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January 18, 1989
TO: UNIT INVESTMENT TRUST MEMBERS NO. 7-89
SEC RULES COMMITTEE NO. 4-89
AD HOC SUBCOMMITTEE ON YIELD
RE: YIELD QUOTATIONS ON MARKET DISCOUNT MUNICIPAL BONDS
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Attached is a letter from the Institute addressed to the
Divisions of Investment Management and Market Regulation that
requests the Divisions to recommend to the SEC standardization of
the yield formulae for mutual funds investing in market discount
municipal bonds and for market discount municipal bonds sold
directly through dealers.
Specifically, the letter requests amendments to Rule 482
and Form N-1A to allow mutual funds that invest in such
securities to advertise a yield that reflects the value of the
market discount of such instruments by applying the standard
yield-to-maturity formula used for most other debt instruments
pursuant to Form N-1A. The current formula under Form N-1A
excludes market discount on such instruments, since the resulting
principal appreciation is not exempt from federal income tax.
The proposed amendments would require the proposed optional yield
quotation to be accompanied by disclosure that a portion of the
yield may be subject to federal income tax.
The letter also requests corresponding changes in the
advertising rules of the Municipal Securities Rulemaking Board
("MSRB"), which regulates direct sales of municipal bonds.
Currently, MSRB guidelines require all yield quotations to be
accompanied by yield-to-maturity. The Institute requests that
the guidelines be modified so as to require that all yield
quotations be accompanied by a pure tax-exempt yield that
excludes market discount.
In addition, the letter requests that the formula for
computing tax-equivalent yield for mutual funds under Form N-1A
be modified to include the effect of principal appreciation on
market discount municipal securities.
We will keep you informed of developments.
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Craig S. Tyle
Assistant General Counsel
Attachment