SECURITIES AND EXCHANGE COMMISSION

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON. D.C. 20549

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Dear Registrant:

The Division of Investment Management (the II

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Division ") has prepared this letter to

assist investment conip.any registrants in preparig disclosure fiings in 1995. These comments

represent the views of the staf of the Division and are not necessarily those of the Securities

and Exchange Commission (the "Commission") and should not be considered

of precedential

. value in any court or other official forum. The comments in this letter apply to filings made

on Forms N-IA, N-2, N-14 and S-6, unless otherwise indicated.

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This letter covers disclosure and procedura developments since February 25, 1994 when

the staf issued its last ~'generic comment letter. II Accounting-related matters of interest to

registrants and their independent public accountants can be found in the accompanying letter

from Lawrence A. l'riend, Chief Accountant of the Division, that supplements his letter dated

November 1, 1994 addressed to chief financial officers. Genera guidance for variable annuity,

varable life, and other insurance company investment contract registrnts can be found in a

letter dated October 21, 1994 from Brenda D. Sneed, Assistant Director, Office of Insurance

Products.

I. FIING PROCEDURS

A. Post-Effecive Amendments Under Rules 485 and 486

The Commission adopted amendments to Rule 485 under the Securities Act of 1933 (the

"1933 Act") to revise the procedures by which open..end investment companies ("mutual funds")

fie post-effective amendments to registration statements. These amendments became effective

on October 11, 1994. See Investment Company Act Release No. 20486 (August 17, 1994).

The amendments to Rule 485:

(1) permit mutual funds to fie post-effective amendments under paragraph (b) of Rule

485 ("B-Amendments") for certin purposes not previously covered by the Rule. These

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purposes include, among others, delaying the effective date of a previously fied post-effective

amendment, updating a fund's discussion of its pedormance, revising disclosure regarding a

mutual fund's portolio manager and adding interim financial statements;

'(2) give the Division delegated authority to suspend the abilty of a mutual

fund to fie

B-Amendments for a specifed time if the fund has fied a B-Amendment under circumstances

in which pargraph (b) is not available; .

(3) permit B-Amendments to become effective up to 30 days after fiing;

(4) enable the Division to permit certin typs of post-effective amendments not

otherwise eligible to be fied under Rule 485(b) to become effective immediately upon filing.

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See new subpargraplì (b)(l)(jx) of Rule 485. Acting under this authority, the staf of the

Division has permitted th~' -automatic effectiveness of a post -effective amendment to a

registration statement fied by one fund in a fund complex when the amendment reflects

substatialy identical revisions to those contaed in a post -effective amendment of another fund

in the complex previously reviewed. Requests ,pursuant to this new provision should be

and Review. Insurance

company investment contract registrats should send their requests to the Assistat Director,

addressed in writing to the Assistant Director, Offce of Disclosure

Office of Insurance Products; and

A-Amendments

(5) provide that amendments fied under pargraph (a) ("

series wil not become effective until

") adding new

75 days afer filg. A mutual fund may designate a

longer period - up to 95 days - before the A-Amendment beComes effective.

The Commission has also adopted new Rule 486. Ths new rule permits closed-end

management investment companies and business development companies that periodically

repurchase their shares in accordace with Rule 23c-3 under the Investment Company Act of

registration statements that

become effective automatically.

and

1940 (the "1940"Act") to fie certin post-:.effective amendments

B. Amendments to Proxy Rules

The Commission has revised the proxy rules . applicable to investment companies

the Securities Exchange Act of 1934 tthe II 1934 Act"). See

Investment Company AètRelease No. 206i4 (October 13, 1994). The revised rules were

("funds") under the 1940 Act and.

effective on November 23, 1994 ard apply to al proxy statements fied on or after Januar 23,

1995. Signicant changes reflected in the new rules include:

. Roorganiation of Rules: The

revised proxy rules consolidate the fund-specifc

disclosure'requirements of the Commission's proxy rules into a new Item 22

in Schedule 14A

under the J934 Act, which sets forth general proxy statement requirements. The other items

in Schedule 14A, unless they specifically state otherwise, continue to apply to funds.

. Summary Table: When a proxy statement solicits votes on different proposals from

shareh91ders of more than one fund, a portfolio'.of a senes fund, or a class of a multiple class

fund, the new rules require a table at the beginning of the proxy .statement that summares each

proposal and indicates which shareholders are being requested to approve each proposal.

