[Federal Register Volume 69, Number 46 (Tuesday, March 9, 2004)]
[Rules and Regulations]
[Pages 11244-11273]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 04-4829]
[[Page 11243]]
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Part VI
Securities and Exchange Commission
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17 CFR Parts 210, 239, et al.
Shareholder Reports and Quarterly Portfolio Disclosure of Registered
Management Investment Companies; Final Rule
Federal Register / Vol. 69, No. 46 / Tuesday, March 9, 2004 / Rules
and Regulations
[[Page 11244]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 210, 239, 249, 270, and 274
[Release Nos. 33-8393; 34-49333; IC-26372; File No. S7-51-02]
RIN 3235-AG64
Shareholder Reports and Quarterly Portfolio Disclosure of
Registered Management Investment Companies
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Securities and Exchange Commission is adopting rule and
form amendments under the Securities Act of 1933, the Securities
Exchange Act of 1934, and the Investment Company Act of 1940 to improve
the periodic disclosure provided by registered management investment
companies about their costs, portfolio investments, and past
performance. The amendments will require a registered open-end
management investment company to include in its shareholder reports
disclosure of fund expenses borne by shareholders during the reporting
period. The amendments also will permit a registered management
investment company to include a summary portfolio schedule of
investments in its reports to shareholders, provided that the complete
schedule is filed with the Commission and is provided to shareholders
upon request, free of charge. In addition, the amendments will require
a registered management investment company to include a tabular or
graphic presentation of its portfolio holdings in its reports to
shareholders. The amendments also will require a registered management
investment company to disclose its complete portfolio schedule on a
quarterly basis in filings with the Commission that will be certified
by the company's principal executive and financial officers and
available on the Commission's Electronic Data Gathering, Analysis, and
Retrieval System. Finally, the amendments will require a registered
open-end management investment company to include Management's
Discussion of Fund Performance in its annual report to shareholders.
DATES: Effective Date: May 10, 2004.
Compliance Date: See Section II.D. of this release for information
on compliance dates.
FOR FURTHER INFORMATION CONTACT: John M. Faust, Attorney, Christopher
P. Kaiser, Special Counsel, or Paul G. Cellupica, Assistant Director,
Office of Disclosure Regulation, Division of Investment Management,
(202) 942-0721, at the Securities and Exchange Commission, 450 Fifth
Street NW, Washington, DC 20549-0506.
SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission (the
``Commission'') is adopting new rule 30b1-5 \1\ and amendments to rules
30a-2,\2\ 30a-3,\3\ and 30d-1 \4\ under the Investment Company Act of
1940 \5\ (``Investment Company Act''); amendments to Forms N-1A,\6\ N-
2,\7\ and N-3 \8\ under the Investment Company Act and the Securities
Act of 1933\9\ (``Securities Act''); new Form N-Q \10\ and amendments
to Form N-CSR \11\ under the Investment Company Act and the Securities
Exchange Act of 1934 \12\ (``Exchange Act''); and amendments to Article
6 \13\ and Article 12 \14\ of Regulation S-X.\15\
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\1\ 17 CFR 270.30b1-5.
\2\ 17 CFR 270.30a-2.
\3\ 17 CFR 270.30a-3.
\4\ 17 CFR 270.30d-1.
\5\ 15 U.S.C. 80a-1 et seq.
\6\ 17 CFR 239.15A; 17 CFR 274.11A.
\7\ 17 CFR 239.14; 17 CFR 274.11a-1.
\8\ 17 CFR 239.17; 17 CFR 274.11b.
\9\ 15 U.S.C. 77a et seq.
\10\ 17 CFR 249.332; 17 CFR 274.130.
\11\ 17 CFR 249.331; 17 CFR 274.128.
\12\ 15 U.S.C. 78a et seq.
\13\ 17 CFR 210.6.
\14\ 17 CFR 210.12.
\15\ 17 CFR 210.
Table of Contents
Executive Summary
I. Background
A. Disclosure of Fund Expenses
B. Disclosure of Fund Portfolio Holdings
C. The Commission's Proposal
II. Discussion
A. Disclosure of Fund Expenses
B. Disclosure of Portfolio Holdings
1. Summary Portfolio Schedule
2. Exemption of Money Market Funds from Portfolio Schedule
Requirements in Shareholder Reports
3. Tabular or Graphic Presentation of Portfolio Holdings
4. Quarterly Filing of Complete Portfolio Schedule
C. Management's Discussion of Fund Performance (``MDFP'')
D. Compliance Date
III. Paperwork Reduction Act
IV. Cost/Benefit Analysis
V. Consideration of Burden on Competition; Promotion of Efficiency,
Competition, and Capital Formation
VI. Final Regulatory Flexibility Analysis
VII. Statutory Authority
Text of Rule and Form Amendments
Executive Summary
We are adopting rule and form amendments \16\ that:
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\16\ The Commission proposed these amendments in December 2002.
Investment Company Act Release No. 25870 (Dec. 18, 2002) [68 FR 160
(Jan. 2, 2003)] (``Proposing Release'').
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Require open-end management investment companies
(``mutual funds'') to disclose fund expenses borne by shareholders
during the reporting period in reports to shareholders;\17\
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\17\ A management investment company is an investment company
other than a unit investment trust or face-amount certificate
company. See section 4 of the Investment Company Act [15 U.S.C. 80a-
4]. Management investment companies typically issue shares
representing an undivided proportionate interest in a changing pool
of securities, and include open-end and closed-end companies. See T.
Lemke, G. Lins, A. Smith III, Regulation of Investment Companies,
Vol. I, ch. 4, Sec. 4.04, at 4-5 (2002). An open-end company is a
management company that is offering for sale or has outstanding any
redeemable securities of which it is the issuer. A closed-end
company is any management company other than an open-end company.
See section 5 of the Investment Company Act [15 U.S.C. 80a-5]. Open-
end companies (``mutual funds'') generally offer and sell new shares
to the public on a continuous basis, while closed-end companies
generally engage in traditional underwritten offerings of a fixed
number of shares and in most cases do not offer their shares to the
public on a continuous basis.
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Permit a management investment company
registered under the Investment Company Act (``fund'') to include a
summary portfolio schedule in its reports to shareholders, provided
that the complete portfolio schedule is filed with the Commission on
Form N-CSR semi-annually and is provided to shareholders upon request,
free of charge;
Exempt money market funds from including a
portfolio schedule in reports to shareholders, provided that this
information is filed with the Commission on Form N-CSR and is provided
to shareholders upon request, free of charge;
Require reports to shareholders by funds to
include a tabular or graphic presentation of a fund's portfolio
holdings by identifiable categories;
Require a fund to file its complete portfolio
schedule as of the end of its first and third fiscal quarters with the
Commission on new Form N-Q, which will be filed under the Investment
Company Act and the Exchange Act and certified by the fund's principal
executive and financial officers; and
Require a mutual fund to include Management's
Discussion of Fund Performance in its annual report to
shareholders.\18\
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\18\ Item 5 of Form N-1A.
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These amendments are intended to provide better information to
investors
[[Page 11245]]
about fund costs, investments, and performance.
I. Background
The Investment Company Act and rules thereunder require each fund
to transmit a report to its shareholders semi-annually, within 60 days
of the end of the period for which the shareholder report is made, and
to file the report with the Commission no later than 10 days after it
is transmitted to shareholders.\19\ Shareholder reports are one of the
principal means by which funds provide periodic information to their
investors. Fund shareholder reports historically have served primarily
as a vehicle to provide financial statements and other financial
information to shareholders.\20\ We believe that today's amendments and
new rules will make these reports more effective vehicles for
communicating information to investors. Today's amendments principally
address disclosure of fund expenses and portfolio holdings, two
significant areas for improvement that have been the subject of public
discussion and concern.
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\19\ See section 30(e) of the Investment Company Act [15 U.S.C.
80a-29(e)]; Rule 30e-1 under the Investment Company Act [17 CFR
270.30e-1] (transmission of report to shareholders); section
30(b)(2) of the Investment Company Act [15 U.S.C. 80a-30(b)(2)];
Rule 30b2-1 under the Investment Company Act [17 CFR 270.30b2-1]
(filing of shareholder report with the Commission); Form N-CSR (form
used by registered management investment companies to file
shareholder reports).
\20\ Section 30(e) of the Investment Company Act [15 U.S.C. 80a-
29(e)] (requiring a fund to transmit to its stockholders, at least
semi-annually, reports containing financial statements and other
financial information as the Commission may prescribe by rules and
regulations); National Securities Markets Improvement Act of 1996,
Pub. L. 104-290, section 207, 110 Stat. 3416, 3430 (Oct. 11, 1996)
(adding section 30(f) to the Investment Company Act, which allows
the Commission to require that semi-annual reports ``include such
other information as the Commission deems necessary or appropriate
in the public interest or for the protection of investors'').
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A. Disclosure of Fund Expenses
Potential mutual fund investors receive significant disclosure
about fund fees and expenses. Since 1988, the Commission has required
the mutual fund prospectus to include a fee table that shows all fees
and charges associated with a mutual fund investment as a percentage of
net assets.\21\ Recent rulemaking initiatives have also sought to
improve disclosure to investors of mutual fund fees and charges. For
example, the Commission recently adopted amendments requiring
investment company advertisements to highlight the availability and
importance of information on fees and charges found in the prospectus
\22\ and has proposed amendments to the mutual fund prospectus that
would require enhanced disclosure regarding breakpoint discounts on
front-end sales loads.\23\ In addition, the Commission published a
concept release seeking views regarding improving disclosure of
transaction costs.\24\ Finally, the Commission recently proposed new
rules that would require broker-dealers to provide their customers with
information, at the point of sale and in transaction confirmations,
regarding the costs and conflicts of interest that arise from the
distribution of mutual fund shares.\25\
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\21\ Item 3 of Form N-1A; Investment Company Act Release No.
16244 (Feb. 1, 1988) [53 FR 3192 (Feb. 4, 1988)] (release adopting
mutual fund fee table); Investment Company Act Release No. 15932
(Aug. 18, 1987) [52 FR 32018 (Aug. 25, 1987)] (release proposing
mutual fund fee table).
\22\ See Investment Company Act Release No. 26195 (Sept. 29,
2003) [68 FR 57760 (Oct. 6, 2003)].
\23\ See Investment Company Act Release No. 26298 (Dec. 17,
2003) [68 FR 74732 (Dec. 24, 2003)].
\24\ See Investment Company Act Release No. 26313 (Dec. 18,
2003) [68 FR 74820 (Dec. 24, 2003)].
\25\ See Investment Company Act Release No. 26341 (Jan. 29,
2004) [69 FR 6438 (Feb. 10, 2004)].
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In addition, the Commission has undertaken efforts to increase
investor awareness and understanding of the significance of the costs
that they pay in connection with mutual fund investments. For example,
we recently added educational information to our Web site addressing
breakpoints on front-end sales loads and prospectus fee tables.\26\
Since 1999, the Commission has made available on its Web site the
Mutual Fund Cost Calculator, an Internet-based tool that enables
investors to compare the costs of owning different funds.\27\
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\26\ See Breakpoints (last modified Jan. 17, 2003), http://
www.sec.gov/answers/breakpt.htm; Tips for Reading a Prospectus (last
modified Feb. 5, 2003), http://www.sec.gov/answers/
mfprospectustips.htm.
\27\ Mutual Fund Cost Calculator (last modified July 24, 2000),
http://www.sec.gov/investor/tools/mfcc/mfcc-int.htm. See also Invest
Wisely: An Introduction to Mutual Funds (last modified June 2,
2003), http://www.sec.gov/investor/pubs/inwsmf.htm (investor
brochure describing types of mutual fund fees and expenses); Mutual
Fund Fees and Expenses (last modified Oct. 19, 2000), http:/
www.sec.gov/answers/mffees.htm.
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Despite these ongoing efforts, the degree to which investors
understand mutual fund fees and expenses remains a source of concern.
Mutual fund fees are of two types, transactional (e.g., sales loads,
redemption fees) and ongoing (e.g., asset-based charges such as
management fees and 12b-1 fees).\28\ While transactional fees are
relatively transparent, ongoing fees are less evident because they are
deducted from fund assets and are reflected in reduced account balances
rather than being separately stated. Significant concerns have been
raised regarding the degree to which investors understand the nature
and effect of these ongoing fees.\29\ These ongoing fees can have a
dramatic effect on an investor's return. A 1% annual fee, for example,
will reduce an ending account balance by 18% on an investment held for
20 years. In December 2002, we proposed amendments intended to address
these concerns, that would require a registered open-end management
investment company to include in its shareholder reports disclosure of
fund expenses borne by shareholders during the reporting period.\30\
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\28\ A 12b-1 fee is a fee charged by some mutual funds against
fund assets to pay for marketing and distribution activities. See
section 12(b) of the Investment Company Act [80 U.S.C. 80a-12(b)];
Rule 12b-1 under the Investment Company Act [17 CFR 270.12b-1].
\29\ See, e.g., Mara Der Haranesian, et al., How to Fix the
Mutual Funds Mess, Business Week, Sept. 22, 2003, at 106 (discussing
the impact of fees on returns and arguing that it is difficult for
investors to determine what they personally pay based on a fund's
expense ratio); Chuck Jaffe, In ``Plain English,'' Disclosure is a
Joke, The Boston Globe, August 31, 2003, at E4 (arguing for more
understandable fee disclosure in fund prospectuses); Theo Francis,
Getting the Most From Fund Costs, Wall Street Journal, Dec. 2, 2002,
at R1 (discussing the importance of considering fees and expenses
when investing in mutual funds, and explaining how to use the SEC's
cost calculator); James Glassman, A Failing Grade for Mutual Funds,
Washington Post, Dec. 1, 2002, at H1 (discussing importance of
differences in expenses to fund returns, and using examples from
SEC's cost calculator); Neil Weinberg, Fund Manager Knows Best; As
Corporations are Fessing Up to Investors, Mutual Funds Still Gloss
Over Costs, Forbes Magazine, Oct. 14, 2002 (84% of investors believe
higher expenses result in higher performance); Investors Need to
Bone Up on Bonds and Costs, According to Vanguard/Money Investor
Literacy Test, Press Release, Business Wire, Sept. 25, 2002 (75% of
survey respondents could not accurately define fund expense ratio
and 64% did not understand the impact of expenses on fund returns).
\30\ See Proposing Release, supra note 16. Cf. Mutual Funds
Integrity and Fee Transparency Act of 2003, H.R. 2420, 108th Cong.
Sec. 101 (2003); Mutual Fund Investor Confidence Restoration Act of
2003, S. 1971, 108th Cong. Sec. 101 (2003); Mutual Fund Investor
Protection Act of 2003, S. 1958, 108th Cong. Sec. 101 (2003)
(requiring enhanced disclosure of mutual fund operating expenses).
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B. Disclosure of Fund Portfolio Holdings
Currently, funds are required to include their complete portfolio
holdings in the reports that are delivered to all shareholders twice a
year.\31\ Investor groups, members of the
[[Page 11246]]
fund industry, and others have suggested ways to improve this
disclosure regime, both by increasing the frequency with which funds
disclose their portfolio holdings, and by streamlining the portfolio
schedules that are delivered to investors to make them more useful and
understandable.
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\31\ Rule 6-10(c)(1) of Regulation S-X [17 CFR 210.6-10(c)(1)]
requires that schedules of investments be filed in support of the
balance sheet entries for these investments. The forms of these
schedules are specified in Rules 12-12 to 12-14 of Regulation S-X
[17 CFR 210.12-12--12-14]. The schedules of investments are also
required to be included with the financial statements in the
Statement of Additional Information (``SAI'') of a fund, which is
part of the registration statement filed with the Commission under
both the Securities Act and the Investment Company Act. See current
Item 22 of Form N-1A; Item 23 of Form N-2; Item 27(a) of Form N-3.
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First, some have argued that investors would benefit if funds were
required to disclose their complete portfolio schedules more frequently
than semi-annually. The Commission has received six rulemaking
petitions in the past several years that advocate more frequent
disclosure of funds' portfolio holdings.\32\ The petitioners argue that
increasing the frequency of portfolio disclosure by funds will allow
investors to better monitor the extent to which their funds' portfolios
overlap, and hence will enable investors to make more informed asset
allocation decisions. In addition, the petitioners argue that more
frequent disclosure would expose ``style drift'' (when the actual
portfolio holdings of a fund deviate from its stated investment
objective) and provide investors with greater information about how a
fund is complying with its stated investment objective. The petitioners
also argue that more frequent disclosure would help to shed light on
and prevent several potential forms of portfolio manipulation, such as
``window dressing'' (buying or selling portfolio securities shortly
before the date as of which a fund's holdings are publicly disclosed,
in order to convey an impression that the manager has been investing in
companies that have had exceptional performance during the reporting
period) and ``portfolio pumping'' (buying shares of stock the fund
already owns on the last day of the reporting period, in order to drive
up the price of the stocks and inflate the fund's performance results).
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\32\ See Rulemaking Petition by the International Brotherhood of
Teamsters (Jan. 18, 2001); Rulemaking Petition by the American
Federation of Labor and the Congress of Industrial Organizations
(Dec. 20, 2000); Rulemaking Petition by the National Association of
Investors Corporation (Oct. 9, 2000); Rulemaking Petition by the
Consumer Federation of America, et al. (Aug. 8, 2000); Rulemaking
Petition by the Financial Planning Association (June 28, 2000);
Rulemaking Petition by Fund Democracy, LLC (June 28, 2000). The
petitions are available for inspection and copying in File No. S7-
51-02 in the Commission's public reference room.
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Second, others have argued that permitting funds to include a
summary portfolio schedule in lieu of a complete portfolio schedule in
their shareholder reports would enable investors to focus on a fund's
principal holdings and thereby better evaluate the fund's risk profile
and investment strategy.\33\ At the same time, the fund's full
portfolio schedule would remain available, upon request, to those
investors who find this information useful. In addition, these
advocates have argued that the use of a summary schedule would reduce
the burden on the funds and their shareholders of providing
unnecessarily lengthy schedules of portfolio investments, which at
present may require as many as 35 or 40 pages to list. For many funds,
such as index funds, providing a lengthy portfolio schedule may not
contribute significantly to investor understanding regarding the fund's
primary investment focus. It may, however, result in significant
printing and mailing costs, which are ultimately borne by investors.
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\33\ See Letter from Craig S. Tyle, General Counsel, Investment
Company Institute, to Barry P. Barbash, Director, Division of
Investment Management, Securities and Exchange Commission (``SEC'')
(Aug. 11, 1998); Letter from Heidi Stam, Principal, Securities
Regulation, The Vanguard Group, to Cynthia Fornelli, Deputy
Director, Division of Investment Management, SEC (Oct. 13, 1999);
Letter from Robert C. Pozen, General Counsel and Managing Director,
Fidelity Investments, to The Honorable Steven Wallman, Commissioner,
SEC (May 5, 1995). The letters are available for inspection and
copying in File No. S7-51-02 in the Commission's public reference
room.
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The amendments that we proposed in December 2002 were intended to
address both of these suggestions for improvement. First, the proposed
amendments would require a fund to file its complete portfolio schedule
as of the end of its first and third fiscal quarters with the
Commission on proposed Form N-Q. Second, the proposed amendments would
permit a fund to include a summary portfolio schedule of investments in
its reports to shareholders, provided that the complete schedule is
filed with the Commission and is provided to shareholders upon request,
free of charge.
C. The Commission's Proposal
The Commission received 65 comment letters on the proposed
amendments regarding shareholder reports and quarterly portfolio
disclosure from individual investors, professional and trade
associations, investor advocacy groups, members of the fund industry,
bar associations, accounting firms, consultants, and academics. These
commenters generally supported the Commission's proposals to improve
the periodic disclosure provided to investors, although some expressed
concerns regarding portions of the proposals or suggested changes.
Today, the Commission is adopting these proposed amendments, with
certain modifications as described below to address the suggestions of
commenters.
II. Discussion
A. Disclosure of Fund Expenses
We are adopting, substantially as proposed, the requirement that
mutual funds disclose in their reports to shareholders fund expenses
borne by shareholders during the reporting period. Mutual fund
shareholder reports will be required to include: (1) The cost in
dollars associated with an investment of $1,000, based on the fund's
actual expenses and return for the period; and (2) the cost in dollars
associated with an investment of $1,000, based on the fund's actual
expenses for the period and an assumed return of 5 percent per
year.\34\ The first figure is intended to permit investors to estimate
the actual costs, in dollars, that they bore over the reporting period.
The second figure is intended to provide investors with a basis for
comparing the level of current period expenses of different funds.
Together, the two expense figures are designed to increase investor
understanding of the fees that they pay on an ongoing basis for
investing in a fund.
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\34\ Item 21(d)(1) of Form N-1A.
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Location of Disclosure
We continue to believe that disclosure of current period expenses
in the shareholder reports strikes an appropriate balance between
investors' need for this information and the costs and burdens that
would be associated with providing this information on an
individualized basis. Commenters, including individual investors and
fund groups, generally supported the proposed expense disclosure on the
grounds that it would enhance investor understanding of fund expenses.
However, two commenters encouraged the Commission to consider an
alternative approach that would require expense disclosure in quarterly
account statements, consisting of either the amount of expenses paid by
the individual investor, or expenses associated with a standardized
investment amount.
We are not persuaded that expense disclosure in quarterly account
statements would be preferable to the proposed shareholder reports
disclosure. Disclosure of expenses in a fund's shareholder reports will
enable investors to evaluate this information
[[Page 11247]]
alongside other key information about the fund's operating results,
including management's discussion of the fund's performance. In effect,
shareholders will be able to evaluate the costs they pay against the
services they receive. By contrast, expense disclosure in quarterly
account statements would provide a less effective context for investors
to assess the expenses shown.
In addition, disclosure of the cost in dollars associated with an
investment of $1,000, based on the fund's actual expenses for the
period and an assumed return of 5 percent per year, will provide
investors with expense information in a standardized manner that will
facilitate comparison of ongoing costs among funds. By contrast,
personalized expense disclosure in quarterly account statements would
not assist investors in making comparisons among funds because it would
be based on different investment amounts and different rates of return.
We acknowledge that individualized expense disclosure in quarterly
account statements would have the benefit of providing cost disclosure
tailored to each investor. Our approach, however, effectively permits
an investor to estimate this personalized information readily (by
dividing the investor's account value by $1,000 and multiplying the
result by the cost shown for a $1,000 investment).
