[Federal Register Volume 62, Number 46 (Monday, March 10, 1997)]
[Proposed Rules]
[Pages 10898-10942]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-5368]



[[Page 10897]]

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Part II





Securities and Exchange Commission





_______________________________________________________________________



17 CFR Part 230, et al.



Registration Form Used by Open-End Management Investment Companies; 
Proposed Rule



Proposed New Disclosure Option for Open-End Management Investment 
Companies; Proposed Rule



Investment Company Names; Proposed Rule

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

[[Page 10898]]



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.

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SUMMARY: The Securities and Exchange Commission is proposing amendments 
to Form N-1A, the form used by open-end 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: <a href="/cdn-cgi/l/email-protection#fc8e899099d19f9391919992888fbc8f999fd29b938a"><span class="__cf_email__" data-cfemail="2153544d440c424e4c4c444f5552615244420f464e57">[email protected]</span></a>. 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\
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    \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.
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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.
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    \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).
    \4\ Compare 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).
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    Many have criticized fund prospectuses, finding them 
unintelligible, tedious, and legalistic.\5\

[[Page 10899]]

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.
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    \5\ See, 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 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.
    \6\ A 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 
employer-provided 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).
    \7\ Over 30 million U.S. households own funds. ICI Fact Book, 
supra note 3, at 92.
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    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.
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    \8\ See ``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).
    \9\ As 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.
    \10\ Profile Release, supra note 1.
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    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.
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    \11\ Securities Act Release No. 7380 (Jan. 14, 1997) (62 FR 
3152) (``Plain English Release'). In conjunction with these 
proposals, the Commission's Office of Investor Assistance has issued 
a draft of A Plain English Handbook: How to Create Clear SEC 
Disclosure Documents to explain the plain English principles of the 
proposed amendments and other techniques for preparing clear 
disclosure documents. See also ``Plain English: A Work in 
Progress,'' Remarks by Isaac C. Hunt, Commissioner, SEC, before the 
First Annual Institute on Mergers and Acquisition: Corporate, Tax, 
Securities, and Related Aspects, Key Biscayne, Fla. (Feb. 6, 1997).
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    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.<SUP>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. . . .'' <SUP>13
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    \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').
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    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').<SUP>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.<SUP>15
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    \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).
    \15\ See, 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).
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    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.<SUP>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

[[Page 10900]]

(``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.<SUP>17
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    \16\ See 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).
    \17\ See ICI Profile Survey, supra note 6, at 31-32.
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    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'').<SUP>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.
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    \18\ Investment Company Act Release No. 20974 (Mar. 29, 1995) 
(60 FR 17172).
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    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:

    <bullet> Improved prospectus disclosure: Although some funds 
have made significant and commendable efforts to improve their 
prospectuses,<SUP>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.
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    \19\ See, 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).
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    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.<SUP>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.<SUP>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:
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    \20\ See Form N-1A Proposing Release, supra note 13, at 814.
    \21\ Under 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.

    <bullet> 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;
    <bullet> Permit a fund that is offered as an investment 
alternative in a participant-directed defined contribution plan to 
tailor its prospectus for use by plan participants;
    <bullet> 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; 
<SUP>22 and
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    \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).
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    <bullet> 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.<SUP>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.
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    \23\ Fund Names Release, supra note 2.
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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.<SUP>24 Each investor using the profile to 
make an investment decision would receive the

[[Page 10901]]

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.
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    \24\ The 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)).
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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.<SUP>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.
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    \25\ The 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 .
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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,<SUP>26 the proposals 
would improve risk disclosure as follows:

    \26\ The 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').
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    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 broad-based 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.<SUP>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.<SUP>28
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    \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.
    \28\ See 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.
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    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.<SUP>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.<SUP>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.
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    \29\ See infra Part II.D.
    \30\ Funds 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.
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    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.<SUP>31 The Commission's plain English proposals also would 
apply to prospectus disclosure.<SUP>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.<SUP>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.<SUP>34 
The Commission also requested comment whether the plain English 
disclosure principles should be modified for fund prospectuses.
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    \31\ See, e.g., General Instruction G of Form N-1A.
    \32\ See 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)).
    \34\ To 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.

