Money Market Fund Prospectuses

SUMMARY: The Commission is proposing amendments to the registration

forms for money market funds. The amendments would tailor the

prospectus disclosure requirements to the unique characteristics of

money market funds. These changes are intended to allow money market

funds to prepare prospectuses that are shorter, simpler, more

informative, and more readily understandable to investors.

DATES: Comments on the proposed rule and form amendments and on the

proposed staff Guides must be received on or before September 27, 1995.

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

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

NW., Washington, DC 20549. All comment letters should refer to File No.

S7-21-95. All comments received will be available for public inspection

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

Street, NW., Washington, DC 20549.

FOR FURTHER INFORMATION CONTACT: Martha H. Platt, Senior Attorney, or

Robert E. Plaze, Assistant Director, (202) 942-0721, Office of

Disclosure and Investment Adviser Regulation; for accounting questions,

contact James F. Volk, Assistant Chief Accountant, (202) 942-0637,

Division of Investment Management, 450 Fifth Street, NW., Washington,

DC 20549.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission

(``the Commission'') today is proposing for comment amendments to Form

N-1A [17 CFR 239.15A and 274.11A] and Form N-3 [17 CFR 239.17a and

274.11b], the registration forms used by open-end management investment

companies (``mutual funds'') and separate accounts organized as

management investment companies (``separate accounts'') to comply with

the registration statement requirements of the Investment Company Act

of 1940 [15 U.S.C. 80a-1 et seq.] (``1940 Act'') and to register their

securities under the Securities Act of 1933 [15 U.S.C. 77a et seq.]

(``1933 Act''). The proposed amendments would shorten and simplify

money market fund prospectuses. The Commission is proposing additional

amendments to Form N-1A that would: (1) modify the manner in which the

yield of a tax exempt money market fund is calculated; (2) change the

calculation of total return for partial years in the financial

highlights table; (3) remove the requirement that funds file a schedule

of performance quotation computations; and (4) amend the instructions

regarding the fee table. Conforming amendments are being proposed to

rule 482 under the 1933 Act [17 CFR 230.482] and Form N-2 [17 CFR

239.14 and 274.11a-1], the registration form for closed-end management

investment companies. The Commission also is publishing related changes

to staff Guides to Forms N-1A and N-3.

Table of Contents

Executive Summary

I. Background and Summary of Proposed Amendments

II. Discussion of the Proposed Amendments

A. Proposed Revisions Pertaining to Money Fund Prospectuses

1. Replacement of Financial Highlights Table

2. Descriptions of Investment Policies and Techniques

3. Inclusion of Description of Advertised Performance Data in

SAI

4. Summary Description of Securities Valuation

B. Other Amendments

1. Calculation of Tax Exempt Money Fund Yield

2. Total Return Calculation

3. Amendments to Fee Table

4. Exhibit 16 to Form N-1A

C. Request for Comments Regarding Prospectus Simplification

Generally

III. Amendments to Staff Guides

IV. Transition Period

V. General Request for Comments

VI. Cost/Benefit of Proposal

VII. Summary of Initial Regulatory Flexibility Analysis

Text of Proposed Rule and Form Amendments

Executive Summary

The Commission is proposing to amend the prospectus disclosure

requirements of Form N-1A to permit and encourage money market funds

(``money funds'') to provide shorter prospectuses that are more

relevant to the needs of typical money fund investors. The Commission

believes that the proposed rule and form amendments will significantly

shorten and simplify money fund prospectuses and provide valuable

information to investors in more useable formats. The most significant

of the proposed changes are summarized below.

First, the multi-line financial highlights table would be replaced

with a bar graph showing a fund's total returns for each of the last

ten years. The bar graph is intended to provide investors with

information regarding fund performance in a simple, graphic format that

is easy to understand.

Second, a money fund's description of its portfolio and investment

techniques would be greatly abbreviated. Money fund prospectuses often

contain detailed, technical descriptions of instruments and investment

techniques that are unlikely to assist an investor in understanding a

money fund's essential characteristics. The Commission is concerned

that these complicated descriptions add substantial length and

complexity to money fund prospectuses, which may discourage investors

from reading important information in the prospectuses. The Commission

proposes to address this concern by permitting all money funds to

describe themselves in their prospectuses with very basic, general

statements about their investment objectives and portfolio composition.

The narrative disclosure that money funds would remove from their

prospectuses in response to the proposals described above would be

relocated to the Statement of Additional Information (``SAI''), which

is available to investors upon request and without charge.

I. Background and Summary of Proposed Amendments

Money funds are open-end management investment companies that

invest in short-term debt instruments or instruments that have similar

characteristics. Money funds currently hold over $692 billion in assets

1 in approximately 25 million shareholder accounts.2 Through

these funds, individual investors are able to participate in the money

markets.

\1\ Money Fund Report (July 7, 1995). $574 billion is invested

in taxable funds and $118 billion is invested in tax exempt funds.

Id.

\2\ Investment Company Institute Mutual Fund Fact Book 99 (35th

ed. 1995). See Investment Company Act Rel. No. 17589 (July 17, 1990)

[55 FR 30239 (July 25, 1990)] at nn. 3-7 and 15-18, and accompanying

text, for a summary of the development of money funds.

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Like other mutual funds, money funds offer investors a diversified

and professionally managed portfolio of securities. Many investors

select money funds as part of their investment plans because these

funds have characteristics that allow them to be used as a cash

management tool. These characteristics

[[Page 38455]]

include relative safety of principal, a high degree of liquidity, a

wide range of shareholder services (including check-writing), and

maintenance of a stable net asset value, usually of $1.00. Money funds

are not protected by federal deposit insurance, and there is no

guarantee that a money fund will always be able to maintain a stable

net asset value.3 Nevertheless, money funds' success at

maintaining a stable $1.00 share price has encouraged investors to view

these funds as alternatives to bank deposit and checking

accounts.4

\3\ Item 1(a)(vi) of Form N-1A requires a money fund to disclose

this fact on the cover of its prospectus.

\4\ An exception to this historical success occurred in

September 1994 when the US Government Money Market Fund, a series of

Community Bankers Mutual Fund, Inc. that had invested in certain

adjustable rate notes, announced that it would liquidate and

distribute less than $1.00 per share to its shareholders. See, e.g.,

Olaf de Senerpont Domis and Karen Talley, ``Collapse of Money Fund

Seen Heightening Derivatives Scrutiny,'' American Banker, Sept. 29,

1994 at 1, 3; Leslie Wayne, ``For Money Market Investors, New

Cautions,'' N.Y. Times, Sept. 29, 1994 at D1, D8.

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Form N-1A is the registration form that mutual funds, including

money funds, use to satisfy the registration statement requirements of

the 1940 Act and to register their shares under the 1933 Act. Form N-1A

permits mutual funds to provide investors with a simplified prospectus

covering matters of fundamental importance about the funds. Upon

request, detailed information is available in an SAI. When the

Commission proposed Form N-1A in the early 1980s, money funds were

relatively new, tax exempt money funds had just been introduced, and

money funds invested in only a few types of relatively simple

instruments.5 Accordingly, few provisions of the form reflect the

unique characteristics of money funds or specify the level of

disclosure appropriate for describing the many different types of

instruments that now comprise money fund portfolios. As a result,

although money funds are acknowledged as being the most stable and

conservative mutual funds, their prospectus disclosure is often more

detailed and technical than that of other mutual funds.

\5\ In the 1980s, these funds generally restricted their

investments to short-term U.S. government securities, bank

instruments, and commercial paper. See, e.g., In the Matter of

Intercapital Liquid Asset Fund, Inc., et al., Investment Company Act

Rel. No. 10201 (Apr. 12, 1978) [43 FR 16830 (Apr. 20, 1978)] (notice

of applications for exemption from section 2(a)(41) of 1940 Act and

rules promulgated thereunder and order for hearing on ten related

applications). By contrast, money funds today invest in a vast array

of instruments, many of which have complex structures. The types of

instruments available are constantly expanding in response to demand

from money funds. See infra, Section II.A.2 of this Release. This

trend is especially marked in the case of tax exempt money funds,

where the demand for securities that are eligible for money fund

investment has resulted in the investment banking community

developing many types of new instruments. See Investment Company Act

Rel. No. 19959 (Dec. 15, 1993) [58 FR 68585 (Dec. 28, 1993)]

(``Release 19959'') (proposing further amendments to tighten the

risk-limiting conditions of rule 2a-7, 17 CFR 270.2a-7) at nn. 24-25

and accompanying text. All references to rule 2a-7 or any paragraph

of the rule will be to 17 CFR 270.2a-7.

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While detailed disclosure about investment policies and portfolio

securities may be material to investors choosing among other types of

funds, it may not be material to a money fund investor. Money fund

investment policies and the composition of money fund portfolios are

subject to much more detailed regulation under the 1940 Act and, as a

result, are very similar.6 While the differences among taxable

money funds, tax exempt money funds, and money funds that invest only

in U.S. government securities may be material to money fund investors,

small differences in types of portfolio holdings that differentiate

money funds within each of these groups may not be particularly

important to investors, who typically select money funds on the basis

of convenience, shareholder services, or yield.

\6\ Rule 2a-7 [17 CFR 270.2a-7] allows money funds to use the

amortized cost method of valuation and the penny-rounding method of

share pricing to assist in maintaining a stable share price. In

addition, any investment company that holds itself out as a money

fund may only invest in U.S. dollar-denominated instruments and must

meet the risk-limiting conditions of rule 2a-7 regarding portfolio

quality, maturity, and diversification. Paragraphs (b), (c)(2),

(c)(3) and (c)(4) of rule 2a-7. These conditions limit a fund's

exposure to credit, interest rate, and currency risk. All references

to rule 2a-7 or any paragraph of the rule will be to 17 CFR 270.2a-

7.