The Commission's approach also avoids certain costs and logistical
complexity that individualized disclosure in quarterly statements might
entail. Mutual fund expenses are charged against fund assets and are
not accounted for on an individual account basis. Therefore,
implementation of individualized expense disclosure would require
systems changes to provide for expense accounting on an individual
account basis. Moreover, in many cases, fund shares are held by broker-
dealers, financial advisers, and other third-party intermediaries, who
must prepare accurate and timely customer account statements by
integrating data supplied by many unrelated fund groups. In addition to
the systems changes necessary for the fund itself, these financial
intermediaries would need to implement new systems in order to
calculate and report personalized expense information for each fund
held in an account each quarter. Estimates of the costs of these
changes are substantial. One commenter estimated, based on a survey of
various industry participants conducted in 2000, that the aggregate
costs to survey respondents associated with calculating and disclosing
individualized fund expenses would be $200.4 million in initial
implementation costs and $65 million in annual, ongoing costs.\35\ By
contrast, we estimate that the costs for standardized cost disclosure
in shareholder reports, including printing and mailing costs, and the
costs of preparing the new disclosure, would total approximately $16
million annually.\36\
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\35\ Investment Company Institute Survey on GAO Report on Mutual
Fund Fees (Jan. 31, 2001) (available for inspection and copying in
File No. S7-51-02 in the Commission's Public Reference Room).
\36\ See Section IV., ``Cost/Benefit Analysis,'' infra.
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Format and Methodology
Our amendments will require both an expense example based on the
fund's actual expenses and actual return, and an expense example based
on actual expenses and a 5% assumed return, as proposed. We note that
several commenters objected to the second example. These commenters
raised concerns that this example would make the fee disclosure
unnecessarily cumbersome, particularly for multiple class funds. They
also argued that it might confuse investors because the example in the
shareholder report would be similar, but not identical, to the example
in the fee table of the fund prospectus. For example, one commenter
noted that the fee table example reflects sales charges, whereas the
shareholder report example would not. We continue to believe, however,
that this second example will enhance the utility to investors of the
expense disclosure by facilitating comparison of ongoing expenses among
funds. While the first example, based on the actual return of the fund,
will enable investors to estimate readily the actual dollar cost that
they paid over the reporting period, it cannot effectively serve as a
vehicle for comparison of fund expenses, because the fund's return will
necessarily affect the expenses incurred. The second example
facilitates comparison by standardizing assumed return.
The methodology for calculation of the expense disclosure that we
are adopting is similar to that required for the expense example in the
fee table of the mutual fund prospectus and, with one exception, is
unchanged from our proposal.\37\ We are modifying the proposal to base
the expense figures on costs associated with an investment of $1,000,
as opposed to $10,000. We believe that it may be easier for
shareholders to estimate their actual expenses using an example based
on a $1,000 amount because it will simplify the multiplication
involved, e.g., for shareholders holding less than $10,000 in a fund.
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\37\ See Section II.B. of the Proposing Release, supra note 16,
68 FR at 168-169 (describing methodology to be used).
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We are also modifying the format of the expense example to include
the account values for an initial investment of $1,000 as of the end of
the period alongside the expense figures, and to show the fund's
expense ratio expressed as a percentage. In the proposing release, we
requested comment on better approaches to providing disclosure to
investors about actual costs paid over the current period, and on
possible modifications to the proposed computation methodology to help
achieve the objective of permitting investors to estimate the actual
costs, in dollars, that they bore over the reporting period. Several
commenters addressed ways to improve the expense examples, and one
commenter suggested addressing the impact of brokerage and related soft
dollar expenses.
The Commission has given additional consideration to the questions
raised in its request for comment and the comments received and has
determined to modify the expense example to include figures for ending
account value, as well as the fund's expense ratio as a percentage.\38\
We believe that this revised format will help investors better
understand the impact of fund expenses and the relationship between
expenses and return, as well as the effect of brokerage and soft dollar
expenses. These changes are designed to help investors understand
ongoing fund costs and make better cost comparisons among funds.
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\38\ See Section IV.B., ``Cost/Benefit Analysis: Costs,'' infra,
for a discussion of the costs to funds of including the additional
information.
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Under the amendments we are adopting, the figures for beginning and
ending account value and expenses paid will be required to be shown in
a tabular format.\39\ The instructions to the table clarify that the
expense calculations are to be based on the fund's most recent fiscal
half-year (the fund's second fiscal half-year in the case of an annual
report). A fund will be required to state, in a footnote to the table,
that expenses are equal to the fund's annualized expense ratio,
multiplied by the average account value over the period, multiplied by
the number of days in the fund's most recent fiscal half-year divided
by 365 or 366 (to reflect the one-half year period shown). The expense
ratio shown in the footnote to the table will be expressed on an
annualized basis and calculated in the
[[Page 11248]]
manner required in the financial highlights table using the expenses
for the fund's most recent fiscal half-year.\40\
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\39\ Item 21(d)(1) of Form N-1A.
\40\ Instruction 1(c) to Item 21(d)(1) of Form N-1A.
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The numerical expense disclosure will be accompanied by a
prescribed narrative explanation, including an explanation of the types
of costs charged by mutual funds and the assumptions used in the
example.\41\ We are revising the proposed narrative disclosure
requirements to reflect that expenses will be shown in a table
alongside the ending account values for a $1,000 initial investment. In
addition, we are adding headings and revising the narrative disclosure
to separate more clearly the explanations of the two expense examples.
We are also adding material to the required narrative disclosure,
explaining how the investor can use the information in the first
expense example, together with the investor's account value, to
estimate the expenses that the investor paid. A fund that charges any
account fees or other recurring fees that are not included in the
expenses shown in the table will be required to disclose the amounts of
these fees; describe the accounts that are charged these fees; and
explain how an investor would use this information to estimate the
total ongoing expenses paid over the period, the impact of these fees
on ending account value, and how an investor would use this information
to compare the ongoing costs of investing in different funds. Finally,
a fund may modify the narrative explanations if the explanation
contains comparable information to that shown, and will be required to
make any modifications necessary to reflect accurately the fund's
circumstances.\42\
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\41\ Item 21(d)(1) and Instruction 1(b) to Item 21(d)(1) of Form
N-1A.
\42\ Instruction 1(b) to Item 21(d)(1) of Form N-1A.
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B. Disclosure of Portfolio Holdings
The Commission is adopting, with several modifications to address
commenters' concerns, rule and form amendments that will: (1) Permit a
fund to include a summary portfolio schedule in its reports to
shareholders, provided that the complete portfolio schedule is filed
with the Commission semi-annually on Form N-CSR and is provided to
shareholders upon request, free of charge; (2) exempt money market
funds from including a portfolio schedule in reports to shareholders,
provided that this information is filed with the Commission on Form N-
CSR and is provided to shareholders upon request, free of charge; (3)
require reports to shareholders to include a tabular or graphic
presentation of a fund's portfolio holdings by identifiable category;
and (4) require a fund to file its complete portfolio schedule as of
the end of its first and third fiscal quarters with the Commission on
new Form N-Q, which will be certified by the fund's principal executive
and financial officers. Together, these amendments will replace a one-
size-fits-all approach to portfolio holdings disclosure, where all
funds deliver their full portfolio schedules to all their shareholders
twice a year, with a layered approach that will make more information
available while permitting funds to tailor their shareholder reports to
their particular circumstances and investors to tailor the amount of
information they receive to meet their particular needs. This approach
is intended to result in the availability of enhanced portfolio
information at a reduced cost.
1. Summary Portfolio Schedule
We are adopting, with modifications to address commenters'
concerns, amendments that will permit a fund to include in its reports
to shareholders a summary portfolio schedule, in lieu of a complete
portfolio schedule. The complete portfolio schedule will, however,
continue to be available, free of charge, to those investors who are
interested in this more detailed information. These amendments are
designed to streamline shareholder reports and help investors to focus
on a fund's principal holdings, and thereby better evaluate the fund's
risk profile and investment strategy. Commenters generally supported
these proposed amendments, agreeing that they would encourage investors
to focus on a fund's most significant investments.
Our amendments to Regulation S-X will permit a fund to include in
its reports to shareholders a summary portfolio schedule, Schedule VI--
Summary schedule of investments in securities of unaffiliated issuers,
in lieu of the full schedule contained in Schedule I--Investments in
securities of unaffiliated issuers.\43\ The summary portfolio schedule
will include each of the fund's 50 largest holdings in unaffiliated
issuers and each investment in unaffiliated issuers that exceeds one
percent of the fund's net asset value.\44\ Commenters generally
supported these thresholds.
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\43\ Schedule I of Regulation S-X [17 CFR 210.12-12]; Schedule
VI of Regulation S-X [17 CFR 210.12-12C]; Article 6-10(c)(2) of
Regulation S-X [17 CFR 210.6-10(c)(2)]; Instruction 1 to Item
21(b)(1) and Instruction to Item 21(c)(1) of Form N-1A; Instructions
4.a., 5.a., and 7 to Item 23 of Form N-2; Instructions 4.(i), 5.(i),
and 7 to Item 27(a) of Form N-3.
\44\ Note 3 to Schedule VI.
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We are requiring, as proposed, that with respect to each issue
required to be listed, the schedule would show (1) the name of the
issuer and title of issue; (2) the balance held at the close of the
period (i.e., the number of shares or the principal amount of bonds and
notes); (3) the value of the issue at the close of the period; and (4)
the percentage value of the issue compared to net assets.\45\ The
summary schedule would also show the total value of all investments in
securities of unaffiliated issuers.\46\
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\45\ Columns A, B, C, and D of Schedule VI.
\46\ Note 7 to Schedule VI.
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Funds will continue to be required to include in their reports to
shareholders the other schedules currently required by Regulation S-
X.\47\ Some commenters argued that funds should also be permitted to
include the investments described by these schedules, and in particular
investments in securities of affiliated issuers and investments other
than securities, in a summary portfolio schedule. These commenters
reasoned that inclusion of these investments in a summary schedule
would serve to focus investors' attention on the fund's most
significant investments in these areas. Other commenters, however,
reasoned that providing a complete presentation of these investments is
important to investors and gives them a better understanding of the
nature of the fund's investments, its hedging strategies, its use of
leverage, and any potential conflicts of interest in the management of
the fund. We agree with these latter commenters. Requiring a complete
presentation of investments other than securities of unaffiliated
issuers in shareholder reports is important in order to provide
investors with an understanding of the risks and potential conflicts of
interest associated with the fund's portfolio.
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\47\ In addition to Schedule I--Instruments in securities of
unaffiliated issuers, Article 6-10(c) of Regulation S-X [17 CFR
210.6-10(c)] requires the following schedules to be filed: Schedule
II--Investments--other than securities [17 CFR 210.12-13]; Schedule
III--Investments in and advances to affiliates [17 CFR 210.12-14];
Schedule IV--Investments--securities sold short [17 CFR 210.12-12A];
and Schedule V--Open option contracts written [17 CFR 210.12-12B].
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Format of the Summary Schedule
As adopted, our amendments to Regulation S-X will require the
securities in the summary schedule to be identified by category.\48\
Specifically, the summary schedule must be categorized by (i) the type
of investment (such as common stocks, preferred stocks, convertible
securities, fixed
[[Page 11249]]
income securities, government securities, options purchased, warrants,
loan participations and assignments, commercial paper, bankers'
acceptances, certificates of deposit, short-term securities, repurchase
agreements, other investment companies, and so forth); and (ii) the
related industry, country, or geographic region of the investment.\49\
We are also adopting a conforming amendment to clarify that these
categories are required to be used in the complete portfolio schedule,
in lieu of the current required categories.\50\
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\48\ Note 1 to Schedule VI.
\49\ Note 1 to Schedule VI.
\50\ Note 2 to Schedule I. Currently, the complete portfolio
schedule requires a fund to list separately (a) common shares, (b)
preferred shares, (c) bonds and notes, (d) time deposits, and (e)
put and call options purchased. Within each of these subdivisions, a
fund must classify investments in an appropriate manner according to
type of business, e.g., aerospace, banking, chemicals, machinery and
machine tools, petroleum, utilities, etc.; or according to type of
instrument, e.g., commercial paper, bankers' acceptances,
certificates of deposit.
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Our proposal would have required the securities in the summary
schedule to be listed in order of descending value. However, we are
persuaded by a number of commenters who asked that we require, or at
least permit, funds to list securities according to identifiable
categories. These commenters argued that this presentation would
enhance investors' understanding of the different kinds of investments
in the fund, for example, by illustrating whether a fund is
significantly concentrated in one particular industry or geographic
region. While we considered giving funds the flexibility to list the
securities in the summary portfolio either in order of descending value
or by categories, we determined that requiring a consistent approach
would benefit investors who seek to compare the summary portfolio
schedules of different funds, or the summary portfolio schedule and the
complete portfolio schedule.
We had proposed to require that all securities not separately
listed in the summary schedule be listed in a category labeled ``Other
securities.'' \51\ Because we are requiring issues in the summary
schedule to be categorized, however, we are modifying the proposal to
require a fund, within each category identified, to group all issues
that are not separately listed in a sub-category labeled ``Other
securities.'' \52\ The summary schedule will be required to show the
subtotals for each category of investments, subdivided by industry,
country, or geographic region, together with their percentage value
compared to net assets.\53\
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\51\ Proposed Note 2 to Schedule VI.
\52\ Note 4 to Schedule VI.
\53\ Note 2 to Schedule VI.
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As in the current complete portfolio schedule, the summary schedule
will require funds to identify by an appropriate symbol each issue of
securities that is non-income producing, each issue of securities held
in connection with open put or call option contracts or loans for short
sales, and each issue of restricted securities.\54\ Also, as in the
current complete schedule, a fund will be required to state in a
footnote to the summary schedule the following amounts based on cost
for Federal income tax purposes: (i) Aggregate gross unrealized
appreciation for all securities in which there is an excess of value
over tax cost; (ii) aggregate gross unrealized depreciation for all
securities in which there is an excess of tax cost over value; (iii)
net unrealized appreciation and depreciation; and (iv) the aggregate
cost of securities for Federal income tax purposes.\55\
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\54\ Notes 8, 9, and 10 to Schedule VI; Notes 5, 6, and 7 to
Schedule I.
\55\ Note 11 to Schedule VI; Note 8 to Schedule I.
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Aggregation of Issues in the Summary Schedule
Our amendments include aggregation rules applicable to the summary
portfolio schedule. First, we are adopting our proposed requirement
that a fund aggregate and treat as a single issue short-term debt
instruments of the same issuer (with disclosure indicating the range of
interest rates and maturity dates).\56\ In response to a commenter's
suggestion, we are also clarifying that short-term debt instruments are
debt instruments whose maturities or expiration dates at the time of
acquisition are one year or less, and we are adding a similar
clarification to the full portfolio schedule.\57\
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\56\ Note 3 to Schedule VI.
\57\ Note 3 to Schedule VI; Note 2 to Schedule I.
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Second, we are adopting our proposed requirement that a fund
aggregate and treat as a single issue fully collateralized repurchase
agreements (with footnote disclosure indicating the range of dates of
the repurchase agreements, the total purchase price of the securities,
the total amount to be received upon purchase, the range of purchase
dates, and a description of the securities subject to the repurchase
agreements).\58\ This aggregation would apply to all fully
collateralized repurchase agreements without regard to their percentage
of net asset value or their issuer.
---------------------------------------------------------------------------
\58\ Note 3 to Schedule VI.
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Third, we are clarifying the treatment of restricted and
unrestricted securities of the same issue. Restricted and unrestricted
securities of the same issue should be aggregated for purposes of
determining whether the issue is among the 50 largest issues, but
should not be combined in the schedule.\59\ The proposal, which tracked
the current complete portfolio schedule, stated that the summary
schedule could not combine restricted securities with unrestricted
securities of the same issue, but did not address whether these
securities should be aggregated for purposes of determining whether an
issue is among the 50 largest issues.
---------------------------------------------------------------------------
\59\ Notes 3 and 4 to Schedule VI.
---------------------------------------------------------------------------
Fourth, we are adopting our proposal that, for purposes of
determining whether the value of an issue exceeds one percent of net
asset value, a fund will be required to aggregate and treat as a single
issue all securities of any one issuer.\60\ If multiple securities of
an issuer aggregate to greater than one percent of net asset value,
each issue will be required to be listed separately in the schedule,
with the exceptions described in the following paragraph.\61\ We are
clarifying that the U.S. Treasury and each agency, instrumentality, or
corporation, including each government-sponsored entity, that issues
U.S. government securities is a separate issuer. For example, Fannie
Mae, Sallie Mae, and Freddie Mac each will be considered a separate
issuer.
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\60\ Note 3 to Schedule VI. As described above, however, all
fully collateralized repurchase agreements are required to be
aggregated and treated as a single issue.
\61\ Note 4 to Schedule VI. Restricted and unrestricted
securities of the same issue will be listed separately.
---------------------------------------------------------------------------
Fifth, if multiple securities of an issuer aggregate to greater
than one percent of net asset value, a fund may aggregate and list as a
single issue: (a) Fixed-income securities of the same issuer which are
not among the 50 largest issues and whose value does not exceed one
percent of net asset value of the registrant as of the close of the
period (indicating the range of interest rates and maturity dates); and
(b) U.S. government securities of a single agency, instrumentality, or
corporation, which are not among the 50 largest issues and whose value
does not exceed one percent of net asset value of the registrant as of
the close of the period (indicating the range of interest rates and
maturity dates).\62\ Under our proposal, all securities of each such
issuer would have been aggregated to determine whether the value of the
securities exceeded the 1% of net asset value threshold, but, if this
threshold was exceeded, each such security would
[[Page 11250]]
then be listed separately (unless the securities were otherwise subject
to aggregation as short-term debt instruments). One commenter pointed
out that this requirement would nullify the benefits of the summary
schedule for U.S. government and corporate fixed income funds that
invest in numerous issues of a single issuer. In essence, the commenter
argued that, for such government securities and fixed-income funds, the
proposed rules would have required the listing of nearly every issue,
regardless of size, and that this result would be inconsistent with the
purpose of the summary schedule. We agree.
---------------------------------------------------------------------------
\62\ Note 4 to Schedule VI.
---------------------------------------------------------------------------
For example, assume that a fund that invests exclusively in U.S.
Treasury securities holds the following: the fund's 50 largest
holdings, 20 issues which each exceed 1% of net asset value but are not
among the 50 largest holdings, and 930 issues each of which does not
exceed 1% of net asset value (and is not among the 50 largest
holdings). Also assume that none of the 1,000 issues qualifies as
short-term debt. The rules we are adopting require that all securities
of any one issuer be aggregated and treated as a single issue for
purposes of determining whether the value of a security exceeds 1% of
net asset value, so all 1,000 issues, considered in the aggregate,
would exceed the threshold. As proposed, the summary schedule would
have required that each of the 1,000 issues be listed separately. As
adopted, however, the summary schedule would require a separate listing
only for each of the 50 largest holdings and each of the 20 other
issues that considered separately exceed the 1% of net asset value
threshold. The remaining 930 issues would be aggregated and listed as a
single issue.
Sixth, we are modifying the proposed requirements for the summary
portfolio schedule to permit certain securities to be identified as
``Miscellaneous securities,'' as is currently permitted in the complete
portfolio schedule.\63\ Currently, a fund's portfolio schedule may list
an amount not exceeding five percent of the total value of the
portfolio holdings in one amount as ``Miscellaneous securities,''
provided that securities so listed are not restricted, have been held
for not more than one year prior to the date of the related balance
sheet, and have not previously been reported by name to the
shareholders, or set forth in any registration statement, application,
or annual report or otherwise made available to the public.\64\
Commenters noted that funds rely on this exclusion in the complete
portfolio schedule to guard against the premature release of certain
positions in securities of unaffiliated issuers that could lead to
front-running and other predatory trading practices.
---------------------------------------------------------------------------
\63\ Note 5 to Schedule VI.
\64\ Note 1 to Schedule I.
---------------------------------------------------------------------------
We agree with these commenters that funds should not be forced to
choose between using the summary schedule and relying on this
exclusion. Thus, the final rules permit any issues that would otherwise
be required to be listed separately or included in a group of
securities that is listed in the aggregate as a single issue to be
listed in one amount as ``Miscellaneous securities'' in the summary
schedule, provided that the securities so listed are eligible to be,
and are, categorized as ``Miscellaneous securities'' in the fund's
complete schedule.\65\ The rules make clear, however, that if any
security that is included in ``Miscellaneous securities'' would
otherwise be required to be included in a group of securities that is
listed in the aggregate as a single issue, the remaining securities of
that group must nonetheless be listed as required even if the remaining
securities alone would not otherwise be required to be listed in this
manner.\66\ For example, assume that a fund holds three securities of
Corporation X as follows: common stock valued at 0.7% of net asset
value, preferred stock valued at 0.4% of net asset value, and bonds
valued at 0.3% of net asset value, none of which is among the fund's
largest 50 issues. If the fund lists the common stock as
``Miscellaneous securities,'' it must still separately list the
preferred stock and bonds because the aggregate value of all three
issues exceeds one percent of net asset value.
---------------------------------------------------------------------------
\65\ Note 5 to Schedule VI.
\66\ Note 5 to Schedule VI.
---------------------------------------------------------------------------
We note that the terms ``Miscellaneous securities'' and ``Other
securities'' \67\ may be unclear to many investors. To avoid confusion,
we are therefore requiring that, if any securities are listed as
``Miscellaneous securities'' or ``Other securities,'' a fund briefly
explain in a footnote what those terms represent.\68\ We are adopting a
conforming requirement with respect to the term ``Miscellaneous
securities'' in the complete portfolio schedule.\69\
---------------------------------------------------------------------------
\67\ See discussion of ``Other securities'' in Section II.B.1,
``Summary Portfolio Schedule: Format of the Summary Schedule,''
supra.
\68\ Note 6 to Schedule VI.
\69\ Note 1 to Schedule I.
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Filing and Availability of Complete Portfolio Schedule
To ensure that shareholders have continued access to a complete
schedule of the fund's portfolio holdings, any fund that uses a summary
portfolio schedule will be required to file its complete portfolio
schedule with the Commission on Form N-CSR, which will be available on
the Commission's Electronic Data Gathering, Analysis, and Retrieval
System (``EDGAR'').\70\ In addition, any fund that uses a summary
portfolio schedule will be required to send its complete schedule of
investments in securities of unaffiliated issuers to shareholders upon
request within three business days of receipt of the request, by first-
class mail or other means designed to ensure equally prompt delivery,
and to disclose in its reports to shareholders that this complete
portfolio schedule is available (i) without charge, upon request, by
calling a specified toll-free (or collect) telephone number; (ii) on
the fund's Web site, if applicable; and (iii) on the Commission's Web
site.\71\
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\70\ Item 6 of Form N-CSR. Funds that include the complete
portfolio schedule in their shareholder reports will also file this
schedule on Form N-CSR, as part of the shareholder report. This
schedule must be audited, except in the case of a report on Form N-
CSR as of the end of a fiscal half-year. Instruction to Item 6 of
Form N-CSR.
\71\ Instruction 1 to Item 21(b)(1) and Instruction to Item
21(c)(1) of Form N-1A; Instruction 7 to Item 23 of Form N-2;
Instruction 7 to Item 27(a) of Form N-3.
