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SECURITIES AND EXCHANGE COMMISSION
Veterans Affairs Department
CFR Citation: 17 CFR Parts 230, 232, 239, and 274
DOCUMENT ID: [Release Nos. 33-8861; IC-28064; File No. S7-28-07]
RIN ID: RIN 3235-AJ44
NOTICE: Part II
DOCUMENT ACTION: Proposed rule.
SUBJECT CATEGORY: Enhanced Disclosure and New Prospectus Delivery Option for Registered Open-End Management Investment Companies
DATES: Comments should be submitted on or before February 28, 2008.
DOCUMENT SUMMARY: The Securities and Exchange Commission is proposing amendments to the form used by mutual funds to register under the Investment Company Act of 1940 and to offer their securities under the Securities Act of 1933 in order to enhance the disclosures that are provided to mutual fund investors. The proposed amendments, if adopted, would require key information to appear in plain English in a standardized order at the front of the mutual fund statutory prospectus. The Commission is also proposing rule amendments that would permit a person to satisfy its mutual fund prospectus delivery obligations under Section 5(b)(2) of the Securities Act by sending or giving the key information directly to investors in the form of a summary prospectus and providing the statutory prospectus on an Internet Web site. Upon an investor's request, mutual funds would also be required to send the statutory prospectus to the investor. The proposals are intended to improve mutual fund disclosure by providing investors with key information in plain English in a clear and concise format, while enhancing the means of delivering more detailed information to investors.
SUMMARY: Securities and Exchange Commission,
SUPPLEMENTAL INFORMATION
The Securities and Exchange Commission (``Commission'') is proposing for comment amendments to rules 159A,\1\ 482,\2\ 485,\3\ 497,\4\ and 498 \5\ under the Securities Act of 1933 (``Securities Act'') and rules 304 \6\ and 401 \7\ of Regulation S T.\8\ The Commission is also proposing for comment amendments to Form N1A,\9\ the form used by openend management investment companies to register under the Investment Company Act of 1940 (``Investment Company Act'') and to offer securities under the Securities Act; Form N4,\10\ the form used by insurance company separate accounts organized as unit investment trusts and offering variable annuity contracts to register under the Investment Company Act and to offer securities under the Securities Act; and Form N14,\11\ the form used by registered management investment companies and business development companies to register under the Securities Act securities to be issued in business combinations.\1\ 17 CFR 230.159A.
\2\ 17 CFR 230.482.
\3\ 17 CFR 230.485.
\4\ 17 CFR 230.497.
\5\ 17 CFR 230.498.
\6\ 17 CFR 232.304.
\7\ 17 CFR 232.401.
\8\ 17 CFR 232.10 et seq.
\9\ 17 CFR 239.15A and 274.11A.
\10\ 17 CFR 239.17b and 274.11c.
\11\ 17 CFR 239.23.
Table of Contents
I. Background
II. Discussion
A. Proposed Amendments to Form N1A
B. New Delivery Option for Mutual Funds
C. Technical and Conforming Amendments
D. Compliance Date
III. General Request for Comments
IV. Special Request for Comments From Investors
V. Paperwork Reduction Act
VI. Cost/Benefit Analysis
VII. Consideration of Promotion of Efficiency, Competition, and Capital Formation
VIII. Initial Regulatory Flexibility Analysis
IX. Consideration of Impact on the Economy
X. Statutory Authority
Text of Proposed Rule and Form Amendments
Appendix
I. Background
Millions of individual Americans invest in shares of openend
management investment companies (``mutual funds''),\12\ relying on
mutual funds for their retirement, their children's education, and
their other basic financial needs.\13\ These investors face a difficult
task in choosing among the more than 8,000 available mutual funds.\14\
Fund prospectuses, which have been criticized by investor advocates,
representatives of the fund industry, and others as long and
complicated, often prove difficult for investors to use efficiently in comparing their many choices.\15\ Current Commission rules
[[Page 67791]]
require mutual fund prospectuses to contain key information about
investment objectives, risks, and expenses that, while important to
investors, can be difficult for investors to extract. Prospectuses are
often long, both because they contain a wealth of detailed information,
which our rules require, and because prospectuses for multiple funds
are often combined in a single document. Too frequently, the language
of prospectuses is complex and legalistic, and the presentation formats
make little use of graphic design techniques that would contribute to readability.
\12\ An openend management investment company is an investment company, other than a unit investment trust or faceamount
certificate company, that offers for sale or has outstanding any
redeemable security of which it is the issuer. See Sections 4 and
5(a)(1) of the Investment Company Act [15 U.S.C. 80a4 and 80a 5(a)(1)].
\13\ Investment Company Institute, 2007 Investment Company Fact
Book, at 57 (2007), available at: http://www.icifactbook.org/pdf/2007_factbook.pdf (96 million individuals own mutual funds).
\14\ Id. at 10 (as of yearend 2006, there were 8,726 mutual funds).
\15\ See William D. Lutz, Ph.D., Professor of English, Rutgers
University, Transcript of U.S. Securities and Exchange Commission
Interactive Data Roundtable, at 69 (June 12, 2006), available at:
http://www.sec.gov/spotlight/xbrl/xbrlofficialtranscript0606.pdf
(``June 12 Roundtable Transcript'') (stating that current mutual
fund prospectus is ``unreadable''); Don Phillips, Managing Director,
Morningstar, Inc., id. at 26 (stating that current prospectus is
``bombarding investors with way more information than they can
handle and that they can intelligently assimilate''). A Webcast
archive of the June 12 Interactive Data Roundtable is available at:
http://www.connectlive.com/events/secxbrl/. See also Investment
Company Institute, Understanding Preferences for Mutual Fund
Information, at 8 (Aug. 2006), available at: http://ici.org/pdf/rpt_06_inv_prefs_summary.pdf (``ICI Investor Preferences
Study'') (noting that sixty percent of recent fund investors
describe mutual fund prospectuses as very or somewhat difficult to
understand, and twothirds say prospectuses contain too much
information); Associated Press Online, Experts: Investors Face
Excess Information (May 25, 2005) (``There is broad agreement * * *
that prospectuses have too much information * * * to be useful.''