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Based upon these considerations, the Commission is proposing to

revise the prospectus disclosure requirements for money funds to

account for the unique characteristics of money funds and the

regulatory structure to which they are subject. The revisions would

result in shorter and more comprehensible prospectuses that are more

relevant to the needs of typical money fund investors.7

\7\ In addition, shorter prospectuses would result in reduced

printing and mailing costs. Those costs usually are borne by the

fund and, indirectly, by fund shareholders.

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II. Discussion of the Proposed Amemdments

A. Proposed Revisions Pertaining to Money Fund Prospectuses

1. Replacement of Financial Highlights Table

The financial highlights table currently required by Item 3(a) of

Form N-1A 8 provides summary financial information about a fund,

including the fund's total return for each of the previous ten fiscal

years.9 Although the table provides useful information for

investors in stock and bond funds generally, some of the table's items

are generally not relevant to money fund investors because money funds

rarely experience changes in per share net asset value or realize

capital gains.

\8\ Most of the form amendments are being proposed for both Form

N-1A and Form N-3. For ease of reference, citations to proposed and

current form items and instructions refer to Form N-1A unless the

context otherwise requires.

\9\ The financial highlights table contains the following

fourteen items: beginning net asset value; net investment income;

net gains (losses); total income from investment operations;

dividends from net investment income; distributions from capital

gains; returns of capital; total distributions; ending net asset

value; total return; total net assets; ratio of expenses to average

net assets; ratio of net income to average net assets; and portfolio

turnover rate. The table is required to contain information for the

fund's last ten fiscal years. Item 23 of Form N-1A requires that the

financial highlights information for each of the previous five

fiscal years be provided in fund annual reports to shareholders.

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The Commission proposes to replace the financial highlights table

in money fund prospectuses with a bar graph showing the fund's total

return for each of its last ten fiscal years.10 Because most of a

money fund's return consists of dividends, the bar graph would

primarily reflect the fund's annual yield. Money funds occasionally

recognize capital gains as a result of the disposition of a portfolio

security, which would be reflected in the bar graph as part of the

fund's total return. If a fund makes capital gains distributions during

the period, a footnote to the graph would state the amount of the

distribution per share and indicate that the amount of the distribution

is indicated in the bar graph by a shaded or otherwise distinctively

marked area of the bar for each year for which such a distribution was

made.11 The bar graph would be accompanied by statements that: (1)

Past performance is not predictive of future performance; (2)

performance is primarily affected by short-term interest rates and fund

expenses; and (3) more detailed information regarding performance is

contained in the financial statements in the SAI.

\10\ Proposed Item 3(b). The financial statements for the fund's

previous fiscal year would continue to be required in the SAI. See

Item 23 of Form N-1A. While other mutual funds currently are

required to provide a performance graph and discussion of

performance in their prospectuses or annual reports, money funds are

exempt from those requirements of Form N-1A. See Investment Company

Act Rel. No. 19382 (Apr. 6, 1993), [58 FR 19050 (Apr. 12, 1993)]

(``Release 19382'').

\11\ Proposed Item 3(b) of Form N-1A.

The bar graph is intended to provide investors with a depiction of

historical

[[Page 38456]]

fund returns in a format that is simple and understandable. The

Commission is particularly concerned that investors with long-term

financial goals, such as those using mutual funds to fund a retirement

plan, understand that money funds provide them with substantially less

of an opportunity for long-term growth than other types of mutual

funds.

Comment is requested whether funds should be required to compare

their performance during each of the ten years with that of an index,

and, if so, what type of index should be required for the comparison.

Such a comparison would permit investors to compare how the fund

performed relative to alternative investments or industry averages. For

example, should money funds be required to compare their total returns

to changes in the Consumer Price Index, or to a securities index? In

order to foster comparability among funds, should the Commission

prescribe the scale of the vertical and horizontal axes of the graph

and other formatting specifications?

The Commission requests comment whether money fund investors are

likely to use historical performance information when selecting a money

fund. Alternatively, or supplementally, should the Commission require a

short-term depiction of fund yield, such as a line graph comparing the

fund's yield during the last twelve months with that of an index of

short-term or money funds securities. Would investors find a line graph

showing recent yields useful in money fund annual and semi-annual

reports to shareholders, documents that focus on the more recent

financial history of the fund? Should such a graph be substituted for

the current financial highlights tables in those reports?

2. Descriptions of Investment Policies and Techniques

Item 4(a) of Form N-1A requires a fund to describe how it proposes

to achieve its investment objectives. The Commission is proposing to

amend this item to reduce substantially the amount of detailed,

technical information regarding investment policies, techniques, and

instruments now found in money fund prospectuses. In addition, this

item would be reorganized to clarify its requirements.

Item 4(a)(ii) of Form N-1A currently requires ``a short description

of the types of securities'' in which a fund invests, as well as any

``special investment practices or techniques'' used by the fund in

connection with those securities and ``significant investment policies

or techniques (such as risk arbitrage, repurchase agreements, forward

delivery contracts, investing for control or management)'' that the

fund uses or intends to use in the foreseeable future.12 The

responses to paragraphs (a) and (b) of Item 4 have become the longest

and most complex section of many money fund prospectuses.13 The

responses often include detailed descriptions of numerous types of

instruments, including U.S. Treasury bills and notes, government agency

securities, short-term tranches of collateralized mortgage obligations

and other types of asset-backed securities, certificates of deposit,

bankers' acceptances, floating and variable rate securities, commercial

paper, and repurchase and reverse repurchase agreements. The list is

even longer for tax exempt money fund prospectuses, which may contain

descriptions of variable rate demand notes; put bonds; general

obligation bonds; bond, revenue, and tax anticipation notes; industrial

development bonds; lease obligations; tax exempt commercial paper; and

``synthetic'' instruments, such as tender option bonds and custodial

receipts. Descriptions of particular securities are often accompanied

by lengthy descriptions of investment techniques, such as purchasing

securities on a ``when-issued'' basis and acquisition of stand-by

commitments.14

\12\ Item 4(b)(ii) (proposed instruction 3(ii) to item 4(a))

permits a fund simply to identify a practice if five percent or less

of the fund's net assets are placed ``at risk'' by the practice.

Money funds generally are not able to take advantage of this

opportunity to simplify their disclosure because they require the

flexibility to employ, above the five percent ``at risk'' level,

many or all of the investment practices they describe.

\13\ Some money funds, however, already limit those descriptions

to general, basic statements about the securities in which they

invest.

\14\ Descriptions of particular types of securities (Item

4(a)(ii)(B)(1)) and various investment techniques (Item

4(a)(ii)(B)(1) and (D)) used by a fund often appear together in the

same section of money market fund prospectuses.

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The following is a typical description of a portfolio security for

a tax exempt money fund currently provided in response to Item 4(a):

The Fund may purchase participation interests in municipal

securities that have fixed, floating or variable rates of interest.

These participation interests will be purchased from financial

institutions that sell undivided interests in the securities that

underlie the instrument. The Fund will only purchase such an

interest if: (i) the underlying securities mature in twelve months

or less or the instrument includes a right to demand payment (a

``demand feature''), usually exercisable within no more than seven

days; (ii) the security meets certain quality standards set forth by

the Fund and federal regulation; and (iii) the security is

accompanied by an opinion of counsel or is the subject of a ruling

from the Internal Revenue Service stating that the interest earned

is exempt from federal income tax.

Another tax exempt money fund describes the investment technique of

purchasing municipal bonds on a ``when-issued'' basis, also in response

to Item 4(a), as follows:

The Fund may purchase Municipal Obligations on a ``when-issued''

basis--the purchase of securities which are paid for and delivered

beyond the normal settlement date. The Fund will generally not pay

for such securities or start earning interest on them until they are

received. Securities purchased on a when-issued basis are recorded

as an asset and subject to changes in value based upon changes in

the general level of interest rates. The Fund expects that its

commitments to purchase when-issued securities will not exceed 25%

of total assets, absent unusual market conditions, and that it will

not commit to purchase when-issued securities beyond 45 days. The

Fund does not intend to purchase when-issued securities for

speculative purposes but only to further its investment objective.

To be eligible for money fund investment under rule 2a-7, the

instruments described above all must be high quality and, although they

may have different mechanisms for determining interest rates or

maturity, all are designed to have the stability of principal and yield

of short-term debt instruments. The riskiness of any particular

investment technique is further limited by rule 2a-7's maturity and

currency denomination conditions,15 as well as the requirement

that the board of directors adopt procedures designed to maintain a

stable share price or net asset value.16

\15\ Rule 2a-7 limits the amount of currency risk to which money

funds can be exposed by restricting their investments to U.S.

dollar-denominated instruments. Paragraph (c)(3) of rule 2a-7. The

rule limits the interest rate and credit risks to which money funds

can be exposed by requiring that they maintain a dollar-weighted

average portfolio maturity of no more than ninety days and generally

invest in individual securities that have remaining maturities of no

more than 397 days. Paragraph (c)(2) of rule 2a-7.

\16\ See paragraph (c) of rule 2a-7.

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Because of the limitations on securities in which a money fund is

permitted to invest, the particular types of securities in which a fund

invests are unlikely to be an important factor for most investors when

selecting a money fund.17 Moreover, detailed, technical

[[Page 38457]]

descriptions of instruments and investment techniques are unlikely to

contribute to investor understanding of a money fund's essential

characteristics. Finally, these complicated descriptions often add

substantial length to money fund prospectuses, contributing to

investors' perceptions that prospectuses are too complicated and

discouraging them from reading the important information that is in the

prospectuses.

