[Federal Register: October 6, 2003 (Volume 68, Number 193)]
[Rules and Regulations]
[Page 57759-57782]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06oc03-14]
[[Page 57759]]
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Part III
Securities and Exchange Commission
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17 CFR Parts 230, 239, et al.
Amendments to Investment Company Advertising Rules; Final Rule
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 230, 239, 270, and 274
[Release Nos. 33-8294; 34-48558; IC-26195; File No. S7-17-02]
RIN 3235-AH19
Amendments to Investment Company Advertising Rules
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Securities and Exchange Commission is adopting rule and
form amendments under the Securities Act of 1933, the Securities
Exchange Act of 1934, and the Investment Company Act of 1940 that
require enhanced disclosure in investment company advertisements and
that are designed to encourage advertisements that convey balanced
information to prospective investors, particularly with respect to past
performance. The amendments also implement section 24(g) of the
Investment Company Act by permitting the use of a prospectus under
section 10(b) of the Securities Act with respect to securities issued
by an investment company that includes information the substance of
which is not included in the investment company's statutory prospectus.
DATES: Effective Date: November 15, 2003.
Compliance Dates: See section II.F. of this release for information
on compliance dates.
FOR FURTHER INFORMATION CONTACT: Christopher P. Kaiser, Special
Counsel, David S. Schwartz, Senior Counsel, or Keith E. Carpenter,
Senior Special Counsel, at (202) 942-0721, Office of Disclosure
Regulation, Division of Investment Management, Securities and Exchange
Commission, 450 5th Street, NW., Washington, DC 20549-0506.
SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission
(``Commission'') is adopting amendments to rule 134 [17 CFR 230.134],
rule 156 [17 CFR 230.156], and rule 482 [17 CFR 230.482] under the
Securities Act of 1933 [15 U.S.C. 77a et seq.] (``Securities Act'') and
rule 34b-1 [17 CFR 270.34b-1] under the Investment Company Act of 1940
[15 U.S.C. 80a-1 et seq.] (``Investment Company Act''). The Commission
also is adopting technical amendments to Form N-1A [17 CFR 239.15A and
274.11A], Form N-3 [17 CFR 239.17a and 274.11b], Form N-4 [17 CFR
239.17b and 274.11c], and Form N-6 [17 CFR 239.17c and 274.11d],
registration forms used by investment companies to register under the
Investment Company Act and to offer their securities under the
Securities Act.
Table of Contents
I. Introduction and Background
II. Discussion
A. Eliminating the ``Substance of Which'' Requirement from Rule
482 and Rescinding Rule 134 for Funds
B. Applicability of Antifraud Provisions To Fund Advertising
C. Enhanced Disclosure Under Rule 482
D. Reorganization of Rule 482 and Technical Form Amendments
E. Rule 482(a)(5)(i) Relating to Variable Insurance Products
F. Compliance Dates
III. Cost/Benefit Analysis
IV. Consideration of Effects on Efficiency, Competition, and Capital
Formation
V. Paperwork Reduction Act
VI. Final Regulatory Flexibility Analysis
VII. Statutory Authority
Text of Rule and Form Amendments
I. Introduction and Background
Like most issuers of securities, when an investment company
(``fund'') offers its shares to the public, its promotional efforts
become subject to the advertising restrictions of the Securities Act.
Congress imposed these restrictions so that investors would base their
investment decisions on the full disclosures contained in the
``statutory prospectus,'' which Congress intended to be the primary
selling document.\1\ The advertising restrictions of the Securities Act
cause special problems for many investment companies, particularly for
open-end management investment companies (``mutual funds'') and other
investment companies that continuously offer and sell their shares.\2\
For these funds, the advertising restrictions apply continuously
because the offering process, in effect, is continuous.
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\1\ ``Statutory prospectus'' refers to the full prospectus
required by section 10(a) of the Securities Act. 15 U.S.C. 77j(a).
\2\ An open-end management investment company is an investment
company, other than a unit investment trust or face-amount
certificate company, that offers for sale or has outstanding any
redeemable security of which it is the issuer. Sections 4 and
5(a)(1) of the Investment Company Act [15 U.S.C. 80a-4 and 80a-
5(a)(1)]. Mutual funds typically offer and sell their shares
continuously to provide an ongoing flow of capital into their
portfolios and to enable them to meet redemption requests from their
shareholders.
A unit investment trust (``UIT'') is ``an investment company
which (A) is organized under a trust indenture, contract of
custodianship or agency, or similar instrument, (B) does not have a
board of directors, and (C) issues only redeemable securities, each
of which represents an undivided interest in a unit of specified
securities, but does not include a voting trust.'' Section 4(2) of
the Investment Company Act [15 U.S.C. 80a-4(2)]. UITs typically have
active secondary markets in which the trusts' sponsors are
continuously purchasing and selling the trusts' units.
A face-amount certificate is a security that obligates the
issuer to pay a stated (or determinable) amount on a fixed (or
determinable) date or series of dates more than twenty-four months
after the date of issuance. Section 2(a)(15) of the Investment
Company Act [15 U.S.C. 80a-2(a)(15)]. A face-amount certificate
company is an investment company that engages or proposes to engage
in the business of issuing certain face-amount certificates. Section
4(1) of the Investment Company Act [15 U.S.C. 80a-4(1)].
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In recognition of these problems, the Commission has adopted
special advertising rules for investment companies. The most important
of these is rule 482 under the Securities Act, which permits investment
companies to advertise investment performance data, as well as other
information.\3\ Rule 482 advertisements are ``prospectuses'' under
section 10(b) of the Securities Act (so-called ``omitting
prospectuses''),\4\ which means that, historically, they could only
contain information the ``substance of which'' is included in the
statutory prospectus.\5\
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\3\ 17 CFR 230.482.
