Payment for Investment Company Services With Brokerage Commissions

Federal RegisterAug 17, 1994

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 239, 274

[Release No. 33-7081; IC-20472; S7-22-94]

RIN 3235-AF94

Payment for Investment Company Services With Brokerage

Commissions

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule and form amendments.

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SUMMARY: The Commission is proposing for comment rule and form

amendments relating to the reporting of expenses by investment

companies. The proposed amendments would require an investment company

to reflect as expenses in its statement of operations certain

liabilities of the company paid by broker-dealers in connection with

the allocation of the company's brokerage transactions to the broker-

dealers. The amendments would also require an investment company to

include expenses paid in this manner in the fee table and financial

highlights table appearing in the company's prospectus, and in

calculating the company's yield. The amendments are designed to enhance

the information provided to investors so that they may be better able

to assess and compare investment company expenses and performance.

DATES: Comments should be received on or before October 17, 1994.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G.

Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street,

N.W., Washington, D.C. 20549. All comment letters should refer to File

No. S7-22-94. All comments received will be available for public

inspection and copying in the Commission's Public Reference Room, 450

Fifth Street, N.W., Washington, D.C. 20549.

FOR FURTHER INFORMATION CONTACT: Eric C. Freed, Senior Counsel, Office

of Disclosure and Investment Adviser Regulation, (202) 942-0726, or

Anthony Evangelista, Assistant Chief Accountant, (202) 942-0636,

Division of Investment Management, Securities and Exchange Commission,

450 Fifth Street, N.W., Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission today

is proposing for comment:

(1) Amendments to rule 6-07 of Regulation S-X [17 CFR 210.6-07].

(2) Amendments to Form N-1A [17 CFR 239.15A, 274.11A], Form N-2 [17

CFR 239.14, 274.11a-1], Form N-3 [17 CFR 239.17a, 274.11b], and Form N-

4 [17 CFR 239.17b, 274.11c] under the Securities Act of 1933 [15 U.S.C.

77a et seq.] (``1933 Act'') and the Investment Company Act of 1940 [15

U.S.C. 80a-1 et seq.] (``1940 Act'').

Executive Summary

The Commission is proposing to amend rule 6-07 of Regulation S-X,

the regulation setting forth form and content requirements for

financial statements included in registration statements, proxy

statements, annual reports, and shareholder reports under the various

securities laws. The amendments would require a registered investment

company (``fund'') to adjust the amount of expenses reflected in the

statement of operations in its financial statements to include amounts

the fund would have paid to its service providers had a broker-dealer

or any affiliate of the broker-dealer not paid or agreed to pay those

service providers on behalf of the fund in connection with the

allocation of fund transactions to the broker-dealer. The Commission is

also proposing amendments to various fund registration forms to require

that the adjusted expenses be reflected in the fee table and financial

highlights table included in fund prospectuses, in the yield quotation

required in fund Statements of Additional Information, and, as a

result, in yield quotations in fund advertisements and sales

literature. Finally, the Commission is proposing to require that the

financial highlights table disclose the average commission rate paid by

the fund.

I. Background

Some investment companies recently have entered into arrangements

under which a broker-dealer agrees to pay the cost of certain products

or services provided to the investment company in exchange for fund

brokerage (``brokerage/service arrangements''). Under a typical

brokerage/service arrangement, a broker agrees to pay a fund's

custodian fees or transfer agency fees and, in exchange, the fund

agrees to direct a minimum amount of brokerage to the broker. The fund

usually negotiates the terms of the contract with the service provider,

who is paid directly by the broker.1

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\1\Brokerage/service arrangements are structurally similar to

the more common research soft-dollar arrangements by which an

investment adviser uses client commission dollars to obtain research

services. In a research soft-dollar arrangement, however, the

receipt of a benefit by an adviser through the use of its clients'

commission dollars raises conflict of interest concerns addressed by

the safe harbor provisions of section 28(e) of the Securities

Exchange Act of 1934 (``1934 Act''). These concerns generally are

not raised by brokerage/service arrangements, which typically

involve the use of a fund's commission dollars to obtain services

that directly and exclusively benefit the fund. Nevertheless, a

fund's investment adviser can benefit from these brokerage/service

arrangements, particularly if a reduction in fund expenses affects

the amount of any expense waiver or reimbursement by the adviser.

