New Disclosure Option for Open-End Management Investment Companies
Federal RegisterMar 23, 1998
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 230 and 270
[Release Nos. 33-7513; IC-23065; File No. S7-18-96]
RIN 3235-AH03
New Disclosure Option for Open-End Management Investment
Companies
AGENCY: Securities and Exchange Commission
ACTION: Final rule
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SUMMARY: The Securities and Exchange Commission is adopting a new rule
that would permit a mutual fund to offer investors a new disclosure
document called a ``Aprofile,'' which summarizes key information about
the fund, including the fund's investment strategies, risks,
performance, and fees, in a concise, standardized format. A fund that
offers a profile will be able to give investors a choice of the amount
of information that they wish to consider before making a decision
about investing in the fund; investors will have the option of
purchasing the fund's shares after reviewing the information in the
profile or after requesting and reviewing the fund's prospectus (and
other information). An investor deciding to purchase fund shares based
on the information in a profile will receive the fund's prospectus with
the confirmation of purchase.
DATES: Effective on June 1, 1998.
FOR FURTHER INFORMATION CONTACT: Kathleen K. Clarke, Assistant
Director, George J. Zornada, Team Leader, or Laura J. Riegel, Attorney,
(202) 942-0721, Office of Disclosure Regulation, Division of Investment
Management, Securities and Exchange Commission, 450 Fifth Street, N.W.,
Mail Stop 5-6, Washington, D.C. 20549-6009. Contact the Office of Chief
Counsel, Division of Investment Management, Securities and Exchange
Commission, at (202) 942-0659 or 450 Fifth Street, N.W., Mail Stop 5-6,
Washington, D.C. 20549-6009 for additional information, including
interpretive guidance, relating to this release or the profile.
SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission (the
``Commission'') today is adopting new rule 498 [17 CFR 230.498] under
the Securities Act of 1933 [15 U.S.C. 77a, et seq.] (``Securities
Act'') and the Investment Company Act of 1940 [15 U.S.C. 80a-1, et
seq.] (``Investment Company Act''). Rule 498 permits an open-end
management investment company that registers on Form N-1A [17 CFR
274.11A] (a ``fund'') to provide to investors a disclosure document
called a ``profile,'' which summarizes key information about the fund
and gives investors the option of purchasing the fund's shares based on
the information in the profile. The Commission also is adopting
amendments to rule 497 under the Securities Act [17 CFR 230.497] to
require a fund to file a profile with the Commission at least 30 days
prior to the profile's first use. In a companion release, the
Commission is adopting revisions to the prospectus disclosure
requirements in Form N-1A, the registration statement used by funds.\1\
These revisions seek to minimize prospectus disclosure about technical,
legal, and operational matters that generally are common to all funds
and to focus prospectus disclosure on essential information about a
particular fund that would assist an investor in making a decision
about investing in that fund.
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\1\ Investment Company Act Release No. 23064 (Mar. 13, 1998)
(``Form N-1A Release'').
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TABLE OF CONTENTS
I. Introduction and Background
II. Discussion
A. General
1. Overview of Comments
2. Liability
3. Plain English Disclosure
4. Use of the Profile by Other Types of Investment Companies
5. Standardized Format
6. Additional Disclosure Items
7. Eligibility
8. Number of Funds Described in a Profile
B. Profile Disclosure
1. Cover Page
2. Risk/Return Summary
3. Other Disclosure Requirements
4. Application to Purchase Shares
C. Filing Requirements
D. Dissemination of Profiles
E. Modified Profiles for Certain Funds
III. Effective Date
IV. Cost/Benefit Analysis and Effects on Competition, Efficiency,
and Capital Formation
V. Paperwork Reduction Act
VI. Summary of Final Regulatory Flexibility Analysis
VII. Statutory Authority
Text of Rule
I. Introduction and Background
Over the last decade, the fund industry has grown tremendously.
Over 6,000 funds are now available to investors and close to 40 million
American households own funds.\2\ Today, fund assets exceed the
deposits of commercial banks.\3\
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\2\ See INVESTMENT COMPANY INSTITUTE (``ICI''), Trends in Mutual
Fund Investing: September 1997 at 3 (Oct. 30, 1997) (ICI News No.
97-93) (``ICI Trends'') (as of Sept. 1997, there were 6,666 funds )
and ICI, Mutual Fund Ownership in the U.S., FUNDAMENTALS, Dec. 1996,
at 1 (approximately 36.8 million households owned mutual funds
either directly or through a retirement plan as of April 1996).
\3\ Compare ICI Trends at 1 (fund net assets exceeded $4.4
trillion as of Sept. 1997) with Federal Reserve Bank Statistical
Release H.8: Assets and Liabilities of Commercial Banks in the
United States (Nov. 7, 1997) (commercial bank deposits were
approximately $3.0 trillion as of Oct. 1997).
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As more investors turn to funds for professional management of
current and retirement savings, funds have introduced new investment
options and shareholder services to meet the needs of investors. While
benefiting from these developments, investors also face an increasingly
difficult task in choosing among different fund investments. The
Commission, fund investors, and others have recognized the need to
improve fund disclosure documents to help investors evaluate and
compare funds.\4\ In the Commission's view, the growth of the fund
industry and the diversity of fund investors warrant a new approach to
fund disclosure that will offer more choices in the format and amount
of information available about fund investments.\5\
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\4\ See, e.g., ``Fulfilling the Promise of Disclosure,'' Remarks
by Arthur Levitt, Chairman, SEC, before the American Savings
Education Council, New York, NY (July 23, 1997); Remarks by Steven
M.H. Wallman, Commissioner, SEC, before the ICI's 1995 Investment
Company Directors Conference and New Directors Workshop, Wash., D.C.
(Sept. 22, 1995); ``Mutual Funds and the International Marketplace:
``A Regulatory Challenge,'' Remarks by Isaac C. Hunt, Jr.,
Commissioner, SEC, before the Sixth Annual Conference on
International Issues, The University of Tulsa, Tulsa, Okla. (Mar. 6,
1997). See also McTague, Simply Beautiful: Shorn of Legalese, Even
Prospectuses Make Sense, BARRON'S, Oct. 7, 1996, at F10 (concerning
the recent efforts of the John Hancock funds and other fund groups
to simplify their prospectuses).
\5\ The Commission has demonstrated an on-going commitment to
improve the information provided in fund disclosure documents to
meet changes in the fund industry and investors' needs. The
Commission has taken a number of steps in recent years to meet this
goal. See Investment Company Act Release No. 20974 (Mar. 29, 1995)
[60 FR 17172] (requesting comment on ways to improve risk disclosure
and comparability of fund risk levels) (``Risk Concept Release'');
Investment Company Act Release No. 19382 (Apr. 6, 1993) [58 FR
19050] (simplifying financial highlights information and requiring
management's discussion of fund performance (``MDFP'')); Investment
Company Act Release No. 16245 (Feb. 2, 1988) [53 FR 3868] (``Fund
Performance Release'') (adopting a uniform formula for calculating
fund performance); Investment Company Act Release No. 16244 (Feb. 1,
1988) [53 FR 3182] (adopting a uniform fee table in fund
prospectuses). See also SEC, REPORT OF THE ADVISORY COMMITTEE ON THE
CAPITAL FORMATION AND REGULATORY PROCESSES (July 24, 1996); SEC,
REPORT OF THE TASK FORCE ON DISCLOSURE SIMPLIFICATION (1996)
(recommending specific improvements in the disclosure provided by
corporate issuers).
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[[Page 13969]]
In seeking to meet this goal, the Commission proposed, on February
27, 1997, new rule 498, which would permit a fund to provide investors
with a profile (the ``Proposed Profile'').\6\ The Proposed Profile
would summarize key information about a fund, including the fund's
investment objectives, strategies, risks, performance, fees, investment
adviser and portfolio manager, purchase and redemption procedures,
distributions, and the services available to the fund's investors. The
Proposed Profile was designed to provide summary information about a
fund that would assist an investor in deciding whether to invest in a
fund or to request additional information about the fund before
deciding whether to buy shares in that fund. Proposed rule 498 would
require a fund to mail the prospectus and other information to the
requesting investor within 3 business days of a request. An investor
deciding to purchase fund shares based on the Proposed Profile would
receive the fund's prospectus with the purchase confirmation.
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\6\ Investment Company Act Release No. 22529 (Feb. 27, 1997) [62
FR 10943], correction [62 FR 24160] (``Profile Proposing Release'').
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On the same day that it proposed rule 498 for comment, the
Commission published a release in which it proposed major changes to
the prospectus disclosure requirements in Form N-1A (``Form N-1A
Proposing Release'').\7\ The proposed amendments to Form N-1A were
designed to focus prospectus disclosure on essential information about
a particular fund that would assist an investor in making a decision
about investing in that fund. The proposed amendments reflected the
Commission's strongly-held belief that a prospectus, as the primary
disclosure document contemplated under the federal securities laws,
should present clear, concise, and understandable information about an
investment in a fund.
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\7\ Investment Company Act Release No. 22528 (Feb. 27, 1997) [62
FR 10898], correction [62 FR 24160] (``Form N-1A Proposing
Release'').
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The Proposed Profile was based on a number of initiatives
undertaken by the Commission to assess options for improving fund
disclosure documents. One of these initiatives was a pilot program
conducted by the Commission, with participation by the Investment
Company Institute (``ICI'') and several large fund groups, in which the
funds used profile-like summaries (``Pilot Profiles'') with their
prospectuses.\8\ The Pilot Profiles, like the profile adopted today,
summarized important information about funds. The purpose of the pilot
program was to assess whether investors found the Pilot Profiles
helpful in making investment decisions. Focus groups conducted on the
Commission's behalf (``Focus Groups'') responded positively to the
profile concept, indicating that a disclosure document such as the
Pilot Profile would assist them in making investment decisions. Fund
investors participating in a survey sponsored by the ICI also strongly
supported the Pilot Profiles.\9\
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\8\ See Investment Company Institute (pub. avail. July 31, 1995)
(``1995 Profile Letter''); Investment Company Institute (pub. avail.
July 29, 1996) (``1996 Profile Letter''). The Division of Investment
Management (``Division'') has permitted the pilot program to
continue until adoption of proposed rule 498. See Investment Company
Institute (pub. avail. July 16, 1997) (``1997 Profile Letter'').
\9\ Letter from Paul Schott Stevens, Senior Vice President and
General Counsel, ICI, to Barry P. Barbash, Director, Division of
Investment Management, SEC, at 5-6 (May 20, 1996) (``ICI Survey
Letter'') (enclosing Investment Company Institute, The Profile
Prospectus: An Assessment by Mutual Fund Shareholders (1996) (survey
of over 1,000 fund investors) (``ICI Profile Survey'')).
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The Commission received 256 comment letters on the Proposed
Profile, a large percentage of which were from individual investors
(226 letters or 88%).\10\ Commenters expressed strong support for the
Proposed Profile.\11\ Many commenters cited the advantages of a
document that is less technical and easier to read. Commenters believed
that the Proposed Profile would assist investors in selecting a fund in
which to invest. Many of those commenting on the Proposed Profile,
particularly individual investors, endorsed the Proposed Profile's goal
of providing standardized, summary information about a fund.\12\
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\10\ In addition to the comment letters from individuals, the
Commission received comment letters from 6 broker-dealers and
investment advisers, 8 funds, 3 law firms, 1 rating agency, 4 trade
associations, and 8 other interested organizations. The comment
letters, as well as a comment summary prepared by the Commission's
staff, are available for public inspection and copying at the
Commission's public reference room in File No. S7-18-96.
\11\ Of the comment letters received by the Commission, 88%
supported the Proposed Profile.
\12\ See also Middleton, Cure on the Way for * * *
Prospectusphobia, Mutual Funds Magazine, June 1997, at 58; Fosback,
Profiles--A Valuable New Tool for Investors, Mutual Funds Magazine,
May 1997, at 10; Profile Prospectuses: An Idea Whose Time Has Come,
Mutual Funds Magazine, Aug. 1996, at 11.
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The Commission is adopting rule 498 with modifications that reflect
the Commission's consideration of commenters' suggestions. Rule 498
permits a fund to provide investors with a new disclosure option in the
form of a profile that summarizes key information about the fund.\13\ A
fund that makes a profile available will be able to offer an investor
the option of purchasing the fund's shares after reviewing the
information in the profile or of requesting and reviewing the fund's
prospectus (and other information) before making an investment
decision. An investor deciding to purchase fund shares based on the
profile will receive the fund's prospectus with the purchase
confirmation.
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\13\ The ICI recently conducted a survey to assess information
that investors considered before making a fund purchase. The results
indicated that investors considered fund risk levels, total returns,
and investment goals most frequently (listed respectively as first,
second, and fourth). ICI, Uncerstanding Shareholders' Use of
Information and Advisers at 4 (1997) (``ICI Shareholder Survey'').
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Under rule 498, as adopted, the profile will include:
--Standardized Fund Summaries. The profile includes concise disclosure
of 9 items of key information about a fund in a specific sequence.
--Improved Risk Disclosure. A risk/return summary (also required at the
beginning of a fund's prospectus) provides information about a fund's
investment objectives, principal strategies, risks, performance, and
fees.
--Graphic Disclosure of Variability of Returns. The risk/return summary
provides a bar chart of a fund's annual returns over a 10-year period
that illustrates the variability of those returns and gives investors
some idea of the risks of an investment in the fund. To help investors
evaluate a fund's risks and returns relative to ``the market,'' a table
accompanying the bar chart compares the fund's average annual returns
for 1-, 5-, and 10-year periods to that of a broad-based securities
market index.
--Other Fund Information. The profile includes information on the
fund's investment adviser and portfolio manager, purchase and
redemption procedures, tax considerations, and shareholder services.
--Plain English Disclosure. The Commission's recently adopted plain
English disclosure requirements, which are designed to give investors
understandable disclosure documents, will apply to the profile.\14\ The
Commission's plain English rule requires the use of plain English
writing principles, including short sentences, everyday language,
active voice, tabular presentation of complex
[[Page 13970]]
material, no legal or business jargon, and no multiple negatives.\15\
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\14\ See Securities Act Release No. 7497 (Jan. 28, 1998) [63 FR
6370] (``Plain English Release'') (adopting amendments to rule 421
under the Securities Act [17 CFR 230.421] requiring the use of plain
English disclosure principles).
\15\ Rule 421(d).
Rule 498, as adopted, also permits a fund that serves as an
investment option for a participant-directed defined contribution plan
(or for certain other tax-deferred arrangements) to provide investors
with a profile that includes disclosure that is tailored for the plan
(or other arrangement). Profiles tailored for such use can exclude
information relating to the purchase and sale of fund shares, fund
distributions, tax consequences, and fund services otherwise required
in a profile.