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[[Page 10902]]

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.<SUP>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.<SUP>36
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    \35\ When 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.
    \36\ Proposed 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.
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    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.<SUP>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.<SUP>38 
These statements do not appear to be particularly helpful to investors.
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    \37\ See infra notes 52-58 and accompanying text.
    \38\ See 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.
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    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.<SUP>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.<SUP>40 The back cover page also would include 
disclosure about how a shareholder can make inquires about the 
fund.<SUP>41
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    \39\ See 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).
    \40\ The 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).
    \41\ This 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.
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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.<SUP>42 The proposed question-and-answer 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.
---------------------------------------------------------------------------

    \42\ The 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.
---------------------------------------------------------------------------

    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.<SUP>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.
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    \43\ Focus 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.
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    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.<SUP>44
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    \44\ The criteria for determining whether a particular strategy 
is a principal strategy and disclosure about concentration policies 
are discussed infra notes--and accompanying text.
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    A fund also would be required to inform investors about the 
availability of additional information about the fund's investments in 
the fund's shareholder reports. Fund annual reports typically include 
the MDFP, which discusses a fund's strategies that materially affected 
the fund's performance during the most recent fiscal year.<SUP>45 The 
Division's review of and experience with MDFP disclosure indicates that 
the annual report may be a valuable resource for investors.<SUP>46 The

[[Page 10903]]

proposed amendments would require the risk/return summary to contain 
---------------------------------------------------------------------------
disclosure to the following effect:

    \45\ See proposed Item 5 (current Item 5A) (requiring the MDFP 
to be disclosed in the prospectus unless disclosed in the annual 
report).
    \46\ Commenters also have cited the annual report as a source of 
valuable information. See Voss Sanders, Dear Shareholder, 
Morningstar Mutual Funds, Apr. 26, 1996, at 1 (commenting on 
improved annual report disclosure).
---------------------------------------------------------------------------

    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 
________________.<SUP>47

    \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.
---------------------------------------------------------------------------

    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? <SUP>48
---------------------------------------------------------------------------

    \48\ As proposed, the back cover page of the prospectus would 
include more general disclosure about the availability of additional 
information.
---------------------------------------------------------------------------

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.<SUP>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).<SUP>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.<SUP>51
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    \49\ See infra notes 133-138 and accompanying text. The proposed 
amendments also would require a fund to disclose, if applicable, 
that it is non-diversified. 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 
non-diversified fund would be required to describe the effects and 
to summarize the risks of non-diversification.
    \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.
    \51\ The 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.
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    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.<SUP>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.<SUP>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.<SUP>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.<SUP>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.<SUP>56 
This disclosure is intended to alert investors that funds advised by or 
sold through banks are not federally insured.<SUP>57
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    \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.
    \54\ See 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).
    \55\ Unlike 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'').
    \57\ See 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).
---------------------------------------------------------------------------

    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,

[[Page 10904]]

it is possible to lose money by investing in the fund.<SUP>58

    \58\ The 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.
---------------------------------------------------------------------------

    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.<SUP>59
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    \59\ Among 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).
---------------------------------------------------------------------------

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

    \60\ Proposed Item 2(c)(2).
    \61\ Risk 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'').
---------------------------------------------------------------------------

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

    \62\ The 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.
---------------------------------------------------------------------------

    An example of the risk/return bar chart and table is set forth 
below:

BILLING CODE 8010-01-P

[[Page 10905]]

[GRAPHIC] [TIFF OMITTED] TP10MR97.000



BILLING CODE 8010-01-C

[[Page 10906]]

    Bar Chart Return Information. <SUP>63 The proposed amendments would 
require the bar chart to reflect annual returns for a fund's last 10 
calendar years. <SUP>64 Requiring calendar year returns is intended to 
help investors compare the risks of different funds over similar time 
periods.
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    \63\ Funds 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.
    \64\ A 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.
---------------------------------------------------------------------------

    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. <SUP>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. 
<SUP>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. 
<SUP>67
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    \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).
    \66\ As 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).
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    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. <SUP>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.
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    \68\ See, 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).
---------------------------------------------------------------------------

    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. <SUP>69 Bar charts included in the pilot profiles 
reflect information for only one fund. <SUP>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.
---------------------------------------------------------------------------

    \69\ While 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).
    \70\ See 1995 Profile Letter, supra note 16 (permitting the 
pilot profiles to include disclosure for a single fund or series of 
a fund).
---------------------------------------------------------------------------

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

    \71\ Instruction 3(a) to proposed Item 2(c)(2).
---------------------------------------------------------------------------

    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

[[Page 10907]]

last one, five, and ten fiscal years (or for the life of the fund, if 
shorter) <SUP>72 and to compare that information to the returns of a 
broad-based securities market index. <SUP>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. <SUP>74 The proposed approach also would 
be consistent with the line graph presentation of fund performance 
required in MDFP disclosure. <SUP>75
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    \72\ The 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.
    \73\ A 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.
    \74\ See 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.
    \75\ See 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).
---------------------------------------------------------------------------

