[Federal Register Volume 62, Number 46 (Monday, March 10, 1997)]
[Proposed Rules]
[Pages 10943-10955]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-5376]
[[Page 10943]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 230
[Release Nos. 33-7399; IC-22529; File No. S7-18-96]
RIN 3235-AH03
Proposed New Disclosure Option for Open-End Management Investment
Companies
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission is proposing a new rule
to permit open-end management investment companies to provide investors
with a ``fund profile.'' The profile would present a summary of key
information about a fund, including the fund's investment strategies,
risks, performance, and fees, in a concise, standardized format. A fund
that provides a profile would be able to offer investors a choice of
the amount of information they wish to consider before making an
investment decision; investors would have the option of purchasing the
fund's shares based on the information in the profile or requesting and
reviewing the fund's prospectus (and other information). An investor
deciding to purchase fund shares based on the information in a profile
would receive the fund's prospectus with the confirmation of purchase.
DATES: Comments must be received on or before June 9, 1997.
ADDRESSES: Submit comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 5th Street, NW.,
Washington, DC 20549-6009. Comments can be submitted electronically at
the following E-mail address: rule-comments@sec.gov. All comment
letters should refer to File No. S7-18-96; include this file number on
the subject line if E-mail is used. All comments received will be
available for public inspection and copying in the Commission's Public
Reference Room, 450 5th Street, NW., Washington, DC 20549-6009.
Electronically-submitted comment letters will be posted on the
Commission's Internet Web site (http://www.sec.gov).
FOR FURTHER INFORMATION CONTACT: David U. Thomas, Senior Counsel,
Markian M.W. Melnyk, Senior Counsel, Kathleen K. Clarke, Special
Counsel, or Elizabeth R. Krentzman, Assistant Director, (202) 942-0721,
Office of Disclosure and Investment Adviser Regulation, Division of
Investment Management, Securities and Exchange Commission, 450 5th
Street, NW., Mail Stop 10-2, Washington, DC 20549-6009.
SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission (the
``Commission'') today is proposing for comment rule 498 (17 CFR
230.498) under the Securities Act of 1933 (15 U.S.C. 77a et seq.)
(``Securities Act'') and the Investment Company Act of 1940 (15 U.S.C.
80a-1 et seq.) (``Investment Company Act''). The new rule would permit
an open-end management investment company that registers on Form N-1A
(17 CFR 274.11A) (a ``fund'') to provide at its option a fund profile
(``profile'') to investors that contains a summary of key information
about a fund. The Commission also is proposing amendments to rule 497
under the Securities Act (17 CFR 230.497) that would require a fund to
file a profile with the Commission at least 30 days prior to its first
use. In a companion release, the Commission is proposing revisions to
the prospectus disclosure requirements in Form N-1A, the registration
statement used by funds. These amendments seek to minimize prospectus
disclosure about technical, legal, and operational matters that
generally are common to all funds and to focus prospectus disclosure on
essential information about a particular fund that would assist an
investor in deciding whether to invest in that fund. 1 In another
companion release, the Commission is proposing new rule 35d-1 under the
Investment Company Act, which would, among other things, require a fund
with a name suggesting that it focuses on a particular type of
investment (e.g., an investment company that calls itself the ABC Stock
Fund, the XYZ Bond Fund, or the QRS U.S. Government Fund) to invest at
least 80% of its assets in the type of investment suggested by its
name. 2
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\1\ Investment Company Act Release No. 22528 (Feb. 27, 1997)
(``Form N-1A Release'').
\2\ Investment Company Act Release No. 22530 (Feb. 27, 1997)
(``Fund Names Release''). Proposed rule 35d-1 would apply to all
registered investment companies, including funds, closed-end
investment companies, and unit investment trusts.
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TABLE OF CONTENTS
I. Executive Summary and Introduction
II. Discussion
A. General
B. Profile Disclosure
1. Cover Page
2. Risk/Return Summary
3. Other Disclosure Requirements
4. Application to Purchase Shares
C. Disclosure Safeguards
D. Filing Requirements
E. Dissemination of Profiles
F. Defined Contribution Plans
III. General Request for Comments
IV. Paperwork Reduction Act
V. Summary of Initial Regulatory Flexibility Analysis
VI. Statutory Authority
VII. Text of Proposed Rule
I. Executive Summary and Introduction
Over the last decade, the fund industry has grown tremendously.
With over 6,000 funds available and over 130 million shareholder
accounts, fund assets exceed the deposits of commercial banks.3 As
more Americans turn to funds for professional management of current and
retirement savings, funds have introduced new investment options and
shareholder services to meet the needs of investors. While benefitting
from these developments, investors also face an increasingly difficult
task in choosing suitable fund investments. The Commission, fund
investors, and others have recognized the need to improve fund
disclosure to help investors evaluate and compare funds.4 In the
Commission's view, the growth of the fund industry and the diversity of
fund investors warrant a new approach to fund disclosure that would
offer more choices in the format and amount of information available
about fund investments.
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\3\ See Investment Company Institute (``ICI''), Trends in Mutual
Fund Investing: November 1996 at 3 (Dec. 1996) (ICI News No. 96-107)
(``ICI Trends'') and ICI, Memorandum on Supplementary Data at 22
(Jan. 13, 1997) (as of November 1996, there were 6,243 funds and
148.5 million shareholder accounts); compare ICI Trends at 1 (fund
net assets exceeded $3.5 trillion as of November 1996) with 82 Fed.
Res. Bull. 12, table 1.21, at A13 (1996) (commercial bank deposits
were approximately $2.5 trillion as of Sept. 1996).
\4\ See, e.g., ``From Security to Self-Reliance: American
Investors in the 1990s,'' Remarks by Arthur Levitt, Chairman, SEC,
before the ICI's General Membership Meeting, Wash., D.C. (May 22,
1996); Remarks by Steven M.H. Wallman, Commissioner, SEC, before the
ICI's 1995 Investment Company Directors Conference and New Directors
Workshop, Wash., D.C. (Sept. 22, 1995); ``Toward Better
Disclosure,'' Remarks by Isaac C. Hunt, Jr., Commissioner, SEC,
before the American Society of Corporate Secretaries, Seattle, Wash.
(June 26, 1996). See also McTague, Simply Beautiful: Shorn of
Legalese, Even Prospectuses Make Sense, Barron's, Oct. 7, 1996, at
F10 (concerning the recent efforts of the John Hancock funds and
other fund groups to simplify their prospectuses).
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The Commission's commitment to improve the information provided in
fund disclosure documents is long-standing, and the Commission has
taken a number of steps to meet this goal.5
[[Page 10944]]
Today, the Commission is proposing new rule 498, which would permit a
fund to provide investors with a profile. The profile would include a
summary of key information about a fund, including a fund's investment
objectives, strategies, risks, performance, fees, investment adviser
and portfolio manager, purchase and redemption procedures, tax
implications, and the services available to the fund's investors. The
profile is designed to permit investors at their option to purchase a
fund's shares based on the information in the profile or to request and
review the fund's prospectus (and other information about the fund)
before making an investment decision. Investors deciding to purchase
fund shares based on a profile would receive the fund's prospectus with
their purchase confirmation.
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\5\ See Investment Company Act Release No. 20974 (Mar. 29, 1995)
(60 FR 17172) (requesting comment on ways to improve risk disclosure
and comparability of fund risk levels) (``Risk Concept Release'');
Investment Company Act Release No. 21216 (July 19, 1995) (60 FR
38454) (proposing amendments designed to make money market fund
prospectuses simpler and more informative); Investment Company Act
Release No. 19382 (Apr. 6, 1993) (58 FR 19050) (simplifying
financial highlights information and requiring management's
discussion of fund performance); Investment Company Act Release No.
16245 (Feb. 2, 1988) (53 FR 3868) (``Fund Performance Release'')
(adopting a uniform formula for calculating fund performance);
Investment Company Act Release No. 16244 (Feb. 1, 1988) (53 FR 3182)
(adopting a uniform fee table in fund prospectuses). See also SEC,
Report of the Advisory Committee on the Capital Formation and
Regulatory Processes (July 24, 1996); SEC, Report of the Task Force
on Disclosure Simplification (1996) (recommending specific
improvements in the disclosure provided by corporate issuers).
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In connection with the profile initiative, the Commission also is
proposing, in the first of two companion releases, changes to
prospectus disclosure requirements (``Form N-1A Release''). This
proposal seeks to focus prospectus disclosure on essential information
about a particular fund that would assist an investor in deciding
whether to invest in that fund.6 In the other companion release,
the Commission is proposing a new rule that would address investment
company names. This rule would require funds and other registered
investment companies with names suggesting a particular investment
emphasis to invest at least 80% of their assets in the type of
investment suggested by their names.7 Taken together, the
initiatives proposed today are intended to allow funds flexibility to
respond to the diverse information needs of investors, improve and
streamline prospectus disclosure, and address fund names that are
likely to mislead investors about a fund's investments and risks.
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\6\ Form N-1A Release, supra note 1.
\7\ Fund Names Release, supra note 2.
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In a related initiative, the Commission recently proposed rule
amendments to require the use of plain English principles in drafting
prospectuses and to provide other guidance on improving the readability
of prospectuses.8 The Commission intends that the plain English
initiatives serve as the standard for all disclosure documents, and the
plain English proposals are an important counterpart of the proposed
fund disclosure initiatives. If adopted, the plain English requirements
would apply to fund prospectuses and the profile.
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\8\ Securities Act Release No. 7380 (Jan. 14, 1997) (62 FR 3152)
(``Plain English Release''). In conjunction with these proposals,
the Commission's Office of Investor Assistance has issued a draft of
A Plain English Handbook: How to Create Clear SEC Disclosure
Documents to explain the plain English principles of the proposed
amendments and other techniques for preparing clear disclosure
documents. See also ``Plain English: A Work in Progress,'' Remarks
by Isaac C. Hunt, Commissioner, SEC, before the First Annual
Institute on Mergers and Acquisition: Corporate, Tax, Securities,
and Related Aspects, Key Biscayne, Fla. (Feb. 6, 1997).
