any agreements relating to the

implementation of the plan, including:

(1) A list of the principal types of

activities for which payments are or will

be made, including the dollar amount

and the manner in which amounts paid

by the Fund under the plan during the

last fiscal year were spent on:

(i) Advertising;

(ii) Printing and mailing of

prospectuses to other than current

shareholders;

(iii) Compensation to underwriters;

(iv) Compensation to broker-dealers;

(v) Compensation to sales personnel;

(vi) Interest, carrying, or other

financing charges; and

(vii) Other (specify).

(2) The relationship between amounts

paid to the distributor and the expenses

it incurs (e.g., whether the plan

reimburses the distributor only for

expenses incurred or compensates the

distributor regardless of its expenses).

(3) The amount of any unreimbursed

expenses incurred under the plan in a

previous year and carried over to future

years, in dollars and as a percentage of

the Fund’s net assets on the last day of

the previous year.

(4) Whether the Fund participates in

any joint distribution activities with

another series or investment company.

If so, disclose, if applicable, that fees

paid under the Fund’s rule 12b–1 plan

may be used to finance the distribution

of the shares of another series or

investment company, and state the

method of allocating distribution costs

(e.g., relative net asset size, number of

shareholder accounts).

(5) Whether any of the following

persons had a direct or indirect

financial interest in the operation of the

plan or related agreements:

(i) Any interested person of the Fund;

or

(ii) Any director of the Fund who is

not an interested person of the Fund.

(6) The anticipated benefits to the

Fund that may result from the plan.

(h) Other Service Providers.

(1) Unless disclosed in response to

paragraph (d), identify any person who

provides significant administrative or

business affairs management services for

the Fund (e.g., an ‘‘Administrator’’),

describe the services provided, and the

compensation paid for the services.

(2) State the name and principal

business address of the Fund’s transfer

agent and the dividend paying agent.

(3) State the name and principal

business address of the Fund’s

custodian and independent public

accountant and describe generally the

services performed by each. If the

Fund’s portfolio securities are held by a

person other than a commercial bank,

trust company, or depository registered

with the Commission as custodian, state

the nature of the business of that person

or persons.

(4) If an affiliated person of the Fund,

or an affiliated person of the affiliated

person, acts as custodian, transfer agent,

or dividend-paying agent for the Fund,

describe the services the person

performs and the basis for

remuneration.

Item 16. Brokerage Allocation and Other

Practices

(a) Brokerage Transactions. Describe

how transactions in portfolio securities

are effected, including a general

statement about brokerage commissions

and markups on principal transactions

and the aggregate amount of any

brokerage commissions paid by the

Fund during the three most recent fiscal

years. If, during either of the two years

preceding the Fund’s most recent fiscal

year, the aggregate dollar amount of

brokerage commissions paid by the

Fund differed materially from the

amount paid during the most recent

fiscal year, state the reason(s) for the

difference(s).

(b) Commissions.

(1) Identify, disclose the relationship,

and state the aggregate dollar amount of

brokerage commissions paid by the

Fund during the three most recent fiscal

years to any broker:

(i) That is an affiliated person of the

Fund or an affiliated person of that

person; or

(ii) An affiliated person of which is an

affiliated person of the Fund, its

investment adviser, or principal

underwriter.

(2) For each broker identified in

response to paragraph (b)(1), state:

(i) The percentage of the Fund’s

aggregate brokerage commissions paid

to the broker during the most recent

fiscal year; and

(ii) The percentage of the Fund’s

aggregate dollar amount of transactions

involving the payment of commissions

effected through the broker during the

most recent fiscal year.

(3) State the reasons for any material

difference in the percentage of brokerage

commissions paid to, and the

percentage of transactions effected

through, a broker disclosed in response

to paragraph (b)(1).

(c) Brokerage Selection. Describe how

the Fund will select brokers to effect

securities transactions for the Fund and

how the Fund will evaluate the overall

reasonableness of brokerage

commissions paid, including the factors

the Fund will consider in making these

determinations.

Instructions.

1. If the Fund will consider the

receipt of products or services other

than brokerage or research services in

selecting brokers, specify those products

and services.

2. If the Fund will consider the

receipt of research services in selecting

brokers, identify the nature of those

research services.