    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. <SUP>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. <SUP>77
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    \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).
    \77\ Other 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).
---------------------------------------------------------------------------

    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. <SUP>78 Specifically, the Commission requests comment on 
requiring the annual returns of a broad-based 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.
---------------------------------------------------------------------------

    \78\ Focus Group participants did not express a preference as to 
the placement of this information in the bar chart or accompanying 
table.
---------------------------------------------------------------------------

    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. <SUP>79 Consistent 
with this objective, the Commission is proposing several amendments 
designed to improve fee table disclosure.
---------------------------------------------------------------------------

    \79\ See Fee Table Adopting Release, supra note 14, at 3194.
---------------------------------------------------------------------------

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. <SUP>80 Focus 
Group participants, however, had difficulty understanding and using the 
information in the Example.
---------------------------------------------------------------------------

    \80\ Id. (also noting that the Example provides information 
about the cost of a fund investment).
---------------------------------------------------------------------------

    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. <SUP>81

    \81\ Like 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.
---------------------------------------------------------------------------

    To further assist investors in understanding the Example, the 
proposed amendments would revise the description of how the Example is 
calculated. <SUP>82
---------------------------------------------------------------------------

    \82\ See 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).
---------------------------------------------------------------------------

    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. <SUP>83 Using the 
$10,000 figure in the Example also would be consistent with the $10,000

[[Page 10908]]

hypothetical initial account value used in the MDFP line graph. <SUP>84
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    \83\ See 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).
    \84\ See proposed Item 5(b).
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    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. <SUP>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. <SUP>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. <SUP>87 Like the 
fee table requirements applicable to sales loads, the proposed 
amendments would require a fund to show the maximum account fee 
imposed. <SUP>88
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    \85\ Instruction 10 to Item 2(a).
    \86\ Certain 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.
---------------------------------------------------------------------------

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. <SUP>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:

    \89\ Instruction 1 to Item 2(a).
---------------------------------------------------------------------------

    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').<SUP>90
---------------------------------------------------------------------------

    \90\ See ICI Survey Letter, supra note 39 (changing the caption 
from ``sales load'' to ``sales charge,'' without using the term 
``load').
---------------------------------------------------------------------------

    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.<SUP>91 The proposed amendments would change 
the caption to ``Marketing (12b-1) Fees.'' <SUP>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.
---------------------------------------------------------------------------

    \91\ 17 CFR 270.12b-1.
    \92\ Focus Group participants indicated that the term 
``marketing fees'' would help them understand the expenses included 
in the line item.
---------------------------------------------------------------------------

    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).'' <SUP>93
---------------------------------------------------------------------------

    \93\ See ICI Survey Letter, supra note 39 (enclosing a prototype 
profile that includes similar explanatory information).
---------------------------------------------------------------------------

    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.<SUP>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.<SUP>95
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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

    \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).
---------------------------------------------------------------------------

    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.<SUP>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

[[Page 10909]]

identify the expenses that comprise this line item either under 
separate subcaptions or in a parenthetical following the ``Other 
Expenses'' caption.<SUP>99 When subcaptions are provided, the proposed 
amendments would clarify that the subcaptions must identify the 3 
largest expenses that comprise ``Other Expenses.''
---------------------------------------------------------------------------

    \98\ Instruction 10(b) to Item 2(a).
    \99\ Instruction 3(c)(iii) to proposed Item 3.
---------------------------------------------------------------------------

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.<SUP>100
---------------------------------------------------------------------------

    \100\ See 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).
---------------------------------------------------------------------------

    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.<SUP>101 Since funds are intended to offer 
investors professional investment management,<SUP>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.'' <SUP>103
---------------------------------------------------------------------------

    \101\ The 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').
    \102\ See, e.g., 1 T. Lemke, G. Lins & A.T. Smith III, 
Regulation of Investment Companies Sec. 1.01, at 1-1 (1996).
    \103\ See 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'').
---------------------------------------------------------------------------

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.<SUP>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.<SUP>105 Form N-1A also requires 
disclosure about ``significant investment policies or techniques'' that 
a fund intends to use, subject to certain limitations.<SUP>106
---------------------------------------------------------------------------

    \104\ Proposed 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).
---------------------------------------------------------------------------

    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.<SUP>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.<SUP>108
---------------------------------------------------------------------------

    \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.
    \108\ A 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.
---------------------------------------------------------------------------