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As part of a broad review of fund disclosure requirements, the
Commission conducted a pilot program that permits funds to use profiles
(``pilot profiles'') with their prospectuses.9 The Investment
Company Institute (``ICI'') and several large fund groups participated
in the pilot program. The pilot profiles, like the profile proposed
today, provide a summary of key information about a fund. The purpose
of the pilot program was to assess whether investors found the pilot
profiles helpful in making investment decisions. Focus groups conducted
on the Commission's behalf (``Focus Groups'') responded very positively
to the profile concept, indicating that a profile would assist them in
making investment decisions. Fund investors participating in a survey
sponsored by the ICI strongly supported the pilot profiles.10 In
addition, many commenters, including individual investors, have
endorsed the profile's goal of providing standardized, summary
information about a fund.11
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\9\ See Investment Company Institute (pub. avail. July 31, 1995)
(``1995 Profile Letter''). The Division of Investment Management has
permitted the pilot program, with some modifications, to continue
for another year. See Investment Company Institute (pub. avail. July
29, 1996) (``1996 Profile Letter'').
\10\ Letter from Paul Schott Stevens, Senior Vice President and
General Counsel, ICI, to Barry P. Barbash, Director, Division of
Investment Management, SEC, at 5-6 (May 20, 1996) (``ICI Survey
Letter'') (enclosing Investment Company Institute, The Profile
Prospectus: An Assessment by Mutual Fund Shareholders (1996) (survey
of over 1,000 fund investors)).
\11\ A number of individual investors have written to the
Commission expressing strong support for the profile. See also
Profile Prospectuses: An Idea Whose Time Has Come, Mutual Funds
Magazine, Aug. 1996, at 11.
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Proposed rule 498 would implement the pilot program and give
investors a new option of purchasing fund shares based on a profile,
which would be a summary disclosure document. Each investor using the
profile to make an investment decision would receive the full
prospectus with the purchase confirmation. Since a fund's prospectus
and other information about the fund would be available upon request,
the profile would not reduce the information available to investors (or
securities professionals). The profile also would not modify the
protections afforded investors under the federal securities laws for
misleading statements in fund disclosure documents. As an additional
safeguard against misleading statements, rule 498 would require a fund
to file the profile with the Commission before its first use, which
would allow the Commission to monitor compliance with the profile
disclosure requirements.
The profile would meet the Commission's goal of improving fund
disclosure by providing:
A new disclosure choice for investors: Focus Group
participants and information from other sources indicate that different
investors prefer different amounts of information before making an
investment decision. 12 The profile would allow investors to
choose the amount and format of information they want before making an
investment decision. An investor comfortable with the level of
information contained in a profile could purchase fund shares based on
that information (and receive the fund's prospectus with the purchase
confirmation). An investor who prefers more information before
investing in a fund could use the profile to request the fund's
prospectus and other information about the fund.
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\12\ See, e.g., ICI Survey Letter, supra note 10, at 4-6.
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As a short, summary document, the profile could be a more efficient
and less costly means of providing information to investors. A fund
would have the flexibility to use diverse methods to distribute a
profile (e.g., by direct mail or by electronic media). To respond to
investor interest, a fund could make the profile available and incur
lower printing and mailing costs than it pays when sending a prospectus
to every investor who is selecting among a number of similar or
different types of funds. Investors, for example, could use the profile
to narrow the number of funds being considered for investment and
request prospectuses only for those funds about which the investor
would
[[Page 10945]]
like additional information before making a final investment decision.
13
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\13\ Focus Group participants indicated that they would use the
profile to narrow their investment options.
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Standardized fund summaries: Investors and others have
expressed a strong preference for summary information about a fund in a
standardized format. 14 The profile would meet this goal by
requiring concise disclosure of 9 items of key information in a
specific order and a question-and-answer format. These items would
include a risk/return summary (also proposed to be required at the
beginning of all fund prospectuses), which would summarize the fund's
investment objectives, strategies, risks, performance, and fees.
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\14\ Focus Group participants identified the standardized,
summary fund information in the profile as particularly helpful in
evaluating and comparing fund investments. See also ICI Survey
Letter, supra note 10, at 4.
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Disclosure about a fund's risks would include a concise narrative
description of the fund's overall risks and a bar chart that would
illustrate graphically the fund's past risks by showing changes in the
fund's returns from year to year. A table accompanying the bar chart
would compare the average annual returns of the fund to those of a
broad-based securities market index so that investors could evaluate
the fund's performance and risks relative to the market.
Requiring profiles to present information in a standardized format
should help investors identify key information about a fund and make
comparisons among different funds. Rule 498 also would allow a fund to
adapt the profile for use by investors in participant-directed defined
contribution plans, who could use the summary information to evaluate
and compare the investment alternatives offered by a plan. 15
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\15\ See infra note 97 and accompanying text.
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II. Discussion
A. General
The proposed requirements for the profile would be based on the
current no-action letter of the Commission's Division of Investment
Management (``Division'') permitting the pilot profiles (``1996 Profile
Letter'').16 Rule 498 would modify certain requirements in the
1996 Profile Letter in light of both the Commission's experience with
the pilot program and its broad consideration of fund disclosure
requirements.17 As in the pilot program, use of the profile would
be limited to funds because the profile appears to be particularly
well-suited to the structure and operation of funds and the way fund
shares are marketed. Based on, among other things, the Commission's
experience with the use of the profile by funds, the Commission may
consider in the future extending rule 498 to other types of investment
companies, including separate accounts and unit investment
trusts.18 The Commission requests comment whether and why the
profile as proposed for funds would be appropriate for other types of
investment companies.
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\16\ 1996 Profile Letter, supra note 9. Any fund that has an
effective registration statement and a current prospectus would be
eligible to use a profile under rule 498.
\17\ See Form N-1A Release, supra note 1. See also ICI Survey
Letter, supra note 10.
\18\ Currently, a profile of a fund that offers shares to a
separate account registered on Forms N-4 (17 CFR 274.11c) or S-6 (17
CFR 239.16) must be accompanied by the separate account's
prospectus. See National Association for Variable Annuities (pub.
avail. June 4, 1996) (permitting variable annuity registrants to use
``variable annuity profiles'' together with their prospectuses).
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Rule 498 would require 9 items of information to appear in a
specific sequence and in a question-and-answer format. Standardizing
the order of profile disclosure is designed to help investors locate
information and compare the profiles of various funds.19 The
proposed question-and-answer format, frequently used by many funds, is
intended to help communicate the required information effectively. The
Commission is not proposing to limit funds to specific questions, and
rule 498 would give funds the flexibility to substitute substantially
similar questions to those included in the rule. The Commission
requests comment on the proposed question-and-answer format and whether
rule 498 instead should permit funds to choose the type of heading for
the prescribed disclosure topics.
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\19\ The profile would be subject to the font size and other
legibility requirements for prospectuses under rule 420 of the
Securities Act (17 CFR 230.420), which requires prospectuses to be
in roman type at least as large and as legible as 10-point modern
type.
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The profile would be a summary prospectus within the meaning of
section 10(b) of the Securities Act.20 As a summary disclosure
document, the profile is intended to provide a concise, standardized
summary of key information disclosed in a fund's prospectus.21
Rule 498 would identify the subjects to be covered and provide guidance
about the degree of detail that is appropriate for a summary document.
Rule 498 would require funds to include only the information specified
by the rule.22 The 9 items of required disclosure in the profile
are intended to summarize key information in a fund's prospectus. As a
result, a fund would not be able to use a profile when material
information relating to its particular circumstances is not addressed
by the instructions for the 9 items of required disclosure. The
Commission believes that the goal of achieving a short, summary
disclosure document that investors can use to evaluate and compare
funds would not be met unless the rule establishes certain limits on
the information included in a profile. The Commission requests comment
on the types of disclosure proposed to be required in the 9 items and
whether other or additional items would be appropriate.
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\20\ 15 U.S.C. 77j(b). See also section 24(g) of the Investment
Company Act, 15 U.S.C. 80a-24(g). The Commission has long-encouraged
summary prospectuses under section 10(b) to supply investors with a
condensed statement of the more important information included in
the prospectus. In 1956, the Commission adopted a rule permitting
the use of a summary prospectus under section 10(b), which was
extended to investment companies in 1972. See Securities Act Release
No. 3722 (Nov. 23, 1956) (adopting rule 434A (17 CFR 230.434A) to
permit the use of a summary prospectus); Securities Act Release No.
5248 (May 9, 1972) (37 FR 10071) (extending rule 434A to investment
companies); Securities Act Release No. 6383 (Mar. 3, 1982) [47 FR
11380] (renumbering rule 434A as rule 431 [17 CFR 230.431). Rule 498
is intended to replace the summary prospectuses that funds are
permitted to use under rule 431, and the Commission is proposing to
revise rule 431 to clarify that it is not applicable to funds. In
keeping with this approach, the Commission is proposing to eliminate
the ``Instructions as to Summary Prospectuses'' that accompany Form
N-1A. See Form N-1A Release, supra note 1.
\21\ The profile generally would provide a summary of the
material elements in the prospectus, while the prospectus would
provide a fuller description of each of these items. The prospectus,
for example, would disclose the amount of any rule 12b-1 fees
charged by a fund in the fee table and would include a narrative
discussion about the fund's rule 12b-1 fees. In contrast, the
profile as a summary disclosure document would disclose the amount
of the fund's rule 12b-1 fees as part of the fee table disclosure.
Similarly, a prospectus would identify each sub-adviser, if any,
that manages a fund's portfolio while, in certain cases, a profile
could disclose the number of sub-advisers managing the fund's
portfolio without identifying each sub-adviser. See Form N-1A
Release, supra note 1, and infra notes 58 and 65 and accompanying
text.
\22\ Proposed rule 498(b). In addition, a fund would not be
allowed to use footnotes or to include cross-references within the
profile or to other information, unless specifically required or
permitted.
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The Commission's plain English proposal, which would modify the
general rule under the Securities Act addressing prospectus
disclosure,23 would apply to the profile.24 While the release
proposing the plain English
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amendments was issued before this release and does not refer
specifically to the profile, the Commission intends that the plain
English requirements apply to all disclosure in the profile. If the
proposed profile and the plain English requirements are adopted, the
Commission intends to apply the plain English requirements specifically
to the profile.
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\23\ Rule 421 under the Securities Act (17 CFR 230.421).