A fund may incorporate its financial statements by reference
into its registration statement. A fund that includes a summary
portfolio schedule in its reports to shareholders, and that chooses
to incorporate its financial statements in its Statement of
Additional Information (``SAI'') by reference, would be expected to
incorporate by reference its full portfolio schedule from Form N-
CSR, along with the other financial statements and supporting
schedules in its annual report to shareholders. See General
Instruction D.1.(c) to Form N-1A (permitting incorporation by
reference into the SAI generally); General Instruction F to Form N-2
(permitting incorporation by reference of information from Form N-
CSR in response to Item 23 (``Financial Statements'')); General
Instruction G to Form N-3 (permitting incorporation by reference of
information from Form N-CSR in response to Item 27 (``Financial
Statements'')). Such a fund would be required to deliver the full
portfolio schedule from Form N-CSR, as well as the shareholder
report, upon a shareholder request for the SAI. See Instruction to
Item 10(a)(2)(iii) of Form N-1A (requiring any information
incorporated by reference into the SAI to be delivered with the SAI
unless the information has been previously delivered in a
shareholder report and the fund states that the shareholder report
is available, without charge, upon request); General Instruction F
to Form N-2 (requiring any information incorporated by reference
into the SAI to be delivered with the SAI unless the person to whom
the SAI is sent or given holds securities of the fund and otherwise
has received copies of the material, and fund states that the
material is available, without charge, upon request); General
Instruction G to Form N-3 (same).
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[[Page 11251]]
2. Exemption of Money Market Funds From Portfolio Schedule Requirements
in Shareholder Reports
We are adopting, as proposed, the amendment permitting money market
funds to omit Schedule I, the schedule of investments in securities of
unaffiliated issuers, from their reports to shareholders, provided that
they make this schedule available to shareholders upon request and free
of charge, and disclose the availability of the schedule in their
reports to shareholders.\72\ Currently, money market funds, like other
funds, are required to include their portfolio schedules in the
shareholder reports that are delivered to all investors.
---------------------------------------------------------------------------
\72\ 17 CFR 210.12-12. See Instruction 2 to Item 21(b)(1) and
Instruction to Item 21(c)(1) of Form N-1A; Instruction 7(ii) to Item
27(a) of Form N-3.
---------------------------------------------------------------------------
While commenters generally supported the proposed exemption for
money market funds from a requirement to include portfolio holdings in
their reports to shareholders, some commenters objected. These
commenters argued that information regarding a money market fund's
significant investments is helpful to understanding a money market
fund's financial statements, and that exclusion of such disclosure from
shareholder reports implies that money market fund shareholders need
not inform themselves about their fund's credit quality, maturity, and
diversification characteristics. We continue to believe, however, that
portfolio holdings disclosure of money market funds in reports to
shareholders is not necessary because the investments of money market
funds are circumscribed by the credit quality, maturity, and portfolio
diversification requirements of rule 2a-7 under the Investment Company
Act.\73\ Portfolio holdings schedules of money market funds typically
contain a list of short-term government and corporate debt securities
that may not assist the average investor in evaluating the money market
fund, or in distinguishing one money market fund from another.
---------------------------------------------------------------------------
\73\ 17 CFR 270.2a-7.
---------------------------------------------------------------------------
Our amendments will require money market funds to file their
complete portfolio holdings schedules semi-annually with the Commission
on Form N-CSR, however, so that complete information about their
portfolios will remain available to interested investors.\74\ In
addition, we are requiring any money market fund that does not include
its complete portfolio schedule in its reports to shareholders to
disclose in its shareholder reports that its complete schedule of
investments in unaffiliated issuers is available (i) without charge,
upon request, by calling a specified toll-free (or collect) telephone
number; (ii) on the fund's Web site, if applicable; and (iii) on the
Commission's Web site at http://www.sec.gov.\75\ Finally, the
amendments will require a money market fund to send its complete
schedule of investments in securities of unaffiliated issuers within
three business days of receipt of the request, by first-class mail or
other means designed to ensure equally prompt delivery.\76\
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\74\ Item 6 of Form N-CSR.
\75\ Instruction 2 to Item 21(b)(1) and Instruction to Item
21(c)(1) of Form N-1A; Instruction 7(ii) to Item 27(a) of Form N-3.
\76\ Id.
---------------------------------------------------------------------------
As adopted, the exemption for money market funds from portfolio
holdings disclosure in shareholder reports would not apply to
disclosure of investments other than investments in securities of
unaffiliated issuers. One commenter had suggested that the exemption be
extended to other investments, particularly investments in securities
of affiliated issuers. We disagree. We believe that, as with other
funds, requiring a complete presentation of investments other than
securities of unaffiliated issuers in money market fund shareholder
reports is important in order to provide investors with an
understanding of the risks and potential conflicts of interest
associated with the money market fund's portfolio.
3. Tabular or Graphic Presentation of Portfolio Holdings
We are also adopting, with modifications, the requirement that a
fund include in its annual and semi-annual reports to shareholders a
presentation using tables, charts, or graphs that depicts the fund's
portfolio holdings by reasonably identifiable categories (e.g.,
industry sector, geographic region, credit quality, or maturity).\77\
We believe that such a presentation could illustrate, in a concise and
user-friendly format, the allocation of a fund's investments across
asset classes. We believe that this presentation, coupled with a
summary portfolio schedule, has the potential to effectively convey to
investors key information about a fund's investments. Particularly in
the case of a fund with a large number of holdings, the combination of
a summary portfolio schedule and a tabular or graphic asset allocation
presentation could be significantly more useful to many investors than
the fund's complete portfolio schedule standing alone.
---------------------------------------------------------------------------
\77\ Item 21(d)(2) of Form N-1A; Instruction 6.a to Item 23 of
Form N-2; Instruction 6(i) to Item 27(a) of Form N-3.
---------------------------------------------------------------------------
A fund will have the flexibility to determine both the categories
to be used (e.g., industry sector, geographic region, credit quality,
maturity, etc.) and the format (e.g., tables, charts, graphs, etc.).
The categories in this presentation will be required to be selected,
and the presentation formatted, in a manner reasonably designed to
depict clearly the types of investments made by the fund, given its
investment objectives. We had proposed to require that the fund select
categories and design the format of the tabular or graphic presentation
to provide the ``most useful information'' to investors about the types
of investments. However, one commenter objected to this standard,
arguing that the determination of what constituted the ``most useful
information'' about a fund would require a subjective judgment open to
second-guessing, and that instead a requirement that a fund provide
``useful information'' to investors would be sufficient. Another
commenter, by contrast, suggested that the Commission prescribe the
categories to be used in the tabular or graphic presentation, arguing
that some degree of consistency in format is necessary to make the
information in the presentation accessible and understandable to
investors.
We believe that it is not advisable at the present time to require
a standardized format for the tabular or graphic presentation.
Permitting a fund to determine the means of presenting this portfolio
information will allow each fund to tailor this presentation in a
manner that is appropriate to its holdings. For example, a domestic
equity fund could choose to categorize its investments by attributes
such as industry sector, market capitalization, or price-earnings
ratio. A bond fund could choose to categorize its investments by
attributes such as credit quality or maturity or government versus non-
government securities.\78\ Prescribing specific categories to be used,
by contrast, might result in presentations that are not particularly
relevant for investors in a given fund. For example, categories such as
market capitalization and industry sector might be less relevant for
investors in an international
[[Page 11252]]
or global equity fund than categories showing the distribution of the
fund's holdings across regions or countries. In addition, a prescribed
category, such as market capitalization or industry sector, might
convey little useful information about a fund that has a principal
investment strategy of investing primarily in securities in only one
component of that category (e.g., a small capitalization fund).
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\78\ Credit quality would be required to be the ratings grade
assigned by a nationally recognized statistical rating organization
(``NRSRO''), as that term is used in paragraphs (c)(2)(vi)(E), (F),
and (H) of Rule 15c3-1 under the Exchange Act [17 CFR 240.15c3-
1(c)(2)(vi)(E), (F), and (H)]. The fund could use ratings of only
one NRSRO. Item 21(d)(2) of Form N-1A; Instruction 6.a to Item 23 of
Form N-2; Instruction 6(i) to Item 27(a) of Form N-3.
---------------------------------------------------------------------------
However, we also believe that a standard requiring that a fund's
tabular or graphic presentation be designed merely to provide ``useful
information'' may result in presentations that do not effectively
convey to investors the allocation of a fund's investments across
relevant asset classes. As a result, we are adopting a standard that
should allow funds sufficient flexibility, while encouraging
development of tabular or graphic presentations that clearly depict the
types of investments made by a fund. Over time, this flexible approach
may enable both funds and the Commission to determine whether certain
types of presentations are more effective for different types of funds.
Further, as adopted, the amendments will permit a fund the
flexibility to base the tabular or graphic presentation on either net
asset value or total investments, rather than solely net asset value,
as proposed. However, as with the selection of the categories and the
formatting of the presentation to be used, funds must select the basis
of presentation (e.g., net asset value or total investments) in a
manner reasonably designed to depict clearly the types of investments
made by the fund, given its investment objectives. We are providing
funds this flexibility because there may be instances where net asset
value differs from total investments and a presentation based on total
investments might be clearer to shareholders. A presentation based on
total investments might be preferable when, for example, a fund has
borrowed money for investment purposes. In this case, the fund's
investments would total more than 100 percent of net asset value,
making the fund's investments difficult to present graphically on a net
asset value basis. Regardless of which method is chosen, funds should
clearly identify the basis of the presentation and provide any
additional explanatory information that would be useful in
understanding the presentation.
Finally, we have modified the amendments to require that the
tables, charts, or graphs depict the ``portfolio holdings,'' rather
than the ``securities holdings'' of the fund. We are adopting this
modification to clarify that the tabular or graphic presentation must
reflect all of the investment activities of the fund, and not just
investments in securities of unaffiliated issuers or investments in
securities generally.
4. Quarterly Filing of Complete Portfolio Schedule
We are adopting the requirement that a fund file its complete
portfolio holdings schedule with the Commission on a quarterly basis,
with one modification. A fund will be required to file its complete
portfolio schedules for the second and fourth fiscal quarters on Form
N-CSR,\79\ and will be required to file its complete portfolio
schedules for the first and third fiscal quarters on new Form N-Q,
within 60 days of the end of the quarter.\80\ Form N-Q will require
funds to file the same schedules of investments that are currently
required in annual and semi-annual reports to shareholders. These
schedules may be unaudited.\81\ As proposed, Form N-Q would have been
filed under the Investment Company Act only. We are adopting Form N-Q
as a combined Exchange Act and Investment Company Act form.
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\79\ Item 6 of Form N-CSR. See note and accompanying text,
supra.
\80\ Form N-Q; 17 CFR 249.332; 17 CFR 274.130; rule 30b1-5 under
the Investment Company Act. Small business investment companies
(``SBICs'') registered with the Commission on Form N-5 will not be
required to file Form N-Q. General Instruction A to Form N-Q.
Although they are management investment companies, SBICs are not
currently required to deliver reports to shareholders containing
financial statements, and hence are not required to deliver
schedules of investments to their shareholders.
\81\ See Item 1 of Form N-Q; Schedule I--Investments in
securities of unaffiliated issuers [17 CFR 210.12-12]; Schedule II--
Investments-other than securities [17 CFR 210.12-13]; Schedule III--
Investments in and advances to affiliates [17 CFR 210.12-14];
Schedule IV--Investments-securities sold short [17 CFR 210.12-12A];
and Schedule V--Open option contracts written [17 CFR 210.12-12B].
---------------------------------------------------------------------------
We are adopting, as proposed, the requirement that Form N-Q be
filed with the Commission on EDGAR. Form N-Q will not be required to be
delivered to shareholders. However, a fund will be required to include
in its annual and semi-annual reports to shareholders a statement that:
(i) The fund files its complete schedule of portfolio holdings with the
Commission for the first and third quarters of each fiscal year on Form
N-Q; (ii) the fund's Forms N-Q are available on the Commission's Web
site at http://www.sec.gov; (iii) the fund's Forms N-Q may be reviewed
and copied at the Commission's Public Reference Room, and how
information on the operation of the Public Reference Room may be
obtained; and (iv) if the fund makes the information on Form N-Q
available to shareholders on its Web site or upon request, a
description of how the information may be obtained from the fund.\82\
This approach is designed to strike an appropriate balance between
investors' interest in more frequent portfolio information and the
costs associated with disclosing and making that information available
to investors, which are ultimately borne by investors.
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\82\ Item 21(d)(3) of Form N-1A; Instruction 6.b. to Item 23 of
Form N-2; Instruction 6.(ii) to Item 27(a) of Form N-3.
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Commenters, including investors and many fund groups, generally
supported the proposal for quarterly portfolio disclosure on Form N-Q.
Commenters argued that quarterly disclosure with a 60-day delay would
help investors to better monitor whether, and how, a fund is complying
with its stated investment objective, and noted that quarterly
disclosure would make it easier to track whether funds are engaging in
forms of portfolio manipulation such as ``window dressing.'' However,
some commenters, including individual investors and investor advocacy
groups, suggested that portfolio disclosure be required even more
frequently, such as monthly, or that the proposed delay for filing the
quarterly disclosure be shortened to 30 days, to provide investors with
even more certainty that a fund is investing consistent with its
investment objective. By contrast, other commenters, including some
fund groups, raised concerns that the proposed quarterly disclosure may
expand the opportunities for professional traders to exploit portfolio
information by engaging in predatory trading practices. The commenters
suggested modifications to the proposals to address these concerns,
including allowing funds to request confidential treatment of certain
holdings otherwise required to be reported on Form N-Q, and decreasing
the frequency of required reports on Form 13F or increasing the 45 day
delay for these reports.\83\
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\83\ See section 13(f) of the Exchange Act [15 U.S.C. 78m(f)];
rule 13f-1 under the Exchange Act [17 CFR 240.13f-1]. Fund managers
and other institutional investment managers exercising investment
discretion over $100 million or more in certain equity securities
must disclose information about portfolios that they manage on Form
13F within 45 days of the end of each quarter.
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We have determined to adopt the proposed requirement for quarterly
disclosure of portfolio holdings with a 60-day delay. We are not
requiring more frequent portfolio disclosure, or a shorter delay,
because we take seriously concerns that more frequent portfolio
holdings disclosure and/or a shorter delay for release of this
information may expand the opportunities for predatory trading
practices that harm fund
[[Page 11253]]
shareholders. However, we also do not believe that it is appropriate to
modify our proposal by adopting a confidential treatment mechanism. We
believe that such a mechanism is unnecessary because the 60-day delay
in the quarterly disclosure will adequately protect funds from
predatory trading practices. In addition, we believe that requiring
quarterly portfolio disclosure, as proposed, may help to address the
concerns raised by recent allegations that some mutual fund managers
have selectively disclosed their portfolio holdings in order to reward
large investors.\84\
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\84\ See SEC v. Gary L. Pilgrim, Harold J. Baxter, and Pilgrim
Baxter & Associates, Ltd, (United States District Court, E.D. Pa.,
Civil Action No. 03-CV-6341) (alleged disclosure of nonpublic fund
portfolio information by adviser's principal permitted certain
investors to exploit mispricing of the fund's net asset value); In
the Matter of Alliance Capital Management, L.P., Investment Advisers
Act Release No. 2205 (Dec. 18, 2003) (disclosure of material
nonpublic information about certain mutual fund portfolio holdings
permitted favored client to profit from market timing). See also
Investment Company Act Release No. 26337 (Jan. 20, 2004) [69 FR
40410 (Jan. 27, 2004)] (proposing requirements for investment
adviser codes of ethics, including provisions reasonably designed to
prevent misuse of material nonpublic information about client
securities, holdings, and transactions); Investment Company Act
Release No. 26299 Dec. 17, 2003) [68 FR 74714 (Dec. 24, 2003)]
(stating that a fund's compliance policies and procedures should
address misuses of nonpublic information, including the disclosure
to third parties of material information about the fund's portfolio,
its trading strategies, or pending transactions); Investment Company
Act Release No. 26287 (Dec. 11, 2003) [68 FR 70402 (Dec. 17, 2003)]
(proposing rules requiring disclosure by mutual funds of their
policies and procedures with respect to the disclosure of their
portfolio securities).
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We have also determined not to modify the reporting requirements of
Form 13F at this time. Fund portfolio holdings have been required to be
disclosed on Form 13F, aggregated by investment manager, since
1979.\85\ By contrast, concerns about predatory trading practices
arising from Form 13F have surfaced recently in the context of the
current proposal. Commenters have not presented concrete evidence that
quarterly disclosure of aggregate holdings by institutional investment
managers on Form 13F has resulted in such trading practices.
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\85\ Institutional investment managers may request confidential
treatment of information in filings on Form 13F pursuant to section
13(f)(3) of the Exchange Act [15 U.S.C. 78m(f)(3)] on the basis,
among others, that the information would reveal an investment
manager's ongoing program of acquisition or disposition. See Report
of Senate Comm. on Banking, Housing and Urban Affairs, S. Rep. No.
75, 94th Cong., 1st Sess. 87 (1975). An application for confidential
treatment on this basis must, among other requirements: (a) Describe
the investment strategy being followed with respect to the relevant
securities holdings; (b) explain why public disclosure of the
securities would, in fact, be likely to reveal the investment
strategy; (c) demonstrate that such revelation of an investment
strategy would be premature, and indicate whether the manager was
engaged in a program of acquisition or disposition of the security
both at the end of the quarter and at the time of the filing; and
(d) demonstrate that failure to grant the request for confidential
treatment would be likely to cause substantial harm to the manager's
competitive position. Instructions for Confidential Treatment
Requests, Form 13F [17 CFR 249.325].
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As proposed, Form N-Q would have been filed under the Investment
Company Act only. We are adopting Form N-Q as a reporting form under
sections 13 and 15(d) of the Exchange Act, in addition to the
Investment Company Act. We are also requiring that Form N-Q be signed
and certified by its principal executive and financial officers,
consistent with section 302 of the Sarbanes-Oxley Act of 2002.\86\ In
addition, we are amending rule 30a-3 under the Investment Company Act
to broaden the definition of disclosure controls and procedures to
include controls and procedures designed to ensure that information
required to be disclosed on Form N-Q is recorded, processed,
summarized, and reported within the time periods specified in the
Commission's rules and forms.\87\ As is currently the case with Form N-
CSR, a fund's management would be required to evaluate, with the
participation of its principal executive and financial officers, the
effectiveness of the fund's disclosure controls and procedures within
the 90-day period prior to the filing of a report on Form N-Q.\88\
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\86\ Rule 30d-1 under the Investment Company Act [17 CFR
270.30d-1]; General Instruction F.2.(a) to Form N-Q; section 302 of
the Sarbanes-Oxley Act of 2002, Pub. L. 107-204, 116 Stat. 745
(2002).
\87\ 17 CFR 270.30a-3(c).
\88\ 17 CFR 270.30a-3(b).
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We are designating Form N-Q as a filing required under the Exchange
Act, because the fund's portfolio schedule constitutes financial
information of great significance to investors. We believe that
requiring certification of this financial information is consistent
with the intent of the certification requirement of section 302 of the
Sarbanes-Oxley Act, which is to improve the quality of the disclosure
that a company provides about its financial condition in its periodic
reports to investors. We also note that the complete financial
statements required in the shareholder reports included in Form N-CSR
are required to be certified, and that funds are required to maintain
the disclosure controls and procedures, and internal control over
financial reporting, referenced in the certification on Form N-CSR. The
Commission believes that any marginal increase in costs associated with
certifying the portfolio holdings information contained in filings on
Form N-Q will be justified by the benefits to investors.
The certification required for Form N-Q will be similar to that
required for Form N-CSR. However, because Form N-Q will only contain a
fund's schedules of investments and not complete financial statements,
the certification on Form N-Q will require a certifying officer to
state, based on the officer's knowledge, that the schedules of
investments included in the report fairly present in all material
respects the investments of the registrant as of the end of the fiscal
quarter for which the report is filed.\89\ By contrast, the
certification in Form N-CSR requires a certifying officer to state,
based on the officer's knowledge, that the financial statements, and
other financial information included in the report, fairly present in
all material respects the financial condition, results of operations,
changes in net assets, and cash flows (if the financial statements are
required to include a statement of cash flows) of the registrant as of,
and for, the periods presented in the report.\90\
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\89\ Paragraph 3 of certification exhibit of Item 3 of Form N-Q.
\90\ Paragraph 3 of certification exhibit of Item 11(a)(2) of
Form N-CSR.
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In addition, because funds will now be filing periodic reports
under the Exchange Act on a quarterly basis, the form of certification
for Form N-Q will require a certifying officer to state that he or she
has disclosed in the report any change in the registrant's internal
control over financial reporting that occurred during the most recent
fiscal quarter, rather than the registrant's most recent fiscal half-
year, as Form N-CSR currently requires.\91\ We are adding an Item to
Form N-Q for funds to disclose any such change in internal control over
financial reporting.\92\ We are also adopting conforming changes to the
comparable disclosure item and the certification of Form N-CSR.\93\
Because the certification of Form N-Q, like the current certification
of Form N-CSR, will require the certifying officers to state that they
have conducted an evaluation of the fund's disclosure controls and
procedures and have presented in the report their conclusions about the
effectiveness of the disclosure controls and procedures as of a date
within 90 days prior to the filing date of the report, Form N-Q will
[[Page 11254]]
include an Item requiring disclosure of the conclusions of this
evaluation.\94\
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\91\ Paragraph 4(d) of certification exhibit of Item 3 of Form
N-Q.
\92\ Item 2(b) of Form N-Q.
\93\ Item 10(b) of Form N-CSR; paragraph 4(d) of certification
exhibit of Item 11(a)(2) of Form N-CSR.
\94\ Item 2(a) of Form N-Q.
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C. Management's Discussion of Fund Performance (``MDFP'')
We are adopting, as proposed, a requirement that a mutual fund,
other than a money market fund, include MDFP in its annual reports to
shareholders.\95\ Currently, a mutual fund is required to include MDFP
in its prospectus unless the fund includes the information in its
latest annual report to shareholders.\96\ We note that mutual funds
typically include MDFP in their annual reports. We believe that
requiring MDFP to be included in the annual report will aid investors
in assessing a fund's performance over the prior year and will
complement other ``backward looking'' information required in the
annual report, such as financial statements. In addition, requiring
MDFP to be included in annual reports to shareholders will mean that
this information will be required to be certified by a fund's principal
executive and financial officers pursuant to section 302 of the
Sarbanes-Oxley Act and rule 30a-2 under the Investment Company Act.
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\95\ Item 21(b)(7) of Form N-1A.
\96\ Current Item 5 of Form N-1A. Currently, a fund that
includes MDFP in its annual report must disclose in its prospectus
that its annual report contains a discussion of the market
conditions and investment strategies that significantly affected the
fund's performance during its last fiscal year and that this
discussion will be made available upon request and without charge.
Current Item 1(b)(1) of Form N-1A. Because we are now requiring MDFP
in a mutual fund's annual report, we are amending Instruction 5 to
Item 1(b)(1) to require all funds, other than many market funds
(which are not required to provide MDFP), to include this prospectus
disclosure.