The Commission has determined to adopt rule 498 and permit funds to
use summary disclosure documents in accordance with the rule under the
authority of section 10(b) of the Securities Act \16\ and other
provisions of the federal securities laws.\17\ Section 10(b) gives the
Commission the authority to adopt rules allowing the use of a summary
prospectus if the Commission determines that doing so is ``necessary or
appropriate in the public interest and for the protection of
investors.'' \18\ In making this determination about profiles, the
Commission considered, among other things: An extensive analysis of
fund disclosure issues it recently conducted; its assessment of funds'
use of Pilot Profiles; its assessment of certain other disclosure
initiatives; and its substantial experience gained in administering the
two-part disclosure format adopted in 1983 permitting a fund to provide
investors with a simplified prospectus containing essential information
about the fund and to place more detailed information about the fund in
a Statement of Additional Information (``SAI''), which investors can
obtain upon request.\19\ The Commission believes, and the broad support
for the Proposed Profile confirms its belief, that rule 498 will
benefit investors and promote effective communication of information
about funds.
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\16\ 15 U.S.C. 77j(b). Section 10(b) of the Securities Act of
1933 (``Securities Act'') permits the use of a summary prospectus
(which provides information the substance of which is included in
the prospectus) to communicate information for purposes of an offer
under section 5(b)(1) of the Securities Act [15 U.S.C. 77e(b)(1)].
Section 5(b)(2) of the Securities Act [15 U.S.C. 77e(b)(2)]
requires, as a condition of selling a security, the delivery to
investors of a prospectus that meets the requirements of section
10(a) of the Securities Act [15 U.S.C. 77j(a)].
\17\ Congress recently confirmed the authority of the Commission
to permit the use of a summary prospectus by adding new section
24(g) to the Investment Company Act [15 U.S.C. 80a-24(g)]. National
Securities Markets Improvement Act of 1996, Pub. L. 104-290 (1996)
(``Improvements Act''), section 204 (amending section 24 to add new
paragraph (g)). While the profile, as adopted, will include a
summary of information that is required in the prospectus, the
Commission may adopt other rules under section 24(g) allowing a fund
to use a summary prospectus that includes information the substance
of which is not included in the prospectus.
\18\ See supra note 16.
\19\ Investment Company Act Release No. 13436 (Aug. 12, 1983)
[48 FR 37928] (``1983 Form N-1A Adopting Release''). See also supra
note 5.
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Today, the Commission also is adopting the proposed amendments to
Form N-1A.\20\ As they did with the Proposed Profile, commenters
strongly supported the revised prospectus disclosure requirements.
Taken together, these two disclosure initiatives are intended to allow
funds flexibility to respond to the diverse information needs of
investors and to improve fund disclosure.\21\
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\20\ See Form N-1A Release, supra note 1.
\21\ The Commission also proposed as part of these disclosure
initiatives a new rule to address investment company names that are
likely to mislead investors about the investments and risks of an
investment company. Investment Company Act Release No. 22530 (Feb.
27, 1997) [62 FR 10955], correction [62 FR 24161]. The proposed rule
would require, among other things, funds and other registered
investment companies with names suggesting a specific investment
emphasis to invest at least 80% of their assets in the type of
investment suggested by their name. The Commission received a number
of substantive comments on the proposed rule, many of which asserted
that the proposal had flaws that the Commission should address. The
Division is analyzing the comments and expects to recommend a final
rule for Commission consideration in the near future.
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II. DISCUSSION
A. General
1. Overview of Comments
The vast majority of commenters on the Proposed Profile expressed
strong support for the profile and specifically supported the concept
of giving investors the option of purchasing shares of a fund on the
basis of information contained in a summary disclosure document.\22\ A
small number of commenters, however, questioned whether providing
investors with this option was in the best interests of fund investors.
These commenters asserted that investors may not appreciate the
significance of an investment in a fund if they purchase its shares
based on a summary document rather than the prospectus. These
commenters also were concerned that widespread use of a profile could
cause fewer investors to read the prospectus and asserted that the
Commission would be better advised to direct its efforts to improving
the prospectus.
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\22\ The Commission has long encouraged summary prospectuses
under section 10(b) of the Securities Act to provide investors with
a condensed statement of important information included in the
prospectus. In 1956, the Commission adopted a rule permitting the
use of a summary prospectus under section 10(b), which was extended
to investment companies in 1972. See Securities Act Release No. 3722
(Nov. 23, 1956) (adopting rule 434A [17 CFR 230.434A] to permit the
use of a summary prospectus); Securities Act Release No. 5248 (May
9, 1972) [37 FR 10071] (extending rule 434A to investment
companies); Securities Act Release No. 6383 (Mar. 3, 1982) [47 FR
11380] (renumbering rule 434A as rule 431) [17 CFR 230.431]. The
profile permitted by rule 498 is intended to replace the summary
prospectuses that funds are currently permitted to use by rule 431
under the Securities Act, and the Commission is amending rule 431 to
clarify that the rule no longer applies to funds. The Commission
also is eliminating the ``Instructions as to Summary Prospectuses''
that now accompany Form N-1A. See Form N-1A Release, supra note 1.
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Implicit in these comments would seem to be the view that all
investors should use a longer document--the prospectus--rather than a
shorter document--the profile--in making a decision about investing in
a fund. Such a view appears to be inconsistent with the sentiments of
fund investors. The Commission and others, in seeking to identify ways
to improve the disclosure of information about mutual funds to
investors, have collected data about investors. This data demonstrates
that different investors desire and use different types and amounts of
materials in determining whether to invest in funds.\23\ The Commission
believes that the data supports its conclusion to allow funds the
option of offering their shares through the profile with delivery of a
prospectus with the confirmation of purchase.
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\23\ As noted above, Focus Groups responded very positively to
the profile option. A number of individual investors also have
written to the Commission and expressed strong support for the
profile. See Profile Proposing Release, supra note 6, at 10944. See
also ICI Profile Survey, supra note 9, at 22, 26; ICI Shareholder
Survey, supra note 13, at 4.
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The Commission's strongly held belief is that the principal goal of
fund disclosure, whether it takes the form of a long or short document,
should be to provide investors with useful and relevant information.
Each of the disclosure initiatives that the Commission is adopting
today has this goal, which the Commission believes complements the
themes underlying the recently adopted plain English rule.\24\ To
further this goal, the Commission encourages all funds that decide to
use profiles to take the steps necessary to ensure that their
prospectuses effectively communicate information to investors. The
Commission believes that funds need to take this action if the
initiatives adopted today are to achieve their objectives.
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\24\ See Plain English Release, supra note 14.
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2. Liability
In its release proposing new rule 498 (``the Profile Proposing
Release''), the Commission discussed the protections
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afforded investors under the federal securities laws for false and
misleading statements in a profile.\25\ These protections include the
provisions of sections 12(a)(2) and 17(a) of the Securities Act, which
impose civil and criminal liability upon any person who offers or sells
securities using an untrue statement of material fact or who omits to
state a material fact necessary in order to make a statement, in light
of the circumstances under which it was made, not misleading.\26\
Investor protections applicable to a profile also include the antifraud
provisions of section 10(b) of the Securities Exchange Act of 1934 and
rule 10b-5 under that Act.\27\
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\25\ See Profile Proposing Release, supra note 6, at 10950.
\26\ 15 U.S.C. 77l(a)(2); 15 U.S.C. 77q(a).
\27\ 15 U.S.C. 78j(b); 17 CFR 240.10b-5. In addition, the
Commission has the authority under section 10(b) of the Securities
Act to suspend the use of a profile, as a summary prospectus, if the
profile includes a false or misleading statement or omits to state a
material fact necessary in order to make the statements, in light of
the circumstances under which they were made, not misleading. This
authority supplements the Commission's authority under section 8(b)
of the Securities Act [15 U.S.C. 77h(b)] to issue an order to stop
the sale of securities by means of a materially inaccurate or
incomplete section 10(a) prospectus.
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When it gave the Commission the authority to permit the use of a
summary prospectus under section 10(b) of the Securities Act, Congress
provided a specific exception from strict liability for misleading
statements and omissions imposed under section 11 of the Securities Act
\28\ for these type of disclosure documents. The purpose of the
exception was to encourage the use of a summary prospectus while
maintaining investor protection by requiring delivery of a section
10(a) prospectus at or before the time that the investor receives the
confirmation of the purchase of the security described in the summary
prospectus.\29\
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\28\ 15 U.S.C. 77k.
\29\ See I LOSS & SELIGMAN, SECURITIES REGULATION 480 and n.214
(3d ed. 1989) (citing S. Rep. 1036, 83d Cong., 2d Sess. 17-18 (1954)
and H.R. Rep. 1542, 83d Cong., 2d Sess. 26 (1954)). Although section
11 liability would not apply to the profile, section 11 liability
would apply to the sale of a fund's securities if a misleading
statement is included in both the profile and the prospectus.
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The Commission believes that the profile fits squarely within the
statutory framework contemplated by Congress for the offering and sale
of securities under the federal securities laws. The profile of a fund
will be a summary prospectus under section 10(b) of the Securities Act,
but the fund's section 10(a) prospectus will remain the primary
disclosure document under the federal securities laws. To inform
investors about the availability of the prospectus, a profile includes
a legend on the cover page (or at the beginning of the profile)
explaining that the profile is a summary document and stating that more
information about the fund is available in the prospectus.\30\
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\30\ The legend also indicates that other information about the
fund is available in addition to the prospectus. See infra Section
II.B.1 for a discussion of the profile legend.
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While most commenters strongly favored the profile, several
commenters expressed concern that a fund using a profile could face
increased liability under the federal securities laws. These commenters
argued in particular that a fund's use of a profile could result in
claims under section 12(a)(2) of the Securities Act alleging that the
profile is misleading because it omits information disclosed in the
fund's prospectus.\31\
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\31\ Section 12(a)(2) imposes liability for material
misstatements or omissions when the seller cannot demonstrate the
exercise of ``reasonable care.'' An action under section 12(a)(2)
does not require proof of scienter (i.e., intent to mislead
investors), e.g., Wigand v. Flo-Tek, Inc., 609 F.2d 1028, 1034 (2d
Cir. 1979), or investor reliance on a misleading statement or
omission, e.g., MidAmerica Fed. S. & L. Assoc. v. Shearson/American
Express, Inc., 886 F.2d 1249, 1256 (10th Cir. 1989); Sanders v. John
Nuveen & Co., 619 F.2d 1222, 1225 (7th Cir. 1980), cert. denied, 450
U.S. 1005 (1981). In contrast, claims by private plaintiffs under
the antifraud provisions of section 10(b) of the Securities Exchange
Act of 1934 (``Securities Exchange Act'') require proof of scienter
and investor reliance. Under either type of claim, however, it must
be established that the misrepresentation or omission was
``material,'' which generally means that a substantial likelihood
exists that a reasonable investor would consider the information
important in making an investment decision. TSC Industries, Inc. v.
Northway, Inc., 426 U.S. 438, 449 (1976); Basic, Inc. v. Levinson,
485 U.S. 224, 231-32 (1988). Commenters cited several cases as
examples of the claims funds may face under section 12(a)(2) for
alleged nondisclosures in profiles. See, e.g., In re TCW/DW North
Am. Gov. Income Trust Secs. Litigation, 941 F. Supp. 326, 337-38
(S.D.N.Y. 1996) (dismissing certain allegations that fund misstated
and omitted information regarding risks of international investing
on the basis that a reasonable investor would not have been misled);
In Re Alliance North Am. Gov. Income Trust, Inc. Secs. Litigation,
1996 U.S. Dist. LEXIS 14209 (S.D.N.Y. 1996) (same); Tabankin v.
Kemper Short-Term Global Income Fund, 1994 U.S. Dist. LEXIS 965
(N.D.Ill. 1994) (dismissing allegations that fund failed to disclose
adequately the risks of investment).
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To address this concern, several commenters urged the Commission to
permit funds to incorporate by reference the prospectus into the
profile to provide funds with a defense against unwarranted claims that
a profile omits material information. As stated in the Profile
Proposing Release, however, the Commission believes that allowing funds
to incorporate by reference the prospectus into the profile would be
inconsistent with the purpose of the profile and not in the public
interest.\32\ The profile is designed to provide summary information
about a fund in a self-contained format that will assist an investor in
deciding to invest in, or in deciding to request additional information
about, the fund. Permitting a fund to incorporate by reference the
prospectus into the profile would result in the prospectus being
considered a part of the profile and would be inconsistent with the
profile being a self-contained document.\33\
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\32\ Profile Proposing Release, supra note 6, at 10950. One
commenter suggested as an alternative to incorporation by reference
that the Commission create a liability ``safe harbor'' for funds
using profiles. Under such a provision, a fund using a profile
meeting the requirements of rule 498 would be deemed to have
disclosed all material information about a fund for purposes of the
profile if the fund's prospectus contained all material information.
Such a provision, in effect, would amount to incorporation by
reference and, in the Commission's view, would be inconsistent with
the purpose of the profile.
\33\ See White v. Melton, 757 F. Supp. 267, 271-72 (S.D.N.Y.
1991). See also 1983 Form N-1A Adopting Release, supra note 19, at
37930.
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On the basis of, among other things, its prior experience with
summary documents, such as advertisements designed to meet the
requirements of rule 482 under the Securities Act,\34\ the Commission
does not agree with commenters' claims that the use of profiles will
lead to significant potential liabilities under the federal securities
laws. In the Commission's view, a fund using a profile generally should
not face liability for omitting information included in the fund's
prospectus if the profile includes the information required or
permitted by rule 498; potential liability would arise only if a
profile contains a material misstatement or omits a statement necessary
to make the disclosure in the profile not materially misleading. The
mere omission of information from the profile that is required or
permitted in the prospectus should not, in the Commission's view, give
rise to liability under the federal securities laws.\35\
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\34\ In 1979, the Commission adopted rule 434d under the
Securities Act [17 CFR 230.434d], subsequently redesignated rule 482
[17 CFR 230.482], which permits investment companies to use
advertisements that are designed to be omitting prospectuses of the
type contemplated by section 10(b) of the Securities Act. Securities
Act Release No. 6116 (Aug. 31, 1979) [44 FR 52816].
\35\ Like those commenting on the Proposed Profile, commenters
on proposed rule 434d argued that a fund using an advertisement
under the rule would be subject to potential liability under section
12(a)(2) if the advertisement did not contain all of the information
included in the fund's prospectus. In adopting rule 434d, the
Commission stated its belief that a fund should not be liable under
section 12(a)(2) merely because information included in the fund's
section 10(a) prospectus was not included in the advertisement. 44
FR at 52817. The Commission is not aware of any lawsuits brought
since the adoption of rule 434d in which a fund was found liable for
an advertisement meeting the requirements of the rule on the basis
that the advertisement failed to include information contained in
the fund's prospectus.
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[[Page 13972]]
The Commission believes that the intended purpose of a profile as a
summary disclosure document supports the view that a fund using a
profile should not be subject to liability under the federal securities
laws for omitting information from the profile that is included in the
fund's prospectus. Rule 498 specifies the information that can or must
be included in a fund's profile and requires the fund to state that the
profile contains a summary of certain information in the fund's
prospectus. The Commission's goal in adopting rule 498, which is to
facilitate the use of a short, summary disclosure document that
investors can use to evaluate and compare funds, would not be met
unless rule 498 is read as limiting the information required to be
included in the profile.
