January 22, 1991
TO: ACCOUNTING/TREASURERS MEMBERS NO. 1-91
CLOSED-END FUND MEMBERS NO. 2-91
OPERATIONS MEMBERS NO. 1-91
SEC RULES MEMBERS NO. 2-91
UNIT INVESTMENT TRUST MEMBERS NO. 2-91
RE: SEC STAFF ISSUES SECOND GENERIC COMMENT LETTER
__________________________________________________________
The Division of Investment Management recently issued a
second "generic comment letter" to investment company registrants
intended to provide guidance on disclosure filings. A copy of
the letter is attached. The letter covers only developments in
the staff’s views on disclosure since January 1990, when the
staff issued its first generic comment letter. Accordingly,
registrants also should refer to that letter for guidance on the
staff’s views. (The Institute distributed copies of the first
letter last year. See Memorandum to SEC Rules Members No. 4-90,
Accounting/Treasurers Members No. 2-90, Closed-End Fund Members
No. 1-90 and Operations Members No. 3-90, dated January 19, 1990
and Memorandum to Unit Investment Trust Members No. 3-90, dated
January 17, 1990.)
Set forth below is a brief summary of certain of the items
discussed in the letter. Please refer to the letter itself for a
more complete discussion of the staff’s views.
I. PROCEDURAL COMMENTS
Prospectus Delivery. The staff stated that the practice of
sending copies of any new prospectus to all shareholders each
time it is updated satisfies the prospectus delivery requirements
of the federal securities laws. In connection with "stickered"
prospectuses, funds and their counsel are instructed to consider
the nature and materiality of the new disclosure in determining
whether to send copies to shareholders.
Undertakings. The letter states that a registrant filing
an initial Form N-1A (or a post-effective amendment to add a new
series) must undertake to file a post-effective amendment
containing reasonably current financial statements within four to
six months. Any such registrant also must undertake to hold a
meeting of public shareholders to consider election of directors,
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ratification of accountants, approval of investment advisory or
similar contracts and approval of any 12b-1 plan. As recommended
by the Institute, the staff clarified that, in the case of
registrants adding a new series, shareholders of that series need
only consider the advisory (or similar) contract and any 12b-1
plan. The staff also has revised its policy on how soon this
shareholder’s meeting is required to be held. As we previously
informed you, the time period is now sixteen months from the date
of effectiveness or commencement of operations, whichever is
later. (See Memorandum to SEC Rules Members No. 84-90, dated
December 11, 1990.)
Incorporation by Reference. As recommended by the
Institute, the staff has clarified that the requirement to
include copies of annual reports in filings where financial
statements are incorporated by reference from the annual reports
is not applicable to EDGAR filings where the annual report has
been filed electronically. The letter notes that copies of
incorporated materials do not have to accompany prospectuses
delivered to investors if they have been previously delivered and
the prospectus includes a statement at the place of incorporation
that the incorporated material will be furnished upon request at
no charge.
Rule 24f-2. The letter states that a registrant ceasing
operations must file both a post-effective amendment terminating
its Rule 24f-2 declaration and a final Rule 24f-2 notice prior to
its cessation of operations. In the case of a reorganization,
the date of the transaction’s consummation is deemed the fiscal
year end of the acquired fund; consequently, the acquired fund
must file its 24f-2 notice within two months of that date in
order to net redemptions.
Other. The letter refers to staff positions taken within
the past year with respect to prospectuses contained in
periodicals (See Memorandum to SEC Rules Members No. 42-90 and
Unit Investment Trust Members No. 36-90, dated June 13, 1990) and
granting conditional relief from the requirement to include a
certified balance sheet of a fund’s investment adviser as of the
adviser’s most recent fiscal year in proxy materials (See
Memorandum to SEC Rules Members No. 84-90, dated December 11,
1990).
II. SUBSTANTIVE COMMENTS
Fund Names. The staff’s position is that a fund that
includes the name of a country in its name should have an
investment policy requiring at least 65 percent of its assets to
be invested in that country under normal market conditions. A
"global" fund (or a "world" or "atlas" fund) should have such a
policy with respect to at least three different countries; in the
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case of an "international" fund, the requirement is three
different countries other than the United States.
In the case of series funds, the staff notes that the
investment policies of each series must be consistent with the
name of the registrant.
The letter also refers to the staff’s October letter
regarding the use of "guaranteed" or "insured" in fund names.
(See Memorandum to SEC Rules Members No. 74-90 and Unit
Investment Trust Members No. 69-90, dated October 26, 1990.)
Foreign Government Securities. It is the staff’s position
that securities issued by a foreign government do not constitute
"government securities" for purposes of diversification or
concentration. (Thus, a fund may not reserve freedom to
concentrate in securities issued by a foreign government.)
Organizational Expenses. If a registrant capitalizes its
organization expenses, a straight-line method should generally be
used unless the registrant demonstrates that another "systematic
and rational method" is more appropriate. Expenses should not be
amortized for over sixty months from the commencement of
operations. If any original shares are redeemed prior to the end
of the amortization period, the redemption proceeds should be
reduced by the pro rata share of the unamortized expenses.
Rule 144A. A fund that intends to invest in Rule 144A
securities and to treat those securities as liquid pursuant to a
determination by the fund’s board should include additional risk
disclosure in its prospectus. The requested disclosure includes
a discussion of the nature of Rule 144A securities, the role of
the board in determining whether such securities are liquid, the
factors the board will take into account and the risk of
increasing illiquidity during times when qualified institutional
buyers are uninterested in purchasing Rule 144A securities.
Redemption Charges. Charges for wiring redemption proceeds
should be disclosed in a footnote to the fee table. Account
close-out fees should be listed as transaction expenses in the
fee table.
Other. The letter referred to the staff’s earlier letters
on disclosure for high yield bond funds (See Memorandum to SEC
Rules Members No. 55-89, Closed-End Fund Members No. 49-89 and
Unit Investment Trust Members No. 52-89, dated October 5, 1989;
Memorandum to SEC Rules Members No. 16-90, Closed-End Fund
Members No. 10-90 and Unit Investment Trust Members No. 12-90,
dated February 27, 1990; and Memorandum to SEC Rules Members No.
71-90, dated October 18, 1990) and portfolio quality standards
for money market funds (See Memorandum to SEC Rules Members No.
36-90, dated May 9, 1990).
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III. CLOSED-END FUNDS
The letter sets forth several items that should be
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disclosed by closed-end funds contemplating share repurchases in
the secondary market or through tender offers. The items
include: (1) that there is no assurance the board will decide to
make a tender offer or that it will reduce market discount, (2)
the factors influencing market prices of the fund’s shares, (3)
how often the board will consider tender offers, (4) that tender
offers will decrease total assets and will likely increase the
expense ratio, (5) that interest on borrowings to finance tender
offers will increase fund expenses and (6) any objective
standards the board will consider that would result in not
proceeding with the tender offer.
The letter also reminds closed-end funds that any tender
offers must fully comply with applicable requirements under the
1934 Act. Registrants are instructed to contact both the Office
of Trading Practices of the Division of Market Regulation and the
Office of Tender Offers of the Division of Corporation Finance
before undertaking a tender offer.
IV. UNIT INVESTMENT TRUSTS
The letter states that, with respect to substitution of
portfolio securities, trusts are not permitted to sell securities
and reinvest the proceeds solely on the basis of declines in
market value due to market or industry conditions. A decline in
price can only be grounds for a substitution if it is due to
issuer-specific credit factors that, in the sponsor’s opinion,
would make retention of the security detrimental to the trust or
its unitholders.
Craig S. Tyle
Associate General Counsel
Attachment