(quoting Mercer Bullard, President, Fund Democracy, Inc.)); Thomas
P. Lemke and Gerald T. Lins, The ``Gift'' of Disclosure: A Suggested
Approach for Managed Investments, The Investment Lawyer, at 19 (Jan.
2001) (stating that the fund prospectus ``typically contains more information than the average investor needs'').
Numerous commentators have suggested that investment information
that is key to an investment decision should be provided in a
streamlined document with other more detailed information provided
elsewhere.\16\ Furthermore, recent investor surveys indicate that
investors prefer to receive information in concise, userfriendly formats.\17\
\16\ See Charles A. Jaffe, Improving Disclosure of Funds Can Be
Done, The Fort Worth StarTelegram (May 7, 2006) (``Bring back the
profile prospectus, and make its use mandatory. * * * A two page
summary of [the] key points [in the profile]at the front of the
prospectuswould give investors the bare minimum of what they
should know out of the paperwork.''); Experts: Investors Face Excess
Information, supra note 15 (stating ``a possible middle ground in
the disclosure debate is to rely more heavily on socalled profile
documents which provide a twopage synopsis of a fund'' (attributing
statement to Mercer Bullard, President, Fund Democracy, Inc.));
Mutual Funds: A Review of the Regulatory Landscape, Hearing Before
the Subcomm. on Capital Markets, Insurance and Government Sponsored
Enterprises of the Comm. on Financial Services, U.S. House of
Representatives, 109th Cong. (May 10, 2005), at 24 (``To my mind, a
new and enhanced mutual fund prospectus should have two core
components. It should be short, addressing only the most important
factors about which typical fund investors care in making investment
decisions, and it should be supplemented by additional information
available electronically, specifically through the Internet, unless
an investor chooses to receive additional information through other
means.'' (Testimony of Barry P. Barbash, then Partner, Shearman &
Sterling LLP)); Thomas P. Lemke and Gerald T. Lins, The ``Gift'' of
Disclosure: A Suggested Approach for Managed Investments, supra note
15, at 19 (information that is important to investors includes goals
and investment policies, risks, costs, performance, and the identity and background of the manager).
In addition, a mutual fund task force organized by the National
Association of Securities Dealers, Inc. (``NASD'') supported the use
of a ``profile plus'' document, on the Internet, that would include,
among other things, basic information about a fund's investment
strategies, risks, and total costs, with hyperlinks to additional
information in the prospectus. See NASD Mutual Fund Task Force,
Report of the Mutual Fund Task Force: Mutual Fund Distribution (Mar.
2005), available at: http://www.finra.org/web/groups/rules_regs/documents/rules_regs/p013690.pdf .
\17\ See ICI Investor Preferences Study, supra note 15, at 29
(``Nearly nine in 10 recent fund investors say they prefer a summary
of the information they want to know before buying fund shares,
either alone or along with a detailed document. * * * Just 13
percent prefer to receive only a detailed document.''); Barbara
Roper and Stephen Brobeck, Consumer Federation of America, Mutual
Fund Purchase Practices, at 1314 (June 2006), available at: http://www.consumerfed.org/pdfs/mutual_fund_survey_report.pdf (survey
respondents more likely to consult a fund summary document rather than a prospectus or other written materials).
Similar opinions were voiced at a roundtable held by the Commission
in June 2006, at which representatives from investor groups, the mutual
fund industry, analysts, and others discussed how the Commission could
change the mutual fund disclosure framework so that investors would be
provided with better information. Significant discussion at the
roundtable concerned the importance of providing mutual fund investors
with access to key fund data in a shorter, more easily understandable
format.\18\ The participants focused on the importance of providing
mutual fund investors with shorter disclosure documents, containing key
information, with more detailed disclosure documents available to
investors and others who choose to review additional information.\19\
There was consensus among the roundtable participants that the key
information that investors need to make an investment decision includes
information about a mutual fund's investment objectives and strategies, risks, costs, and performance.\20\
\18\ See, e.g., Henry H. Hopkins, Vice President and Chief Legal
Counsel, T. Rowe Price Group, Inc., June 12 Roundtable Transcript,
supra note 15, at 31 (``[S]hareholders prefer receiving a concise
summary of fund information before buying.''); William D. Lutz,
Ph.D., Professor of English, Rutgers University, id. at 88 (stating
that ``investors [should] be able to find quickly and easily the information they want'').
\19\ See Don Phillips, Managing Director, Morningstar, Inc., id.
at 27 (stating that mutual fund investors need two different
documents, including a simplified print document and a tagged
electronic document); Paul Schott Stevens, President and Chief
Executive Officer, Investment Company Institute, id. at 7273
(urging the Commission to consider permitting mutual funds to
``deliver a clear concise disclosure document * * * much like the
profile prospectus'' with a statement that additional disclosure is
available on the funds' website or upon request in paper); Elisse B.
Walter, Senior Executive Vice President, NASD, id. at 41 (noting
that the industryrecommended disclosure document, the ``profile
plus,'' would include hyperlinks to the statutory prospectus, which
would enable investors to ``choose for themselves the level of detail they want'').
\20\ See Barbara Roper, Director of Investor Protection,
Consumer Federation of America, June 12 Roundtable Transcript, supra
note 15, at 20 (noting that there is ``agreement to the point of
near unanimity about the basic factors that investors should
consider when selecting a mutual fund. These closely track the
content of the original fund profile with highest priority given to
investment objectives and strategies, risks, costs, and past
performance particularly as it relates to the volatility of past
returns.''). See also Paul G. Haaga, Jr., Executive Vice President,
Capital Research and Management Company, id. at 90 (stating that the
Commission should ``specify some minimum amounts of information'' to
provide investors with ``something along the lines of the [fund]
profile''); Henry H. Hopkins, Vice President and Chief Legal
Counsel, T. Rowe Price Group, Inc., id. at 31 (``The profile is an
excellent well organized disclosure document whose content
requirements were substantiated by SECsponsored focus groups and an
industry pilot program.''); William D. Lutz, Ph.D., Professor of
English, Rutgers University, id. at 88 (noting that the information
that mutual fund investors want has not changed substantially since
the adoption of the profile); Elisse B. Walter, Senior Executive
Vice President, NASD, id. at 4041 (noting that NASD's ``profile
plus'' builds on the profile and includes key information about a
fund's objectives, risks, fees, and performance, as well as information about dealer fees and conflicts of interest).
