March 13, 1990
TO: BOARD OF GOVERNORS NO. 17-90
SEC RULES MEMBERS NO. 21-90
OPERATIONS MEMBERS NO. 8-90
ACCOUNTING/TREASURERS MEMBERS NO. 7-90
ADVERTISING SUBCOMMITTEE
FORM N-1A TASK FORCE
RE: INSTITUTE COMMENT LETTER ON PROPOSED AMENDMENTS TO FORM N-1A
__________________________________________________________
As we previously informed you, the SEC has proposed
amendments to Form N-1A, the mutual fund registration statement.
(See Memorandum to Board of Governors No. 3-90, SEC Rules Members
No. 2-90, Operations Members No. 2-90 and Accounting/Treasurer
Members No. 1-90, dated January 9, 1990.) The proposed
amendments would require funds to include prospectus disclosure
of the name and background of all persons who "significantly
contribute" to the fund's investment advice. The release also
contained two alternative proposals concerning disclosure of past
performance and would amend the per share table in the
prospectus.
Attached is a copy of the Institute's comment letter, which
was submitted March 12, 1990. The Institute had several comments
on the proposals, which are summarized below.
Per Share Table
The Institute supported the proposed amendments to the per
share table, which would simplify the table and add annual total
return information, stating that the changes would provide
material information and make the table more understandable.
Portfolio Managers
The Institute supported the concept of disclosing the
identity of advisory personnel where appropriate but opposed the
Commission's proposal to require prospectus disclosure of
information concerning all persons who make "significant
contributions to the investment advice provided to the
2registrant". The Institute's letter stated that this would
result in meaningless disclosure (since it would require
disclosure of numerous non-essential personnel) and burdensome
costs (since funds would have to "sticker" whenever there was a
change in personnel.)
Instead, the Institute proposed that information on
advisory personnel be set forth in prospectuses only in those
instances (1) where the success of the fund may be, to a large
extent, contingent upon retaining those persons and (2) where the
organization actively promotes those persons to the press or the
public as being critical to the success of the fund. (This test
is similar, though not identical, to that proposed by the
Institute in its comment letter on the proposed amendments to
Form N-2, the registration form for closed-end investment
companies.) The Institute argued that this test is closer to the
Commission's stated goals in the Release.
"Management's Discussion and Analysis"
The release contained two alternative proposals concerning
disclosure of past fund performance. The first would require a
narrative "management's discussion and analysis." The Institute
opposed this proposal, which would require fund managers to
conduct a subjective self-evaluation of their own past
performance and is required of no other issuer. However, the
Institute endorsed a requirement for fund annual reports to
contain a discussion of factors and strategies that affected past
performance, provided that the discussion not be required to
include an evaluation of that performance or be required to be
incorporated by reference into the prospectus.
Comparison with an Index
The Commission's alternative proposal would require funds
to compare their one, five and ten year total returns (or yields,
in the case of money market funds) to an "appropriate securities
index." The Institute flatly opposed this proposal on the
grounds that (1) it would violate a basic tenet of prospectus
disclosure by requiring disclosure not concerning the issuer, (2)
the determination of an "appropriate" index is subjective and,
for many funds, there will be no appropriate index and (3) the
comparision is inappropriate, as funds would be required to
deduct all expenses while the performance of the index would be
on a cost-free basis.
Distribution Policies
3The Institute generally supported the proposal that all
funds disclose the effects of any policy of fixed distributions.
Other
The Institute's letter also commented on various changes to
Rule 34b-1, governing supplemental sales literature, and endorsed
the proposed automatic incorporation by reference in the
registration statement of subsequently filed annual reports.
* * *
The Institute would appreciate receiving copies of any
comment letters filed by members. Please send any copies to
Michael Branch at the Institute.
We will keep you informed of developments.
Craig S. Tyle
Associate General Counsel
Attachment