Commenters on the Proposed Profile requested that the Commission
provide guidance about the applicability of section 19(a) of the
Securities Act to a fund that uses a profile under new rule 498. By its
terms, section 19(a) protects a defendant from liability for actions
taken in good faith in conformity with any rule of the Commission.\36\
The Commission believes that a fund that provides investors with a
profile in good faith compliance with rule 498 would be able to rely on
section 19(a) against a claim that its profile did not include
information that is disclosed in the fund's prospectus.
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\36\ 15 U.S.C. 77s(a). See also section 38(c) of the Investment
Company Act [15 U.S.C. 80a-37(c)].
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3. Plain English Disclosure
In seeking to encourage all issuers, including funds, to provide
disclosure materials required under the federal securities laws that
are simpler, clearer, and more useful to investors, the Commission
recently adopted initiatives that would require the use of plain
English in drafting those materials.\37\ These initiatives contemplate
disclosure documents using plain English writing principles including
short sentences, everyday language, active voice, tabular presentation
of complex material, no legal or business jargon, and no multiple
negatives. The Commission strongly believes that, by drafting profiles
in strict compliance with plain English principles, funds can provide
improved disclosure to investors. Rule 498, as adopted, reflects this
belief. The rule requires that funds disclose the information in the
profile using the plain English writing principles set out in the
Commission's plain English rule.\38\
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\37\ See Plain English Release, supra note 14. As part of the
plain English initiatives, the Commission plans to issue A Handbook
on Plain English: How to Create Clear SEC Disclosure Documents,
prepared by the Commission's Office of Investor Education and
Assistance.
\38\ Instruction 2 to rule 498(b) (requiring funds to use the
plain English writing principles set out in rule 421(d) in drafting
the disclosure in the profile). See supra note 14 and accompanying
text.
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4. Use of the Profile by Other Types of Investment Companies
The Commission proposed to permit funds to use profiles, but did
not propose to permit other types of investment companies, such as
closed-end investment companies, unit investment trusts, and separate
accounts that offer variable annuities, to rely on rule 498. Several
commenters disagreed with the Commission's decision and urged the
Commission to allow other types of investment companies to use
profiles. The Commission is not persuaded at this time by these
commenters, and rule 498, as adopted, is available only to funds.
Although it recognizes that a short, summary disclosure document such
as the profile could potentially benefit investors in other types of
investment companies, the Commission has concluded that it should
assess the use of profiles by funds over a period of time before
considering a rule that would allow other types of investment companies
to use similar summary documents. As the Commission gains experience
with funds' use of the profile and analyzes the results of other pilot
profile programs that are underway,\39\ it will consider expanding use
of the concept to other types of investment companies.\40\
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\39\ See National Association for Variable Annuities (pub.
avail. June 4, 1996) (staff no-action letter allowing pilot program
for variable annuity profiles). The Division has permitted this
program to continue pending its taking any further action with
respect to variable annuity profiles. National Association for
Variable Annuities (pub. avail. May 30, 1997) (staff no-action
letter).
\40\ The Proposed Profile refined the prototype profile used in
the pilot program, which allowed the Commission to evaluate use of
the profile concept for funds. See supra note 8 and accompanying
text. The Commission believes that further initiatives to adapt the
profile concept for other types of investment companies should
follow a similar approach that includes a review of existing
prospectus disclosure requirements and an assessment of investor
responses to a different disclosure format.
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5. Standardized Format
The Proposed Profile required disclosure of 9 items of key
information presented in a specific sequence following a question-and-
answer format. The purpose of standardizing the order of the items was
to help investors locate similar information in the profiles of
different funds and compare the funds. The proposed question-and-answer
format, frequently used by many funds in their prospectuses, was
intended to help communicate the required information effectively. Most
commenters supported a standardized presentation in profiles, but
several commenters criticized the prescribed question-and-answer
format, suggesting that funds should be able to choose other formats to
set out the information required in a profile. The Commission is
adopting the standardized presentation requirement as proposed because
it believes that requiring the profile items in a specific sequence
will substantially assist investors in locating information and
comparing funds. Consistent with the goal of allowing funds to design
effective disclosure documents, however, rule 498 does not limit the
presentation of the required information to a question-and-answer
format.\41\ Any fund that chose to do so could use a question-and-
answer format in its profile.
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\41\ The profile is, however, subject to certain other format
requirements. Under rule 498, as adopted, profiles must meet
requirements with respect to font size and legibility set out in
rule 420 under the Securities Act [17 CFR 230.420]. Rule 420
requires, among other things, that prospectuses be in roman type at
least as large and as legible as 10-point modern type.
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6. Additional Disclosure Items
Several commenters suggested that additional disclosure items would
be useful in a profile, including:
--a fund's top ten portfolio holdings;
--an investment style box;
--additional measures of risk; and
--financial highlights.
The Commission acknowledges that the disclosure suggested by the
commenters could be useful to some fund investors and could generally
enhance the information available about funds. Nonetheless, the
Commission has concluded that none of these items should be required by
rule 498 at this time.
In considering fund disclosure requirements, the Commission must
balance many factors, including, among other things, the amount of
information that is consistent with the purpose of a particular
disclosure document. The purpose of the profile is to provide investors
with a short, standardized disclosure document containing summary
information about a fund. In the Commission's view, the additional
items suggested by commenters could be of interest to some fund
investors but are not necessarily essential information for the average
or typical investor. The Commission believes that some of the
[[Page 13973]]
types of information cited by commenters may be more helpful in
connection with a fund's discussion of its current investment
activities that is presently included in fund shareholder reports.\42\
The Commission has directed the Division of Investment Management
(``Division'') to begin work on a comprehensive assessment of the
Commission's existing rules specifying the disclosure to be included in
fund reports to shareholders to assess whether other types of
information should be added to those reports.\43\
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\42\ See section 30(d) of the Investment Company Act [15 U.S.C.
80a-29(d)] and rule 30d-1 [17 CFR 270.30d-1] (requiring funds to
provide investors with semi-annual reports about a fund's current
operations).
\43\ See Form N-1A Release, supra note 1. In proposing changes
to improve the disclosure in fund prospectuses, the Commission
recognized that revisions to shareholder report requirements could
enhance the disclosure provided to investors. See Form N-1A
Proposing Release, supra note 7, at 10912. Recent legislation gives
the Commission greater authority to specify the content of annual
reports and to require additional disclosure in annual and semi-
annual reports as necessary or appropriate in the public interest or
for the protection of investors. Improvements Act, supra note 16,
section 206(f) (amending section 30 of the Investment Company Act
[15 U.S.C. 80a-29] to add new paragraph (f)). The Commission notes
its preliminary view that an ``integrated'' approach to registration
and reporting requirements applicable to funds could improve the
overall information about funds available to investors. See Form N-
1A Release, supra note 1.
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7. Eligibility
In the Profile Proposing Release, the Commission suggested that
certain funds might not be eligible to use a profile. In particular,
the Commission stated that, if material information about a fund exists
but is not addressed by the 9 items of disclosure required to be in a
profile, the fund might not appropriately use a profile.\44\ Several
commenters strongly objected to this assertion. They argued that it is
inconsistent with the premise underlying the profile initiative that a
typical fund investor would have enough information to make an
investment decision about a fund using a summary disclosure document
containing the 9 required items accompanied by a statement about the
availability of additional information in the fund's prospectus and
other documents. One commenter suggested that the Commission address
the eligibility issue by requiring the profile to provide additional
summary information about other items of disclosure that are required
in prospectuses. Another commenter suggested that, as an alternative,
the Commission provide for a tenth item in the profile in response to
which a fund could include at its option any other information that the
fund believed was material to an investor's consideration of an
investment in the fund. Several other commenters, however, argued that
such an item was not consistent with the Commission's purpose in
developing the Proposed Profile as a short, standardized, self-
contained disclosure document.
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\44\See Profile Proposing Release, supra note 6, at 10945.
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After consideration of these comments, the Commission has
determined to adopt rule 498 to require funds to include only the
information specified by the 9 items in the rule and to delete any
suggestion that certain funds may be ineligible to use profiles.\45\
The Commission has selected these items because it believes that they
fulfill the goal of providing investors with a short, summary
disclosure document on the basis of which investors can make decisions
about investing in a fund. Under rule 498, as adopted, an investor who
believes that he or she needs more information before making such a
decision has the option of obtaining additional information by
requesting the fund's prospectus or other disclosure materials.\46\
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\45\ Rule 498(b). The profile generally will provide a summary
of certain items in the prospectus, while the prospectus will
provide a fuller description of each of these items. The prospectus,
for example, discloses the amount of any rule 12b-1 fees charged by
a fund in the fee table and includes a narrative discussion about
the fund's rule 12b-1 fees. In contrast, the profile as a summary
disclosure document discloses the amount of the fund's rule 12b-1
fees as part of the fee table disclosure. Similarly, a prospectus
identifies each investment adviser of a fund, including a sub-
adviser of the fund, while, in certain cases, a profile could
disclose the number of sub-advisers managing the fund's portfolio
without identifying each sub-adviser. See Form N-1A Release, supra
note 1, and infra notes 90 and 93-94 and accompanying text.
\46\ Proposed rule 498 provided that a fund could not use
footnotes or include cross-references within the profile or to
information appearing in another of the fund's disclosure documents,
unless specifically required or permitted in the rule. See Profile
Proposing Release, supra note 6, at 10945 n.22. The Commission
believes that footnotes and cross-references should generally be
unnecessary in a summary document such as a profile. The Commission
acknowledges, however, that circumstances may exist under which
footnotes or cross-references within the profile may result in
better disclosure. Thus, the Commission is revising rule 498 to
discourage, but not to preclude, the use of footnotes or cross-
references within a profile; under the rule, a fund may use
footnotes or cross-references within a profile if their use promotes
a better understanding of the information about the fund contained
in the profile. Instruction 1 to rule 498(b). Rule 498, as adopted,
continues to preclude use of cross-references to information
appearing in another of the fund's disclosure documents. Such cross-
references would be inconsistent with the purpose that the profile
be a self-contained document. For purposes of the profile only, a
hyperlink to a fund's prospectus from the fund's profile when both
documents are available electronically would not be deemed a cross-
reference. See infra note 120 (describing and explaining the use of
hyperlinks in a profile).
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8. Number of Funds Described in a Profile
Rule 498, as proposed, would permit a profile to describe more than
one fund. As discussed in the Profile Proposing Release, the Commission
concluded, on the basis of the Pilot Program and Focus Group responses,
that a profile that describes more than one fund can be consistent with
the goal of a summary disclosure document that assists investors in
evaluating and comparing funds. Describing more than one fund or class
in a profile, for example, could be a useful means of providing
investors with information about related investment alternatives
offered by a fund group (e.g., a range of tax-exempt funds or different
types of money market funds) or about the classes of a multiple class
fund.
Recognizing that too much information could make the profile
lengthy, complex, and difficult to understand, the Commission requested
comment whether use of a profile should be limited to one fund or to
some other number of funds. Most commenters supported the proposal to
allow a profile to describe more than one fund. One commenter expressed
concerns about the proposal and suggested that funds instead be allowed
to bind separate profiles together.
The Commission believes that the ability to describe different
investment options in one summary document will enable funds to develop
profiles that help investors compare investment alternatives offered by
a fund group. Therefore, the Commission is adopting rule 498, as
proposed, with no express limitation on the number of funds that can be
described in a profile. Information about multiple funds in a single
profile, however, would need to be set out in a concise and summary
manner in a format designed to communicate the information
effectively.\47\
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\47\ Instruction 2 to rule 498(b). A fund must use plain English
writing principles in drafting disclosure in the profile. See supra
note 37. In response to a comment, the Commission is modifying rule
498 to clarify that information that is common to all funds or
classes described in a profile need be stated only once and not
repeated for each fund or class. Instruction 4 to rule 498(b). Rule
498, as adopted, does not preclude binding separate profiles for
different funds together in one document.
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B. Profile Disclosure
1. Cover Page
Proposed rule 498 would require the cover page of a fund's profile
to include certain basic information about the fund
[[Page 13974]]
and to disclose that the profile is a summary disclosure document. As
proposed, the cover page would identify the disclosure document as a
``profile,'' would include a legend explaining the profile's purpose,
and would include the fund's name. A fund also could describe its
investment objectives or its type or category (e.g., that the fund is a
growth fund or invests its assets in a particular country). Proposed
rule 498 also would require the cover page to state the approximate
date of the profile's first use and, if applicable, the date of the
most recent updated performance information included in the profile.
The Commission is adopting the proposed cover page requirements
with modifications to reflect the suggestions of various
commenters.\48\ Some commenters questioned the proposed requirement to
state on a profile's cover page the date of the most recent performance
information included in the profile, asserting that this requirement
would necessitate a fund's reprinting its profile frequently to reflect
updated performance information. These commenters suggested that, as an
alternative, the Commission permit the date of the most recent
performance information to accompany that information in the body of
the profile. The Commission has concluded that the date of performance
information included in a profile can be communicated to investors
effectively if the date accompanies the disclosure of performance
information. Rule 498, as adopted, reflects this conclusion.\49\
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\48\ One commenter requested clarification whether a profile
must include a separate cover page. Rule 498, as adopted, clarifies
that a profile need not have a separate cover page so long as the
specified cover page disclosure is included as introductory
information at the beginning of the profile. The proposed cover page
requirements were intended to identify introductory information that
should appear at the beginning of a profile.
\49\ Rule 498(c)(2)(iii). Rule 498 permits a fund to reflect
updated performance information in a ``sticker'' or similar means to
avoid requiring frequent reprinting of the profile to change this
section of the profile. Instruction to rule 498(c)(2)(iii).
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Proposed rule 498 would require funds to identify the document on
the cover page as a ``profile'' without using the term ``prospectus.''
\50\ Several commenters asserted that funds should be able to refer to
the profile as a prospectus because a profile is a summary prospectus
under the federal securities laws.\51\ When proposing the profile as an
optional disclosure document, the Commission made it clear that the
profile was not intended to supersede the section 10(a) prospectus as
the primary disclosure document for funds under the federal securities
laws.\52\ In restricting funds from referring to the profile as a
prospectus, the Commission intended to avoid investor confusion by
distinguishing between the two documents. The Commission believes that,
if a profile is labeled a prospectus, investors may not understand the
difference between the two documents. In the Commission's view, the
technical legal status of the profile as a summary prospectus should
not be determinative of the appropriate label for the document. The
Commission believes that investors will benefit from clear
identification of the disclosure documents and is adopting rule 498, as
proposed, with the restriction on the use of the term
``prospectus.''\53\
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\50\ Proposed rule 498(c)(1)(ii).
\51\ See supra note 16.
\52\ See Profile Proposing Release, supra note 6, at 10950. See
also supra Section II.A.2.