    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.<SUP>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.<SUP>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.<SUP>111 The proposed amendments would require 
disclosure about non-principal strategies to appear in the SAI.<SUP>112
---------------------------------------------------------------------------

    \109\ Proposed 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).
    \112\ Proposed Item 12(b).
---------------------------------------------------------------------------

    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

[[Page 10910]]

practices (e.g., entering into overnight repurchase agreements) since 
these practices are not typically among a fund's principal 
strategies.<SUP>113
---------------------------------------------------------------------------

    \113\ Similarly, 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.
---------------------------------------------------------------------------

    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.<SUP>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.<SUP>115
---------------------------------------------------------------------------

    \114\ Proposed 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.
    \115\ Because 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.
---------------------------------------------------------------------------

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

    \116\ Proposed Item 4(b)(3).
---------------------------------------------------------------------------

    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.<SUP>117
---------------------------------------------------------------------------

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

    The proposed amendments would continue to require disclosure about 
temporary defensive positions to alert investors of potential changes 
in a fund's investments.<SUP>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.<SUP>119
---------------------------------------------------------------------------

    \118\ Proposed 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.
---------------------------------------------------------------------------

    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.<SUP>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.<SUP>121 This approach 
is designed to focus prospectus disclosure on a fund's expected 
portfolio practices, not past practices.<SUP>122
---------------------------------------------------------------------------

    \120\ Guide 5.
    \121\ Proposed 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.
---------------------------------------------------------------------------

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

    \123\ Like 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.
---------------------------------------------------------------------------

    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.<SUP>124
---------------------------------------------------------------------------

    \124\ Prospectuses, for example, state that high portfolio 
turnover rates will likely result in higher transaction costs and 
may increase taxable gains.
---------------------------------------------------------------------------

    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.<SUP>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.<SUP>126
---------------------------------------------------------------------------

    \125\ See 15 U.S.C. 80a-4, -5.
    \126\ Item 4(a)(i)(B).
---------------------------------------------------------------------------

    The proposed amendments would move to the SAI disclosure about a 
fund's legal status as an open-end management company.<SUP>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

[[Page 10911]]

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.
---------------------------------------------------------------------------

    \127\ Proposed Item 12(a).
---------------------------------------------------------------------------

    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 non-diversified status in the 
prospectus.<SUP>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.
---------------------------------------------------------------------------

    \128\ Proposed Item 4(d).
---------------------------------------------------------------------------

    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.<SUP>129 Most funds do not engage in these practices to a 
significant extent, because the Investment Company Act limits their use 
by funds.<SUP>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.<SUP>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.<SUP>132
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    \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.
    \130\ See, 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. 80a-12(c)) (limiting the underwriting practices of 
a diversified fund).
    \131\ See Items 4(a)(ii)(C), 4(b); Guides 3, 14.
    \132\ Proposed 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.
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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.<SUP>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.
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    \133\ Proposed 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.
---------------------------------------------------------------------------

    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.<SUP>134
---------------------------------------------------------------------------

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

    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.<SUP>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.<SUP>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.<SUP>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.<SUP>138
---------------------------------------------------------------------------

    \135\ Risk 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.
    \136\ See, e.g., 1995 ICI Risk Comment Letter, supra note 101, 
at 10-16 (questioning, among other things, the feasibility of 
developing a single, all-encompassing measure of fund risks and 
whether quantitative information would be understood and accurately 
used by fund investors).
    \137\ See 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).
---------------------------------------------------------------------------

    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 
broad-based 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.

[[Page 10912]]

    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.<SUP>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.<SUP>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.
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    \139\ National 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).
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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.<SUP>141 As in 
the current Form, the revised Form would require prospectus disclosure 
of fees paid to any sub-adviser.<SUP>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.
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    \141\ Proposed Items 6(a)(1), (2).
    \142\ See section 2(a)(20) (15 U.S.C. 80a-2(a)(20)) (defining 
``investment adviser'' to include a sub-adviser).
---------------------------------------------------------------------------

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

    \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).
---------------------------------------------------------------------------

    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.<SUP>144 The proposed amendments would move this 
disclosure to the SAI.<SUP>145 The responsibilities of fund directors 
are governed by the Investment Company Act and state law.<SUP>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.
---------------------------------------------------------------------------

    \144\ Item 5(a).
    \145\ Proposed Item 13(a).
    \146\ These 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 Sec. 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')).
---------------------------------------------------------------------------

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

    \147\ Section 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)).
---------------------------------------------------------------------------

    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.<SUP>148 The proposed amendments 
would no longer