3. State whether persons acting on the

Fund’s behalf are authorized to pay a

broker a higher brokerage commission

than another broker might have charged

for the same transaction in recognition

of the value of (a) brokerage or (b)

research services provided by the

broker.

4. If applicable, explain that research

services provided by brokers through

whom the Fund effects securities

transactions may be used by the Fund’s

investment adviser in servicing all of its

accounts and that not all of these

services may be used by the adviser in

connection with the Fund. If other

policies or practices are applicable to

the Fund with respect to the allocation

of research services provided by

brokers, explain those policies and

practices.

(d) Directed Brokerage. If, during the

last fiscal year, the Fund or its

investment adviser, through an

agreement or understanding with a

broker, or otherwise through an internal

allocation procedure, directed the

Fund’s brokerage transactions to a

broker because of research services

provided, state the amount of the

transactions and related commissions.

(e) Regular Broker-Dealers. If the

Fund has acquired during its most

recent fiscal year or during the period of
10938 Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules

time since organization, whichever is

shorter, securities of its regular brokers

or dealers as defined in rule 10b-1 (17

CFR 270.10b-1) or of their parents,

identify those brokers or dealers and

state the value of the Fund’s aggregate

holdings of the securities of each issuer

as of the close of the Fund’s most recent

fiscal year.

Instruction. The Fund need only

disclose information about an issuer

that derived more than 15% of its gross

revenues from the business of a broker,

a dealer, an underwriter, or an

investment adviser during its most

recent fiscal year.

Item 17. Capital Stock and Other

Securities

(a) Capital Stock. For each class of

capital stock of the Fund, provide:

(1) The title of each class; and

(2) A full discussion of the following

provisions or characteristics of each

class, if applicable:

(i) Dividend rights;

(ii) Voting rights (including whether

the rights of shareholders can be

modified by other than a majority vote);

(iii) Liquidation rights;

(iv) Preemptive rights;

(v) Conversion rights;

(vi) Redemption provisions;

(vii) Sinking fund provisions; and

(viii) Liability to further calls or to

assessment by the Fund.

Instructions.

1. If any class described in response

to this paragraph possesses cumulative

voting rights, disclose the existence of

those rights and explain the operation of

cumulative voting.

2. If the rights evidenced by any class

described in response to this paragraph

are materially limited or qualified by the

rights of any other class, explain those

limitations or qualifications.

(b) Other Securities. Describe the

rights of any authorized securities of the

Fund other than capital stock. If the

securities are subscription warrants or

rights, state the title and amount of

securities called for, and the period

during which and the prices at which

the warrants or rights are exercisable.

Item 18. Purchase, Redemption, and

Pricing of Shares

(a) Purchase of Shares. Describe how

the Fund’s shares are offered to the

public. Include any special purchase

plans or methods not described in the

prospectus or elsewhere in the SAI,

including letters of intent, accumulation

plans, withdrawal plans, exchange

privileges, and services in connection

with retirement plans.

(b) Fund Reorganizations. Disclose

any arrangements that result in

breakpoints in, or elimination of, sales

loads in connection with the terms of a

merger, acquisition, or exchange offer

made under a plan of reorganization.

Identify each class of individuals to

which the arrangements apply and state

each different sales load available as a

percentage of both the offering price and

the net amount invested.

(c) Offering Price. Describe the

method followed or to be followed by

the Fund in determining the total

offering price at which its shares may be

offered to the public and the method(s)

used to value the Fund’s assets.

Instructions.

1. Describe the valuation procedure

the Fund uses in determining the net

asset value and public offering price of

its shares.

2. Explain how the excess of the

offering price over the net amount

invested is distributed among the

Fund’s principal underwriters or others

and the basis for determining the total

offering price.

3. Explain the reasons for any

difference in the price at which

securities are offered generally to the

public, and the prices at which

securities are offered for any class of

transactions or to any class of

individuals.

4. Unless provided as a continuation

of the balance sheet in response to Item

22, include a specimen price-make-up

sheet showing how the Fund calculates

the total offering price per unit. Base the

calculation on the value of the Fund’s

portfolio securities and other assets and

its outstanding securities as of the date

of the balance sheet filed by the Fund.