---------------------------------------------------------------------------
Most commenters supported the proposed requirement that MDFP be
included in mutual fund annual reports. However, one commenter argued
that requiring MDFP to be certified by a fund's principal executive and
financial officers would have a negative impact on the quality of MDFP,
as funds may be reluctant to include subjective, albeit useful,
information that does not readily lend itself to meaningful
certification. We disagree with this commenter's conclusion that MDFP
should not be certified. Investors rely upon MDFP to explain the
investment operations and performance of a mutual fund, which is as
significant for investors in a fund as management's discussion and
analysis of financial condition and results of operations is for
investors in an operating company. We believe that a requirement that
MDFP be included in shareholder reports and certified by a mutual
fund's principal executive and financial officers will encourage funds
to include a more complete and accurate discussion of the factors that
affected fund performance in their MDFP. We have asked our staff in
their review of fund shareholder reports to continue to focus on the
sufficiency of MDFP disclosures and identify instances where funds have
failed to provide sufficient substantive discussion of the factors that
affected the fund's performance during the reporting period.\97\
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\97\ See In the Matter of Davis Selected Advisers `` NY, Inc.,
Investment Advisers Act Release No. 2055 (Sept. 4, 2002) (fund
violated section 34(b) of the Investment Company Act [15 U.S.C. 80a-
34(b)] by failing to disclose the material impact that investments
in initial public offerings had on its performance during its
previous fiscal year in its MDFP). See also Investment Company Act
Release No. 25870, supra note 16, 68 FR at 170 (noting that the
staff has identified instances where MDFP has provided insufficient
substantive discussion of the factors that affected the fund's
performance, and asking the staff to continue to focus on
deficiencies in MDFP disclosure).
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D. Compliance Date
The effective date for these amendments will be May 10, 2004. We
are requiring all fund reports to shareholders for periods ending on or
after July 9, 2004 to comply with the amendments. In addition, we are
requiring funds to file quarterly reports on Form N-Q with respect to
any fiscal quarter ending on or after July 9, 2004. This timeframe is
consistent with the transition period requested by most commenters, and
is appropriate in light of the systems changes and other tasks that
many funds may have to undertake.
Funds will be required to comply with the amendments to Items 10(b)
and 11 of Form N-CSR upon the effective date. However, we are adding
transition provisions in Form N-CSR that will require funds to comply
with some of the current requirements of these Items, which require
disclosure of changes in internal control over financial reporting with
respect to the entire semi-annual period covered by the report, until
the earlier of June 30, 2005, or the date that a fund has filed its
first report on Form N-Q.\98\ We would expect that by June 30, 2005,
all funds will have begun to file reports on Form N-Q that would
include disclosure regarding changes in internal control over financial
reporting that occurred during the most recent fiscal quarter. This
transition rule is intended to prevent any gap in the disclosure that
funds provide regarding changes in internal control over financial
reporting.
---------------------------------------------------------------------------
\98\ Instruction to Item 10(b) of Form N-CSR; Instruction to
Item 11(a)(2) of Form N-CSR.
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Funds will not be required to comply with the portion of the
introductory language in paragraph 4 of the certification in Item 3 of
the Form N-Q that refers to the certifying officers' responsibility for
establishing and maintaining internal control over financial reporting,
or with paragraph 4(b) of the certification, until the first report on
Form N-Q following a report on Form N-CSR that is required to contain
these portions of the certification. This compliance date is consistent
with the transition period we provided in adopting these portions of
the certification for Form N-CSR, in which we stated that funds must
comply with these portions of the certification beginning with the
first annual report on Form N-CSR for a fiscal year ending on or after
June 15, 2004.\99\
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\99\ Investment Company Act Release No. 26068 (June 5, 2003) [68
FR 36636, 36650 (June 18, 2003)] (amending Form N-CSR
certification).
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III. Paperwork Reduction Act
As explained in the Proposing Release, certain provisions of the
amendments contain ``collection of information'' requirements within
the meaning of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501, et
seq). The titles for the collections of information are: (1) ``Form N-
1A under the Investment Company Act of 1940 and Securities Act of 1933,
Registration Statement of Open-End Management Investment Companies;''
(2) ``Form N-2--Registration Statement of Closed-End Management
Investment Companies;'' (3) ``Form N-3--Registration Statement of
Separate Accounts Organized as Management Investment Companies;'' (4)
``Form N-CSR--Certified Shareholder Report of Registered Management
Investment Companies;'' (5) ``Rule 30e-1 under the Investment Company
Act of 1940, Reports to Stockholders of Management Companies;'' (6)
``Form N-Q--Quarterly Schedule of Portfolio Holdings of Registered
Management Investment Company;'' and (7) ``Rule 30b1-5 under the
Investment Company Act of 1940, `Quarterly Report.''' 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 OMB
control number.
Form N-1A (OMB Control No. 3235-0307), Form N-2 (OMB Control No.
3235-0026), and Form N-3 (OMB Control No. 3235-0316) were adopted
pursuant to section 8(a) of the Investment Company Act (15 U.S.C. 80a-
8) and section 5 of the Securities Act (15 U.S.C. 77e). Form N-CSR (OMB
Control No. 3235-0570) was adopted pursuant to section 30 of the
Investment
[[Page 11255]]
Company Act (15 U.S.C. 80a-29) and sections 13 and 15(d) of the
Exchange Act (15 U.S.C. 78m and 78o(d)). Rule 30e-1 (OMB Control No.
3235-0025) was adopted pursuant to section 30(e) of the Investment
Company Act (15 U.S.C. 80a-29(e)). Form N-Q (OMB Control No. 3235-0578)
is being adopted pursuant to section 30 of the Investment Company Act
(15 U.S.C. 80a-29) and sections 13 and 15(d) of the Exchange Act (15
U.S.C. 78m and 78o(d)). Rule 30b1-5 under the Investment Company Act is
being adopted pursuant to section 30(b)(1) of the Investment Company
Act (15 U.S.C. 80a-29(b)(1)).
We published notice soliciting comments on the collection of
information requirements in the Proposing Release and submitted these
requirements to the Office of Management and Budget (``OMB'') for
review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11.\100\ OMB
approved these collection requirements. We received no comments on the
collection of information requirements.
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\100\ See Proposing Release, supra note 16, 68 FR at 170-73.
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The amendments adopted in this release will:
Require a mutual fund to disclose fund expenses
borne by shareholders during the reporting period in reports to
shareholders;
Permit a fund to include a summary portfolio
schedule in its reports to shareholders, and exempt a money market fund
from the requirement to include a portfolio schedule of investments in
securities of unaffiliated issuers in its reports to shareholders,
provided that the complete portfolio schedule is filed with the
Commission on Form N-CSR semi-annually and is provided to shareholders
upon request, free of charge;
Require reports to shareholders by funds to
include a tabular or graphic presentation of a fund's portfolio
holdings by identifiable categories;
Require a fund to file its complete portfolio
schedule as of the end of its first and third fiscal quarters with the
Commission on new Form N-Q, which will be filed under the Investment
Company Act and the Exchange Act and certified by the fund's principal
executive and financial officers; and
Require a mutual fund to include Management's
Discussion of Fund Performance in its annual report to shareholders.
These amendments are intended to provide better information to
investors about fund costs, investments, and performance.
Forms N-1A, N-2, and N-3
The purposes of Forms N-1A, N-2, and N-3 are to meet the
registration and disclosure requirements of the Securities Act and the
Investment Company Act and to provide investors with information
necessary to evaluate an investment in a fund. Forms N-1A, N-2, and N-3
contain collection of information requirements. The likely respondents
to the information collection in Form N-1A are open-end funds
registering with the Commission. The likely respondents to the
information collection in Form N-2 are closed-end funds registering
with the Commission. The likely respondents to the information
collection in Form N-3 are separate accounts, organized as management
investment companies and offering variable annuities, registering with
the Commission. Compliance with the disclosure requirements of Forms N-
1A, N-2, and N-3 is mandatory. Responses to the disclosure requirements
are not confidential.
We estimate that the amendments to Forms N-1A, N-2, and N-3 will
have no impact on the hour burden for filing registration statements on
these forms. The amendments to Forms N-1A, N-2, and N-3 relate solely
to the contents of shareholder reports for funds registered on these
forms, and the additional burden hours imposed by these amendments are
reflected in the collection of information requirements for shareholder
reports required by rule 30e-1 under the Investment Company Act.
Form N-CSR
Form N-CSR, including the amendments, contains collection of
information requirements. The respondents to this information
collection are funds subject to rule 30e-1 under the Investment Company
Act of 1940 registering with the Commission on Form N-1A, N-2, or N-3.
Compliance with the disclosure requirements of Form N-CSR is mandatory.
Responses to the disclosure requirements are not confidential.
The amendments will require a fund that has used a summary
portfolio schedule in its reports to shareholders, in lieu of including
a complete schedule of investments in securities of unaffiliated
issuers, or a money market fund that has omitted its schedule of
investments in securities of unaffiliated issuers from its reports to
shareholders, to file its complete schedule of investments in
securities of unaffiliated issuers pursuant to Item 6 of Form N-CSR. As
described in the Proposing Release, we continue to estimate that the
hour burden associated with the requirements of Item 6 of Form N-CSR
will increase the burden of filing Form N-CSR by 5 hours per portfolio
per filing. Since the Proposing Release, however, our estimate of the
number of portfolios that will file Form N-CSR has changed. We now
estimate that 3,800 funds file reports on Form N-CSR, representing
9,706 portfolios, including 1,000 money market portfolios.\101\ Of
these, we estimate that 7,094 portfolios will file complete schedules
of investments in securities of unaffiliated issuers pursuant to Item 6
of Form N-CSR.\102\
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\101\ The total number of portfolios is comprised of 8,938
portfolios of mutual funds registered on Form N-1A, 733 portfolios
of closed-end funds registered on Form N-2, and 35 sub-accounts of
managed separate accounts registered on Form N-3. The estimates of
the total number of funds, the number of mutual fund portfolios
registered on Form N-1A, the number of money market portfolios, and
the number of closed-end funds registered on Form N-2 are based on
the Commission staff's analysis of reports filed on Form N-SAR in
2003. The estimate of the number of sub-accounts of managed separate
accounts registered on Form N-3 is based on the staff's analysis of
reports filed on Form N-SAR in 2003.
\102\ We calculate this number assuming that all 1,000 money
market portfolios will omit portfolio schedules from their
shareholder reports and that 70% of the remaining 8,706 portfolios
will include a summary schedule in lieu of the complete schedule. As
a result 1,000 money market portfolios and 6,094 (8,706 portfolios x
.70) other portfolios would be required to complete Item 6 of Form
N-CSR, for a total of 7,094.
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Based on these estimates, the total estimated increase in burden
hours associated with the change to Form N-CSR is 70,940 hours (7,094
portfolios x 5 hours per portfolio x 2 filings per year). This
represents an estimate that is 1,010 hours lower that the 71,950 hours
estimate in the Proposing Release. The current total hour burden
associated with Form N-CSR before these amendments is 142,619 hours and
the per filing burden is 19.27 hours.\103\ Thus, we now estimate that
the total hour burden for filing Form N-CSR, as amended, would be
141,609 hours (142,619 hours--1,010 hours reduction) and that the
weighted average burden per filing on Form N-CSR would be approximately
18.63 hours (141,609 hours / (3,800 filers x 2 filings per year)).
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\103\ The current OMB approved burden associated with Form N-CSR
is 142,498 hours. The Commission has submitted a request to increase
the approved burden to 142,619 hours. This request is still pending.
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Shareholder Reports
Rule 30e-1, which requires funds to include in the shareholder
reports the information that is required by the fund's registration
statement form, contains collection of information
[[Page 11256]]
requirements.\104\ The respondents to this collection of information
requirement are funds registered on Forms N-1A, N-2, and N-3.
Compliance with the disclosure requirements of rule 30e-1 is mandatory.
Responses to the disclosure requirements will not be kept confidential.
---------------------------------------------------------------------------
\104\ The amendments being adopted are to the shareholder
reports requirements in Forms N-1A, N-2, and N-3. Rule 30e-1(a)
under the Investment Company Act of 1940 [17 CFR 270.30e-1(a)]
requires funds to include in the shareholder reports the information
that is required by the fund's registration statement form.
---------------------------------------------------------------------------
We estimate that approximately 3,800 funds are subject to rule 30e-
1.\105\ The current hour burden for preparing and filing semi-annual or
annual shareholder reports in compliance with rule 30e-1 is 125.18
hours per report per fund, for a total of 926,350 hours (125.18 x 2 x
3,800 funds). As a result of an increase in the number of registered
investment companies required to prepare and file these reports, the
burden has increased to 951,368 annual burden hours (125.18 hours per
report x 2 reports x 3,800 funds). We estimate that the 3,800 funds
filing annual and semi-annual shareholder reports pursuant to rule 30e-
1 include 9,706 portfolios, including 8,938 portfolios of mutual funds
registered on Form N-1A, 733 closed-end funds registered on Form N-2,
and 35 sub-accounts of managed separate accounts registered on Form N-
3.\106\
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\105\ See supra note .
\106\ Id.
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We estimate, as we did in the Proposing Release, that there are
1,000 money market fund portfolios that will take advantage of the
provision permitting a money market fund to omit its schedule of
investments in securities of unaffiliated issuers from its shareholder
reports. This will decrease the hour burden of complying with rule 30e-
1 for these funds by 5 hours per portfolio per filing, or 10,000 hours
(1,000 portfolios x 5 hours x 2 filings per year). We estimate that, of
the remaining 8,706 portfolios of funds filing shareholder reports,
70%, or 6,094 portfolios, will choose to take advantage of the
provisions permitting use of a summary portfolio schedule.\107\
However, as we discussed in the Proposing Release, we continue to
estimate that use of the summary portfolio schedule provisions will
have no net effect on the burden hours of complying with rule 30e-1.
The estimated time necessary to prepare a summary portfolio schedule is
equivalent to the time currently required to prepare a complete
portfolio schedule, because a fund will still need to evaluate the size
of each of its investments in securities of unaffiliated issuers in
order to prepare the summary portfolio schedule. Further, we continue
to estimate that the requirement to include a tabular or graphic
presentation in shareholder reports, which will apply to all funds,
will increase the estimated burden hours for complying with rule 30e-1
by 3 hours per portfolio per filing. Due to the change in the number of
portfolios, we now estimate that the annual burden associated with this
requirement is 58,236 hours (9,706 portfolios x 3 hours x 2 filings per
year). We estimate that the requirement to disclose in shareholder
reports the dollar cost of investing in the fund over the reporting
period, which would apply only to mutual funds, will increase the
estimated burden hours for complying with rule 30e-1 by 5 hours per
portfolio per filing. We estimate that the modifications that we are
adopting that will require the expense example to include the ending
account values for an initial investment of $1,000, and the fund's
expense ratio expressed as a percentage, will not increase this burden,
because the annualized expense ratio will be based on information
required elsewhere in the shareholder report as part of the financial
highlights table, and funds will be calculating ending account value
for an initial investment of $1,000 in order to calculate expenses paid
on that investment. Due to the change in the number of portfolios, we
now estimate that the associated annual burden associated with this
requirement is 89,380 hours (8,938 mutual fund portfolios x 5 hours x 2
filings per year). Finally, we continue to estimate that the
requirement for mutual funds to include MDFP in annual reports to
shareholders would have a negligible effect on the estimated burden
hours for complying with rule 30e-1, because, in the staff's
experience, over 90% of mutual funds already include MDFP in annual
reports to shareholders.
---------------------------------------------------------------------------
\107\ This is based on the Commission staff's estimate that more
than 70% of funds had more than 50 securities in their portfolios,
according to the staff's analysis of data from the Morningstar
Principia Pro database.
---------------------------------------------------------------------------
Thus, taking into account the change in the number of portfolios,
we estimate that the amendments will have a net increase on the burden
hours of complying with rule 30e-1 of 137,616 hours (-10,000 hours +
58,236 hours + 89,380 hours), for a new total burden of 1,088,984 hours
(951,368 total hours + 137,616 hours increase).
Rule 30b1-5
The purpose of Rule 30b1-5 is to improve transparency of
information about funds' portfolio holdings. Rule 30b1-5 will require
funds to file a quarterly report via the Commission's EDGAR system on
Form N-Q, not more than sixty calendar days after the close of each
first and third fiscal quarter, containing their complete portfolio
holdings. The likely respondents to Rule 30b1-5 will be registered
management investment companies, other than small business investment
companies registered with the Commission on Form N-5.
We estimate that Rule 30b1-5 will affect approximately 3,800
portfolios, each of which will be required to file a complete portfolio
holdings schedule via EDGAR on Form N-Q. However, for purposes of this
Paperwork Reduction Act analysis, the burden associated with the
requirements of Rule 30b1-5 has been included in the collection of
information requirements of Form N-Q, rather than the new rule.
Compliance with rule 30b1-5 is mandatory for every registered fund.
Responses to the disclosure requirements will not be kept confidential.
Form N-Q
The purpose of Form N-Q is to meet the disclosure requirement of
the Investment Company Act and the Exchange Act and to provide
investors with information necessary to evaluate an investment in the
fund. Form N-Q contains collection of information requirements. The
respondents to this information collection will be management
investment companies subject to rule 30e-1 under the Investment Company
Act registering with the Commission on Forms N-1A, N-2, or N-3.
Compliance with the disclosure requirements of Form N-Q will be
mandatory. Responses to the disclosure requirements will not be kept
confidential.
Every registered management investment company, other than a small
business investment company registered on Form N-5, will be required to
file a quarterly report on Form N-Q disclosing the information required
therein, not more than sixty calendar days after the close of the first
and third quarters of each fiscal year. In the Proposing Release, we
estimated that for each of those funds the disclosure of their
portfolio holdings schedules in filings on Form N-Q as of the end of
each first and third fiscal quarter would require, on average, 10 hours
per
[[Page 11257]]
portfolio per filing.\108\ We have, however, modified Form N-Q since
the proposal to require that the form be certified by the fund's
principal executive and financial officers, similar to the present
requirement in Form N-CSR. We estimate that the increase in hour burden
associated with the new requirement for certification of Form N-Q will
be 1 hour per registered investment company plus 0.25 hours for every
additional portfolio in the company beyond the first portfolio.\109\ We
currently estimate that Form N-Q will affect approximately 3,800 funds,
which include 9,706 portfolios. Taking into account the change in the
number of portfolios, the annual hours associated with filing Form N-Q,
absent the certification requirement, would be 194,120 hours (9,706
portfolios x 2 reports per year x 10 hours per portfolio). We estimate
that the annual hour burden increase attributable to the requirement to
certify Form N-Q will equal 10,554 hours (((3,800 funds x 1 hour per
fund) + (5,906 additional portfolios x .25 hour per additional
portfolio)) x 2 filings per year). The total hour burden estimate
associated with Form N-Q, including compliance with the certification
requirement, is 204,674 hours (194,120 hours + 10,554 hours
attributable to certification).
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\108\ This estimate was based on a review of the estimated hour
burdens associated with other rules and forms under the Investment
Company Act that impose similar disclosure requirements.
\109\ Our estimate of the burden hours associated with the Form
N-Q certification requirement is based on the staff's experience
reviewing financial statements, including portfolio schedules, and
the staff's previous estimate of the hour burden associated with
certification under Form N-CSR. Investment Company Release No. 25914
(Jan. 27, 2003) [68 FR 5348, 5357-58 (Feb. 3, 2003)] (estimating the
hour burden for certification of Form N-CSR to be 5 hours per
registrant plus 0.5 hours per additional portfolio.)
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IV. Cost/Benefit Analysis
The Commission is sensitive to the costs and benefits imposed by
its rules. Our amendments are intended to improve the periodic
disclosure provided by funds about their costs, portfolio investments,
and past performance. The amendments:
Require mutual funds to disclose fund expenses
borne by shareholders during the reporting period in reports to
shareholders;
Permit a fund to include a summary portfolio
schedule in its reports to shareholders, and exempt a money market fund
from the requirement to include a portfolio schedule of investments in
securities of unaffiliated issuers in its reports to shareholders,
provided that the complete portfolio schedule is filed with the
Commission on Form N-CSR semi-annually and is provided to shareholders
upon request, free of charge;
Require reports to shareholders by funds to
include a tabular or graphic presentation of a fund's portfolio
holdings by identifiable categories;
Require a fund to file and certify its complete
portfolio schedule as of the end of its first and third fiscal quarters
with the Commission on new Form N-Q under the Investment Company Act
and the Exchange Act; and
Require a mutual fund to include Management's
Discussion of Fund Performance in its annual report to shareholders.
These amendments are intended to significantly improve the periodic
disclosure that fund investors receive, particularly with respect to
portfolio holdings and expenses, while reducing the costs of printing
and delivering funds' annual and semi-annual reports to shareholders.
In the Proposing Release, we provided an analysis of the costs and
benefits of the proposed amendments, and we requested comments.\110\
Seven commenters commented directly on this cost/benefit analysis,
while others raised cost and benefit issues with regard to specific
substantive provisions without specifically mentioning the cost/benefit
analysis. These comments are discussed in further detail below.
---------------------------------------------------------------------------
\110\ See Section V, ``Cost/Benefit Analysis,'' of the Proposing
Release, supra note 16, 68 FR at 173-176.
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A. Benefits
Disclosure of Fund Expenses in Shareholder Reports. The requirement
for mutual funds to disclose in their reports to shareholders fund
expenses borne by shareholders during the reporting period should
benefit investors by increasing their awareness and understanding of
the fees that they pay on an ongoing basis for investing in a mutual
fund. The benefits of the improved transparency of funds' ongoing fees
and expenses are difficult to quantify, however.
Use of Summary Portfolio Schedule and Exemption of Money Market
Funds from Portfolio Schedule Requirements in Shareholder Reports. The
Commission estimates that more than 70% of all non-money market funds
may realize at least some cost savings, through reduced printing and
mailing expenses, by use of a summary portfolio holdings schedule in
their shareholder reports.\111\ Similar benefits would be available to
all money market funds, which will be exempt from the requirement to
include the schedule of investments in securities of unaffiliated
issuers in their reports to shareholders. For funds with large numbers
of holdings, such as index funds, the cost savings in printing and
mailing could be substantial.
---------------------------------------------------------------------------
\111\ See supra note 107.
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As of year-end 2002, there were approximately 257 million
shareholder accounts invested in funds affected by the amendments.\112\
For each account, funds are required to provide an annual and semi-
annual shareholder report, although our rules allow the delivery of a
single shareholder report to investors who share an address
(``householding'') under certain conditions.\113\ Assuming that the use
of householding would reduce the number of shareholder reports by at
least 10%, we estimate that, as a result, funds currently print and
deliver approximately 462.4 million (257 million accounts x 2 reports x
.9 (using 10% savings estimate)) shareholder reports per year.\114\
Estimating that 70% of these reports will include summary schedules in
lieu of complete ones, 323.82 million (462.4 million shareholder
reports x .7) shareholder reports may be streamlined, reducing the
associated printing and mailing costs.\115\ If funds reduce their
printing and distribution expenses by only one page per shareholder
report, at an estimated cost of 2[cent] per page, funds could save
approximately $6.48 million per year (323.82 million shareholder
reports x $.02 per page).\116\ The Commission believes, however, that
some funds may be able to reduce the length of their shareholder
reports by more than a single printed page, and we therefore expect
that the cost savings to funds may exceed these estimates. These
potential savings may be passed on to fund shareholders.\117\
---------------------------------------------------------------------------
\112\ The estimate is based on the staff's review of N-SAR
filings and information from the Investment Company Institute.