\24\ In addition, an Instruction to rule 498 would advise a fund
to present profile disclosure clearly and concisely, without using
excessive details, legal or technical terms, complex language, or
long sentences and paragraphs.
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Under rule 498, a profile could describe more than one fund. The
pilot profile, in contrast, contains information about a single
fund.25 The Commission's assessment of the pilot program and the
Focus Groups conducted on the Commission's behalf indicate that a
profile that describes more than one fund can achieve the goal of
providing a summary disclosure document that assists investors in
evaluating and comparing funds.26 In particular, describing more
than one fund in a profile can be a useful means of providing investors
with investment alternatives offered by a fund group. The Commission
recognizes, however, that too much information could make the profile
lengthy, complex, and difficult to understand. Therefore, the
Commission requests comment whether the number of funds described in a
profile should be limited to one fund or some other number of funds to
assure clear and concise disclosure.
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\25\ 1995 Profile Letter, supra note 9, at 2.
\26\ See General Instruction C of proposed Form N-1A, supra note
1, for guidance on disclosing information for more than one fund in
the same prospectus.
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B. Profile Disclosure
1. Cover Page
Rule 498 would require the cover page of the profile to include
certain basic information about the fund and to disclose that the
profile is a summary disclosure document.27 The cover page would
include the fund's name and, at a fund's option, could disclose the
fund's investment objectives or the type of fund offered (e.g., that
the fund is a growth fund or invests its assets in a particular
country). The profile cover page also would identify the disclosure
document as a `profile'28 and include a legend explaining the
profile's purpose. The profile legend is intended to make it clear that
investors may obtain the fund's prospectus and other information about
the fund before making an investment decision. In keeping with this
objective, rule 498 would require a fund to provide the following
legend:
\27\ Proposed rule 498. The cover page also would include the
date of the profile. See infra note 84 and accompanying text
regarding the proposed dating requirements. If the profile is
distributed electronically or as part of another document (e.g.,
when the profile is printed in a magazine), rule 498 would require
cover page information to appear at the beginning of the profile.
\28\ In identifying the document as a ``profile,'' a fund would
be instructed not to use the term ``prospectus.'' Proposed rule
498(c)(1)(ii).
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This Profile summarizes key information about the Fund that is
included in the Fund's prospectus. If you would like more
information before you invest, you may obtain the Fund's prospectus
and other information about the Fund at no cost by calling
____________.29
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\29\ See 1996 Profile Letter, supra note 9, at 1 (requiring a
similar legend). A fund would be required to provide a toll-free or
collect telephone number for investors to request the prospectus or
other information. If applicable, a fund could indicate that the
prospectus is available on its Internet site or by E-mail. When an
application to purchase the fund's shares accompanies the profile,
rule 498 would require the application to present with equal
prominence the option to invest in the fund based on the information
included in the profile or request the prospectus before making an
investment decision. See infra text accompanying note 72. The
profile disclosure about the fund's investment strategies also would
inform investors about the availability of additional information in
the fund's shareholder reports. See infra note 37 and accompanying
text.
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The Commission requests comment on the substance and wording of this
legend. As an alternative, the Commission requests comment whether the
legend should state the following:
This Profile summarizes key information about the Fund that is
included in the Fund's prospectus. The prospectus includes
additional material information about the Fund that you may want to
consider before you invest. You may obtain the Fund's prospectus and
other information about the Fund at no cost by calling ____________.
The Commission requests comment whether this statement would better
inform an investor of the profile's nature as a summary document and
the availability of a fuller description about the fund and its
operations in the prospectus.
To assure that investors receive additional information promptly,
rule 498 would require a fund to send the prospectus within 3 business
days of a request. The Commission views compliance with this
requirement as an essential component of the profile initiative and the
goal of promoting effective communication of information about funds.
The Commission's Office of Compliance Inspections and Examinations
would examine a fund's compliance with the 3-day requirement and the
Commission would bring an enforcement action in an appropriate case for
failing to comply with the requirement. 30
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\30\ Proposed rule 498(b). In addition to the 3-day mailing
requirement for prospectuses, rule 498 would require a fund to send
within 3 business days of a request its annual or semi-annual
shareholder report and Statement of Additional Information (``SAI').
The Commission staff also would examine a fund's compliance with
this requirement and the Commission would bring an enforcement
action in an appropriate case for failing to comply with this
requirement.
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2. Risk/Return Summary
The first 4 items of the profile would be substantially identical
to the disclosure required in the proposed risk/return summary at the
beginning of fund prospectuses. 31 The Form N-1A Release discusses
these disclosure requirements in detail and requests specific comment
about certain requirements. Commenters, therefore, also should review
the discussion of the risk/return summary in the Form N-1A Release.
32 The Commission expects that if the requirements for the risk/
return summary change in response to comments or otherwise, conforming
amendments would be made to both rule 498 and Form N-1A.
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\31\ See Items 2 and 3 of proposed Form N-1A. See also General
Instruction C.2.(a) of proposed Form N-1A.
\32\ Form N-1A Release, supra note 1.
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The proposed first 4 items in the profile would require disclosure
in response to the following questions:
What are the fund's goals?
To assist investors in identifying funds that meet their general
investment needs, rule 498 would require a fund to disclose its
investment objectives. 33 A fund, at its option, also could
disclose the type of fund offered.
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\33\ Proposed rule 498 (incorporating Item 2(a) of proposed Form
N-1A). In providing this disclosure, a fund could refer to its
investment objectives as investment goals.
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What are the fund's main investment strategies?
Rule 498 would require a fund to summarize, based on the
information provided in the fund's prospectus, how the fund intends to
achieve its investment objectives. The summary would be required to
identify the fund's principal investment strategies, including the
particular type or types of securities in which the fund invests or
will invest principally, and any policy of the fund to concentrate in
an industry or group of industries.34
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\34\ The criteria for determining whether a particular strategy
is a principal strategy and disclosure about concentration policies
are discussed in the Form N-1A Release, supra note 1.
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A fund also would be required to inform investors about the
availability of additional information about the fund's investments in
the fund's shareholder reports. Fund annual reports typically include
management's discussion of fund performance (``MDFP''), which describes
a fund's strategies that materially affected the fund's returns during
the most recent
[[Page 10947]]
fiscal year.35 The Division's review of and experience with MDFP
disclosure indicate that the annual report may be a valuable resource
for investors.36 The proposed rule would require the section of
the profile relating to a fund's investment strategies to contain
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disclosure to the following effect:
\35\ See Item 5 of proposed Form N-1A.
\36\ Commenters also have cited the annual report as a source of
valuable information. See Voss Sanders, Dear Shareholder,
Morningstar Mutual Funds, Apr. 26, 1996, at 1 (commenting on
improved annual report disclosure).
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Additional information about the fund's investments is available in
the fund's annual and semi-annual reports to shareholders. In
particular, the fund's annual report discusses the relevant market
conditions and investment strategies used by the fund's adviser that
materially affected the fund's performance during the last fiscal
year. You may obtain these reports at no cost by calling
____________.37
\37\ If applicable, a fund could indicate that its annual and
semi-annual reports are available on its Internet site or by E-mail
request. In addition, a fund that provides its MDFP in the
prospectus or a money market fund (which is not required to prepare
a MDFP) would omit the second sentence of this disclosure.
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This disclosure would be required to appear in the context of
information about a fund's investments.38 The Commission requests
comment on this approach. For example, would it be more helpful to
investors if the profile included under a separate caption an
explanation of the various types of additional information available to
investors (e.g., the fund's shareholder reports and SAI)?
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\38\ The 1996 Profile Letter, supra note 9, at 1, contemplates
that information about the availability of a fund's shareholder
reports appear at the beginning of the profile.
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What are the main risks of investing in the fund?
Narrative Disclosure. Rule 498 would require a fund to summarize
the principal risks of investing in the fund based on the risk
disclosure provided in the fund's prospectus.39 The risk section
of the profile would provide an overview of the risks to which the
fund's particular portfolio as a whole is expected to be subject and
the circumstances reasonably likely to affect adversely the fund's net
asset value and performance. The risk section also would include
disclosure about the risk of losing money 40 and identify the
types of investors for whom the fund may be an appropriate or
inappropriate investment (based on, for example, an investor's risk
tolerance or time horizon). Information about whether the fund is
appropriate for particular types of investors is designed to help
investors evaluate and compare funds based on their investment
objectives and individual circumstances.41 A fund, at its option,
also could discuss in the risk section the potential rewards of
investing in the fund as long as the discussion provides a balanced
presentation of the fund's risks and rewards.42
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\39\ Proposed rule 498(c)(2)(iii) (incorporating Item 2(c) of
proposed Form N-1A). See also Form N-1A Release, supra note 1
(regarding fund risk disclosure proposed to be required in the
prospectus).
\40\ In recognition of the relative safety of money market
funds, a money market fund would be required to state that: Although
the fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the fund.
\41\ The 1996 Profile Letter, supra note 9, at 2, requires
information about the appropriateness of the fund for particular
types of investors to be presented under a separate caption. Because
this information is closely related to the risks of investing in a
fund, rule 498 would integrate this disclosure into the discussion
of a fund's risks.
\42\ The 1996 Profile Letter, supra note 9, at 2, permits
disclosure about the rewards of investing in a fund only if
presented separately from disclosure about the fund's risks.
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Special Disclosure Requirements. A money market fund and a fund
advised by or sold through a bank would be required to disclose in the
risk section of the profile that an investment in the fund is not
insured or guaranteed by the Federal Deposit Insurance Corporation or
any other government agency. A tax-exempt money market fund that
concentrates its investments in a particular state would be required to
disclose that investing in the fund may be riskier than investing in
other types of money market funds, since the fund may invest a
significant portion of its assets in a single issuer.
Similar disclosure for these funds currently is required to appear
on the cover page of their prospectuses.43 Consistent with the
proposed risk/return summary in the prospectus, rule 498 would require
this disclosure to appear in the risk section of the profile. Since the
disclosure relates directly to a fund's risks, it would appear to be
more meaningful to investors when presented in the context of
information about the fund's risks. The proposed approach also would
help streamline the profile cover page and avoid repeating information
on the cover page and in the risk section of the profile.
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\43\ See Item 1(a)(vi) and (vii) of Form N-1A; Letter to
Registrants from Carolyn B. Lewis, Assistant Director, Division of
Investment Management, SEC, at II.B (Feb. 25, 1994).
