# Enhanced Disclosure and New Prospectus Delivery Option for Registered Open-End Management Investment Companies

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URL: https://www.frixlaw.com/law-library/documents/fr%3A07-5852

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** November 30, 2007
- **Citation:** 72 FR 67790

## Text

SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 230, 232, 239, and 274
[Release Nos. 33-8861; IC-28064; File No. S7-28-07]
RIN 3235-AJ44
Enhanced Disclosure and New Prospectus Delivery Option for Registered Open-End Management Investment Companies

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rule.

SUMMARY:

The Securities and Exchange Commission is proposing amendments to the form used by mutual funds to register under the Investment Company Act of 1940 and to offer their securities under the Securities Act of 1933 in order to enhance the disclosures that are provided to mutual fund investors. The proposed amendments, if adopted, would require key information to appear in plain English in a standardized order at the front of the mutual fund statutory prospectus. The Commission is also proposing rule amendments that would permit a person to satisfy its mutual fund prospectus delivery obligations under Section 5(b)(2) of the Securities Act by sending or giving the key information directly to investors in the form of a summary prospectus and providing the statutory prospectus on an Internet Web site. Upon an investor's request, mutual funds would also be required to send the statutory prospectus to the investor. The proposals are intended to improve mutual fund disclosure by providing investors with key information in plain English in a clear and concise format, while enhancing the means of delivering more detailed information to investors.

DATES:

Comments should be submitted on or before February 28, 2008.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's Internet comment form (
http://www.sec.gov/rules/proposed.shtml
);

• Send an e-mail to
rule-comments@sec.gov.
Please include File Number S7-28-07 on the subject line; or

• Use the Federal eRulemaking Portal (
http://www.regulations.gov
). Follow the instructions for submitting comments.

Paper Comments

• Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-28-07. This file number should be included on the subject line if e-mail is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (
http://www.sec.gov/rules/ proposed.shtml
). Comments are also available for public inspection and copying in the Commission's Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 am and 3 pm. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT:

Kieran G. Brown, Senior Counsel; Sanjay Lamba, Senior Counsel; Tara R. Buckley, Branch Chief; or Brent J. Fields, Assistant Director, Office of Disclosure Regulation, Division of Investment Management, at (202) 551-6784, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-5720.

SUPPLEMENTARY INFORMATION:

The Securities and Exchange Commission (“Commission”) is proposing for comment amendments to rules 159A,
1

482,
2

485,
3

497,
4

and 498
5

under the Securities Act of 1933 (“Securities Act”) and rules 304
6

and 401
7

of Regulation S-T.
8

The Commission is also proposing for comment amendments to Form N-1A,
9

the form used by open-end management investment companies to register under the Investment Company Act of 1940 (“Investment Company Act”) and to offer securities under the Securities Act; Form N-4,
10

the form used by insurance company separate accounts organized as unit investment trusts and offering variable annuity contracts to register under the Investment Company Act and to offer securities under the Securities Act; and Form N-14,
11

the form used by registered management investment companies and business development companies to register under the Securities Act securities to be issued in business combinations.

1
17 CFR 230.159A.

2
17 CFR 230.482.

3
17 CFR 230.485.

4
17 CFR 230.497.

5
17 CFR 230.498.

6
17 CFR 232.304.

7
17 CFR 232.401.

8
17 CFR 232.10
et seq.

9
17 CFR 239.15A and 274.11A.

10
17 CFR 239.17b and 274.11c.

11
17 CFR 239.23.

Table of Contents

I. Background

II. Discussion

A. Proposed Amendments to Form N-1A

B. New Delivery Option for Mutual Funds

C. Technical and Conforming Amendments

D. Compliance Date

III. General Request for Comments

IV. Special Request for Comments From Investors

V. Paperwork Reduction Act

VI. Cost/Benefit Analysis

VII. Consideration of Promotion of Efficiency, Competition, and Capital Formation

VIII. Initial Regulatory Flexibility Analysis

IX. Consideration of Impact on the Economy

X. Statutory Authority

Text of Proposed Rule and Form Amendments

Appendix

I. Background

Millions of individual Americans invest in shares of open-end management investment companies (“mutual funds”),
12

relying on mutual funds for their retirement, their children's education, and their other basic financial needs.
13

These investors face a difficult task in choosing among the more than 8,000 available mutual funds.
14

Fund prospectuses, which have been criticized by investor advocates, representatives of the fund industry, and others as long and complicated, often prove difficult for investors to use efficiently in comparing their many choices.
15

Current Commission rules

require mutual fund prospectuses to contain key information about investment objectives, risks, and expenses that, while important to investors, can be difficult for investors to extract. Prospectuses are often long, both because they contain a wealth of detailed information, which our rules require, and because prospectuses for multiple funds are often combined in a single document. Too frequently, the language of prospectuses is complex and legalistic, and the presentation formats make little use of graphic design techniques that would contribute to readability.

12
An open-end management investment company is an investment company, other than a unit investment trust or face-amount certificate company, that offers for sale or has outstanding any redeemable security of which it is the issuer.
See
Sections 4 and 5(a)(1) of the Investment Company Act [15 U.S.C. 80a-4 and 80a-5(a)(1)].

13
Investment Company Institute,
2007 Investment Company Fact Book
, at 57 (2007), available at:
http://www.icifactbook.org/pdf/2007_factbook.pdf
(96 million individuals own mutual funds).

14

Id
. at 10 (as of year-end 2006, there were 8,726 mutual funds).

15

See
William D. Lutz, Ph.D., Professor of English, Rutgers University, Transcript of U.S. Securities and Exchange Commission Interactive Data Roundtable, at 69 (June 12, 2006), available at:
http://www.sec.gov/spotlight/xbrl/xbrlofficialtranscript0606.pdf
(“June 12 Roundtable Transcript”) (stating that current mutual fund prospectus is “unreadable”); Don Phillips, Managing Director, Morningstar, Inc.,
id.
at 26 (stating that current prospectus is “bombarding investors with way more information than they can handle and that they can intelligently assimilate”). A Webcast archive of the June 12 Interactive Data Roundtable is available at:
http://www.connectlive.com/events/secxbrl/
.
See also

Investment Company Institute,
Understanding Preferences for Mutual Fund Information
, at 8 (Aug. 2006), available at:
http://ici.org/pdf/rpt_06_inv_prefs_summary.pdf
(“
ICI Investor Preferences Study
”) (noting that sixty percent of recent fund investors describe mutual fund prospectuses as very or somewhat difficult to understand, and two-thirds say prospectuses contain too much information); Associated Press Online,
Experts: Investors Face Excess Information
(May 25, 2005) (“There is broad agreement * * * that prospectuses have too much information * * * to be useful.” (quoting Mercer Bullard, President, Fund Democracy, Inc.)); Thomas P. Lemke and Gerald T. Lins,
The “Gift” of Disclosure: A Suggested Approach for Managed Investments
, The Investment Lawyer, at 19 (Jan. 2001) (stating that the fund prospectus “typically contains more information than the average investor needs”).

Numerous commentators have suggested that investment information that is key to an investment decision should be provided in a streamlined document with other more detailed information provided elsewhere.
16

Furthermore, recent investor surveys indicate that investors prefer to receive information in concise, user-friendly formats.
17

16

See
Charles A. Jaffe,
Improving Disclosure of Funds Can Be Done
, The Fort Worth Star-Telegram (May 7, 2006) (“Bring back the profile prospectus, and make its use mandatory. * * * A two page-summary of [the] key points [in the profile]—at the front of the prospectus—would give investors the bare minimum of what they should know out of the paperwork.”);
Experts: Investors Face Excess Information, supra
note 15 (stating “a possible middle ground in the disclosure debate is to rely more heavily on so-called profile documents which provide a two-page synopsis of a fund” (attributing statement to Mercer Bullard, President, Fund Democracy, Inc.));
Mutual Funds: A Review of the Regulatory Landscape
, Hearing Before the Subcomm. on Capital Markets, Insurance and Government Sponsored Enterprises of the Comm. on Financial Services, U.S. House of Representatives, 109th Cong. (May 10, 2005), at 24 (“To my mind, a new and enhanced mutual fund prospectus should have two core components. It should be short, addressing only the most important factors about which typical fund investors care in making investment decisions, and it should be supplemented by additional information available electronically, specifically through the Internet, unless an investor chooses to receive additional information through other means.” (Testimony of Barry P. Barbash, then Partner, Shearman & Sterling LLP)); Thomas P. Lemke and Gerald T. Lins,
The “Gift” of Disclosure: A Suggested Approach for Managed Investments, supra
note 15, at 19 (information that is important to investors includes goals and investment policies, risks, costs, performance, and the identity and background of the manager).

In addition, a mutual fund task force organized by the National Association of Securities Dealers, Inc. (“NASD”) supported the use of a “profile plus” document, on the Internet, that would include, among other things, basic information about a fund's investment strategies, risks, and total costs, with hyperlinks to additional information in the prospectus.
See
NASD Mutual Fund Task Force,
Report of the Mutual Fund Task Force: Mutual Fund Distribution
(Mar. 2005), available at:
http://www.finra.org/web/groups/rules_regs/documents/rules_regs/p013690.pdf
.

17

See ICI Investor Preferences Study, supra
note 15, at 29 (“Nearly nine in 10 recent fund investors say they prefer a summary of the information they want to know before buying fund shares, either alone or along with a detailed document. * * * Just 13 percent prefer to receive only a detailed document.”); Barbara Roper and Stephen Brobeck, Consumer Federation of America,
Mutual Fund Purchase Practices
, at 13-14 (June 2006), available at:
http://www.consumerfed.org/pdfs/mutual_fund_survey_report.pdf
(survey respondents more likely to consult a fund summary document rather than a prospectus or other written materials).

Similar opinions were voiced at a roundtable held by the Commission in June 2006, at which representatives from investor groups, the mutual fund industry, analysts, and others discussed how the Commission could change the mutual fund disclosure framework so that investors would be provided with better information. Significant discussion at the roundtable concerned the importance of providing mutual fund investors with access to key fund data in a shorter, more easily understandable format.
18

The participants focused on the importance of providing mutual fund investors with shorter disclosure documents, containing key information, with more detailed disclosure documents available to investors and others who choose to review additional information.
19

There was consensus among the roundtable participants that the key information that investors need to make an investment decision includes information about a mutual fund's investment objectives and strategies, risks, costs, and performance.
20

18

See, e.g.
, Henry H. Hopkins, Vice President and Chief Legal Counsel, T. Rowe Price Group, Inc., June 12 Roundtable Transcript,
supra
note 15, at 31 (“[S]hareholders prefer receiving a concise summary of fund information before buying.”); William D. Lutz, Ph.D., Professor of English, Rutgers University,
id.
at 88 (stating that “investors [should] be able to find quickly and easily the information they want”).

19

See
Don Phillips, Managing Director, Morningstar, Inc.,
id.
at 27 (stating that mutual fund investors need two different documents, including a simplified print document and a tagged electronic document); Paul Schott Stevens, President and Chief Executive Officer, Investment Company Institute,
id.
at 72-73 (urging the Commission to consider permitting mutual funds to “deliver a clear concise disclosure document * * * much like the profile prospectus” with a statement that additional disclosure is available on the funds' website or upon request in paper); Elisse B. Walter, Senior Executive Vice President, NASD,
id.
at 41 (noting that the industry-recommended disclosure document, the “profile plus,” would include hyperlinks to the statutory prospectus, which would enable investors to “choose for themselves the level of detail they want”).