\53\ Rule 498(c)(1)(ii).
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The Commission proposed that the cover page of the profile include
a legend designed to alert an investor to the summary nature of a
fund's profile and to inform the investor that he or she can obtain the
fund's prospectus and other disclosure materials of the fund before
making a decision about investing in the fund. In considering an
appropriate profile legend, the Commission sought a concise, clear
statement that minimized technical or legal jargon; provided investors
with a description of a fund's profile; and informed them about the
availability of other information about the fund. The Profile Proposing
Release set out two alternative legends about which a number of
commenters expressed strong views.\54\
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\54\ See Profile Proposing Release, supra note 6, at 10946.
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The primary difference between the two legends proposed by the
Commission was the reference to information in the prospectus. The
first legend, which was similar to that used in the Pilot Profile,
stated that the profile summarizes key information in the
prospectus.\55\ The second legend added a statement that the prospectus
includes additional material information about the fund.\56\
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\55\ See id. The first proposed legend read as follows:
This Profile summarizes key information about the Fund that is
included in the Fund's prospectus. If you would like more
information before you invest, you may obtain the Fund's prospectus
and other information about the Fund at no cost by calling ______.
\56\ See id. The second proposed legend read as follows:
This Profile summarizes key information about the Fund that is
included in the Fund's prospectus. The prospectus includes
additional material information about the Fund that you may want to
consider before you invest. You may obtain the Fund's prospectus and
other information about the Fund at no cost by calling ______.
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No commenters expressed support for the first proposed legend, and
the comments on the second were mixed. Many commenters believed that
the second legend would clearly inform investors that the profile
contains summary disclosure of key information about a fund and that
additional important information about the fund is available in the
prospectus. Several of these commenters, however, strongly urged the
Commission to delete the word material from the legend. They asserted
that the use of that term would imply incorrectly that a fund's profile
may be legally deficient simply because it did not contain all of the
information contained in the fund's prospectus. Several commenters
suggested that both of the proposed legends were insufficient and
should be strengthened to alert investors more clearly about the
summary nature of the profile and the availability of additional
information in the prospectus.
The Commission believes that the profile legend serves an important
purpose and that the numerous comments that it received on the proposed
legends clearly indicate that commenters share this belief. To ensure
that the legend sufficiently serves its purpose of informing investors
of the summary nature of the profile, the Commission has determined to
strengthen the legend and include specific language offered by
commenters. As adopted, rule 498 requires the following legend on the
cover page, or at the beginning, of a profile:
This profile summarizes key information about a Fund that is
included in the Fund's prospectus. The Fund's prospectus includes
additional information about the Fund, including a more detailed
description of the risks associated with investing in the Fund that
you may want to consider before you invest. You may obtain the
prospectus and other information about the Fund at no cost by
calling ______.\57\
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\57\ Rule 498(c)(1)(iv). A fund will be required to provide a
toll-free or collect telephone number for investors to request the
prospectus or other information. A fund also may, if applicable,
indicate that the prospectus is available on its Internet web site
or by E-mail. Rule 498(c)(1)(v). Rule 498 requires that an
application to purchase shares of a fund that accompanies the fund's
profile present with equal prominence the option to invest in the
fund based on the information included in the profile or to request
the prospectus and other information before making an investment
decision. Rule 498(c)(3). See infra note 104 and accompanying text.
To ensure that fund investors who, after reviewing a profile,
request other information about a fund receive that
[[Page 13975]]
information promptly, the Commission proposed to require a fund to send
its prospectus to the requesting investors within 3 business days of a
request. Those commenters addressing this requirement generally
supported it, although one commenter maintained that revising the
requirement to state that mailings need to be made ``reasonably
promptly,'' which the commenter stated should normally be deemed to be
within 3 business days of a request, would protect funds against claims
that they failed to meet the requirements as a result of unforeseen
circumstances. The Commission continues to believe, as discussed in the
Profile Proposing Release, that prompt mailing of the prospectus to
investors who request it is an essential component of the profile
initiative and the goal of promoting effective communication of
information about funds.\58\ Therefore, the Commission is adopting the
3-business day mailing requirement as proposed.\59\
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\58\ See Profile Proposing Release, supra note 6, at 10946.
\59\ Instruction to rule 498(c)(1)(v). The Commission's Office
of Compliance Inspections and Examinations will, as a part of its
routine periodic inspections of a fund's operations, examine a
fund's compliance with the 3-business day mailing requirement. In
addition to the 3-business day mailing requirement for prospectuses,
rule 498 requires a fund to send within 3 business days of a request
its annual or semi-annual shareholder report and Statement of
Additional Information (``SAI''). Id. The Commission staff also will
examine a fund's compliance with this requirement. Failure to comply
with either requirement could result in action by the Commission to
ensure compliance, including an enforcement action in an appropriate
case.
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Some commenters requested clarification from the Commission about
the procedure that a fund should follow in responding to requests for
additional information when its shares are sold through financial
intermediaries, such as broker-dealers or banks. Commenters recommended
that the Commission revise rule 498 to permit the legend to state that
additional information in such a case may be obtained from financial
intermediaries. The Commission acknowledges that many funds use
intermediaries in distributing or servicing their shares and that
investors may look to these intermediaries for information about the
funds. Thus, rule 498, as adopted, allows funds to state that
additional information about a fund is available from a financial
intermediary.\60\ A fund whose information is available through another
entity, however, retains the obligation to ensure that information is
sent to investors within 3 business days of an investor's request. The
Commission expects that funds will fulfill this obligation through
contractual arrangements with broker-dealers, banks, or other financial
intermediaries.
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\60\ Instruction to Rule 498(c)(1)(v).
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2. Risk/Return Summary
The Commission proposed that the first 4 items of the profile
elicit information that would be substantially identical to the
proposed risk/return summary at the beginning of every prospectus. Most
commenters supported the risk/return summary in the profile, and the
Commission is adopting it generally as proposed. The Form N-1A Release
discusses in detail the prospectus risk/return summary.\61\ The risk/
return summary required in the profile by rule 498, as adopted, will
incorporate substantially all of the requirements for the summary in
Form N-1A, as amended. The following discussion summarizes the main
features of the risk/return summary required by Form N-1A and discusses
specific disclosure required in the profile.
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\61\ See Form N-1A Release, supra note 1.
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--Fund Investment Objectives/Goals
To assist investors in identifying funds that meet their general
investment needs, the proposed risk/return summary would require a fund
to disclose its investment objectives or goals. The Commission is
adopting this disclosure requirement in rule 498 as proposed.\62\
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\62\ Rule 498(c)(2)(i).
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--Principal Investment Strategies
The proposed risk/return summary would require a fund to summarize,
based on the information provided in its prospectus, how the fund
intends to achieve its investment objectives. The purpose of the
proposed disclosure was to provide a summary of the fund's principal
investment strategies, including the specific types of securities in
which the fund invests or will invest principally, and any policy of
the fund to concentrate its investments in an industry or group of
industries. The Commission is adopting this requirement in rule 498 as
proposed.\63\
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\63\ Rule 498(c)(2)(ii).
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In seeking to supplement the information about a fund's principal
investment strategies set out in a profile, the Commission proposed to
require that a fund's risk summary inform investors about the
availability in the fund's shareholder reports of additional
information about the fund's investments.\64\ Some commenters
questioned the proposed placement of this disclosure, arguing that the
disclosure should appear together with the legend on the cover page of
the profile, while other commenters supported requiring the disclosure
in the profile's risk/return summary. The Commission believes that
requiring this disclosure on the cover page of the profile would result
in too much information on the cover page. Therefore, the Commission is
adopting the proposal requiring a fund's profile to indicate in its
risk summary that additional information about a fund's investments is
available in its shareholder reports.\65\
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\64\ A fund's annual report to its shareholders typically
contains a MDFP. The Commission believes that the information in a
fund's MDFP, including the discussion of the fund's performance
during its most recent fiscal year, could be useful to some
investors considering an investment in the fund.
\65\ Rule 498(c)(2)(ii). This provision requires a fund (other
than a new fund) to include disclosure in the risk/return summary to
the following effect:
Additional information about the fund's investments is available
in the fund's annual and semi-annual reports to shareholders. In the
fund's annual report you will find a discussion of the market
conditions and investment strategies that significantly affected the
fund's performance during the last fiscal year. You may obtain
either or both of these reports at no cost by calling __________.
Unlike rule 498, as adopted, Form N-1A, as amended, requires
that the statement about the availability of a fund's shareholder
reports appear together with disclosure about the availability of
the fund's SAI and other information about the fund on the back
cover page of the fund's prospectus. Item 1(b)(1) of Form N-1A.
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--Principal Risks of Investing in the Fund
Summary Risk Disclosure. The proposed risk/return summary would
require a fund to summarize the information contained in the fund's
prospectus about the principal risks of investing in the fund.
Reflecting the Commission's proposed new approach to risk disclosure
described in the Form N-1A Proposing Release, the profile disclosure
was intended to summarize the risks of a fund's anticipated portfolio
holdings as a whole, and the circumstances reasonably likely to affect
adversely the fund's net asset value, yield, and total return.\66\
Commenters generally supported the summary risk disclosure contemplated
by proposed rule 498, agreeing that it would be focused and brief and
would assist investors in identifying the principal risks of investing
in a particular fund. The Commission is adopting this disclosure
requirement with modifications to reflect certain commenters'
suggestions.\67\
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\66\ See Form N-1A Proposing Release, supra note 7 (regarding
fund risk disclosure required in the prospectus).
\67\ Rule 498(c)(2)(iii) (incorporating Item 2(c)(1)(i) of Form
N-1A).
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The Commission proposed to require that the risk summary identify
the types
[[Page 13976]]
of investors for whom the fund may be an appropriate or inappropriate
investment. Commenters either opposed or raised significant concerns
about this provision, arguing that it could be viewed as requiring a
fund to determine whether its shares, among other things, are an
investment suitable for a particular investor.\68\ Commenters also
stated that the disclosure would tend to be generic and not meaningful
or useful for investors.
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\68\ As several commenters pointed out, applicable regulatory
rules for brokers and other investment professionals require that
these determinations be made on the basis of a review of information
about the unique circumstances of an individual investor. See, e.g.,
rule 2310(a) of the National Association of Securities Dealers, Inc.
(``NASD'') Conduct Rules, NASD Manual (CCH) para.4261 (suitability
of recommendations); rule 405 of the New York Stock Exchange, 2
N.Y.S.E. Guide (CCH) para.2403 (the ``know your customer rule'').
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The Commission is persuaded by commenters that disclosure about the
appropriateness of funds for particular investors should not be
required in all profiles and has deleted this requirement from the risk
summary. The Commission believes, however, that disclosure indicating
whether a fund is appropriate for specific types of investors or is
consistent with certain investment goals, even if generic in nature,
may be useful for some investors and may provide a means for the fund
to distinguish itself from other investment alternatives. Therefore,
the risk summary requirement, as adopted, will give a fund the option
to include disclosure in its profile about the types of investors for
whom the fund is intended and the types of investment goals that may be
consistent with an investment in the fund.\69\
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\69\ Rule 498(c)(2)(iii) (incorporating Item 2(c)(1)(i) of Form
N-1A).
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Under the proposed risk/return summary, a fund could at its option
discuss the potential rewards of investing in the fund in the risk
summary as long as the discussion provided a balanced presentation of
the fund's risks and rewards. One commenter strongly questioned this
provision of the proposal, asserting that it would detract from a clear
presentation of risks in the summary. The Commission has reconsidered
this disclosure in light of the intended standardized and summary
nature of the risk summary and has concluded that the disclosure there
should focus solely on the risks of investing in the fund. Thus, the
Commission has determined to eliminate the option to describe the
rewards of investing in a fund in the risk summary.\70\
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\70\ In keeping with the disclosure flexibility provided to
funds under Form N-1A, as amended, a fund could discuss the
potential rewards of investing in the fund elsewhere in its
prospectus as long as the information is not incomplete, inaccurate,
or misleading. See Form N-1A Release, supra note 1.
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Special Risk Disclosure Requirements. The Commission proposed to
require special disclosure in the risk summary for money market
funds\71\ and for funds advised by or sold through banks. Commenters
supported the proposed disclosure requirements, and the Commission is
adopting them substantially as proposed.\72\
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\71\ For these purposes, a money market fund is a fund that
holds itself out to investors as a money market fund and meets the
conditions of paragraphs (c)(2), (c)(3), and (c)(4) of rule 2a-7
under the Investment Company Act [17 CFR 270.2a-7].
\72\ Rule 498(c)(2)(iii) (incorporating Item 2(c)(1)(ii) of Form
N-1A). This provision, as adopted, requires the following disclosure
by a money market fund in the risk summary of its profile:
An investment in the Fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by
investing in the Fund.
A fund advised by or sold though a bank would disclose in the
risk summary of its profile:
An investment in the Fund is not a deposit of the bank and is
not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Some commenters asserted that the proposed disclosure was
inconsistent with that required by bank regulators in the
Interagency Statement on Retail Sales of Nondeposit Investment
Products. See Board of Governors of the Federal Reserve System,
FDIC, Office of the Comptroller of the Currency, and Office of
Thrift Supervision, Interagency Statement on Retail Sales of
Nondeposit Products, 6 Fed. Banking L. Rep. (CCH) para.70-113, at
82,598 (Feb. 15, 1994) (``Interagency Statement'') (requiring
disclosure that the fund is not a deposit or other obligation of the
bank). The Commission has confirmed with these bank regulators that
no such inconsistency exists, because the disclosure required by the
Interagency Statement applies to sales material and not to fund
prospectuses. In response to suggestions from bank regulators, the
Commission has revised the required disclosure to add language
indicating that an investment in a fund advised by or sold through a
bank is not a deposit of the bank. The requirement, as amended in
this way, is consistent with the requirement now in effect.
The Commission is making conforming amendments to the disclosure
requirement contained in rule 482(a)(7) for advertisements by money
market funds. The Commission also is amending rule 482(d) under the
Securities Act and rule 34b-1 under the Investment Company Act [17
CFR 270.34b-1] to conform to changes made in Item 21 of Form N-1A,
as amended. See Form N-1A Release, supra note 1.
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The Commission proposed to require a tax-exempt money market fund
that concentrates its investments in a particular state (a ``single
state money market fund'') to include specific disclosure in its
profile risk summary describing certain risks associated with an
investment in such a fund.\73\ In the Form N-1A Proposing Release, the
Commission asked, however, whether it should continue to require this
disclosure in prospectuses.\74\ The Commission noted that this
disclosure may exaggerate the risk of investing in single state money
market funds. As the Form N-1A Proposing Release pointed out, although
these funds are subject to less stringent issuer diversification
provisions under Commission rules than other money market funds, they
are subject to credit quality and maturity investment restrictions that
are comparable to other money market funds.