. Fee Table: The new rules require a fee table in proxy statements that conta proposals

that would result, directly or indirectly, in increased fees or expenses. The fee table must

compare the,proposed fees and expenses to those currep-tly in effect.

. Elecion of Directors: The revised rules continue to require basic information

concernng directors and nominees, such as business background and relationships with certin

affiiates of the fund.' This information is now required for the past five yeas. Proxy

requirements for the election of directors no longer include detaed information about the fund's

investment advisor (including the investment advisor's balance sheet), the advisory agreement,

or the fund's brokerage arrgements.

. Management Compensation: The amended rules require a table setting forth the

amount of compensation a director received, pension or retirement benefits accrued by the fund

for each director, and estimated annual retirement benefits for each director. The compens~tion

table also must disclose the aggregate remuneration reeived by a director from all funds in the

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same fund complex. "Fund complex" is defined broadly for these purposes as two or more

funds that hold themselves out to investors as related companies or that have a common

investment advisor.

For disclosure in a proxy statement of compensation of directors serving on more than

one board of directors of funds in a, fund complex with different fiscal years, the staf has stated

that it would not object if:

(1) disclosure of compensation from each fund (columns (1)-(4) of the compensation

that fund or, where compensation can

table) is for

the ,most recently completed fiscal year of

be reasonably estimated or is a presently quantifiable amount, for a fiscal yea that wil be

completed within two months of the' date of fiing of the proxy statement; and

(2) disclosure of aggregate compensation from the fund complex (column (5) of the

compensation table) is for the most recently completed calendar year or, where compensation

can be reasonably estimated or is a presently quantifable amount, for a calendar year that wil

be completed,. withîn two months of the date of fiing of the proxy statement.

also amended fuiid

To make the disclosure of compensation unifòrm, the new rules

registration statement forms to require the same compensation table as in Item 22. This

information should' be reflected in the first post-effective amendment fied on or afer January

23, 1995 and may be fied under Rule 485(b) if it is otherwise eligible for such a filig. New

registration statements should include the table with amounts estimat~ for the first fiscal yea,

but using aCtual fund complex inormation if it is available.

. Investment Advisory Contract and Distribution Plans: The amended rules retain most

of the disclosure requirements concerning shareholder approval of investment advisory contracts

and impose similar requirements for distribution plans. The rules, however, no longer require

the inclusion of an investment advisor's balance sheet or extensive discussion of brokerage

arrngements. There is a new requirement for a

discussion

of the material factors considere

by the board of directors' in recommending the advisory . contract for shareholder approval,

including a discussion of soft dollar arrngements that benefit the investment advisor.

. Annual Reports: In .conneCtion with the proxy

rules revisions, the Commission

eliminated for funds the requirement in Rule 14a-3(b) under the 1934 Act that an annual report

accompany or precede a proxy statement. Item 22 requires that the proxy statement state that

the fund's most recent annual and semi-annual report are available upon request.

C. Registration of Additional Shares Pursuant to Rule 24e-2

Section 24(e)(1) of the 1940 Act provides that registration statements under the 1933 Act

relating to certn investment companies may be amended after their effective dates to increase

the amount of securities proposed to be offered. Section 24(e)(1) further provides that a fiing

fee, calculated in the manner specified in Section 6(b) of the 1933 Act, be paid at the time of

fiing of the amendment. Pursuant to Rule 24e-2 under the 1940 Act, mutual funds and unit

investment trusts registering additional securities pursuant to Section 24(e)(1) may, in calculating

the filing fee, make an adjustment for the amount of securities of the same class redeemed or

repurchased by the issuer in its previous fiscal year.

Registrants are reminded' that Rule 24e- 2 permits the preservation of net redemption

credits only if a post-effective amendment contaning the information required by Rule 24e­

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2(b) is fied in the year immediately following the fiscal year in which the net redemptions

occur.