20

See
Barbara Roper, Director of Investor Protection, Consumer Federation of America, June 12 Roundtable Transcript,
supra
note 15, at 20 (noting that there is “agreement to the point of near unanimity about the basic factors that investors should consider when selecting a mutual fund. These closely track the content of the original fund profile with highest priority given to investment objectives and strategies, risks, costs, and past performance particularly as it relates to the volatility of past returns.”).
See also
Paul G. Haaga, Jr., Executive Vice President, Capital Research and Management Company,
id.
at 90 (stating that the Commission should “specify some minimum amounts of information” to provide investors with “something along the lines of the [fund] profile”); Henry H. Hopkins, Vice President and Chief Legal Counsel, T. Rowe Price Group, Inc.,
id.
at 31 (“The profile is an excellent well organized disclosure document whose content requirements were substantiated by SEC-sponsored focus groups and an industry pilot program.”); William D. Lutz, Ph.D., Professor of English, Rutgers University,
id.
at 88 (noting that the information that mutual fund investors want has not changed substantially since the adoption of the profile); Elisse B. Walter, Senior Executive Vice President, NASD,
id.
at 40-41 (noting that NASD's “profile plus” builds on the profile and includes key information about a fund's objectives, risks, fees, and performance, as well as information about dealer fees and conflicts of interest).

The roundtable participants also discussed the potential benefits of increased Internet availability of fund disclosure documents, which include, among other things, facilitating comparisons among funds and replacing “one-size-fits-all” disclosure with disclosure that each investor can tailor to his or her own needs.
21

In recent years, access to the Internet has greatly expanded,
22

and significant strides

have been made in the speed and quality of Internet connections.
23

The Commission has already harnessed the power of these technological advances to provide better access to information in a number of areas. Recently, for example, we created a program that permits issuers, on a voluntary basis, to submit to the Commission financial information and, in the case of mutual funds, key prospectus information, in an interactive data format that facilitates automated retrieval, analysis, and comparison of the information.
24

Earlier this year, we adopted rules that provide all shareholders with the ability to choose whether to receive proxy materials in paper or via the Internet.
25

As suggested by the participants at the roundtable, advances in technology also offer a promising means to address the length and complexity of mutual fund prospectuses by streamlining the key information that is provided to investors, ensuring that access to the full wealth of information about a fund is immediately and easily accessible, and providing the means to present all information about a fund online in an interactive format that facilitates comparisons of key information, such as expenses, across different funds and different share classes of the same fund.
26

Technology has the potential to replace the current one-size-fits-all mutual fund prospectus with an approach that allows investors, their financial intermediaries, third party analysts, and others to tailor the wealth of available information to their particular needs and circumstances.

21

See
Paul Schott Stevens, President and Chief Executive Officer, Investment Company Institute,
id.
at 70-71 (stating that the Internet can serve as “far more than a stand-in for paper documents * * * It can * * *put investors in control when it comes to information about their investments.”); Don Phillips, Managing Director, Morningstar, Inc.,
id.
at 49 (discussing “the ability to use the Internet as a tool for comparative shopping”); Elisse B. Walter, Senior Executive Vice President, NASD,
id.
at 41 (noting that the Internet “doesn't force disclosure into one size fits all”).

22
Recent surveys show that Internet use among adults is at an all time high with approximately three quarters of Americans having access to the Internet.
See A Typology of Information and Technology Users
, Pew Internet & American Life Project, at 2 (May 2007), available at:
http://www.pewinternet.org/pdfs/PIP_ICT_Typology.pdf; Internet Penetration and Impact,
Pew Internet & American Life Project, at 3 (Apr. 2006), available at:
http://www.pewinternet.org/pdfs/PIP_Internet_Impact.pdf
. Further, while some have noted a “digital divide” for certain groups,
see, e.g.
, Susannah Fox,
Digital Divisions
, Pew Internet & American Life Project, at 1 (Oct. 5, 2005) (noting that certain groups lag behind in Internet usage, including Americans age 65 and older, African-Americans, and those with less education), others have noted that this divide may be diminishing for

those groups.
See, e.g.
,
Mutual Fund Shareholders' Use of the Internet, 2006
, Investment Company Institute, Research Fundamentals, at 7 (Oct. 2006), available at:
http://www.ici.org/stats/res/1fm-v15n6.pdf
(“Recent increases in Internet access among older shareholders * * * have narrowed the generational gap considerably. Today, shareholders age 65 or older are more than twice as likely to have Internet access than in 2000.”); Michel Marriott,
Blacks Turn to Internet Highway, And Digital Divide Starts to Close
, The New York Times (Mar. 31, 2006), available at:
http://www.nytimes.com/2006/03/31/us/31divide.html?ex=1301461200&en=6fd4e942aaaa04ad&ei=5088
(“African-Americans are steadily gaining access to and ease with the Internet, signaling a remarkable closing of the ‘digital divide’ that many experts had worried would be a crippling disadvantage in achieving success.”).

23

See
John B. Horrigan,
Home Broadband Adoption 2007
, Pew Internet & American Life Project, at 1 (June 2007), available at:
http://www.pewinternet.org/pdfs/PIP_Broadband%202007.pdf
(47% of all adult Americans had a broadband connection at home as of early 2007).

24

See
Securities Act Release No. 8823 (July 11, 2007) [72 FR 39290 (July 17, 2007)] (adopting rule amendments to enable mutual funds voluntarily to submit supplemental tagged information contained in the risk/return summary section of their prospectuses); Securities Act Release No. 8529 (Feb. 3, 2005) [70 FR 6556 (Feb. 8, 2005)] (adopting rule amendments to enable registrants voluntarily to submit supplemental tagged financial information).

25
Exchange Act Release No. 56135 (July 26, 2007) [72 FR 42222 (Aug. 1, 2007)].

26
A mutual fund may issue more than one class of shares that represent interests in the same portfolio of securities with each class, among other things, having a different arrangement for shareholder services or the distribution of securities, or both.
See
rule 18f-3 under the Investment Company Act [17 CFR 270.18f-3].

We are proposing an improved mutual fund disclosure framework that is intended to provide investors with information that is easier to use and more readily accessible, while retaining the comprehensive quality of the information that is available today. The foundation of the proposal is the provision to all investors of streamlined and user-friendly information that is key to an investment decision. More detailed information would be provided both on the Internet and, upon an investor's request, in paper or by e-mail.

To implement this improved disclosure framework, we are proposing amendments to Form N-1A that would require every prospectus to include a summary section at the front of the prospectus, consisting of key information about the fund, including investment objectives and strategies, risks, costs, and performance. This key information has been identified by the participants in the roundtable, by investor research, and by a variety of commentators as information that is important to most investors in selecting mutual funds.
27

The key information would be required to be presented in plain English in a standardized order. Our intent is that this information would be presented succinctly, in three or four pages at the front of the prospectus.

27

See supra
notes 16 and 20.

We are also proposing a new option for satisfying prospectus delivery obligations with respect to mutual fund securities under the Securities Act. Under the proposed option, key information would be sent or given to investors in the form of a summary prospectus (“Summary Prospectus”), and the statutory prospectus would be provided on an Internet Web site.
28

Upon an investor's request, funds would also be required to send the statutory prospectus to the investor. Our intent in proposing this option is that funds take full advantage of the Internet's search and retrieval capabilities in order to enhance the provision of information to mutual fund investors.

28
A “statutory prospectus” is a prospectus that meets the requirements of Section 10(a) of the Securities Act [15 U.S.C. 77j(a)].

Today's proposals have the potential to revolutionize the provision of information to the millions of mutual fund investors who rely on mutual funds for their most basic financial needs. The proposals are intended to help investors who are overwhelmed by the choices among thousands of available funds described in lengthy and legalistic documents to readily access key information that is important to an informed investment decision. At the same time, by harnessing the power of technology to deliver information in better, more usable formats, the proposals can help those investors, their intermediaries, third party analysts, the financial press, and others to locate and compare facts and data from the wealth of more detailed disclosures that are available.

II. Discussion

A. Proposed Amendments to Form N-1A

We are proposing amendments to Form N-1A that would require the statutory prospectus of every mutual fund to include a summary section at the front of the prospectus consisting of key information presented in plain English in a standardized order. This presentation is intended to address investors' preferences for concise, user-friendly information. The proposed summary section in a fund's prospectus would provide investors with key information about the fund that investors could use to evaluate and compare the fund. This summary would be located in a standardized, easily accessible place and would be available to all investors, regardless of whether the fund uses a Summary Prospectus and regardless of whether the investor is reviewing the prospectus in a paper or electronic format.

Our proposal builds upon the risk/return summary that is currently required at the front of every mutual fund prospectus.
29

The risk/return summary presents a mutual fund's investment objectives and strategies, risks, and costs, in a standardized order at the front of the prospectus. The risk/return summary has, to a significant extent, functioned effectively to convey this information to investors. As a result, the current risk/return summary serves as the centerpiece of the proposed prospectus summary section.

29
Items 2 and 3 of Form N-1A.
See
Investment Company Act Release No. 23064 (Mar. 13, 1998) [63 FR 13916, 13919-25 (Mar. 23, 1998)] (adopting risk/return summary requirement).

We are, however, proposing to modify the front portion of the prospectus in two significant ways in order to make it more useful to investors. First, we are proposing to require that brief additional information be included in

the summary section of the prospectus so that this section will function as a more comprehensive presentation. The information required in the summary section of the prospectus would be the same as that required in the new Summary Prospectus, and it is key information that is important to an investment decision. This approach differs from that used in the current risk/return summary. When the Commission adopted the risk/return summary, it simultaneously permitted funds to offer their shares pursuant to a “profile” that summarizes key information about the fund.
30

While the risk/return summary items were included in the profile, the profile also included additional information. We believe that the key information that is important to an investment decision is the same, whether an investor is reviewing the summary section of a statutory prospectus or a short-form disclosure document; and, for that reason, we are proposing to require the same information in the summary section of the statutory prospectus and in the Summary Prospectus. In each case, our intent is for funds to prepare a concise summary (on the order of three or four pages) that will provide comprehensive key information.

30
Investment Company Act Release No. 23065 (Mar. 13, 1998) [63 FR 13968 (Mar. 23, 1998)]. Our proposed amendments would eliminate the profile.

Second, we are proposing to require that the summary information be presented separately for each fund covered by a multiple fund prospectus and that the information for multiple funds not be integrated.
31

This requirement is intended to assist investors in finding important information regarding the particular fund in which they are interested. Currently, in presenting the risk/return summary information, multiple fund prospectuses may present all of the investment objectives, investment strategies, and risks for multiple funds, followed by the performance information for those funds, and, finally, the fee tables for those funds.
32

Unfortunately, in practice, this flexibility has too frequently resulted in lengthy presentations that are not summary in nature and from which an investor would have considerable difficulty extracting the information about the particular fund in which he or she is interested. In practice, multiple fund prospectuses have integrated information for as many as 40 funds, and we are concerned that it would be extremely difficult, if not impossible, to achieve our goal of short summaries on the order of three or four pages if those summaries were permitted to contain information about multiple funds.

31
Proposed General Instruction C.3.(c)(ii) of Form N-1A.

32
General Instruction C.3.(c) of Form N-1A.

The proposed requirement that summary information be separately presented for each fund in a multiple fund prospectus is intended to address the problem of lengthy, complex multiple fund prospectuses in the least intrusive manner possible. Multiple fund prospectuses contribute substantially to prospectus length and complexity, which act as barriers to investor understanding. Rather than eliminate altogether the ability to use multiple fund prospectuses, which could have more significant cost and other implications than our proposal, we concluded that it was preferable to propose to require a self-contained summary section for each fund.