The receipt by a fund's adviser of any direct or indirect economic

benefit as the result of these arrangements would almost certainly

violate section 17(e)(1) of the 1940 Act [15 U.S.C. 80a-17(e)(1)],

unless the benefit received fell within the safe harbor provided by

Section 28(e).

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By entering into a brokerage/service arrangement, a fund can reduce

expenses reported to shareholders in its statement of operations, fee

table, and its expense ratio and can increase its reported yield.2

This is because the costs paid on behalf of the fund by the broker are

embedded in the brokerage commissions the fund pays.3 Under

current accounting treatment, brokerage commissions are reflected in

the cost basis of the purchased securities or as a reduction of the

proceeds from the sale of securities.4 In substance, however, a

brokerage/service arrangement involves a rebate on brokerage

commissions which, if paid in cash to the fund, would not reduce fund

expenses.5

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\2\A fund is currently required to disclose in footnotes to its

fee table, financial highlights table, and financial statements its

participation in brokerage/service arrangements and the effect the

arrangements may have on the level of brokerage commissions paid by

the fund. To the extent practicable, a fund must also quantify in

these footnotes the effect of brokerage/service arrangements on fund

expenses. This footnote disclosure would no longer be necessary if

the amendments are adopted.

\3\The safe harbor provided by section 28(e) of the 1934 Act

does not encompass soft dollar arrangements under which research

services are acquired as a result of principal transactions, i.e.,

when a broker buys or sells securities for or from its own account.

U.S. Department of Labor (pub. avail. July 25, 1990). Because, as

discussed at note 1 supra and accompanying text, brokerage/service

arrangements do not fall under the Section 28(e) safe harbor, a fund

may use principal as well as agency transactions to accumulate

credits with brokers for the payment of fund expenses. Therefore,

references in this release to ``commissions'' or ``commission

dollars'' rather than ``spreads'' or ``mark-ups'' are not intended

to indicate otherwise.

\4\See R. Kay & D. Searfoss, Handbook of Accounting and Auditing

12-18 (2d ed. 1989).

\5\Cash rebates would reduce the cost basis of securities

purchased or increase the proceeds from securities sold.

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As a result of the current accounting treatment of brokerage/

service arrangements, investors may not be able to evaluate fully the

expenses of a fund that pays for services with commission dollars and

accurately compare expenses and yields among funds. This lack of

comparability is particularly significant considering the wide use of

fund expense data by investors.

Brokerage/service arrangements may benefit funds (and their

shareholders) by reducing overall fund costs and increasing total

return,6 particularly if lower commissions are not available to

funds that do not enter into the arrangements.7 The receipt of a

net benefit by a fund does not, however, alter the substance of the

services provided under these arrangements. The services provided are

generally wholly distinct from the execution of securities

transactions, and their reflection as capital costs can distort fund

financial information.8

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\6\The characterization of costs as expenses or capital items

will not affect a fund's total return calculated in accordance with

Commission standards. The formula for total return is based upon

``ending redeemable value''; expenses and capital costs are both

inherent in this formula. See, e.g., Item 22(b)(i) of Form N-1A.

\7\Entering into a brokerage/service arrangement when lower

commissions are available raises questions whether the fund is

receiving best execution for its transactions. See Securities

Exchange Act Rel. No. 23170 (Apr. 23, 1986) [51 FR 16004 (Apr. 30,

1986)] (``Release 23170'') at Sec. V (discussing best execution

obligations of money managers in the context of section 28(e)).

\8\The Commission believes that a fund's board of directors or

trustees, in connection with its review of brokerage allocation

policies, should be informed of the fund's brokerage/service

arrangements and the effects of the arrangements on fund expenses

and commission rates.

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The Commission, therefore, is proposing to amend its accounting

rules to require that amounts the fund would have paid for services in

the absence of brokerage/service arrangements be reflected as

``expenses'' in fund financial information and in fund performance

data.