(d) Redemption in Kind. If the Fund

has received an order of exemption from

section 18(f) or has filed a notice of

election under rule 18f-1 that has not

been withdrawn, describe the nature,

extent, and effect of the exemptive relief

or notice unless the information has

been disclosed in the prospectus.

Item 19. Taxation of the Fund

(a) If applicable, state that the Fund is

qualified or intends to qualify under

Subchapter M of the Internal Revenue

Code.

(b) Disclose any special or unusual tax

aspects of the Fund, such as taxation

resulting from foreign investment or

from status as a personal holding

company, or any tax loss carry-forward

to which the Fund may be entitled.

Item 20. Underwriters

(a) Distribution of Securities. For each

principal underwriter distributing

securities of the Fund, state:

(1) The nature of the obligation to

distribute the Fund’s securities;

(2) Whether the offering is

continuous; and

(3) The aggregate dollar amount of

underwriting commissions and the

amount retained by the principal

underwriter for each of the last three

fiscal years.

(b) Compensation. Provide the

information required by the following

table with respect to all commissions

and other compensation received by

each principal underwriter, who is an

affiliated person of the Fund or an

affiliated person of that affiliated

person, directly or indirectly, from the

Fund during the Fund’s most recent

fiscal year:

(1)

Name of Principal Underwriter

(2)

Net Underwriting Discounts and Commissions

(3)

Compensation on Redemptions and Repurchases

(4)

Brokerage

Commissions

(5)

Other

Compensation

Instruction. Disclose in a footnote to

the table the type of services rendered

in consideration for the compensation

listed under column (5).

(c) Other Payments. With respect to

any payments made by the Fund to an

underwriter or dealer in the Fund’s

shares during the last fiscal year,

disclose the name and address of the

underwriter or dealer, the amount paid

and basis for determining that amount,

the circumstances surrounding the

payments, and the consideration

received by the Fund. Do not include

information about:

(1) Payments made through deduction

from the offering price at the time of

sale of securities issued by the Fund;

(2) Payments representing the

purchase price of portfolio securities

acquired by the Fund;

(3) Commissions on any purchase or

sale of portfolio securities by the Fund;

or

(4) Payments for investment advisory

services under an investment advisory

contract.
Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules 10939

Instructions.

1. Do not include in response to this

paragraph information provided in

response to paragraph (b) or with

respect to service payments under Item

8(b). Do not include any payment for a

service excluded by Instructions 1 and

2 to Item 15(d) or by Instruction 2 to

Item 30.

2. If the payments were made under

an arrangement or policy applicable to

dealers generally, describe only the

arrangement or policy.

Item 21. Calculation of Performance

Data

(a) Money Market Funds. If a Money

Market Fund advertises a yield

quotation(s), disclose, as applicable, the

yield quotation(s) calculated according

to paragraphs (a)(1)–(4). Use the same

calculations for a yield quotation(s)

included in the prospectus.

(1) Yield Quotation. Based on the 7

days ended on the date of the most

recent balance sheet included in the

registration statement, calculate the

Fund’s yield by determining the net

change, exclusive of capital changes, in

the value of a hypothetical pre-existing

account having a balance of one share

at the beginning of the period,

subtracting a hypothetical charge

reflecting deductions from shareholder

accounts, and dividing the difference by

the value of the account at the beginning

of the base period to obtain the base

period return, and then multiplying the

base period return by (365/7) with the

resulting yield figure carried to at least

the nearest hundredth of one percent.

(2) Effective Yield Quotation. Based

on the 7 days ended on the date of the

most recent balance sheet included in

the registration statement, calculate the

Fund’s effective yield, carried to at least

the nearest hundredth of one percent, by

determining the net change, exclusive of

capital changes, in the value of a

hypothetical pre-existing account

having a balance of one share at the

beginning of the period, subtracting a

hypothetical charge reflecting

deductions from shareholder accounts,

and dividing the difference by the value

of the account at the beginning of the

base period to obtain the base period

return, and then compounding the base

period return by adding 1, raising the

sum to a power equal to 365 divided by

7, and subtracting 1 from the result,

according to the following formula:

EFFECTIVE YIELD=[(BASE PERIOD

RETURN+1)365⁄7]¥1.