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\73\ Proposed rule 498 would require a single state money market
fund to make disclosure similar to that Form N-1A currently requires
such a fund to disclose in its prospectus. Existing Form N-1A
requires a single state money market fund to disclose that it may
invest a significant percentage of its assets in a single issuer and
that investing in it may be riskier than investing in other types of
money market funds. See Form N-1A Proposing Release, supra note 7,
at 10903.
\74\ See Form N-1A Proposing Release, supra note 7, at 10904.
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In response to the Commission's question regarding single state
money market funds, commenters indicated that the special disclosure
now required in fund prospectuses overstates the risks of investing in
single state money market funds, particularly in view of the minimal
risk that commenters asserted is associated with these funds. The
Commission is persuaded by these commenters and has determined not to
require the disclosure in either the profile or the prospectus.\75\
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\75\ See Form N-1A Release, supra note 1.
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Risk/Return Bar Chart and Table. The proposed risk/return summary
would require a fund's profile to include a bar chart showing the
fund's annual returns for each of the last 10 calendar years and a
table comparing the fund's average annual returns for the last 1-, 5-,
and 10-fiscal years to those of a broad-based securities market index.
The bar chart reflects the Commission's determination that investors
need improved disclosure about the risks of investing in a fund. The
bar chart is intended to illustrate graphically the variability of a
fund's returns (e.g., whether a fund's annual returns for a 10-year
period have varied significantly from year to year or were relatively
even over the period). Presenting return information in this format was
designed to give investors some indication of the variability of a
fund's annual returns and thus some idea of the risk of an investment
in the fund. The average annual return information in the table would
assist investors in evaluating a fund's performance and risks relative
to ``the market.'' Commenters generally supported the proposed bar
chart and performance table, and the Commission is adopting these
requirements with
[[Page 13977]]
modifications to reflect suggestions of commenters.\76\
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\76\ Rule 498(c)(2)(iii) (incorporating Item 2(c)(2) of Form N-
1A). This provision requires a fund to have at least one calendar
year of returns before including the bar chart and requires a fund
whose profile does not include a bar chart because the fund does not
have annual returns for a full calendar year to modify the narrative
explanation to refer only to information presented in the table. The
provision also requires the bar chart of a fund in operation for
fewer than 10 years to include annual returns for the life of the
fund.
In adopting the bar chart requirement, the Commission does not
mean to suggest that all, or even a significant portion of all fund
investors equate the variation in a fund's returns to the risk of
investing in the fund. As it indicated in the Form N-1A Release, the
Commission acknowledges that investors have a wide range of ideas of
what ``risk'' means. See Form N-1A Release, supra note 1.
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In the Form N-1A Proposing Release, the Commission requested
comment about alternative presentations that could improve fund risk
disclosure.\77\ In particular, the Commission expressed interest in
disclosure that would show a fund's highest and lowest returns (or
``range'' of returns) for annual or other periods as an alternative, or
in addition, to the bar chart. The Commission suggested that this
information could be presented in a separate table or included in the
performance table.
---------------------------------------------------------------------------
\77\ See Form N-1A Proposing Release, supra note 7, at 10907.
---------------------------------------------------------------------------
In response to the Commission's request, some commenters suggested
including in a fund's bar chart one or more indexes or other benchmarks
(such as 3-month Treasury returns or the rate of inflation) to help
investors evaluate the fund's returns by comparisons to other measures
of market performance or economic factors.\78\ Most commenters,
however, opposed requiring additional information in the bar chart,
asserting that it could complicate and reduce the effectiveness of the
bar chart.
---------------------------------------------------------------------------
\78\ Rule 498, as adopted, in incorporating the requirements of
Form N-1A, as amended, permits a fund to use other indexes in the
presentation of the average annual return information in the table
accompanying the bar chart. Rule 498(c)(2)(iii) (incorporating
Instruction 2(b) to Item 2(c)(2) of Form N-1A).
---------------------------------------------------------------------------
Several commenters supported the inclusion of annual return
information in the bar chart on a quarterly or semi-annual rather than
an annual basis. They argued that this change to the bar chart would
respond to concerns that fund investors may not sufficiently appreciate
that an investment in a fund may be subject to the risk of a short-term
decline in value. This risk, commenters asserted, may not be apparent
from the annual returns proposed to be shown in the bar chart.
The Commission acknowledges that a fund's returns may vary
significantly and could decrease in value over short periods and that
the annual returns in the bar chart, as proposed, would not necessarily
reflect this pattern. On the other hand, the Commission is concerned
that requiring quarterly returns over a 10-year period would make the
bar chart more complex and less useful in communicating information to
investors. In balancing the desire to make typical fund investors aware
that fund shares may experience price fluctuations over shorter periods
with its underlying goal that fund documents communicate information in
as straightforward and uncomplicated a manner as possible, the
Commission has determined to require a fund to disclose, in addition to
the bar chart, its best and worst returns for a quarter during the 10-
year (or other) period reflected in the bar chart.\79\ The Commission
believes that this information will assist investors in understanding
the variability of a fund's returns and the risks of investing in the
fund by illustrating, without adding unwarranted complexity to the bar
chart, that the fund's shares may be subject to short-term price
fluctuations.
---------------------------------------------------------------------------
\79\ Rule 498(c)(2)(iii) (incorporating Item 2(c)(2)(ii) of Form
N-1A).
---------------------------------------------------------------------------
Presentation of Return Information. The proposed risk/return
summary would require a fund to include the bar chart and table under a
separate sub-heading that referred to both risk and performance.
Several commenters argued that the separate sub-heading requirement was
unnecessary and suggested that a fund should be able to choose whether
to include any sub-heading. Consistent with the objective of
encouraging funds to develop disclosure formats that are most helpful
to investors, the profile risk/return summary, as adopted, does not
require the sub-heading including the proposed risk/return summary. To
help investors use the information in the bar chart and table, the
profile risk/return summary, as adopted, however, does require a fund
to provide a brief narrative explanation of how the information
illustrates the variability of the fund's returns.\80\
---------------------------------------------------------------------------
\80\ Rule 498(c)(2)(iii) (incorporating Item 2(c)(2)(i) of Form
N-1A).
---------------------------------------------------------------------------
Bar Chart Return Information. The Commission proposed to require
that a fund's bar chart show the fund's annual returns for the last 10-
calendar years of the fund's existence. The purpose of the calendar-
year requirement was to facilitate the comparison of the annual returns
among funds, which typically have fiscal periods that do not correspond
to the calendar year.\81\ Unlike the proposed bar chart, the proposed
performance table required disclosure of a fund's returns for fiscal
year periods. In requiring this disclosure to be made for fiscal year
periods, the proposal was consistent with existing disclosure
requirements for the presentation of other financial information
included in a fund's prospectus.
---------------------------------------------------------------------------
\81\ The Commission understands that funds increasingly organize
themselves as series companies and tend to stagger the financial
periods of their series to spread audits and financial reporting
periods over an entire calendar year.
---------------------------------------------------------------------------
Several commenters argued that using different time periods for the
proposed bar chart and performance table would confuse investors and
urged the Commission to minimize potential investor confusion by
adopting consistent time periods for this information. The Commission
is persuaded by these comments and believes that requiring both the bar
chart and the performance table to be based on calendar periods will
promote understandable information in the profile. Therefore, the risk/
return summary, as adopted, requires calendar-year periods for both the
bar chart and table.\82\ Under rule 498, as adopted, the average annual
return information in the table in a fund's profile risk/return summary
must be as of the most recent calendar quarter and updated
quarterly.\83\
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\82\ Rule 498(c)(2)(iii) (incorporating Item 2(c)(2) of Form N-
1A).
\83\ Rule 498(c)(2)(iii). Unlike rule 498, as adopted, Form N-
1A, as amended, requires the fund's prospectus risk/return summary
to reflect average annual return information as of the end of a
fund's most recent calendar year. Item 2(c)(2) of Form N-1A, as
amended. A fund would update the information in the prospectus in
connection with the filing of an annual post-effective amendment to
update a fund's registration statement.
---------------------------------------------------------------------------
The proposed bar chart would not reflect sales loads assessed upon
the sale of a fund's shares, although the average annual return
information for the fund in the table would reflect the payment of any
sales loads. Commenters generally supported this presentation of annual
return information. The Commission believes that, in light of the
different types of sales loads that may be charged on fund shares, it
would be difficult for funds to compute annual returns for the purpose
of the bar chart and to communicate the information effectively to
investors.\84\ In addition, the Commission has concluded that more
precise return information is not necessary for the bar chart to serve
the purposes of graphically showing a fund's annual returns and
illustrating
[[Page 13978]]
the variability of an investment in the fund over a 10-year period.
Therefore, the bar chart, as adopted, is not required to show returns
adjusted for sales loads.
---------------------------------------------------------------------------
\84\ In contrast, sales loads can be accurately and fairly
reflected in return information of the type contained in the table
by deducting sales loads at the beginning (or end) of particular
periods from a hypothetical initial fund investment.
---------------------------------------------------------------------------
Bar Chart Presentation. Consistent with the bar chart as proposed,
the bar chart, as adopted, may include return information for more than
one fund.\85\ In contrast, the risk/return summary, as adopted, would
require a fund offering more than one class of shares in a profile to
include annual return information in its bar chart for only one
class.\86\ Unlike individual funds, classes of funds represent
interests in the same portfolio of securities and the returns of each
class differ only to the extent that the classes do not have the same
expenses. The Commission believes that including return information for
all classes offered through a fund's profile is not necessary to
provide an indication of the risks of investing in the fund. In
addition, the table accompanying such a fund's bar chart would provide
return information for each class offered in the profile so that
investors will be able to identify and compare the performance of each
class.\87\
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\85\ While rule 498 does not limit the number of funds whose
return information may be included in a bar chart, the presentation
of the bar chart is subject to the general requirement that
disclosure should be presented in a format designed to communicate
information effectively. Instruction 2 to rule 498(b).
\86\ Rule 498(c)(2)(iii) (incorporating Instruction 3(a) to Item
2(c)(2) of form N-1A).
\87\ Rule 498(c)(2)(iii) (incorporating Instruction 3(b) to Item
2(c)(2) of form N-1A).
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The proposed risk/return summary would require the bar chart of a
fund offering more than one class of shares through a profile to
reflect annual return information for the class offered in the profile
that had the longest performance history over the last 10 years. Most
commenters considering the issue suggested that the Commission instead
permit such a fund to include the performance of any existing class in
the bar chart, maintaining that the effect of expenses on the returns
for different classes of shares is not significant.\88\ The Commission
is persuaded that allowing a multiple class fund in such a case to
choose the class reflected in the fund's bar chart will simplify
compliance with the bar chart requirement and provide investors with
sufficient information to evaluate the variability of returns for any
class of the fund. Therefore, the profile risk/return summary, as
adopted, permits a fund to choose the class to be reflected in the bar
chart, subject to certain limitations.\89\
\88\ In making this argument, commenters cited rule 18f-3 under
the Investment Company Act [17 CFR 270.18f-3], which provides that a
class of shares may have different expenses for shareholder
services, distribution fees, or other expenses actually incurred in
a different amount by the class. The rule does not permit expenses
for advisory or custodial fees, or other management fees, to vary
among classes.
\89\ Rule 498(c)(2)(iii) (incorporating Instruction 3(a) to Item
2(c)(2) of Form N-1A). The bar chart must reflect the performance of
any class that has returns for at least 10 years (e.g., a fund could
not present a class in the bar chart with 2 years of returns when
another class has returns for at least 10 years). In addition, if
two or more classes offered in the profile have returns for less
than 10 years, the bar chart must reflect returns for the class that
has returns for the longest period.
---------------------------------------------------------------------------
--Fees and Expenses of the Fund
The proposed risk/return summary would require a table accompanying
a fund's bar chart showing the fund's fees and expenses, including any
sales loads charged in connection with an investment in the fund.
Including the fee table in both the profile and the prospectus reflects
the Commission's strongly held belief in the importance of fees and
expenses in a typical investor's decision to invest in a fund. The fee
table is designed to help investors understand the costs of investing
in a fund and to compare those costs with the costs of other funds. The
Commission is adopting the requirement for a fee table with
modifications incorporating suggestions from commenters.\90\
---------------------------------------------------------------------------
\90\ Rule 498(c)(2)(iv) (incorporating Item 3 of Form. N-A). The
modifications adopted by the Commission are discussed in Form N-1A
Release, supra note 1.
---------------------------------------------------------------------------
3. Other Disclosure Requirements
The Commission proposed to require the profile of a fund to include
not only the risk/return summary, but also disclosure about other key
aspects of investing in the fund. Commenters generally supported these
disclosure requirements, which are summarized below, and the Commission
is adopting them substantially as proposed.
--Investment Adviser and Portfolio Manager of the Fund
Proposed rule 498 would generally require a fund to identify in its
profile its investment adviser and the person or persons primarily
responsible for the day-to-day management of the fund's portfolio
(``portfolio manager''). The proposed disclosure in the profile about
portfolio managers also would require a fund to indicate the length of
time that a portfolio manager has managed the fund and to summarize the
portfolio manager's business experience for the last 5 years. Proposed
rule 498 contemplated that a fund for which a committee or other group
shared day-to-day management of its portfolio would disclose that it
was managed in this fashion and not identify any individual portfolio
manager. Commenters supported all of these proposed requirements, which
the Commission has determined to adopt.\91\
---------------------------------------------------------------------------
\91\ Rule 498(c)(2)(v). Item 6(a)(2) of Form N-1A sets out the
disclosure requirements for Form N-1A covering this information. As
discussed in the Form N-1A Release, the Commission has provided
additional guidance in Form N-1A regarding the prospectus disclosure
obligations of a fund for which day-to-day management
responsibilities are shared. See Form N-1A Release, supra note 1
(Instructions to Item 6(a)(2)).
---------------------------------------------------------------------------
In seeking to meet its goal that profile disclosure be clear,
concise, and summary in nature, the Commission proposed that, subject
to one exception, a fund having 3 or more portfolio managers, each with
responsibility over a portion of the fund's portfolio, could choose to
disclose the number, and not the names, of its portfolio managers.
Under the proposed exception, a fund would be required to disclose the
identity of a portfolio manager who was responsible for managing 40% or
more of its portfolio.\92\ One commenter questioned the operation of
these provisions and suggested that the Commission instead adopt a
requirement that a fund disclose the name and experience of only those
portfolio managers having responsibility over the day-to-day management
of a significant portion of the fund's investments. The commenter
suggested further that 30 to 40% of a fund's portfolio should be deemed
significant for this purpose.
---------------------------------------------------------------------------
\92\ Under the 1996 Profile Letter, supra note 8, at 3, a fund
could disclose that 3 or more persons managed the fund's portfolio,
without regard to the percentage of the portfolio managed by any one
person.
---------------------------------------------------------------------------
The Commission believes that the commenter's suggestions are
consistent with the goal underlying the profile and could result in
better disclosure than that contemplated by the Commission's proposal.