II. Discussion

A. Accounting for Expenses Paid From Brokerage Commissions

1. The Proposed Accounting Method

The Commission is proposing to amend rule 6-07 of Regulation S-

X9 to require that the amounts of the various expenses (such as

custody fees, transfer agency fees, printing and legal fees, and other

miscellaneous fees) listed in a fund's statement of operations be

adjusted, or ``grossed-up,'' to include amounts paid with commission

dollars.10 The required adjustments to the statement of operations

would be made at the time financial statements are prepared, and no

daily expense accruals for services paid for with commission dollars

would be required. No amounts in the financial statements other than

expenses and the expense ratio would be required to be adjusted.

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\9\Article 6 of Regulation S-X specifies the contents of

financial statements included in registration statements, proxy

statements and shareholder reports of registered investment

companies. Rule 6-07 of Regulation S-X sets forth the requirements

for investment company statements of operations.

\10\Rule 6-04(15) of Regulation S-X [17 CFR 210.6-04(15)]

requires fund financial statements to disclose material contractual

commitments. Contractual commitments covered by this rule include

material commitments to allocate commission dollars for payment of

fund expenses.

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Under the proposed amendments, the total of the itemized expenses

in the statement of operations, including the expenses paid with

commission dollars, would be shown as the fund's ``total expenses.'' As

discussed below, the total expense figure also would be used in

determining the fund's expense ratio, its ``Other Expenses'' listed in

the fee table, and its yield. The total expenses would be reduced by

the total amount paid with commission dollars and the remainder shown

on the statement of operations as ``net expenses.''\11\ The following

example illustrates the adjustments to the statement of operations that

would be required by the proposed amendments if custodian fees were

paid with commission dollars:

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\11\Because only expenses, and not realized gains/losses or

unrealized appreciation/depreciation, would be adjusted in the

statement of operations, the presentation of ``net expenses'' would

be necessary so that net investment income remains the same.

Expenses:

Management Fee............................................... 50

[Other direct fund expenses]................................. 48

Custodian Fee [would include 8 paid by brokers].............. 10

--------

Total Expenses........................................... 108

Fees Paid with Commission Dollars........................ (8)\12\

--------

Net Expenses............................................. 100

The additional ``cost'' reflected on the statement of operations

would be the amount that the fund would have paid for the services if

commission dollars had not been used. If a fund negotiates the service

provider's fees directly with the service provider, the cost of the

services for purposes of making the required adjustments would be the

amount negotiated, presumably the same amount the fund would have paid

for the service in the absence of the arrangement. When the broker

arranges for the services or provides them itself or through an

affiliate, however, the actual cost of the services may not be readily

determinable by the fund. In this case, the proposed amendments would

require that the fund reflect in its financial statements an amount

determined by making a good-faith estimate of the amount the fund would

have paid had it contracted for the services directly in an arms-length

transaction.\13\ Comment is requested whether there are alternative

methods for valuing services provided or arranged by brokers.

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\12\A footnote would be required to identify the specific

services paid for with commission dollars. Any expense that, as a

result of the proposed amendments, was increased by five percent or

more over the amount paid directly by the fund, as well as the

amount of the increase, would be required to be separately

identified in the footnote. Amounts that were individually less than

five percent of the unadjusted expense could be aggregated. The

total of these amounts, which should equal the amount of the ``Fees

Paid with Commission Dollars'' line item, also would be required to

be stated in the footnote.

\13\The good-faith estimate could be based upon price quotes for

the services obtained by the fund or the amount funds of similar

size and having similar investment objectives pay for the services.

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The amendments would specifically except research services, as that

term is used in section 28(e) of the 1934 Act, from the services the

cost of which must be reflected as expenses.\14\ The cost of research

``purchased'' by an adviser with fund commission dollars could also be

considered an expense of the fund which is not reflected as an expense

in the statement of operations and other financial information. The

Commission is concerned that the adoption of these disclosure rules

might lead some funds to discontinue brokerage/service arrangements and

purchase more research through traditional soft dollar arrangements,

which, under these proposals, would not be required to be treated as an

expense. Comment is requested whether these proposals would have this

effect.