(3) Tax Equivalent Current Yield

Quotation. Calculate the Fund’s tax

equivalent current yield by dividing that

portion of the Fund’s yield (as

calculated under paragraph (a)(1)) that

is tax-exempt by 1 minus a stated

income tax rate and adding the quotient

to that portion, if any, of the Fund’s

yield that is not tax-exempt.

(4) Tax Equivalent Effective Yield

Quotation. Calculate the Fund’s tax

equivalent effective yield by dividing

that portion of the Fund’s effective yield

(as calculated under paragraph (a)(2))

that is tax-exempt by 1 minus a stated

income tax rate and adding the quotient

to that portion, if any, of the Fund’s

effective yield that is not tax-exempt.

(5) State:

(i) The length of and the last day in

the base period used in calculating the

quotation(s);

(ii) A description of the method(s) by

which the yield quotation(s) is

calculated; and

(iii) The income tax rate used in the

calculation, if applicable.

Instructions.

1. When calculating yield or effective

yield quotations, the calculation of net

change in account value must include:

(a) The value of additional shares

purchased with dividends from the

original share and dividends declared

on both the original shares and

additional shares; and

(b) All fees, other than nonrecurring

account or sales charges, that are

charged to all shareholder accounts in

proportion to the length of the base

period. For any account fees that vary

with the size of the account, assume an

account size equal to the Fund’s mean

(or median) account size.

2. Exclude realized gains and losses

from the sale of securities and

unrealized appreciation and

depreciation from the calculation of

yield and effective yield.

3. Disclose the amount or specific rate

of any nonrecurring account or sales

charges not included in the calculation

of the yield.

4. If the Fund holds itself out as

distributing income that is exempt from

federal, state, or local income taxation,

in calculating yield and effective yield

(but not tax equivalent yield or tax

equivalent effective yield), reduce the

yield quoted by the effect of any income

taxes on the shareholder receiving

dividends, using the maximum rate for

individual income taxation. For

example, if the Fund holds itself out as

distributing income exempt from federal

taxation and the income taxes of State

A, but invests in some securities of State

B, it must reduce its yield by the effect

of state income taxes that must be paid

by the residents of State A on that

portion of the income attributable to the

securities of State B.

(b) Other Funds. If the Fund

advertises performance data, disclose, as

applicable, the performance information

calculated according to paragraphs

(b)(1)–(4). Use the same calculations for

performance information included in

the prospectus.

(1) Average Annual Total Return

Quotation. For the 1, 5, and 10 year

periods ended on the date of the most

recent balance sheet included in the

registration statement (or for the periods

the Fund has been in operation),

calculate the Fund’s average annual

total return by finding the average

annual compounded rates of return over

the 1, 5, and 10 year periods (or for the

periods of the Fund’s operations) that

would equate the initial amount

invested to the ending redeemable

value, according to the following

formula:

P(1+T)n=ERV

Where:

P=a hypothetical initial payment of

$1,000.

T=average annual total return.

n=number of years.

ERV=ending redeemable value of a

hypothetical $1,000 payment made

at the beginning of the 1, 5, or 10

year periods at the end of the 1, 5,

or 10 year periods (or fractional

portion).

Instructions.

1. Assume the maximum sales load

(or other charges deducted from

payments) is deducted from the initial

$1,000 payment. If shareholders are

charged a deferred sales load, assume

the maximum deferred sales load is

deducted at the times, in the amounts,

and under the terms disclosed in the

prospectus.

2. Assume all dividends and

distributions by the Fund are reinvested

at the price stated in the prospectus

(including any sales load charged upon

reinvestment of dividends) on the

reinvestment dates during the period.

3. Include all recurring fees that are

charged to all shareholder accounts. For

any account fees that vary with the size

of the account, assume an account size

equal to the Fund’s mean (or median)

account size. Reflect, as appropriate,

any recurring fees charged to

shareholder accounts that are paid other

than by redemption of the Fund’s

shares.

4. Determine the ending redeemable

value by assuming a complete

redemption at the end of the 1, 5, or 10

year periods and the deduction of all

nonrecurring charges deducted at the

end of each period.