The roundtable participants also discussed the potential benefits
of increased Internet availability of fund disclosure documents, which
include, among other things, facilitating comparisons among funds and
replacing ``onesizefitsall'' disclosure with disclosure that each
investor can tailor to his or her own needs.\21\ In recent years,
access to the Internet has greatly expanded, \22\ and significant strides
[[Page 67792]]
have been made in the speed and quality of Internet connections.\23\
The Commission has already harnessed the power of these technological
advances to provide better access to information in a number of areas.
Recently, for example, we created a program that permits issuers, on a
voluntary basis, to submit to the Commission financial information and,
in the case of mutual funds, key prospectus information, in an
interactive data format that facilitates automated retrieval, analysis,
and comparison of the information.\24\ Earlier this year, we adopted
rules that provide all shareholders with the ability to choose whether
to receive proxy materials in paper or via the Internet.\25\ As
suggested by the participants at the roundtable, advances in technology
also offer a promising means to address the length and complexity of
mutual fund prospectuses by streamlining the key information that is
provided to investors, ensuring that access to the full wealth of
information about a fund is immediately and easily accessible, and
providing the means to present all information about a fund online in
an interactive format that facilitates comparisons of key information,
such as expenses, across different funds and different share classes of
the same fund.\26\ Technology has the potential to replace the current
onesizefitsall mutual fund prospectus with an approach that allows
investors, their financial intermediaries, third party analysts, and
others to tailor the wealth of available information to their particular needs and circumstances.
\21\ See Paul Schott Stevens, President and Chief Executive
Officer, Investment Company Institute, id. at 7071 (stating that
the Internet can serve as ``far more than a standin for paper
documents * * * It can * * *put investors in control when it comes
to information about their investments.''); Don Phillips, Managing
Director, Morningstar, Inc., id. at 49 (discussing ``the ability to
use the Internet as a tool for comparative shopping''); Elisse B.
Walter, Senior Executive Vice President, NASD, id. at 41 (noting
that the Internet ``doesn't force disclosure into one size fits all'').
\22\ Recent surveys show that Internet use among adults is at an
all time high with approximately three quarters of Americans having
access to the Internet. See A Typology of Information and Technology
Users, Pew Internet & American Life Project, at 2 (May 2007),
available at: http://www.pewinternet.org/pdfs/PIP_ICT_Typology.pdf ; Internet Penetration and Impact, Pew Internet &
American Life Project, at 3 (Apr. 2006), available at: http://www.pewinternet.org/pdfs/PIP_Internet_Impact.pdf. Further, while
some have noted a ``digital divide'' for certain groups, see, e.g.,
Susannah Fox, Digital Divisions, Pew Internet & American Life
Project, at 1 (Oct. 5, 2005) (noting that certain groups lag behind
in Internet usage, including Americans age 65 and older, African
Americans, and those with less education), others have noted that
this divide may be diminishing for those groups. See, e.g., Mutual
Fund Shareholders' Use of the Internet, 2006, Investment Company
Institute, Research Fundamentals, at 7 (Oct. 2006), available at:
http://www.ici.org/stats/res/1fmv15n6.pdf (``Recent increases in
Internet access among older shareholders * * * have narrowed the
generational gap considerably. Today, shareholders age 65 or older
are more than twice as likely to have Internet access than in
2000.''); Michel Marriott, Blacks Turn to Internet Highway, And
Digital Divide Starts to Close, The New York Times (Mar. 31, 2006),
available at: http://www.nytimes.com/2006/03/31/us/31divide.html?ex=1301461200&en=6fd4e942aaaa04ad&ei=5088 (``African
Americans are steadily gaining access to and ease with the Internet,
signaling a remarkable closing of the `digital divide' that many
experts had worried would be a crippling disadvantage in achieving success.'').
\23\ See John B. Horrigan, Home Broadband Adoption 2007, Pew
Internet & American Life Project, at 1 (June 2007), available at:
http://www.pewinternet.org/pdfs/PIP_Broadband%202007.pdf (47% of
all adult Americans had a broadband connection at home as of early 2007).
\24\ See Securities Act Release No. 8823 (July 11, 2007) [72 FR
39290 (July 17, 2007)] (adopting rule amendments to enable mutual
funds voluntarily to submit supplemental tagged information
contained in the risk/return summary section of their prospectuses);
Securities Act Release No. 8529 (Feb. 3, 2005) [70 FR 6556 (Feb. 8,
2005)] (adopting rule amendments to enable registrants voluntarily to submit supplemental tagged financial information).
\25\ Exchange Act Release No. 56135 (July 26, 2007) [72 FR 42222 (Aug. 1, 2007)].
\26\ A mutual fund may issue more than one class of shares that
represent interests in the same portfolio of securities with each
class, among other things, having a different arrangement for
shareholder services or the distribution of securities, or both. See
rule 18f3 under the Investment Company Act [17 CFR 270.18f3].
We are proposing an improved mutual fund disclosure framework that is intended to provide investors with information that is easier to use and more readily accessible, while retaining the comprehensive quality of the information that is available today. The foundation of the proposal is the provision to all investors of streamlined and user friendly information that is key to an investment decision. More detailed information would be provided both on the Internet and, upon an investor's request, in paper or by email.