The Commission is committed to encouraging statutory prospectuses that are simpler, clearer, and more useful to investors. The proposed prospectus summary section is intended to provide investors with streamlined disclosure of key mutual fund information at the front of the statutory prospectus, in a standardized order that facilitates comparisons across funds. We are proposing the following amendments to Form N-1A in order to implement the summary section.

1. General Instructions to Form N-1A

We are proposing amendments to the General Instructions to Form N-1A to address the proposed new summary section of the statutory prospectus. These proposed amendments address plain English and organizational requirements.

We propose to amend the General Instructions to state that the summary section of the prospectus must be provided in plain English under rule 421(d) under the Securities Act.
33

Rule 421(d) requires an issuer to use plain English principles in the organization, language, and design of the front and back cover pages, the summary, and the risk factors sections of its prospectus.
34

The amended instruction would serve as a reminder that the new prospectus summary section is subject to rule 421(d). The use of plain English principles in the new summary section will further our goal of encouraging funds to create usable summaries at the front of their prospectuses. The prospectus, in its entirety, also would remain subject to the requirement that the information be presented in a clear, concise, and understandable manner.
35

33
Proposed General Instruction B.4.(c) of Form N-1A; 17 CFR 230.421(d).

34
Rule 421(d) requires the use of the following plain English principles: (1) Short sentences; (2) definite, concrete, everyday words; (3) active voice; (4) tabular presentation or bullet lists for complex material, wherever possible; (5) no legal jargon or highly technical business terms; and (6) no multiple negatives.

35
Pursuant to rule 421(b), the following standards must be used when preparing prospectuses: (1) Present information in clear, concise sections, paragraphs, and sentences; (2) use descriptive headings and subheadings; (3) avoid frequent reliance on glossaries or defined terms as the primary means of explaining information in the prospectus; and (4) avoid legal and highly technical business terminology. 17 CFR 230.421(b).

We are also proposing amendments to the organizational requirements of the General Instructions. The proposals would require mutual funds to disclose the summary information in numerical order at the front of the prospectus and not to precede this information with any information other than the cover page or table of contents.
36

Information included in the summary section need not be repeated elsewhere in the prospectus. While a fund may continue to include information in the prospectus that is not required, a fund may not include any such additional information in the summary section of the prospectus.
37

36
Proposed General Instruction C.3.(a) to Form N-1A.

37
Proposed General Instruction C.3.(b) of Form N-1A.

As noted above, we are also proposing that a multiple fund prospectus be required to present all of the summary information for each fund sequentially and not integrate the information for more than one fund.
38

That is, a multiple fund prospectus would be required to present all of the summary information for a particular fund together, followed by all of the summary information for each additional fund. For example, a multiple fund prospectus would not be permitted to present the investment objectives for several funds followed by the fee tables for several funds. A multiple fund prospectus would be required to clearly identify the name of the particular fund at the beginning of the summary information for the fund.

38
Proposed General Instruction C.3.(c)(ii) of Form N-1A;
see supra
note and accompanying text.

As is the case with the current risk/return summary, the proposed instructions would permit a fund with multiple share classes, each with its own cost structure, to present the summary information separately for each class, to integrate the information for multiple classes, or to use another presentation that is consistent with disclosing the summary information in a standard order at the beginning of the

prospectus.
39

Generally, this flexibility has resulted in effective presentations of class-specific cost and performance information that facilitate comparisons among classes.

39
Proposed General Instruction C.3.(c)(ii) of Form N-1A.

Finally, we are proposing to eliminate the provisions of Form N-1A that permit a fund to omit detailed information about purchase and redemption procedures from the prospectus and to provide this information in a separate document that is incorporated into and delivered with the prospectus.
40

This option appears to be unnecessary in light of the proposed new Summary Prospectus which could be used, at a fund's option, along with any additional sales materials, including a document describing purchase and redemption procedures.
41

In addition, the option to provide a separate purchase and redemption document has been used infrequently since its adoption. We are also proposing to eliminate a similar provision in the requirements for the statement of additional information (“SAI”).
42

The proposed elimination of these provisions does not otherwise alter the information about purchase and redemption procedures that must appear in the fund's prospectus and SAI, and this information would continue to be required in those documents.

40
Instruction 6 to Item 1(b) of Form N-1A; Item 6(g) of Form N-1A; Investment Company Act Release No. 23064,
supra
note , 63 FR at 13932-33.

41

See infra
notes 87 through 90 and accompanying text.

42
Instruction to Item 18(a) of Form N-1A; proposed Item 24(a) of Form N-1A (redesignating current Item 18(a) and eliminating Instruction).

We request comment on the proposed amendments to the General Instructions, and in particular on the following issues:

• Are the proposed revisions to the General Instructions appropriate? Will they be helpful in encouraging prospectus summary sections that address investors' preferences for concise, user-friendly information?

• Should we amend the General Instructions to Form N-1A in other respects? For example, should we impose any formatting requirements on the summary section of the prospectus, such as limitations on page length (
e.g.
, three or four pages) or required font sizes or layouts? Would any such formatting requirements further the goal of making the summary section a user-friendly presentation of information?

• Is it appropriate to prohibit a fund from including information in the summary section that is not required?

• Are the proposed requirements for the order of information appropriate? Will they contribute to more readable prospectuses and summary information that is easy to evaluate and compare?

• Is it helpful for the prospectus to have a separate summary section?

• Are the requirements with respect to multiple fund and multiple class prospectuses appropriate? Should we prohibit multiple fund or multiple class prospectuses altogether? Should we provide greater or lesser flexibility in the presentation of multiple fund or multiple class prospectuses? If we permit greater flexibility, how can we do so consistent with the goal of achieving concise, readable summaries? For example, if we permit integrated multiple fund summary presentations for some or all funds, should we also impose a maximum page limit on a summary section that integrates the information for multiple funds?

• Should we eliminate or otherwise modify the optional separate purchase and redemption document? What, if any, purpose will this option serve if we adopt the new Summary Prospectus?

• Are there alternatives we should consider that would achieve our goal of providing enhanced disclosures to investors in a more cost effective manner?

2. Information Required in Summary Section

The summary section of a mutual fund statutory prospectus would consist of the following information: (1) Investment objectives; (2) costs; (3) principal investment strategies, risks, and performance; (4) top ten portfolio holdings; (5) investment advisers and portfolio managers; (6) brief purchase and sale and tax information; and (7) financial intermediary compensation. This information is largely drawn from the current risk/return summary and fund profile.

Investment Objectives and Goals

Like the current risk/return summary, the proposed summary section would begin with disclosure of a fund's investment objectives or goals. A fund also would be permitted to identify its type or category (
e.g.
, that it is a money market fund or balanced fund).
43

43
Proposed Item 2 of Form N-1A; Item 2(a) of Form N-1A; rule 498(c)(2)(i).
See
Investment Company Act Release No. 23064,
supra
note 29, 63 FR 13919-20 (adopting investment objectives or goals disclosure requirement in Item 2(a) of Form N-1A).

Fee Table

The fee table and example, which are drawn from the current risk/return summary and which disclose the costs of investing, would immediately follow the fund's investment objectives.
44

In order to address continuing concerns about investor understanding of mutual fund costs,
45

we are proposing several modifications to the current fee table that are intended to provide greater prominence to the cost disclosures and make the table more understandable.

44
Proposed Item 3 of Form N-1A; Item 3 of Form N-1A; rule 498(c)(2)(iv).

45

See
Barbara Roper, Director of Investor Protection, Consumer Federation of America, June 12 Roundtable Transcript,
supra
note 15, at 21; James J. Choi, David Laibson, & Brigitte C. Madrian, National Bureau of Economic Research,
Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds,
at 6 (May 2006), available at:
http://www.nber.org/papers/w12261.pdf.

We are proposing to move the fee table forward from its current location, which follows information about investment strategies, risks, and past performance. Contrary to our intent in including the fee table in the risk/return summary, this information has sometimes appeared fairly deep within the prospectus, particularly in multiple fund prospectuses covering a large number of funds. The proposed change to the location of the fee table, together with the proposed requirement that the summary section for each fund be provided separately, should serve to enhance the prominence of the cost information. The fee table and example are designed to help investors understand the costs of investing in a fund and to compare those costs with the costs of other funds. Placing the fee table and example at the front of the summary information reflects the importance of costs to an investment decision.
46

46
For example, a 1% increase in annual fees reduces an investor's return by approximately 18% over 20 years.

We are proposing several additional amendments to the fee table that are intended to improve the disclosure that investors receive regarding fees and expenses of the fund. First, we are proposing that mutual funds that offer discounts on front-end sales charges for volume purchases (so-called “breakpoint discounts”) include brief narrative disclosure alerting investors to the availability of those discounts.
47

Several years ago, the Commission and NASD staffs identified concerns regarding the extent to which mutual fund investors were receiving breakpoint discounts to which they were entitled. The Commission adopted enhanced prospectus disclosure requirements regarding breakpoint

discounts at that time.
48

We believe that investor awareness of the availability of these discounts may be heightened further by requiring brief narrative disclosure about the availability of these discounts at the beginning of the fee table.

47
Proposed Item 3 of Form N-1A; proposed Instruction 1(b) to proposed Item 3 of Form N-1A.

48

See
Investment Company Act Release No. 26464 (June 7, 2004) [69 FR 33262 (June 14, 2004)].

Second, we are proposing to revise the heading “Annual Fund Operating Expenses” in the fee table. Specifically, we propose to revise the parenthetical following the heading to read “ongoing expenses that you pay each year as a percentage of the value of your investment” in place of “expenses that are deducted from Fund assets.” In recent years, we have taken significant steps to address concerns that investors do not understand that they pay ongoing costs every year when they invest in mutual funds, including requiring disclosure of ongoing costs in shareholder reports.
49

Our proposed revision further addresses those concerns by making clear that the expenses in question are paid by investors as a percentage of the value of their investments in the fund.

49
Item 22(d)(1) of Form N-1A; Investment Company Act Release No. 26372 (Feb. 27, 2004) [69 FR 11244 (Mar. 9, 2004)] (adopting disclosure of ongoing costs in shareholder reports).
See also General Accounting Office report on Mutual Fund Fees: Additional Disclosure Could Encourage Price Competition,
at 66-81 (June 2000), available at:
http://www.gao.gov/archive/2000/gg00126.pdf
(discussing lack of investor awareness of the fees they pay and investor focus on mutual fund sales charges rather than ongoing fees).

Third, for funds other than money market funds, the proposal would require the addition of brief disclosure regarding portfolio turnover immediately following the fee table example.
50

A fund would be required to disclose its portfolio turnover rate for the most recent fiscal year, as a percentage of the average value of its portfolio. This numerical disclosure would be accompanied by a brief explanation of the effect of portfolio turnover on transaction costs and fund performance. The prospectus currently is required to include the portfolio turnover rate in the financial highlights table as well as narrative information about portfolio turnover,
51

and the effect of transaction costs is reflected in fund performance. Nonetheless, some concerns have been expressed in recent years regarding the degree to which investors understand the effect of portfolio turnover, and the resulting transaction costs, on fund expenses and performance.
52

Our proposal to require brief portfolio turnover disclosure in the summary section of the prospectus is intended to address these concerns.

50
Proposed Instruction 5 to proposed Item 3 of Form N-1A.

51
Instruction 7 to Item 4(b)(1) of Form N-1A; Item 8(a) of Form N-1A; Item 11(e) of Form N-1A. The portfolio turnover rate that would be required to be disclosed in the summary section would be calculated in the same manner that is currently required in Form N-1A.