5. State the total return quotation to

the nearest hundredth of one percent.
10940 Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules

6. Total return information in the

prospectus need only be current to the

end of the Fund’s most recent fiscal

year.

(2) Yield Quotation. Based on a 30-

day (or one month) period ended on the

date of the most recent balance sheet

included in the registration statement,

calculate the Fund’s yield by dividing

the net investment income per share

earned during the period by the

maximum offering price per share on

the last day of the period, according to

the following formula:

YIELD

a b

cd = − + 



 



 − 















2 1 1

6

Where:

a=dividends and interest earned

during the period.

b=expenses accrued for the period

(net of reimbursements).

c=the average daily number of shares

outstanding during the period that were

entitled to receive dividends.

d=the maximum offering price per

share on the last day of the period.

Instructions.

1. To calculate interest earned on debt

obligations for purposes of ‘‘a’’ above:

(a) Calculate the yield to maturity of

each obligation held by the Fund based

on the market value of the obligation

(including actual accrued interest) at the

close of business on the last business

day of each month or, with respect to

obligations purchased during the

month, the purchase price (plus actual

accrued interest). The maturity of an

obligation with a call provision(s) is the

next call date on which the obligation

reasonably may be expected to be

called, or if none, the maturity date.

(b) Divide the yield to maturity by 360

and multiply the quotient by the market

value of the obligation (including actual

accrued interest) to determine the

interest income on the obligation for

each day of the subsequent month that

the obligation is in the portfolio.

Assume that each month has 30 days.

(c) Total the interest earned on all

debt obligations and all dividends

accrued on all equity securities during

the 30-day (or one month) period.

Although the period for calculating

interest earned is based on calendar

months, a 30-day yield may be

calculated by aggregating the daily

interest on the portfolio from portions of

2 months. In addition a Fund may

recalculate daily interest income on the

portfolio more than once a month.

(d) For a tax-exempt obligation issued

without original issue discount and

having a current market discount, use

the coupon rate of interest in lieu of the

yield to maturity. For a tax-exempt

obligation with original issue discount

in which the discount is based on the

current market value and exceeds the

then-remaining portion of original issue

discount (market discount), base the

yield to maturity on the imputed rate of

the original issue discount calculation.

For a tax-exempt obligation with

original issue discount, where the

discount based on the current market

value is less than the then-remaining

portion of original issue discount

(market premium), base the yield to

maturity on the market value.

2. For discount and premium on

mortgage or other receivables-backed

obligations that are expected to be

subject to monthly payments of

principal and interest (‘‘paydowns’’):

(a) Account for gain or loss

attributable to actual monthly paydowns

as an increase or decrease to interest

income during the period; and

(b) The Fund may elect:

(i) To amortize the discount and

premium on the remaining securities,

based on the cost of the securities, to the

weighted average maturity date, if the

information is available, or to the

remaining term of the securities, if the

weighted average maturity date is not

available; or

(ii) Not to amortize the discount or

premium on the remaining securities.

3. Solely for the purpose of

calculating yield, recognize dividend

income by accruing 1/360 of the stated

dividend rate of the security each day

that the security is in the portfolio.

4. Do not use equalization accounting

in calculating yield.

5. Include expenses accrued under a

plan adopted under rule 12b-1 in the

expenses accrued for the period.

Reimbursement accrued under the plan

may reduce the accrued expenses, but

only to the extent the reimbursement

does not exceed expenses accrued for

the period.

6. Include in the expenses accrued for

the period all recurring fees that are

charged to all shareholder accounts in

proportion to the length of the base

period. For any account fees that vary

with the size of the account, assume an

account size equal to the Fund’s mean

(or median) account size.

7. If a broker-dealer or an affiliate of

the broker-dealer (as defined in rule 1–

02(b) of Regulation S–X (17 CFR 210.1–

02(b)) has, in connection with directing

the Fund’s brokerage transactions to the

broker-dealer, provided, agreed to

provide, paid for, or agreed to pay for,

in whole or in part, services provided to

the Fund (other than brokerage and

research services as those terms are used

in section 28(e) of the Securities

Exchange Act (15 U.S.C. 78bb(e)), add to

expenses accrued for the period an

estimate of additional amounts that

would have been accrued for the period

if the Fund had paid for the services

directly in an arm’s length transaction.