[[Page 10913]]

require this information in the prospectus. Transactions between 
controlling persons and a fund are subject to restrictions under the 
Investment Company Act.<SUP>149 When transactions with controlling 
persons are permitted, a fund's board of directors is responsible for 
reviewing and approving the arrangements.<SUP>150 Disclosure about 
controlling persons of the investment adviser and the fund would 
continue to be available in the SAI.<SUP>151
---------------------------------------------------------------------------

    \148\ Items 5(b)(i) and 6(b).
    \149\ See, e.g., section 17 (15 U.S.C. 80a-17) and rules 17a-6, 
17d-1 (17 CFR 270.17a-6, .17d-1).
    \150\ See 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').
---------------------------------------------------------------------------

    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.<SUP>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.<SUP>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.<SUP>154
---------------------------------------------------------------------------

    \152\ Item 5(g).
    \153\ Some 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).
---------------------------------------------------------------------------

    Form of Organization. Form N-1A requires disclosure about a fund's 
form of organization (along with the date) and state of 
incorporation.<SUP>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,<SUP>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,<SUP>157 unless a fund is organized outside 
the United States and registered under the Investment Company Act 
pursuant to section 7(d).<SUP>158
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    \155\ Item 4(a).
    \156\ See 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)).
    \157\ Proposed 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).
---------------------------------------------------------------------------

    Expenses. Form N-1A requires a fund to provide a statement about 
its expenses.<SUP>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.<SUP>160
---------------------------------------------------------------------------

    \159\ Item 5(f).
    \160\ Item 15.
---------------------------------------------------------------------------

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

    \161\ For 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.
---------------------------------------------------------------------------

    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.<SUP>162 Because the 
Investment Company Act requires all fund shares to have equal voting 
rights <SUP>163 and prescribes the vote required for significant 
matters,<SUP>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.<SUP>165
---------------------------------------------------------------------------

    \162\ Item 6 (a), (c).
    \163\ Section 18(i) (15 U.S.C. 80a-18(i))].
    \164\ See, 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).
    \165\ Proposed Item 17(a).
---------------------------------------------------------------------------

    Senior Securities. Form N-1A requires disclosure about any class of 
senior securities issued by a fund.<SUP>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 <SUP>167 and

[[Page 10914]]

required to be disclosed in a fund's financial statements.<SUP>168
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    \166\ Item 3(b).
    \167\ Section 18(f)(1) (requiring, for example, asset coverage 
of at least 300% for bank borrowings).
    \168\ The 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).
---------------------------------------------------------------------------

    Fund Classes. Form N-1A requires disclosure about ``other classes'' 
of fund shares (excluding borrowings that are not senior 
securities).<SUP>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.
---------------------------------------------------------------------------

    \169\ Item 6(d).
---------------------------------------------------------------------------

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.<SUP>170
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.<SUP>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.<SUP>172
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.<SUP>173
---------------------------------------------------------------------------

    \173\ See 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.
---------------------------------------------------------------------------

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

    \174\ See section 2(a)(41) (15 U.S.C. 80a-2(a)(41)) and rule 2a-
4 (17 CFR 270.2a-4).
---------------------------------------------------------------------------

    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.<SUP>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.<SUP>176 The name and address of the underwriter typically are not 
necessary for investors to purchase and redeem a fund's shares.<SUP>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.<SUP>178
---------------------------------------------------------------------------

    \175\ Item 7(a).
    \176\ Proposed Item 15(b).
    \177\ Fund 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.
    \178\ See supra note .
---------------------------------------------------------------------------

    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.<SUP>179 The Form also requires the name and address 
of the fund's transfer agent and dividend paying agent.<SUP>180 The 
proposed amendments would move this disclosure to the SAI.<SUP>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.<SUP>182
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    \179\ Item 5(d).
    \180\ Item 5(e).
    \181\ Proposed 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).
    \182\ Rule 6-07 of Regulation S-X (17 CFR 210.6-07); Instruction 
3(c) to proposed Item 3.
---------------------------------------------------------------------------

    Account Transfers. The GCLs require certain information about 
transfers of shares held in street name accounts.<SUP>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.<SUP>184
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    \183\ 1990 GCL, supra note 28, at II.D.
    \184\ Proposed Item 7(b)(7).
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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.<SUP>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

