May 7, 1992
TO: STATE SECURITIES MEMBERS NO. 20-92
SEC RULES COMMITTEE NO. 28-92
RE: WASHINGTON ISSUES HIGH YIELD BOND FUND DISCLOSURE
__________________________________________________________
As we previously advised you, the Washington Securities
Division has been requiring additional cover page risk disclosure
for high yield bond funds. Most recently, the disclosure was
based upon the percentage of assets invested in high yield bonds.
(See Memorandum to State Securities Members No. 14-92, dated
March 24, 1992.)
Inasmuch as application of the requisite disclosure was
inconsistent and varied according to the staff person reviewing
the application for registration or renewal, the Institute
contacted the staff of the Securities Division to express its
concerns with respect to the disclosure.
Based upon the Institute's efforts, the Securities Division
has issued Securities Policy Statement-15, dated May 5, 1992,
which sets forth the legend requirements for mutual funds
investing in "junk bonds". According to the Administrator, full
and fair disclosure requires an appropriate cover page legend for
funds investing 35% or more of their assets in high yield bonds.
The policy statement sets forth two sample legends that will be
considered "presumptively reasonable" by the Administrator as
follows:
(a) This fund invests [significantly] [primarily] in lower
rated bonds, commonly known as "junk bonds." Investments
of this type are subject to a greater risk of loss of
principal and interest. Purchasers should carefully assess
the risks associated with an investment in this fund; or
(b) The XYZ fund invests [significantly] [predominantly]
in lower rated bonds, commonly referred to as "junk bonds."
Bonds of this type are considered to be speculative with
regard to the payment of interest and return of principal.
Purchasers should carefully assess the risks associated
with an investment in this fund.
The foregoing legend must be made by sticker or otherwise on the
cover page of the prospectus and be in bold face type. The use
of the terms "significantly," "primarily," or "predominantly" is
based on the percentage of assets invested in high yield bonds.
A copy of Policy Statement-15 is attached. The Institute
will be contacting the securities administrators in Arizona and
Texas to determine whether the Washington high yield bond fund
disclosure would be accepted in those jurisdictions. We will
keep you advised of developments.
Patricia Louie
Assistant General Counsel
Attachment