Thus, under rule 498, as adopted, a fund with 3 or more portfolio
managers need not identify each of the managers, except that the fund
must identify any manager who is (or is reasonably expected to be)
responsible for the management of a significant portion of the fund's
assets.\93\ Under rule 498, as adopted, a portfolio manager of 30% or
more of a fund's net assets generally would be deemed to be responsible
for the management of a
[[Page 13979]]
significant portion of the fund's net assets.\94\
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\93\ Rule 498(c)(2)(v)(C). In tying this disclosure to the
portion of a fund's net assets over which a person has day-to-day
responsibility, the Commission intends to provide funds with a
standard way of determining whether a person has responsibility over
a significant portion of a fund's portfolio. Like Form N-1A, as
amended, rule 498, as adopted, does not require disclosure about the
portfolio manager of a money market fund or an index fund.
\94\ Rule 498, as adopted, requires disclosure about a portfolio
manager of a fund who is, or who is reasonably expected to be,
responsible for the management rather than one who ``manages'' a
significant portion of the fund's portfolio. The revised language
recognizes that the portion of a fund's portfolio over which a
manager has responsibility may change from time to time.
Proposed rule 498 generally would require a fund to identify in its
profile any person or entity serving as a sub-adviser of the fund.\95\
Under the proposal, a fund would not need to identify a sub-adviser
whose sole responsibility for the fund is limited to managing the
fund's cash positions on a day-to-day basis.\96\ Commenters supported,
and the Commission has adopted, this provision, with a clarification
that recognizes that responsibility for cash management generally is
incidental to a fund's investment objectives and unlikely to affect the
fund's overall portfolio management and risks.\97\
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\95\ See section 2(a)(20) of the Investment Company Act [15
U.S.C. 80a-2(a)(20)] (defining ``investment adviser'' broadly so as
to include a sub-adviser).
\96\ In contrast the 1996 Profile Letter, supra note 8, at 3,
required disclosure about a sub-adviser only if it managed a
material portion of a fund's portfolio.
\97\ Rule 498(c)(2)(v). As adopted, this exception does not
apply to any sub-adviser for a money market fund because the primary
investment objective for such a fund can be viewed as cash
management. The exception also does not apply to any other type of
fund with a principal strategy of regularly holding cash or cash
equivalent instruments. A fund, for example, with a principal
strategy of allocating its assets among cash equivalents, equity
securities, and income securities, and which employed different sub-
advisers to manage each of these asset categories, would need to
identify all of the sub-advisers.
---------------------------------------------------------------------------
Under rule 498, as proposed, a fund with 3 or more sub-advisers,
each of which manages a portion of the fund's portfolio, could choose
to disclose the number, and not the identity, of its sub-advisers,
subject to one exception. Under the exception, a fund would be required
to identify any sub-adviser that manages 40% or more of its net assets.
Consistent with the modification to the disclosure requirement for
portfolio managers, rule 498, as adopted, requires a fund to identify
any sub-adviser that is (or is reasonably expected to be) responsible
for the management of a significant portion of the fund's net assets.
The rule defines a significant portion of the fund's net assets for
this purpose generally to be 30% or more of the fund's net assets.\98\
---------------------------------------------------------------------------
\98\ Rule 498(c)(2)(v)(B)(2).
---------------------------------------------------------------------------
--Purchase and Sale of Fund Shares
The Commission proposed to require a fund to describe in its
profile how to purchase its shares under one caption and how to redeem
its shares under another caption. Proposed rule 498 would require,
under the purchase caption, information about the fund's minimum
investment requirements (e.g., initial and minimum account balances)
and, when applicable, any breakpoints in or waivers of sales loads.
Several commenters criticized the generic nature of the information
on purchases and sales of fund shares contemplated by proposed rule
498. They argued that without some guidance as to the specific kinds of
information relating to purchases and sales of fund shares that the
Commission believes is of importance to investors, funds would include
an excessive amount of information in their profiles. The Commission
believes that such a result would be inconsistent with the profile's
intended purpose as a summary disclosure document and has revised rule
498 to specify in greater detail the information about a fund's
purchase and sale procedures that funds must include in a profile.
Under rule 498, as adopted, a fund must disclose the minimum initial or
subsequent investment requirements, the initial sales load (or other
loads), and, if applicable, the initial sales load breakpoints or
waivers.\99\ Rule 498 also requires a fund to state that its shares are
redeemable, to identify the procedures for redeeming shares (e.g., on
any business day by written request, telephone, or wire transfer), and
to identify any charges or sales loads that may be assessed upon
redemption (including, if applicable, the existence of waivers of these
charges). \100\
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\99\ Rule 498(c)(2)(vi).
\100\ Rule 498(c)(2)(vii).
---------------------------------------------------------------------------
--Fund Distributions and Tax Information
The Commission is adopting the proposed requirement that a fund
disclose information in its profile about the terms and conditions
under which it makes distributions, as well as the expected tax
treatment of those distributions.\101\ Rule 498, as adopted, requires a
fund's profile to describe how frequently the fund intends to make
distributions and what reinvestment options for distributions (if any)
are available to investors in the fund. Rule 498 also requires a fund
to disclose whether its distributions to shareholders may be taxed as
ordinary income or capital gains and that the rates shareholders pay on
capital gains will depend on the length of time that the fund holds its
assets.\102\ Rule 498 requires a tax-exempt fund to state that it
intends to distribute tax-exempt income and to disclose, as applicable,
that a portion of its distributions may be taxable.
---------------------------------------------------------------------------
\101\ Rule 498(c)(2)(viii).
\102\ If a fund expects that its distributions, as a result of
its investment objectives or strategies, primarily will consist of
ordinary income or capital gains, the fund must provide disclosure
to that effect in responding to rule 498(c)(2)(viii). Funds subject
to this requirement would include, for example, those often
described as ``tax-managed,'' ``tax-sensitive,'' or ``tax-
advantaged,'' which have investment strategies to maximize long-term
capital gains and minimize ordinary income. To the extent that a
fund has a principal investment objective or strategy to achieve
tax-managed results (e.g., to maximize long-term gains and minimize
ordinary income), the fund would be required under rule 498 to
provide disclosure to that effect in the discussion of its
investment objectives. Rule 498(c)(2)(ii).
---------------------------------------------------------------------------
--Other Services Provided by the Fund
Recognizing that funds often seek to distinguish themselves by the
services that they offer investors and that investors often select
funds for the services that they provide, the Commission proposed to
require a fund to summarize or list in its profile the services
available to its investors, including, for example, any exchange
privileges or automated information services. One commenter expressed
concern about the open-ended nature of this item and suggested that the
Commission clarify that a fund need not respond to the item by
disclosing all of its services available to all investors. This
clarification, according to the commenter, would ensure that the
profile serves its intended purpose as a summary document that includes
information of use to a typical fund investor. The Commission agrees,
and as adopted, rule 498 requires only that a fund's profile provide a
summary of services available to typical investors in the fund.\103\
---------------------------------------------------------------------------
\103\ Rule 498(c)(2)(ix).
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4. Application to Purchase Shares
The Commission proposed to permit a fund to include in its profile
an application to purchase its shares.\104\ To ensure that investors
are informed of the
[[Page 13980]]
availability of a fund's prospectus, which can be reviewed by an
investor before investing in the fund, proposed rule 498 would require
the application to note with equal prominence that an investor has the
option of purchasing shares of the fund after reviewing the information
in the profile or after requesting and reviewing the fund's prospectus
(and other information).
---------------------------------------------------------------------------
\104\ Proposed rule 498(c)(3). Rule 482 under the Securities Act
prohibits a fund from including an application to purchase its
shares in an advertisement. This prohibition was based on concerns
that an application would be inconsistent with the purpose of rule
482, which was to provide a limited amount of information about a
fund and a means of requesting a fund's prospectus. See Fund
Performance Release, supra, note 5. In 1993, the Commission proposed
to amend rule 482 to permit a fund to include in an advertisement a
purchase application if the advertisement included certain
information about a fund. Investment Company Act Release No. 19342
(Mar. 5, 1993) [58 FR 16141]. In lieu of adopting the proposed
revisions to rule 482, the Commission is adopting rule 498. The
Commission is amending rule 482 in a number of respects to reflect
the adoption of rule 498. In addition, the Commission is adopting
revisions to rule 482 to permit letters or other materials permitted
under the rule to accompany a profile. See infra note 123 and
accompanying text.
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Commenters generally supported permitting a fund to include an
application in its profile, and the Commission is adopting rule 498 as
proposed. One commenter questioned why an application needed to be
included within a profile and suggested that it should be sufficient
for an application to accompany the profile. The Commission recognizes
that allowing funds to separate purchase applications from profiles may
facilitate the printing and distribution of profiles and make it easier
for funds to administer and process investors' applications. The
Commission is concerned, however, that separating the application from
the profile may cause investors to overlook the information provided in
the profile. Balancing these concerns with a desire to ease the
administrative burden on funds, the Commission has revised rule 498 to
permit a fund to provide an application for purchase of fund shares
either in the profile, or together with the profile in a manner
reasonably designed to alert investors that the application is to be
considered along with the information about the fund disclosed in the
profile.\105\
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\105\ Instruction to rule 498(c)(3).
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C. Filing Requirements
The Commission proposed to require a fund to file its profile with
the Commission at least 30 days before its first use.\106\ Proposed
rule 498 would require a fund to file any profile containing
substantive changes to a previously filed profile 30 days before use.
The proposed rule would not require a fund to re-file a previously
filed profile that has been revised only to update return information
about the fund's past performance included in the risk/return summary.
Commenters generally supported the proposed filing requirement,
although some commenters suggested that it was unnecessary to require
the subsequent re-filing of a profile with substantive changes 30 days
before use. Commenters recommended that, if the Commission believes
that such a filing requirement is necessary, the period before an
amended profile can be used should be shortened to 5 days. Other
commenters requested clarification about the kinds of changes made to a
profile in use that would trigger a second filing requirement.
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\106\ Proposed rule 498 would require a fund to file the profile
under rule 497, which sets out general filing requirements for fund
prospectuses. The Commission proposed to include the profile
requirement in new paragraph (k) to rule 497.
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The Commission has determined to adopt the proposed filing
requirements with modifications to address commenters' concerns.\107\
As discussed in the Profile Proposing Release, requiring profiles to be
filed prior to their first use will allow the Commission's staff to
monitor the document's compliance with the provisions of rule 498 and
other provisions under the federal securities laws.\108\ The Commission
believes that the 30-day filing requirement for a new profile will
provide the staff with sufficient time to review the profile.\109\ The
subsequent filing of an amended profile was intended to enable the
Commission to continue to monitor and assess the use of profiles by
funds. Because substantive changes to the profile, particularly the
risk/return summary, will be reflected in amended prospectus filed with
the Commission that can be reviewed by the Division, the Commission
believes that a subsequent filing of amendments to a profile before its
use is not necessary. Therefore, the Commission has revised the
procedures under which profiles are filed to require that a fund file
its amended profile within 5-business days after its use.\110\
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\107\ The Commission has determined that it is not necessary or
appropriate in the public interest or for the protection of
investors to require that a fund's profile be filed as part of the
fund's registration statement on Form N-1A. Filing the profile as
part of a registration statement would not add to the Commission's
ability to monitor the disclosure in the profile, would provide no
additional protection to investors, and would impose unnecessary
administrative burdens on funds.
\108\ See Profile Proposing Release, supra note 6, at 10950.
Under rule 498, as adopted, a profile can be used by a fund only
with an effective registration statement and a current prospectus.
\109\ Rule 497, as amended, requires a fund to file a definitive
form of any profile required to be filed with the Commission within
5 days after it is used.
\110\ Rule 497(k)(1)(ii). Rule 497(k) separates filings of
amended profiles into those that contain a material change to the
investment objectives/goals, strategies, or risks of investing in
the fund (changes to the information in, respectively, paragraphs
(c)(2)(i)-(iii) of rule 498) and those that do not. Rule
497(k)(1)(iii) (A) and (B). As with any profile filing, rule 497
requires that a fund filing an amended profile designate under which
paragraph and sub-paragraph of rule 497 the fund is filing the
amended profile. Rule 497(k)(2)(i). This requirement will assist the
staff of the Division in determining whether an amended profile
contains substantive changes to the information in the risk/return
summary.
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Funds would be required to submit profiles electronically on the
Commission's electronic data gathering analysis and retrieval
(``EDGAR'') system.\111\ Because filings on the EDGAR system currently
are text-only, do not reflect formatting, and do not reproduce graphic
images (such as the bar chart required to be in the profile), the
Commission proposed to require a fund to submit 2 copies of the profile
in the primary form intended to be distributed to investors (e.g.,
paper or electronic media) with its electronically-filed profile. The
purpose of this requirement was to allow the Commission to assess how
funds present information in the profile.\112\ Pointing out that all
funds are now required to file their disclosure documents required
under the federal securities laws electronically and are no longer
permitted to file paper copies, one commenter argued that it would be
burdensome to require an additional paper submission of a profile and
that the paper filing was not necessary to review the content of the
profile. The commenter suggested that, if the Commission determines
that a paper (or other distributed form of) filing is necessary, the
Commission should require that the first filing of the profile be in
its primary format and allow subsequent filings to be made
electronically on EDGAR only. The Commission believes that review of
profiles in the form in which they will be distributed to investors
will allow its staff to evaluate the effectiveness of the profile and
will be helpful in assessing whether the Commission should permit other
types of investment companies to use a form of profile.\113\ To avoid
unnecessary administrative burdens on funds, which file most forms
required by the Commission electronically, however, the Commission is
revising the additional profile filing requirement. Under these
revisions, the first profile filing must be accompanied by the
submission of a profile in the format in which it will be distributed
to investors.\114\ Subsequent filings will not require the additional
formatted profile.
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\111\ The Commission requires most other filings to be made in
the same manner. Rule 101(a)(1)(i) of Regulation S-T [17 CFR
232.101(a)(1)(i)], for example requires prospectuses filed pursuant
to the Securities Act to be submitted in electronic format.
\112\ See Profile Proposing Release, supra note 6, at 10951 nn.
86-88 and accompanying text.
\113\ See supra Section II.A.4 (discussion of use of profile by
other investment companies).
\114\ Rule 497(k)(2)(ii). If a fund intends to disseminate its
profile electronically, the supplemental submission need only
include the Internet web site electronic address (``URL'').
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D. Dissemination of Profiles
The Commission believes, on the basis of its own research and
studies
[[Page 13981]]
undertaken by others, that the profile has the potential to be used by
a significant number of fund investors. To facilitate use of the
profile, the Commission proposed to permit profiles to be distributed
to investors through any form of media.\115\ Commenters generally
supported this approach, although one commenter urged the Commission to
limit distribution of the profile to mass print media, arguing that the
use of electronic media or direct mail to distribute a profile could
promote fraud. The Commission believes that the profile's filing
requirements and its staff's periodic regular review of fund operations
through its inspections program provide important safeguards against
the fraudulent use of the profile. In addition, the Commission has
determined that it is in the interest of fund investors to provide them
with different means to access sources of information about funds.