[[Page 10915]]

a fund.<SUP>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.
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    \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.
    \186\ Many 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.
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    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.<SUP>187 Subchapter M 
confers pass-through tax treatment for funds that meet certain 
conditions.<SUP>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.<SUP>189
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    \187\ Proposed 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).
    \188\ To 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.
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    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.<SUP>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.<SUP>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.<SUP>192
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    \190\ Proposed Item 7(d).
    \191\ The 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).
    \192\ See Item 6(g)(iii) (consistent with this requirement).
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    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 Tax-Exempt Funds. The proposed 
amendments would require a tax-exempt fund to inform investors of the 
special tax consequences associated with investing in the fund.<SUP>193 
Because investors may be unaware that a portion of the distributions 
received from a tax-exempt 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:

    \193\ The 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.
---------------------------------------------------------------------------

    (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; <SUP>194
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    \194\ A 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 .
---------------------------------------------------------------------------

    (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.<SUP>195

    \195\ See 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).
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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.<SUP>196 
The proposed amendments would require information about distribution 
arrangements to appear together in the prospectus.<SUP>197 This 
approach would help investors locate information designed to assist 
them in evaluating a

[[Page 10916]]

particular fund and comparing fund investments.
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    \196\ A 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.
    \197\ Proposed 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.
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b. Rule 12b-1 Plans
    Prospectus Disclosure. Form N-1A requires detailed prospectus 
disclosure about rule 12b-1 plans.<SUP>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.<SUP>199
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    \198\ Item 7(e), (f).
    \199\ See 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.
---------------------------------------------------------------------------

    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:

    <bullet> The fund has a rule 12b-1 plan that allows the fund to 
pay fees for the sale and distribution of its shares; and
    <bullet> 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').<SUP>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.<SUP>201
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    \200\ Rule 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.
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    A fund may pay ``service fees'' alone or combined with fees for the 
sale and distribution of its shares.<SUP>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.
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    \202\ See 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).
---------------------------------------------------------------------------

    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).<SUP>203 The Form requires additional disclosure if the fund 
engages in joint distribution activities with another fund <SUP>204 or 
if the fund's underwriter has incurred unreimbursed expenses under the 
fund's 12b-1 plan.<SUP>205
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    \203\ Guide 29.
    \204\ A 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.
    \205\ A 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).
---------------------------------------------------------------------------

    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.<SUP>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.<SUP>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.<SUP>208
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    \206\ Fund 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 broker-
dealers 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.
    \207\ See 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).
    \208\ See 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.
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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

[[Page 10917]]

investments).<SUP>209 The proposed amendments would continue to require 
most of this disclosure to appear in the prospectus.<SUP>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.
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    \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).
    \210\ The 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.
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    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 <SUP>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.<SUP>212
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    \211\ Proposed Item 15(f).
    \212\ Rule 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.
---------------------------------------------------------------------------

    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. <SUP>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. <SUP>214
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    \213\ For 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.
    \214\ Proposed Item 13(e).
---------------------------------------------------------------------------

    The proposed amendments also would move to the SAI disclosure about 
sales load breakpoints and waivers in connection with a merger or other 
reorganization. <SUP>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. <SUP>216
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    \215\ Proposed Item 18(b).
    \216\ Form 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).
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    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. <SUP>217 The proposed amendments 
would no longer require this disclosure, since these fees are not 
charged by the fund. <SUP>218 Investors are informed of (and pay) the 
fees as part of their relationship with, and the services provided by, 
the third party. <SUP>219
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    \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.
    \219\ For 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) 
para. 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).
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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. <SUP>220 Consistent with the 
proposed approach for sales loads and rule 12b-1 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. <SUP>221
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    \220\ General Instruction I; Item 6(h); Guide 34.
    \221\ Potential 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.
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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. <SUP>222 The 
proposed amendments would retain the table, but no longer require this 
information to appear at the front of the prospectus. <SUP>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.
---------------------------------------------------------------------------

    \222\ Item 3(a); General Instruction G to Form N-1A.
    \223\ Proposed Item 9; proposed General Instruction C.2(a).
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    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:


[[Page 10918]]


    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 ________, whose 
report, along with the fund's financial statements, is included in 
(the SAI or annual report), which is available upon request. 
<SUP>224
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    \224\ Since 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.
---------------------------------------------------------------------------