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Rule 498 would require a fund to disclose in the risk section of
the profile (if applicable) that it is non-diversified.44 To help
investors understand this disclosure, rule 498 would require a non-
diversified fund to describe the effects of non-diversification (e.g.,
that, compared to diversified funds, the fund may invest a greater
percentage of its assets in a particular issuer) and to summarize the
risks of this practice.45
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\44\ See Investment Company Act section 5(b) (15 U.S.C. 80a-
5(b)) (regarding diversified and non-diversified funds).
\45\ The 1996 Profile Letter, supra note , at 2, requires a fund
to disclose without further explanation that it is non-diversified.
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Risk/Return Bar Chart and Table. Rule 498 would require the risk
section of the profile to include a bar chart showing a fund's calendar
year returns and a table comparing the fund's average annual returns to
those of a broad-based securities market index.46 The proposed
rule would require the bar chart and table to be included in the risk
section of the profile under a subheading that refers to both risk and
performance.47 Over 75% of individual investors responding to a
Commission release requesting comment about ways to improve risk
disclosure favored a bar chart presentation of fund risks.48 Focus
Group participants found both the bar chart and a tabular presentation
of fund performance (particularly when the table included return
information for a broad-based securities market index) helpful in
evaluating and comparing fund investments.
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\46\ Proposed rule 498 (incorporating Item 2(c) of proposed Form
N-1A).
\47\ The 1996 Profile Letter, supra note , at 2-3, requires the
bar chart and table to appear under a caption relating to a fund's
past performance. To help investors use the information in the bar
chart and table, the proposed rule would require a fund to explain
how the information illustrates the fund's risks and performance.
Item 2 of proposed Form N-1A would provide the following example of
this explanation: This information illustrates the fund's risks and
performance by showing changes in the fund's performance from year
to year and by showing how the fund's average annual returns for
one, five, and ten years compare to those of a broad measure of
market performance. A fund also would be required to disclose that
how the fund has performed in the past is not necessarily an
indication of how the fund will perform in the future.
\48\ See Risk Concept Release, supra note .
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The bar chart would present a fund's returns for each of the last
10 calendar years and would illustrate graphically a fund's past risks
by showing changes in the fund's returns over time.49 The table
would present the fund's average annual
[[Page 10948]]
returns for the last one, five, and ten fiscal years (or for the life
of the fund, if shorter) and would provide comparable return
information for a broad-based securities market index.50 Requiring
comparative return information for a broad-based market index would
provide investors with a basis for evaluating a fund's performance and
risks relative to the market.51 The proposed approach also would
be consistent with the line graph presentation of fund performance
required in MDFP disclosure. Rule 498 would permit a fund to include
return information for other indexes, including a ``peer group'' index
of comparable funds.
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\49\ The proposed rule would require the bar chart of a fund in
operation for fewer than 10 years to include annual returns for the
life of the fund. In addition, a fund would be required to have at
least one calendar year of returns before including the bar chart. A
fund that includes a single bar in the bar chart or a fund that does
not include the bar chart because the fund does not have annual
returns for a full calendar year would be required to modify, as
appropriate, the narrative explanation accompanying the bar chart
and table (e.g., by stating that the information shows the fund's
risks and performance by comparing the fund's performance to a broad
measure of market performance). See Item 2 of proposed Form N-1A.
\50\ A money market fund would be required to include its 7-day
yield in the table. A non-money market fund would be permitted to
disclose its yield, and any fund (including a money market fund)
would be permitted to disclose its tax-equivalent yield. When yield
information is disclosed, a fund would be required to include a
toll-free (or collect) telephone number that investors can use to
obtain current yield information.
\51\ See 1996 Profile Letter, supra note , at 3 (permitting a
fund, at its option, to compare its returns to those of an
appropriate broad-based securities market index).
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While the average annual return information for the fund in the
table would reflect the payment of any sales loads charged by the fund,
the return information in the bar chart would not reflect sales
loads.52 Sales loads can be accurately and fairly reflected in
return information of the type contained in the table by deducting
sales loads at the beginning (or end) of particular periods from a
hypothetical initial fund investment. Reflecting sales loads in the bar
chart, however, may be impracticable. In addition, reflecting the
payment of sales loads may be less important in the bar chart than in
the table, since the bar chart is intended primarily to depict fund
risks graphically. A fund that charges sales loads would be required to
disclose that sales loads are not reflected in the bar chart and that,
if the loads were included, returns would be less than those
shown.53
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\52\ The annual returns in the bar chart would be calculated
using the same method required by Item 9 of proposed Form N-1A to
calculate annual returns in the financial highlights information
included in fund prospectuses. As in the case of annual returns in
the financial highlights information, the returns in the bar chart
would not reflect sales loads or account fees. The average annual
returns included in the table would be calculated using the same
method required by Item 21 of proposed Form N-1A to calculate fund
performance included in advertisements, which reflects the payment
of sales loads and recurring shareholder account fees. See also Item
5 of proposed Form N-1A (requiring sales loads and recurring
shareholder account fees to be reflected in the return information
shown in the line graph in the MDFP).
\53\ Similar disclosure would be required if a fund charges
account fees.
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Rule 498 would require a multiple class fund to include return
information in the bar chart for only one class. Because the returns of
each class differ only to the extent the classes do not have the same
expenses, including return information in the bar chart for all classes
appears to be unnecessary to illustrate the risks of investing in the
fund.54 Rule 498 would require the bar chart to reflect annual
return information for the class offered in the profile that has
returns for the longest period over the last 10 years. This approach is
intended to provide the greatest amount of information about changes in
the fund's returns.55
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\54\ In addition, the table accompanying the bar chart would
provide return information for each class offered in the profile.
\55\ When two or more classes included in the profile have
returns for at least 10 years or returns for the same period but
fewer than 10 years, the fund would be required to provide annual
returns for the class with the greatest net assets as of the end of
the fund's most recent fiscal year. Focusing on the class with the
greatest net assets is intended to provide returns in the bar chart
for a ``representative'' class offered in the profile.
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Rule 498 would require a fund to provide in the table its average
annual returns and those of a broad-based securities market index as of
the end of the most recent calendar quarter prior to the profile's
first use. A fund would be required to update this information for each
succeeding calendar quarter as soon as reasonably practicable following
the completion of the quarter. To avoid having to reprint the profile,
a fund would be permitted to update performance information by using,
for example, a sticker or stamp reflecting the updated information.
What are the fund's fees and expenses?
Consistent with current prospectus disclosure, the profile would
include a fee table summarizing a fund's fees and expenses, including
any sales loads charged in connection with an investment in the
fund.56 Fees and expenses directly affect a fund's performance and
can be important elements of an investment decision for fund investors.
The fee table is designed to help investors understand the costs of
investing in a fund and compare those costs with the costs of other
funds.57
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\56\ Proposed rule 498 (incorporating Item 3 of proposed Form N-
1A). See also Item 2(a) of Form N-1A.
\57\ See Form N-1A Release, supra note (proposing amendments to
improve fee table disclosure).
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Other Disclosure Requirements
Rule 498 would require the profile to include disclosure about
additional key aspects of a fund investment in response to the
following questions:
Who are the fund's investment adviser and portfolio manager?
Rule 498 would require a fund to identify its investment adviser
and the person or persons primarily responsible for the day-to-day
management of the fund's portfolio (``portfolio manager'').58 Rule
498 also would require information about the length of time the
portfolio manager has managed the fund and a summary of the portfolio
manager's business experience for the last 5 years. Focus Group
participants indicated that information about a fund's portfolio
manager was important in evaluating and comparing fund
investments.59
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\58\ Proposed rule 498. Consistent with Item 6(a)(2) of proposed
Form N-1A, rule 498 would not require information about the
portfolio manager of a money market fund or an index fund.
\59\ See also ICI Survey Letter, supra note , at 9 (recommending
that the profile include this information).
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When several persons act together to manage a fund's portfolio,
profile disclosure, like the portfolio manager disclosure required in
fund prospectuses, would indicate that a committee has primary
responsibility for the fund's portfolio management.60 When 3 or
more persons each manage a portion of the portfolio, rule 498 would
permit a fund to identify the number of persons managing the portfolio
without naming each manager, except that, if a portfolio manager
manages 40% or more of the fund's portfolio, information about that
manager would be require to be disclosed.61 When portions of a
fund's portfolio are managed by several persons, the fund's risks and
returns generally are less dependent on the activities of a particular
person. Focusing profile disclosure on the number of a fund's portfolio
managers would inform investors about the shared responsibility for the
fund's portfolio management without adding unnecessary length to the
profile. In addition, requiring information about any portfolio manager
who manages 40% or more of a fund's portfolio would assure that
disclosure would be provided when a portfolio manager has
[[Page 10949]]
significant responsibilities with respect to the fund's portfolio.
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\60\ See Instruction 3 to Item 6(a)(2) of proposed Form N-1A.
\61\ The 1996 Profile Letter, supra note , at 3, permits a fund
to disclose that 3 or more persons manage the fund's portfolio,
without regard to the percentage of the portfolio managed by any one
person.
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A fund would be required to identify a sub-adviser (if any) subject
to two exceptions.62 First, rule 498 would not require a fund to
identify a sub-adviser whose sole responsibility for the fund is
limited to routine cash management.63 Responsibility for routine
cash management generally is incidental to a fund's investment
objectives and unlikely to affect the fund's overall portfolio
management and risks.64 Second, consistent with the proposed
approach for portfolio manager disclosure, rule 498 would permit a fund
with 3 or more sub-advisers, each of which manages a portion of the
fund's portfolio to disclose the number of sub-advisers without giving
the name of each sub-adviser, except that the identity of any sub-
adviser that manages 40% or more of the fund's portfolio would be
required to be disclosed.65
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\62\ See section 2(a)(20) (15 U.S.C. 80a-2(a)(20)) (defining
``investment adviser'' to include a sub-adviser).
\63\ In contrast, the 1996 Profile Letter, supra note 9, at 3,
requires disclosure about a sub-adviser only if it manages a
material portion of a fund's portfolio.
\64\ Information about a fund's cash management practices
generally would not be disclosed in the section of the profile that
discusses the fund's main investment strategies. See Form N-1A
Release, supra note (prospectus disclosure would focus on a fund's
principal strategies, which generally would not include the fund's
cash management practices).