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\14\Because research services are typically provided to the

adviser, not the fund, the specific exception may be unnecessary.

However, in light of the widespread use of research soft-dollar

arrangements, the Commission is proposing a specific exception.

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The Commission is studying whether the cost of research services

provided by brokers should be reflected as fund expenses and requests

comment on this issue.\15\ Commenters favoring inclusion of research

services in the amendments should address how such services should be

valued and how the value of the services should be allocated among

clients of the adviser that may benefit from them. If research services

cannot be valued, should the Commission require that assumptions be

made about their value by extrapolation from the brokerage commissions

paid? For example, should the difference between a brokerage commission

paid on a transaction and the lowest commission paid by the fund be

considered a fund expense for research? Alternatively, should the

Commission require only that the values of research services that have

readily ascertainable values be quantified, such as subscriptions to

newspapers, price quotation or valuation services, or research that is

received in return for the direction of a determinable amount of

brokerage?

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\15\Funds are required to describe their soft-dollar practices

in the Statement of Additional Information that must be provided to

investors upon request. See, e.g., Item 17 of Form N-1A.

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2. An Alternative Accounting Method

As an alternative to the accounting changes being proposed, funds

could be required to allocate each commission paid between execution

cost and payment for fund services and to present their financial

statements based upon those allocations. This method would require

separating commissions into brokerage and expense components, and

reflecting the expense component as an expense in the financial

statements.

The allocation method would assess the actual economic character of

a fund's brokerage commissions and adjust all fund financial

information to reflect this assessment. Under the allocation method,

the portion of a commission properly allocated to expenses would have

to be estimated and may need to be adjusted as the total amount of

commission dollars paid to the broker increases.\16\ This adjustment,

in turn, would require that the cost bases and sales prices of

particular securities be adjusted periodically based upon the

transactions directed to a particular broker. Therefore, using the

allocation method to account for expenses paid with commission dollars

could prove to be costly and lead to undesirable uncertainties in

accounting.

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\16\If the benefits received by a fund from a given brokerage/

service arrangement remain constant (e.g., the payment of a

specified fund expense), the portion of each commission used to pay

for that benefit will decrease as the amount of commissions directed

to the broker increases.

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The Commission requests comment (i) on the ability of funds to

account for amounts paid with commission dollars by the allocation

method, (ii) whether the proposed gross-up method adequately reflects

the economic nature of these arrangements, and (iii) on the costs of

each of these accounting methods compared to their benefits to

investors.

B. The Fee Table and Financial Highlights Table

The Commission is proposing to amend instructions to the items of

the fund registration forms that require funds to include in their

prospectuses a table presenting the expenses paid by fund shareholders,

either directly or out of the assets of the fund (the ``fee

table'').\17\ The amended instructions would require that the expense

percentages included in a fund's fee table be based upon total expenses

(i.e., that the percentages include amounts paid with commission

dollars).\18\ Similarly, the amendments would revise Form N-1A and Form

N-2 to require that the ``ratio of expenses to average net assets'' in

a fund's ``financial highlights'' table reflect expenses paid with

commission dollars.\19\ The fee table and financial highlights table

are required to be placed prominently in the prospectus, and are

intended to be the primary means for the communication of fund expenses

and performance to shareholders and prospective shareholders.\20\ The

proposed amendments are intended to improve the ability of investors to

use the fee table and financial highlights table to compare fund

expenses.\21\

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\17\Item 2(a)(i) of Form N-1A, Item 3.1 of Form N-2, Item 3(a)

of Form N-3, and Item 3(a) of Form N-4.

\18\The amended instructions to the fee table would clarify that

the ``Other Expenses'' set forth in the fee table should be

determined by reference to the expense amounts reported in the

fund's statement of operations, including adjustments to reflect

expenses paid with commission dollars. Accordingly, references in

the instructions to the omission of brokerage commissions and other

similar costs (which are not reported on the statement of

operations) would be deleted. The amended instructions are not

intended otherwise to revise the substance of the fee table

requirements. See Instructions 10 to Item 2(a)(i) of Form N-1A;

Instruction 9 to Item 3.1 of Form N-2; Instruction 15 to Item 3(a)

of Form N-3; and Instruction 17 to Item 3(a) of Form N-4.