D. EDGAR Implem~ntation

Mandated electronic filing on theCorrmission's Electronic Data Gathering, Analysis,

and Retrieval ("EDGAR") System began for some investment company registrants on April 26,

1993. See Rulemaking for EDGAR System -- Investment Companies and Institutional Investment

Managers, Investment Company Act Release No. 19284 (58 FR 14848 (Mar. 18, 1993)). On

December 19,,1994, the Commission made final the EDGAR ìnterim rules and adopted minor

and technical amendments to thpse rules. See Rulemaking for, EDGAR System, Investment

Company Act Release No. IC-20783 ("Release No. 20783") (59 FR 67752 (Dec. 30, 1994)).

phase-in list establishing the

timetables by which investment company registrants who are not already electronic filers wil

become subject to mandated electronic filing. Phase-in wil recómmence on January 30, 1995.

be phased in as

Release No. 20783 also contains the phase-in schedule and

Investment company I:egistrants assigned to the remaining phase-in groups wil

set forth below: "

IM-03 Januar 30, 1995

IM-04 March 6, 1995

IM-05 Mayl,""1995

IM-06 November 6, 1995

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To ascertin the phase-in group to which an investment company registrant is assigned, the

registrat should consult the Investment Management Phase-In, List published as Appendix C

to Release No. 20783 and the phase-in and electronic

fiing rules found in Regulation S- T (17

CFR Part 232).

A registrant makng filgs on EDGAR must furnish the Commission a paper èopy of

its first electronic filg made after its phase-in date. The paper copy may be either a

traditional paper copy or a computer prit-out of the EDGAR fùing (with the confidential

information in the header blanked out or omitted). The paper copy must incluqe the legend

mailed to OFIS Filer Support,

SEC Operations Center, 6432 General Green Way, Alexandria, Virginia 22312-2413, and be

required by Rule 902(g) of Regulation S-T and should be

received no later than six business days after the electronic filing. .

Registrants are also reminded that all correspondence (including cover letters and

requests for acceleration) relat~ to electronic filings must also be submitted electronically. See

Rule 101(a) of Regulation S:. T. Electronically submitted cover letters should include the

information requested in Comment LA of the February 22, 1993, and Comment LD of the

February 25, 1994, generic comment letters.

. Investment company registrants are required to furnsh a Financial Data Schedule as an

exhibit to certin filings that are submitted electronically, namely registration statements on

Forms S-6, N-l, N-IA, N-2, N-3, N-4, and N-5; FonT N-SAR; and

certin proxy materials

(as specified inItem 22(a)(4) of Schedule 14A). However, there are circumstances under which

this requirement would not be applicable. For example, ail initial fiing of Form S-6 typically

does not include financial statements; they are furnshed in pre-effective amendments.

Therefore, the instructions to Form'S-6 provide that a Financial Data Schedule is required when

fied electronically. In addition, the staff has taen the position

thåf a Financial Data Schedule nee not be submitted with the fiing of a registration statement

any amendment to that form is

or amendment on Forms S-6, N-l, N-IA, N-2, N-3, N-4, or N-5 containing no financial

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information or containing only information concerning initial capitalization. Of course, a

registration statement contang financial information incoiporated by reference from another

source, such as the annual report to shareholders, would require as an exhibit a Financial Data

Schedule. For the specific requirements for Financial Data Schedules, see Rule 483(e) of

Regulation C.

Questions regarding the EDGAR phase-in may be directed to Anthony A. Vertuno,

Division of Investment Management, at 202-942-0591. Questions regarding the EDGAR rules

may be direted to Ruth Armfield Sanders, Division of Investment Management, at 202-942­

0633, or to Mr. Vertno.

E. Filings Under Rule 497

Registrants are reminded that they may not materially alter the nature of the fund

contemplated in the last pre-effective amendment by merely fiing a Rule 497(b) or (c)

prospectus that makes those material changes. For example, if a new fund designed to invest

pnmariy in domestic equity securities, afer the effective date of its registration statement but

before the comiÌencement of its public offerig, changes its investment objective and.policies

so that it becomes an emerging markets fund, a post-effective amendment fied under Rule

485(a), rather than a

Rule 497 prospectus, should be the vehicle for reflecting the change.

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DISCLOSUR COMMENTS

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A. Disclosure Regarding Management's Discussion of Fund,Perfonnance

Registrats including their Management's Disçussion of Fund Performance in the annual

report are reminded that Item 32( c) of Form N - i A requires an undertg to furnish to. each

person to whom a prospetus is delivered, upon request and without charge, a copy of the

registrat's latest anual report to shareholders. In addition, Item 3 (Condensed Financial

Information) of Form N-IA requirs the prospetus to disclose that further information about

theregistrat's performance is contaned in the annual report, which may be obtained without

charge.