52

See
Investment Company Act Release No. 26313 (Dec. 18, 2003) [68 FR 74820 (Dec. 24, 2003)] (request for comment regarding ways to improve disclosure of transaction costs); Report of the Mutual Fund Task Force on Soft Dollars and Portfolio Transaction Costs (Nov. 11, 2004), available at:
http://www.finra.org/web/groups/rules_regs/documents/rules_regs/p012356.pdf.

Finally, we are proposing to amend the requirement that a fund disclose in its fee table gross operating expenses that do not reflect the effect of expense reimbursement or fee waiver arrangements, which result in reduced expenses being paid by the fund.
53

While gross operating expenses may provide investors with a more accurate understanding of the potential long-term costs of an investment in the fund, they may also overstate the actual, current expenses. In addition, gross operating expenses may overstate long-term expenses because any expense increase due to the termination of an expense reimbursement or fee waiver arrangement may be offset by reduced expenses that accompany economies of scale resulting from asset growth.

53
Instructions 3(d)(i) and 5(a) to Item 3 of Form N-1A. In an expense reimbursement arrangement, the adviser reimburses the fund for expenses incurred. Under a fee waiver arrangement, the adviser agrees to waive a portion of its fees in order to limit fund expenses.

To address these issues, we are proposing to permit a fund to place two additional captions directly below the “Total Annual Fund Operating Expenses” caption in cases where there were expense reimbursement or fee waiver arrangements that reduced fund operating expenses and that will continue to reduce them for no less than one year from the effective date of the fund's registration statement.
54

One caption would show the amount of the expense reimbursement or fee waiver, and a second caption would show the fund's net expenses after subtracting the fee reimbursement or expense waiver from the total fund operating expenses. Funds that disclose these arrangements would also be required to disclose the period for which the expense reimbursement or fee waiver arrangement is expected to continue, and briefly describe who can terminate the arrangement and under what circumstances. Further, in computing the fee table example, a fund would be permitted to reflect any expense reimbursement or fee waiver arrangements that reduced any fund operating expenses during the most recently completed calendar year and that will continue to reduce them for no less than one year from the effective date of the fund's registration statement.
55

This adjustment could be reflected only in the periods for which the expense reimbursement or fee waiver arrangement is expected to continue. For example, if such an arrangement were expected to continue for one year, then, in the computation of 10-year expenses in the fee table example, the arrangement could only be reflected in the first of the 10 years.

54
Proposed Instructions 3(e) and 6(b) to proposed Item 3 of Form N-1A.

55
Proposed Instruction 4(a) to proposed Item 3 of Form N-1A. We also propose a technical amendment to the instructions to the expense example to eliminate language permitting funds to reflect the impact of the amortization of initial organization expenses in the expense example numbers.
Id.
This language is unnecessary because initial organization expenses must be expensed as incurred and may no longer be capitalized.
See
American Institute of Certified Public Accountants, Statement of Position 98-5,
Reporting on the Costs of Start-Up Activities
(Apr. 3, 1998).

Investments, Risks, and Performance

Following the fee table and example, we are proposing that a fund disclose its principal investment strategies and risks,
56

in the same manner required in the current risk/return summary.
57

This would include the current risk/return bar chart and table illustrating the variability of returns and showing the fund's past performance.

56
Proposed Item 4 of Form N-1A. To conform to other changes we are proposing to Form N-1A, the Instructions to proposed Item 4 contain technical revisions that (1) amend cross-references to other Items in Form N-1A; and (2) eliminate language related to the presentation of performance information for more than one fund, given the proposed requirement that information for each fund be presented separately. Proposed Instructions 2(e) and 3 to proposed Item 4(b)(2) of Form N-1A.

57
Items 2(b) and (c) of Form N-1A.

Portfolio Holdings

The proposed summary section would next need to include a list of the 10 largest issues contained in the fund's portfolio, in descending order, together with the percentage of net assets represented by each.
58

Information concerning portfolio holdings may provide investors with a greater understanding of a fund's stated investment objectives and strategies and may assist investors in making more informed asset allocation decisions. It was suggested at our roundtable that it may be appropriate to include this information, which currently is not contained in the prospectus, in a short summary of key fund information.
59

In

addition, many funds and third party analysts include top 10 portfolio holdings in fund summaries distributed to investors and prominently on their Web sites, suggesting significant investor interest in this information. While complete portfolio holdings information currently is available in Commission filings on Form N-CSR and Form N-Q on a quarterly basis,
60

we believe that the top 10 holdings may be important information in the summary section of the prospectus, which is intended to bring together, in a single, readily accessible place, key information that is important to an investment decision.

58
Proposed Item 5 of Form N-1A.

59

See
Henry H. Hopkins, Vice President and Chief Legal Counsel, T. Rowe Price Group, Inc.,

June 12 Roundtable Transcript,
supra
note 15, at 32 (suggesting that the current profile be amended to include the top 10 portfolio holdings).

60
Form N-CSR [17 CFR 249.331; 17 CFR 274.128]; Form N-Q [17 CFR 249.332; 17 CFR 274.130].

Mutual funds would be required to provide their top 10 portfolio holdings as of the end of the most recent calendar quarter.
61

In determining their top 10 holdings, funds would be required to aggregate and treat as a single issue (1) all fully collateralized repurchase agreements; and (2) all securities of any one issuer (other than fully collateralized repurchase agreements).
62

The U.S. Treasury and each agency, instrumentality, or corporation, including each government-sponsored entity, that issues U.S. government securities would be treated as a separate issuer.
63

61
Proposed Instruction 1 to proposed Item 5 of Form N-1A.

62
This proposed aggregration provision is the same as that currently applicable for purposes of determining whether the value of an issue exceeds one percent of net asset value in the summary portfolio schedule that may be included in a fund's report to shareholders. Schedule VI of Regulation S-X [17 CFR 210.12-12C] (Summary of Schedule of Investments in Securities of Unaffiliated Issuers).

63
Proposed Instruction 2 to proposed Item 5 of Form N-1A.

We are proposing an exclusion to the requirement to list the top 10 holdings that is similar to an exclusion in the current requirements for quarterly disclosure of a fund's complete portfolio holdings.
64

Funds rely on this exclusion to guard against the premature release of certain positions that could lead to front-running and other predatory trading practices.
65

Currently, a fund's complete portfolio schedule filed with the Commission on Form N-CSR or Form N-Q may list an amount not exceeding five percent of the total value of the portfolio holdings in one amount as “Miscellaneous securities,” provided that securities so listed are not restricted, have been held for not more than one year prior to the date of the related balance sheet, and have not previously been reported by name to the shareholders, or set forth in any registration statement, application, or annual report or otherwise made available to the public.

64
Note 1 to Schedule I of Regulation S-X [17 CFR 210.12-12] (Schedule of Investments in Securities of Unaffiliated Issuers); Note 5 to Schedule VI of Regulation S-X [17 CFR 210.12-12C] (Summary of Schedule of Investments in Securities of Unaffiliated Issuers).

65
Investment Company Act Release No. 26372,
supra
note 49, 69 FR at 11250.

Under the proposal, in listing the top 10 holdings, any securities that would be required to be listed separately or included in a group of securities that is listed in the aggregate as a single issue could be listed in one amount as “Miscellaneous securities,” provided that the securities so listed are eligible to be categorized by the fund as “Miscellaneous securities” in a complete portfolio schedule dated as of the end of the most recent calendar quarter. However, if any security that is included in “Miscellaneous securities” would otherwise be required to be included in a group of securities that is listed in the aggregate as a single issue in the top 10 portfolio holdings, the remaining securities of that group must nonetheless be listed in the top 10 portfolio holdings, even if the remaining securities alone would not otherwise be required to be listed in this manner (
e.g.
, because the combined value of the security listed in “Miscellaneous securities” and the remaining securities of the same issuer is sufficient to cause them to be among the 10 largest issues, but the value of the remaining securities alone is not sufficient to cause the remaining securities to be among the 10 largest issues). A brief footnote explaining the term “Miscellaneous securities” would be required.
66

66
Proposed Instruction 3 to proposed Item 5 of Form N-1A.

Management

The next item in the proposed prospectus summary section would be the name of each investment adviser and sub-adviser of the fund, followed by the name, title, and length of service of the fund's portfolio managers.
67

These items are similar to disclosures currently required in a fund profile, as well as in the fund's prospectus.
68

67
Proposed Item 6 of Form N-1A.

68
Item 5 of Form N-1A; rule 498(c)(2)(v). Additional disclosures regarding investment advisers and portfolio managers that are currently required in the prospectus would continue to be required, but not in the summary section. Proposed Item 11(a) of Form N-1A.

As in the current profile, a fund would not be required to identify a sub-adviser whose sole responsibility is limited to day-to-day management of the fund's cash instruments unless the fund is a money market fund or other fund with a principal investment strategy of regularly holding cash instruments.
69

Also as in the current profile, a fund having three or more sub-advisers, each of which manages a portion of the fund's portfolio, would not be required to identify each sub-adviser, except that the fund would be required to identify any sub-adviser that is (or is reasonably expected to be) responsible for the management of a significant portion of the fund's net assets.
70

We believe that, as in the current profile, a significant portion of the fund's net assets for this purpose generally should be deemed to be 30% or more of the fund's net assets.
71

The portfolio managers required to be listed would be the same ones with respect to which information is currently required in the prospectus.
72

69
Proposed Instruction 1 to proposed Item 6(a) of Form N-1A; rule 498(c)(2)(v)(B)(1). A fund would continue to be required to provide the name, address, and experience of all sub-advisers elsewhere in the prospectus. Proposed Item 11(a)(1)(i) of Form N-1A.

70
Proposed Instruction 2 to proposed Item 6(a) of Form N-1A; rule 498(c)(2)(v)(B)(2).

71
This proposed exception would be consistent with the requirements of the current profile. Rule 498(c)(2)(v)(B)(2).

72
Item 5(a)(2) of Form N-1A.

Purchase and Sale of Fund Shares

The proposed summary section would next disclose the fund's minimum initial or subsequent investment requirements and the fact that the fund's shares are redeemable, and would identify the procedures for redeeming shares (
e.g.
, on any business day by written request, telephone, or wire transfer).
73

This disclosure would be the same as that required in the current rule 498 profile except that we are not proposing to include certain fee disclosures that are also covered by the fee table, including a fund's sales loads, breakpoints, and charges upon redemption.
74

73
Proposed Item 7 of Form N-1A.

74

See
rules 498(c)(2)(vi) and (vii) (profile purchase and sale disclosures).

Tax Information

Our proposals would require a mutual fund to state, as applicable, that it intends to make distributions that may be taxed as ordinary income or capital gains or that the fund intends to distribute tax-exempt income. A fund that holds itself out as investing in securities generating tax-exempt income would be required to provide, as applicable, a general statement to the effect that a portion of the fund's

distributions may be subject to federal income tax.
75

This proposed disclosure is a streamlined version of the tax disclosure required in the current rule 498 profile.
76

75
Proposed Item 8 of Form N-1A.

76

See
rule 498(c)(2)(viii). The current rule 498 profile also requires (1) a description of how frequently the fund intends to make distributions and what options for reinvestment of distributions are available to investors; (2) a statement that distributions may be taxable at different rates depending on the length of time that the fund holds its assets; and (3) that if a fund expects that its distributions primarily will consist of ordinary income or capital gains, disclosure to that effect be provided. This disclosure would continue to be required in the statutory prospectus. Proposed Items 12(d) and (f)(1)(i) (redesignating current Items 6(d) and (f)(1)(i)).