\17\ The Commission has considered whether disclosure of each

type of security may provide investors with information they can use

to avoid investment in money market funds investing in securities

whose characteristics may threaten the fund's stable net asset

value. In 1994 a number of fund advisers took steps to maintain the

share values of money funds that had invested in adjustable rate

securities that had interest rate adjustment formulas that did not

result in the value of the security returning to par on the interest

rate reset date as required by rule 2a-7; the adviser of one fund

holding these instruments was not in a position to take steps to

maintain the fund's share price. See supra, note 4. Under the

current requirements of Form N-1A, these funds disclosed that they

invest in adjustable rate instruments, but generally did not

describe the terms of the interest rate adjustment formula of each

instrument. Thus, even under the current rules, investors are not

able to ascertain whether to avoid funds investing in inappropriate

securities. Because the interest rate adjustment formulas are

complicated, if the Commission were to require disclosure of the

formulas, money market fund prospectuses would be considerably

longer and more complex, even though most investors could not be

expected to draw any conclusions as to the appropriateness of a

particular adjustable rate security.

To address these concerns, the Commission is proposing to add an

instruction to Item 4 stating that it is sufficient for a money fund to

describe the characteristics of the fund and its portfolio in very

general and basic terms (e.g., that it seeks to maintain a stable net

asset value of $1.00 by investing in a portfolio of high-quality,

short-term debt obligations issued by corporations, banks and other

financial institutions), and that a listing or description of the

particular instruments that the fund may purchase is not

necessary.18 If the fund limits investment to a group of

securities or a type of issuer (e.g., to U.S. government securities),

the fund would also be required to identify any other group of

securities or type of issuer in which it has reserved the right to

invest more than five percent of assets, unless the fund has not

invested more than five percent of its assets in those securities

within the past year and has no current intention of doing so in the

foreseeable future.19 For example, if the ``XYZ U.S. Government

Money Market Fund'' reserves the right to invest twenty percent of its

assets in corporate obligations and has invested in such securities

within the past year, the fund would state that in its prospectus.

\18\ Proposed Instruction 1 to Item 4(a).

\19\ Proposed Instruction 1(b) to Item 4(a).

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The proposed instruction is intended to encourage funds to avoid

lengthy descriptions of the areas currently covered by Item 4(a) that

have resulted in technical, multi-page descriptions of types of

securities and investment policies and techniques. Instead, the

detailed descriptions of instruments and techniques would be placed in

the SAI, where they would be available upon request to interested

investors, including those who restrict their investments in mutual

funds to funds that invest only in particular types of

instruments.20 The proposed instruction makes clear that the

Commission is not proposing to eliminate from money fund prospectuses

discussion of those material investment policies that distinguish one

group of money funds from another.21 For example, a fund would be

expected to state, as appropriate, that it proposes to achieve its

investment objective by investing only in Government securities,

securities exempt from the income taxes of a particular state, or

securities exempt from federal income taxation. The proposed

instruction also makes explicit that a money fund is not required to

describe the detailed investment policies that it has adopted in order

to comply with rule 2a-7.22

\20\ Proposed Instruction 3 to Item 13. Requiring more detailed

disclosure in the SAI also enables Commission staff to review

whether the fund's stated policies and techniques comply with

regulatory requirements.

\21\ Proposed Instruction 1(b) to Item 4(a).

\22\ The Commission also proposes to reorganize the current

structure of sub-item 4(a). Several paragraphs would be redesignated

as instructions to reflect their modifying the more general

requirements of Item 4.

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The proposed changes should not be interpreted to suggest that the

Commission believes that investment in a money fund is riskless. No

substantive changes are being proposed to existing Item 4(c) (Item

4(b), as proposed to be amended), which requires a money fund to

discuss ``briefly the principal risk factors associated with

investment'' in the fund, including risk factors peculiar to the fund

and those of the same fund type generally. Money funds would continue

to respond to this sub-item and to Item 1(a) of Form N-1A, which

requires a money fund to disclose on the cover page of its prospectus

that an investment in the fund is neither insured nor guaranteed by the

U.S. government and that there can be no assurance that the fund will

be able to maintain a stable net asset value.23 A money fund that

is sold by or through a bank, or whose name is the same as, or similar

to, the name of a bank that advises or sells the fund's shares, would

also continue to be required to prominently disclose on the cover page

of its prospectus that shares in the fund are not deposits or

obligations of, or guaranteed or endorsed by, the bank, and that the

shares are not federally insured.24

\23\ In addition, other amendments that were proposed to Form N-

1A in 1993 would require a money fund to disclose the fund's

reliance on credit and liquidity enhancements from third parties

when more than forty percent of the fund's portfolio consists of

securities subject to such features and, for single state tax exempt

money market funds, the risks associated with reduced issuer

diversification and greater geographic concentration. See Release

19959, supra note 5 at nn. 196-197.

\24\ See Letter to Registrants from Barbara J. Green, Deputy

Director, Division of Investment Management (May 13, 1993).

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3. Inclusion of Description of Advertised Performance Data in SAI

Item 3(c) currently requires a brief explanation in the prospectus

of how the fund calculates performance data that it advertises.25

Because money fund yields are calculated in a uniform manner prescribed

by the Commission, an investor is unlikely to use these descriptions

when evaluating advertisements by the fund. The Commission therefore

proposes to permit a money fund to place its response to this item in

the SAI if the response is incorporated by reference into the

prospectus.26 The Commission requests comment on whether this

option should be made available to other mutual funds.27

\25\ This disclosure provides a basis for inclusion of

performance information in advertisements. Rule 482 advertisements

may only include information the ``substance of which'' is included

in the fund's statutory prospectus. For performance quotations, this

requirement is met if the methodology for calculating performance is

set forth in the prospectus. See Dechert, Price & Rhoads (pub.

avail. Nov. 12, 1979). The Division has recommended eliminating the

``substance of which'' requirement (see Protecting Investors: A Half

Century of Investment Company Regulation 349, Division of Investment

Management, United States Securities and Exchange Commission (May

1992)), and legislation has been introduced that would eliminate the

requirement (see H.R. 1495, 104th Cong., 1st Sess. Sec. 3 (1995)).

\26\ Proposed Instruction to Item 3(d). Because information

incorporated by reference from the SAI is deemed to be included in

the prospectus, the legal requirement that the substance of the

information in an advertisement be contained in the statutory

prospectus would be met. If adopted, the response to this item would

be the only response to a prospectus item that could be incorporated

by reference from the SAI.

\27\ The Division is considering deleting the guide regarding

explanations of performance data from Form N-1A (Guide 32).

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4. Summary Description of Securities Valuation

Item 7(b) of Form N-1A requires funds to describe, among other

things, the way in which the public offering price of fund shares is

determined and the timing of the determination. The methodologies money

funds use to calculate their net asset values are prescribed by the

1940 Act and Commission rules and are designed so that the value of

each share represents the pro rata value of the assets of the fund,

typically at a stabilized share

[[Page 38458]]

value of $1.00.28 The descriptions of these methodologies, which

tend to be complicated, may be less important to money fund investors

than the fact that the share price represents a pro rata share of the

fund's net assets. Therefore, the Commission is proposing to permit

money funds simply to state in the prospectus that the share price

represents a pro rata share of the net assets of the fund, and to

describe in the SAI the pricing method employed by the fund.29

\28\ The methodologies include amortized cost (acquisition cost

as adjusted for amortization of premium or accretion of discount),

market value (marking to market daily), and fair value (good faith

estimate by the board of directors) and combinations of these

methods.

\29\ See Item 19, Instruction 1 (valuation procedure). Money

market funds would continue to state in the prospectus when the fund

will not process requests to purchase or sell shares. See Guide 28

to Form N-1A (interpreting Item 7 regarding days on which fund will

not price shares).

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In the case of a money fund that seeks to maintain a stable net

asset value, the timing of the determination of the share price each

day may not be material to an investor who will ordinarily receive the

same price per share regardless of the time a payment is made or a

redemption tendered.30 Therefore, the Commission is proposing to

relieve money funds that seek to maintain a stable net asset value from

the requirement to disclose in the prospectus the timing of the

determination of the offering price. This information would continue to

appear in the SAI.31

\30\ Perhaps more important to a money market fund investor is

the relationship of the timing of a share purchase to the accrual of

dividends on the investment (for example, whether dividends on

shares begin to accrue on the day the fund receives the investment,

or on the next business day). This information would continue to be

required in the prospectus in response to Item 6(f) (Capital Stock

and Other Securities). Funds also would be required to disclose the

date on which dividends cease accruing as the result of a

redemption. Proposed Instruction to Item 8(a) (Redemption and

Repurchase).

\31\ See Item 19, Instruction 3 (timing of calculation of net

asset value). A money market fund that does not maintain a stable

net asset value would continue to describe the timing of its share

price calculation in the prospectus.

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B. Other Amendments

1. Calculation of Tax Exempt Money Fund Yield

Tax exempt funds typically advertise a ``tax free'' yield. Under

staff guides, a money fund that holds itself out as distributing income

that is exempt from income taxation may invest up to twenty percent of

its net assets in taxable securities or invest its assets so as much as

twenty percent of its income is taxable.32 In addition, most tax

exempt money funds reserve the authority to temporarily invest any or

all of the fund's assets in taxable securities if no suitable tax-

exempt securities are available. Because taxable instruments generally

have higher yields than tax exempt instruments, a prospective investor

may be unaware that a tax exempt fund's relatively higher yield may be

the result of the inclusion of some taxable securities in its

portfolio. Therefore, the Commission is proposing to revise the money

fund yield formula set forth in Item 22(a) of Form N-1A to require a

tax exempt fund to reduce any taxable income by a percentage equal to

the highest marginal income tax rate in effect at the time the yield is

quoted.33 The tax-adjusted yield would represent a more accurate

tax-free yield.34

\32\ See Guide 1 to Form N-1A.

\33\ If a fund represents itself as being free from state and/or

local income taxation as well as federal income taxation, the fund

would also be required to reduce the yield of those securities that

are not exempt from state and/or local income taxation by the

highest marginal state and/or local income tax rates for

individuals.

\34\ The Commission is also proposing technical amendments to

rule 482 and Form N-1A to clarify that money market funds may

advertise tax equivalent and tax equivalent effective yields and how

those yields should be calculated.