Investment Company Institute, Mutual Fund Fact Book 65 (43rd ed.
2003).
\113\ See Investment Company Act Release No. 24123 (Nov. 4,
1999) [64 FR 62540, 62543 (Nov. 16, 1999)] (estimating that
householding rules would produce a decline in the number of
shareholder reports required to be delivered of between 10 and 30
percent) (``Householding Release'').
\114\ Id.
\115\ These calculations are based on the estimate that 70% of
funds that will use a summary portfolio schedule and hence may
benefit from reduced printing costs. See text accompanying note,
supra.
\116\ This cost per page is based on an estimate that the
typical shareholder report is approximately 25 pages long and costs
$.52 to print and deliver. See Householding Release, supra. note, 64
FR at 62543.
\117\ The provision permitting use of a summary portfolio
schedule in shareholder reports, and the exemption for money market
funds from the requirement to include in shareholder reports a
complete schedule of investments in securities of unaffiliated
issuers, are not expected to result in any reduction in internal
costs for funds, because funds that utilize these provisions will
still be required to file their complete portfolio schedules on Item
6 of Form N-CSR.
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[[Page 11258]]
Apart from savings in printing and distribution costs, use of a
summary portfolio schedule may benefit investors by helping them focus
on a fund's principal holdings, and thereby better evaluate a fund's
risk profile and investment strategy. These benefits to investors are
difficult to quantify, however.\118\
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\118\ We note that, for purposes of the Paperwork Reduction Act,
we have estimated that the exemption for money market funds from the
requirement to include complete portfolio schedules in their reports
to shareholders will reduce the internal burden hours for compliance
with shareholder reports requirements by 10,000 hours, translating
into a cost savings of $689,400 annually. However, this cost savings
is offset by an equal increase in the burden associated with the
requirement for money market funds to file a complete portfolio
schedule in Item 6 of Form N-CSR.
---------------------------------------------------------------------------
The estimated cost savings is derived from the estimated reduction
in burden hours, and an estimated hourly wage rate for professional and
non-professional staff of $78.48. This estimated wage rate is a blended
rate, based on published hourly wage rates for compliance attorneys
($74.22) and programmers ($42.05) in New York City, and the estimate
that professional and non-professional staff will divide time equally
on compliance with the disclosure requirements, yielding a weighted
wage rate of $58.135 (($74.22 x .50) + ($42.05 x .50)) = $58.135). See
Securities Industry Association, Report on Management & Professional
Earnings in the Securities Industry 2001 (Oct. 2001) (for most current
rate for compliance attorneys in New York City); Securities Industry
Association, Report on Management & Professional Earnings in the
Securities Industry 2002 (Sep. 2002) (for most current rate for
programmers in New York City). This weighted wage rate was then
adjusted upward by 35% for overhead, reflecting the costs of
supervision, space, and administrative support, to obtain the total per
hour internal cost of $78.48 ($58.135 x 1.35 = $78.48).
A number of commenters addressed the benefits of allowing the use
of the summary portfolio schedule. These commenters supported the
conclusion that summary schedules should reduce costs associated with
printing and mailing shareholder reports and provide more meaningful
information to shareholders, although they did not specifically mention
the cost-benefit analysis or provide any quantitative analysis.
Tabular or Graphic Presentation of Portfolio Holdings. The
requirements for funds to provide a tabular or graphic presentation of
their portfolio holdings in their annual and semi-annual reports to
shareholders should benefit fund investors by illustrating, in a
concise and user-friendly format, the allocation of a fund's
investments across asset classes. This presentation, coupled with a
summary portfolio schedule, could be significantly more useful to many
investors than the fund's complete portfolio schedule standing alone,
particularly in the case of funds with large numbers of holdings. These
benefits to investors resulting from the use of a tabular or graphic
presentation are difficult to quantify, however.
Quarterly Filing of Complete Portfolio Schedule. The requirement
for a fund to file its complete portfolio schedule on new Form N-Q via
EDGAR, within 60 days after the end of the first and third fiscal
quarters, should benefit investors by providing them with greater
information about whether, and how, a fund is complying with its stated
investment objective. These requirements will allow investors, and
their advisers or other investment professionals, to better monitor the
extent to which the portfolios of the funds that investors hold
overlap, and hence should promote more informed asset allocation
decisions. In addition, quarterly disclosure of a fund's portfolio
holdings may expose instances of ``style drift,'' when the actual
portfolio holdings of a fund deviate from its stated investment
objective.
The increased transparency resulting from quarterly disclosure may
also deter several forms of portfolio manipulation by portfolio
managers, including ``window dressing'' (buying or selling portfolio
securities shortly before the date as of which a fund's holdings are
publicly disclosed, in order to convey an impression that the manager
has been investing in companies that have had exceptional performance
during the reporting period) and ``portfolio pumping'' (buying shares
of stocks the fund already owns on the last day of the reporting
period, in order to drive up the price of the stocks and inflate the
fund's performance results). Any of these forms of portfolio
manipulation enhance the appearance of the portfolio at the expense of
portfolio returns. By increasing the frequency of reporting, engaging
in these activities becomes more expensive in terms of returns.
Therefore, we expect fewer funds to engage in these activities. To the
extent that portfolio managers currently engage in these activities,
shareholders will be better off as a result of the amendments. More
broadly, the increased frequency of disclosure will permit investors to
better link the composition of a fund portfolio to fund performance.
In addition, the requirement that reports on Form N-Q be signed and
certified by a fund's principal executive and financial officers,
consistent with section 302 of the Sarbanes-Oxley Act, will benefit
investors. A fund's portfolio schedule constitutes financial
information of great significance to investors. Requiring certification
of this financial information should help to enhance investor
confidence in this disclosure, and is consistent with the intent of the
certification requirement of section 302.
Inclusion of MDFP in Annual Reports to Shareholders by Mutual
Funds. The requirement that funds include MDFP in their annual reports
to shareholders should assist investors in assessing the fund's
performance over the prior year. Requiring MDFP in the annual report,
as opposed to the fund's prospectus, may benefit shareholders by
enabling them to assess information provided in the MDFP together with
other ``backward looking'' information contained in the annual report.
We note, however, that to the extent that, based on the staff's
experience, over 90% of mutual funds already include this information
in their annual reports to shareholders, these benefits are already
being realized.
B. Costs
The amendments may lead to some additional costs for funds, which
could be passed on to fund shareholders. In the case of the additional
disclosure requirements being adopted, these costs will include both
internal costs (for attorneys and other non-legal staff of a fund, such
as computer programmers, to prepare and review the required disclosure)
and external costs (for printing and typesetting of the disclosure).
Disclosure of Fund Expenses in Shareholder Reports. We estimate
that in order for mutual funds to comply with the requirement to
include in annual and semi-annual reports disclosure of the dollar cost
associated with investing a standardized amount in a fund, a typical
mutual fund will need to add one additional page to each of its annual
and semi-annual reports, at a cost of $0.02 per page.\119\ We estimate
that there are approximately 251 million shareholder accounts
associated with mutual fund companies, which will send out 451.8
million reports to shareholders annually.\120\ Therefore,
[[Page 11259]]
this additional disclosure in shareholder reports will cost
approximately $9,036,000 ((451.8 million shareholder reports x $0.02
per page) in external costs per mutual fund annually.
---------------------------------------------------------------------------
\119\ See supra note 116.
\120\ Investment Company Institute, Mutual Fund Fact Book, at 63
(43rd ed. 2003) (estimating approximately 251 million shareholder
accounts associated with mutual funds). We estimated the number of
shareholder reports by multiplying the number of accounts by 2 to
reflect the requirement that each fund must deliver an annual and a
semi-annual report to each account-holder, and then reducing that
number by 10% to reflect an estimated 10% savings in the number of
reports that must be delivered to shareholders due to householding
rules, arriving at 451.8 million shareholder reports annually (251
million shareholder accounts x 2 reports per year x .9 reduction due
to householding). See supra note 113.
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In addition, we estimate for purposes of the Paperwork Reduction
Act that these disclosure requirements will add 89,730 burden hours for
mutual funds required to transmit shareholder reports, equal to
internal costs of $7,042,010 for the industry annually.\121\ Thus, we
estimate that the total cost of this requirement would be approximately
$16 million annually. We estimate that the modifications that we are
adopting that will require the expense example to include the ending
account values for an initial investment of $1,000, and the fund's
expense ratio expressed as a percentage, will not increase this cost
estimate, because the annualized expense ratio will be based on
information required elsewhere in the shareholder report as part of the
financial highlights table, and funds will be calculating ending
account value for an initial investment of $1,000 in order to calculate
expenses paid on that investment.
---------------------------------------------------------------------------
\121\ This figure is based on an estimated hourly wage rate of
$78.48. See supra note 118.
---------------------------------------------------------------------------
As the Commission considered how to best disclose to investors the
fees and expenses that they incur with investment in a fund, it
considered the costs and benefits of various alternatives, including
providing fund shareholders with individualized cost information (in
dollars) as to the fees and expenses that they paid in quarterly
account statements. We estimate that the cost of providing this
individualized cost disclosure would greatly exceed the cost of our
amendments. According to a report of the U.S. General Accounting Office
which recommended requiring individualized cost disclosure in account
statements, one broker-dealer with approximately 6.5 million customer
accounts estimated that for it to develop the systems necessary to
produce such statements might cost as much as $4 million, with
additional annual costs of $5 million.\122\ Given that as of year-end
2002, there were approximately 251 million shareholder accounts
invested in mutual funds, estimated industry-wide costs could easily
exceed $100 million annually.\123\
---------------------------------------------------------------------------
\122\ U.S. General Accounting Office, Mutual Fund Fees:
Additional Disclosure Could Encourage Price Competition 79 (June 7,
2000).
\123\ See Investment Company Institute, Mutual Fund Fact Book,
supra note 112, at 63 (estimating number of shareholder accounts in
mutual funds).
---------------------------------------------------------------------------
Several commenters addressed the cost of including individualized
expense information in quarterly account statements, and agreed with
the cost/benefit analysis provided in the Proposing Release that such a
requirement would involve significant costs and logistical challenges.
One commenter who supported requiring individualized cost disclosure
acknowledged that the alternative might impose large costs on funds,
but recommended that the Commission consider whether the additional
costs truly would outweigh the potential benefits that improved fee
disclosure and the attendant increase in price competition would
provide.
Use of Summary Portfolio Schedule and Exemption of Money Market
Funds From Portfolio Schedule Requirements in Shareholder Reports. Our
amendments that will allow funds to include summary portfolio schedules
in reports to shareholders may result in some costs to funds.\124\ For
purposes of the Paperwork Reduction Act, we estimate that these
amendments will not increase the hour burden for completing a
shareholder report in compliance with rule 30e-1 under the Investment
Company Act. However, we estimate that use of either the provision
permitting use of a summary portfolio schedule or the provision
permitting a money market fund to omit its schedule of investments in
securities of unaffiliated issuers will increase the hour burden for
filing Form N-CSR by 5 hours per portfolio per filing, or 70,940 hours
(7,094 portfolios x 5 hours per portfolio x 2 filings per year),
resulting in an additional cost of filing Form N-CSR of
$5,567,371.\125\
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\124\ The amendments would have no net impact on the hour burden
of compliance for money market funds, for purposes of the Paperwork
Reduction Act, because the increase in burden hours associated with
filing the complete portfolio schedule pursuant to Item 6 of Form N-
CSR would be offset by a decrease in the burden associated with the
exemption allowing money market funds to omit this schedule from
their shareholder reports. See supra note 118.
\125\ These figures are based on an estimated hourly wage rate
of $78.48. See supra note 118 (explaining calculation of wage rate).
---------------------------------------------------------------------------
Further, to the extent that investors want to see a complete
portfolio schedule, investors will incur search costs to gather this
information (i.e., requesting the information from the fund). However,
since funds will be required to deliver the complete portfolio schedule
within three days and free of charge to all investors who request it,
we expect these costs to be minimal.
Tabular or Graphic Presentation of Portfolio Holdings. The
amendments will require funds to provide one or more tables, charts, or
graphs depicting the securities holdings of the fund by reasonably
identifiable categories (e.g., type of security, industry sector,
geographic region, credit quality, or maturity) showing the percentage
of net asset value or total investments attributable to each. We
estimate that these costs will be limited, however, because a fund will
have the flexibility to select categories and format the presentation
in a manner reasonably designed to depict clearly the types of
investments made by the fund, given its investment objectives, and
because a majority of funds, according to the staff's estimate, already
provide some type of tabular or graphic depiction of their holdings in
shareholder reports. For purposes of the Paperwork Reduction Act, we
have estimated that the disclosure requirements will add 3 hours per
portfolio to the burden of completing each annual and semi-annual
report to shareholders, or 58,236 hours total (3 hours per portfolio x
2 reports per year x 9,706 portfolios of funds required to provide
reports to shareholders). We estimate that this additional burden will
equal total internal costs of $4,570,361 annually.\126\ Further,
because most funds already include a similar type of presentation
voluntarily in shareholder reports, we estimate that this new
disclosure requirement will not increase printing and mailing costs of
shareholder reports for most funds, and hence the external costs to
funds of this requirement will be minimal.
---------------------------------------------------------------------------
\126\ These figures are based on an estimated hourly wage rate
of $78.48. See supra note 118 (explaining calculation of wage rate).
---------------------------------------------------------------------------
Quarterly Filing of Complete Portfolio Schedule. Our requirement
for funds to certify and file with the Commission for the first and
third fiscal quarters of each fiscal year their complete portfolio
holdings schedule on Form N-Q, and to disclose the availability of the
filing on the Commission's Web site, will impose certain costs on
funds. We estimate that, for purposes of the Paperwork Reduction Act,
these disclosure requirements will impose 10 burden hours per portfolio
per filing on Form N-Q, plus an additional 1 hour per fund and 0.25
hours for every additional portfolio in a fund beyond the first. We
estimate that the total burden will
[[Page 11260]]
therefore be 204,674 hours, or $16,062,816 in total internal costs
annually, based on an estimate of 3,800 funds filing reports on Form N-
Q for 9,706 fund portfolios.\127\ Because this quarterly disclosure
will only be required to be filed on EDGAR, and not actually delivered
to shareholders, we estimate that the external costs per fund, for
typesetting, printing, and mailing, of this additional disclosure will
be negligible.
---------------------------------------------------------------------------
\127\ This estimate is based on data from the Commission's EDGAR
system of the number of registered management investment companies,
and an estimated hourly wage rate of $78.48. See supra note 118.
---------------------------------------------------------------------------
Mandating quarterly portfolio disclosure may impose other costs on
funds and their shareholders. We received several comments on this
issue. In the Proposing Release, we addressed the possibility that more
frequent disclosure of portfolio holdings may expand the opportunities
for professional traders to exploit this information by engaging in
predatory trading practices, such as trading ahead of funds, often
called ``front-running,'' and thereby increasing funds'' costs which
ultimately are borne by shareholders. However, we noted that, in order
for ``front-running'' to significantly decrease investment returns
under the quarterly reporting requirements, it appears that several
conditions may have to be present, and we indicated that these
conditions may rarely be met, and hence the resulting costs of front-
running may be minimal.\128\
---------------------------------------------------------------------------
\128\ See Proposing Release, supra note 16, 68 FR at 175-176.
---------------------------------------------------------------------------
The Commission's cost-benefit analysis in the Proposing Release
also addressed the possibility that more frequent portfolio disclosure
may facilitate the ability of outside investors to ``free ride'' on a
mutual fund's investment strategies, by obtaining for free the benefits
of fund research and investment strategies that are paid for by fund
shareholders. The Commission's analysis noted that the extent to which
the quarterly disclosure requirement, with a 60-day lag, will result in
these types of costs is difficult to quantify, and may depend on a
number of assumptions and conditions. The Commission's analysis
concluded that these conditions may not often simultaneously hold,
although when they do, funds may be adversely impacted. The
Commission's analysis also noted, however, that once the fund adviser
has completed its trading strategy, it may hope that other traders will
follow it because the price impacts of their trading will make the
fund's trades profitable. The net effect of ``free riding'' therefore
is not necessarily negative.\129\
---------------------------------------------------------------------------
\129\ Proposing Release, supra note 16, 68 FR at 176.
---------------------------------------------------------------------------
One commenter supported the Commission's analysis, arguing that it
thoroughly rebutted any arguments that front-running and other
predatory trading practices would occur with more frequent portfolio
disclosure. Other commenters disagreed with aspects of the Commission's
analysis. One such commenter argued that more frequent disclosure of
fund portfolio holdings would add to the mix of information that is
currently available about the individual portfolio securities of funds
(including information from reports filed by institutional investment
managers on Form 13F) and thus could be expected to compound the risk
of front-running of fund trades that already exists. The commenter also
argued that evidence indicates that free-riding based on fund portfolio
holdings disclosure can be achieved, and will be facilitated by more
frequent portfolio disclosure.
Inclusion of MDFP in Annual Reports to Shareholders by Mutual
Funds. We estimate that the requirement that mutual funds include MDFP
in their annual reports to shareholders will not impose any costs on
funds or shareholders. The staff estimates that over 90 percent of
mutual funds already include MDFP in their annual reports to
shareholders. Further, a fund that does not include MDFP in its annual
reports must include MDFP in its prospectus. Thus, this amendment will
not impose any new disclosure requirement on funds, but rather will
only mandate a change in the location of the required disclosure for
the minority of funds that do not already include MDFP in their annual
reports. To the extent, however, that a fund does not already include
MDFP in its annual report to shareholders, the fund may incur
additional printing and mailing costs.
V. Consideration of Burden on Competition; Promotion of Efficiency,
Competition, and Capital Formation
Section 23(a)(2) of the Exchange Act requires the Commission, when
adopting rules under the Exchange Act, to consider the impact that any
new rule would have on competition. Section 23(a)(2) also prohibits the
Commission from adopting any rule that would impose a burden on
competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act.\130\ In addition, section 2(c) of the Investment
Company Act, section 2(b) of the Securities Act, and section 3(f) of
the Exchange Act require the Commission, when engaging in rulemaking
that requires it to consider or determine whether an action is
necessary or appropriate in the public interest, to consider, in
addition to the protection of investors, whether the action will
promote efficiency, competition, and capital formation.\131\ In the
Proposing Release, we requested comments on whether the proposed
amendments would promote efficiency, competition, and capital
formation. We received no comments on this section of the proposals.
---------------------------------------------------------------------------
\130\ 15 U.S.C. 78w(a)(2).
\131\ 15 U.S.C. 77(b), 78c(f), and 80a-2(c).
---------------------------------------------------------------------------
The amendments are intended to provide greater transparency for
fund shareholders regarding their investments in funds. These
amendments may improve efficiency. The enhanced disclosure requirements
will provide shareholders with more frequent access to portfolio
holdings of the funds in which they invest, which may promote more
efficient allocation of investments by investors and more efficient
allocation of assets among competing funds. We believe that the rule
amendments may also improve competition, as enhanced disclosure will
lead to better-informed investors and will prompt funds to seek to
provide better-informed investors with improved products and services.
In addition, permitting funds to deliver summary portfolio schedules in
shareholder reports may provide a significant reduction in printing and
delivery costs ultimately borne by shareholders. Finally, the effects
of the rule amendments on capital formation are unclear. Although, as
noted above, we believe that the rule amendments will benefit
investors, the magnitude of the effect of the rule amendments on
efficiency, competition, and capital formation is difficult to
quantify, particularly given that many funds do not currently provide
the type of disclosure contemplated by the rule amendments.
VI. Final Regulatory Flexibility Analysis
This Final Regulatory Flexibility Analysis (``Analysis'') has been
prepared in accordance with 5 U.S.C. 604, and relates to the
Commission's rule and form amendments under the Securities Act, the
Exchange Act, and the Investment Company Act to improve the quality of
periodic disclosure provided by funds about their costs, portfolio
investments, and past performance. These rule amendments are intended
to enable funds to provide
[[Page 11261]]
more meaningful information to shareholders while reducing the costs of
producing and delivering annual and semi-annual reports to
shareholders. An Initial Regulatory Flexibility Analysis (``IRFA''),
which was prepared in accordance with 5 U.S.C. 603, was published in
the release proposing these amendments.
A. Need for, and Objectives of, Amendments
Shareholder reports are one of the principal means by which funds
provide periodic information to their investors. Fund shareholder
reports historically have served primarily as a vehicle to provide
financial statements and other financial information to shareholders.
The Commission believes that, with some modifications, fund shareholder
reports could become a more effective vehicle for communicating
information to investors. The amendments adopted by the Commission
principally address disclosure of fund portfolio holdings and expenses,
two significant areas for improvement that have been identified by
investor groups, members of the fund industry, and others.
B. Significant Issues Raised by Public Comment
In the IRFA for the proposed amendments, we requested comment on
any aspect of the IRFA, including the number of small entities that
would be affected by the proposed amendments, the likely impact of the
proposal on small entities, the nature of any impact, and providing any
empirical data supporting the extent of the impact. We received no
comment letters on this section.
C. Small Entities Subject to the Rule
The amendments adopted by the Commission will affect registered
investment companies that are small entities. For purposes of the
Regulatory Flexibility Act, an investment company is a small entity if
it, together with other investment companies in the same group of
related investment companies, has net assets of $50 million or less as
of the end of its most recent fiscal year.\132\ Approximately 205 out
of 3700 investment companies that will be affected by these amendments
meet this definition.\133\
---------------------------------------------------------------------------
\132\ 17 CFR 270.0-10.
\133\ This estimate is based on figures compiled by Division of
Investment Management staff regarding investment companies
registered on Form N-1A, Form N-2, and Form N-3. In determining
whether an insurance company separate account is a small entity for
purposes of the Regulatory Flexibility Act, the assets of insurance
company separate accounts are aggregated with the assets of their
sponsoring insurance companies. Investment Company Act rule 0-10(b)
[17 CFR 270.0-10(b)].
---------------------------------------------------------------------------
D. Reporting, Recordkeeping, and Other Compliance Requirements
The amendments will:
Require mutual funds to disclose fund expenses
borne by shareholders during the reporting period in reports to
shareholders;
Permit a fund to include a summary portfolio
schedule in its reports to shareholders, and exempt a money market fund
from the requirement to include a portfolio schedule of investments in
unaffiliated issuers in its reports to shareholders, provided that the
complete portfolio schedule is filed with the Commission on Form N-CSR
semi-annually and is provided to shareholders upon request, free of
charge;
Require reports to shareholders by funds to
include a tabular or graphic presentation of a fund's portfolio
holdings by identifiable categories;
Require a fund to file its complete portfolio
schedule as of the end of its first and third fiscal quarters with the
Commission on new Form N-Q which will be filed under the Investment
Company Act and the Exchange Act and certified by the fund's principal
executive and financial officers; and
Require a mutual fund to include Management's
Discussion of Fund Performance in its annual report to shareholders.