Financial Intermediary Compensation

The proposed summary section of the prospectus would conclude with the following statement, which could be modified provided that the modified statement contains comparable information.
77

77
Proposed Item 9 of Form N-1A.

“
Payments to Broker-Dealers and Other Financial Intermediaries

If you purchase the Fund through a broker-dealer or other financial intermediary (such as a bank), the Fund and its related companies may pay the intermediary for the sale of Fund shares and related services. These payments may influence the broker-dealer or other intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary's Web site for more information.”

This disclosure would be new to fund prospectuses and would identify the existence of compensation arrangements with selling broker-dealers or other financial intermediaries, alert investors to the potential conflicts of interest arising from these arrangements, and direct investors to their salesperson or the financial intermediary's Web site for further information. It is intended to address, in part, concerns that mutual fund investors lack adequate information about certain distribution-related costs that create conflicts for broker-dealers and their associated persons.
78

78
The Commission has recognized these concerns in a separate initiative in which the Commission proposed to require, among other things, disclosure of mutual fund distribution-related costs and conflicts of interest by selling broker-dealers and other financial intermediaries at the point of sale. Securities Act Release No. 8544 (Feb. 28, 2005) [70 FR 10521 (Mar. 4, 2005)]; Securities Act Release No. 8358 (Jan. 29, 2004) [69 FR 6438 (Feb. 10, 2004)]. One commenter to that proposal recommended use of a short-form disclosure document that would include, among other things, basic information about such potential conflicts of interest. Comment Letter of NASD, dated March 31, 2005, available at:
http://www.sec.gov/rules/proposed/s70604/nasd033005.pdf
(supporting the use of a “profile plus” document on the Internet).
See also supra
note 16.

We request comment generally on the information proposed to be included in the summary section of the statutory prospectus, and in particular on the following issues:

• Does the proposed summary section encourage prospectuses that are simpler, clearer, and more useful to investors? Would the proposed summary section help investors to better compare funds?

• Should each of the proposed items be included in the summary section? Should any additional disclosure items currently required in Form N-1A be included in the summary section? Should we consider disclosure items that are not currently in Form N-1A? If so, what types of additional disclosures should we consider including in the summary section?

• How would the required narrative explanations of various items contribute to readability and length of the summary section? Should each of these explanations be required, permitted, or prohibited in the summary section? Should any of these explanations be required to appear in the prospectus, but outside the summary section?

• Is the proposed order of the information appropriate, or should it be modified? If so, how should it be modified?

• Should we also require a fund to disclose whether its objective may be changed without shareholder approval in the summary section?

• Are our proposed revisions to the fee table and example appropriate? Are there any other revisions to the fee table or example that we should consider?

• Is the proposed disclosure at the beginning of the fee table regarding discounts on front-end sales charges for volume purchases (
i.e.
, breakpoint discounts) appropriate?

• Should we consider any other revisions to headings in the fee table to make them more understandable to investors? For example, should the terms “load” or “12b-1” be eliminated? Do investors generally understand these terms, or are there clearer terms that we should require?

• How, if at all, should expense reimbursement and fee waiver arrangements be reflected in the fee table and expense example and accompanying disclosures?

• Should funds be required to disclose the detailed fee table information in the summary section or would it be more useful to investors to require disclosure of total shareholder fees and total annual fund operating expenses in the summary section and require disclosure of the detailed fee table outside the summary section? Are there any details regarding fund fees or expenses that should be included only outside the summary section? For example, the fee table currently permits “Other Expenses” to be subdivided into no more than three subcaptions that identify the largest expense or expenses comprising “Other Expenses.”
79

Should we permit this detail in the summary section of the prospectus, or should we require that funds providing this level of detail include it outside the summary section?

79
Instruction 3(c)(iii) to Item 3 of Form N-1A.

• Are there any revisions to the fee table example that would make it more useful for investors? For example, should the fee table example separately break out one-time charges, such as sales loads, and recurring expenses, such as management and 12b-1 fees? Should the required narrative explanation of the purpose of the fee table example be modified or eliminated?

• Should the proposed disclosure regarding a fund's portfolio turnover rate be included in the summary section? Should the proposed portfolio turnover narrative disclosure be modified or should funds be required to disclose their portfolio turnover in the summary section without any narrative explanation? Should any additional information regarding a fund's portfolio turnover rate be required to be disclosed as part of the summary section, for example, information about a fund that engages in active and frequent trading of portfolio securities and the tax consequences to shareholders and effects on fund performance of increased portfolio turnover?
80

Should funds be required to provide an explanation of the effect of portfolio turnover on transaction costs and fund performance? Should new funds (
e.g.
, funds with less than six months or one year of operations) be required to include information about portfolio turnover in the summary section given their limited period of operations? Is the portfolio turnover rate meaningful enough for a new fund that it should be required in the summary section?

80

Cf.
Instruction 7 to Item 4 of Form N-1A.

• Should we consider any revisions to the bar chart or table disclosing a fund's returns? For example, should we modify or eliminate the required explanation that this information illustrates the variability of a fund's returns?

• Are there additional performance measures, such as past performance adjusted for the impact of inflation, that

should be required in the summary section?

• Should we require disclosure regarding portfolio holdings in the summary section? If so, what information should be required,
e.g.
, top five holdings, top 10, top 25? If we require portfolio holdings disclosure, should any funds be exempt from the requirement,
e.g.
, money market funds or exchange-traded funds? Should new funds be exempt from this requirement? Are there circumstances where this disclosure might not be useful to investors or where additional information regarding a fund's investment exposures would be necessary to make the portfolio holdings information useful, for example, where the top 10 holdings represent a relatively small percentage of the fund's total holdings? Should we require funds to disclose additional information such as the percentage of a fund's net assets represented by the combined top 10 holdings? Should we require a fund to disclose its holdings that represent a specified percentage of the fund's holdings?

• Would the proposed exception to the requirement to list the top 10 holdings that would permit a fund to list an amount not exceeding five percent of the total value of the portfolio holdings in one amount as “Miscellaneous securities” adequately guard against the premature release of certain positions that could lead to front-running and other predatory trading practices? If not, what other protections would be necessary? Is the “Miscellaneous securities” exception necessary and appropriate?

• Should we require funds to present tables, charts, or graphs that depict portfolio holdings by reasonably identifiable categories (
e.g.
, industry sector, geographic region, credit quality, maturity, etc.) either instead of, or in addition to, top 10 portfolio holdings?
81

81

Cf
. Item 22(d)(2) of Form N-1A; Investment Company Act Release No. 26372,
supra
note 49, 69 FR at 11251-52 (requiring similar disclosures in shareholder reports).

• Should, as proposed, a fund having three or more sub-advisers be required to identify only those sub-advisers that are (or are reasonably expected to be) responsible for the management of a significant portion of the fund's net assets? Are there situations where this would result in the disclosure of no sub-advisers and, if so, would this be appropriate? Should we, as proposed, provide that a “significant portion” of a fund's net assets generally would be deemed to be 30% or more of a fund's net assets? Should a higher or lower percentage or some other measure or standard be used?

• Should any or all of the information that we propose to require in the summary section regarding the purchase and sale of fund shares be permitted rather than required? Should any of this information be prohibited from being included in the summary section?

• Should any additional information regarding the purchase and sale of fund shares be required to be disclosed in the summary section? For example, should information regarding policies and procedures with respect to frequent purchases and redemptions of fund shares be disclosed in the summary, or is it appropriate to maintain the location of this information elsewhere in the prospectus?

• Is there any additional tax information that should be included in the summary section?

• Should we require disclosure regarding the compensation of broker-dealers, banks, and other financial intermediaries in the summary section? Should we permit this disclosure to be omitted or modified in any context? For example, should a fund be permitted to omit this disclosure if the fund is marketed directly to investors or where a transaction is initiated by an investor and not on the basis of a financial intermediary's recommendation? Should funds be permitted to modify this disclosure to reflect the fact that some transactions may be initiated by an investor and not on the basis of a financial intermediary's recommendation?

• In addition or as an alternative to directing customers to ask salespersons or visit a financial intermediary's Web site for more information about intermediary compensation, should the summary prospectus direct customers to other sources of information? Do all financial intermediaries that distribute mutual funds have Internet Web sites? Is information typically available on the Web sites of financial intermediaries? Should the Commission require that such information be made available on intermediaries' Web sites?

• Should we require or permit a fund to include its ticker symbol in the summary section? Alternatively, should we require or permit a fund to include its ticker symbol on the front or back cover page of the statutory prospectus or SAI or elsewhere in those documents?

3. Conforming and Technical Amendments to Form N-1A

The proposed amendments to Form N-1A would require adding new items to the form and revising and renumbering certain existing items. We are proposing conforming amendments to Form N-1A in order to update the table of contents and the various references to Form N-1A items contained within the form. We are also proposing technical amendments to Form N-1A to update the Commission's telephone number and address.
82

82
Proposed Item 1(b)(3) of Form N-1A.

B. New Delivery Option for Mutual Funds

1. Use of Summary Prospectus and Satisfaction of Statutory Prospectus Delivery Requirements

The Commission is proposing to replace rule 498, the current voluntary profile rule, with a new rule that would permit the obligation under the Securities Act to deliver a statutory prospectus with respect to mutual fund securities to be satisfied by sending or giving a Summary Prospectus and providing the statutory prospectus online. In addition, the new rule would require a fund to send the statutory prospectus in paper or by e-mail upon request. The Summary Prospectus would be required to contain the key information that is included in the new summary section of the statutory prospectus in the same order that would be required in the statutory prospectus. As discussed above, the proposal is intended to take advantage of technological developments and the expanded use of the Internet in order to provide investors with information that is easier to use and more readily accessible, while retaining the comprehensive quality of the information that is available to investors today. The proposal provides for a layered approach to disclosure in which key information is sent or given to the investor and more detailed information is provided online and, upon request, is sent in paper or by e-mail.

The proposed new rule would provide that any obligation under Section 5(b)(2) of the Securities Act
83

to have a statutory prospectus precede or accompany the carrying or delivery of a mutual fund security in an offering registered on Form N-1A is satisfied if (1) a Summary Prospectus is sent or given no later than the time of the carrying or delivery of the fund security;
84

and, if any other materials accompany the Summary Prospectus,

the Summary Prospectus is given greater prominence than those materials and is not bound together with any of those materials;
85

(2) the Summary Prospectus that is sent or given satisfies the rule's requirements at the time of the carrying or delivery of the fund security; and (3) the conditions set forth in the rule, which require a fund to provide the statutory prospectus and other information on the Internet in the manner specified in the rule, are satisfied.
86

Section 5(b)(2) of the Securities Act makes it unlawful to deliver a security for purposes of sale or for delivery after sale “unless accompanied or preceded” by a statutory prospectus. Under the rule, delivery of the statutory prospectus for purposes of Section 5(b)(2) would be accomplished by sending or giving a Summary Prospectus and by providing the statutory prospectus and other required information online. Failure to comply with the rule's requirements for sending or giving a Summary Prospectus and providing the statutory prospectus and other information online would mean that the rule could not be relied on to meet the Section 5(b)(2) prospectus delivery obligation. Absent satisfaction of the Section 5(b)(2) obligation by other means, a Section 5(b)(2) violation would result. The rule would also require a fund to send the statutory prospectus upon request. This requirement would not be a condition to reliance on the rule, and failure to send the requested statutory prospectus would result in a violation of the rule (as opposed to a violation of Section 5(b)(2)).

83
15 U.S.C. 77e(b)(2).