8. Undeclared earned income,

calculated in accordance with generally

accepted accounting principles, may be

subtracted from the maximum offering

price. Undeclared earned income is the

net investment income that, at the end

of the base period, has not been

declared as a dividend, but is

reasonably expected to be and is

declared as a dividend shortly

thereafter.

9. Disclose the amount or specific rate

of any nonrecurring account or sales

charges.

10. If a Fund imposes, in connection

with sales of its shares, a deferred sales

load payable in installments, the

‘‘maximum public offering price’’

includes the aggregate amount of the

installments (‘‘installment load

amount’’).

(3) Tax Equivalent Yield Quotation.

Based on a 30-day (or one month)

period ended on the date of the most

recent balance sheet included in the

registration statement, calculate the

Fund’s tax equivalent yield by dividing

that portion of the Fund’s yield (as

calculated under paragraph (b)(2)) that

is tax-exempt by 1 minus a stated

income tax rate and adding the quotient

to that portion, if any, of the Fund’s

yield that is not tax-exempt.

(4) Non-Standardized Performance

Quotation. A Fund may calculate

performance using any other historical

measure of performance (not subject to

any prescribed method of computation)

if the measurement reflects all elements

of return.

(5) State:

(i) The length of and the last day in

the base period used in calculating the

quotation(s);

(ii) A description of the method(s) by

which the performance data is

calculated; and

(iii) The income tax rate used in the

calculation, if applicable.

Item 22. Financial Statements

(a) Registration Statement.

(1) Include, in a separate section

following the responses to the preceding

Items, the financial statements and

schedules required by Regulation S–X.

The specimen price-make-up sheet

required by Instruction 4 to Item 18(c))

may be provided as a continuation of

the balance sheet specified by

Regulation S–X.

Instructions.
Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules 10941

1. The statements of any subsidiary

that is not a majority-owned subsidiary

required by Regulation S–X may be

omitted from Part B and included in

Part C.

2. In addition to the requirements of

rule 3–18 of Regulation S–X (17 CFR

210.3–18), any Fund registered under

the Investment Company Act that has

not previously had an effective

registration statement under the

Securities Act must include in its initial

registration statement under the

Securities Act any additional financial

statements and condensed financial

information (which need not be audited)

necessary to make the financial

statements and condensed financial

information included in the registration

statement current as of a date within 90

days prior to the date of filing.

(2) File a post-effective amendment

containing financial statements, which

do not have to be audited, within 4 to

6 months of the effective date of the

Fund’s registration statement or the date

the Fund commences operations (i.e.,

begins selling shares to the public or

investing assets in accordance with its

investment objectives).

Instruction. A Fund may file the posteffective amendment within 8 months of

the effective date of the Fund’s

registration statement if the posteffective amendment is filed within 30

days of the date of the latest balance

sheet included in the Fund’s annual or

semi-annual report to shareholders.

(b) Annual Report. Every annual

report to shareholders required under

rule 30d–1 must contain the following:

(1) The audited financial statements

required, and for the periods specified,

by Regulation S–X.

(2) The condensed financial

information required by Item 9(a), for

the 5 most recent fiscal years, with at

least the most recent fiscal year audited.

(3) Unless shown elsewhere in the

report as part of the financial statements

required by paragraph (b)(1), the

aggregate remuneration paid by the

Fund during the period covered by the

report to:

(i) All directors and all members of

any advisory board for regular

compensation;

(ii) Each director and each member of

an advisory board for special

compensation;

(iii) All officers; and

(iv) Each person of whom any officer

or director of the Fund is an affiliated

person.

(4) The information concerning

changes in and disagreements with

accountants and on accounting and

financial disclosure required by Item

304 of Regulation S–K (17 CFR 229.304).

(c) Semi-Annual Report. Every semiannual report to shareholders required

by rule 30d–1 must contain the

following information (which need not

be audited):

(1) The financial statements required

by Regulation S–X for the period

commencing either with:

(i) The beginning of the Fund’s fiscal

year (or date of organization, if newly

organized); or

(ii) A date not later than the date after

the close of the period included in the

last report under rule 30d–1 and the

most recent preceding fiscal year.

