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January 19, 1990
TO: SEC RULES MEMBERS NO. 4-90
ACCOUNTING/TREASURERS MEMBERS NO. 2-90
CLOSED-END FUND MEMBERS NO. 1-90
OPERATIONS MEMBERS NO. 3-90
RE: SEC STAFF ISSUES GENERIC COMMENT LETTER
__________________________________________________________
The Division of Investment Management issued the attached
letter to the investment company industry to provide guidance on
the filing of registration statements and post-effective
amendments. The letter is a compilation of the staff's positions
on filing procedures and certain disclosure requirements of
mutual funds, closed-end funds and unit investment trusts. (For
a more complete discussion of the item concerning unit investment
trusts, see Memorandum to Unit Investment Trust Members No. 3-90,
dated January 17, 1990.) Summarized below are several of the
significant comments included in the letter. Please refer to the
letter for a more complete discussion of the staff's views.
I. Filing Requirements
A. Updating the Registration Statement
In connection with filing post-effective amendments under
rule 485(a) of the Securities Act of 1933 (the "Act"), the staff
has requested that registrants use the selective review
procedures to expedite the processing of post-effective
amendments. The appropriate level of review will then be
determined by the branch based on the available information.
The staff also reminded registrants that filings made under
485(b) must include the appropriate certification on the
signature page and, if applicable, the requisite counsel's
representation concerning the eligibility of the registrant to
rely on paragraph (b) of the rule. Furthermore, the staff noted
that the facing page should be marked to indicate that the filing
is being made under paragraph (b).
B. 24f-2 Notices
The staff reiterated that rule 24f-2 requires that 24f-2
Notices be filed within two months (not 60 days) after the close
of the fund's fiscal year to be able to net redemptions against
purchases in order to offset the fee. For example, the
Commission must receive the Notice from a fund that has a
December 31 fiscal year-end by February 28 for the fund to be
able to net against sales in calculating the fee. The staff also
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commented that all 24f-2 Notices must include an opinion of
counsel as to the legality of the securities being registered.
II. Disclosure Comments
A. Risk Disclosure
The staff noted that the discussion in the prospectus of
the risk factors associated with the fund should appear under the
caption "Risk Factors," as opposed to "Special Considerations."
Funds that invest in high-yield bonds are advised to include a
discussion of the risk factors inherent in such investments in a
manner consistent with the staff's views set forth in its October
3 letter concerning the appropriate disclosure of those risks.
B. Valuation and Liquidation
Funds are reminded that matrix pricing used to value debt
securities should not ignore a reliable market quotation of an
actively traded security.
The staff also expressed the view that it considers
municipal lease securities to be illiquid and reminded funds that
they may invest only 10% of its assets in illiquid securities.
The letter further states that funds must clearly disclose its
policy of investing in illiquid securities and its procedures for
valuing securities. For guidance on this disclosure, the staff
refers registrants to Guides 11, 12, 13 and 28 to Form N-1A.
C. Account Transfers
The letter requires certain disclosure in the prospectus
concerning the transferring of fund shares between broker/dealer
street name accounts. If such shares cannot be transferred,
then the prospectus must disclose the alternatives available to
the shareholder. Disclosure is also required of the impact, if
any, on the ability of a proprietary fund shareholder to transfer
shares to a broker/dealer which has not entered into a selling
agreement with the fund or to purchase additional shares after an
account has been transferred.
D. Contingent Offerings
Funds which offer shares on a contingency basis are
reminded that they must satisfy the requirements of rules 10b-9
and 15c2-4 under the Securities Exchange Act of 1934. These
rules require, among other things, that a subscriber's funds be
placed in a separate bank account and also limit the types of
investments that can be made with the funds in the bank account
pending transfer to the issuer or refund to the subscriber.
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E. Redemptions
The letter requires funds that offer a telephone redemption
privilege to include a complete discussion in the prospectus of
the privilege including the procedures for redeeming by telephone
and the fees associated with doing so.
F. Dividend Reinvestment Plans
Funds are required to clearly disclose the amount of any
sales load imposed upon the reinvestment of dividends. Although
the example in the per share table should be prepared without
reflecting the sales load on reinvested dividends, the narrative
following the table must disclose that the sales load is not
reflected in the example and that the amounts would be increased
if it had been included.
G. Prospectus Simplification
The letter encourages funds to review the disclosure in
their prospectuses to identify areas in which it may be reduced
or deleted. The staff identified three specific areas of
disclosure on which funds should focus. These areas of
disclosure concern repurchase agreements, options and futures
transactions and arrangements subject to the Glass-Steagall Act
restrictions.
III. Closed-End Funds
A. Discount
The staff is requiring all closed-end funds to prominently
disclose in the prospectus summary that shares of closed-end
funds frequently trade at a discount from net asset value and to
discuss the risks of purchasing shares in an initial offering
which may trade at a discount in the secondary market. The staff
also refers registrants to the release issued last summer
proposing revisions to Form N-2 for guidance on disclosure
matters relevant to their offerings.
B. Rule 430A
The letter states that during the registration process, the
staff will seek certain information from funds relying on rule
430A under the Act such as what data will be omitted from the
final pre-effective amendment. The staff also notes that funds
relying on rule 415 under the Act must furnish the undertaking
required by item 512(a) of Regulation S-K concerning the filing
of a post-effective amendment, if necessary.
Amy B. Rosenblum
Assistant General Counsel
Attachment