\19\Item 3(a) of Form N-1A and Item 4.1 of Form N-2. Amendments

to the per share tables in Forms N-3 and N-4 are not being proposed.

\20\Unlike amounts paid with commission dollars, the amounts of

any fee waivers or expense reimbursements would continue to be

deducted from expenses for purposes of the fee table and financial

highlights table. While, as discussed above, a fund bears the cost

of expenses paid by a broker under a brokerage/service arrangement,

it does not bear any cost to the extent an expense is waived or

reimbursed.

\21\The proposed instructions would not require the calculation

of the ``net investment income'' and ``ratio of net income to

average net assets'' entries in the financial highlights table based

upon gross expenses. Net investment income in the financial

highlights table would continue to correspond to the net investment

income reported in the statement of operations.

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The financial highlights table in fund prospectuses presents key

financial data for each of the last ten fiscal years. Funds may not be

able to readily determine amounts paid with commission dollars during

past years. Therefore, the proposed amendments would not require that

total expenses be reflected in the expense ratio in the financial

highlights table for fiscal years ending before the adoption of the

amendments.\22\ A footnote would be required disclosing the change in

the manner in which expenses have been determined.

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\22\If these proposals are adopted, the Commission may require

funds to present the grossed-up expense information in statements of

operations and financial highlights tables for the entire fiscal

period ending on or after the date of adoption. Because funds

ordinarily would maintain records related to these arrangements,

this should not be burdensome. Comment is requested whether

reflecting total expenses for the period beginning before adoption

of the rule would be burdensome.

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C. Performance Information

Commission rules require that any quotation of yield in a mutual

fund advertisement be calculated in accordance with a formula that

reflects fund expenses accrued for the period.\23\ Use of total

expenses in the calculation of a fund's yield may be appropriate to

reflect actual fund expenses and necessary to maintain the value of

yield as an indicator of fund performance.\24\ Therefore, the

Commission is proposing instructions to the yield formulas for funds

(other than money market funds) to require that the costs of services

paid for with brokerage commissions be reflected in quotations of yield

in a fund's registration statement, and, as a result, in its

advertisements.

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\23\Paragraph (e)(1) of rule 482 under the 1933 Act [17 CFR

230.482(e)(1)] requires that yield quotations included in fund

advertisements be calculated in accordance with the formulas

specified in fund registration forms. The yield formulas are set

forth in Item 22(b)(ii) of Form N-1A, Item 25(b)(ii) of Form N-3,

and Item 21(b)(ii) of Form N-4.

\24\As discussed supra at note 4, the characterization of costs

as expenses or capital items does not affect a fund's total return,

and, therefore, no amendment to the total return formula is being

proposed.

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As discussed above, the proposed amendments to Regulation S-X would

require that adjustments to fund expenses be made at the end of a

financial statement period.\25\ Those amendments generally would not

require funds to accrue or otherwise determine at the end of the

thirty-day period for which yield is calculated the amount of expenses

paid with brokerage commissions for that period. The proposed

instructions to the yield formulas, therefore, would require funds to

estimate amounts paid with commission dollars for the period of the

yield quotation. Comment is requested on the feasibility of making such

an estimate and whether there are alternative approaches.

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\25\See Section II.A.1 supra.

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The proposals would not revise the manner in which yield is

calculated by money market funds. The money market fund yield formula

is based upon the net change in the value of a hypothetical account,

and any spread or mark-up paid by a fund would be amortized and

reflected in that change in value.\26\ Therefore, requiring money

market funds to include fees paid with commission dollars in the

calculation of yield would result in those fees being counted

twice.\27\ Comment is specifically requested whether the money market

fund yield formula should be revised to reflect the cost of services

paid for with commission dollars as expenses when they are incurred.

Commenters should discuss the extent to which money market funds pay or

can pay expenses through brokerage/service arrangements, and commenters

suggesting revisions to the yield calculation should provide specific

text or formulas.