The amendments will apply equally to funds that are small entities
and to other funds. The Commission estimates that the amendments will
result in some one-time formatting and ongoing costs and burdens that
would be imposed on all funds, but which may have a relatively greater
impact on smaller firms. These include the costs related to disclosing
the dollar cost associated with investing a standardized amount in a
fund and the requirement that funds file their complete portfolio
schedules with the Commission on a quarterly basis, in filings that
would be certified by a fund's principal executive and financial
officers. These costs also could include expenses for computer time,
legal and accounting fees, information technology staff, and additional
computer and telephone equipment. However, we believe that the benefits
that will result to shareholders through better information about their
funds' costs, portfolio investments, and past performance justify these
potential costs.
E. Agency Action To Minimize Effect on Small Entities
The Regulatory Flexibility Act directs us to consider significant
alternatives that would accomplish our stated objective, while
minimizing any significant adverse impact on small issuers. In
connection with the rule amendments, the Commission considered the
following alternatives: (i) The establishment of differing compliance
or reporting requirements or timetables that take into account the
resources available to small entities; (ii) the clarification,
consolidation, or simplification of compliance and reporting
requirements under the proposed amendments for small entities; (iii)
the use of performance rather than design standards; and (iv) an
exemption from coverage of the proposed amendments, or any part
thereof, for small entities.
The Commission believes at the present time that special compliance
or reporting requirements for small entities, or an exemption from
coverage for small entities, will not be appropriate or consistent with
investor protection. The disclosure amendments will provide
shareholders with greater transparency regarding a fund's investments,
costs, and performance. Different disclosure requirements for small
entities may create the risk that shareholders of those small entities
will not have access to sufficient information to make informed
evaluations. For example, requiring less frequent filing of portfolio
holdings reports by small entities will make it more difficult for the
shareholders of small entities to determine whether the fund is
complying with its stated investment objective. Likewise, reducing the
disclosure requirements in the shareholder reports of small entities
would, for example, leave the shareholders of small funds less able to
assess the amount of fees and charges that they pay. We believe it is
important that the disclosure that will be required by the rule
amendments be provided to shareholders by all funds, not just funds
that are not considered small entities.
We have endeavored throughout these rule amendments to minimize the
regulatory burden on all funds, including small entities, while meeting
our regulatory objectives. For example, we have modified our proposal
to extend the compliance date an additional 60 days. We also note that
some of the amendments contained in this release, such as the exemption
for money market funds from the requirement to include a complete
schedule in their shareholder reports,
[[Page 11262]]
work to lessen the regulatory burden on all funds. Small entities
should benefit from the Commission's reasoned approach to the rule
amendments to the same degree as other investment companies. Further
clarification, consolidation, or simplification of the proposals for
funds that are small entities would be inconsistent with the
Commission's concern for investor protection. Finally, we do not
consider using performance rather than design standards to be
consistent with our statutory mandate of investor protection in the
present context.
VII. Statutory Authority
The Commission is adopting amendments to Regulation S-X pursuant to
authority set forth in sections 5, 6, 7, 8, and 19(a) of the Securities
Act (15 U.S.C. 77e, 77f, 77g, 77h, and 77s(a)); sections 12, 13, 15(d),
and 23(a) of the Exchange Act (15 U.S.C. 78l, 78m, 78o(d), and 78w(a));
and sections 8, 24(a), 30, 31, and 38 of the Investment Company Act (15
U.S.C. 80a-8, 80a-24(a), 80a-29, 80a-30, and 80a-37). The Commission is
adopting new rule 30b1-5 and new Form N-Q pursuant to authority set
forth in sections 10(b), 13, 15(d), and 23(a) of the Exchange Act (15
U.S.C. 78j(b), 78m, 78o(d), 78w(a), and 78mm) and sections 8, 30, 31,
and 38 of the Investment Company Act (15 U.S.C. 80a-8, 80a-29, 80a-30,
and 80a-37). The Commission is adopting amendments to Forms N-1A, N-2,
and N-3 pursuant to authority set forth in sections 5, 6, 7, 10, 19(a),
and 28 of the Securities Act (15 U.S.C. 77e, 77f, 77g, 77j, 77s(a), and
77z-3) and sections 6(c), 8, 24(a), 30, and 38 of the Investment
Company Act (15 U.S.C. 80a-6(c), 80a-8, 80a-24(a), 80a-29, and 80a-37).
The Commission is adopting amendments to Form N-CSR pursuant to
authority set forth in sections 10(b), 13, 15(d), 23(a), and 36 of the
Exchange Act (15 U.S.C. 78j(b), 78m, 78o(d), 78w(a), and 78mm) and
sections 6(c), 8, 24(a), 30, and 38 of the Investment Company Act (15
U.S.C. 80a-6(c), 80a-8, 80a-24(a), 80a-29, and 80a-37).
List of Subjects
17 CFR Parts 210, 270, and 274
Investment companies, Reporting and recordkeeping requirements,
Securities.
17 CFR Parts 239 and 249
Reporting and recordkeeping requirements, Securities.
Text of Rule and Form Amendments
0
For the reasons set out in the preamble, Title 17, Chapter II of the
Code of Federal Regulations is amended as follows:
PART 210--FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL
STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF
1934, PUBLIC UTILITY HOLDING COMPANY ACT OF 1935, INVESTMENT
COMPANY ACT OF 1940, INVESTMENT ADVISERS ACT OF 1940, AND ENERGY
POLICY AND CONSERVATION ACT OF 1975
0
1. The authority citation for part 210 continues to read as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3,
77aa(25), 77aa(26), 78c, 78j-1, 78l, 78m, 78n, 78o(d), 78q, 78u-5,
78w(a), 78ll, 78mm, 79e(b), 79j(a), 79n, 79t(a), 80a-8, 80a-20, 80a-
29, 80a-30, 80a-31, 80a-37(a), 80b-3, 80b-11, 7202 and 7262, unless
otherwise noted.
0
2. Paragraph (c) of Sec. 210.6-10 is revised to read as follows:
Sec. 210.6-10 What schedules are to be filed.
* * * * *
(c) Management investment companies.
(1) Except as otherwise provided in the applicable form, the
schedules specified in this paragraph shall be filed for management
investment companies as of the dates of the most recent audited balance
sheet and any subsequent unaudited statement being filed for each
person or group.
Schedule I--Investments in securities of unaffiliated issuers. The
schedule prescribed by Sec. 210.12-12 shall be filed in support of
caption 1 of each balance sheet.
Schedule II--Investments--other than securities. The schedule
prescribed by Sec. 210.12-13 shall be filed in support of caption 3 of
each balance sheet. This schedule may be omitted if the investments,
other than securities, at both the beginning and end of the period
amount to less than one percent of the value of total investments
(Sec. 210.6-04.4).
Schedule III--Investments in and advances to affiliates. The
schedule prescribed by Sec. 210.12-14 shall be filed in support of
caption 2 of each balance sheet.
Schedule IV--Investments--securities sold short. The schedule
prescribed by Sec. 210.12-12A shall be filed in support of caption
10(a) of each balance sheet.
Schedule V--Open option contracts written. The schedule prescribed
by Sec. 210.12-12B shall be filed in support of caption 10(b) of each
balance sheet.
(2) When permitted by the applicable form, the schedule specified
in this paragraph may be filed for management investment companies as
of the dates of the most recent audited balance sheet and any
subsequent unaudited statement being filed for each person or group.
Schedule VI--Summary schedule of investments in securities of
unaffiliated issuers. The schedule prescribed by Sec. 210.12-12C may
be filed in support of caption 1 of each balance sheet.
* * * * *
0
3. Section 210.12-12 is amended by:
0
a. Adding a sentence to the end of footnote 1 to the table; and
0
b. Revising the first three sentences of footnote 2 to the table.
The addition and revision would read as follows:
Sec. 210.12-12 Investments in securities of unaffiliated issuers.
\1\ * * * If any securities are listed as ``Miscellaneous
securities,'' briefly explain in a footnote what the term
represents.
\2\ Categorize the schedule by (i) the type of investment (such
as common stocks, preferred stocks, convertible securities, fixed
income securities, government securities, options purchased,
warrants, loan participations and assignments, commercial paper,
bankers' acceptances, certificates of deposit, short-term
securities, repurchase agreements, other investment companies, and
so forth); and (ii) the related industry, country, or geographic
region of the investment. Short-term debt instruments (i.e., debt
instruments whose maturities or expiration dates at the time of
acquisition are one year or less) of the same issuer may be
aggregated, in which case the range of interest rates and maturity
dates shall be indicated. * * *
* * * * *
0
4. Section 210.12-12C is added to read as follows:
Sec. 210.12-12C Summary schedule of investments in securities of
unaffiliated issuers.
[[Page 11263]]
----------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D
----------------------------------------------------------------------------------------------------------------
Name of issuer and title of issue 1 3 Balance held at close Value of each item at Percentage value
4 5 6. of period. Number of close of period 2 7 9 compared to net
shares--principal 10 11. assets.
amount of bonds and
notes8.
----------------------------------------------------------------------------------------------------------------
\1\ Categorize the schedule by (a) the type of investment (such as common stocks, preferred stocks, convertible
securities, fixed income securities, government securities, options purchased, warrants, loan participations
and assignments, commercial paper, bankers' acceptances, certificates of deposit, short-term securities,
repurchase agreements, other investment companies, and so forth); and (b) the related industry, country, or
geographic region of the investment.
\2\ The subtotals for each category of investments, subdivided by industry, country, or geographic region, shall
be shown together with their percentage value compared to net assets.
\3\ Except as provided in note 5, list separately the 50 largest issues and any other issue the value of which
exceeded one percent of net asset value of the registrant as of the close of the period. For purposes of the
list (including, in the case of short-term debt instruments, the first sentence of note 4), aggregate and
treat as a single issue, respectively, (a) short-term debt instruments (i.e., debt instruments whose
maturities or expiration dates at the time of acquisition are one year or less) of the same issuer (indicating
the range of interest rates and maturity dates); and (b) fully collateralized repurchase agreements (indicate
in a footnote the range of dates of the repurchase agreements, the total purchase price of the securities, the
total amount to be received upon repurchase, the range of repurchase dates, and description of securities
subject to the repurchase agreements). Restricted and unrestricted securities of the same issue should be
aggregated for purposes of determining whether the issue is among the 50 largest issues, but should not be
combined in the schedule. For purposes of determining whether the value of an issue exceeds one percent of net
asset value, aggregate and treat as a single issue all securities of any one issuer, except that all fully
collateralized repurchase agreements shall be aggregated and treated as a single issue. The U.S. Treasury and
each agency, instrumentality, or corporation, including each government-sponsored entity, that issues U.S.
government securities is a separate issuer.
\4\ If multiple securities of an issuer aggregate to greater than one percent of net asset value, list each
issue of the issuer separately (including separate listing of restricted and unrestricted securities of the
same issue) except that the following may be aggregated and listed as a single issue: (a) Fixed-income
securities of the same issuer which are not among the 50 largest issues and whose value does not exceed one
percent of net asset value of the registrant as of the close of the period (indicating the range of interest
rates and maturity dates); and (b) U.S. government securities of a single agency, instrumentality, or
corporation, which are not among the 50 largest issues and whose value does not exceed one percent of net
asset value of the registrant as of the close of the period (indicating the range of interest rates and
maturity dates). For each category identified pursuant to note 1, group all issues that are neither separately
listed nor included in a group of securities that is listed in the aggregate as a single issue in a sub-
category labeled ``Other securities,'' and provide the information for Columns C and D.
\5\ Any securities that would be required to be listed separately or included in a group of securities that is
listed in the aggregate as a single issue may be listed in one amount as ``Miscellaneous securities,''
provided the securities so listed are eligible to be, and are, categorized as ``Miscellaneous securities'' in
the registrant's Schedule of Investments in Securities of Unaffiliated Issuers required under Sec. 210.12-
12. However, if any security that is included in ``Miscellaneous securities'' would otherwise be required to
be included in a group of securities that is listed in the aggregate as a single issue, the remaining
securities of that group must nonetheless be listed as required by notes 3 and 4 even if the remaining
securities alone would not otherwise be required to be listed in this manner (e.g., because the combined value
of the security listed in ``Miscellaneous securities'' and the remaining securities of the same issuer exceeds
one percent of net asset value, but the value of the remaining securities alone does not exceed one percent of
net asset value).
\6\ If any securities are listed as ``Miscellaneous securities'' pursuant to note 5 or ``Other securities''
pursuant to note 4, briefly explain in a footnote what those terms represent.
\7\ Total Column C. The total of column C should equal the total shown on the related balance sheet for
investments in securities of unaffiliated issuers.
\8\ Indicate by an appropriate symbol each issue of securities which is non-income producing. Evidences of
indebtedness and preferred shares may be deemed to be income producing if, on the respective last interest
payment date or date for the declaration of dividends prior to the date of the related balance sheet, there
was only a partial payment of interest or a declaration of only a partial amount of the dividends payable; in
such case, however, each such issue shall be indicated by an appropriate symbol referring to a note to the
effect that, on the last interest or dividend date, only partial interest was paid or partial dividends
declared. If, on such respective last interest or dividend date, no interest was paid or no cash or in kind
dividends declared, the issue shall not be deemed to be income producing. Common shares shall not be deemed to
be income producing unless, during the last year preceding the date of the related balance sheet, there was at
least one dividend paid upon such common shares.
\9\ Indicate by an appropriate symbol each issue of restricted securities. State the following in a footnote:
(a) as to each such issue: (1) Acquisition date, (2) carrying value per unit of investment at date of related
balance sheet, e.g., a percentage of current market value of unrestricted securities of the same issuer, etc.,
and (3) the cost of such securities; (b) as to each issue acquired during the year preceding the date of the
related balance sheet, the carrying value per unit of investment of unrestricted securities of the same issuer
at: (1) The day the purchase price was agreed to; and (2) the day on which an enforceable right to acquire
such securities was obtained; and (c) the aggregate value of all restricted securities and the percentage
which the aggregate value bears to net assets.
\10\ Indicate by an appropriate symbol each issue of securities held in connection with open put or call option
contracts or loans for short sales.
\11\ State in a footnote the following amounts based on cost for Federal income tax purposes: (a) Aggregate
gross unrealized appreciation for all securities in which there is an excess of value over tax cost, (b) the
aggregate gross unrealized depreciation for all securities in which there is an excess of tax cost over value,
(c) the net unrealized appreciation or depreciation, and (d) the aggregate cost of securities for Federal
income tax purposes.
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
0
5. The general authority citation for Part 239 is revised to read as
follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 78c, 78l,
78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 79l,
79m, 79n, 79q, 79t, 77sss, 80a-8, 80a-24, 80a-26, 80a-29, 80a-30,
and 80a-37, unless otherwise noted.
* * * * *
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
0
6. The authority citation for part 249 continues to read, in part, as
follows:
Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; and 18 U.S.C.
1350, unless otherwise noted.
* * * * *
0
7. Section 249.332 is added to read as follows:
Sec. 249.332 Form N-Q, quarterly schedule of portfolio holdings of
registered management investment company.
This form shall be used by registered management investment
companies, other than small business investment companies registered on
Form N-5 (Sec. Sec. 239.24 and 274.5 of this chapter), to file reports
pursuant to Sec. 270.30b1-5 of this chapter not later than 60 days
after the close of the first and third quarters of each fiscal year.
[[Page 11264]]
PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940
0
8. The authority citation for part 270 continues to read, in part, as
follows:
Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, and 80a-
39, unless otherwise noted.
* * * * *
0
9. Section 270.30a-2 is amended by revising the section heading and
paragraph (a) to read as follows:
Sec. 270.30a-2 Certification of Form N-CSR and Form N-Q.
(a) Each report filed on Form N-CSR (Sec. Sec. 249.331 and 274.128
of this chapter) or Form N-Q (Sec. Sec. 249.332 and 274.130 of this
chapter) by a registered management investment company must include
certifications in the form specified in Item 11(a)(2) of Form N-CSR or
Item 3 of Form N-Q, as applicable, and such certifications must be
filed as an exhibit to such report. Each principal executive and
principal financial officer of the investment company, or persons
performing similar functions, at the time of filing of the report must
sign a certification.
* * * * *
0
10. Section 270.30a-3 is amended by revising paragraphs (b) and (c) to
read as follows:
Sec. 270.30a-3 Controls and procedures.
* * * * *
(b) Each such registered management investment company's management
must evaluate, with the participation of the company's principal
executive and principal financial officers, or persons performing
similar functions, the effectiveness of the company's disclosure
controls and procedures, within the 90-day period prior to the filing
date of each report on Form N-CSR (Sec. Sec. 249.331 and 274.128 of
this chapter) and Form N-Q (Sec. Sec. 249.332 and 274.130 of this
chapter).
(c) For purposes of this section, the term disclosure controls and
procedures means controls and other procedures of a registered
management investment company that are designed to ensure that
information required to be disclosed by the investment company on Form
N-CSR (Sec. Sec. 249.331 and 274.128 of this chapter) and Form N-Q
(Sec. Sec. 249.332 and 274.130 of this chapter) is recorded,
processed, summarized, and reported within the time periods specified
in the Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure
that information required to be disclosed by an investment company in
the reports that it files or submits on Form N-CSR and Form N-Q is
accumulated and communicated to the investment company's management,
including its principal executive and principal financial officers, or
persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
* * * * *
0
11. Section 270.30b1-5 is added to read as follows:
Sec. 270.30b1-5 Quarterly report.
Every registered management investment company, other than a small
business investment company registered on Form N-5 (Sec. Sec. 239.24
and 274.5 of this chapter), shall file a quarterly report on Form N-Q
(Sec. Sec. 249.332 and 274.130 of this chapter) not more than 60 days
after the close of the first and third quarters of each fiscal year. A
registered management investment company that has filed a registration
statement with the Commission registering its securities for the first
time under the Securities Act of 1933 is relieved of this reporting
obligation with respect to any reporting period or portion thereof
prior to the date on which that registration statement becomes
effective or is withdrawn.
0
12. Section 270.30d-1 is revised to read as follows:
Sec. 270.30d-1 Filing of copies of reports to shareholders.
A registered management investment company, other than a small
business investment company registered on Form N-5 (Sec. Sec. 239.24
and 274.5 of this chapter), that is required to file annual and
quarterly reports pursuant to section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) shall satisfy its
requirement to file such reports by the filing, in accordance with the
rules and procedures specified therefor, of reports on Form N-CSR
(Sec. Sec. 249.331 and 274.128 of this chapter) and Form N-Q
(Sec. Sec. 249.332 and 274.130 of this chapter). A registered unit
investment trust or a small business investment company registered on
Form N-5 that is required to file annual and quarterly reports pursuant
to section 13(a) or 15(d) of the Securities Exchange Act of 1934 shall
satisfy its requirement to file such reports by the filing, in
accordance with the rules and procedures specified therefor, of reports
on Form N-SAR (Sec. Sec. 249.330 and 274.101 of this chapter).
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940
0
13. The authority citation for part 274 is amended by adding the
following citation in numerical order to read as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m,
78n, 78o(d), 80a-8, 80a-24, 80a-26, and 80a-29, unless otherwise
noted.
* * * * *
Section 274.130 is also issued under 15 U.S.C. 7202 and 7241.
0
14. Form N-1A (referenced in Sec. Sec. 239.15A and 274.11A) is amended
by:
0
a. Removing Item 5 and redesignating Items 6 through 30 as Items 5
through 29;
0
b. In paragraph B.2(b) of the General Instructions, revising the phrase
``(except Items 1, 2, 3, 5, and 9), B, and C (except Items 23(e) and
(i)--(k))'' to read ``(except Items 1, 2, 3, and 8), B, and C (except
Items 22(e) and (i)--(k))'';
0
c. In paragraph C.3(a) of the General Instructions, revising the
reference ``Item 8'' to read ``Item 7'';
0
d. In paragraph C.3(d)(i), introductory text, of the General
Instructions and in newly redesignated Item 6, the introductory text of
paragraph (f), revising the reference ``Items 7(b)-(d) and 8(a)(2)'' to
read ``Items 6(b)--(d) and 7(a)(2)'';
0
e. In paragraph (b)(1) of Item 1, removing the phrase ``, if required
by Item 5'';
0
f. In Instruction 6 to Item 1(b)(1) and paragraph (a)(2) of newly
redesignated Item 7, revising the reference ``Item 7(f)'' to read
``Item 6(f)'';
0
g. In Instruction 6 to Item 1(b)(1), revising the reference ``Item
7(f)(3)'' to read ``Item 6(f)(3)'';
0
h. In Item 2(c)(2)(iii), revising the phrase ``Instruction 5 to Item
5(b)'' to read ``Instruction 5 to Item 21(b)(7)'';
0
i. In Instruction 1(a) to Item 2(c)(2), revising the reference ``Item
9(a)'' to read ``Item 8(a)'';
0
j. In Instruction 2(a) to Item 2(c)(2), revising the references ``Item
21(a)'', ``Item 21(b)(1)'', and ``Items 21(b)(2) and (3)'' to read
``Item 20(a)'', ``Item 20(b)(1)'', and ``Items 20(b)(2) and (3)'',
respectively;
0
k. In Instruction 2(b) to Item 2(c)(2), revising the phrase
``Instruction 6 to Item 5(b)'' to read ``Instruction 6 to Item
21(b)(7)'';
0
l. In Instruction 2(d) to Item 2(c)(2), revising the references ``Item
21(b)(2)'' and ``Item 21'' to read ``Item 20(b)(2)'' and ``Item 20'',
respectively;
0
m. In Instruction 4 to Item 2(c)(2), revising the phrase ``Instruction
11 of
[[Page 11265]]
Item 5(b)'' to read ``Instruction 11 to Item 21(b)(7)'';
0
n. In Instruction 2(a)(i) to Item 3, revising the reference ``Item
8(a)'' to read ``Item 7(a)'';
0
o. In Instruction 5 to Item 4(b)(1), revising the reference ``Item
12(c)(1)'' to read ``Item 11(c)(1)'';
0
p. In paragraph (e) of newly redesignated Item 11, revising the
reference ``Item 9'' to read ``Item 8'';
0
q. Revising the reference ``Item 13'' to read ``Item 12'' in the
following places:
0
i. Instruction 1 to newly redesignated Item 12;
0
ii. Paragraph (a)(2) of newly redesignated Item 12;
0
iii. Paragraph (b)(3) of newly redesignated Item 12;
0
iv. Paragraph (b)(6) of newly redesignated Item 12;
0
v. Instructions 6, 8, and 10 to newly redesignated Item 12(b)(7) each
time it appears;
0
vi. Paragraph (b)(8) of newly redesignated Item 12 each time it
appears;
0
vii. Instructions 2, 4, 6, 7, and 8 to newly redesignated Item 12(b)(8)
each time it appears; and
0
viii. Paragraph (b)(9)(iii) of newly redesignated Item 12.