2. Total Return Calculation

The Commission is proposing a technical amendment to the

instructions regarding calculation of the total return in the financial

highlights table that would apply to all management investment

companies using Forms N-1A and N-2.35 Instruction 11(e) to Item 3

of Form N-1A currently requires a fund to annualize total return for

partial year periods. The Commission is concerned that annualization of

performance based on a short period may result in a distorted

performance figure that may mislead investors.36 The Commission

proposes to amend the instruction in Form N-1A and add an instruction

to Form N-2 to require that performance for a period of less than

twelve months be stated without annualization.

\35\ If the proposed amendments to Item 3 are adopted, money

market funds would be exempt from the Financial Highlights table

requirement.

\36\ Notwithstanding the current instruction, the Commission

urges funds not to annualize the total return for a partial year.

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3. Amendments to Fee Table

The Commission is proposing several technical amendments to Item 2

of Form N-1A, which requires a fund to provide in its prospectus a

table summarizing the transaction and operating expenses associated

with an investment in the fund. In addition, the fee table provides

examples of what expenses a shareholder would pay if shares were

redeemed at the end of several time periods.

Instruction 13(a) to Item 2(a) of Form N-1A instructs funds that

have expense reimbursement or fee waiver arrangements that reduce fund

operating expenses to reflect these arrangements in their fee table if

the reimbursement or waiver ``will continue.'' The Commission is

proposing to amend the instruction to clarify that the phrase ``will

continue'' applies regardless of whether a guarantee that the

arrangement will continue is in place. A fund is required to update its

prospectus by means of a prospectus supplement or ``sticker'' to

reflect a material change in the reimbursement or waiver

arrangement.37 As a result, fund shareholders will be informed of

decreases in amounts reimbursed or fees waived that would have a

material affect on fund expenses.

\37\ The Commission acknowledges that a material change

requiring a stickering of a fund's prospectus would ordinarily not

occur where a fee waiver or reimbursement is increased, thereby

reducing fund expenses.

---------------------------------------------------------------------------

Two amendments are being proposed to conform Form N-1A to Forms N-3

and N-4. The instructions to the example in the table would be amended

to permit a new fund to adjust the data in the example to reflect the

completion of amortization of expenses associated with organizing the

fund 38 and to prescribe a method for allocating account fees

charged to shareholders in an investment company complex or a series

company.39

\38\ Instruction 14(a) to Form N-1A.

\39\ Proposed Instruction 14(i) to Item 2(a) of Form N-1A.

---------------------------------------------------------------------------

Funds are currently required to provide a brief explanation of the

table immediately after the table. The proposed amended instruction

would permit funds to provide the explanation ``contiguous to'' the

table, giving funds additional discretion to determine how the table's

purposes can be made clear to investors.40

\40\ See General Instruction 1 to Item 2, as proposed to be

amended.

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4. Exhibit 16 to Form N-1A

Funds are currently required by Item 24 of Form N-1A to include as

an exhibit to their financial statements a schedule showing how the

fund computes performance quotations. The Commission is proposing to

remove this requirement. Funds' calculations of their performance data

instead will be reviewed during fund examinations.

[[Page 38459]]

C. Request for Comments Regarding Prospectus Simplification Generally

The Commission is currently reviewing the prospectus disclosure

requirements for all management investment companies to determine what

changes might improve further the quality of prospectus disclosure,

particularly in light of regulatory developments and changes in the

investment company industry.41 The Commission would consider

proposing further amendments to Form N-1A to simplify and generally

improve the quality of prospectus disclosure to investors in other

types of mutual funds. The Commission requests comments and suggestions

about ways in which the Form may be amended to further shorten and

simplify prospectus disclosure for other mutual funds. Specifically,

the Commission seeks comment on: (i) whether some information currently

required to be presented in narrative form could be presented more

effectively in a graphic, pictorial, or tabular format; and (ii)

whether the appropriate allocation of required disclosure between the

prospectus and the SAI should be clarified.

\41\ The Commission recently issued a concept release regarding

mutual fund risk disclosure and requested comment regarding a broad

range of issues related to this topic. See Investment Company Act

Rel. No. 20974 (Mar. 29, 1995) [60 FR 17172 (Apr. 4, 1995)].

---------------------------------------------------------------------------

The Commission also requests comment on the utility to investors of

money fund portfolio schedules, which are provided in semi-annual

reports to shareholders.42 Do these schedules provide useful

information for investors? Should other information be provided instead

or in a different format from that currently required?

\42\ Rule 30d-1 [17 CFR 270.30d-1] requires that shareholder

reports contain the financial statements specified in the

appropriate investment company registration statement form.

Instructions for preparing financial statements are contained in the

registration statement forms, which refer to the requirements of

Regulation S-X. See, e.g., instructions to Item 23 of Form N-1A.

---------------------------------------------------------------------------

III. Amendments to Staff Guides

Form N-1A is accompanied by a series of staff guides designed,

among other things, to clarify the disclosure requirements in the form.

The Appendix to this release contains draft revisions to the current

guides.

The Division of Investment Management (the ``Division'') intends to

revise Guides 3, 4, 8 and 22 to Form N-1A to reflect the amendments

proposed today. Guide 3 (Investment Objectives and Policies) would be

revised to urge money funds to be concise in describing the manner in

which they propose to achieve their investment objectives and would

state that a general description of the types of instruments in which

the fund may invest and the issuers of those instruments generally

should be sufficient; that listing or describing each type of

instrument in which the fund may invest is not required; and that

detailed descriptions of rule 2a-7's requirements and the various

nationally recognized statistical rating organizations (``NRSROs'') and

the ratings they assign should be omitted. The Division staff intends

to revise Guide 4 (Types of Securities) to state that money funds are

not required to list or describe the particular instruments in which

the fund may invest. Guide 8 (Senior Securities, Reverse Repurchase

Agreements, Firm Commitment Agreements and Standby Commitment

Agreements) would be revised to state that money funds should discuss

the use of certain trading practices in the SAI in response to Item 13

rather than in the prospectus. Finally, Guide 22 (Government

Securities) would be amended to shift some of the disclosure money

funds place in their prospectuses about U.S. Government securities to

the SAI.

The Division also intends to revise Guides 4 and 5 to clarify

certain other matters applicable to money funds. Guide 4 (Types of

Securities) would be revised to clarify the Commission's policy that

money funds may not invest more than ten percent of their assets in

illiquid securities.43 Guide 5 (Portfolio Turnover) would be

amended to indicate that money funds need not discuss the effects of

portfolio turnover, as an investment technique, in the prospectus.

Money funds would still be required to discuss the effects of portfolio

turnover in the SAI.44

\43\ See Investment Company Act Rel. No. 13380 (July 11, 1983)

[48 FR 32555 (July 18, 1983)]. See also Investment Company Institute

(pub. avail. Dec. 9, 1992). The limit on illiquid holdings by other

types of mutual funds is fifteen percent of net assets. See

Investment Company Act Rel. No. 18612 (Mar. 12, 1992). See also

Merrill Lynch Money Markets, Inc. (pub. avail. Jan. 14, 1994)

(subject to certain conditions, limit on illiquid securities does

not apply to commercial paper issued in reliance on Section 4(2) of

the 1933 Act).

\44\ In the 1993 amendments to Form N-1A, money funds were

explicitly exempted from the requirement to state their portfolio

turnover rates in the Financial Highlights table. See Release 19382,

supra note 10 at n.3.

---------------------------------------------------------------------------

The Division requests comment on the proposed changes to the guides

and the deletion of the guides regarding performance data,45 as

well as any suggestions for amendment of existing guides that would

result in improved disclosure by money funds and other types of mutual

funds.

\45\ See supra note 31.

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IV. Transition Period

If adopted, the proposed amendments would become effective sixty

days after publication in the Federal Register. Funds would be required

to conform their prospectuses and SAIs to the amendments in their next

post-effective amendment filed after the conclusion of the sixty day

period that updates financial statements pursuant to the requirements

of section 10(a)(3) of the 1933 Act [15 U.S.C. 77j(a)(3)]. New funds

would be required to implement the new requirements in registration

statements filed after the conclusion of the sixty day period.

V. General Request for Comments

All interested persons who wish to submit written comments on the

proposed form, rule, and Guide amendments discussed in this release, to

suggest other amendments to Forms N-1A and N-3, or to comment on

related matters that might have a significant impact upon the proposals

discussed in this release, are requested to do so. Commenters

suggesting alternative approaches are encouraged to submit proposed

text to amend the Form or related rules or staff guides.

VI. Cost/Benefit of Proposal

The changes to Forms N-1A and N-3 and related rules proposed today

are intended to shorten and simplify the prospectuses provided to

investors and potential investors in money funds and to improve the

quality of prospectus disclosure by these funds. The proposed revisions

should benefit investors by providing them with a shorter, clearer and,

therefore, more useful document and better enable investors to make an

informed investment decision. Because the proposed revisions would

shorten the prospectuses provided by most money funds, the revisions

should reduce the burdens of preparing and the cost of mailing the

prospectus for funds. That information which is transferred from the

prospectus to the SAI will lengthen the SAIs of some funds; however,

the number of investors typically requesting the SAI is much lower than

the number of investors to whom the prospectus will be provided. The

Commission is interested in any public comment concerning the cost

savings or cost burdens to money funds of all sizes affected by these

proposals.

VII. Summary of Initial Regulatory Flexibility Analysis

The Commission has prepared an Initial Regulatory Flexibility

Analysis in

[[Page 38460]]

accordance with 5 U.S.C. 603 regarding the proposed amendments. The

Analysis notes that the proposed amendments are intended to simplify

money fund prospectus disclosure. Pertinent information contained in

the preceding section of this release (``Cost/Benefit of Proposal'') is

also reflected in the Analysis. A copy of the Initial Regulatory

Flexibility Analysis may be obtained by contacting Martha H. Platt,

Mail Stop 10-6, Securities and Exchange Commission, 450 Fifth Street,

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

Text of Proposed Rule and Form Amendments

List of Subjects in 17 CFR Parts 230, 239, and 274

Investment companies, Reporting and recordkeeping requirements,

Securities.

