January 7, 1991
TO: SEC RULES COMMITTEE NO. 4-91
RE: ARIZONA DISCLOSURE FOR HIGH YIELD BOND FUNDS
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The Institute was informed recently that the Arizona
Securities Division was requiring certain investment companies
investing in high yield bonds to include a legend stating "THESE
ARE SPECULATIVE SECURITIES" on the outside front cover of its
prospectus pursuant to Rule 118B of the Division. The legend is
required for any investment company that invests over thirty-five
percent of its assets in high yield bonds. Investment companies
investing less than thirty-five percent of its assets in high
yield bonds will generally not be required to include the
disclosure in its prospectus; however, the staff of the Division
may require the statement to be included if after a review of the
composition of the investment company’s portfolio, it deems such
to be necessary.
The Institute wrote to the Division questioning the
applicability of this disclosure since high yield debt securities
are not included in the seven types of "speculative securities"
listed in Rule 118B. In addition, the Institute noted that the
Securities and Exchange Commission requires detailed and specific
prospectus disclosure by high yield bond funds and that the
Arizona disclosure was unnecessary for the protection of
investors. Therefore, the letter stated, such disclosure should
not be required to be included in a fund’s prospectus.
However, in a letter responding to the Institute, the
Division stated that it will continue to require the statement
"THESE ARE SPECULATIVE SECURITIES" to be included on the outside
front cover of the prospectus of any investment company that
invests over thirty-five percent of its assets in high yield
bonds.
Attached are copies of Rule 118B of the Arizona Securities
Division, the Institute’s letter to the Division dated December
18, 1990 and the Division’s letter to the Institute dated
December 31, 1990.
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We will keep you advised of developments.
Patricia Louie
Assistant General Counsel
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