    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. <SUP>225
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    \225\ See, e.g., Money Market Fund Prospectus Release, supra 
note 14, at 38458.
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    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, <SUP>226 or provided in other disclosure, such as 
in a fund's Form N-SAR filings.
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    \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.
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    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. <SUP>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. <SUP>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. <SUP>229
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    \227\ Item 3(c); 17 CFR 230.482(a).
    \228\ See 1996 Securities Act supra note 139, at section 204.
    \229\ Proposed 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.
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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. <SUP>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.
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    \230\ See proposed General Instruction C.1(b) (current General 
Instruction G). See also supra notes 39 and 47 accompanying text.
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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. <SUP>231 The proposed amendments would revise Part C to eliminate 
unnecessary filing requirements. <SUP>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 <SUP>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. 
<SUP>234 Amended Part C also would no longer require a fund to file a 
schedule showing how it calculates performance data, <SUP>235 since 
these calculations have become routine and the Commission staff can 
verify a fund's performance calculations during a fund 
examination.<SUP>236
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    \231\ Items 24 to 32.
    \232\ The 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).
    \234\ See 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).
    \236\ See 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.
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    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. <SUP>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

[[Page 10919]]

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. <SUP>238 The proposed amendments 
would codify the requirement to file updated financial information. 
<SUP>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?
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    \237\ Item 32(b).
    \238\ 1994 GCL, supra note 28, at V.
    \239\ Proposed 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.
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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. <SUP>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.
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    \240\ Certain 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).
---------------------------------------------------------------------------

    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. <SUP>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. 
<SUP>242
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    \241\ Form 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 ``Master-Feeder 
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.
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    Filing and Use of Form N-1A; Preparation of the Registration 
Statement. Proposed General Instruction B would incorporate a more 
user-friendly, 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. <SUP>243
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    \243\ See, 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.
---------------------------------------------------------------------------

    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. <SUP>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 cross-references 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.
---------------------------------------------------------------------------

    \244\ See supra notes 39-40, 45, and 224 and accompanying text.
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    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. <SUP>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. <SUP>246
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    \245\ See John Hancock Funds, Inc. (pub. avail. June 28, 1996).
    \246\ A 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).
---------------------------------------------------------------------------

    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

[[Page 10920]]

by plan participants.<SUP>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).<SUP>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.<SUP>249
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    \247\ See Profile Release, supra note 1 (permitting a profile to 
be modified for use by plan participants).
    \248\ See supra note 234.
    \249\ E.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.
---------------------------------------------------------------------------

    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.<SUP>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.<SUP>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.<SUP>252
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    \250\ Form 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).
    \252\ See 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'').
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    Proposed General Instruction D would address incorporation by 
reference and replace current Instruction E. <SUP>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. <SUP>254
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    \253\ The 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.
    \254\ Section 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.
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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.<SUP>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.<SUP>256
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    \255\ Form 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'').
    \256\ See supra note 28.
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    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.<SUP>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.<SUP>258 In addition, the presentation of 
information in 35 Guides and 7 GCLs is not organized in the most useful 
or effective manner.
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    \257\ See, 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).
    \258\ See, 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).
---------------------------------------------------------------------------

    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.<SUP>259
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    \259\ See supra section II.A.4.
---------------------------------------------------------------------------

    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

[[Page 10921]]

Package (``Registration Package').<SUP>260 The Registration Package 
would be made available to all funds and updated on a regular 
basis.<SUP>261
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    \260\ Similar 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.
    \261\ The 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)).
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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.<SUP>262 The Task Force has recommended eliminating the cross-
reference sheet requirements in registration statements because similar 
information is available in the table of contents required in the 
prospectus.<SUP>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.<SUP>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.<SUP>265 The 
proposed amendments would revise signature requirements for funds in 
accordance with this recommendation.<SUP>266
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    \262\ See 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.
    \265\ Release 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.
    \266\ Proposed 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.
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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 Open-End 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 semi-annual 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

[[Page 10922]]

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 open-end 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 Sec. 230.480 to read as 
follows:

    Note: The rules in this section of Regulation C (Secs. 230.480 
to 230.488 and Secs. 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 (Secs. 230.400 to 
230.479 and Secs. 230.490 to 230.494), unless the context 
specifically indicates otherwise, also apply to investment companies 
and business development companies. See Sec. 230.400.

    Amend Sec. 230.481 to revise the section heading and paragraphs (a) 
and (b)(1) to read as follows:


Sec. 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
* * * * *

[[Page 10923]]

    Amend Sec. 230.485 to revise paragraph (b)(1)(iv) to read as 
follows:


Sec. 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);
* * * * *


Sec. 230.495  [Amended]

    5. Amend Sec. 230.495 to remove the words ``cross-reference 
sheet;'' from paragraph (a).


Sec. 230.497  [Amended]

    6. Amend Sec. 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 Sec. 270.8b-11 to remove the word ``manually'' from 
paragraph (c) and to revise paragraph (e) to read as follows:


Sec. 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 Secs. 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. ____ [  ]
    Post-Effective Amendment No. ____ [  ]
      and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 
                                                                   [  ]
Amendment No. ____..................................................[  
                                                                      ]

(Check appropriate box or boxes.)