For the reasons set out in the preamble, the Commission is

proposing to amend Chapter II, Title 17 of the Code of Federal

Regulations as follows:

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

1. The authority citation for Part 230 continues to read in part as

follows:

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

78l, 78m, 78n, 78o, 78w, 79ll(d), 79t, 80a-8, 80a-29, 80a-30, and

80a-37, unless otherwise noted.

* * * * *

2. Section 230.482 is amended by removing the word ``or'' at the

end of paragraph (d)(1); removing the period and adding ``; or'' at the

end of paragraph (d)(2); and adding paragraph (d)(3) to read as

follows:

Sec. 230.482 Advertising by an investment company as satisfying

requirements of section 10.

* * * * *

(d) * * *

(3) In the case of a money market fund holding itself out as

distributing income exempt from regular federal income tax, in addition

to the quotation of yields described in paragraphs (d)(1) and (d)(2) of

this section:

(i) A quotation of current yield described in paragraph (d)(1) of

this section and a corresponding quotation of tax equivalent yield

based on the method of computation prescribed in Form N-1A, relating to

the same base period and of equal prominence; or

(ii) A quotation of current yield and effective yield and

corresponding quotations of tax equivalent current yield and tax

equivalent effective yield based on methods of computation prescribed

in Form N-1A, relating to the same base period and of equal prominence.

* * * * *

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

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.

* * * * *

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

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

follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m,

78n, 78o(d), 80a-8, 80a-24, and 80a-29, unless otherwise noted.

Note: Form N-2 does not and the amendments will not appear in

the Code of Federal Regulations.

5. Form N-2 (referenced in Secs. 239.14 and 274.11a-1) is amended

by removing ``and'' at the end of paragraph (b), removing the period at

the end of paragraph (c), adding ``; and'' at the end of paragraph (c),

and adding instruction 13.d. to Item 4.1, to read as follows:

Form N-2

* * * * *

Item 4. Financial Highlights

1. General * * *

Instructions

General Instructions

* * * * *

Total Investment Return

13. * * *

d. for a period of less than a full fiscal year, state the total

investment return for the period and disclose in a note to the table

that the figure is not annualized.

* * * * *

Note: Form N-1A does not and the amendments will not appear in

the Code of Federal Regulations.

6. General Instruction A of Form N-1A (referenced in Secs. 239.15A

and 274.11A) is amended by adding a second paragraph (unnumbered) to

read as follows:

Form N-1A

* * * * *

General Instructions

A. Rule as to Use of Form N-1A

* * * * *

Several Items of Form N-1A contain specific provisions or

instructions for money market fund Registrants. See General Instruction

E and Items 1, 3, 4, 7, and 8 of Part A, Items 13, 22 and 23 of Part B,

and Item 32 of Part C. In addition, money market fund registrants need

not respond to Items 5(c) and 5A.

* * * * *

7. General Instruction E of Form N-1A (referenced in Secs. 239.15A

and 274.11A) is amended by removing the second sentence of the second

paragraph (unnumbered) and adding two sentences to the end of that

paragraph, to read as follows:

Form N-1A

* * * * *

General Instructions

* * * * *

E. Incorporation by Reference

* * * * *

* * * In general, a Registrant may incorporate by reference, in

answer to any item in a registration statement filed on Form N-1A not

required to be included in a prospectus, any information contained

elsewhere in the registration statement or any information contained in

other statements, applications or reports filed with the Commission,

except that a money market fund Registrant's response to Item 3(d) may

be incorporated into the prospectus by reference from the Statement. A

money market fund Registrant that elects to incorporate its response to

Item 3(d) from the Statement of Additional Information is not required

as a result of that incorporation to physically deliver the Statement

with the prospectus if the Statement is available as described in the

first paragraph of this instruction.

* * * * *

8. Item 1, Part A of Form N-1A (referenced in Secs. 239.15A and

274.11A) is amended by adding an instruction immediately following

paragraph (a)(iii), to read as follows:

Form N-1A

* * * * *

Part A

Information Required in a Prospectus

Item 1. Cover Page

(a) * * *

(iii) * * *

Instruction

A money market fund Registrant incorporating by reference from the

Statement of Additional Information only its response to Item 3(d) must

[[Page 38461]]

include within the prospectus a statement that information has been

incorporated into the prospectus by reference from the Statement of

Additional Information, but may omit the statement from its cover page.

9. Item 2, General Instruction 1 of Form N-1A (referenced in

Secs. 239.15A and 274.11A) is revised by removing ``Immediately after''

and adding in its place ``Contiguous to''.

10. Item 2, Part A of Form N-1A (referenced in Secs. 239.15A and

274.11A is amended by adding paragraph (c) instruction 13 to read as

follows:

Form N-1A

* * * * *

Part A

Information Required in a Prospectus

Item 2. Synopsis

(a)(i) * * *

Instructions

General Instructions * * *

Annual Fund Operating Expenses * * *

13. (a) * * *

(c) The registrant should reflect any expense reimbursement or fee

waiver arrangement that reduced any fund operating expense that is

expected to continue, regardless of whether the reimbursement or waiver

arrangement has been guaranteed.

11. Item 2, Part A of Form N-1A (referenced in Secs. 239.15A and

274.11A is amended by adding ``, except that an appropriate adjustment

to reflect reduced annual expenses from completion of organization

expense amortization may be made'' before the semi-colon at the end of

instruction 14(a).

12. Item 2, Part A of Form N-1A (referenced in Secs. 239.15A and

274.11A is amended by adding paragraph (i) to instruction 14 to read as

follows:

Form N-1A

* * * * *

Part A

Information Required in a Prospectus

Item 2. Synopsis

(a)(i) * * *

Instructions

General Instructions * * *

Example

14. * * *

(i) Reflect any administrative fee collected by dividing the total

amount of the fee collected during the year by all funds or series

whose shareholders are subject to the administrative fee by the total

average net assets of all the funds or series. Add the resulting

percentage to ``Annual Fund Operating Expenses'' and assume that it

remains the same in each of the one, three, five, and ten-year periods.

New Registrants should estimate administrative fees collected.

13. Item 3 of Form N-1A (Secs. 239.15A and 274.11A) is amended by

revising the introductory text of paragraph (a) and revising

instruction 11(e) to paragraph (a), redesignating paragraphs (b), (c),

and (d) as paragraphs (c), (d), and (e), and adding paragraph (b) and

an instruction to newly designated paragraph (d) to read as follows:

Form N-1A

* * * * *

Item 3. Condensed Financial Information

(a) For a Registrant other than a money market fund, furnish the

following information for the Registrant, or for the Registrant and its

subsidiaries, consolidated as prescribed in Rule 6-03 [17 CFR 210.6-03]

of Regulation S-X.

* * * * *

Instructions

General Instructions

* * * * *

Total Return

11. * * *

(e) for a period of less than a full fiscal year, state the total

return for the period and disclose in a note to the table that the

figure is not annualized.

* * * * *

(b) For a money market fund Registrant, provide a bar graph showing

the annual total returns of the fund for each of the last ten fiscal

years, or the life of the fund if less than ten years. The graph should

also show the return for each year in numerical form. Accompany the

graph with a statement or statements that: (1) Past performance is not

predictive of future performance; (2) money market fund performance is

primarily affected by short-term interest rates and fund expenses (and

provide a cross-reference to the Registrant's tabular responses to Item

2(a), unless the bar graph and tabular responses to Item 2(a) appear on

the same page of the prospectus); and (3) financial statements

providing more detailed information regarding the fund's performance

are contained in the Statement of Additional Information.

Instructions

General

Briefly explain the nature of the information contained in the bar

graph and that the information is derived from the financial statements

in the Statement of Additional Information. The auditor's report as to

the financial statements need not be included in the prospectus. Note

that the auditor's report as to the fund's financial data reflected in

the bar graph is included elsewhere in the registration statement,

specify its location, and state that it can be obtained by

shareholders.

Bar Graph Presentation

1. Partial Years/New Registrants. Do not reflect partial fiscal

years in the bar graph. The first year shown in the graph will be the

first full fiscal year for which: (i) the Registrant's registration

statement was effective (or, in the case of a series, the Registrant

offered shares of the series); or (ii) the Registrant (or series)

invested its assets in accordance with its investment objectives.

2. Total Return. Calculate total return as prescribed in

Instruction 11 to Item 3(a) of this form.

3. Distribution of Capital Gains. If the fund made capital gains

distributions during the period, state in a footnote to the graph what

the amount of the distribution per share was and state that such

distribution is reflected in the bar graph by means of a shaded or

otherwise distinctively marked area within the bar for each year in

which capital gains distributions were made.

4. Format. Measure return on the vertical axis of the bar graph and

measure time in yearly increments on the horizontal axis.

5. Series Companies. Treat each series as a separate Registrant for

purposes of this item.

* * * * *

(d) * * *

Instruction

A money market fund Registrant may incorporate its response to this

sub-item from the Statement of Additional Information. See General

Instruction E.