To implement this improved disclosure framework, we are proposing amendments to Form N1A that would require every prospectus to include a summary section at the front of the prospectus, consisting of key information about the fund, including investment objectives and strategies, risks, costs, and performance. This key information has been identified by the participants in the roundtable, by investor research, and by a variety of commentators as information that is important to most investors in selecting mutual funds.\27\ The key information would be required to be presented in plain English in a standardized order. Our intent is that this information would be presented succinctly, in three or four pages at the front of the prospectus.
\27\ See supra notes 16 and 20.
We are also proposing a new option for satisfying prospectus delivery obligations with respect to mutual fund securities under the Securities Act. Under the proposed option, key information would be sent or given to investors in the form of a summary prospectus (``Summary Prospectus''), and the statutory prospectus would be provided on an Internet Web site.\28\ Upon an investor's request, funds would also be required to send the statutory prospectus to the investor. Our intent in proposing this option is that funds take full advantage of the Internet's search and retrieval capabilities in order to enhance the provision of information to mutual fund investors. \28\ A ``statutory prospectus'' is a prospectus that meets the requirements of Section 10(a) of the Securities Act [15 U.S.C. 77j(a)].
Today's proposals have the potential to revolutionize the provision
of information to the millions of mutual fund investors who rely on
mutual funds for their most basic financial needs. The proposals are
intended to help investors who are overwhelmed by the choices among
thousands of available funds described in lengthy and legalistic
documents to readily access key information that is important to an
informed investment decision. At the same time, by harnessing the power
of technology to deliver information in better, more usable formats,
the proposals can help those investors, their intermediaries, third
party analysts, the financial press, and others to locate and compare
facts and data from the wealth of more detailed disclosures that are available.
II. Discussion
A. Proposed Amendments to Form N1A
We are proposing amendments to Form N1A that would require the statutory prospectus of every mutual fund to include a summary section at the front of the prospectus consisting of key information presented in plain English in a standardized order. This presentation is intended to address investors' preferences for concise, userfriendly information. The proposed summary section in a fund's prospectus would provide investors with key information about the fund that investors could use to evaluate and compare the fund. This summary would be located in a standardized, easily accessible place and would be available to all investors, regardless of whether the fund uses a Summary Prospectus and regardless of whether the investor is reviewing the prospectus in a paper or electronic format.
Our proposal builds upon the risk/return summary that is currently
required at the front of every mutual fund prospectus.\29\ The risk/
return summary presents a mutual fund's investment objectives and
strategies, risks, and costs, in a standardized order at the front of
the prospectus. The risk/return summary has, to a significant extent,
functioned effectively to convey this information to investors. As a
result, the current risk/return summary serves as the centerpiece of the proposed prospectus summary section.
\29\ Items 2 and 3 of Form N1A. See Investment Company Act
Release No. 23064 (Mar. 13, 1998) [63 FR 13916, 1391925 (Mar. 23, 1998)] (adopting risk/return summary requirement).
We are, however, proposing to modify the front portion of the
prospectus in two significant ways in order to make it more useful to
investors. First, we are proposing to require that brief additional information be included in
[[Page 67793]]
the summary section of the prospectus so that this section will
function as a more comprehensive presentation. The information required
in the summary section of the prospectus would be the same as that
required in the new Summary Prospectus, and it is key information that
is important to an investment decision. This approach differs from that
used in the current risk/return summary. When the Commission adopted
the risk/return summary, it simultaneously permitted funds to offer
their shares pursuant to a ``profile'' that summarizes key information
about the fund.\30\ While the risk/return summary items were included
in the profile, the profile also included additional information. We
believe that the key information that is important to an investment
decision is the same, whether an investor is reviewing the summary
section of a statutory prospectus or a shortform disclosure document;
and, for that reason, we are proposing to require the same information
in the summary section of the statutory prospectus and in the Summary
Prospectus. In each case, our intent is for funds to prepare a concise
summary (on the order of three or four pages) that will provide comprehensive key information.
\30\ Investment Company Act Release No. 23065 (Mar. 13, 1998)
[63 FR 13968 (Mar. 23, 1998)]. Our proposed amendments would eliminate the profile.
Second, we are proposing to require that the summary information be
presented separately for each fund covered by a multiple fund
prospectus and that the information for multiple funds not be
integrated.\31\ This requirement is intended to assist investors in
finding important information regarding the particular fund in which
they are interested. Currently, in presenting the risk/return summary
information, multiple fund prospectuses may present all of the
investment objectives, investment strategies, and risks for multiple
funds, followed by the performance information for those funds, and,
finally, the fee tables for those funds.\32\ Unfortunately, in
practice, this flexibility has too frequently resulted in lengthy
presentations that are not summary in nature and from which an investor
would have considerable difficulty extracting the information about the
particular fund in which he or she is interested. In practice, multiple
fund prospectuses have integrated information for as many as 40 funds,
and we are concerned that it would be extremely difficult, if not
impossible, to achieve our goal of short summaries on the order of
three or four pages if those summaries were permitted to contain information about multiple funds.
\31\ Proposed General Instruction C.3.(c)(ii) of Form N1A. \32\ General Instruction C.3.(c) of Form N1A.
The proposed requirement that summary information be separately presented for each fund in a multiple fund prospectus is intended to address the problem of lengthy, complex multiple fund prospectuses in the least intrusive manner possible. Multiple fund prospectuses contribute substantially to prospectus length and complexity, which act as barriers to investor understanding. Rather than eliminate altogether the ability to use multiple fund prospectuses, which could have more significant cost and other implications than our proposal, we concluded that it was preferable to propose to require a selfcontained summary section for each fund.
The Commission is committed to encouraging statutory prospectuses that are simpler, clearer, and more useful to investors. The proposed prospectus summary section is intended to provide investors with streamlined disclosure of key mutual fund information at the front of the statutory prospectus, in a standardized order that facilitates comparisons across funds. We are proposing the following amendments to Form N1A in order to implement the summary section.
1. General Instructions to Form N1A
We are proposing amendments to the General Instructions to Form N 1A to address the proposed new summary section of the statutory prospectus. These proposed amendments address plain English and organizational requirements.