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\26\See Item 22(a) of Form N-1A, Item 25(a) of Form N-3, and

Item 21(a) of Form N-4.

\27\The same double-counting problem does not arise with respect

to non-money market funds because the yield formula for those funds

generally requires that the amortization of premium and accretion of

discount on debt securities be based upon the market value of the

security, rather than the initial purchase price. See, e.g.,

Instruction 1(a) to Item 22(b)(ii) of Form N-1A. The mark-up or

spread paid by the fund upon the purchase of a security is not

reflected in the security's market value and therefore would not be

a part of any premium amortized or discount accreted for the

purposes of calculating yield.

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D. Related Arrangements

The Commission is aware that funds enter into certain other

arrangements that, like brokerage/service arrangements, have the effect

of reducing reported fund expenses. Some funds, for example, have

``compensating balance'' arrangements with their custodians under which

their custodian fees are reduced if they maintain cash on deposit with

the custodians in non-interest bearing accounts. In these arrangements

expenses are reduced by forgoing income rather than by recharacterizing

them as capital items. The Commission requests comment whether an

adjustment to fund expenses similar to that being proposed for

brokerage/service arrangements should be required for these expense

offset arrangements, or whether these arrangements should be addressed

in footnotes to the financial statements. Because a fund that enters

into these arrangements forgoes income, comment also is requested

whether such income should be estimated and reflected in fund financial

information, and how such estimates might be made.

Some custodial arrangements may involve explicit oral or written

understandings regarding the fee reductions that will occur when

uninvested cash balances exceed predetermined levels. Often, however, a

fund's custodian fee reflects an estimate of the income the custodian

expects to derive from the fund's uninvested cash balances, and the

resulting reduction in the fee is not explicitly disclosed in the

custodial agreement. The Commission requests comment whether the amount

of any increase in fund expenses to reflect these arrangements should

include only amounts that are explicit in the agreements, or should

also include amounts implicit in the basic custodian fee.\28\

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\28\Footnote disclosure of compensating balance arrangements

under which the withdrawal or use of cash or cash items is

restricted, either legally or as a practical matter, is currently

required by rule 6-04.5 of Regulation S-X [17 CFR 210.6-04.5].

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E. Average Commission Rates

Brokerage commissions and other costs incurred in connection with

the execution of a fund's portfolio transactions are not reflected in

the fund's statement of operations, financial highlights table or fee

table because these costs are treated as capital items which increase

the cost of securities purchased or reduce the proceeds of securities

sold. The Commission is concerned that adequate information about these

costs currently may not be provided to investors.\29\ The Commission,

therefore, is proposing to require that the average commission rate

paid by a fund (in cents per share) be disclosed in the financial

highlights table next to the portfolio turnover rate.\30\ Other fund

transaction costs, such as mark-ups, mark-downs, and spreads, would not

be included in this commission rate figure. Comment is requested

whether these other costs should be reflected, and, if so, how they

should be calculated or estimated.

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\29\A fund is currently required to disclose in its Statement of

Additional Information the aggregate amount of any brokerage

commissions it paid during its three most recent fiscal years, as

well as certain data about commissions paid to fund affiliates. Item

17 of Form N-1A.

\30\The new information would only be required for fiscal years

beginning after adoption of the amendments.

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III. General Request for Comments

Any interested persons wishing to submit written comments on the

rule and form changes that are the subject of this Release, to suggest

additional changes, or to submit comments on other matters that might

have an effect on the proposals contained in this Release, are

requested to do so. Comment is specifically requested regarding the

prevalence and significant terms of brokerage/service arrangements, the

expenses paid through the arrangements, and the effect of the

arrangements on fund expenses and commissions.

IV. Cost/Benefit Analysis

The rule and form changes proposed today are intended to improve

the reporting of investment company expenses and improve the ability of

investors to compare investment company expenses and performance. While

the rule and form changes may increase the costs to funds of preparing

financial statements and fund registration materials, the Commission

believes that any such cost increases would, at most, be minimal. A

fund that has brokerage/service arrangements would be required to add

two captions and a footnote to its statement of operations and replace

the net expense figures currently disclosed in its fee table and

financial highlights table with total expense figures. These figures

will normally be readily determinable by the fund. Funds should also be

able to readily estimate expenses paid with brokerage commissions for

purposes of yield calculations. In short, the Commission believes that

the costs of the amendments proposed today would be substantially

outweighed by the benefits to investors of receiving more accurate and

useful financial information about funds.