84
A fund could rely upon existing Commission guidance, which typically requires affirmative consent from individual investors, to send or give a Summary Prospectus by electronic means.
See
Securities Act Release No. 7233 (Oct. 6, 1995) [60 FR 53458 (Oct. 13, 1995)]; Securities Act Release No. 7856 (Apr. 28, 2000) [65 FR 25843 (May 4, 2000)].

85

Cf
. 17 CFR 240.17a-5(c)(5)(ii) (requiring a financial disclosure document to be “given prominence in the materials delivered to customers of the broker or dealer”).

86
Proposed rule 498(c).

The proposed rule also would provide that a communication relating to an offering registered on Form N-1A that is sent or given after the effective date of a mutual fund's registration statement (other than a prospectus permitted or required under Section 10 of the Securities Act) shall not be deemed a prospectus under Section 2(a)(10) of the Securities Act if (1) it is proved that prior to or at the same time with the communication a Summary Prospectus was sent or given to the person to whom the communication was made; and, if any other materials accompany the Summary Prospectus, the Summary Prospectus is given greater prominence than those materials and is not bound together with any of those materials; (2) the Summary Prospectus that was sent or given satisfies the rule's requirements at the time of the communication; and (3) the conditions set forth in the rule, which require a fund to provide the statutory prospectus and other information on the Internet in the manner specified in the rule, are satisfied.
87

This provision is similar to Section 2(a)(10)(a) of the Securities Act, which provides that a communication sent or given after the effective date of the registration statement (other than a prospectus permitted under subsection (b) of Section 10) shall not be deemed a prospectus if it is proved that prior to or at the same time with the communication a written prospectus meeting the requirements for a statutory prospectus at the time of the communication was sent or given to the person to whom the communication was made.
88

Pursuant to this provision, communications that would otherwise be considered “prospectuses” subject to the liability provisions of Section 12(a)(2) of the Securities Act are not deemed prospectuses and are not subject to Section 12(a)(2) if they are preceded or accompanied by the statutory prospectus.
89

Similarly, under our proposal, communications that are preceded or accompanied by a Summary Prospectus would not be deemed to be prospectuses and would not be subject to Section 12(a)(2) if all the conditions of the proposed rule are met. These communications would remain subject to the general antifraud provisions of the federal securities laws.
90

87
Proposed rule 498(d). This provision would be limited to a mutual fund Summary Prospectus that satisfies the terms of the proposed rule and would not apply in the case of any issuer other than a mutual fund.

88
15 U.S.C. 77b(a)(10)(a).

89
15 U.S.C. 77
l
(a)(2). Section 12(a)(2) of the Securities Act imposes liability for materially false or misleading statements in a prospectus or oral communication, subject to a reasonable care defense.

90

See, e.g.
, Section 17(a) of the Securities Act [15 U.S.C. 77q(a)]; Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. 78j(b)]; Section 34(b) of the Investment Company Act [15 U.S.C. 80a-33(b)].

The current proposal is intended to create a disclosure regime that is tailored to the unique needs of mutual fund investors in a manner that provides ready access to the information that investors need, want, and choose to review in connection with a mutual fund purchase decision. In crafting this proposal, the Commission has drawn upon recent initiatives that have harnessed technology in order to provide investors with better access to information.
91

The current proposal provides for a layered approach to disclosure in which key information is sent or given to the investor and more detailed information is provided online and, upon request, is sent in paper or by e-mail. This is intended to provide investors with better ability to choose the amount and type of information to review, as well as the format in which to review it (online or paper). In addition, the provision of a Summary Prospectus containing key information about the fund, coupled with online provision of more detailed information, should aid investors in comparing funds. The requirement that the Summary Prospectus be given greater prominence than, and not be bound together with, accompanying materials is intended to prevent the Summary Prospectus from being obscured by accompanying sales materials and highlight for investors the concise, balanced presentation of the Summary Prospectus. In short, we believe that the proposal has the potential to result in funds providing investors with more usable information than they receive today in a format that investors are more likely to use and understand. Under the proposal, an investor could choose to receive the statutory prospectus in the same paper format that would be provided today.

91
Exchange Act Release No. 56135,
supra
note 25, 72 FR 42222 (shareholder choice regarding proxy materials); Exchange Act Release No. 55146 (Jan. 22, 2007) [72 FR 4148 (Jan. 29, 2007)] (Internet availability of proxy materials); Securities Act Release No. 8591 (July 19, 2005) [70 FR 44722 (Aug. 3, 2005)] (securities offering reform).

We request comment generally on the proposed prospectus delivery option for mutual funds and specifically on the following issues:

• Should we permit mutual funds to meet their prospectus delivery obligations in the manner provided in the proposed rule? Does this approach adequately protect investors and provide them with material information about the fund? Does the proposed approach adequately protect investors who have no Internet access or limited Internet access or who prefer not to receive information about mutual fund investments over the Internet? Should we make any other changes with respect to prospectus delivery obligations?

• Are there other approaches that would provide mutual fund investors with key information in a user-friendly format?

• Should we permit mutual funds to meet their prospectus delivery obligations by filing with the Commission and/or by posting online without giving or sending a Summary Prospectus?

• Should mutual fund investors have the ability to opt out of the rule

permanently and thereafter receive a paper copy of any statutory prospectus? How could this be implemented in practice? For example, how would a mutual fund that had no prior relationship with an investor be apprised of the investor's decision to opt out? Could such an opt-out provision be implemented on a fund or fund complex basis?

• Should we require that the Summary Prospectus be given greater prominence than other materials that accompany the Summary Prospectus and that the Summary Prospectus not be bound together with any of those materials? Are any clarifications of these requirements needed? Are the requirements workable in all situations? Should we permit a Summary Prospectus to be included within a newspaper or magazine? Should we impose additional requirements to encourage the prominence and separateness of a Summary Prospectus, when provided in paper, at an Internet Web site, or by e-mail, such as requiring that the Summary Prospectus be at the top of a list of documents provided electronically or on top of a group of documents provided in paper?

2. Content of Summary Prospectus

The proposed rule sets forth the content requirements that a Summary Prospectus must satisfy.
92

Similar to a current profile, a Summary Prospectus meeting the requirements of the rule would be deemed to be a prospectus that is authorized under Section 10(b) of the Securities Act and Section 24(g) of the Investment Company Act for the purposes of Section 5(b)(1) of the Securities Act.
93

A Summary Prospectus meeting these content requirements could be used to offer securities of the fund pursuant to Section 5(b)(1) even if the other conditions of the rule were not satisfied. The failure to satisfy these other conditions would, however, preclude the use of the Summary Prospectus for the other purposes described in proposed rule 498, including for purposes of satisfying, in part, a fund's obligation under Section 5(b)(2) to deliver a statutory prospectus. In these circumstances, the Section 5(b)(2) obligation to deliver a fund's statutory prospectus would have to be met by means other than the proposed rule or a Section 5(b)(2) violation would result.

92
Proposed rule 498(b). Proposed rule 498(a) would define terms used in the rule. The Appendix to this release contains a hypothetical Summary Prospectus, which is provided solely for illustrative purposes.

93
Proposed rule 498(b); rule 498(a)(2) [17 CFR 230.498(a)(2)]. Section 10(b) of the Securities Act authorizes the Commission to adopt rules permitting the use of a prospectus for the purposes of Section 5(b)(1) that summarizes information contained in the statutory prospectus. Section 24(g) of the Investment Company Act authorizes the Commission to permit the use of a prospectus under Section 10(b) of the Securities Act to include information the substance of which is not included in the statutory prospectus. 15 U.S.C. 77j(b); 15 U.S.C. 77e(b)(1); 15 U.S.C. 80a-24(g).

General

The proposal generally would require the Summary Prospectus to include the same information as the summary section of the statutory prospectus in the same order as would be required in the statutory prospectus.
94

This key information about investment objectives, costs, and risks would form the body of the Summary Prospectus.

94
Proposed rule 498(b)(2)(i).

The Summary Prospectus would not be permitted to omit any of the required information or to include additional information except as described below. A document that omits information required in a Summary Prospectus or includes additional information not permitted by the rule would not be a Summary Prospectus under the proposed rule and could not be used under the proposed rule for any purpose, including meeting the obligation to deliver a fund's statutory prospectus.
95

95
A Summary Prospectus that omits certain information required by the proposed rule or includes additional information not permitted by the proposed rule could be deemed to be a prospectus under Section 10(b) of the Securities Act for purposes of Section 5(b)(1) of the Securities Act pursuant to rule 482 under the Securities Act [17 CFR 230.482] if the conditions of that rule are met.

In addition, a Summary Prospectus would be permitted to describe only one fund, but could describe multiple classes of a single fund.
96

These restrictions are similar to restrictions with respect to the proposed summary section of the statutory prospectus.
97

Like those restrictions, they are intended to result in a presentation of key fund information that is concise and easy to read.

96
Proposed rule 498(b)(4).

97

See supra
introductory text to Section II.A. and Section II.A.1.

Cover Page or Beginning of Summary Prospectus

The proposed Summary Prospectus would be required to include the following information on the cover page or at the beginning of the Summary Prospectus:

• The fund's name and the share classes to which the Summary Prospectus relates;

• A statement identifying the document as a “Summary Prospectus”; and

• The approximate date of the Summary Prospectus's first use.

In addition, the cover page or beginning of the Summary Prospectus would be required to include the following legend:

“Before you invest, you may want to review the Fund's prospectus, which contains more information about the Fund and its risks. You can find the Fund's prospectus and other information about the Fund online at [______]. You can also get this information at no cost by calling [______] or by sending an e-mail request to [______].”
98

98
Proposed rule 498(b)(1).

In addition, the legend could include a statement to the effect that the Summary Prospectus is intended for use in connection with a defined contribution plan that meets the requirements for qualification under Section 401(k) of the Internal Revenue Code, a tax-deferred arrangement under Section 403(b) or 457 of the Internal Revenue Code, or a variable contract as defined in Section 817(d) of the Internal Revenue Code and is not intended for use by other investors.
99

99
Proposed rule 498(b)(1)(iv)(B).

The legend would be required to provide an Internet address, toll free (or collect) telephone number, and e-mail address that investors can use to obtain the statutory prospectus and other information.
100

The legend would also be permitted to indicate that the statutory prospectus and other information are available from a financial intermediary (such as a broker-dealer or bank) through which shares of the fund may be purchased or sold. The Internet address at which the statutory prospectus and other information are available would not be permitted to be the address of the Commission's Electronic Data Gathering, Analysis, and Retrieval System (“EDGAR”).
101

The address would be required to be specific enough to lead investors directly to the statutory prospectus and other required information, rather than to the home page or other section of the Web site on which the materials are posted.
102

The Web site could be a central site with prominent links to each required document.
103

100
Proposed rule 498(b)(1)(iv)(A).

101

Cf.
rule 14a-16(b)(3) under the Exchange Act [17 CFR 240.14a-16(b)(3)] (similar requirement in rules relating to Internet availability of proxy materials).

102
For a description of the information required to be available at the Web site and a discussion of the manner in which such information must be available,
see infra
Section II.B.3.

103

Cf.
Exchange Act Release No. 55146,
supra
note 91, 72 FR at 4153-54 n. 79 (use of central site with prominent links in electronic delivery of proxy materials).

Updating Requirements

The proposed Summary Prospectus rule, similar to the current voluntary profile rule, would require that average annual total returns and yield be provided as of the end of the most recent calendar quarter prior to the Summary Prospectus's first use.
104

This information would be required to be updated as of the end of each succeeding calendar quarter not later than one month after the completion of the quarter.
105

104
Proposed rule 498(b)(2)(ii).

105

Cf.
rule 498(c)(2)(iii) (current voluntary profile rule requiring quarterly updating of return information as soon as practicable after the completion of each calendar quarter). The date of the performance information would be required to be included along with the performance information. The proposed rule would not require a fund to explain in the Summary Prospectus the reasons for any change in the securities market index used for comparison purposes in the performance presentation.
Cf.
Instruction 2(c) to proposed Item 4(b)(2) of Form N-1A (requiring this explanation in proposed summary section of prospectus). Proposed rule 498(b)(2)(ii).

