* See Memorandum to Primary Contacts - Member Complex No. 14-97 and SEC Rules Members No. 17-97, dated March 3, 1997;
Memorandum to Unit Investment Trust Committee No. 16-97, dated March 10, 1997.
June 9, 1997
TO: PRIMARY CONTACTS - MEMBER COMPLEX No. 37-97
SEC RULES COMMITTEE No. 59-97
UNIT INVESTMENT TRUST COMMITTEE No. 39-97
DISCLOSURE REFORM WORKING GROUP
RE: INSTITUTE COMMENTS ON SEC’S DISCLOSURE INITIATIVES
______________________________________________________________________________
As we previously reported, the Securities and Exchange Commission has proposed
significant changes to the disclosure requirements applicable to mutual funds.* The proposals
would (1) substantially revise Form N-1A, (2) allow funds to use a simplified "fund profile,"
which would provide investors with the option of purchasing fund shares or requesting the
long-form prospectus, and (3) increase the "name test" investment requirement from 65% to
80% (which would apply to all investment companies). The Institutes comment letters on
these proposals are summarized below and a copy of each is attached. The letters reflect the
consensus of members developed at several meetings held to discuss the proposals.
Form N-1A
The Institutes letter on the proposed amendments to Form N-1A praises the
Commissions efforts to make mutual fund disclosure more comprehensible, informative and
useful to investors. It indicates that the proposed amendments will greatly enhance the quality
of disclosure all funds provide to investors, and strongly encourages the Commission to move
expeditiously to implement the new disclosure standards.
In particular, the letter supports the proposal to require a standardized "risk/return
summary" at the beginning of each prospectus. The letter also strongly supports the proposed
bar chart showing a funds annual total returns for the past ten calendar years. In addition, the
letter expresses strong support for the proposals general approach to disclosure of fund
investments and risks, which would focus on a funds principal investment strategies and the
principal risks of the portfolio as a whole.
While very supportive of the proposal overall, the letter proposes numerous technical
changes. For example, the letter recommends, among other things: (1) that all references to the
availability of additional information about a fund appear on the back cover page; (2) a
2revised approach to the selection by a multiple class fund of an appropriate class for inclusion
in the bar chart; (3) that funds be permitted to provide purchase, redemption and certain other
information to investors in a separate "owners manual" document; (4) elimination of a
proposed requirement to disclose material legal proceedings "known to be contemplated" by a
governmental authority; and (5) deletion of the financial highlights table from the prospectus.
The letter suggests that the Commission revise the proposed transition period to
provide that existing funds must comply with the amendments within 18 months from their
effective date. It notes that discipline will be required of both the Commission and the industry
if the proposals promise of significantly improving mutual fund disclosure is to be realized
fully.
Fund Profile
The Institutes letter strongly supports the Commissions proposal to authorize the use
of fund "profiles" and urges the Commission to act expeditiously in adopting a final profile
rule. The letter supports the Commissions proposal to permit a profile to contain information
about more than one fund and supports the proposed approach regarding disclosure of
investment advisers, subadvisers, and portfolio managers. The Institutes letter also is very
supportive of the Commissions efforts to permit funds to tailor a fund profile for retirement
plan participants and specifically supports permitting funds to omit purchase and redemption
information, distribution and taxation information and information regarding fund services
from profiles provided only to retirement plan investors.
The letter also contains several recommendations designed to further enhance the utility
of the profile and encourage its widespread use by funds as a supplement to their prospectuses.
For example, the letter recommends that the Commission specifically limit the amount of
purchase and redemption information that funds are required to provide in the profile. In
addition, the letter recommends that the Commission only require a profile to be filed with the
Commission prior to use in two circumstances -- before its first use and when a fund has been
added to an existing profile (and not, as proposed, each time a substantive change is made to an
existing profile). The letter also suggests that the Commission reiterate the summary nature of
the profile as providing a concise presentation of key information about a fund in a standard
format. In addition, the letter urges the Commission to clarify the adequacy of the profiles
contents by withdrawing the statement in the proposing release that "a fund would not be able
to use a profile when material information relating to its particular circumstances is not
addressed by the instructions for the 9 items of required disclosure." Finally, the letter urges
the Commission to affirmatively state that a fund that complies in good faith with the
Commissions instructions in the preparation and distribution of a profile should be able to rely
on Section 19(a) of the Securities Act to defend against litigation that alleges that the fund
omitted material information from the profile.
Fund Name Rule
3The Institutes letter on the proposed fund name rule, Rule 35d-1 under the Investment
Company Act, expresses general support for a requirement that funds with names that suggest
they focus on a particular type of investment invest at least 80% of their
net assets in the type of investment suggested by their name. The Institutes support, however,
is conditioned upon the proposed rule being revised in three significant respects: (1) funds
should not be required to adopt the 80% investment requirement as a fundamental policy; (2)
the name rule should apply only "under normal conditions;" and (3) the 80% standard should
be based only on a funds net assets, unless a fund has adopted a policy to borrow for
investment purposes, in which case it should apply to the funds net assets plus any such
borrowings. These changes are designed to provide funds subject to the rule appropriate
investment management flexibility. In this regard, the letter states that the requirements of the
rule should not be so stringent as to discourage funds from using descriptive names.
In addition, the letter recommends that single state money market funds be exempt
from the proposed rule because of the limited supply of securities eligible for purchase by such
funds. The letter also recommends that the Commission require funds with a stated maturity
policy to have a commensurate duration policy, once a standardized methodology for
calculating duration has been developed.
Craig S. Tyle
Vice President & Senior Counsel
Attachments (in .pdf format)
Note: Not all recipients of this memo will receive an attachment. If you wish to obtain a copy
of the attachment referred to in this memo, please call the Institute’s Information Resource
Center at (202)326-8304, and ask for this memo’s attachment number: 8974.