\65\ See 1996 Profile Letter, supra note , at 3 (permitting a
fund to provide disclosure to the effect that 3 or more sub-advisers
manage the fund's portfolio without regard to the percentage of the
portfolio managed by any one sub-adviser). To further limit the
scope of this exception, a sub-adviser solely responsible for
managing a fund's cash positions would not be counted in determining
whether 3 or more sub-advisers manage the fund's portfolio.
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The Commission requests comment on the proposed approach when 3 or
more portfolio managers or sub-advisers each manage a portion of a
fund's portfolio. The Commission requests specific comment on the
proposed exceptions for providing information about any portfolio
manager and the identity of any sub-adviser that manages 40% or more of
a fund's portfolio. In particular, the Commission requests comment
whether a lower or higher percentage would be appropriate. The
Commission also requests comment on alternatives that would simplify
this disclosure while continuing to provide information about a
portfolio manager or sub-adviser that has significant responsibilities
for management of a fund's portfolio.
How do I buy the fund's shares? How do I sell the fund's
shares?
Rule 498 would require a fund to describe in the profile under two
separate questions how to purchase and how to redeem the fund's
shares.66 The purchase section of the profile would include
information on minimum investment requirements (e.g., initial and
minimum account balances) and, when applicable, any breakpoints in or
waivers of sales loads.67
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\66\ Proposed rule 498, (vii).
\67\ To help investors understand the meaning of the term
``sales load,'' proposed Form N-1A would require the fee table and
narrative discussion of sales loads in the prospectus to refer to
``sales fees (loads).'' This approach also would apply to profile
disclosure.
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Apart from the general requirement to provide summary information
and concise disclosure, rule 498 would not limit the extent of purchase
and redemption information included in a profile. Funds participating
in the pilot program disclosed this information concisely when the
profile accompanied the prospectus. When a profile is used without the
prospectus, however, a fund may find it necessary to disclose more
extensive information about purchase and redemption procedures and, in
particular, sales load breakpoints and waivers.68 Including
detailed purchase, redemption, and sales load information in the
profile would appear to be inconsistent with the profile's purpose as a
summary disclosure document. For this reason, the Commission requests
comment whether rule 498 should impose any restrictions on the
disclosure of purchase and redemption information. Commenters favoring
limiting this disclosure are asked to provide specific suggestions for
requirements that would serve to limit the disclosure while providing
information that would assist fund investors in making investment
decisions. Should the rule, for example, require a fund to summarize
sales load information by showing the highest and lowest sales load
breakpoints?
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\68\ Fund prospectuses, for example, often include detailed
information about automatic investment programs, telephone and wire
redemption requests, rights of accumulation and letters of intent
that can be used to reduce sales loads, and sales load waivers for
particular classes of investors and transactions. See also Form N-1A
Release, supra note 1 (proposing to modify certain prospectus
disclosure requirements to focus prospectus disclosure on the amount
of the sales load charged in connection with a fund investment).
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How are the fund's distributions made and taxed?
Rule 498 would require the profile to describe how frequently a
fund intends to make distributions and what reinvestment options (if
any) are available to investors. Rule 498 also would require a fund
other than a tax-exempt fund to state, as applicable, that the fund
intends to make distributions that may be taxed as ordinary income and
capital gains.69 A tax-exempt fund would be required to state that
it intends to distribute tax-exempt income and to disclose, as
applicable, that a portion of its distributions may be taxable.70
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\69\ Proposed rule 498(c)(2)(iii). If a fund, as a result of its
investment objectives or strategies, expects its distributions
primarily to consist of ordinary income (or short-term capital gains
that are taxed as ordinary income) or capital gains, the fund would
be required to provide disclosure to that effect.
\70\ Rule 498 would give a tax-exempt fund the option of
providing specific disclosure about its taxable distributions or a
general statement that a portion of its distributions may be
taxable. A fund choosing to disclose specific information would be
required to provide the disclosure required by Item 7(d)(2)(ii) of
proposed Form N-1A (i.e., The fund would be required to state, as
applicable, that: (1) the fund may invest a portion of its assets in
securities that generate income that is not exempt from federal or
state income tax; (2) income exempt from federal income tax may be
subject to state and local income tax; (3) any capital gains
distributed by the fund may be taxable; and (4) a portion of the
tax-exempt income distributed by the fund may be treated as a tax
preference item for purposes of determining whether the shareholder
is subject to the federal alternative minimum tax).
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What other services are available from the fund?
Rule 498 would require the profile to summarize or list the
services available to the fund's investors (e.g., any exchange
privileges or automated information services).71 Funds
increasingly offer a wide variety of shareholder services. Information
about the services offered by a particular fund may be useful to
investors and help investors compare the services offered by different
funds.
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\71\ Proposed rule 498(c)(2)(ix). Some funds using pilot
profiles disclosed services relating to the purchase and redemption
of the fund's shares (e.g., telephone redemption procedures) in the
purchase and redemption sections of the profile, while other funds
disclosed this information in the section of the profile relating to
the services offered by the fund. Rule 498 would continue to give a
fund the flexibility to disclose, as appropriate, information about
its services in the purchase, redemption, or fund services sections
of the profile. To keep profile disclosure concise, rule 498 would
not permit information discussed in the purchase and redemption
sections to be repeated in the section relating to fund services.
---------------------------------------------------------------------------
Application to Purchase Shares
Rule 498 would permit a fund to include an application with the
profile to purchase the fund's shares.72 To make
[[Page 10950]]
it clear that investors may review the prospectus before investing,
rule 498 would require the application to present with equal prominence
the options of investing in the fund based on the information in the
profile or requesting the fund's prospectus before making an investment
decision.
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\72\ Proposed rule 498(c)(3). Rule 482 under the Securities Act
(17 CFR 230.482) prohibits a fund from including an application to
purchase the fund's shares in an advertisement. This prohibition was
based on concerns that an application would be inconsistent with the
purpose of rule 482, which was to provide certain information about
a fund and a means of requesting a fund's prospectus. See Fund
Performance Release, supra note 5. In 1993, the Commission proposed
to amend rule 482 to permit advertisements containing significantly
more information about a fund and a purchase application. Investment
Company Act Release No. 19342 (Mar. 5, 1993) (58 FR 16141). Unlike
the proposed amendments to rule 482, rule 498 would require a
profile to present a summary of key information about a fund in a
standardized format and is being proposed by the Commission in
conjunction with proposed amendments to Form N-1A that are designed
to improve the disclosure provided in fund prospectuses. In
connection with proposed rule 498, the Commission is proposing to
amend rule 482 to clarify that it would not apply to profiles.
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Disclosure Safeguards
The federal securities laws specifically contemplate the use of a
summary prospectus, such as the profile, for offering
securities.73 As a consequence, existing protections under the
federal securities laws would apply to false or misleading statements
in a profile. The general provisions of sections 12(a)(2) and 17(a) of
the Securities Act, which impose civil and criminal liability upon any
person who offers or sells securities based on false or misleading
statements, would apply to a profile as a summary prospectus.74
The anti-fraud provisions of section 10(b) of the Securities Exchange
Act of 1934 and rule 10b-5 under that Act also would apply.75
Section 10(b) of the Securities Act also authorizes the Commission to
suspend the use of a summary prospectus if it includes false or
misleading statements.76
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\73\ Section 10(b) of the Securities Act permits the use of a
summary prospectus (which provides information the substance of
which is included in the prospectus) to communicate information for
purposes of an offer under section 5(b)(1) of the Securities Act (15
U.S.C. 77e(b)(1)). Section 5(b)(2) of the Securities Act (15 U.S.C.
77e(b)(2)) requires, as a condition of selling a security, the
delivery to investors of a prospectus that meets the requirements of
section 10(a) of the Securities Act (15 U.S.C. 77j(a)). To meet this
requirement, rule 498 would require a fund to provide its section
10(a) prospectus in response to an investor's request or, as
required by section 5(b)(2), to provide the prospectus prior to or
with the purchase confirmation. Recent legislation added new section
24(g) to the Investment Company Act authorizing the Commission to
adopt rules permitting a fund to use a summary prospectus that
includes information the substance of which is not included in the
prospectus. National Securities Markets Improvement Act of 1996,
Pub. L. No. 104-290 (1996), section 204 (amending section 24 to add
new paragraph (g)).
\74\ 15 U.S.C. 77l(a)(2); 15 U.S.C. 77q(a).
\75\ 15 U.S.C. 78j(b); 17 CFR 240.10b-5. See also Fund
Performance Release, supra note 5, at 3878 (for anti-fraud purposes,
disclosure in a section 10(a) prospectus will not cure a false or
misleading advertisement (or ``omitting prospectus'' under section
10(b) of the Securities Act) permitted under rule 482).
\76\ This administrative remedy supplements the Commission's
stop order authority under section 8 of the Securities Act (15
U.S.C. 77h). Section 10(b) of the Securities Act specifically
excludes summary prospectuses from section 11 of the Securities Act
(15 U.S.C. 77k), which imposes strict liability for misleading
statements in a prospectus. Congress adopted this exception to
encourage the use of summary prospectuses. The exception was
justified on the basis that the Commission's review of summary
prospectuses would disclose deficiencies that could be corrected,
and that the section 10(a) prospectus has to be delivered at or
before the time a buyer receives the securities. See I L. Loss & J.
Seligman, Securities Regulation 480 & n.214 (3d ed. 1989) (citing S.
Rep. 1036, 83d Cong., 2d Sess. 17-18 (1954) and H.R. Rep. 1542, 83d
Cong., 2d Sess. 26 (1954)). If a misleading statement is included in
both the prospectus and a profile, section 11 would apply to the
sale of the fund's securities. See id.
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Rule 498 would not permit a profile to incorporate by reference the
information included in the fund's prospectus or any other disclosure
document filed with the Commission.77 The profile is designed to
summarize prospectus information in a self-contained format that would
assist an investor in making an investment decision or in deciding to
request additional information. Permitting a fund to incorporate by
reference into the profile information included in the prospectus would
mean that information in the prospectus would be considered to be part
of the profile disclosure.78 This result would not be consistent
with the purpose of the profile, which is to offer investors the option
to make an investment in a fund based solely on the information in the
profile.