(2) The condensed financial

information required by Item 9(a), for

the period of the report as specified by

paragraph (c)(1), and the most recent

preceding fiscal year.

(3) Unless shown elsewhere in the

report as part of the financial statements

required by paragraph (c)(1), the

aggregate remuneration paid by the

Fund during the period covered by the

report to the persons specified under

paragraph (b)(3).

(4) The information concerning

changes in and disagreements with

accountants and on accounting and

financial disclosure required by Item

304 of Regulation S–K.

Part C Other Information

Item 23. Exhibits

Subject to General Instruction H

regarding incorporation by reference

and rule 483 under the Securities Act

(17 CFR 230.483), file the exhibits listed

below as part of the registration

statement. Letter or number the exhibits

in the sequence indicated and file

copies rather than originals, unless

otherwise required by rule 483. Reflect

any exhibit incorporated by reference in

the list below and identify the

previously filed document containing

the incorporated material.

(a) Articles of Incorporation. The

Fund’s current articles of incorporation,

charter, declaration of trust or

corresponding instruments and any

related amendment.

(b) By-laws. The Fund’s current bylaws or corresponding instruments and

any related amendment.

(c) Instruments Defining Rights of

Security Holders. Instruments defining

the rights of holders of the securities

being registered, including the relevant

portion of the Fund’s articles of

incorporation or by-laws.

(d) Investment Advisory Contracts.

Investment advisory contracts relating

to the management of the Fund’s assets.

(e) Underwriting Contracts.

Underwriting or distribution contracts

between the Fund and a principal

underwriter, and agreements between

principal underwriters and dealers.

(f) Bonus or Profit Sharing Contracts.

Bonus, profit sharing, pension, or

similar contracts or arrangements in

whole or in part for the benefit of the

Fund’s directors or officers in their

official capacity. Describe in detail any

plan not included in a formal document.

(g) Custodian Agreements. Custodian

agreements and depository contracts

under section 17(f) (15 U.S.C. 80a–17(f))

concerning the Fund’s securities and

similar investments, including the

schedule of remuneration.

(h) Other Material Contracts. Other

material contracts not made in the

ordinary course of business to be

performed in whole or in part on or after

the filing date of the registration

statement.

(i) Legal Opinion. An opinion and

consent of counsel regarding the legality

of the securities being registered, stating

whether the securities will, when sold,

be legally issued, fully paid, and

nonassessable.

(j) Other Opinions. Any other

opinions, appraisals, or rulings, and

related consents relied on in preparing

the registration statement and required

by section 7 of the Securities Act (15

U.S.C. 77g).

(k) Omitted Financial Statements.

Financial statements omitted from Item

22.

(l) Initial Capital Agreements. Any

agreements or understandings made in

consideration for providing the initial

capital between or among the Fund, the

underwriter, adviser, promoter or initial

shareholders and written assurances

from promoters or initial shareholders

that purchases were made for

investment purposes and not with the

intention of redeeming or reselling.

(m) Rule 12b–1 Plan. Any plan

entered into by the Fund under rule

12b–1 and any agreements with any

person relating to the plan’s

implementation.

(n) Financial Data Schedule. A

Financial Data Schedule meeting the

requirements of rule 483 under the

Securities Act.

(o) Rule 18f–3 Plan. Any plan entered

into by the Fund under rule 18f–3, any

agreement with any person relating to

the plan’s implementation, any

amendment to the plan or an agreement,

and the relevant minutes from a meeting

of the Fund’s directors describing any

action taken to revoke the plan.

Item 24. Persons Controlled by or Under

Common Control with the Fund

Provide a list or diagram of all

persons directly or indirectly controlled

by or under common control with the
10942 Federal Register / Vol. 62, No. 46 / Monday, March 10, 1997 / Proposed Rules

Fund. For any person controlled by

another person, disclose the percentage

of voting securities owned by the

immediately controlling person or other

basis of that person’s control. For each

company, also provide the state or other

sovereign power under the laws of

which the company is organized.

Instructions.

1. Include the Fund in the list or

diagram and show the relationship of

each company to the Fund and to the

other companies named, using crossreferences if a company is controlled

through direct ownership of its

securities by two or more persons.