B. Fund Names and Guide 1

Guide 1 to' Form N-IA provides, in pertinent part, that if a registrant's name suggests

that it wil invest primariy in a particular type of security, industry or industries; the registrant

should have an investment policy that requires, under normal circumstances, at least 65 percent

of the value of its tota assets wil be invested in the indicated type of security or industry.

Frequently, fund names have suggested that all, or substantially all, of a particular

fund's assets wil be invested in a certin type of security., industry, country, or geographic

region. In such cases, the staff believes that the fund's investment policy should conform with

the higher threshold implied by its name.

C. Updated Risk Disclosure

A fund's prospectus disclosure must adequately inform investors as to the risk factors

peculiar to the fund (e.g., investment strategies, assumptions, practices or techniques) or its

portfolio of securities. See, for example; Item 4 of Form N-IA and Guide 21 thereto and Item

8 of Form N-2. Over time, with changes in the marketplace or in the fund's portfolio or

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investment strategy or practices, the signicace of some risk factors may change, or new ones

on the Commission to identify these changing areas

of risk. signicance and new areas of risk disclosure. Registrants are reminded that they have

analyze fund risk and review prospectus risk disclosure, and to

may be introduced. Registrats cannot rely

a duty, on an ongoing basis, to

update prospectus disclosure when appropriate.

il. Recent Staff Positions

c,.

A. Shareholder Approval of New Funds' Assigned Advisory Contracts Following

Acquisition of Advisor

In a letter to the Investment Company Institute (pub. avaiL. Nov. 6, 1992), the staff

stated that a fund no longer would be asked to underte, in its initial registration statement,

to hold a shareholderß' meeting to approve, among

other thigs, the fund's investment advisory

contract. The sta recently considered shareholder approval in the context of a fund whose

advisor was acquired by another entity shortly

after the commencement of the fund's public

offering of its securities. In that case, the staf said that it would not object if the ,fund's

contract with the ad¥Ïsor was not re-approved by the fund's shareholders afer the acquisition.

The facts that the staf found persuasive were: (1) the advisor was acquired shortly (e.g., less

than six weeks) after the fund began offering its shares to the public; (2) the initial shareholder

of the fund had approved the pre-acquisition

contract and also woild approve the post­

acquisition advisory contract; (3) the post-acquisition advisory contract would conta the same'

material terms as the pre-acquisition contract; (4) the persons who signicantly contribute to

the investment advice relied on to manage the fund's portfolio were expected to remain the

same; and (5) the fund would disclose the impending

acquisition ,and assignment to shareholders

through prospectus disclosure.

B. Advertising Past Performance Following a Reorganization'

In Nonh American Security Trust (pub. avaiL. August 5, 1994) the staff stated that it

would not recommend enforcement action under Rule 482 under the 1933 Act or Rule 34b-l

under the i 940 Act if a fund formed as a result of merging three other funds advertised its

historical pedormance using, for periods prior to the reorganiztion, the pedormance data of

the predecessor fund that it most closely resembled.

The staf said ,that, in determining whether

any predecessor fund resembles a new or surviving fund closely enough to justify the use of the

predecessor fund's pedormance, the factors to be considered are the funds': (i) investment

advisors; (ii) investment objectives, policies, and restrictions; (ii) expense structures and

expense ratios; (iv) asset sizes; and (v) portfolio compositions. The staff believes that the

survivor ofa business combination for accounting purposes (i.e., the fund whose financial

statements ar cared forward), typicaly wil be the fund whose historical pedormance may

be used by a new or surviving fund. While this letter involved mutual funds, the same rationale

would apply to a merger of closed-end funds.

C. Diversification Issues: Privately Issued Asset~Backed and Mortgage-Backed

Securities

In Hyperion Capital Management, Inc. (pub. avail. August 1, 1994) the staff grated no­

action assurance if, forthe purposes of determining compliance with Section 5(b)(1) of

the 1940'

Act, a fund treats each underlying pool of assets backing certin privately issuoo mortgage-

backed and asset-backed securities, rather than the sponsor or depositor of the pool, as a

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separte issuer provided that (1) in the event of the sponsor's banptcy, the sponsor's

the holder of the asset-backed or

creitors would have no reourse agàinst the pool, and (2)

mortgage-backed security would look to the pool for payment.

