October 7, 1991
TO: STATE SECURITIES MEMBERS NO. 45-91
RE: WASHINGTON DISCLOSURE FOR HIGH YIELD BOND FUNDS
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The Institute was recently advised that the Washington
Securities Division is requiring certain investment companies
investing in high yield bonds to include a legend stating "THIS
FUND IS CONSIDERED TO BE HIGHLY SPECULATIVE" on the outside front
cover of its prospectus pursuant to the discretionary authority
of the administrator of the Division. The legend is required for
any investment company that invests over 35% of its assets in
securities rated BBB or lower by Standard & Poor's or Baa or
lower by Moody's Investor Services. The staff of the Division
also advised the Institute that it would accept the legend
currently required by the Arizona Securities Division, "THESE ARE
SPECULATIVE SECURITIES" in lieu of the Washington legend.
Investment companies that have the ability to invest more
than 35% of its assets in such debt securities but currently
invest less than 35%, must include additional disclosure in a
supplement to the prospectus. However, in lieu of the additional
disclosure, an investment company may submit an undertaking to
the Division that it will provide shareholders with 30 days
advance notice in the event the fund invests 35% or more of its
total assets in lower rated debt securities and that prior to
such investment, the fund will attach the requisite legend to the
front cover of its prospectus.
The Institute wrote to the Division to request that the
Division reconsider requiring such disclosure for high yield
bonds funds, particularly since the Securities and Exchange
Commission already requires high yield bond funds to include
detailed and specific disclosure in their prospectus. Therefore,
in light of the current federal disclosure requirements, it is
questionable whether the Washington disclosure provides any
additional investor protection.
* * *
Attached is a copy of the Washington Securities Division's
letter outlining its disclosure requirements as well as the
Institute's response. We will keep you advised of further
developments.
Patricia Louie
Assistant General Counsel
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