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\77\ Proposed rule 498(b). See General Instruction D to proposed
Form N-1A (permitting the SAI to be incorporated by reference in the
prospectus, and other documents filed with the Commission to be
incorporated by reference in the SAI and other parts of the Form N-
1A registration statement).
\78\ See White v. Melton, 757 F. Supp. 267, 271 (S.D.N.Y. 1991).
See also Investment Company Act Release No. 13436 (Aug. 12, 1983)
(48 FR 37928, 37930).
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Although investors would be able to purchase a fund's shares based
on the summary information contained in a profile, the prospectus would
remain the primary disclosure document under the federal securities
laws. To inform investors about the availability of the prospectus, the
profile would be required to include a legend on the cover page stating
that more information is available in the prospectus, and the
application accompanying the profile would be required to give equal
prominence to the options of requesting a prospectus or investing in
the fund. A fund would be required to deliver its prospectus either in
response to an investor's request or with the purchase
confirmation.79
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\79\ See also supra note 30 and accompanying text (a fund would
be required to send the prospectus within 3 business days of a
request).
---------------------------------------------------------------------------
D. Filing Requirements
Rule 498 would require a fund to file the profile with the
Commission at least 30 days before its first use.80 The pre-use
filing requirement would allow the Commission to monitor compliance
with rule 498's disclosure requirements and reduce the possibility of
misleading information in a profile.81 Subsequently, a fund would
have to file any profile containing substantive changes to a previously
filed profile 30 days before use.82 No filing would be required
for a previously filed profile that is revised only to update return
information. The Commission requests comment on the proposed filing
requirements, including whether the pre-use filing period of 30 days
should be shorter or longer.
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\80\ Rule 498 would require a fund to file the profile under
rule 497, which sets out general filing requirements for fund
prospectuses. New paragraph (k) to rule 497 would include the
profile filing requirements. If the profile is revised during the
30-day period, a fund would be required to file a definitive copy of
the profile within 5 business days of its use so that the Commission
has a filed copy that is the same as the profile given to investors.
\81\ The Commission has determined that it is not necessary or
appropriate in the public interest or for the protection of
investors to require that the profile be filed as part of a
registration statement. Filing the profile as part of a registration
statement would impose unnecessary burdens, would restrict the
flexible use of the profile, and would not add to the Commission's
ability to monitor the disclosure in the profile.
\82\ Non-substantive changes to a profile would not require a
filing before use of the profile, although a copy would be required
to be filed within 5 days of use.
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Rule 498 would require the profile filed with the Commission to be
dated approximately as of the date of its first use.83 Rule 498
also would require a fund to add the date of the most recent
performance information included in the profile.84 This
requirement would alert investors to the updated performance
information in the profile, while assisting the Commission staff in
responding to inquiries by identifying the date of the profile filed
with the Commission.
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\83\ Proposed rule 498(c)(1)(iii).
\84\ A profile, for example, showing January 1, 1998 as its date
of first use could include a parenthetical below the January date
indicating that the profile has been ``updated as of March 31,
1998.''
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The profile would be filed electronically on the Commission's
electronic data gathering analysis and retrieval system
(``EDGAR'').85 The availability of the profile on EDGAR
[[Page 10951]]
would permit public access to fund information in profiles. Although
EDGAR does not currently reproduce graphic images (such as the profile
bar chart),86 the EDGAR rules require a fair and accurate
narrative description or tabular representation in the place of any
omitted material.87 To assist the Commission's review of the
content, use, and effectiveness of the profile, including the bar
chart, a fund would be required to file 2 copies of the profile in the
primary form intended to be distributed to investors (e.g., paper or
electronic media).88 This requirement would expire 2 years after
the effective date of rule 498 because the Commission expects that the
format and use of the profile would become largely routine and
standardized by that time, and the pre-use filing of the profile on
EDGAR would be sufficient to monitor compliance with the profile
disclosure requirements.
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\85\ Rule 101(a)(1)(i) of Regulation S-T (17 CFR
232.101(a)(1)(i)) requires prospectuses filed pursuant to the
Securities Act to be submitted in electronic format.
\86\ The Commission anticipates future modifications that would
permit EDGAR to reflect graphic images in electronically filed
documents.
\87\ Rule 304(a) of Regulation S-T (17 CFR 232.304(a)).
Immaterial differences between delivered and electronically filed
documents, such as pagination, color, type size, or corporate logo,
need not be described.
\88\ Proposed rule 497(k)(5).
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E. Dissemination of Profiles
Rapidly changing technology, particularly the electronic
distribution of information, has enhanced investors' access to
securities-related information. The Commission has recognized these
developments by allowing funds (and other registrants) maximum
flexibility in the choice and use of distribution media.89 In
keeping with this approach, rule 498 would not limit a fund's use of
any particular medium for disseminating the profile. A profile could be
made available through direct mail and mass print (e.g., magazines and
newspapers), broadcast, and electronic media. Permitting broad
dissemination of the profile would be consistent with and further the
purposes for which the profile is designed--to provide information
about a fund in a standardized and readily accessible format.
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\89\ See Investment Company Act Release No. 21399 (Oct. 6, 1995)
(60 FR 53458, 53460 & n.20) (``Electronic Distribution Release'')
(providing guidance on the electronic delivery of documents,
including prospectuses, shareholder reports, and proxies, under the
Securities Act, the Securities Exchange Act of 1934 (15 U.S.C. 78a
et seq.), and the Investment Company Act); Investment Company Act
Release No. 21945 (May 9, 1996) (61 FR 24644) (addressing the use of
electronic media by broker-dealers, transfer agents, and investment
advisers); Investment Company Act Release No. 21946 (May 9, 1996)
(61 FR 24652) (``Release 21946'') (adopting technical amendments to
rules premised on the delivery of paper documents).
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As in the case of other disclosure documents, the general
requirements of the federal securities laws would impose certain
limitations on the distribution of a profile. The means of distributing
the profile would be required to communicate the information in the
profile effectively and to enable an investor to review the disclosed
information. 90 Each version of a profile (e.g., electronic or
paper) would be required to contain all of the information required by
rule 498.91 In addition, while the profile may be delivered
without a prospectus, a profile accompanied by sales literature cannot
be delivered without the prospectus.92
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\90\ Electronic Distribution Release, supra note 89, at 53460 &
n.20. Some media, particularly broadcast media, may be inappropriate
for disseminating the profile because they may not communicate the
profile information effectively (e.g., the bar chart may not be
effectively conveyed by a radio broadcast) or provide a meaningful
opportunity for retaining the information (e.g., a short television
commercial).
\91\ Release 21946, supra note 89, at 24653. A document, whether
delivered electronically or on paper, must contain all required
information and, if the order of information has been specified,
must present the information in substantially the prescribed order.
Electronic Distribution Release, supra note 89, at 53460 n.20.
\92\ See section 2(a)(10)(a) of the Securities Act (15 U.S.C.
77b(a)(10)(a)) (excluding sales literature from the definition of a
``prospectus'' (and from the filing requirements under the
Securities Act) if a section 10(a) prospectus (but not a summary
prospectus under section 10(b)) precedes or accompanies the sales
literature).
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Electronic media, such as the Internet, may be particularly well-
suited for the delivery of the profile to investors.93 Including
the profile together with the prospectus (and other information) at a
fund's Internet site also may be a more efficient method for funds to
disseminate disclosure documents. Electronic availability of both the
profile and prospectus could mean that investors could easily invest in
a fund and access the fund's prospectus for more information.94 An
investor's use of an electronic application in the profile would create
a presumption of delivery of the prospectus if both the profile and the
prospectus are available at the same electronic site.95 A fund
that does not electronically disseminate the profile and prospectus
together could not rely on this presumption and would be required to
provide a copy of the prospectus with the purchase confirmation.
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\93\ Electronic media include, for example, electronic bulletin
boards, E-mail, facsimiles, Internet sites, audiotapes, and
videotapes. Electronic Distribution Release, supra note 89, at 53458
n.9.
\94\ A fund could provide a hyperlink to the prospectus from the
profile. A hyperlink in a document (which, for example, may be an
underlined word or phrase) permits a viewer to ``jump'' to another
document (or part of the same document) with a mouse click. The
words ``investment strategies'' in the profile, for example, could
be set up as a hyperlink to the discussion of investment strategies
in the prospectus. Using hyperlinks would promote the profile's role
as a gateway for fund investors to obtain additional information in
the prospectus and other documents.
\95\ Cf. Electronic Distribution Release, supra note 89, at
53465-66 (example (39)) (``If the fund can identify the application
form as coming from the electronic system that contains both the
application and the prospectus, electronic delivery of the
prospectus can be inferred.'').
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F. Defined Contribution Plans
Investors in participant-directed defined contribution plans
(``plans'') may find a profile helpful in evaluating and comparing the
funds offered as investment alternatives in a plan.96 Certain
information required by rule 498, however, appears to be unnecessary
for plan participants because of the way these plans are structured and
regulated. The requirements of the Employee Retirement Income Security
Act of 1974 and the Internal Revenue Code, and the terms of individual
plans govern, among other things, participant investments and plan
distributions (including the tax consequences of distributions).97
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\96\ In 1995, the Division issued a no-action letter confirming
that certain informational materials about a fund offered as an
investment option in a plan could be treated as an omitting
prospectus under rule 482 of the Securities Act. Fidelity
Institutional Retirement Services Company, Inc. (pub. avail. Apr. 5,
1995). The informational materials, which were intended to be
distributed to plan participants, disclosed only information
included in the fund's prospectus (i.e., the fund's investment
objectives, policies and risks, expenses, past performance, and
distribution practices) and contained a legend informing
participants of the availability of the fund's prospectus.
\97\ See 29 U.S.C. 1104(c). The most prevalent type of defined
contribution plan is the 401(k) plan (26 U.S.C. 401(k)), which
allows an employee to defer receipt and taxation of a portion of his
or her salary and permits an employer to match a percentage of the
employee's contributions. A 401(k) plan typically provides for
individual accounts and permits a participant to exercise control
over the assets in his or her account. These plans often provide
several investment options, frequently including one or more funds.
See Investment Company Institute, Mutual Fund Fact Book 87 (36th ed.