We propose to amend the General Instructions to state that the
summary section of the prospectus must be provided in plain English
under rule 421(d) under the Securities Act.\33\ Rule 421(d) requires an
issuer to use plain English principles in the organization, language,
and design of the front and back cover pages, the summary, and the risk
factors sections of its prospectus.\34\ The amended instruction would
serve as a reminder that the new prospectus summary section is subject
to rule 421(d). The use of plain English principles in the new summary
section will further our goal of encouraging funds to create usable
summaries at the front of their prospectuses. The prospectus, in its
entirety, also would remain subject to the requirement that the
information be presented in a clear, concise, and understandable manner.\35\
\33\ Proposed General Instruction B.4.(c) of Form N1A; 17 CFR 230.421(d).
\34\ Rule 421(d) requires the use of the following plain English
principles: (1) Short sentences; (2) definite, concrete, everyday
words; (3) active voice; (4) tabular presentation or bullet lists
for complex material, wherever possible; (5) no legal jargon or
highly technical business terms; and (6) no multiple negatives.
\35\ Pursuant to rule 421(b), the following standards must be
used when preparing prospectuses: (1) Present information in clear,
concise sections, paragraphs, and sentences; (2) use descriptive
headings and subheadings; (3) avoid frequent reliance on glossaries
or defined terms as the primary means of explaining information in
the prospectus; and (4) avoid legal and highly technical business terminology. 17 CFR 230.421(b).
We are also proposing amendments to the organizational requirements of the General Instructions. The proposals would require mutual funds to disclose the summary information in numerical order at the front of the prospectus and not to precede this information with any information other than the cover page or table of contents.\36\ Information included in the summary section need not be repeated elsewhere in the prospectus. While a fund may continue to include information in the prospectus that is not required, a fund may not include any such additional information in the summary section of the prospectus.\37\ \36\ Proposed General Instruction C.3.(a) to Form N1A.
\37\ Proposed General Instruction C.3.(b) of Form N1A.
As noted above, we are also proposing that a multiple fund
prospectus be required to present all of the summary information for
each fund sequentially and not integrate the information for more than
one fund.\38\ That is, a multiple fund prospectus would be required to
present all of the summary information for a particular fund together,
followed by all of the summary information for each additional fund.
For example, a multiple fund prospectus would not be permitted to
present the investment objectives for several funds followed by the fee
tables for several funds. A multiple fund prospectus would be required
to clearly identify the name of the particular fund at the beginning of the summary information for the fund.
\38\ Proposed General Instruction C.3.(c)(ii) of Form N1A; see supra note and accompanying text.
As is the case with the current risk/return summary, the proposed
instructions would permit a fund with multiple share classes, each with
its own cost structure, to present the summary information separately
for each class, to integrate the information for multiple classes, or
to use another presentation that is consistent with disclosing the
summary information in a standard order at the beginning of the [[Page 67794]]
prospectus.\39\ Generally, this flexibility has resulted in effective
presentations of classspecific cost and performance information that facilitate comparisons among classes.
\39\ Proposed General Instruction C.3.(c)(ii) of Form N1A.
Finally, we are proposing to eliminate the provisions of Form N1A
that permit a fund to omit detailed information about purchase and
redemption procedures from the prospectus and to provide this
information in a separate document that is incorporated into and
delivered with the prospectus.\40\ This option appears to be
unnecessary in light of the proposed new Summary Prospectus which could
be used, at a fund's option, along with any additional sales materials,
including a document describing purchase and redemption procedures.\41\
In addition, the option to provide a separate purchase and redemption
document has been used infrequently since its adoption. We are also
proposing to eliminate a similar provision in the requirements for the
statement of additional information (``SAI'').\42\ The proposed
elimination of these provisions does not otherwise alter the
information about purchase and redemption procedures that must appear
in the fund's prospectus and SAI, and this information would continue to be required in those documents.
\40\ Instruction 6 to Item 1(b) of Form N1A; Item 6(g) of Form
N1A; Investment Company Act Release No. 23064, supra note , 63 FR at 1393233.
\41\ See infra notes 87 through 90 and accompanying text.
\42\ Instruction to Item 18(a) of Form N1A; proposed Item 24(a)
of Form N1A (redesignating current Item 18(a) and eliminating Instruction).
We request comment on the proposed amendments to the General Instructions, and in particular on the following issues:
2. Information Required in Summary Section
The summary section of a mutual fund statutory prospectus would consist of the following information: (1) Investment objectives; (2) costs; (3) principal investment strategies, risks, and performance; (4) top ten portfolio holdings; (5) investment advisers and portfolio managers; (6) brief purchase and sale and tax information; and (7) financial intermediary compensation. This information is largely drawn from the current risk/return summary and fund profile.
Investment Objectives and Goals
Like the current risk/return summary, the proposed summary section
would begin with disclosure of a fund's investment objectives or goals.
A fund also would be permitted to identify its type or category (e.g., that it is a money market fund or balanced fund).\43\
\43\ Proposed Item 2 of Form N1A; Item 2(a) of Form N1A; rule
498(c)(2)(i). See Investment Company Act Release No. 23064, supra
note 29, 63 FR 1391920 (adopting investment objectives or goals disclosure requirement in Item 2(a) of Form N1A).
Fee Table
The fee table and example, which are drawn from the current risk/
return summary and which disclose the costs of investing, would
immediately follow the fund's investment objectives.\44\ In order to
address continuing concerns about investor understanding of mutual fund
costs,\45\ we are proposing several modifications to the current fee
table that are intended to provide greater prominence to the cost disclosures and make the table more understandable.
\44\ Proposed Item 3 of Form N1A; Item 3 of Form N1A; rule 498(c)(2)(iv).
\45\ See Barbara Roper, Director of Investor Protection,
Consumer Federation of America, June 12 Roundtable Transcript, supra
note 15, at 21; James J. Choi, David Laibson, & Brigitte C. Madrian,
National Bureau of Economic Research, Why Does the Law of One Price
Fail? An Experiment on Index Mutual Funds, at 6 (May 2006),
available at: http://www.nber.org/papers/w12261.pdf.