V. Summary of Initial Regulatory Flexibility Analysis

The Commission has prepared an Initial Regulatory Flexibility

Analysis in accordance with 5 U.S.C. 603 regarding the proposed

amendments. The analysis notes that the rule and form proposals

contained in this Release are intended to provide for the comparability

of fund expenses reflected in fund disclosure documents and

advertisements. Other aggregate cost-benefit information reflected in

the ``Cost/Benefit Analysis'' section of this release also is reflected

in the analysis. A copy of the Initial Regulatory Flexibility Analysis

may be obtained by contacting Eric C. Freed, Securities and Exchange

Commission, 450 Fifth Street, NW., Mail Stop 10-6, Washington, DC

20549.

VI. Text of Proposed Rule and Form Amendments

List of Subjects

17 CFR Part 210

Accounting, Reporting and recordkeeping requirements, Securities.

17 CFR Parts 239 and 274

Investment companies, Reporting and recordkeeping requirements,

Securities.

For the reasons set out in the preamble, Chapter II, Title 17 of

the Code of Federal Regulations is proposed to be amended as follows:

PART 210--FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL

STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF

1934, PUBLIC UTILITY HOLDING COMPANY ACT OF 1935, INVESTMENT

COMPANY ACT OF 1940, AND ENERGY POLICY AND CONSERVATION ACT OF 1975

1. The authority citation for part 210 continues to read as

follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77aa(25),

77aa(26), 78l, 78m, 78n, 78o(d), 78w(a), 78ll(d), 79e(b), 79j(a),

79n, 79t(a), 80a-8, 80a-20, 80a-29, 80a-30, and 80a-37, unless

otherwise noted.

2. By adding a new paragraph 2(g) to the statements of operations

in Sec. 210.6-07 to read as follows:

Sec. 210.6-07 Statements of operations.

* * * * *

2. Expenses. * * *

(g) If a broker-dealer or an affiliate of the broker-dealer has,

in connection with the direction of the person's brokerage

transactions to the broker-dealer, provided, agreed to provide, paid

for, or agreed to pay for, in whole or in part, services provided to

the person (other than brokerage and research services as those

terms are used in Section 28(e) of the Securities Exchange Act of

1934 [15 U.S.C. 78bb(e)]), reflect as the cost of any such services

in the expense items set forth under this caption the amount that

would have been incurred by the person for the services had it paid

for the services directly in an arms-length transaction. Show the

total amount by which expenses are increased as a corresponding

reduction in total expenses under this caption. In a note to the

financial statements, list each expense that is increased and the

amount of the increase in each expense, except that expenses

increased by less than 5 percent of the unadjusted amount of the

expense may be aggregated. The note should also include the total

amount by which expenses are increased.

* * * * *

PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

3. The authority citation for Part 239 continues to read, in part,

as follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77sss, 78c, 78l,

78m, 78n, 78o(d), 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 79l, 79m,

79n, 79q, 79t, 80a-8, 80a-29, 80a-30 and 80a-37, unless otherwise

noted.

* * * * *

4. The authority citation for Part 274 continues to read as

follows:

Authority: 15 U.S.C. 80a-1, et seq., unless otherwise noted.

Note: The text of Form N-1A does not and the amendments will not

appear in the Code of Federal Regulations.

5. By revising the introductory text of Instruction 10 to Item

2(a)(i) of Part A of Form N-1A (referenced in Secs. 239.15A and

274.11A) to read as follows:

Form N-1A

* * * * *

Part A. Information Required in a Prospectus

* * * * *

Item 2. Synopsis

(a)(i) * * *

Instructions: * * *

10. ``Other Expenses'' include all expenses (except nonrecurring

account fees and expenses reported in other items of the table) that

are deducted from fund assets or charged to all shareholder

accounts. The amounts of expenses deducted from fund assets are the

amounts shown as expenses in the Registrant's statement of

operations (including increases resulting from complying with

paragraph 2(g) of Rule 6-07 [17 CFR 210.6-07] of Regulation S-X

regarding fees paid with Registrant's brokerage commissions).