0
r. In Instruction to paragraph (a) of newly redesignated Item 17,
revising the reference ``Item 18(a)'' to read ``Item 17(a)'';
0
s. In Instruction 4 to paragraph (c) of newly redesignated Item 17 and
paragraph (k) of newly redesignated Item 22, revising the reference
``Item 22'' to read ``Item 21'';
0
t. In Instruction 1 to paragraph (c) of newly redesignated Item 19,
revising the references ``Item 8(b)(2)'', ``Item 15(d)'', and ``Item
30'' to read ``Item 7(b)(2)'', ``Item 14(d)'', and ``Item 29'',
respectively;
0
u. In paragraph (b) of newly redesignated Item 26, revising the
reference ``Item 20'' to read ``Item 19'';
0
v. In Instruction 2 to paragraph (c) of newly redesignated Item 26,
revising the reference ``Item 20(c)'' to read ``Item 19(c)'';
0
w. In Instruction 1 to newly redesignated Item 28, revising the
reference ``Item 15'' to read ``Item 14''; and
0
x. Revising Instruction 5 to Item 1(b)(1) and newly redesignated Item
21. The revisions read as follows:
Note: The text of Form N-1A does not and this amendment will not
appear in the Code of Federal Regulations.
Form N-1A
* * * * *
Item 1. Front and Back Cover Pages
* * * * *
(b) * * *
(1) * * *
Instructions
* * * * *
5. A Money Market Fund may omit the sentence indicating that a
reader will find in the Fund's annual report a discussion of the market
conditions and investment strategies that significantly affect the
Fund's performance during its last fiscal year.
* * * * *
Item 21. Financial Statements
(a) Registration Statement. Include, in a separate section
following the responses to the preceding Items, the financial
statements and schedules required by Regulation S-X. The specimen
price-make-up sheet required by Instruction 4 to Item 17(c) may be
provided as a continuation of the balance sheet specified by Regulation
S-X.
Instructions
1. The statements of any subsidiary that is not a majority-owned
subsidiary required by Regulation S-X may be omitted from Part B and
included in Part C.
2. In addition to the requirements of rule 3-18 of Regulation S-X
[17 CFR 210.3-18], any Fund registered under the Investment Company Act
that has not previously had an effective registration statement under
the Securities Act must include in its initial registration statement
under the Securities Act any additional financial statements and
condensed financial information (which need not be audited) necessary
to make the financial statements and condensed financial information
included in the registration statement current as of a date within 90
days prior to the date of filing.
(b) Annual Report. Every annual report to shareholders required by
rule 30e-1 must contain the following:
(1) Financial Statements. The audited financial statements
required, and for the periods specified, by Regulation S-X.
Instructions
1. Schedule VI `` Summary schedule of investments in securities of
unaffiliated issuers [17 CFR 210.12-12C] may be included in the
financial statements in lieu of Schedule I--Investments in securities
of unaffiliated issuers [17 CFR 210.12-12] if: (a) The Fund states in
the report that the Fund's complete schedule of investments in
securities of unaffiliated issuers is available (i) without charge,
upon request, by calling a specified toll-free (or collect) telephone
number; (ii) on the Fund's Web site, if applicable; and (iii) on the
Commission's Web site at http://www.sec.gov; and (b) whenever the Fund
(or financial intermediary through which shares of the Fund may be
purchased or sold) receives a request for the Fund's schedule of
investments in securities of unaffiliated issuers, the Fund (or
financial intermediary) sends a copy of Schedule I--Investments in
securities of unaffiliated issuers within 3 business days of receipt by
first-class mail or other means designed to ensure equally prompt
delivery.
2. In the case of a Money Market Fund, Schedule I `` Investments in
securities of unaffiliated issuers (17 CFR 210.12-12C) may be omitted
from its financial statements, provided that: (a) The Fund states in
the report that the Fund's complete schedule of investments in
securities of unaffiliated issuers is available (i) without charge,
upon request, by calling a specified toll-free (or collect) telephone
number; (ii) on the Fund's Web site, if applicable; and (iii) on the
Commission's Web site at http://www.sec.gov; and (b) whenever the Fund
(or financial intermediary through which shares of the Fund may be
purchased or sold) receives a request for the Fund's schedule of
investments in securities of unaffiliated issuers, the Fund (or
financial intermediary) sends a copy of Schedule I--Investments in
securities of unaffiliated issuers within 3 business days of receipt by
first-class mail or other means designed to ensure equally prompt
delivery.
(2) Condensed Financial Information. The condensed financial
information required by Item 8(a) with at least the most recent fiscal
year audited.
(3) Remuneration Paid to Directors, Officers, and Others. Unless
shown elsewhere in the report as part of the financial statements
required by paragraph (b)(1), the aggregate remuneration paid by the
Fund during the period covered by the report to:
(i) All directors and all members of any advisory board for regular
compensation;
(ii) Each director and each member of an advisory board for special
compensation;
(iii) All officers; and
(iv) Each person of whom any officer or director of the Fund is an
affiliated person.
(4) Changes in and Disagreements with Accountants. The information
concerning changes in and disagreements with accountants and on
accounting and financial disclosure
[[Page 11266]]
required by Item 304 of Regulation S-K [17 CFR 229.304].
(5) Management Information. The management information required by
Item 12(a)(1).
(6) Availability of Additional Information about Fund Directors. A
statement that the SAI includes additional information about Fund
directors and is available, without charge, upon request, and a toll-
free (or collect) telephone number for shareholders to call to request
the SAI.
(7) Management's Discussion of Fund Performance. Disclose the
following information unless the Fund is a Money Market Fund:
(i) Discuss the factors that materially affected the Fund's
performance during the most recently completed fiscal year, including
the relevant market conditions and the investment strategies and
techniques used by the Fund's investment adviser.
(ii)(A) Provide a line graph comparing the initial and subsequent
account values at the end of each of the most recently completed 10
fiscal years of the Fund (or for the life of the Fund, if shorter), but
only for periods subsequent to the effective date of the Fund's
registration statement. Assume a $10,000 initial investment at the
beginning of the first fiscal year in an appropriate broad-based
securities market index for the same period.
(B) In a table placed within or next to the graph, provide the
Fund's average annual total returns for the 1-, 5-, and 10-year periods
as of the end of the last day of the most recent fiscal year (or for
the life of the Fund, if shorter), but only for periods subsequent to
the effective date of the Fund's registration statement. Average annual
total returns should be computed in accordance with Item 20(b)(1).
Include a statement accompanying the graph and table to the effect that
past performance does not predict future performance and that the graph
and table do not reflect the deduction of taxes that a shareholder
would pay on fund distributions or the redemption of fund shares.
Instructions
1. Line Graph Computation.
(a) Assume that the initial investment was made at the offering
price last calculated on the business day before the first day of the
first fiscal year.
(b) Base subsequent account values on the net asset value of the
Fund last calculated on the last business day of the first and each
subsequent fiscal year.
(c) Calculate the final account value by assuming the account was
closed and redemption was at the price last calculated on the last
business day of the most recent fiscal year.
(d) Base the line graph on the Fund's required minimum initial
investment if that amount exceeds $10,000.
2. Sales Load. Reflect any sales load (or any other fees charged at
the time of purchasing shares or opening an account) by beginning the
line graph at the amount that actually would be invested (i.e., assume
that the maximum sales load, and other charges deducted from payments,
is deducted from the initial $10,000 investment). For a Fund whose
shares are subject to a contingent deferred sales load, assume the
deduction of the maximum deferred sales load (or other charges) that
would apply for a complete redemption that received the price last
calculated on the last business day of the most recent fiscal year. For
any other deferred sales load, assume that the deduction is in the
amount(s) and at the time(s) that the sales load actually would have
been deducted.
3. Dividends and Distributions. Assume reinvestment of all of the
Fund's dividends and distributions on the reinvestment dates during the
period, and reflect any sales load imposed upon reinvestment of
dividends or distributions or both.
4. Account Fees. Reflect recurring fees that are charged to all
accounts.
(a) For any account fees that vary with the size of the account,
assume a $10,000 account size.
(b) Reflect, as appropriate, any recurring fees charged to
shareholder accounts that are paid other than by redemption of the
Fund's shares.
(c) Reflect an annual account fee that applies to more than one
Fund by allocating the fee in the following manner: divide the total
amount of account fees collected during the year by the Funds' total
average net assets, multiply the resulting percentage by the average
account value for each Fund and reduce the value of each hypothetical
account at the end of each fiscal year during which the fee was
charged.
5. Appropriate Index. For purposes of this Item, an ``appropriate
broad-based securities market index'' is one that is administered by an
organization that is not an affiliated person of the Fund, its
investment adviser, or principal underwriter, unless the index is
widely recognized and used. Adjust the index to reflect the
reinvestment of dividends on securities in the index, but do not
reflect the expenses of the Fund.
6. Additional Indexes. A Fund is encouraged to compare its
performance not only to the required broad-based index, but also to
other more narrowly based indexes that reflect the market sectors in
which the Fund invests. A Fund also may compare its performance to an
additional broad-based index, or to a non-securities index (e.g., the
Consumer Price Index), so long as the comparison is not misleading.
7. Change in Index. If the Fund uses an index that is different
from the one used for the immediately preceding fiscal year, explain
the reason(s) for the change and compare the Fund's annual change in
the value of an investment in the hypothetical account with the new and
former indexes.
8. Other Periods. The line graph may cover earlier fiscal years and
may compare the ending values of interim periods (e.g., monthly or
quarterly ending values), so long as those periods are after the
effective date of the Fund's registration statement.
9. Scale. The axis of the graph measuring dollar amounts may use
either a linear or a logarithmic scale.
10. New Funds. A New Fund (as defined in Instruction 5 to Item 3)
is not required to include the information specified by this Item in
its prospectus (or annual report), unless Form N-1A (or the annual
report) contains audited financial statements covering a period of at
least 6 months.
11. Change in Investment Adviser. If the Fund has not had the same
investment adviser for the previous 10 fiscal years, the Fund may begin
the line graph on the date that the current adviser began to provide
advisory services to the Fund so long as:
(a) Neither the current adviser nor any affiliate is or has been in
``control'' of the previous adviser under section 2(a)(9) [15 U.S.C.
80a-2(a)(9)];
(b) The current adviser employs no officer(s) of the previous
adviser or employees of the previous adviser who were responsible for
providing investment advisory or portfolio management services to the
Fund; and
(c) The graph is accompanied by a statement explaining that
previous periods during which the Fund was advised by another
investment adviser are not shown.
(iii) Discuss the effect of any policy or practice of maintaining a
specified level of distributions to shareholders on the Fund's
investment strategies and per share net asset value during the last
fiscal year. Also discuss the extent to which the Fund's distribution
policy resulted in distributions of capital.
(c) Semi-Annual Report. Every semi-annual report to shareholders
required by rule 30e-1 must contain the following (which need not be
audited):
(1) Financial Statements. The financial statements required by
[[Page 11267]]
Regulation S-X for the period commencing either with:
(i) The beginning of the Fund's fiscal year (or date of
organization, if newly organized); or
(ii) A date not later than the date after the close of the period
included in the last report under rule 30e-1 and the most recent
preceding fiscal year.
Instruction. Instructions 1 and 2 to Item 21(b)(1) also apply to
this Item 21(c)(1).
(2) Condensed Financial Information. The condensed financial
information required by Item 8(a), for the period of the report as
specified by paragraph (c)(1), and the most recent preceding fiscal
year.
(3) Remuneration Paid to Directors, Officers, and Others. Unless
shown elsewhere in the report as part of the financial statements
required by paragraph (c)(1), the aggregate remuneration paid by the
Fund during the period covered by the report to the persons specified
under paragraph (b)(3).
(4) Changes in and Disagreements with Accountants. The information
concerning changes in and disagreements with accountants and on
accounting and financial disclosure required by Item 304 of Regulation
S-K [17 CFR 229.304].
(d) Annual and Semi-Annual Reports. Every annual and semi-annual
report to shareholders required by rule 30e-1 must contain the
following:
(1) Expense Example. The following information regarding expenses
for the period:
Example
As a shareholder of the Fund, you incur two types of costs: (1)
transaction costs, including sales charges (loads) on purchase
payments, reinvested dividends, or other distributions; redemption
fees; and exchange fees; and (2) ongoing costs, including management
fees; distribution [and/or service] (12b-1) fees; and other Fund
expenses. This Example is intended to help you understand your
ongoing costs (in dollars) of investing in the Fund and to compare
these costs with the ongoing costs of investing in other mutual
funds.
The Example is based on an investment of $1,000 invested at the
beginning of the period and held for the entire period [insert
dates].
Actual Expenses
The first line of the table below provides information about
actual account values and actual expenses. You may use the
information in this line, together with the amount you invested, to
estimate the expenses that you paid over the period. Simply divide
your account value by $1,000 (for example, an $8,600 account value
divided by $1,000 = 8.6), then multiply the result by the number in
the first line under the heading entitled ``Expenses Paid During
Period'' to estimate the expenses you paid on your account during
this period. [If the Fund charges any account fees or other
recurring fees that are not included in the expenses shown in the
table, for example, because they are not charged to all investors,
disclose the amounts of these fees, describe the accounts that are
charged these fees, and explain how an investor would use this
information to estimate the total ongoing expenses paid over the
period and the impact of these fees on ending account value.]
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about
hypothetical account values and hypothetical expenses based on the
Fund's actual expense ratio and an assumed rate of return of 5% per
year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate
the actual ending account balance or expenses you paid for the
period. You may use this information to compare the ongoing costs of
investing in the Fund and other funds. To do so, compare this 5%
hypothetical example with the 5% hypothetical examples that appear
in the shareholder reports of the other funds. [If the Fund charges
any account fees or other recurring fees that are not included in
the expenses shown in the table, for example, because they are not
charged to all investors, disclose the amounts of these fees,
describe the accounts that are charged these fees, and explain how
an investor would use this information in making the foregoing
comparison.]
Please note that the expenses shown in the table are meant to
highlight your ongoing costs only and do not reflect any
transactional costs, such as sales charges (loads), redemption fees,
or exchange fees. Therefore, the second line of the table is useful
in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if
these transactional costs were included, your costs would have been
higher.
------------------------------------------------------------------------
Expenses
Beginning Ending paid
account account during
value value period
[date] [date] \*\
[dates]
------------------------------------------------------------------------
Actual................................. $1,000 ......... .........
Hypothetical (5% return before 1,000 ......... .........
expenses).............................
------------------------------------------------------------------------
\*\ Expenses are equal to the Fund's annualized expense ratio of [--%],
multiplied by the average account value over the period, multiplied by
[number of days in most recent fiscal half-year/365 [or 366]] (to
reflect the one-half year period).
Instructions
1. General.
(a) Round all dollar figures to the nearest dollar.
(b) Include the narrative explanations in the order indicated. A
Fund may modify the narrative explanations if the explanation contains
comparable information to that shown, and is required to make any
modifications necessary to reflect accurately the Fund's circumstances.
A Fund may eliminate any parts of the narrative explanations that are
inapplicable. For example, a Fund that does not charge loads need not
include the statement that the Example does not reflect loads or that
costs would be higher if loads were included.
(c) The Fund's expense ratio shown in the footnote to the table
should be calculated in the manner required by Instruction 4(b) to Item
8(a) using the expenses for the Fund's most recent fiscal half-year
(the Fund's second fiscal half-year in the case of an annual report).
Express the expense ratio on an annualized basis.
(d)(i) If the Fund is a Feeder Fund, reflect the aggregate expenses
of the Feeder Fund and the Master Fund. In a footnote to the Example,
state that the Example reflects the expenses of both the Feeder and
Master Funds.
(ii) If the report covers more than one Class of a Multiple Class
Fund or more than one Feeder Fund that invests in the same Master Fund,
provide a separate Example for each Class or Feeder Fund.
2. Computation.
(a)(i) In determining the Fund's ``actual expenses'' for purposes
of this example, include all expenses that are deducted from the Fund's
assets or charged to all shareholder accounts, including ``Management
Fees,'' ``Distribution [and/or Service] (12b-1) Fees,'' and ``Other
Expenses'' as those terms are defined in Instruction 3 to Item 3 of
this form as modified by Instructions 2(a)(ii) and (c)(i) to this Item.
Reflect recurring and non-
[[Page 11268]]
recurring fees charged to all investors other than any exchange fees,
sales charges (loads), or fees charged upon redemption of the Fund's
shares. The amount of expenses deducted from the Fund's assets are the
amounts shown as expenses in the Fund's statement of operations
(including increases resulting from complying with paragraph 2(g) of
rule 6-07 of Regulation S-X [17 CFR 210.6-07]).
(ii) For purposes of this Item 21(d)(1), ``Other Expenses'' include
extraordinary expenses as determined under generally accepted
accounting principles (see Accounting Principles Board Opinion No. 30).
If extraordinary expenses were incurred that materially affected the
Fund's ``Other Expenses,'' the Fund may disclose in a footnote to the
Example what ``actual expenses'' would have been had the extraordinary
expenses not been included.
(b) Assume reinvestment of all dividends and distributions.
(c)(i) Base the percentages of ``actual expenses'' on amounts
incurred during the Fund's most recent fiscal half-year (the Fund's
second fiscal half-year in the case of an annual report). ``Actual
expenses'' should reflect actual expenses after expense reimbursement
or fee waiver arrangements that reduced expenses during the most recent
fiscal half-year.
(ii) If there have been any increases or decreases in Fund expenses
that occurred during the Fund's most recent fiscal half-year (or that
have occurred or are expected to occur during the current fiscal year)
that would have materially affected the information in the Example had
those changes been in place throughout the most recent fiscal half-
year, restate in a footnote to the Example the expense information
using the current fees as if they had been in effect throughout the
entire most recent fiscal half-year. A change in Fund expenses does not
include a decrease in expenses as a percentage of assets due to
economies of scale or breakpoints in a fee arrangement resulting from
an increase in the Fund's assets.
(d) Reflect any shareholder account fees collected by more than one
Fund by allocating the total amount of the fees collected during the
Fund's most recent fiscal half-year (the Fund's second fiscal half-year
in the case of an annual report) for all such Funds to each Fund in
proportion to the relative average net assets of the Fund. A Fund that
charges account fees based on a minimum account requirement exceeding
$1,000 may adjust its account fees based on the amount of the fee in
relation to the Fund's minimum account requirement.
(2) Graphical Representation of Holdings. One or more tables,
charts, or graphs depicting the portfolio holdings of the Fund by
reasonably identifiable categories (e.g., type of security, industry
sector, geographic region, credit quality, or maturity) showing the
percentage of net asset value or total investments attributable to
each. The categories and the basis of presentation (e.g., net asset
value or total investments) should be selected, and the presentation
should be formatted, in a manner reasonably designed to depict clearly
the types of investments made by the Fund, given its investment
objectives. Credit quality should be the ratings grade assigned by a
nationally recognized statistical rating organization (``NRSRO''), as
that term is used in paragraphs (c)(2)(vi)(E), (F), and (H) of Rule
15c3-1 under the Exchange Act (17 CFR 240.15c3-1(c)(2)(vi)(E), (F), and
(H)). The fund should use ratings of only one NRSRO.
(3) Statement Regarding Availability of Quarterly Portfolio
Schedule. A statement that: (i) The Fund files its complete schedule of
portfolio holdings with the Commission for the first and third quarters
of each fiscal year on Form N-Q; (ii) the Fund's Forms N-Q are
available on the Commission's Web site at http://www.sec.gov; (iii) the
Fund's Forms N-Q may be reviewed and copied at the Commission's Public
Reference Room in Washington, DC, and that information on the operation
of the Public Reference Room may be obtained by calling 1-800-SEC-0330;
and (iv) if the Fund makes the information on Form N-Q available to
shareholders on its Web site or upon request, a description of how the
information may be obtained from the Fund.
(4) Statement Regarding Availability of Proxy Voting Policies and
Procedures. A statement that a description of the policies and
procedures that the Fund uses to determine how to vote proxies relating
to portfolio securities is available (i) without charge, upon request,
by calling a specified toll-free (or collect) telephone number; (ii) on
the Fund's Web site, if applicable; and (iii) on the Commission's Web
site at http://www.sec.gov.
Instruction. When a Fund (or financial intermediary through which
shares of the Fund may be purchased or sold) receives a request for a
description of the policies and procedures that the Fund uses to
determine how to vote proxies, the Fund (or financial intermediary)
must send the information disclosed in response to Item 12(f) of this
Form, within three business days of receipt of the request, by first-
class mail or other means designed to ensure equally prompt delivery.
(5) Statement Regarding Availability of Proxy Voting Record. A
statement that information regarding how the Fund voted proxies
relating to portfolio securities during the most recent 12-month period
ended June 30 is available (i) without charge, upon request, by calling
a specified toll-free (or collect) telephone number; or on or through
the Fund's Web site at a specified Internet address; or both; and (ii)
on the Commission's Web site at http://www.sec.gov.
Instructions
1. If a Fund discloses that the Fund's proxy voting record is
available by calling a toll-free (or collect) telephone number, and the
Fund (or financial intermediary through which shares of the Fund may be
purchased or sold) receives a request for this information, the Fund
(or financial intermediary) must send the information disclosed in the
Fund's most recently filed report on Form N-PX, within three business
days of receipt of the request, by first-class mail or other means
designed to ensure equally prompt delivery.
2. If a Fund discloses that the Fund's proxy voting record is
available on or through its Web site, the Fund must make available free
of charge the information disclosed in the Fund's most recently filed
report on Form N-PX on or through its Web site as soon as reasonably
practicable after filing the report with the Commission. The
information disclosed in the Fund's most recently filed report on Form
N-PX must remain available on or through the Fund's Web site for as
long as the Fund remains subject to the requirements of Rule 30b1-4 (17
CFR 270.30b1-4) and discloses that the Fund's proxy voting record is
available on or through its Web site.
* * * * *
0
15. Form N-2 (referenced in Sec. Sec. 239.14 and 274.11a-1) is amended
by:
0
a. Revising the fourth paragraph and subparagraph 2 of General
Instruction F;
0
b. Revising Instructions 4.a. and 5.a. to Item 23;
0
c. Removing Instructions 4.g., 4.h., 5.e., and 5.f. to Item 23;
0
d. Adding ``and'' at the end of Instruction 4.e. to Item 23;
0
e. Removing the semi-colon from the end of Instruction 4.f. to Item 23
and in its place adding a period;
0
f. Adding ``and'' at the end of Instruction 5.c. to Item 23;
0
g. Removing the semi-colon from the end of Instruction 5.d. to Item 23
and in its place adding a period;
[[Page 11269]]
0
h. Redesignating Instructions 6 and 7 to Item 23 as Instructions 8 and
9; and
0
i. Adding new Instructions 6 and 7 to Item 23.
The additions and revisions read as follows:
Note: The text of Form N-2 does not and this amendment will not
appear in the Code of Federal Regulations.