1996) (at the end of 1995, more than $161 billion, or 31%, of 401(k)
assets were invested in funds). Section 404(c) of the Employee
Retirement Income Security Act of 1974 and related rule 404c-1 (29
CFR 2550.404c-1) exempt fiduciaries of a 401(k) plan from liability
for investment losses if a plan participant exercises control over
the assets in his or her account. A participant is deemed to
``exercise control'' if, among other things, the plan offers at
least 3 investment alternatives and a participant is provided or has
the opportunity to obtain sufficient information to make informed
decisions about the plan's investment alternatives.
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To enable a fund to use a profile that is tailored for use by plan
participants, rule 498 would permit a profile to omit information
relating to the purchase and
[[Page 10952]]
sale of fund shares, fund distributions, and tax consequences.98
In addition, since some fund services (e.g., exchange privileges) may
not apply to plan participants, rule 498 would permit a fund to omit
this information. Rule 498 would permit a fund to include the plan's
enrollment form in lieu of the application form because the plan
effects purchases and sales of a fund's shares on behalf of plan
participants.99 The cover page of the profile would disclose, as
required by rule 498, that a fund's prospectus and other disclosure
documents are available upon request.100 The Commission requests
comment whether other information required by rule 498 may not be
useful for plan participants and could be omitted when a profile is
used in connection with a plan.
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\98\ Proposed rule 498.
\99\ The enrollment form would not be required to be filed with
the Commission because the form would be the responsibility of the
company offering the plan and prepared in accordance with the plan's
requirements and applicable law.
\100\ General Instruction C of proposed Form N-1A would include
similar revisions to prospectus disclosure requirements to allow
funds to omit certain information from prospectuses that are limited
to use in the retirement plan market. Form N-1A Release, supra note
1.
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General Request for Comments
The Commission requests that any interested persons submit comments
on proposed rule 498 and other proposed amendments that are the subject
of this release, suggest additional changes (including changes to
related rules and forms that the Commission is not proposing to amend),
or submit comments on other matters that might affect the proposed
changes. Commenters suggesting alternative approaches are encouraged to
submit proposed rule or form text. For purposes of the Small Business
Regulatory Enforcement Fairness Act of 1996 (5 U.S.C. 801 et seq.), the
Commission also is requesting information regarding the potential
impact of the proposed rule on the economy on an annual basis.
Commenters should provide empirical data to support their views.
IV. Paperwork Reduction Act
Proposed rule 498 contains ``collection of information''
requirements within the meaning of the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.), and the Commission has submitted the proposed
rule to the Office of Management and Budget (``OMB'') for review in
accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The title for the
collection of information is ``Profiles for Open-End Management
Investment Companies.'' Responses to the collection of information will
not be kept confidential. An agency may not conduct or sponsor, and a
person is not required to respond to, a collection of information
unless it displays a currently valid control number.
Section 10(a) of the Securities Act describes the type of
information required in a prospectus used to offer securities for sale
under section 5(b)(1) of the Securities Act. Sections 10(b) of the
Securities Act and 24(g) of the Investment Company Act permit the
Commission to allow the use of a prospectus by a fund that omits or
summarizes information required by section 10(a). The Commission is
proposing the profile as a summary prospectus under this authority.
Under proposed rule 498, the profile would present a summary of key
information about a fund, including the fund's investment strategies,
risks, performance, and fees, in a concise, standardized format.
Investors would have the option of purchasing a fund's shares based on
information in the profile or reviewing the fund's prospectus (and
other information) before investing.
Under rule 498, use of the profile is permissive, but the rule is
mandatory for those funds that elect to use a profile. The Commission
expects funds would not choose to prepare and use a profile for every
investment portfolio (``portfolio'') they offer. In addition, a
prospectus, and if used, a profile, may offer the securities of several
portfolios. If a fund chooses to use a profile, it would be filed
before its first use. Subsequent filings may be necessary if there are
significant changes to the profile.
The Commission estimates that there are approximately 180 new
registration statements filed by funds annually and that approximately
300 investment portfolios are included in initial registrations. The
Commission estimates that funds would elect to use a profile for
approximately one-third of these portfolios and a profile would include
information for approximately two portfolios. Based on these estimates,
the preparation and filing of profiles under rule 498 for these funds
would represent a total annual burden of 1,250 hours (50 profiles x 25
hours per profile). The Commission estimates that there are
approximately 2,700 registered open-end investment companies that have
effective registration statements on Form N-1A representing
approximately 7,500 portfolios. The Commission estimates that these
funds would elect to use a profile for approximately one-third of these
portfolios and that a profile would include approximately two
portfolios. Based on these estimates, the total annual burden for
preparing, filing, and updating a profile would be 12,500 hours (1,250
profiles x 10 hours per profile) for funds with effective registration
statements. For these two categories of filers (i.e., funds filing new
registration statements and funds with effective registration
statements), the total annual burden of preparing, filing, and updating
profiles is 13,750 hours.
Under 44 U.S.C. 3506(c)(2)(B), the Commission solicits comment to:
(i) evaluate whether the proposed collection of information is
necessary for the proper performance of the Commission's function,
including whether the information shall have practical utility; (ii)
evaluate the accuracy of the Commission's estimate of the burden of the
proposed collection of information; (iii) enhance the quality, utility,
and clarity of the information to be collected; and (iv) minimize the
burden of the collection of information on those who are to respond,
including through the use of automated collection techniques or other
forms of information technology.
Persons desiring to submit comments on the collection of
information requirements should direct them to the OMB, Attention: Desk
Officer for the Securities and Exchange Commission, Office of
Information and Regulatory Affairs, Washington, D.C. 20503, and should
also send a copy of their comments to Jonathan G. Katz, Secretary,
Securities and Exchange Commission, 450 5th St., NW., Mail Stop 6-9,
Washington, DC 20549-6009, with a reference to S7-18-96. The OMB is
required to make a decision concerning the collection of information
between 30 and 60 days after publication, so a comment to OMB is best
assured of having its full effect if the OMB receives it within 30 days
of publication.
Summary of Initial Regulatory Flexibility Analysis
The Commission has prepared an Initial Regulatory Flexibility
Analysis (``Analysis'') in accordance with 5 U.S.C. 603 regarding
proposed rule 498. The Analysis explains that the proposal would permit
a fund to provide prospective investors with a profile, which would be
a summary prospectus under section 10(b) of the Securities Act and
section 24(g) of the Investment Company Act. The Analysis explains that
a profile would include a summary of key information about a fund and
give investors the option of purchasing the fund's shares based on the
information in the profile or requesting
[[Page 10953]]
the fund's prospectus before making an investment decision. The
Analysis also explains that the profile is intended to provide a
standardized summary of 9 items of information about a fund in a
specific order and in a question-and-answer format designed to help
investors evaluate and compare funds.
The Analysis discusses the impact of the proposed rule on small
entities, which are defined, for the purposes of the Securities Act and
Investment Company Act, as investment companies with net assets of $50
million or less as of the end of the most recent fiscal year (17 CFR
230.157(b) and 270.0-10). The Commission estimates that there are
approximately 620 small entity investment companies, and that
approximately one-third (207) could choose to use proposed rule 498. As
explained in more detail in the Analysis, the Commission estimates that
the total hour burden on small entities to prepare, file, and update
the profile annually would be approximately 2,420 hours. While the
profile would include a summary of information about the fund included
in the prospectus, the disclosure requirements for the profile and the
prospectus are designed for different purposes. The Commission believes
that there are no other duplicative, overlapping, or conflicting
federal rules.
The Analysis explains that proposed rule 498 would not be
significantly burdensome for small entities because use of the profile
is optional and the profile is intended to be a standardized summary of
information required to be disclosed in a fund's prospectus. In
addition, some investors may use profiles instead of prospectuses to
narrow their choices among funds, which would reduce printing and
distribution costs. Lower printing and distribution costs could benefit
small entities as much or more than large funds.
As stated in the Analysis, the Commission considered several
alternatives to proposed rule 498, including, among others,
establishing different compliance or reporting requirements for small
entities or exempting them from all or part of the proposed rule.
Because use of the profile would be optional, and the profile, if used,
would contain the same disclosure that other funds are required to
include in the profile, the Commission believes that the proposed rule
would not impose additional burdens on small entities and separate
treatment for small entities would be inconsistent with the protection
of investors.
The Commission encourages the submission of comments on the
Analysis, including specific comment on (i) the number of small
entities that would be affected by the proposed rule and (ii) the
discussion of the impact of the proposed rule on small entities.
Comments will be considered in the preparation of the Final Regulatory
Flexibility Analysis if the proposed rule is adopted. A copy of the
Analysis may be obtained by contacting Markian M.W. Melnyk, Senior
Counsel, Securities and Exchange Commission, 450 5th Street, NW., Mail
Stop 10-2, Washington, DC. 20549-6009.
VI. Statutory Authority
The Commission is proposing rule 498 under sections 5, 7, 8, 10,
and 19(a) of the Securities Act (15 U.S.C. 77e, 77g, 77h, 77j, and
77s(a)) and sections 8, 22, 24(g), 30, and 38 of the Investment Company
Act (15 U.S.C. 80a-8, 80a-22, 80a-24(g), 80a-29, and 80a-37). The
authority citations for the rule precede the text of the amendments.
VII. Text of Proposed Rule
List of Subjects in 17 CFR Part 230
Investment companies, Reporting and recordkeeping requirement,
Securities.
For the reasons set out in the preamble, the Commission proposes to
amend Chapter II, Title 17 of the Code of Federal Regulations as
follows:
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
1. The authority citation for part 230 continues to read in part as
follows:
Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77s, 77sss, 78c,
77d, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79t, 80a-8, 80a-29, 80a-30,
and 80a-37, unless otherwise noted.
* * * * *
2. Amend Sec. 230.431 to revise the introductory text of paragraph
(a) to read as follows:
Sec. 230.431 Summary prospectuses.
(a) A summary prospectus prepared and filed (except a summary
prospectus filed by an open-end management investment company
registered under the Investment Company Act of 1940) as part of a
registration statement in accordance with this section shall be deemed
to be a prospectus permitted under section 10(b) of the Act (15 U.S.C.
77j(b)) for the purposes of section 5(b)(1) of the Act (15 U.S.C.