* * * * *

6. By amending Item 3(a) of Part A of Form N-1A (referenced in

Secs. 239.15A and 274.11A) by adding the phrase ``Average Commission

Rate Paid (in cents per share)'' below ``Portfolio Turnover Rate'' and

adding a new Instruction 15 to read as follows:

Form N-1A

* * * * *

Part A. Information Required in a Prospectus

* * * * *

Item 3. Condensed Financial Information

(a) * * *

Instructions: * * *

15. Compute the ``ratio of expenses to average net assets''

using the amount of expenses shown in the Registrant's statement of

operations for the relevant fiscal year, including increases

resulting from complying with paragraph 2(g) of Rule 6-07 [17 CFR

210.6-07] of Regulation S-X regarding fees paid with Registrant's

brokerage commissions, and including reductions resulting from

complying with paragraphs 2(a) and (f) of Rule 6-07 (17 CFR 210.6-

07) regarding fee waivers and reimbursements. If a change in the

methodology of determining the ratio of expenses to average net

assets results from applying paragraph 2(g) of Rule 6-07 (17 CFR

210.6-07), explain in a note that the ratio reflects fees paid with

brokerage commissions only for fiscal years ending after [the

effective date of the final rule amendments].

* * * * *

7. By redesignating Instructions 7 and 8 to Item 22(b)(ii) as

Instructions 8 and 9, and adding a new Instruction 7 to Item 22(b)(ii)

of Part B of Form N-1A (referenced in Secs. 239.15A and 274.11A) to

read as follows:

Form N-1A

* * * * *

Part B. Information Required in a Statement of Additional Information

* * * * *

Item 22. Calculation of Performance Data

* * * * *

(b) Other Registrants * * *

(ii) Yield. * * *

Instructions: * * *

7. If a broker-dealer or an affiliate (as defined in paragraph

(b) of Rule 1-02 [17 CFR 210.1-02(b)] of Regulation S-X) of the

broker-dealer has, in connection with the direction of the

Registrant's brokerage transactions to the broker-dealer, provided,

agreed to provide, paid for, or agreed to pay for, in whole or in

part, services provided to the Registrant (other than brokerage and

research services as those terms are used in Section 28(e) of the

Securities Exchange Act of 1934 [15 U.S.C. 78bb(e)]), add to

expenses accrued for the period an estimate of additional amounts

that would have been accrued for the period if the Registrant had

paid for the services directly in an arms-length transaction.

* * * * *

Note: The text of Form N-2 does not and the amendments will not

appear in the Code of Federal Regulations.

8. By revising Instruction 9 to Item 3.1 of part A of Form N-2

(referenced in Secs. 239.14 and 274.11a-1) to read as follows:

Form N-2

* * * * *

Part A--Information Required in A Prospectus

* * * * *

Item 3. Fee Table and Synopsis

1. * * *

Instructions * * *

9. ``Other Expenses'' include all expenses (except fees and

expenses reported in other items in the table) that are deducted

from the Registrant's assets and will be reflected as expenses in

the Registrant's statement of operations (including increases

resulting from complying with paragraph 2(g) of Rule 6-07 [17 CFR

210.6-07] of Regulation S-X regarding fees paid with brokerage

commissions).

* * * * *

9. By amending Item 4.1 of part A of Form N-2 (referenced in

Secs. 239.14 and 274.11a-1) by adding the phrase ``Average Commission

Rate Paid (in cents per share)'' below ``Portfolio Turnover Rate'' and

adding a new Instruction 17 to read as follows:

Form N-2

* * * * *

Part A.--Information Required in a Prospectus

* * * * *

Item 4. Financial Highlights

1. General: * * *

Instructions * * *

17. Compute the ``ratio of expenses to average net assets''