In J.P. Morgan StruCtured Obligations Corp. (pub. avaiL. July 27; 1994) the staf

declined to grant no-action assurance if a fund treted certn notes as instniments issued or

agency theref ("Governent Securities") for

guartee by the U.S. Government or an

the tnist issuing the

puipses of pargraph (d)(I) of Rule 2a-7 under the 1940 Act. Although

notes would hold Government

'Securities, the trust also

proposed to enter into 'an interest rate

and/or currncy exchange agrement ("Swap Agrement") that the staf concluded would

materily alter

the trost's credit risk.

The staff's conclusion was based on two factors. First,

under the Swap Agreement purchasers of the notes were reuir

to look to the obligation of

the swap counterparty to make scheduled payments and to pledge additional collateraL. Second,

alt~o~gh'the potes were to.be collateralized full~, if swap counterparY ins~lyency occ~rr, the

anticipated Federal DepOSIt Insurance Corporation treatment would not mitigate the nsks as to

treat the notes as equivalent to Government Securities.

D. Rule t2b-l Carry-Forwards

Fair Prctice, mutual funds calculate a "remaining amountl,

i.e., the appropriate maximum aggregate sales charge minus the amount of sales chages paid

Under the NASD's Rules of

or accrued, including asset.:based sales charges, front-end and deferr sales charges, plus the

pennitted interest. See NASD Notice to Members 93-12, Questions an A.nswers About New

NASD Rules Governing Investment Company Sales Charges- Artcle ILL, Sections 26(b) an (d)

Practice (February 1993). 'The staff wil not

'raise objections

under Section

17(d) of the 1940 Actor the rules thereunder if a Rule 12b-l plan alows for the trasfer of a

o/the Rules 0/ Fair

portion of a mutual fund's "remaining amount" in the event of an exchange between series of

the same mutual fund or between affiliated mutual funds (or a combination theref), under the

following conditions: (1) the arrgement is conducted in

accordce with Section 26(d)(2)(D)

of the NASD's Rules of Fair Practice, as described more fully

in NASD Notice to Members

93-12; and (2) the carr-forward arrngement is implemented in accordnce with Rule .l2b-l '

reuirements. Speifically, Section 26(d)(2)(D) pennits mutual funds to increse their

"remaining amount" by treating the shares received through an exchange as new gross sales,

provided the amount of the increase is deducted from the "remaining amount" of the mutual

fund out of which the shares are exchanged. '

F. Money Market

Funds

The Commission and the Division have provided guidance concerning certn floating

rate and other securities that are inappropriate for money market funds. See Investment

Company Act Release No. 19959 (Dec. 17, 1993) and the letter dated June 30, i 994 from

Barr Barbash, Director

of the Division, to the Investment Company Institute.

letter also states that, although acquisition of a parcular'security

may not be expressly prohibited by Rule 2a-7 under the 1940 Act, this does not mean that the

security ~s necessarily an appropriate investment for a money market fund. An advisor must

determine not only that holding the security is not expressly prohibited by the Rule, but also

that the security meets the general rule applicàble to all investments by a money market fund:

The June 30, 1994

that investment in the security is consistent with maintaining a stable net asset value per shar.

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G. Bundling of Proxy Proposals

Issues have been raised recently with the staff about whether proposals presented for

" , i.e., submitted and voted upon together in fund

shareholder approvals may be II

bundled

proxies. In accordace with Rule 14a-4 under the 1934 Act, a matter should be voted upon

separately if the 1~40 Act, state law, or a fund's organizational documents (charter, by-laws)

require a matter under

The

consideration to be submitted to shareholders.

staff has not objected to II

" proxy proposals in the following circumstances:

bundling

a. Ministerial proposals. Proposals involving editorial or non-substantive

changes to fund documents.

b. Inextricably Intenwned Proposals. The staff has not required separate

preposals if the proposals would be impractical to separate. .

c. Merger Proposals. A vote to merge with another fund may carr with it

approv~ of new ~dvisory contracts, Rule 12b- i plans, and other matters

. necessary to implement the m~rger.

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The staf continues to strongly encourage registrats to tae the initiative to review,

simplify and improve fund prospectuses. See Comment IT.A in the February 25, 1994 generic

comment letter describing the staff's expeited review proedures for prospectuses in this

regard;

. We hope that this letter wil assist you in prearng fiings in 1995. Of course, it is not

intended to replace the disclosure comment pross. You should diret any questions about

specifc company fiings to the staff member responsible for reviewing that company's

documents.

Sincerely,

()J!l ~

~~i-; B. Lewis

Assistant Director

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