Therefore, the Commission has decided not to restrict the means that
funds may use to distribute profiles.
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\115\ For example, a fund could make a profile available through
direct mail and mass print (e,g, magazines and newspapers),
broadcast, and electronic media, such as electronic bulletin boards,
E-mail, facsimiles, Internet web sites, audiotapes. See e.g.,
Investment Company Act Release No. 21399 (Oct. 6, 1995) [60 FR
53458, 53458 n.9] (``Electronic Distribution Release''). A fund may
find that posting both its profile and its prospectus (and other
information) on its Internet web site may disseminate disclosure
documents to investors more efficiently than other ways.
The Commission has encouraged the electronic dissemination of
information by allowing funds and other types of companies
significant choice in selecting and using distribution media. See,
e.g., id. at 53460 n.20 (providing guidance on the electronic
delivery of documents including prospectuses, shareholder reports,
and proxies, under the Securities Act, the Securities Exchange Act,
and the Investment Company Act); Investment Company Act Release No.
21945 (May 9, 1996) [61 FR 24644] (addressing the use of electronic
media by broker-dealers, transfer agents, and investment advisers);
Investment Company Act Release No. 21946 (May 9, 1996) [61 FR 24652]
(``Release 21946'') (adopting technical amendments to rules premised
on the delivery of paper documents).
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Notwithstanding its decision to permit funds to use all media to
distribute profiles, the Commission acknowledges that some media may
have limitations that make communicating information in a profile
difficult or that raise issues about whether investors have adequate
opportunity to consider the information conveyed by that form of
media.\116\ Regardless of how it is distributed (e.g., through
electronic means or in paper format), a profile must contain all of the
information contemplated by rule 498.\117\ In addition, while a fund's
profile may be delivered without the fund's prospectus, the profile, if
accompanied by supplemental sales literature, cannot be delivered
without the prospectus.\118\
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\116\ The Commission noted the same point generally in the
Electronic Distribution Release, supra note 115, at 53460 & n.20.
For example, broadcast media may be more difficult to use for
disseminating the profile because they may not communicate the
profile information effectively (e.g., the bar chart may not be
effectively conveyed by a radio broadcast) or provide a meaningful
opportunity for retaining the information (e.g., a short television
commercial).
\117\ Release 21946, supra note 115, at 24653. The Commission
has taken the position generally that any document contemplated by
the federal securities laws, whether delivered electronically or on
paper, must contain all required information and, if the order of
information has been specified by the Commission, must present the
information in substantially the prescribed order. Electronic
Distribution Release, supra note 115, at 53460 n.20.
\118\ Profiles may be accompanied by material deemed to be an
omitting prospectus within the meaning of rule 482 under the
Securities Act. The conclusion that a profile accompanied by
supplemental sales literature cannot be delivered to investors
without the prospectus is based on section 2(a)(10) of the
Securities Act [15 U.S.C. 77b(a)(10)], which excludes sales
literature from the definition of a ``prospectus'' (and from the
filing requirements under the Securities Act) if a section 10(a)
prospectus (but not a summary prospectus under section 10(b))
precedes or accompanies the sales literature. For a discussion of
the use of a profile with rule 482 materials, see infra notes 121
and 122 and accompanying text. See also Electronic Distribution
Release, supra note 115, at 53463 and 53465 (examples 15 and 35).
---------------------------------------------------------------------------
As discussed in the Profile Proposing Release, electronic media,
such as the Internet, may be particularly well suited for the delivery
of the profile to investors.\119\ Including the profile together with
the prospectus (and other information) on a fund's Internet web site
may be an efficient method for the fund to disseminate, and for
investors to receive, disclosure documents. Electronic availability of
both the profile and prospectus would allow investors to access the
fund's prospectus for more information contemporaneously with deciding
to make an investment in the fund.\120\
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\119\ See Profile Proposing Release, supra note 6, at 10951.
\120\ A fund could provide a hyperlink to its prospectus from
its profile. A hyperlink in a document (which, for example, may be
an underlined word or phrase) permits a viewer to move to another
document (or part of the same document) with a computer command. The
words ``investment strategies'' in the profile, for example, could
be set up as a hyperlink to the discussion of investment strategies
in the prospectus. Using hyperlinks could facilitate the profile's
serving as a means through which fund investors can obtain
additional information in the prospectus and other documents. An
investor's use of an electronic profile application contemplated by
rule 498 would create the inference of delivery of the prospectus if
both the profile and the prospectus are available at the same
electronic site. Cf. Electronic Distribution Release, supra note
115, at 43565-66 (example (39)) (``If the fund can identify the
application form as coming from the electronic system that contains
both the application and the prospectus, electronic delivery of the
prospectus can be inferred.''). A fund that does not electronically
disseminate the profile and prospectus together could not rely on
this presumption and generally would be required to provide a copy
of the prospectus with the purchase confirmation.
---------------------------------------------------------------------------
Several commenters pointed out that funds could decide to send
profiles to prospective investors with cover letters designed to be
``omitting prospectuses'' within the meaning of rule 482 under the
Securities Act.\121\ Noting that rule 482 materials are designed for a
purpose different from that of the profile and are required to contain
a legend that is inconsistent with the legend in the profile, the
commenters requested that the Commission clarify the circumstances
under which these materials could be used with a profile. The
commenters suggested specifically that the statement required by rule
482, that a prospectus is available from a fund and that the investor
should read it carefully before investing, could confuse investors who
receive rule 482 materials with a profile that contains an application
to purchase shares of the fund. To avoid this type of confusion, the
Commission is revising rule 482 so that a fund can indicate in a letter
or other rule 482 material accompanying the fund's profile that
information about the fund, and the procedures for investing in the
fund, are available in the accompanying profile.\122\ The Commission
also is revising rule 482 to provide that a profile containing, or
accompanied by, an application can be used with rule 482
materials.\123\
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\121\ See supra note 104.
\122\ Rule 482(a)(3).
\123\ Rule 482(a)(5).
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E. Modified Profiles for Certain Funds
The Commission proposed to permit a fund to tailor a profile for
use by investors in participant-directed defined contribution plans
(``plans''). The Commission believes that plan participants may find a
profile helpful in evaluating and comparing the funds offered as
investment alternatives in a plan.\124\ In proposing rule 498, the
Commission recognized that certain information of importance to typical
fund investors is of little importance to participants in plans. Thus,
proposed rule 498 would permit a fund offered through a plan to omit
information relating to the purchase and sale of fund
[[Page 13982]]
shares, fund distributions, and tax consequences.\125\
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\124\ The Division has taken the view that certain informational
materials about a fund offered as an investment option in a defined
contribution plan can be deemed an omitting prospectus within the
meaning of rule 482. Fidelity Institutional Retirement Services
Company, Inc. (pub. avail. Apr. 5, 1995) (staff no-action letter).
None of the initiatives being adopted by the Commission today is
intended to supersede this position of the Division.
\125\ Proposed rule 498(c)(4). The proposed rule also would
permit funds to exclude information about some fund services (e.g.,
exchange privileges) that may not apply to plan participants. In
addition, the proposed rule acknowledged that a plan typically
effects purchases and sales of a fund's shares on behalf of plan
participants and would permit the fund's profile to include the
plan's enrollment form in lieu of the application form.
---------------------------------------------------------------------------
Commenters generally supported allowing funds to develop profiles
containing disclosure of particular relevance for plan participants who
invest in funds. The Commission is adopting the special provisions for
profiles used for plans as proposed with modifications to reflect
suggestions of the commenters.\126\
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\126\ Rule 498(d). General Instruction C.3.(d) of Form N-1A
includes similar provisions enabling funds to omit certain
information from their prospectuses that are used in connection with
plans. Form N-1A Release, supra note 1.
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Under rule 498, as adopted, funds can tailor disclosure for
profiles to be used for investments in defined contribution plans
qualified under the Internal Revenue Code.\127\ One commenter suggested
that the Commission also permit funds that serve as investment options
for variable insurance contracts to modify profiles to take into
account specialized purchase and sale procedures and tax consequences
applicable to these funds.\128\ In response to the commenter's
suggestions, the Commission is revising rule 498 to permit the profile
to be tailored for funds offered through variable insurance contracts.
The Commission believes that this revision will help to ensure that
profiles contain information that investors will find meaningful and
useful. Rule 498, as adopted, permits a profile for a fund offered as
an investment option for a plan to include, or be accompanied by, an
enrollment form for the plan.\129\ An application or enrollment form
for a variable insurance contract may accompany the profile for the
funds that serve as investment options, however, only if the form also
is accompanied by a full prospectus for the contract.\130\
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\127\ In addition to plans under rule 401(k) of the Internal
Revenue Code [26 U.S.C. 401(k)], these plans include those under
section 403(b) [26 U.S.C. 403(b)] (available to employees of certain
tax-exempt organizations and public educational systems) and section
457 [26 U.S.C. 457] (available to employees of state and local
governments and other tax-exempt employers).
\128\ The prospectus for a variable insurance contract discloses
the purchase and sale procedures and tax consequences of investing
in the contract and is provided to investors in addition to
prospectuses for one or more funds that are offered as investment
options under the contract. Use of a profile for the available
investment options could make it easier for investors in variable
contracts to compare and select from the investment alternatives
available under the contract.
\129\ Rule 498(d)(3).
\130\ The Commission is currently considering whether it should
extend the profile to variable annuity contracts. See supra note 39
and accompanying text. The staff of the Division has indicated that,
for variable annuity contracts used to fund employee retirement
plans, summaries of the contract and fund prospectuses, accompanied
by payroll deduction and allocation forms, could be treated as
satisfying the requirements of rule 482 under certain circumstances.
See Aetna Life Insurance and Annuity Co. (pub. avail. Jan. 6, 1997)
(staff no-action letter). A profile could be used as a summary of a
fund prospectus for these purposes.
---------------------------------------------------------------------------
Some commenters suggested that rule 498 permit other modifications
to the disclosure in fund profiles used in connection with plans, such
as including information about purchases and sales of the fund's
shares, taxation, or transfer of participant accounts under the plan or
describing from whom this information can be obtained. Commenters also
suggested that rule 498 permit such a fund to alter the legend in its
profile used by plans to distinguish clearly that profile from another
profile of the same fund. Consistent with the goal of providing
meaningful and useful information that is effectively communicated to
investors, rule 498, as adopted, permits funds to modify the legend and
other disclosure in profiles intended for use in connection with
defined contribution plans, other tax-deferred arrangements described
in the rule, and variable insurance contracts.
III. Effective Date
The Commission proposed a transition period after the effective
date of revised Form N-1A to give funds sufficient time to prepare
their registration statements under the proposed amendments.\131\ One
commenter suggested that, in light of the significant overlap of
information in fund prospectuses and profiles, funds would revise their
prospectuses and develop profiles concurrently, and requested that the
transition period be the same for both rule 498 and Form N-1A, as
amended. The commenter also requested that the Commission continue to
permit funds to use Pilot Profiles during the transition period.\132\
The Commission expects that the practical result of the adoption of
rule 498 and revisions to prospectus disclosure requirements may be
that funds begin using both documents at the same time. In light of the
profile's purpose to provide investors with a new source of clear,
concise information about funds, the Commission believes that funds
should have the option to use the profile as soon as possible and is
making rule 498 effective on June 1, 1998.\133\ The amendments to Form
N-1A will become effective on the same date.\134\ Although existing
funds will have until December 1, 1999 to comply with the Form N-1A
amendments, a fund may, at its option, prepare documents in accordance
with the requirements of the amended Form at any time after the
effective date of the amendments.
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\131\ See Form N-1A Proposing Release, supra note 7, at 10921.
\132\ In the 1977 Profile Letter, supra note 8, the Division
stated that the Commission would address the transition from use of
a Pilot Profile in connection with the adoption of proposed rule
498.
\133\ After the effective date of rule 498, funds could continue
to use a Pilot Profile as supplemental sales literature.
\134\ To simplify compliance with rule 498 and the revised
prospectus disclosure requirements, the Commission is specifying the
same effective date for both as June 1, 1998. All new registration
statements or post-effective amendments that are annual updates to
effective registration statements filed after December 1, 1998 must
comply with the amendments to Form N-1A. The final compliance date
for filing amendments to effective registration statements to
conform with the new Form N-1A requirements is December 1, 1999. See
Form N-1A Release, supra note 1.
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IV. Cost/Benefit Analysis and Effects on Competition, Efficiency,
and Capital Formation
Section 2(b) of the Securities Act provides that whenever the
Commission engages in rulemaking requiring it to consider whether its
action is in the public interest, the Commission also must consider
whether the action will promote efficiency, competition, and capital
formation.\135\ For the reasons stated in the cost/benefit analysis
below, as well as the reasons discussed elsewhere in this adopting
release, the Commission has concluded that rule 498 will protect
investors and will promote efficiency, competition, and capital
formation.
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\135\ 15 U.S.C. 77b(b). See also section 2(c) of the Investment
Company Act [15 U.S.C. 80a-2(c)].
---------------------------------------------------------------------------
Evaluating and comparing funds has become an increasingly difficult
task for investors as the number of funds has grown. The Commission has
designed the profile to allow funds to use different offering documents
to meet the diverse information needs of investors. The Commission
believes that rule 498 allows funds to provide investors with a profile
that conveys information to investors efficiently, to the benefit of
investors and funds. For example, funds may include profiles in various
media, such as magazines, and may use profiles specifically tailored
for investors in defined contribution plans, certain other tax-deferred
arrangements, and variable insurance contracts. The profile, by
providing investors with a concise, standardized information option,
also may enable investors to use information
[[Page 13983]]
efficiently by making it easier to compare funds before investing. This
result will promote competition among funds and better enable investors
to select an investment that is appropriate and consistent with their
investment goals.
The Commission did not receive any comments addressing specifically
the cost associated with rule 498. Acknowledging that it is difficult
to quantify costs and benefits related to the use of a profile, the
Commission notes that commenters strongly favored the proposal. A
fund's use of a profile under rule 498 is voluntary and not every fund
will choose to prepare a profile. Developing a profile consistent with
rule 498, however, would not be burdensome, because a fund that chooses
to use a profile is likely to have developed much of the information
required to appear in a profile as a part of its registration statement
on Form N-1A. As discussed in the Commission's Paperwork Reduction Act
submission in conjunction with the Profile Proposing Release, the
Commission estimated that approximately 2,500 funds, or one third of
eligible funds, will prepare profiles, and that the average profile
will describe 2 funds. The Commission estimated that the annual cost to
the industry of preparing and filing updated profiles would be
approximately $5,600,000.\136\
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\136\ Profile Proposing Release, supra note 6.
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The Commission anticipates that the use of profiles may cause funds
to restructure their expenditures on advertising. It is difficult,
however, to determine how the use of profiles will affect aggregate
expenditures on advertising. Expenditures on profiles may be offset by
reductions in other advertising costs, resulting in no net cost
increase.