----------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)

----------------------------------------------------------------------
(Address of Principal Executive Offices)        (Zip Code)

Registrant's Telephone Number, including Area Code---------------------

(Name and Address of Agent for Service)

Approximate Date of Proposed Public Offering---------------------------

    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    
------------------------------------------------------------------------
                                 Proposed      Proposed                 
   Title of                      Maximum        Maximum      Amount of  
  Securities    Amount Being     Offering      Aggregate    Registration
    Being        Registered     Price Per      Offering         Fee     
  Registered                       Unit          Price                  
------------------------------------------------------------------------
                                                                        
------------------------------------------------------------------------

    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 270.24f-2) 
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

[[Page 10924]]

    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 two-tiered 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'').

[[Page 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

[[Page 10926]]

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 toll-free (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-and-answer 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 (________).

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.

[[Page 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 non-
diversified 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 broad-based 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 tax-
equivalent 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).................................................______%
Maximum Deferred Sales Fee (Load) (as a percentage of ____).....______%
Maximum Sales Fee (Load) Imposed on Reinvested Dividends [and 
other Distributions] (as a percentage of ____)..................______%
Redemption Fee (as a percentage of amount redeemed, if 
applicable).....................................................______%
Exchange Fee....................................................______%
Maximum Account Fee.............................................______%

    Annual Fund Operating Expenses (expenses that are deducted from 
Fund assets)

Management Fees.................................................______%
Marketing (12b-1) Fees..........................................______%
Other Expenses..................................................______%
    ____________%
    ____________%
    ____________%

Total Annual Fund Operating Expenses............................______%

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:

[[Page 10928]]



                                                                                                                
          1 year  $________               3 years  $________       5 years $________        10 years $________  
                                                                                                                
                                                                                                                
                                                                                                                

    You would pay the following expenses if you did not redeem your 
shares:

                                                                                                                
           1 year $________               3 years $________        5 years $________        10 years $________  
                                                                                                                
                                                                                                                
                                                                                                                

    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., ____% in the first year after purchase, declining to 
____% in the ____ 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 non-recurring 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

[[Page 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 non-recurring 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

[[Page 10930]]

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 
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 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 broad-based 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

[[Page 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 performance-based 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

[[Page 10932]]

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 tax-exempt 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,

[[Page 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 ________, 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

[[Page 10934]]

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.

[[Page 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.

                                                                        
                                                        (3)  Principal  
                                   (2)  Position(s)      Occupation(s)  
   (1) Name, Address, and Age       Held with Fund       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                                               
                                                                                                                
                                                        (3) Pension or                             (5) Total    
                                    (2)  Aggregate        Retirement         (4) Estimated     Compensation From
  (1) Name of Person, Position     Compensation From   Benefits Accrued     Annual Benefits      Fund and Fund  
                                         Fund           As Part of Fund     Upon Retirement     Complex Paid to 
                                                           Expenses                                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

[[Page 10936]]

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

[[Page 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

[[Page 10938]]

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:

                                                                                                                
                                       (2)  Net                                                                 
     (1)  Name of Principal          Underwriting      (3)  Compensation    (4)  Brokerage        (5)  Other    
           Underwriter               Discounts and    on Redemptions and      Commissions        Compensation   
                                      Commissions         Repurchases                                           
                                                                                                                

    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.

[[Page 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)<SUP>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.

[[Page 10940]]

    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:
[GRAPHIC] [TIFF OMITTED] TP10MR97.001

    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.

[[Page 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 post-effective amendment within 8 
months of the effective date of the Fund's registration statement if 
the post-effective 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 semi-annual 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 by-laws 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

[[Page 10942]]

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 cross-references 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:

                                                                        
                                   (2) Positions and                    
 (1) Name and principal business     offices with      (3) Positions and
             address                  underwriter      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:

                                                                                                                
                                        (2) Net                                                                 
     (1)  Name of principal          underwriting      (3) Compensation      (4) Brokerage         (5) Other    
           underwriter               discounts and     on redemption and      commissions        compensation   
                                      commissions         repurchases                                           
                                                                                                                

    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 ________, and State of ________ on the day 
of ________, ________ (Year).
----------------------------------------------------------------------
      Fund

By---------------------------------------------------------------------
    (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.
----------------------------------------------------------------------
(Signature)

----------------------------------------------------------------------
(Title)

----------------------------------------------------------------------
(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


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