We are proposing to move the fee table forward from its current
location, which follows information about investment strategies, risks,
and past performance. Contrary to our intent in including the fee table
in the risk/return summary, this information has sometimes appeared
fairly deep within the prospectus, particularly in multiple fund
prospectuses covering a large number of funds. The proposed change to
the location of the fee table, together with the proposed requirement
that the summary section for each fund be provided separately, should
serve to enhance the prominence of the cost information. The fee table
and example are designed to help investors understand the costs of
investing in a fund and to compare those costs with the costs of other
funds. Placing the fee table and example at the front of the summary
information reflects the importance of costs to an investment decision.\46\
\46\ For example, a 1% increase in annual fees reduces an investor's return by approximately 18% over 20 years.
We are proposing several additional amendments to the fee table
that are intended to improve the disclosure that investors receive
regarding fees and expenses of the fund. First, we are proposing that
mutual funds that offer discounts on frontend sales charges for volume
purchases (socalled ``breakpoint discounts'') include brief narrative
disclosure alerting investors to the availability of those
discounts.\47\ Several years ago, the Commission and NASD staffs
identified concerns regarding the extent to which mutual fund investors
were receiving breakpoint discounts to which they were entitled. The
Commission adopted enhanced prospectus disclosure requirements regarding breakpoint
[[Page 67795]]
discounts at that time.\48\ We believe that investor awareness of the
availability of these discounts may be heightened further by requiring
brief narrative disclosure about the availability of these discounts at the beginning of the fee table.
\47\ Proposed Item 3 of Form N1A; proposed Instruction 1(b) to proposed Item 3 of Form N1A.
\48\ See Investment Company Act Release No. 26464 (June 7, 2004) [69 FR 33262 (June 14, 2004)].
Second, we are proposing to revise the heading ``Annual Fund
Operating Expenses'' in the fee table. Specifically, we propose to
revise the parenthetical following the heading to read ``ongoing
expenses that you pay each year as a percentage of the value of your
investment'' in place of ``expenses that are deducted from Fund
assets.'' In recent years, we have taken significant steps to address
concerns that investors do not understand that they pay ongoing costs
every year when they invest in mutual funds, including requiring
disclosure of ongoing costs in shareholder reports.\49\ Our proposed
revision further addresses those concerns by making clear that the
expenses in question are paid by investors as a percentage of the value of their investments in the fund.
\49\ Item 22(d)(1) of Form N1A; Investment Company Act Release
No. 26372 (Feb. 27, 2004) [69 FR 11244 (Mar. 9, 2004)] (adopting
disclosure of ongoing costs in shareholder reports). See also
General Accounting Office report on Mutual Fund Fees: Additional
Disclosure Could Encourage Price Competition, at 6681 (June 2000),
available at: http://www.gao.gov/archive/2000/gg00126.pdf
(discussing lack of investor awareness of the fees they pay and
investor focus on mutual fund sales charges rather than ongoing fees).
Third, for funds other than money market funds, the proposal would
require the addition of brief disclosure regarding portfolio turnover
immediately following the fee table example.\50\ A fund would be
required to disclose its portfolio turnover rate for the most recent
fiscal year, as a percentage of the average value of its portfolio.
This numerical disclosure would be accompanied by a brief explanation
of the effect of portfolio turnover on transaction costs and fund
performance. The prospectus currently is required to include the
portfolio turnover rate in the financial highlights table as well as
narrative information about portfolio turnover,\51\ and the effect of
transaction costs is reflected in fund performance. Nonetheless, some
concerns have been expressed in recent years regarding the degree to
which investors understand the effect of portfolio turnover, and the
resulting transaction costs, on fund expenses and performance.\52\ Our
proposal to require brief portfolio turnover disclosure in the summary
section of the prospectus is intended to address these concerns.
\50\ Proposed Instruction 5 to proposed Item 3 of Form N1A.
\51\ Instruction 7 to Item 4(b)(1) of Form N1A; Item 8(a) of
Form N1A; Item 11(e) of Form N1A. The portfolio turnover rate that
would be required to be disclosed in the summary section would be
calculated in the same manner that is currently required in Form N 1A.
\52\ See Investment Company Act Release No. 26313 (Dec. 18,
2003) [68 FR 74820 (Dec. 24, 2003)] (request for comment regarding
ways to improve disclosure of transaction costs); Report of the
Mutual Fund Task Force on Soft Dollars and Portfolio Transaction
Costs (Nov. 11, 2004), available at: http://www.finra.org/web/groups/rules_regs/documents/rules_regs/p012356.pdf .
Finally, we are proposing to amend the requirement that a fund disclose in its fee table gross operating expenses that do not reflect the effect of expense reimbursement or fee waiver arrangements, which result in reduced expenses being paid by the fund.\53\ While gross operating expenses may provide investors with a more accurate understanding of the potential longterm costs of an investment in the fund, they may also overstate the actual, current expenses. In addition, gross operating expenses may overstate longterm expenses because any expense increase due to the termination of an expense reimbursement or fee waiver arrangement may be offset by reduced expenses that accompany economies of scale resulting from asset growth. \53\ Instructions 3(d)(i) and 5(a) to Item 3 of Form N1A. In an expense reimbursement arrangement, the adviser reimburses the fund for expenses incurred. Under a fee waiver arrangement, the adviser agrees to waive a portion of its fees in order to limit fund expenses.
To address these issues, we are proposing to permit a fund to place
two additional captions directly below the ``Total Annual Fund
Operating Expenses'' caption in cases where there were expense
reimbursement or fee waiver arrangements that reduced fund operating
expenses and that will continue to reduce them for no less than one
year from the effective date of the fund's registration statement.\54\
One caption would show the amount of the expense reimbursement or fee
waiver, and a second caption would show the fund's net expenses after
subtracting the fee reimbursement or expense waiver from the total fund
operating expenses. Funds that disclose these arrangements would also
be required to disclose the period for which the expense reimbursement
or fee waiver arrangement is expected to continue, and briefly describe
who can terminate the arrangement and under what circumstances.