The Commission has taken steps to minimize the costs associated
with the use of a profile, such as designing the required risk/return
summary to allow funds to update return information without
necessitating the reprinting of the entire profile. The ability to
provide better information to investors and encourage investments in a
fund may offset any additional costs to funds created by the
development of a profile. Profiles also may lead to lower printing and
distribution costs for funds that mail fewer prospectuses. On balance,
the Commission believes that rule 498 fosters efficiency and tends to
promote competition and capital formation without imposing significant
costs on funds.
V. Paperwork Reduction Act
As set forth in the Profile Proposing Release, this rulemaking
contains ``collection of information'' requirements within the meaning
of the Paperwork Reduction Act of 1995 (``PRA'').\137\ The collection
of information requirements in the Profile Proposing Release were
submitted to the Office of Management and Budget (``OMB'') for review
under section 3507(d) of the PRA. OMB approved the collection of
information under the title ``Profiles for Open-End Management
Investment Companies'' and assigned it control number 3235-0488. The
collection of information contained in the Profile Proposing Release is
in accordance with the clearance requirements of 44 U.S.C. 3507. An
agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless an agency displays a
valid OMB control number.
---------------------------------------------------------------------------
\137\ 44 U.S.C. 3501, et seq.
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Rule 498 permits funds to provide investors with a profile that
contains a summary of key information about a fund. A fund that chooses
to make a profile available would give investors the option of
purchasing the fund's shares after reviewing the information contained
in the profile or after requesting and reviewing the fund's prospectus
(and other information about the fund). Under rule 498, use of the
profile by a fund is voluntary, but compliance with the rule is
mandatory for any fund that decides to use a profile. Responses to the
collection of information will not be confidential.
The Profile Proposing Release solicited public comment on the
collection of information requirements contained in that release. The
Commission received no comments on the PRA portion of the release. The
estimated total reporting burden, purpose, use and necessity of the
collection of information, as detailed in the Profile Proposing
Release, remains the same.
VI. Summary of Final Regulatory Flexibility Analysis
A summary of the Initial Regulatory Flexibility Analysis
(``Analysis''), which was prepared in accordance with the Regulatory
Flexibility Act, 5 U.S.C. 603, was published in the Profile Proposing
Release. The Commission received no comments on the Analysis. The
Commission has prepared a Final Regulatory Flexibility Analysis
(``FRFA'') in accordance with 5 U.S.C. 604. The FRFA explains that a
profile would include a summary of key information about a fund in a
concise, standardized format designed to help investors evaluate and
compare funds. The FRFA also explains that, if a fund makes a profile
available, investors will have the option to purchase the fund's shares
after reviewing the information in the profile or after requesting and
reviewing the fund's prospectus (and other information about the fund).
An investor deciding to purchase fund shares based on the information
in the profile would receive the fund's propsectus no later than with
the confirmation of the purchase.
The FRFA discusses the effect of rule 498 on small entity
investment companies, which are defined, for the purposes of the
Securities Act and Investment Company Act, as investment companies with
net assets of $50 million or less as of the end of the most recent
fiscal year [17 CFR 230.157(b) and 270.0-10]. The Commission estimates
that there are approximately 620 small entity investment companies and
that approximately one-third (207) could choose to use proposed rule
498. As explained in more detail in the FRFA, the Commission estimates
that the total hour burden on small entities to prepare, file, and
update the profile annually would be approximately 2,420 hours. While
the profile would include a summary of key information about the fund
that is included in the prospectus, the disclosure requirements for the
profile and the prospectus are designed for different purposes.
The FRFA explains that rule 498 would not be significantly
burdensome for small entity investment companies because use of the
profile is optional, and the information to be included in a fund's
profile will typically be drawn from information required to be
disclosed in the fund's prospectus. In addition, some investors may use
profiles instead of prospectuses to narrow their choices among funds,
which would reduce a fund's printing and distribution costs. Lower
printing and distribution costs could benefit small entities as much as
or more than it could for large funds.
As stated in the FRFA, the Commission considered several
alternatives to rule 498, including establishing different compliance
or reporting requirements for small entity investment companies or
exempting them from all or part of the rule. Because use of the profile
would be optional, and, if used, profiles of all funds would be subject
to the same disclosure requirements, the Commission believes that the
rule would not impose additional burdens
[[Page 13984]]
on small entity investment companies. Separate treatment for small
entity investment companies would be inconsistent with the protection
of investors.
A copy of the Final Regulatory Flexibility Analysis may be obtained
by contacting George J. Zornada, Team Leader, Office of Disclosure
Regulation, Division of Investment Management, Securities and Exchange
Commission, 450 Fifth Street, NW., Mail Stop 5-6, Washington, DC 20549-
6009.
VII. Statutory Authority
The Commission is adopting rule 498 under sections 5, 7, 8, 10, and
19(a) of the Securities Act [15 U.S.C. 77e, 77g, 77h, 77j, and 77s(a)]
and sections 8, 22, 24(g), 30, and 38 of the Investment Company Act [15
U.S.C. 80a-8, 80a-22, 80a-24(g), 80a-29, and 80a-37]. The authority
citations for the rule precede the text of the amendments.
List of Subjects in 17 CFR Parts 230 and 270
Investment companies, Reporting and recordkeeping requirement,
Securities.
Text of Rule
For the reasons set out in the preamble, the Commission amends
chapter II, title 17 of the Code of Federal Regulations as follows:
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
1. The general authority citation for part 230 is revised to read,
in part, as follows:
Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77r, 77s, 77sss,
78c, 78d, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79t, 80a-8, 80a-24, 80a-
28, 80a-29, 80a-30, and 80a-37, unless otherwise noted.
* * * * *
2. Amend Sec. 230.431 to revise the introductory text of paragraph
(a) to read as follows:
Sec. 230.431 Summary prospectuses.
(a) A summary prospectus prepared and filed (except a summary
prospectus filed by an open-end management investment company
registered under the Investment Company Act of 1940) as part of a
registration statement in accordance with this section shall be deemed
to be a prospectus permitted under section 10(b) of the Act (15 U.S.C.
77j(b)) for the purposes of section 5(b)(1) of the Act (15 U.S.C.
77e(b)(1)) if the form used for registration of the securities to be
offered provides for the use of a summary prospectus and the following
conditions are met:
* * * * *
3. Amend Sec. 230.482 to revise the introductory text of paragraph
(a), paragraphs (a)(3), (a)(5), and (a)(7), and in paragraph (d) remove
the period at the end of paragraph (d)(1)(ii) and add in its place ``;
or'' and add paragraph (d)(1)(iii) to read as follows:
Sec. 230.482 Advertising by an investment company as satisfying
requirements of section 10.
(a) An advertisement or other sales material that is not a
prospectus, or an advertisement or sales material excluded from the
definition of prospectus by section 2(10) of the Act (15 U.S.C.
77b(10)) and related Sec. 230.134, will be deemed to be a prospectus
under section 10(b) of the Act (15 U.S.C. 77j(b)) for the purpose of
section 5(b)(1) of the Act (15 U.S.C. 77e(b)(1)), if:
* * * * *
(3) It includes a conspicuous statement that:
(i) Identifies a source from which an investor may obtain a
prospectus containing more complete information about the investment
company, which should be read carefully before investing; or
(ii) If used with a profile under Sec. 230.498 (``Profile''),
indicates that information is available in the Profile about the
investment company, the procedures for investing in the investment
company, and the availability of the investment company's prospectus.
Note to Paragraph (a)(3). The fact that the statements included
in the advertisement are included in the section 10(a) prospectus
does not relieve the issuer, underwriter, or dealer of the
obligation to ensure that the advertisement is not false or
misleading.
* * * * *
(5) It does not contain and is not accompanied by any application
by which a prospective investor may invest in the investment company,
except that:
(i) A prospectus meeting the requirements of section 10(a) of the
Act (15 U.S.C. 77j(a)) by which a unit investment trust offers periodic
payment plan certificates may contain a contract application although
the prospectus includes another prospectus that, pursuant to this
section, omits certain information required by section 10(a) of the
Act, regarding investment companies in which the unit investment trusts
invests; and
(ii) It may be used with a Profile that includes, or is accompanied
by, an application to purchase shares of the investment company as
permitted under Sec. 230.498.
* * * * *
(7)(i) In the case of an investment company that holds itself out
to be a money market fund, it includes the following statement:
An investment in the Fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by
investing in the Fund.
(ii) A money market fund that does not hold itself out as
maintaining a stable net asset value may omit the second sentence of
the statement in (a)(7)(i) of this section.
* * * * *
(d) * * *
(1) * * *
(iii) A quotation or quotations of tax equivalent yield or tax
equivalent effective yield if it appears in the same advertisement as a
quotation of current yield and each quotation relates to the same base
period as the quotation of current yield, is presented with equal
prominence, and states the income tax rate used in the calculation.
* * * * *
4. Amend Sec. 230.497 to revise paragraph (a) and to add paragraph
(k) to read as follows:
Sec. 230.497 Filing of investment company prospectuses--number of
copies.
(a) Five copies of every form of prospectus sent or given to any
person prior to the effective date of the registration statement that
varies from the form or forms of prospectus included in the
registration statement filed pursuant to Sec. 230.402(a) shall be filed
as part of the registration statement not later than the date that form
of prospectus is first sent or given to any person, except that:
(1) An investment company advertisement under Sec. 230.482 shall be
filed under this paragraph (a) (but not as part of the registration
statement) unless filed under paragraph (i) of this section; and
(2) A profile under Sec. 230.498 shall be filed in accordance with
paragraph (k) of this section and not as part of the registration
statement.
* * * * *
(k)(1) Profile filing requirements. A form of profile under
Sec. 230.498 shall not be used unless:
(i) The form of profile that has not been previously filed with the
Commission is filed at least 30 days before the date that it is first
sent or given to any person.
(A) No additional filing is required during the 30-day period for
changes (material or otherwise) to a form of
[[Page 13985]]
profile filed under this paragraph if the changes are included in the
definitive profile that is filed with the Commission under paragraph
(k)(2)(ii) of this section.
(B) The form of profile filed under this paragraph (k)(1)(i) can be
used on the later of 30 days after the date of filing or, if the
profile is filed in connection with an initial registration statement
or a post-effective amendment that adds a series of an investment
company to a registration statement, or reflects changes to a
prospectus included in a post-effective amendment filed to update a
registration statement under Sec. 230.485, the date that the
registration statement or post-effective amendment becomes effective.
(ii) A definitive form of a profile filed under paragraph (k)(1)(i)
of this section is filed with the Commission no later than the fifth
business day after the date that it is used.
(iii) A form of profile that differs from any definitive form of
profile that was filed under this paragraph (k) is filed with the
Commission in definitive form no later than the fifth business day
after the date that it is first used. This filing shall be made under
one of the following according to the character of the change contained
in the form of profile:
(A) A form of profile that contains a material change to the
information disclosed under Sec. 230.498 (c)(2)(i)-(iii); and
(B) A form of profile that does not contain a material change to
the information under Sec. 230.498 (c)(2)(i)-(iii).
(2) Filing procedures. (i) Designate, at the top of the first page
of any form of profile that is filed under this paragraph (k), the
paragraph and sub-paragraph under which the profile is filed.
(ii) Send two additional copies of the first definitive form of
profile filed electronically under paragraph (k)(1)(ii) of this section
to the Commission, in the primary form intended to be used for
distribution to investors (e.g., paper, electronic media), by mail or
other means reasonable calculated to result in receipt by the
Commission, no late than the fifth business day after the date the
profile is first sent or given to any person. Send copies to the
following address: Office of Disclosure and Review, Division of
Investment Management, U.S. Securities and Exchange Commission, 450
Fifth St., N.W., Mail Stop 5-6, Washington, D.C. 20549-6009. Note
prominently that the submission is made in accordance with
Sec. 230.497(k)(2) of Regulation C under the Securities Act. If the
profile is distributed primarily on the Internet, supply, in lieu of
copies, the electronic address (``URL'') of the profile page(s) in an
exhibit to the electronic filing under this paragraph (k). This
additional requirement will expire on June 1, 2000.
5. Add Sec. 230.498 under the undesignated center heading
``Regulation C-Registration'' to read as follows:
Sec. 230.498 Profiles for certain open-end management investment
companies.
(a) Definitions. (1) A Fund means an open-end management investment
company, or any series of such a company, that has, or is included in,
an effective registration statement on Form N-1A (Secs. 274.11A and
239.15A of this chapter) and that has a current prospectus under
section 10(a) of the Act (15 U.S.C. 77j(a)).
(2) A Profile means a summary prospectus that is authorized under
section 10(b) of the Act (15 U.S.C. 77j(b)) and section 24(g) of the
Investment Company Act (15 U.S.C. 80a-24(g) for the purpose of section
5(b)(1) of the Act (15 U.S.C. 77e(b)(1)).
(b) General requirements. A Fund may provide a Profile to
investors, which may include, or be accompanied by, and application
that investors may use to purchase the Fund's shares, if the Profile
contains the information required or not precluded by paragraph (c) of
this section and does not incorporate any information by reference to
another document.
Instructions to paragraph (b).
1. The Profile is intended to be a standardized summary of key
information in the Fund's prospectus under section 10(b) of the Act.
Additional information is available in the Fund's prospectus under
section 10(a) of the Act, in the Fund's Statement of Additional
Information under Form N-1A, and in the Fund's annual and semi-
annual shareholder reports prepared in accordance with Sec. 270.30d-
1. Funds may not use cross-references in the Profile to other Fund
disclosure documents unless required or permitted by this rule.
Funds should minimize cross-reference and the use of footnotes
within the Profile; cross-references and footnotes should generally
be used only to promote a better understanding of the information
about the Fund contained in the Profile.
2. Provide clear and concise information in the Profile in a
format designed to communicate the information effectively. Avoid
excessive detail, technical or legal terms, and long sentences and
paragraphs. Provide the information in the Profile using the plain
English writing principles in Sec. 230.421(d).
3. A Fund may use document design techniques intended to promote
effective communication of the information in the Profile unless
inconsistent with the requirements of this section.
4. A Profile may describe more than one Fund or class of a Fund.
A Profile that offers the securities of more than one Fund or class
of a Fund does not need to repeat information that is the same for
each Fund or class of Fund described in the Profile.
5. File the Profile with the Commission as required by
Sec. 230.497(k).
(c) Specific requirements. (1) Include on the cover page of the
Profile or at the beginning of the Profile:
(i) The Fund's name and, at the Fund's option, the Fund's
investment objective or the type of fund or class offered, or both;
(ii) A statement identifying the document as a ``Profile,'' without
using the term ``prospectus'';
(iii) The approximate date of the Profile's first use;
(iv) The following legend:
This Profile summarizes key information about the Fund that is
included in the Fund's prospectus. The Fund's prospectus includes
additional information about the Fund, including a more detailed
description of the risks associated with investing in the Fund that
you may want to consider before you invest. You may obtain the
prospectus and other information about the Fund at no cost by
calling __________.
(v) Provide a toll-free (or collect) telephone number that
investors
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