2. Indicate with appropriate symbols

subsidiaries that file separate financial

statements, subsidiaries included in

consolidated financial statements, or

unconsolidated subsidiaries included in

group financial statements. Indicate for

other subsidiaries why financial

statements are not filed.

Item 25. Number of Holders of

Securities

State in a tabular form similar to the

one below, as of a specified date within

90 days prior to filing, the number of

record holders of each class of the

Fund’s securities.

(1)

Title of class

(2)

Number of record

holders

Item 26. Indemnification

State the general effect of any

contract, arrangements or statute under

which any director, officer, underwriter

or affiliated person of the Fund is

insured or indemnified against any

liability incurred in their official

capacity, other than insurance provided

by any director, officer, affiliated

person, or underwriter for their own

protection.

Item 27. Business and Other

Connections of the Investment Adviser

Describe any other business,

profession, vocation or employment of a

substantial nature that each investment

adviser, and each director, officer or

partner of the adviser, is or has been

engaged within the last two fiscal years

for his or her own account or in the

capacity of director, officer, employee,

partner, or trustee.

Instructions.

1. Disclose the name and principal

business address of any company for

which a person listed above serves in

the capacity of director, officer,

employee, partner, or trustee, and the

nature of the relationship.

2. The names of investment advisory

clients need not be given in answering

this Item.

Item 28. Principal Underwriters

(a) State the name of each investment

company (other than the Fund) for

which each principal underwriter

currently distributing the Fund’s

securities also acts as a principal

underwriter, depositor, or investment

adviser.

(b) Provide the information required

by the following table for each director,

officer, or partner of each principal

underwriter named in the response to

Item 20:

(1)

Name and

principal business address

(2)

Positions and

offices with

underwriter

(3)

Positions and

offices with

fund

(c) Provide the information required

by the following table for all

commissions and other compensation

received, directly or indirectly, from the

Fund during the last fiscal year by each

principal underwriter who is not an

affiliated person of the Fund or any

affiliated person of an affiliated person:

(1)

Name of principal underwriter

(2)

Net underwriting discounts

and commissions

(3)

Compensation on redemption and repurchases

(4)

Brokerage commissions

(5)

Other compensation

Instructions.

1. Disclose the type of services

rendered in consideration for the

compensation listed under column (5).

2. Instruction 1 to Item 20(c) also

applies to this Item.

Item 29. Location of Accounts and

Records

State the name and address of each

person maintaining physical possession

of each account, book, or other

document required to be maintained by

section 31(a) (15 U.S.C. 80a–30(a)) and

the rules thereunder.

Item 30. Management Services

Provide a summary of the substantive

provisions of any management-related

service contract not discussed in Part A

or B, disclosing the parties to the

contract and the total amount paid and

by whom for the last three fiscal years.

Instructions.

1. The instructions to Item 15 also

apply to this Item.

2. Exclude information about any

service provided for payments totalling

less than $5,000 during each of the last

three fiscal years.

Item 31. Undertakings

In initial registration statements filed

under the Securities Act, provide an

undertaking to file an amendment to the

registration statement with certified

financial statements showing the initial

capital received before accepting

subscriptions from more than 25

persons if the Fund intends to raise its

initial capital under section 14(a)(3) (15

U.S.C. 80a–14(a)(3)).

SIGNATURES

Pursuant to the requirements of (the

Securities Act and) the Investment

Company Act, the Fund (certifies that it

meets all of the requirement for

effectiveness of this registration

statement under rule 485(b) under the

Securities Act and) has duly caused this

registration statement to be signed on its

behalf by the undersigned, duly

authorized, in the City of llll, and

State of llll on the day of llll,

llll (Year).

lllllllllllllllllllll

Fund

By lllllllllllllllllll

(Signature and Title)

Pursuant to the requirements of the

Securities Act, this registration

statement has been signed below by the

following persons in the capacities and

on the date indicated.

lllllllllllllllllllll

(Signature)

lllllllllllllllllllll

(Title)

lllllllllllllllllllll

(Date)

By the Commission

Dated: February 27, 1997.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–5368 Filed 3–7–97; 8:45 am]

BILLING CODE 8010–01–P