* * * * *

14. Form N-1A (referenced in Secs. 239.15A and 274.11A) is amended

by revising Item 4 to read as follows:

Form N-1A

* * * * *

Item 4. General Description of Registrant

(a) Concisely discuss the organization and operation or proposed

operation of the Registrant. Include the following:

[[Page 38462]]

(i) basic identifying information, including:

(A) the date and form of organization of the Registrant and the

name of the state or other sovereign power under the laws of which it

is organized; and

(B) the classification and subclassification of the Registrant

pursuant to Sections 4 and 5 of the 1940 Act [15 U.S.C. 80a-4, 80a-5];

(ii) a concise description of the investment objectives and

policies of the Registrant, including, if those objectives may be

changed without a vote of the holders of the majority of the voting

securities, a brief statement to that effect; and

(iii) a concise discussion of how the Registrant proposes to

achieve such objectives, including:

(A) a short description of the types of securities in which the

Registrant invests or will invest principally and, if applicable, any

special investment practices or techniques that will be employed in

connection with investing in such securities;

(B) if the Registrant proposes to have a policy of concentrating in

a particular industry or group of industries, identification of such

industry or industries;

(C) identification of any other policies of the Registrant that may

not be changed without the vote of the majority of the outstanding

voting securities, including those policies which the Registrant deems

to be fundamental within the meaning of Section 8(b) of the 1940 Act;

and

(D) a concise description of those significant investment policies

or techniques (such as risk arbitrage, repurchase agreements, forward

delivery contracts, investing for control or management) that are not

described pursuant to subparagraphs (a)(iii) (A)-(C) above that the

Registrant employs or has the current intention of employing in the

foreseeable future.

Instructions

1. In responding to paragraph (a)(iii) of this item (other than

paragraph (a)(iii)(B), regarding concentration), it is sufficient for a

money market fund Registrant to: (a) describe the characteristics of

the Registrant in general terms (e.g., that it seeks to maintain a

stable net asset value of $1.00 by investing in a portfolio of high

quality short-term debt obligations issued by corporations, banks, and

other financial institutions, etc.) without listing or describing the

particular instruments in which the fund may invest or explaining

detailed investment policies designed to comply with rule 2a-7 of the

1940 Act; and (b) if the fund limits investment to a group of

securities or a type of issuer (e.g., to U.S. government securities, or

securities the distributions from which are exempt from federal income

taxes), identify: (i) the group of securities or type of issuer and

(ii) any other group of securities or type of issuer in which the fund

reserves the right to invest more than 5% of its assets and state the

maximum percentage of the fund's assets that may be so invested, unless

the Registrant has not invested more than 5% of its assets in those

securities within the past year and has no current intention of doing

so in the foreseeable future.

2. ``Concentration,'' for purposes of paragraph (a)(iii)(2), is

deemed to be 25% or more of the value of the Registrant's total assets

invested or proposed to be invested in a particular industry or group

of industries. A fund's policy on concentration should not be

inconsistent with the Registrant's name.

3. Discussion of types of investments that will not constitute the

Registrant's principal portfolio emphasis, and of related policies or

practices, should generally receive less emphasis in the prospectus,

and under the circumstances set forth below may be omitted or limited

to information necessary to identify the type of investment, policy, or

practice. Specifically, and notwithstanding paragraph (a) above:

(i) If the effect of a policy is to prohibit a particular practice,

or, if the policy permits a particular practice but the Registrant has

not employed that practice within the past year and has no current

intention of doing so in the foreseeable future, do not include

disclosure as to that policy; and

(ii) If such a policy has the effect of limiting a particular

practice in such a way that no more than 5% of the Registrant's net

assets are at risk, or, if the Registrant has not followed that

practice within the last year in such a manner that more than 5% of the

Registrant's net assets were at risk, and does not have a current

intention of following such practice in the foreseeable future in such

a manner that more than 5% of the Registrant's net assets will be at

risk, disclosure of information in the prospectus about such practice

should be limited to that which is necessary to identify the practice.

(b) Discuss briefly the principal risk factors associated with

investment in the Registrant, including factors peculiar to the

Registrant as well as those generally attendant to investment in an

investment company with investment policies and objectives similar to

the Registrant's.

* * * * *

15. Form N-1A (referenced in Secs. 239.15A and 274.11A) is amended

by adding an instruction following paragraph (b) of Item 7 to read as

follows:

Form N-1A

* * * * *

Item 7. Purchase of Securities Being Offered

* * * * *

(b) * * *

Instruction

In responding to sub-item (b)(i), a money market fund Registrant

need only state that the public offering price per share represents a

proportionate interest in the net assets of the fund. In responding to

sub-item (b)(ii), a money market fund Registrant that seeks to maintain

a stabilized net asset value need not state the time of day at which

net asset value is calculated.

* * * * *

16. Form N-1A (referenced in Secs. 239.15A and 274.11A) is amended

by adding an instruction following paragraph (a) of Item 8 to read as

follows:

Form N-1A

* * * * *

Item 8. Redemption or Repurchase

(a) * * *

Instruction

In responding to paragraph (a), a money market fund Registrant need

not discuss the timing of share pricing but should state how the timing

of a redemption request will affect the accrual or payment of

dividends.

* * * * *

17. Form N-1A (referenced in Secs. 239.15A and 274.11A) is amended

by adding an instruction 3 following paragraph (b) of Item 13 to read

as follows:

Form N-1A

* * * * *

Item 13. Investment Objectives and Policies

* * * * *

(b) * * *

Instructions

* * * * *

3. In responding to this item, a money market fund Registrant

should include descriptions of:

[[Page 38463]]

(i) The types of instruments which it purchases or intends to

purchase;

(ii) The types of issuers that issue the instruments in which it

intends to invest;

(iii) Significant investment policies or techniques (e.g., forward

delivery contracts, repurchase agreements, and standby commitments)

that the Registrant employs or has the current intention of employing

in the foreseeable future; and

(iv) The quality, maturity, and diversity restrictions which

pertain to money market fund investments, to the extent such

descriptions are not included in the prospectus in response to

Instruction 1 to Item 4.

* * * * *

18. Form N-1A (referenced in Secs. 239.15A and 274.11A) is amended

by revising the introductory text of paragraph (a), redesignating

paragraphs (a)(iii) and (a)(iv) as paragraphs (a)(v) and (a)(vi);

adding paragraphs (a)(iii), (a)(iv), and (a)(vii); revising Instruction

4 to paragraph (a); adding Instruction 5 to paragraph (a); and revising

the introductory text of paragraph (b)(iii) of Item 22 to read as

follows:

Form N-1A

* * * * *

Item 22. Calculation of Performance Data

(a) Money Market Funds. If a money market fund Registrant

advertises a yield quotation, an effective yield quotation, a tax

equivalent yield quotation, or a tax equivalent effective yield

quotation, furnish:

* * * * *

(iii) A tax equivalent current yield quotation computed by dividing

that portion of the yield of the Registrant (as computed pursuant to

Item 22(a)(i)) which is tax-exempt by one minus a stated income tax

rate and adding the product to that portion, if any, of the yield of

the Registrant that is not tax-exempt;

(iv) A tax equivalent effective yield quotation computed by

dividing that portion of the effective yield of the Registrant (as

computed pursuant to Item 22(a)(ii)) which is tax-exempt by one minus a

stated income tax rate and adding the product to that portion, if any,

of the yield of the Registrant that is not tax-exempt;

* * * * *

(vii) The income tax rate used in the computation.

Instructions

* * * * *

4. If the Registrant does not advertise any of the four types of

yield, it need not disclose or discuss the computation of that yield.

5. If the Registrant holds itself out as distributing income that

is exempt from federal and/or state and/or local income taxation, in

calculating yield and effective yield (but not tax equivalent yield or

tax equivalent effective yield), the Registrant must reduce the yield

quoted by the effect of any income taxes on the shareholder receiving

dividends, employing the maximum rate for individual income taxation.

For example, if the Registrant holds itself out as distributing income

exempt from federal taxation and the income taxes of State A, but

invests in some securities of State B, it must reduce its yield by the

effect of state income taxes that must be paid by the residents of

State A on that portion of the income attributable to the securities of

State B.

(b) Other Registrants.

* * * * *

(iii) Tax Equivalent Yield. If the Registrant advertises a tax

equivalent yield, furnish,

* * * * *

19. Form N-1A (referenced in Secs. 239.15A and 274.11A), paragraph

(b) of Item 24, is amended by removing paragraph (16) and redesignating

paragraphs (17) and (18) as paragraphs (16) and (17).

20. Guide 3 to Form N-1A is revised to read as follows:

Guide 3. Investment Objective and Policies

In the response to Item 4, the registrant's investment objective

and policies (including the types of securities in which it will

invest) should be clearly and concisely stated in the prospectus so

that they may be readily understood by the investor. Because the

circumstances of each registrant will vary, it is not possible to

define precisely what level of investment would make a particular type

of investment one in which the registrant invests ``principally,'' as

that term is used in Item 4. As a general matter, however, the level of

disclosure as to a particular type of investment should be consistent

with the prominence of that type of investment in the registrant's

portfolio. The prospectus should emphasize the main types of

investments the registrant proposes to make and the principal risks

inherent in such investments. Accordingly, discussions of types of

investments that will not constitute the registrant's principal

portfolio emphasis should be as brief as possible and, in many cases,

may be limited to identifying the particular type of investments. (As

discussed below, the instructions delineate certain circumstances in

which disclosure may be so limited.) Similar treatment should be

accorded to other types of practices, such as borrowing money. In order

to achieve the objective of clear and concise disclosure, registrants

should avoid extensive legal and technical detail and need not discuss

every possible contingency, such as remote risks.\3\

\3\ See individual subject headings of these Guidelines

concerning disclosure for specific investment techniques or

policies.

---------------------------------------------------------------------------

Money market fund registrants in particular are urged to be concise

in describing the manner in which they propose to achieve their

investment objectives (item 4(a)(iii)). A general description of the

types of instruments in which the registrant may invest (i.e., short-

term, high quality instruments) and the types of issuers that issue the

securities in which the registrant may invest (e.g., corporations,

banks, etc.) should generally be sufficient. As stated in Instruction 1

to Item 4, listing or describing each type of instrument in which the

registrant may invest is not required; however, the registrant should

identify those groups of securities or types of issuers in which it has

reserved the right to invest more than 5% of its assets, unless it has

not invested more than 5% of its assets in those securities or issuers

within the past year and has no current intention of doing so in the

foreseeable future. Registrants should omit detailed descriptions of

rule 2a-7's requirements and the various NRSROs and the ratings they

assign to securities in which the fund may or does invest. More

detailed responses regarding investment policies and techniques should

be provided in the Statement of Additional Information in response to

Item 13.