Further, in computing the fee table example, a fund would be permitted
to reflect any expense reimbursement or fee waiver arrangements that
reduced any fund operating expenses during the most recently completed
calendar year and that will continue to reduce them for no less than
one year from the effective date of the fund's registration
statement.\55\ This adjustment could be reflected only in the periods
for which the expense reimbursement or fee waiver arrangement is
expected to continue. For example, if such an arrangement were expected
to continue for one year, then, in the computation of 10year expenses
in the fee table example, the arrangement could only be reflected in the first of the 10 years.
\54\ Proposed Instructions 3(e) and 6(b) to proposed Item 3 of Form N1A.
\55\ Proposed Instruction 4(a) to proposed Item 3 of Form N1A.
We also propose a technical amendment to the instructions to the
expense example to eliminate language permitting funds to reflect
the impact of the amortization of initial organization expenses in
the expense example numbers. Id. This language is unnecessary
because initial organization expenses must be expensed as incurred
and may no longer be capitalized. See American Institute of
Certified Public Accountants, Statement of Position 985, Reporting on the Costs of StartUp Activities (Apr. 3, 1998).
Investments, Risks, and Performance
Following the fee table and example, we are proposing that a fund
disclose its principal investment strategies and risks,\56\ in the same
manner required in the current risk/return summary.\57\ This would
include the current risk/return bar chart and table illustrating the
variability of returns and showing the fund's past performance.
\56\ Proposed Item 4 of Form N1A. To conform to other changes
we are proposing to Form N1A, the Instructions to proposed Item 4
contain technical revisions that (1) amend crossreferences to other
Items in Form N1A; and (2) eliminate language related to the
presentation of performance information for more than one fund,
given the proposed requirement that information for each fund be
presented separately. Proposed Instructions 2(e) and 3 to proposed Item 4(b)(2) of Form N1A.
\57\ Items 2(b) and (c) of Form N1A.
Portfolio Holdings
The proposed summary section would next need to include a list of
the 10 largest issues contained in the fund's portfolio, in descending
order, together with the percentage of net assets represented by
each.\58\ Information concerning portfolio holdings may provide
investors with a greater understanding of a fund's stated investment
objectives and strategies and may assist investors in making more
informed asset allocation decisions. It was suggested at our roundtable
that it may be appropriate to include this information, which currently
is not contained in the prospectus, in a short summary of key fund information.\59\ In
[[Page 67796]]
addition, many funds and third party analysts include top 10 portfolio
holdings in fund summaries distributed to investors and prominently on
their Web sites, suggesting significant investor interest in this
information. While complete portfolio holdings information currently is
available in Commission filings on Form NCSR and Form NQ on a
quarterly basis,\60\ we believe that the top 10 holdings may be
important information in the summary section of the prospectus, which
is intended to bring together, in a single, readily accessible place,
key information that is important to an investment decision. \58\ Proposed Item 5 of Form N1A.
\59\ See Henry H. Hopkins, Vice President and Chief Legal
Counsel, T. Rowe Price Group, Inc., June 12 Roundtable Transcript,
supra note 15, at 32 (suggesting that the current profile be amended to include the top 10 portfolio holdings).
\60\ Form NCSR [17 CFR 249.331; 17 CFR 274.128]; Form NQ [17 CFR 249.332; 17 CFR 274.130].
Mutual funds would be required to provide their top 10 portfolio
holdings as of the end of the most recent calendar quarter.\61\ In
determining their top 10 holdings, funds would be required to aggregate
and treat as a single issue (1) all fully collateralized repurchase
agreements; and (2) all securities of any one issuer (other than fully
collateralized repurchase agreements).\62\ The U.S. Treasury and each
agency, instrumentality, or corporation, including each government
sponsored entity, that issues U.S. government securities would be treated as a separate issuer.\63\
\61\ Proposed Instruction 1 to proposed Item 5 of Form N1A.
\62\ This proposed aggregration provision is the same as that
currently applicable for purposes of determining whether the value
of an issue exceeds one percent of net asset value in the summary
portfolio schedule that may be included in a fund's report to
shareholders. Schedule VI of Regulation SX [17 CFR 210.1212C]
(Summary of Schedule of Investments in Securities of Unaffiliated Issuers).
\63\ Proposed Instruction 2 to proposed Item 5 of Form N1A.
We are proposing an exclusion to the requirement to list the top 10
holdings that is similar to an exclusion in the current requirements
for quarterly disclosure of a fund's complete portfolio holdings.\64\
Funds rely on this exclusion to guard against the premature release of
certain positions that could lead to frontrunning and other predatory
trading practices.\65\ Currently, a fund's complete portfolio schedule
filed with the Commission on Form NCSR or Form NQ 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\ Note 1 to Schedule I of Regulation SX [17 CFR 210.1212]
(Schedule of Investments in Securities of Unaffiliated Issuers);
Note 5 to Schedule VI of Regulation SX [17 CFR 210.1212C] (Summary
of Schedule of Investments in Securities of Unaffiliated Issuers).
\65\ Investment Company Act Release No. 26372, supra note 49, 69 FR at 11250.
Under the proposal, in listing the top 10 holdings, 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 could
be listed in one amount as ``Miscellaneous securities,'' provided that
the securities so listed are eligible to be categorized by the fund as
``Miscellaneous securities'' in a complete portfolio schedule dated as
of the end of the most recent calendar quarter. 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 in the top 10 portfolio
holdings, the remaining securities of that group must nonetheless be
listed in the top 10 portfolio holdings, 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 is sufficient to cause them to be among the 10 largest issues,
but the value of the remaining securities alone is not sufficient to
cause the remaining securities to be among the 10 largest issues). A
brief footnote explaining the term ``Miscellaneous securities'' would be required.\66\
\66\ Proposed Instruction 3 to proposed Item 5 of Form N1A. Management
The next item in the proposed prospectus summary section would be
the name of each investment adviser and subadviser of the fund,
followed by the name, title, and length of service of the fund's
portfolio managers.\67\ These items are similar to disclosures
currently required in a fund profile, as well as in the fund's prospectus.\68\
\67\ Proposed Item 6 of Form N1A.