Form N-2
* * * * *
General Instructions
* * * * *
F. Incorporation by Reference
* * * * *
A Registrant may incorporate by reference into the prospectus or
the SAI in response to Item 4.1 or 23 of this form the information
contained in Form N-CSR (17 CFR 249.331 and 274.128) or any report to
shareholders meeting the requirements of section 30(e) of the 1940 Act
(15 U.S.C. 80a-29(e)) and Rule 30e-1 (17 CFR 270.30e-1) thereunder (and
a Registrant that has elected to be regulated as a business development
company may so incorporate into Items 4.2, 8.6.c, or 23 of this form
the information contained in its annual report under the Securities
Exchange Act of 1934 (15 U.S.C. 78a et seq.) (the ``Exchange Act'')),
provided:
* * * * *
2. the Registrant states in the prospectus or the SAI, at the place
where the information required by Items 4.1, 4.2, 8.6.c., or 23 of this
form would normally appear, that the information is incorporated by
reference from a report to shareholders or a report on Form N-CSR. (The
Registrant also may describe briefly, in either the prospectus, the
SAI, or Part C of the registration statement (in response to Item 24.1)
those portions of the report to shareholders or report on Form N-CSR
that are not incorporated by reference and are not a part of the
registration statement.); and
* * * * *
Item 23. Financial Statements
* * * * *
Instructions
* * * * *
4. * * *
a. the audited financial statements required by Regulation S-X for
the periods specified by Regulation S-X, modified to permit the
omission of the statements and schedules that may be omitted from Part
B of the registration statement by Instruction 2 above and as permitted
by Instruction 7 below;
* * * * *
5. * * *
a. the financial statements required by Regulation S-X for the
period commencing either with (1) the beginning of the company's fiscal
year (or date of organization, if newly organized); or (2) a date not
later than the date after the close of the period included in the last
report conforming with the requirements of Rule 30e-1 and the most
recent preceding fiscal year, modified to permit the omission of the
statements and schedules that may be omitted from Part B of the
registration statement by Instruction 2 above and as permitted by
Instruction 7 below;
* * * * *
6. Every annual and semi-annual report to shareholders required by
Section 30(e) of the 1940 Act and Rule 30e-1 thereunder shall contain
the following information:
a. one or more tables, charts, or graphs depicting the portfolio
holdings of the Registrant by reasonably identifiable categories (e.g.,
type of security, industry sector, geographic region, credit quality,
or maturity) showing the percentage of net asset value or total
investments attributable to each. The categories and the basis of
presentation (e.g., net asset value or total investments) should be
selected, and the presentation should be formatted, in a manner
reasonably designed to depict clearly the types of investments made by
the Registrant, given its investment objectives. Credit quality should
be the ratings grade assigned by a nationally recognized statistical
rating organization (``NRSRO''), as that term is used in paragraphs
(c)(2)(vi)(E), (F) and (H) of Rule 15c3-1 under the Exchange Act [17
CFR 240.15c3-1(c)(2)(vi)(E), (F) and (H)]. The Registrant should use
ratings of only one NRSRO;
b. a statement that: (i) The Registrant files its complete schedule
of portfolio holdings with the Commission for the first and third
quarters of each fiscal year on Form N-Q; (ii) the Registrant's Forms
N-Q are available on the Commission's Web site at http://www.sec.gov;
(iii) the Registrant's Forms N-Q may be reviewed and copied at the
Commission's Public Reference Room in Washington, DC, and that
information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330; and (iv) if the Registrant makes
the information on Form N-Q available to shareholders on its Web site
or upon request, a description of how the information may be obtained
from the Registrant.
c. a statement that a description of the policies and procedures
that the Registrant uses to determine how to vote proxies relating to
portfolio securities is available (1) without charge, upon request, by
calling a specified toll-free (or collect) telephone number; (2) on the
Registrant's Web site, if applicable; and (3) on the Commission's Web
site at http://www.sec.gov; and
d. a statement that information regarding how the Registrant voted
proxies relating to portfolio securities during the most recent 12-
month period ended June 30 is available (1) without charge, upon
request, by calling a specified toll-free (or collect) telephone
number; or on or through the Registrant's Web site at a specified
Internet address; or both; and (2) on the Commission's Web site at
http://www.sec.gov.
7. Schedule VI--Summary schedule of investments in securities of
unaffiliated issuers (17 CFR 210.12-12C) may be included in the
financial statements required under Instructions 4.a. and 5.a. of this
Item in lieu of Schedule I--Investments in securities of unaffiliated
issuers (17 CFR 210.12-12) if: (a) The Registrant states in the report
that the Registrant's complete schedule of investments in securities of
unaffiliated issuers is available (i) without charge, upon request, by
calling a specified toll-free (or collect) telephone number; (ii) on
the Registrant's Web site, if applicable; and (iii) on the Commission's
Web site at http://www.sec.gov; and (b) whenever the Registrant (or
financial intermediary through which shares of the Registrant may be
purchased or sold) receives a request for the Registrant's schedule of
investments in securities of unaffiliated issuers, the Registrant (or
financial intermediary) sends a copy of Schedule I--Investments in
securities of unaffiliated issuers within 3 business days of receipt by
first-class mail or other means designed to ensure equally prompt
delivery.
* * * * *
0
16. Form N-3 (referenced in Sec. Sec. 239.17 and 274.11b) is amended
by:
0
a. Revising the fourth paragraph and subparagraph 2 of General
Instruction G;
0
b. Revising Instructions 4(i) and 5(i) to Item 27(a);
0
c. Removing Instructions 4(vii), 4(viii), 5(v), and 5(vi) to Item
27(a);
0
d. Adding ``and'' at the end of Instruction 4(v) to Item 27(a);
0
e. Removing the semi-colon from the end of Instruction 4(vi) to Item
27(a) and in its place adding a period;
[[Page 11270]]
0
f. Adding ``and'' at the end of Instruction 5(iii) to Item 27(a);
0
g. Removing the semi-colon from the end of Instruction 5(iv) to Item
27(a) and in its place adding a period;
0
h. Redesignating Instructions 6 and 7 to Item 27(a) as Instructions 8
and 9 to Item 27(a);
0
i. Adding new Instructions 6 and 7 to Item 27(a); and
0
j. Revising newly redesignated Instruction 9 to Item 27(a).
The additions and revisions read as follows.
Note: The text of Form N-3 does not and this amendment will not
appear in the Code of Federal Regulations.
Form N-3
* * * * *
General Instructions
* * * * *
G. Incorporation by Reference
Subject to these rules, a Registrant may incorporate by reference
into the prospectus or the Statement of Additional Information in
response to Items 4(a) or 27 of Form N-3 the information in Form N-CSR
(17 CFR 249.331 and 274.128) or any report to contractowners meeting
the requirements of section 30(e) of the 1940 Act (15 U.S.C. 80a-29(e))
and Rule 30e-1 (17 CFR 270.30e-1) provided:
* * * * *
2. The Registrant states in the prospectus or the Statement of
Additional Information, at the place where the information would
normally appear, that the information is incorporated by reference from
a report to securityholders or a report on Form N-CSR. The Registrant
may also describe, in either the prospectus, the Statement of
Additional Information, or Part C of the Registration Statement (in
response to Item 28(a)), any parts of the report to securityholders or
the report on Form N-CSR that are not incorporated by reference and are
not a part of the Registration Statement; and
* * * * *
Item 27. Financial Statements
(a) * * *
Instructions
* * * * *
4. * * *
(i) the audited financial statements required by Regulation S-X for
the periods specified by Regulation S-X, as modified by Instruction 2
above and as permitted by Instruction 7 below;
* * * * *
5. * * *
(i) the financial statements required by Regulation S-X for the
period commencing either with (A) the beginning of the separate
account's fiscal year (or date of organization, if newly organized); or
(B) a date not later than the date after the close of the period
included in the last report conforming with the requirements of Rule
30e-1 and the most recent preceding fiscal year, as modified by
Instruction 2 above and as permitted by Instruction 7 below;
* * * * *
6. Every report required by section 30(e) of the 1940 Act and Rule
30e-1 under it (17 CFR 270.30e-1) shall contain the following
information:
(i) One or more tables, charts, or graphs depicting the portfolio
holdings of the Registrant by reasonably identifiable categories (e.g.,
type of security, industry sector, geographic region, credit quality,
or maturity) showing the percentage of net asset value or total
investments attributable to each. If the Registrant has sub-accounts,
provide the information separately for each sub-account. The categories
and the basis of presentation (e.g., net asset value or total
investments) should be selected, and the presentation should be
formatted, in a manner reasonably designed to depict clearly the types
of investments made by the Registrant, given its investment objectives.
Credit quality should be the ratings grade assigned by a nationally
recognized statistical rating organization (``NRSRO''), as that term is
used in paragraphs (c)(2)(vi)(E), (F), and (H) of Sec. 240.15c3-1 of
Rule 15c3-1 under the Exchange Act (17 CFR 240.15c3-1(c)(2)(vi)(E),
(F), and (H)). The Registrant should use ratings of only one NRSRO;
(ii) a statement that: (A) the Registrant files its complete
schedule of portfolio holdings with the Commission for the first and
third quarters of each fiscal year on Form N-Q; (B) the Registrant's
Forms N-Q are available on the Commission's Web site at http://
www.sec.gov; (C) the Registrant's Forms N-Q may be reviewed and copied
at the Commission's Public Reference Room in Washington, DC, and that
information on the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330; and (D) if the Registrant makes the
information on Form N-Q available to contractowners on its Web site or
upon request, a description of how the information may be obtained from
the Registrant;
(iii) a statement that a description of the policies and procedures
that the Registrant uses to determine how to vote proxies relating to
portfolio securities is available (A) without charge, upon request, by
calling a specified toll-free (or collect) telephone number; (B) on the
Registrant's Web site, if applicable; and (C) on the Commission's Web
site at http://www.sec.gov; and
(iv) a statement that information regarding how the Registrant
voted proxies relating to portfolio securities during the most recent
12-month period ended June 30 is available (A) without charge, upon
request, by calling a specified toll-free (or collect) telephone
number; or on or through the Registrant's Web site at a specified
Internet address; or both; and (B) on the Commission's Web site at
http://www.sec.gov.
7. (i) Schedule VI--Summary schedule of investments in securities
of unaffiliated issuers (17 CFR 210.12-12C) may be included in the
financial statements required under Instructions 4.(i) and 5.(i) of
this Item in lieu of Schedule I--Investments in securities of
unaffiliated issuers (17 CFR 210.12-12) if: (A) the Registrant states
in the report that the Registrant's complete schedule of investments in
securities of unaffiliated issuers is available (1) without charge,
upon request, by calling a specified toll-free (or collect) telephone
number; (2) on the Registrant's Web site, if applicable; and (3) on the
Commission's Web site at http://www.sec.gov; and (B) whenever the
Registrant (or financial intermediary through which shares of the
Registrant may be purchased or sold) receives a request for the
Registrant's schedule of investments in securities of unaffiliated
issuers, the Registrant (or financial intermediary) sends a copy of
Schedule I--Investments in securities of unaffiliated issuers within 3
business days of receipt by first-class mail or other means designed to
ensure equally prompt delivery.
(ii) In the case of a Registrant or sub-account of a Registrant
that holds itself out as a money market account or sub-account and
meets the maturity, quality, and diversification requirements of rule
2a-7 (17 CFR 270.2a-7) under the 1940 Act, Schedule I--Investments in
securities of unaffiliated issuers (17 CFR 210.12-12C) may be omitted
from the financial statements required under Instructions 4.(i) and
5.(i) of this Item, provided that: (A) the Registrant states in the
report that the Registrant's complete schedule of investments in
securities of unaffiliated issuers is available (1) without charge,
upon request, by calling a specified toll-free (or collect) telephone
number; (2) on the Registrant's Web site, if applicable; and (3) on the
Commission's Web site at
[[Page 11271]]
http://www.sec.gov; and (B) whenever the Registrant (or financial
intermediary through which shares of the Registrant may be purchased or
sold) receives a request for the Registrant's schedule of investments
in securities of unaffiliated issuers, the Registrant (or financial
intermediary) sends a copy of Schedule I--Investments in securities of
unaffiliated issuers within 3 business days of receipt by first-class
mail or other means designed to ensure equally prompt delivery.
* * * * *
9. See General Instruction G regarding incorporation by reference.
* * * * *
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940
0
17. Form N-CSR (referenced in Sec. Sec. 249.331 and 274.128) is
amended by:
0
a. Adding new Item 6;
0
b. Revising paragraph (b) of Item 10;
0
c. Adding an Instruction to paragraph (b) of Item 10;
0
d. Revising paragraph 4(d) of the Certification in Item 11(a)(2); and
0
e. Adding an Instruction to paragraph (a)(2) of Item 11.
The additions and revisions read as follows:
Note: The text of Form N-CSR does not and this amendment will
not appear in the Code of Federal Regulations.
Form N-CSR
* * * * *
Item 6. Schedule of Investments
File Schedule I--Investments in securities of unaffiliated issuers
as of the close of the reporting period as set forth in Sec. 210.12-12
of Regulation S-X [17 CFR 210.12-12], unless the schedule is included
as part of the report to shareholders filed under Item 1 of this Form.
Instruction
Schedule I--Investments in securities of unaffiliated issuers filed
under this Item must be audited, except that in the case of a report on
this Form N-CSR as of the end of a fiscal half-year Schedule I--
Investments in securities of unaffiliated issuers need not be audited.
* * * * *
Item 10. Controls and Procedures
* * * * *
(b) Disclose any change in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR
270.30a-3(d)) that occurred during the second fiscal quarter of the
period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
Instruction to paragraph (b).
Until the earlier of June 30, 2005, or the date that the registrant
has filed its first report on Form N-Q (17 CFR 249.332; 17 CFR
274.130), the registrant must disclose, pursuant to paragraph (b) of
this Item, any change in the registrant's internal control over
financial reporting that occurred during the registrant's last fiscal
half-year (the registrant's second fiscal half-year in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting.
Item 11. Exhibits
(a) * * *
(2) * * *
Certifications
I, [Identify the certifying individual], certify that:
* * * * *
4. * * *
(d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
second fiscal quarter of the period covered by this report that has
materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
* * * * *
Instruction to paragraph (a)(2).
Until the earlier of June 30, 2005, or the date that the registrant
has filed its first report on Form N-Q (17 CFR 249.332; 17 CFR
274.130), in paragraph 4(d) of the certification required by Item
11(a)(2), the registrant's certifying officers must certify that they
have disclosed in the report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal half-year (the registrant's second fiscal half-year
in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
* * * * *
0
18. Section 274.130 and Form N-Q (referenced in Sec. 249.332 and Sec.
274.130) are added to read as follows:
Sec. 274.130 Form N-Q, quarterly schedule of portfolio holdings of
registered management investment company.
This form shall be used by registered management investment
companies, other than small business investment companies registered on
Form N-5 (Sec. Sec. 239.24 and 274.5 of this chapter), to file reports
pursuant to Sec. 270.30b1-5 of this chapter not later than 60 days
after the close of the first and third quarters of each fiscal year.
Note: The text of Form N-Q will not appear in the Code of
Federal Regulations.
OMB Approval
OMB Number: 3235-0578
Expires: February 28, 2006
Estimated average burden hours per response: 20.00
Securities and Exchange Commission, Washington, DC 20549
Form N-Q: Quarterly Schedule of Portfolio Holdings of Registered
Management Investment Company
Investment Company Act file number-------------------------------------
-----------------------------------------------------------------------
(Exact name of registrant as specified in charter)
-----------------------------------------------------------------------
(Address of principal executive offices)
-----------------------------------------------------------------------
(Zip code)
-----------------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: ----------------
Date of fiscal year end: --------
Date of reporting period: --------
Form N-Q is to be used by management investment companies, other
than small business investment companies registered on Form N-5
(Sec. Sec. 239.24 and 274.5 of this chapter), to file reports with the
Commission, not later than 60 days after the close of the first and
third fiscal quarters, pursuant to rule 30b1-5 under the Investment
Company Act of 1940 (17 CFR 270.30b1-5). The Commission may use the
information provided on Form N-Q in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by
Form N-Q, and the Commission will make this information public. A
registrant is not required to respond to the collection of information
contained in Form N-Q unless the Form displays a currently valid Office
of Management and Budget (``OMB'') control number. Please direct
comments concerning the accuracy of the information collection burden
estimate and any suggestions for reducing the burden to the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
DC 20549-0609. The OMB has reviewed
[[Page 11272]]
this collection of information under the clearance requirements of 44
U.S.C. 3507.
General Instructions
A. Rule as to Use of Form N-Q
Form N-Q is a combined reporting form that is to be used for
reports of registered management investment companies, other than small
business investment companies registered on Form N-5 (Sec. Sec. 239.24
and 274.5 of this chapter), under section 30(b) of the Investment
Company Act of 1940 (the ``Act'') and section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (the ``Exchange Act''), filed pursuant
to Rule 30b1-5 under the Act (17 CFR 270.30b1-5). Registered management
investment companies, other than small business investment companies
registered on Form N-5, shall file their complete portfolio holdings on
Form N-Q as of the close of the first and third quarters of each fiscal
year. A report on this form shall be filed not later than 60 days after
the close of the first and third quarters of each fiscal year.
B. Application of General Rules and Regulations
The General Rules and Regulations under the Act and the Exchange
Act contain certain general requirements that are applicable to
reporting on any form under those Acts. These general requirements
should be carefully read and observed in the preparation and filing of
reports on this form, except that any provision in the form or in these
instructions shall be controlling.
C. Preparation of Report
1. This Form is not to be used as a blank form to be filled in, but
only as a guide in preparing the report in accordance with Rules 8b-11
(17 CFR 270.8b-11) and 8b-12 (17 CFR 270.8b-12) under the Act and Rules
12b-11 (17 CFR 240.12b-11) and 12b-12 (17 CFR 240.12b-12) under the
Exchange Act. The Commission does not furnish blank copies of this form
to be filled in for filing.
2. These general instructions are not to be filed with the report.
3. Attention is directed to Rule 12b-20 under the Exchange Act (17
CFR 240.12b-20), which states: ``In addition to the information
expressly required to be included in a statement or report, there shall
be added such further material information, if any, as may be necessary
to make the required statements, in the light of the circumstances
under which they are made not misleading.''
D. Incorporation by Reference
A registrant may incorporate by reference information required by
the Form. All incorporation by reference must comply with the
requirements of this Form and the following rules on incorporation by
reference: Rule 10(d) of Regulation S-K under the Securities Act of
1933 (17 CFR 229.10(d)) (general rules on incorporation by reference,
which, among other things, prohibit, unless specifically required by
this Form, incorporating by reference a document that includes
incorporation by reference to another document, and limits
incorporation to documents filed within the last 5 years, with certain
exceptions); Rule 303 of Regulation S-T (17 CFR 232.303) (specific
requirements for electronically filed documents); Rules 12b-23 and 12b-
32 under the Exchange Act (17 CFR 240.12b-23 and 12b-32) (additional
rules on incorporation by reference for reports filed pursuant to
sections 13 and 15(d) of the Exchange Act); and Rules 0-4, 8b-23, and
8b-32 under the Act (17 CFR 270.0-4, 270.8b-23, and 270.8b-32)
(additional rules on incorporation by reference for investment
companies).
E. Definitions
Unless the context clearly indicates the contrary, terms used in
this Form N-Q have meanings as defined in the Act and the rules and
regulations thereunder. Unless otherwise indicated, all references in
the form to statutory sections or to rules are sections of the Act and
the rules and regulations thereunder.
F. Signature and Filing of Report
1. If the report is filed in paper pursuant to a hardship exemption
from electronic filing (see Item 201 et seq. of Regulation S-T (17 CFR
232.201 et seq.)), eight complete copies of the report shall be filed
with the Commission. At least one complete copy of the report shall be
filed with each exchange on which any class of securities of the
registrant is registered. At least one complete copy of the report
filed with the Commission and one such copy filed with each exchange
must be manually signed. Copies not manually signed must bear typed or
printed signatures.
2. (a) The report must be signed by the registrant, and on behalf
of the registrant by its principal executive and principal financial
officers.
(b) The name of each person who signs the report shall be typed or
printed beneath his or her signature. Any person who occupies more than
one of the specified positions shall indicate each capacity in which he
or she signs the report. Attention is directed to Rule 12b-11 under the
Exchange Act (17 CFR 240.12b-11) and Rule 8b-11 under the Act (17 CFR
270.8b-11) concerning manual signatures and signatures pursuant to
powers of attorney.
Item 1. Schedule of Investments
File the schedules as of the close of the reporting period as set
forth in Sec. Sec. 210.12-12--12-14 of Regulation S-X [17 CFR 210.12-
12--12-14]. The schedules need not be audited.
Item 2. Controls and Procedures
(a) Disclose the conclusions of the registrant's principal
executive and principal financial officers, or persons performing
similar functions, regarding the effectiveness of the registrant's
disclosure controls and procedures (as defined in Rule 30a-3(c) under
the Act (17 CFR 270.30a-3(c))) as of a date within 90 days of the
filing date of the report that includes the disclosure required by this
paragraph, based on the evaluation of these controls and procedures
required by Rule 30a-3(b) under the Act (17 CFR 270.30a-3(b)) and Rule
13a-15(b) or 15d-15(b) under the Exchange Act (17 CFR 240.13a-15(b) or
240.15d-15(b)).
(b) Disclose any change in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR
270.30a-3(d)) that occurred during the registrant's last fiscal quarter
that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting.
Item 3. Exhibits
File as exhibits as part of this Form a separate certification for
each principal executive officer and principal financial officer of the
registrant as required by Rule 30a-2(a) under the Act (17 CFR 270.30a-
2(a)), exactly as set forth below:
Certifications
I, [identify the certifying individual], certify that:
1. I have reviewed this report on Form N-Q of [identify
registrant];
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the schedules of investments included in
[[Page 11273]]
this report fairly present in all material respects the investments of
the registrant as of the end of the fiscal quarter for which the report
is filed;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Investment Company
Act of 1940) and internal control over financial reporting (as defined
in Rule 30a-3(d) under the Investment Company Act of 1940) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of a date within 90 days prior to the filing date of this report, based
on such evaluation; and
(d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to
record, process, summarize, and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date:------------------------------------------------------------------
-----------------------------------------------------------------------
[Signature]
[Title]
Signatures
[See General Instruction F]
Pursuant to the requirements of the Securities Exchange Act of
1934 and the Investment Company Act of 1940, the registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
(Registrant)-----------------------------------------------------------
By (Signature and Title)*----------------------------------------------
Date-------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of
1934 and the Investment Company Act of 1940, this report has been
signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
By (Signature and Title)*----------------------------------------------
Date-------------------------------------------------------------------
By (Signature and Title)*----------------------------------------------
Date-------------------------------------------------------------------
* Print the name and title of each signing officer under his or
her signature.
By the Commission.
Dated: February 27, 2004.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-4829 Filed 3-8-04; 8:45 am]
BILLING CODE 8010-01-P