Pursuant to Instruction 3(i) to Item 4(a), the registrant should

omit from the prospectus disclosure about so-called negative investment

policies, that is, policies that prohibit a particular type of

investment or practice. Item 4(a) may have particular applicability to

those types of activities for which section 8(b) of the 1940 Act

specifically requires that there be information in the registration

statement. Although Item 4(a) generally does not attempt to define what

or how much disclosure should be made about particular practices,

Instruction 3(ii) calls for minimal disclosure of policies registrant

will not follow to a significant extent. Specifically, if not more than

5 percent of the registrant's net assets will be at risk, the

prospectus should merely identify the policy or practice. For example,

if a registrant planned to

[[Page 38464]]

invest no more than 5 percent of its net assets in speculative growth

stocks, it would be sufficient to state that policy in the prospectus

without elaboration.

The response to Item 13 should include a fuller discussion in the

Statement of Additional Information of those investment policies of the

registrant with respect to which an abbreviated or no narrative

description is included in the prospectus. Fuller descriptions of the

registrant's principal types of investment may also be appropriate,

depending on the circumstances. If the registrant has not used a policy

in the past, the registrant should disclose that fact, as well as its

intention with respect to that policy in the coming year in the

Statement of Additional Information in responding to Item 13.

21. Guide 4 to Form N-1A is amended by adding a footnote at the end

of the first sentence to read as follows:

Guide 4. Types of Securities

* * * * *

\4\ As set forth in instruction 1 to Item 4, money market fund

Registrants are not required to list or describe the particular

instruments in which the fund may invest.

* * * * *

22. Guide 4 to Form N-1A is amended by adding a sentence and a

footnote in the last paragraph (unnumbered) after the phrase ``fifteen

percent of its net assets.'' to read as follows:

Guide 4. Types of Securities

* * * * *

* * * A money market fund is limited to investing less than ten

percent of its assets in illiquid securities.\5\ * * *

\5\ See Investment Company Act Rel. No. 13380 (July 11, 1983),

48 FR 32555 (July 18, 1983). See also Investment Company Institute

(pub. avail. Dec. 9, 1992).

---------------------------------------------------------------------------

* * * * *

23. Guide 5 to Form N-1A is amended by adding a footnote at the end

of the first sentence to read as follows, and sequentially renumbering

all subsequent footnotes in the guides to Form N-1A:

Guide 5. Portfolio Turnover

* * * * *

\6\ Money market funds are not required to discuss the effects

of portfolio turnover in their prospectuses.

* * * * *

24. Guide 8 to Form N-1A is amended by adding a sentence to the

second paragraph (unnumbered) following the third sentence to read as

follows:

Guide 8. Senior Securities, Reverse Repurchase Agreements, Firm

Commitment Agreements and Standby Commitment Agreements

* * * * *

* * * Money market funds should discuss their use of these trading

practices in the Statement of Additional Information in response to

Item 13 (see Instruction 1 to Item 4(a)(iii) and Instruction 3 to Item

13). * * *

25. Guide 22 to Form N-1A is amended to read as follows:

Guide 22. Government Securities

If the registrant is investing in United States Government

securities, the prospectus should reflect under what conditions, and to

what extent the registrant intends to invest its assets in United

States Government securities.

If a registrant other than a money market fund is investing to a

significant extent in United States Government securities on a routine

basis, the prospectus should include the following information: (i) The

types of Government securities in which the fund will invest; (ii)

examples of Government agencies and instrumentalities in whose

securities the fund will invest; and (iii) whether the securities of

such agency or instrumentality are: (a) Supported by full faith and

credit of the United States, (b) supported by the ability to borrow

from the Treasury, (c) supported only by the credit of the agency or

instrumentality, or (d) supported by the United States in some other

way. If the registrant is a money market fund, the disclosure described

in (i)-(iii) above should be placed in the Statement of Additional

Information.

If the registrant is a money market fund holding itself out as

investing in United States Government securities, and the registrant

does not invest all of its assets in securities backed by the full

faith and credit of the United States Government, the fund should not

suggest in its prospectus or sales material that there is no credit

risk associated with the fund's investments.

26. Guide 28 to Form N-1A is amended by removing the following

phrase in the first sentence of the tenth paragraph (unnumbered):

``with portfolio securities that mature in one year or less''.

27. General Instruction A of Form N-3 (referenced in Secs. 239.17a

and 274.11b) is amended by adding a paragraph between the first and

second (unnumbered) paragraphs to read as follows:

Form N-3

* * * * *

General Instructions

A. Rule as to Use of Form N-3

* * * * *

Several Items of Form N-3 contain specific provisions or

instructions for money market accounts. See General Instruction G and

Items 1, 4, 5, 11, 12, of Part A, Items 19 and 27 of Part B, and Item

37 of Part C.

* * * * *

Note: Form N-3 does not and the amendments will not appear in

the Code of Federal Regulations.

28. General Instruction G of Form N-3 (referenced in Secs. 239.17a

and 274.11b) is amended by removing the period and adding a comma at

the end of the second paragraph (unnumbered) and adding the following

to read as follows:

Form N-3

* * * * *

General Instructions

* * * * *

G. Incorporation by Reference

* * * * *

* * *, except that a Registrant's response to Item 4(d) may be

incorporated into the prospectus by reference from the Statement of

Additional Information. A money market account electing to incorporate

its response to Item 4(d) from the Statement of Additional Information

will not be required as a result of that incorporation to physically

deliver the Statement with the prospectus if the Statement is available

as described in the first paragraph of this instruction.

* * * * *

29. Item 1 of Form N-3 (referenced in Secs. 239.17a and 274.11b) is

amended by adding an instruction at the end of paragraph (a)(vi) to

read as follows:

Form N-3

* * * * *

Item 1. Cover Page

(a) * * *

(vi) * * *

Instruction

A money market account incorporating by reference from the

Statement of Additional Information only its response to Item 4(c) must

include within the prospectus a statement that information has been

incorporated into the prospectus by reference from the Statement of

Additional Information, but may omit the statement from its cover page.

* * * * *

30. Item 3 of Form N-3 (referenced in Secs. 239.17a and 274.11b) is

amended by

[[Page 38465]]

revising General Instruction 1 by removing ``Immediately after'' and

substituting in its place ``Contiguous to''.

31. Item 3 of Form N-3 (referenced in Secs. 239.17a and 274.11b) is

amended by adding paragraph (c) to instruction 18 to read as follows:

Form N-3

* * * * *

Item 3. Synopsis

(a) * * *

Annual Expenses * * *

18. (a) * * *

(b) * * *

(c) The registrant should reflect any expense reimbursement or fee

waiver arrangement that reduced any operating expense that is expected

to continue, regardless of whether the reimbursement or waiver

arrangement has been guaranteed.

32. Item 4 of Form N-3 (referenced in Secs. 239.17a and 274.11b) is

amended by revising the introductory text of paragraph (a),

redesignating paragraphs (b), (c), and (d) as paragraphs (c), (d), and

(e), adding paragraph (b), and adding an instruction to newly

designated paragraph (d) to read as follows:

Form N-3

* * * * *

Item 4. Condensed Financial Information

(a) For all registrants other than money market accounts, furnish

the following information for each class of accumulation units of the

Registrant, or for such classes of the Registrant and its subsidiaries

consolidated as prescribed in Rule 6-03 of Regulation S-X [17 CFR

210.6-03].

* * * * *

(b) For each money market account, provide a bar graph showing the

annual total returns of the account for each of the last ten fiscal

years, or the life of the account if less than ten years. The graph

should also show the return for each year in numerical form. Accompany

the graph with a statement or statements that: (1) Past performance is

not predictive of future performance; (2) money market account

performance is primarily affected by short-term interest rates and

expenses (and provide a cross-reference to the Registrant's tabular

responses to Item 3(a), unless the bar graph and tabular responses to

Item 3(a) appear on the same page of the prospectus); and (3) financial

statements providing more detailed information regarding the account's

performance are contained in the Statement of Additional Information.

Instructions

General

Briefly explain the nature of the information contained in the bar

graph and that the information is derived from the financial statements

in the Statement of Additional Information. The auditor's report as to

the financial statements need not be included in the prospectus. Note

that the auditor's report as to the fund's financial data reflected in

the bar graph is included elsewhere in the registration statement,

specify its location, and state that it can be obtained by

shareholders.

Bar Graph Presentation

1. Partial Years/New Registrants. Do not reflect partial fiscal

years in the bar graph. The first year shown in the graph will be the

first full fiscal year for which: (i) The Registrant's registration

statement was effective (or, in the case of a series, the Registrant

offered shares of the account); or (ii) the Registrant (or account)

invested its assets in accordance with its investment objectives.

2. Total Return. Calculate total return as prescribed in

Instruction 11 to Item 3(a) of Form N-1A.

3. Distribution of Capital Gains. If the account made capital gains

distributions during the period, state in a footnote to the graph what

the amount of the distribution per share was and state that such

distribution is reflected in the bar graph by means of a shaded or

otherwise distinctively marked area within the bar for each year in

which capital gains distributions were made.

4. Format. Measure return on the vertical axis of the bar graph and

measure time in yearly increments on the horizontal axis.

5. Series Companies. Treat each sub-account as a separate

Registrant for purposes of this item.

* * * * *

(d) * * *

Instruction

A money market account may incorporate its response to this item

from the Statement of Additional Information. See General Instruction

G.