The proposed Summary Prospectus rule also would require the top 10 portfolio holdings information to be provided as of the end of the most recent calendar quarter prior to the Summary Prospectus's first use or the immediately prior calendar quarter if the most recent calendar quarter ended less than one month prior to the Summary Prospectus's first use.
106

This is intended to ensure that there is a lag of at least one month between the end of a calendar quarter and disclosure of the top 10 holdings as of the end of that quarter. The portfolio holdings information would be required to be updated on the same schedule as the performance information, at the end of each succeeding calendar quarter not later than one month after the completion of the quarter. The one-month lag is intended to eliminate any potential harm to fund shareholders from predatory trading practices, such as trading ahead of funds or “front-running,” that could result from more immediate disclosure of fund portfolio holdings. In order to minimize the number of times that a fund would be required to update its Summary Prospectus, the proposed rule would also permit a one-month lag in the required quarterly update of performance information, so that both items could be updated on the same schedule.

106
Proposed rule 498(b)(2)(iii).

The Commission is proposing to require quarterly updating of performance and portfolio holdings information in the Summary Prospectus because we believe that providing updated information in a concise, summary document may contribute significantly to the usefulness of the document to investors and their financial intermediaries. A fund could reflect the updated performance and portfolio holdings information in the Summary Prospectus by affixing a label or sticker, or by other reasonable means, and would not be required to reprint the Summary Prospectus each quarter.
107

This is intended to minimize the costs of quarterly updating while still resulting in an up-to-date and concise, unified presentation of key information. A fund would not be required to update the performance and portfolio holdings information in its statutory prospectus on a quarterly basis. The proposed rule would provide that the failure to include in a statutory prospectus or registration statement the quarterly updated performance and portfolio holdings information required to be included in a Summary Prospectus would not, solely by virtue of inclusion of the information in a Summary Prospectus, be considered an omission of material information required to be included in the statutory prospectus or registration statement.
108

107
Proposed Instruction to proposed rule 498(b)(2)(ii) and (iii).

108
Proposed rule 498(e)(2).
Cf.
rule 408(b) under the Securities Act [17 CFR 230.408(b)].

Notwithstanding the quarterly updating requirements, the proposed rule would provide that, for purposes of satisfying a fund's prospectus delivery obligations, a Summary Prospectus that satisfies the requirements of the rule at the time it is sent or given shall be deemed to continue to satisfy those requirements until the earlier of the date on which (1) the information in the Summary Prospectus is required to be updated for any purpose other than the required quarterly updates to the portfolio holdings and performance information; or (2) the fund is required to file an annual updating amendment to its registration statement for the purpose of updating its statutory prospectus to satisfy the requirements of Section 10(a)(3) of the Securities Act.
109

Thus, if a fund's Summary Prospectus had previously been provided to an investor, persons could continue to rely on the rule with respect to their prospectus delivery obligations to that investor without providing a new Summary Prospectus that merely reflects the quarterly updates to top 10 holdings and performance information. The previously provided Summary Prospectus would continue to be deemed current for purposes of the proposed rule until the fund is required to update the Summary Prospectus for some other purpose or is required to file an annual updating amendment to its registration statement. This would be true in the case of existing investors as well as new investors. Today, some funds choose to send an updated statutory prospectus to all of their existing shareholders once each year in order to meet their prospectus delivery obligations with respect to those shareholders who purchase additional shares of the fund during the coming year. Under the proposed rule, a fund could instead send an updated Summary Prospectus to its shareholders once each year, so long as the only changes to the Summary Prospectus during the year are the required quarterly updates to holdings and performance information and so long as the other conditions of the rule are satisfied.

109
Proposed rule 498(e)(1). Section 10(a)(3) of the Securities Act [15 U.S.C. 77j(a)(3)] generally requires that when a prospectus is used more than nine months after the effective date of the registration statement, the information in the prospectus must be as of a date not more than sixteen months prior to such use. The effect of this provision is to require mutual funds to update their prospectuses annually to reflect current cost, performance, and other financial information.

We request comment generally on the proposed content and updating requirements of the Summary Prospectus and specifically on the following issues:

• Should the Summary Prospectus be required to include the same information as the summary section of the statutory prospectus in the same order as required in the statutory prospectus? Should any of the information that we propose to require in the Summary Prospectus not be required? Should any additional information, such as additional information from the statutory prospectus, SAI, or annual or semi-annual report, be required to be included in the Summary Prospectus?

• Should we, as proposed, prohibit the Summary Prospectus from including information that is not explicitly permitted? What effect would this prohibition have on the length, usability, and completeness of a Summary Prospectus? If we include this prohibition, should we make any exceptions to the prohibition?

• Should we restrict the number of funds or share classes that may be included in a Summary Prospectus? Would including multiple funds in a Summary Prospectus make it too long and confusing, and would it decrease the likelihood that investors would use the Summary Prospectus? Or would including multiple funds in a Summary Prospectus contribute to investors'

ability to compare those funds? Are there groups of funds that should be permitted to be included in a single Summary Prospectus even if we generally prohibit multiple fund Summary Prospectuses? Instead of, or in addition to, restricting the number of funds in a Summary Prospectus, should we impose page limits on Summary Prospectuses (
e.g.
, three or four pages)? If so, what should the page limits be? How would we address situations in which a fund may conclude that it cannot provide the information required in the Summary Prospectus within a prescribed page limit?

• Is the information that we propose to require on the cover page or at the beginning of the Summary Prospectus appropriate? Should we include any additional information or eliminate any of the information that we have proposed to include?

• Is the proposed legend sufficient to notify investors of the availability and significance of the statutory prospectus and other information about the fund and how to obtain this information? Should the legend include greater detail about the information that is available? Will the legend adequately inform investors of the various means for obtaining additional information about a fund? Are the proposed requirements for the Web site address where additional information is available adequate to ensure that the Web site and the additional information will be easy to locate?

• Should we require or permit a fund to include its ticker symbol in the Summary Prospectus? If so, where should such information be included (
e.g.
, at the beginning or on the cover page)?

• Will a one-month lag in reporting top 10 portfolio holdings sufficiently protect against potential dangers to shareholders, such as the dangers of front-running? Would a shorter or longer delay be more appropriate?

• Should we require the performance and portfolio holdings information in the Summary Prospectus to be updated quarterly? How would the inclusion of performance and portfolio holdings information that is not updated quarterly affect the usefulness of a Summary Prospectus to investors? How would the inclusion of performance and portfolio holdings information that is not updated quarterly affect investors' perceptions of the Summary Prospectus and investors' interest in reviewing the information in the Summary Prospectus?

• Would semi-annual updating of performance and portfolio holdings information in the Summary Prospectus be more appropriate or should we require annual updating only?

• Would any concerns relating to investor confusion, liability, or other matters arise from requiring quarterly updating of performance and portfolio holdings information in the Summary Prospectus but not in the statutory prospectus? Have any such concerns resulted in practice for funds that currently use the voluntary profile, where performance information is required to be updated on a quarterly basis, but such information is not required to be updated quarterly in the statutory prospectus?

• If we require quarterly or semi-annual updating of performance and portfolio holdings information in the Summary Prospectus, should we also require this information to be updated quarterly or semi-annually in the statutory prospectus?

• What, if any, burdens would be associated with the requirement for quarterly updating of performance and portfolio holdings information? Would any burdens be reduced due to the availability of “on demand” printing technologies in which copies of documents are printed only as needed? How would any such burdens differ from those associated with quarterly updates to sales materials that include performance information, which funds routinely undertake today? If we require quarterly updating, how can we minimize any associated burdens?

• Should the rule require funds to provide quarterly updated performance and portfolio holdings information on an Internet Web site and/or on a toll-free telephone line instead of updating the Summary Prospectus quarterly? If so, should the Summary Prospectus be required to disclose the availability of the updated information? Would the addition of a legend to this effect, and the elimination of the updated information, affect the usefulness and perceived usefulness of the Summary Prospectus to investors, as well as their willingness to read and use the Summary Prospectus?

• Would it be appropriate for the proposed rule to deem a previously provided Summary Prospectus to be current notwithstanding subsequent quarterly updates to performance and portfolio holdings information? If we require quarterly updating, should we include any additional safe harbors or provide for a cure provision in cases where a Summary Prospectus that lacks a required quarterly update has been inadvertently distributed?

3. Provision of Statutory Prospectus, SAI, and Shareholder Reports

In addition to sending or giving a Summary Prospectus, a person that decides to rely on the proposed rule to meet its statutory prospectus delivery obligations with respect to a mutual fund's securities would be required to provide the statutory prospectus itself on the Internet, together with other information, in the manner specified by the rule.
110

In order to maximize both the accessibility and usability of the information, the statutory prospectus would be required to be provided in two ways, by posting on an Internet website and by sending the information directly to any investor requesting a copy. Sending the information directly to any investor would not, however, be a condition of reliance on the rule.

110
Proposed rule 498(c)(3), (d)(3), and (f).

Under the proposal, the statutory prospectus and other information would be required to be provided through the Internet as follows. The fund's current Summary Prospectus, statutory prospectus, SAI, and most recent annual and semi-annual reports to shareholders would be required to be accessible, free of charge, at the Web site address specified on the cover page or at the beginning of the Summary Prospectus.
111

These documents would be required to be accessible on or before the time that the Summary Prospectus is sent or given and current versions of the documents would be required to remain on the Web site through the date that is at least 90 days after (i) in the case of reliance on the proposed rule to satisfy the obligation to have a statutory prospectus precede or accompany the carrying or delivery of a mutual fund security, the date that the mutual fund security is carried or delivered, and (ii) in the case of reliance on the proposed rule to deem a communication with respect to a mutual fund security not to be a prospectus under Section 2(a)(10) of the Securities Act, the date that the communication is sent or given.
112

This requirement is designed to ensure continuous access to the information from the time the Summary Prospectus is sent or given until at least 90 days after the date of delivery of a security or communication in reliance on the proposed rule.

111
The cost to access the Internet itself (
e.g.
, monthly subscription to an Internet service provider) and related costs, such as the cost of printer ink, would not be considered costs for purposes of determining whether information is accessible, free of charge.

112
Proposed rule 498(f)(1).

We are proposing to require that the information on the Internet be presented in a format that:

• Is convenient for both reading online and printing on paper;
113

113
Proposed rule 498(f)(2)(i).
See also
17 CFR 240.14a-16(c) (requiring materials to be presented in a format convenient for both reading online and printing in paper when delivering proxy materials electronically).

• permits persons accessing the statutory prospectus or SAI to move directly back and forth between the table of contents in that document and each section of that document referenced in the table of contents;
114

and

114
Proposed rule 498(f)(2)(ii).

• permits persons accessing the Summary Prospectus to move directly back and forth between each section of the Summary Prospectus and (A) any section of the statutory prospectus and SAI that provides additional detail concerning that section of the Summary Prospectus; or (B) tables of contents in the statutory prospectus and SAI that prominently display the sections within those documents that provide additional detail concerning information contained in the Summary Prospectus.
115

115
Proposed rule 498(f)(2)(iii).

The first requirement is designed to ensure that the information provided over the Internet will be user-friendly, both online and when printed. This imposes on the online information a standard of usability that is comparable to the readability of a paper document. The latter two requirements are intended to result in online information that is in a better and more usable format than the same information when provided in paper. The first of those two requirements would allow an investor or other user to move directly between the table of contents in the prospectus or SAI and the related sections of that document, by a single mouse click and without the need to flip through multiple pages of a paper document. The second requirement would allow an investor to move back and forth between related sections of the Summary Prospectus, statutory prospectus, and SAI, either directly through a single mouse click or indirectly by means of a table of contents in the prospectus or SAI, in which case two mouse clicks would be required.