\68\ Item 5 of Form N1A; rule 498(c)(2)(v). Additional
disclosures regarding investment advisers and portfolio managers
that are currently required in the prospectus would continue to be
required, but not in the summary section. Proposed Item 11(a) of Form N1A.
As in the current profile, a fund would not be required to identify
a subadviser whose sole responsibility is limited to daytoday
management of the fund's cash instruments unless the fund is a money
market fund or other fund with a principal investment strategy of
regularly holding cash instruments.\69\ Also as in the current profile,
a fund having three or more subadvisers, each of which manages a
portion of the fund's portfolio, would not be required to identify each
subadviser, except that the fund would be required to identify any
subadviser that is (or is reasonably expected to be) responsible for
the management of a significant portion of the fund's net assets.\70\
We believe that, as in the current profile, a significant portion of
the fund's net assets for this purpose generally should be deemed to be
30% or more of the fund's net assets.\71\ The portfolio managers
required to be listed would be the same ones with respect to which information is currently required in the prospectus.\72\
\69\ Proposed Instruction 1 to proposed Item 6(a) of Form N1A;
rule 498(c)(2)(v)(B)(1). A fund would continue to be required to
provide the name, address, and experience of all subadvisers
elsewhere in the prospectus. Proposed Item 11(a)(1)(i) of Form N1A.
\70\ Proposed Instruction 2 to proposed Item 6(a) of Form N1A; rule 498(c)(2)(v)(B)(2).
\71\ This proposed exception would be consistent with the
requirements of the current profile. Rule 498(c)(2)(v)(B)(2). \72\ Item 5(a)(2) of Form N1A.
Purchase and Sale of Fund Shares
The proposed summary section would next disclose the fund's minimum
initial or subsequent investment requirements and the fact that the
fund's shares are redeemable, and would identify the procedures for
redeeming shares (e.g., on any business day by written request,
telephone, or wire transfer).\73\ This disclosure would be the same as
that required in the current rule 498 profile except that we are not
proposing to include certain fee disclosures that are also covered by
the fee table, including a fund's sales loads, breakpoints, and charges upon redemption.\74\
\73\ Proposed Item 7 of Form N1A.
\74\ See rules 498(c)(2)(vi) and (vii) (profile purchase and sale disclosures).
Tax Information
Our proposals would require a mutual fund to state, as applicable,
that it intends to make distributions that may be taxed as ordinary
income or capital gains or that the fund intends to distribute tax
exempt income. A fund that holds itself out as investing in securities
generating taxexempt income would be required to provide, as
applicable, a general statement to the effect that a portion of the fund's
[[Page 67797]]
distributions may be subject to federal income tax.\75\ This proposed
disclosure is a streamlined version of the tax disclosure required in the current rule 498 profile.\76\
\75\ Proposed Item 8 of Form N1A.
\76\ See rule 498(c)(2)(viii). The current rule 498 profile also
requires (1) a description of how frequently the fund intends to make distributions and what options for reinvestment of
distributions are available to investors; (2) a statement that
distributions may be taxable at different rates depending on the
length of time that the fund holds its assets; and (3) that if a
fund expects that its distributions primarily will consist of
ordinary income or capital gains, disclosure to that effect be
provided. This disclosure would continue to be required in the statutory prospectus. Proposed Items 12(d) and (f)(1)(i)
(redesignating current Items 6(d) and (f)(1)(i)).
Financial Intermediary Compensation
The proposed summary section of the prospectus would conclude with
the following statement, which could be modified provided that the modified statement contains comparable information.\77\
\77\ Proposed Item 9 of Form N1A.
``Payments to BrokerDealers and Other Financial Intermediaries
If you purchase the Fund through a brokerdealer or other
financial intermediary (such as a bank), the Fund and its related
companies may pay the intermediary for the sale of Fund shares and
related services. These payments may influence the brokerdealer or
other intermediary and your salesperson to recommend the Fund over
another investment. Ask your salesperson or visit your financial intermediary's Web site for more information.''
This disclosure would be new to fund prospectuses and would identify
the existence of compensation arrangements with selling brokerdealers
or other financial intermediaries, alert investors to the potential
conflicts of interest arising from these arrangements, and direct
investors to their salesperson or the financial intermediary's Web site
for further information. It is intended to address, in part, concerns
that mutual fund investors lack adequate information about certain
distributionrelated costs that create conflicts for brokerdealers and their associated persons.\78\
\78\ The Commission has recognized these concerns in a separate
initiative in which the Commission proposed to require, among other
things, disclosure of mutual fund distributionrelated costs and
conflicts of interest by selling brokerdealers and other financial
intermediaries at the point of sale. Securities Act Release No. 8544
(Feb. 28, 2005) [70 FR 10521 (Mar. 4, 2005)]; Securities Act Release
No. 8358 (Jan. 29, 2004) [69 FR 6438 (Feb. 10, 2004)]. One commenter
to that proposal recommended use of a shortform disclosure document
that would include, among other things, basic information about such
potential conflicts of interest. Comment Letter of NASD, dated March
31, 2005, available at: http://www.sec.gov/rules/proposed/s70604/nasd033005.pdf (supporting the use of a ``profile plus'' document on
the Internet). See also supra note 16.
We request comment generally on the information proposed to be
included in the summary section of the statutory prospectus, and in particular on the following issues:
\80\ Cf. Instruction 7 to Item 4 of Form N1A.
[[Page 67798]]
should be required in the summa
FOR FURTHER INFORMATION CONTACT Kieran G. Brown, Senior Counsel; Sanjay Lamba, Senior Counsel; Tara R. Buckley, Branch Chief; or Brent J. Fields, Assistant Director, Office of Disclosure Regulation, Division of Investment Management, at (202) 5516784, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 205495720.
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