July 5, 1994
TO: BOARD OF GOVERNORS NO. 58-94
SEC RULES COMMITTEE NO. 71-94
STATE LIAISON COMMITTEE NO. 41-94
RE: NASAA LETTER ON SUMMARY PROSPECTUS PROPOSAL; INSTITUTE
RESPONSE
__________________________________________________________
The Investment Companies Committee of the North American
Securities Administrators Association, Inc., recently sent the
attached letter to the SEC's Division of Investment Management
regarding the Commission's summary prospectus proposal, and the
Institute recently sent the attached response. Both letters are
summarized below.
I. The NASAA Committee's Letter
The Committee's letter enclosed the results of the Committee's
survey of state regulators concerning the summary prospectus
proposal and purports to set forth "minimum requirements" necessary
for widespread acceptance of the summary prospectus among state
regulators. The Committee's recommended "minimum requirements"
include a requirement that the summary prospectus rule provide for
its staged implementation, that the fund and the adviser be
"seasoned" before using the summary prospectus, that the summary
prospectus be permanently prefiled, and that investors be permitted
to obtain a refund of sales charges if they redeem within 10 days
of receiving the full prospectus.
II. The Institute's Response
The Institute's response reiterates the benefits of the
summary prospectus, particularly for the defined contribution plan
market. The Institute's response also states that the Committee's
recommendations simply do not comport with the results of its
survey, and that an examination of the survey suggests that it may
have been biased in favor of the Committee's own recommendations.
The Institute's letter strongly opposes staged implementation
of the summary prospectus proposal because it would be "simply
illogical" to limit the benefits of more clarified disclosure to
the purchasers of "the least complex" funds (such as money market
funds). Moreover, staged implementation would undermine the
advantages of the summary prospectus for the defined contribution
plan market.
The Institute's letter also opposes the Committee
recommendation for a three-year seasoning requirement for both the
fund and the adviser. It notes that such a requirement would serve
little purpose, would restrict the dissemination of useful
information about newer funds (as well as established funds with
new advisers), and would act as a barrier to entry into the
industry. The proposal also could chill the creation of new funds
that are particularly well-suited for the retirement market.
In addition, the Institute's letter opposes the Committee's
recommendation that summary prospectuses be permanently prefiled
with the states and the SEC or the NASD. It points out that the
Committee's survey did not indicate a state prefiling requirement
is necessary for widespread state acceptance. Moreover, a state
prefiling requirement could undermine the utility of the summary
prospectus and deprive most investors of the advantages provided by
the summary prospectus. The Institute's letter does propose that
the NASD designate an official to serve as the principal liaison
with the SEC and NASAA for matters related to summary prospectus
disclosure.
Finally, the Institute's letter opposes the Committee's
recommendation for a sales charge rebate provision. The
Institute's letter points out that summary prospectuses would
contain all information that is material to the investor's
decision, including the existence of a sales load that is not
refundable on redemption. Moreover, to the extent any summay
prospectus contained misleading information or omitted material
information, full prospectus liability would apply. Finally, a
sales charge rebate provision would raise operational problems and
impose costs on all shareholders.
Thomas M. Selman
Assistant Counsel
Attachments