In addition, persons accessing the Web site must be able to permanently retain, through downloading or otherwise, free of charge, an electronic version of the Summary Prospectus, statutory prospectus, SAI, and shareholder reports in a format that meets the first two requirements enumerated in the preceding paragraph.
116

That is, the format must be convenient for both reading online and printing on paper, and persons accessing the downloaded version of the statutory prospectus or SAI must be able to move directly back and forth between the table of contents in that document and each section of that document referenced in the table of contents. An electronic version that is retained by an investor would not be required to incorporate links between the Summary Prospectus, statutory prospectus, and SAI because we anticipate that there may be technical difficulties associated with keeping these links current.

116
Proposed rule 498(f)(3).

Compliance with all of the conditions in the proposed rule regarding Internet posting would be required in order to meet prospectus delivery obligations under Section 5(b)(2) of the Securities Act. Failure to comply with any of the conditions would be a violation of Section 5(b)(2) unless the fund's statutory prospectus is delivered by means other than reliance on the rule. The Commission recognizes, however, that there may be times when, due to system outages or other technological issues, a fund is temporarily not in compliance with the Internet posting requirements of the rule, despite the fund's best efforts. For that reason, the proposed rule includes a safe harbor provision stating that the conditions regarding Internet availability of a fund's Summary Prospectus, statutory prospectus, SAI, and shareholder reports would be deemed to be met, notwithstanding the fact that those materials are not available for a time in the manner required, provided that the fund has reasonable procedures in place to ensure that those materials are available in the required manner. In addition, a fund would be required to take prompt action to ensure that those materials become available in the manner required, as soon as practicable following the earlier of the time at which the fund knows or reasonably should have known that the documents are not available in the manner required.
117

117
Proposed rule 498(f)(4). This safe harbor would not be available to a fund that repeatedly fails to comply with the proposed rule's Internet posting requirements or that is not in compliance with the requirements over a prolonged period.

The Commission believes that every investor in a fund taking advantage of the proposed prospectus delivery regime should be permitted to choose whether to review a fund's information on the Internet or whether to receive that information directly, either in paper or through an e-mail. For that reason, the proposed rule would require that a fund (or financial intermediary through which shares of the fund may be purchased or sold) send, at no cost to the requestor and by U.S. first class mail or other reasonably prompt means, a paper copy of the fund's statutory prospectus, SAI, and most recent annual and semi-annual shareholder report to any person requesting such a copy within three business days after receiving a request for a paper copy. Similarly, a fund (or financial intermediary through which shares of the fund may be purchased or sold) would also be required to send, at no cost to the requestor and by e-mail, an electronic copy of the fund's statutory prospectus, SAI, and most recent annual and semi-annual shareholder report to any person requesting such a copy within three business days after receiving a request for an electronic copy.
118

This requirement, which is intended to ensure that an investor has prompt access to the required information in the form that he or she prefers, is based on a similar, existing requirement with respect to requests for the SAI and shareholder reports.
119

118
Proposed rule 498(g).

119

See
Instruction 3 to Item 1 of Form N-1A (requiring the SAI and shareholder reports to be sent within three business days of receipt of a request).

The requirement that a fund send a paper or electronic copy of the statutory prospectus, SAI, and most recent annual and semi-annual shareholder reports, as applicable, to a person requesting such a copy would not be a condition to reliance on the rule to satisfy a fund's delivery obligations under Section 5(b)(2) of the Securities Act or the provision that a communication shall not be deemed a prospectus under Section 2(a)(10) of the Securities Act. A person that complied with all other aspects of the proposed rule would not violate Section 5(b)(2) of the Securities Act if the fund failed to send the required paper or electronic copy of the statutory prospectus, SAI, or most recent shareholder reports. This failure would, however, constitute a violation of the Commission's rules.

We request comment generally on the proposal to require that persons relying on the proposed rule provide the fund's statutory prospectus and other information on the Internet and upon request and specifically on the following issues:

• Should we permit the fund's current statutory prospectus and other information to be provided in the manner specified in the proposed rule? For what period of time should persons relying on the rule be required to retain this information on an Internet Web site?

• Should we require that the information on the Internet Web site be

in a format that is convenient for both reading online and printing on paper?

• Are the proposed requirements regarding the ability to move back and forth within the statutory prospectus and the SAI from the table of contents to relevant sections, and between the Summary Prospectus, statutory prospectus, and SAI appropriate and useful? Would it be difficult or expensive for funds to comply with these requirements? Will these requirements help investors to navigate effectively within and between these documents and contribute to a more useful presentation of information than is possible through paper documents?

• Are there steps that the Commission should take to enhance the accessibility to the general public of fund Summary Prospectuses, statutory prospectuses, and other information that would be provided on an Internet Web site pursuant to the proposed rule? How can we enhance the availability of this information to investors, intermediaries, analysts, and others who are researching funds?

• What steps can the Commission take to enhance electronically provided documents? Should we require funds to tag any of the information in the Summary Prospectus or statutory prospectus using the eXtensible Business Reporting Language (“XBRL”) taxonomy that was recently developed by the Investment Company Institute and is being used in the Commission's voluntary data tagging program?
120

Should the Commission make the submission of tagged risk/return summary information using the XBRL taxonomy mandatory in order for funds to rely upon the proposed rule amendments? If so, should funds be required to tag all of the risk/return summary information or should only certain information be required to be tagged, such as fees and expenses, past performance, and other numerical information? Are there any features, such as the ability to search documents for words and phrases, that we should require in documents that are provided electronically?

120
Recently, the Commission adopted rule amendments to enable mutual funds to submit information from the risk/return summary section of their prospectuses using interactive data under the Commission's voluntary interactive data program.
See
Securities Act Release No. 8823,
supra
note 24.

• Should we require that persons accessing the Web site at which the required documents are posted must be able to permanently retain, through downloading or otherwise, free of charge, an electronic version of such documents? Should we require that documents downloaded from the Internet Web site must retain links that enable a user to move readily within a single document, as proposed? Would this proposed requirement present any technological difficulties? Should we also require that downloaded documents retain links that enable a user to move readily between related passages of multiple documents? Would it be technologically feasible to meet such a requirement? What would the costs be of complying with requirements that downloaded documents retain links, either within a single document or between related passages of multiple documents?

• Does the proposed rule appropriately address the possibility of inadvertent technological problems that may arise from time to time when information is provided electronically? Should funds having technological issues be required to disclose on the Web site that the information was not available for a time in the manner required and explain the reasons for the failure to comply? If so, how long should such information be required to be retained on the Web site? Should funds that are not able to comply for a prolonged period, perhaps a week or more, due to technological issues, or that are not able to comply repeatedly over a long period due to such reasons, be required to notify the Commission and/or investors?

• Are the requirements for sending the statutory prospectus, SAI, and annual and semi-annual shareholder reports in paper and electronically appropriate? Should funds be required to send a paper or electronic copy of the fund's statutory prospectus, SAI, and most recent annual and semi-annual shareholder report to any person requesting such a copy within three business days after receiving a request for a copy? Would a longer or shorter period be appropriate? Will these requirements, together with the requirements for providing information on the Internet, as well as the proposed Summary Prospectus, enhance investors' ability to access, understand, and use the information that they receive?

• Should the requirements to send the statutory prospectus, SAI, and shareholder reports be a condition to reliance on the rule? Should failure to comply with these requirements result in a violation of Section 5(b)(2) of the Securities Act? Alternatively, should the failure to comply with these requirements be a violation of Commission rules that does not result in an inability to rely on the rule or a violation of Section 5(b)(2)?

• Should we require funds or other persons that use the proposed prospectus delivery regime to retain any additional records beyond those required by our current rules? Should we expressly require those persons to retain proof that the statutory prospectus, SAI, and annual and semi-annual reports were available on the Internet as required by the rule and records of the dates that documents were requested, along with the dates such documents were sent?

4. Incorporation by Reference

Permissible Incorporation by Reference

The proposed rule would permit a fund to incorporate by reference into the Summary Prospectus information contained in its statutory prospectus and SAI, as well as any information from its most recent shareholder report, subject to the conditions described below.
121

A fund would not be permitted to incorporate by reference into the Summary Prospectus information from any other source. In addition, a fund could not incorporate by reference any of the information described above that is required to be included in the Summary Prospectus.
122

Information could be incorporated by reference into the Summary Prospectus only by reference to the specific document that contains the information, and not by reference to another document that incorporates the information by reference.
123

Thus, if a fund's statutory prospectus incorporates the fund's SAI by reference, the Summary Prospectus could not incorporate information in the SAI simply by referencing the statutory prospectus but would be required to reference the SAI directly.
124

121
Proposed rule 498(b)(3)(i) and (ii).

122
Proposed rule 498(b)(3)(ii)(B).

123
Proposed rule 498(b)(3)(ii)(C).

124

Cf.
Item 10(d) of Reg. S-K [17 CFR 229.10(d)] (“Except where a registrant or issuer is expressly required to incorporate a document or documents by reference * * * reference may not be made to any document which incorporates another document by reference if the pertinent portion of the document containing the information or financial statements to be incorporated by reference includes an incorporation by reference to another document.”). General Instruction D.2 of Form N-1A makes Item 10(d) of Regulation S-K applicable to incorporation by reference into a fund's statutory prospectus.

Incorporation by reference of information from a fund's statutory prospectus, SAI, and shareholder report would be permitted only if the fund satisfies the conditions described in Section II.B.3, above, which prescribe the means by which the incorporated information is provided to investors.
125

In addition, if a fund incorporates information by reference, the Summary Prospectus legend would be required to clearly identify the document from which the information is incorporated, including the date of the document, and explain that any information that is incorporated from the SAI or shareholder report may be obtained, free of charge, in the same manner as the statutory prospectus.
126

A fund that failed to comply with any of these conditions could not incorporate information by reference into its Summary Prospectus. A fund that provides the incorporated information to investors by complying with all of the conditions, including the conditions for providing the incorporated information through the Internet, would not also be required to send or give the incorporated information together with the Summary Prospectus.
127

While a fund would be required to send a paper or electronic copy of the incorporated information upon request, failure to do so would not preclude or nullify the incorporation by reference. It would, however, be a violation of Commission rules.

125
Proposed rule 498(b)(3)(ii)(A) and (f). As discussed in Section II.B.3, this would not include

the requirement to send or give a paper or electronic copy of the requested information upon request.

126
Proposed rule 498(b)(1)(iv)(B) and (b)(3)(ii)(A).

127
Proposed rule 498(b)(3)(i).
Cf.
Gen. Instr. D.1(b) of Form N-1A (permitting a fund to incorporate by reference any or all of the SAI into the statutory prospectus without delivering the SAI with the prospectus).

We are proposing to permit incorporation by reference in the Summary Prospectus in order to further our goal of creating a layered disclosure regime. The proposed rule requires provision to investors of all of the information in the Summary Prospectus, statutory prospectus, SAI, and shareholder reports. By using multiple means to provide this information and using technology to provide information in a layered format, the proposal is intended to facilit

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A07-5852. Public record. Not legal advice.