* * * * *

33. Item 5 of Form N-3 (referenced in Secs. 239.17a and 274.11b) is

amended by revising paragraph (c)(ii), removing paragraph (d), and

redesignating paragraph (e) as paragraph (d) to read as follows:

Form N-3

* * * * *

Item 5. General Description of Registrant and Insurance Company

* * * * *

(c) * * *

(ii) how the Registrant proposes to achieve its objectives,

including:

(A) a short description of the types of securities in which the

Registrant invests or will invest principally and, if applicable, any

special investment practices or techniques that will be employed in

connection with investing in such securities;

(B) if the Registrant proposes to have a policy of concentrating in

a particular industry or group of industries, identification of such

industry or industries;

(C) the identity of other policies of the Registrant that may be

changed only with the approval of a majority of votes, including those

policies which the Registrant deems to be fundamental within the

meaning of Section 8(b) of the 1940 Act; and

(D) those significant investment policies or techniques (such as

risk arbitrage, repurchase agreements, forward delivery contracts,

investing for control or management) that are not described pursuant to

subparagraphs (A), (B) or (C) above that Registrant employs or intends

to employ in the foreseeable future.

Instructions

1. In responding to paragraph (c)(ii) of this item (other than

paragraph (c)(ii)(B), regarding concentration), it is sufficient for a

money market account to:

(a) Describe the characteristics of the account in general terms

(e.g., that it seeks to maintain a stable net asset value of $1.00 by

investing in a portfolio of high quality short-term debt obligations,

issued by corporations, banks, and other financial institutions, etc.)

without listing or describing the particular instruments in which the

account may invest or explaining detailed investment policies designed

to comply with rule 2a-7 of the 1940 Act; and

(b) If the account limits investment to a group of securities or a

type of issuer (e.g., to U.S. government securities), identify: (i) the

group of securities or type of issuer and (ii) any other group of

securities of type of issuer in which the fund reserves the right to

invest more than 5% of its assets and state the maximum percentage of

the fund's assets that may be so invested, unless the account has not

invested more than 5% of its assets in those securities within the past

year and has no current intention of doing so in the foreseeable

future.

[[Page 38466]]

2. ``Concentration'', for purposes of paragraph (c)(ii)(B), is

deemed to be 25% or more of the value of Registrant's total assets

invested or proposed to be invested in a particular industry or group

of industries. Registrant's policy on concentration should not be

inconsistent with Registrant's name.

3. Discussion of types of investments that will not constitute

Registrant's principal portfolio emphasis, and of related policies or

practices, should generally receive less emphasis in the prospectus,

and under the circumstances set forth below may be omitted or limited

to information necessary to identify the type of investment, policy, or

practice. Specifically, and notwithstanding paragraph (c) above:

(a) If the effect of a policy is to prohibit a particular practice,

or, if the policy permits a particular practice but the Registrant has

not employed that practice within the past year and has no current

intention of doing so in the foreseeable future, do not include

disclosure as to that policy; and

(b) If such a policy has the effect of limiting a particular

practice in such a way that no more than 5% of Registrant's net assets

are at risk, or, if Registrant has not followed that practice within

the last year in such a manner that more than 5% of Registrant's net

assets were at risk, and does not have a current intention of following

such practice in the foreseeable future in such a manner that more than

5% of Registrant's net assets will be at risk, disclosure of

information in the prospectus about such practice should be limited to

that which is necessary to identify the practice.

* * * * *

34. Form N-3 (referenced in Secs. 239.17a and 274.11b) is amended

by adding an instruction following Item 11(c) to read as follows:

Form N-3

* * * * *

Item 11. Purchases and Contract Value

* * * * *

(c) * * *

Instruction

In responding to sub-item 11(c), a money market account need only

state that the accumulation unit value represents a proportionate

interest in the net assets of the account.

* * * * *

35. Form N-3 (referenced in Secs. 239.17a and 274.11b) is amended

by adding an instruction following Item 11(d) to read as follows:

Form N-3

* * * * *

Item 11. Purchases and Contract Value

* * * * *

(d) * * *

Instruction

In responding to sub-item 11(d), a money market account that seeks

to maintain a stabilized accumulation unit value need not state the

time of day at which the calculation is made. * * *

36. Form N-3 (referenced in Secs. 239.17a and 274.11b) is amended

by adding an instruction following Item 12(a) to read as follows:

Form N-3

* * * * *

Item 12. Redemptions

(a) * * *

Instruction

In responding to paragraph (a), a money market account Registrant

need not discuss the timing of unit value pricing but should state how

the timing of a redemption request will affect the accrual of

dividends.

* * * * *

37. Form N-3 (referenced in CFR Secs. 239.17a and 274.11b) is

amended by adding instruction 3 following Item 19(b) to read as

follows:

Form N-3

* * * * *

Item 19. Investment Objectives and Policies

* * * * *

(b) * * *

Instructions:

* * * * *

3. In responding to this item, money market accounts should include

descriptions of:

(a) The types of instruments which it purchases or intends to

purchase;

(b) The types of issuers that issue the instruments in which it

intends to invest;

(c) Significant investment policies or techniques (e.g., forward

delivery contracts, repurchase agreements, and standby commitments)

that the Registrant employs or has the current intention of employing

in the foreseeable future; and

(d) The quality, maturity, and diversity restrictions which pertain

to money market account investments, to the extent such descriptions

have not been included in the prospectus in response to Instruction 1

to Item 5(c).

* * * * *

38. Form N-3 (referenced in Secs. 239.17a and 274.11b), paragraph

(b) of Item 28, is amended by removing paragraph (16) and redesignating

paragraph (17) as paragraph (16).

39. Guide 3 to Form N-3 is amended by removing the word ``basic''

in the first paragraph and substituting in its place ``principal''.

40. Guide 3 to Form N-3 is amended by adding a paragraph

(unnumbered) after the first (unnumbered) paragraph to read as follows:

Guide 3. Investment Objectives and Policies

* * * * *

In particular, Registrants with money market accounts are urged to

be concise in describing the manner in which such accounts propose to

achieve their investment objectives (item 5(c)). A general description

of the types of instruments in which a money market account may invest

(i.e., short-term, high quality instruments) and the types of issuers

that issue the securities in which it may invest (e.g., corporations,

banks, etc.) should generally be sufficient. As stated in Instruction 1

to Item 5, listing or describing each type of instrument in which the

money market account may invest is not required; however, the

registrant should identify those groups of securities or types of

issuers in which the account has reserved the right to invest more than

5% of its assets, unless it has not invested more than 5% of its assets

in those securities or issuers within the past year and has no current

intention of doing so in the foreseeable future. Registrants should

omit detailed descriptions of rule 2a-7's requirements and the various

NRSROs and the ratings they assign. More detailed responses regarding

investment policies and techniques should be provided in the SAI in

response to Item 13.

* * * * *

41. Guide 4 to Form N-3 is amended by adding a footnote at the end

of the first sentence to read as follows:

Guide 4. Types of Securities

* * * * *

\3\ As set forth in instruction 1 to Item 5, money market funds

are not required to list or describe the particular instruments in

which the fund may invest.

* * * * *

42. Guide 4 to Form N-3 is amended by adding a final paragraph to

read as follows:

Guide 4. Types of Securities

* * * * *

If an account holds a material percentage of its assets in

securities or

[[Page 38467]]

other assets for which there is no established market, there may be a

question concerning the ability of the account to make payment within

seven days of the date its shares are tendered for redemption. The

usual limit on aggregate holdings of illiquid assets by separate

accounts is 15 percent of net assets. A money market account is limited

to investing less than ten percent of its assets in illiquid

securities.5 An illiquid asset is any asset which may not be sold

or disposed of in the ordinary course of business within seven days at

approximately the value at which the mutual fund has valued the

instrument.6

\5\ See Investment Company Act Rel. No. 13380 (July 11, 1983),

48 FR 32555 (July 18, 1983). See also Investment Company Institute

(pub. avail. Dec. 9, 1992).

\6\ See Investment Company Act Release No. 14983 (Mar. 12, 1986)

[51 FR 9773 (Mar. 20, 1986)].

---------------------------------------------------------------------------

* * * * *

43. Guide 5 to Form N-3 is amended by adding a footnote at the end

of the first sentence to read as follows:

Guide 5. Portfolio Turnover

* * * * *

\7\ Money market accounts are not required to discuss the

effects of portfolio turnover in their prospectuses.

44. Guide 8 to Form N-3 is amended by adding a sentence in the

second paragraph (unnumbered) following ``and standby commitment

agreements.*, to read as follows, and renumbering sequentially all

subsequent footnotes in the guides to Form N-3:

Guide 8. Senior Securities, Reverse Repurchase Agreements, and Standby

Commitment Agreements

* * * * *

* * * Money market accounts should discuss their use of these

trading practices in the Statement of Additional Information in

response to Item 19 (see Instruction 1 to Item 5(c)(ii) and Instruction

3 to Item 19(b)). * * *

45. Guide 21 to Form N-3 is amended to read as follows:

Guide 21. Government Securities

If the registrant is investing in United States Government

securities, the prospectus should explain when and to what extent the

registrant intends to do so.

If a registrant other than a money market account is investing

significantly in United States Government securities on a routine

basis, the prospectus should include the following information: (1) The

types of Government securities in which the separate account will

invest; (2) examples of Government agencies and instrumentalities in

whose securities the separate account will invest; and (3) whether the

securities of such agency or instrumentality are (a) supported by the

full faith and credit of the United States, (b) supported by the

ability to borrow from the Treasury, (c) supported only by the credit

of the agency or instrumentality, or (d) supported by the United States

in some other way. If the registrant is a money market account, the

disclosure described in (1) through (3) above should be placed in the

Statement of Additional Information.

If the registrant is a money market account holding itself out as

investing in United States Government securities, and the registrant

does not invest all of its assets in securities backed by the full

faith and credit of the United States Government, the account should

not suggest in its prospectus or in its sales material that there is no

credit risk associated with the account's investments.

46. Guide 27 to Form N-3 is amended by removing the phrase in the

first sentence of the tenth paragraph (unnumbered): ``with portfolio

securities that mature in one year or less''.

* * * * *

Dated: July 19, 1995.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95-18243 Filed 7-25-95; 8:45 am]

BILLING CODE 8010-01-P