77e(b)(1)) if the form used for registration of the securities to be
offered provides for the use of a summary prospectus and the following
conditions are met:
* * * * *
3. Amend Sec. 230.482 to revise the introductory text of paragraph
(a) to read as follows:
Sec. 230.482 Advertising by an investment company as satisfying
requirements of section 10.
(a) An advertisement shall be deemed to be a prospectus under
section 10(b) of the Act (15 U.S.C. 77j(b)) for the purpose of section
5(b)(1) of the Act (15 U.S.C. 77e(b)(1)), unless the advertisement is a
profile under Sec. 230.498 or is excepted from the definition of
prospectus by section 2(10) of the Act (15 U.S.C. 77b(10)) and related
Sec. 230.134, if:
* * * * *
4. Amend Sec. 230.497 to revise paragraph (a) and to add paragraph
(k) to read as follows:
Sec. 230.497 Filing of investment company prospectuses, number of
copies.
(a) Five copies of every form of prospectus sent or given to any
person prior to the effective date of the registration statement that
varies from the form or forms of prospectus included in the
registration statement filed pursuant to Sec. 230.402(a) shall be filed
as part of the registration statement not later than the date that form
of prospectus is first sent or given to any person, except that:
(1) An investment company advertisement under Sec. 230.482 shall be
filed under this paragraph (but not as part of the registration
statement) unless filed under paragraph (i) of this section; and
(2) A profile under Sec. 230.498 shall be filed in accordance with
paragraph (k) of this section and not as part of the registration
statement.
* * * * *
(k)(1) A form of profile under Sec. 230.498 shall not be used
unless:
(i) The form of profile is filed with the Commission at least 30
days before the date it is first sent or given to any person. No
additional filing is required during the 30-day period for changes
(substantive or otherwise) to a form of profile filed under this
paragraph if copies of the changes are submitted to the Commission
under paragraph (k)(5) of this section.
(ii) A form of profile that has a substantive change from or an
addition to the information in the last form of profile filed under
paragraph (k)(1)(i) of this section or under this paragraph (except a
profile that is changed to update quarterly return information) is
filed with the Commission at least 30 days before the date it is sent
or given to any person. No additional filing is required during the 30-
day period for
[[Page 10954]]
changes (substantive or otherwise) to a form of profile filed under
this paragraph if copies of the changes are submitted to the Commission
under paragraph (k)(5) of this section.
(2) The form of profile filed under paragraph (k)(1)(ii) of this
section can be used on the later of 30 days after the date of filing
or, if the changes or additions reflect changes to a prospectus
included in a post-effective amendment filed to update a registration
statement under Sec. 230.485, the date the post-effective amendment
becomes effective.
(3) File with the Commission a definitive form of a profile that
varies from the profile filed under paragraph (k)(1) of this section no
later than the fifth business day after the date it is used.
(4) Any form of profile that does not contain substantive changes
from or additions to a definitive profile that was filed under
paragraph (k)(3) of this section does not need to be filed with the
Commission before use if it is filed no later than the fifth business
day after the date it is used. A form of profile in which the only
changes are updated quarterly return information does not need to be
filed with the Commission.
(5) Send two additional copies of a form of profile filed
electronically under paragraph (k)(3) of this section to the
Commission, in the primary form intended to be used for distribution to
investors (e.g., paper, electronic media), by mail or other means
reasonably calculated to result in receipt by the Commission, no later
than the fifth business day after the date the profile is first sent or
given to any person. Send copies to the following address: Assistant
Director, Office of Disclosure and Review, Division of Investment
Management, U.S. Securities and Exchange Commission, 450 5th St. NW.,
Mail Stop 10-2, Washington, DC 20549-6009. Note prominently that the
submission is made under Sec. 230.497(k)(5) of Regulation C. If the
profile is distributed primarily on the Internet, supply, in lieu of
copies, the electronic address (``URL'') of the profile pages(s) in an
exhibit to the electronic filing under this paragraph (k). This
additional filing requirement shall expire on March 10, 1999.
5. Add Sec. 230.498 to read as follows:
Sec. 230.498 Profiles for Certain Open-End Management Investment
Companies.
(a) Definitions. A Fund means an open-end management investment
company, or any series of the company, that has or is included in an
effective registration statement on Form N-1A (Secs. 274.11A and
239.15A of this chapter) and that has a current prospectus under
section 10(a) of the Act (15 U.S.C. 77j(a)).
(2) A Profile means a prospectus that is authorized under section
10(b) of the Act (15 U.S.C. 77j(b)) and section 24(g) of the Investment
Company Act (15 U.S.C. 80a-24(g)) for the purpose of section 5(b)(1) of
the Act (15 U.S.C. 77e(b)(1)).
(b) General profile requirements. A Fund may provide a Profile to
investors, which may contain an application that investors may use to
purchase the Fund's shares, if:
(1) The Profile contains only the information required or permitted
by paragraph (c) of this section and does not incorporate any
information by reference to another document.
(2) The Fund responds within 3 business days to a request for its
prospectus, annual or semi-annual report, or Statement of Additional
Information by first-class mail or other means designed to assure
equally prompt delivery.
Instructions to paragraph (b).
1. The Profile is intended to be a standardized summary of key
information in the Fund's prospectus. Additional information is
available in the prospectus and in the Fund's annual and semi-annual
shareholder reports and Statement of Additional Information. Do not
include cross-references to this (or other) additional information
or use footnotes in the Profile, unless specifically required or
permitted.
2. Provide clear and concise information in the Profile. Avoid
excessive detail, technical or legal terms, complex language, and
long sentences and paragraphs.
3. File the Profile with the Commission as required by
Sec. 230.497(k).
(c) Specific profile requirements. (1) Include on the cover page of
the Profile or at the beginning of the Profile if the Profile is
distributed electronically or as part of another document:
(i) The Fund's name and, at the Fund's option, the Fund's
investment objectives or the type of fund offered or both;
(ii) A statement identifying the document as a ``Profile,'' without
using the term ``prospectus'';
(iii) The approximate date of the Profile's first use and, if
applicable, the date of the most recent updated performance information
included in the Profile;
(iv) The following legend:
This Profile summarizes key information about the Fund that is
included in the Fund's prospectus. If you would like more
information before you invest, you may obtain the Fund's prospectus
and other information about the Fund at no cost by calling
____________.
Instruction to paragraph (c)(1)(iv).
Provide a toll-free (or collect) telephone number that investors
can use to obtain the prospectus or other information. If applicable,
the Fund may indicate that the prospectus is available on its Internet
site or by E-mail request.
(2) Provide the information required by paragraphs (c)(2) (i)
through (ix) of this section in the order indicated and in the same or
substantially similar question-and-answer format shown:
(i) What are the Fund's goals? Provide the information about the
Fund's investment objectives under Item 2(a) of Form N-1A.
(ii) What are the Fund's main investment strategies? Provide the
information about the Fund's principal investment strategies under Item
2(b) of Form N-1A.
(iii) What are the main risks of investing in the Fund? Provide the
narrative disclosure, bar chart, and table under Item 2(c) of Form N-
1A. Provide the Fund's average annual returns and, if applicable, yield
as of the end of the most recent calendar quarter prior to the
Profile's first use and update the information as of the end of each
succeeding calendar quarter as soon as practicable after the completion
of the quarter.
(iv) What are the Fund's fees and expenses? Include the fee table
under Item 3 of Form N-1A.
(v) Who are the Fund's investment adviser and portfolio manager?
(A) Identify the Fund's investment adviser and any sub-adviser, unless
the sub-adviser's responsibility is limited to routine cash management.
When 3 or more sub-advisers each manage a portion of the Fund's
portfolio (other than cash positions), the Fund may disclose the number
of sub-advisers managing the portfolio, without identifying each sub-
adviser, except that the identity of any sub-adviser that manages 40%
or more of the Fund's portfolio must be disclosed.
(B) Using the Instructions to Item 6(a)(2) of Form N-1A, state the
name and length of service of the person or persons employed by or
associated with the Fund's investment adviser (or the Fund) who are
primarily responsible for the day-to-day management of the Fund's
portfolio and summarize each person's business experience for the last
5 years. When 3 or more persons each manage a portion of the Fund's
portfolio, the Fund may disclose the number of persons managing the
portfolio, without identifying each person, except that the information
required by this paragraph must be disclosed for any person that
manages 40% or more of the Fund's portfolio.
[[Page 10955]]
(vi) How do I buy the Fund's shares? Provide information about how
to purchase the Fund's shares, including any minimum investment
requirements. If applicable, disclose any breakpoints in or waivers of
sales loads (referring to sales loads as ``sales fees (loads)').
(vii) How do I sell the Fund's shares? Provide information about
how to redeem the Fund's shares.
(viii) How are the Fund's distributions made and taxed? Describe
how frequently the Fund intends to make distributions and what
reinvestment options (if any) are available to investors. State, as
applicable, that the Fund intends to make distributions that may be
taxed as ordinary income and capital gains or that the Fund intends to
distribute tax-exempt income. If a Fund, as a result of its investment
objectives or strategies, expects its distributions primarily to
consist of ordinary income (or short-term capital gains that are taxed
as ordinary income) or capital gains, provide disclosure to that
effect. For a Fund that holds itself out as investing in securities
generating tax-exempt income, provide, as applicable, the information
required by Item 7(d)(2)(ii) of Form N-1A or a general statement to the
effect that a portion of the Fund's distributions may be subject to
tax.
(ix) What other services are available from the Fund? Summarize or
list the services available to the Fund's shareholders (e.g., any
exchange privileges or automated information services), unless
otherwise disclosed in response to paragraphs (c)(2) (i) through (viii)
of this section.
(3) The Profile may include an application that a prospective
investor can use to purchase the Fund's shares if the application
presents with equal prominence the option to invest in the Fund or
request the Fund's prospectus.
(4) A Profile of a Fund available as an investment option for
participants in a defined contribution plan that meets the requirements
for qualification under the Internal Revenue Code of 1986 may omit the
information required by paragraphs (c)(2) (vi) through (ix) of this
section. In lieu of the application permitted by paragraph (c)(3) of
this section, the Fund may include the plan's enrollment form, which
does not have to be filed with the Commission.
By the Commission.
Dated: February 27, 1997.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-5376 Filed 3-7-97; 8:45 am]
BILLING CODE 8010-01-P