\4\ 15 U.S.C. 77j(b).
\5\ Current 17 CFR 230.482(a)(2).
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In the National Securities Markets Improvement Act of 1996
(``NSMIA''), Congress amended the Investment Company Act to permit,
subject to rules adopted by the Commission, the use of prospectuses
under section 10(b) of the Securities Act that include information the
substance of which is not included in the statutory prospectus.\6\ In
May 2002, we issued a release proposing to amend rule 482 and make
other related rule and form changes to implement this provision of the
legislation (the ``Proposing Release'').\7\
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\6\ National Securities Markets Improvement Act of 1996, Pub. L.
No. 104-290, 110 Stat. 3416, 3428, Section 204.
\7\ Investment Company Act Release No. 25575 (May 17, 2002) [67
FR 36712 (May 24, 2002)] (``Proposing Release'').
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At the same time, we proposed other amendments to the fund
advertising rules to reinforce antifraud protections and encourage the
provision of information to investors that is more balanced and
informative, particularly in the area of investment performance. These
proposed amendments addressed our concern that some funds, when
advertising their performance, may resort to techniques that create
unrealistic investor expectations or may mislead potential investors.
These concerns arose during 1999 and 2000 when many funds experienced
extraordinary performance and engaged in advertising campaigns focusing
on past performance.\8\ In recent months,
[[Page 57761]]
following improved market performance, commentators have already noted
an increase in advertisements highlighting favorable short-term
performance and have expressed concern about this practice.\9\ The
Commission received 29 comment letters on the proposal. Commenters
generally supported the proposal, but also suggested revisions in
certain areas.\10\ Today, the Commission is adopting these proposed
amendments, with certain modifications as described below to address
the suggestions of the commenters.
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\8\ See Proposing Release, supra note 7, 67 FR at 36713 nn. 8
and 9 and accompanying text (discussion regarding funds' advertising
during 1999 and 2000 focused on extraordinary performance).
\9\ See Kimberly Weisul, Mutual Fund Ads: Reader Beware,
Business Week, September 15, 2003, at 44; Suzanne McCoy, Performance
Ads Return in Q2 as Spending Drops (August 12, 2003) http://www.ignites.com
; Gregg Wolper, Buy this Fund--It's Had a Great
Week!, Morningstar Online, July 15, 2003, available at http://news.morningstar.com/doc/document/print/1
,3651,93809,00.html.
\10\ The comment letters and a summary of the comments are
available for public inspection and copying in the Commission's
Public Reference Room, 450 5th Street, NW., Washington, DC 20549-
0102. Public comments submitted electronically and the comment
summary are also available on the Commission's Internet Web site
(http://www.sec.gov).
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II. Discussion
A. Eliminating the ``Substance of Which'' Requirement From Rule 482 and
Rescinding Rule 134 for Funds
We are adopting, as proposed, the amendment removing the
requirement that a rule 482 advertisement contain only information the
``substance of which'' is included in the statutory prospectus.\11\
This amendment implements section 24(g) of the Investment Company Act,
added by NSMIA, which directs the Commission to adopt rules or
regulations that permit registered investment companies to use
prospectuses that (i) include information the substance of which is not
included in the statutory prospectus, and (ii) are deemed to be
permitted by section 10(b) of the Securities Act.\12\ Eliminating this
requirement will permit investment companies to include up-to-date
information in rule 482 advertisements, such as information about
current economic conditions that normally would not be included in a
fund's prospectus. The amendment also will permit funds to eliminate
certain information from the statutory prospectus, such as boilerplate
disclosure about the methods used to calculate performance in fund
advertising, that clutters the statutory prospectus and obscures other
important information. As a result, investors should receive better,
more understandable, and more timely information in both the statutory
prospectus and fund advertisements. In addition, the costs of
regulatory compliance should be reduced for funds and, ultimately, for
investors.
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\11\ The ``substance of which'' requirement is presently
contained in current rule 482(a)(2) [17 CFR 230.482(a)(2)]. We are
also revising the language in the note to current paragraph (a)(3)
of rule 482, which states that ``[t]he 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.'' [17 CFR 230.482(a)(3)]. The removal of the ``substance
of which'' requirement makes the reference to the section 10(a)
prospectus unnecessary. The revised language of this note is
incorporated into the note to newly adopted paragraph (a) of rule
482 [17 CFR 230.482(a)]. See Section II.B., ``Applicability of
Antifraud Provisions to Fund Advertising,'' infra.
\12\ 15 U.S.C. 80a-24(g). See also S. Rep. No. 293, 104th Cong.,
2d Sess. 8 (1996) (stating that the ``bill improves fund advertising
by giving the Commission express authority to create a new
investment company `advertising prospectus' '').
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Elimination of the ``substance of which'' requirement from rule 482
should not diminish investor protection. The ``substance of which''
requirement is a technical requirement that does not, in itself,
prevent misleading statements because it does not require an
advertisement to use the same words as the statutory prospectus or
prohibit the use of advertising techniques that are not included in the
statutory prospectus.\13\ Importantly, rule 482 advertisements, as
``prospectuses,'' will remain subject to liability under section
12(a)(2) of the Securities Act and the antifraud provisions of the
federal securities laws. Also, rule 482 advertisements, as section
10(b) prospectuses under the Securities Act, are subject to the summary
suspension provisions of section 10(b), which permit the Commission to
suspend the use of a materially false or misleading prospectus.\14\ In
addition, fund advertising materials must continue to be filed with
NASD Regulation, Inc. (``NASDR'') or the Commission, and NASDR rules
relating to fund advertising will continue to apply.\15\ Finally, we
are adopting additional amendments to rule 482 to reinforce antifraud
protections, particularly in the area of fund performance.\16\
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\13\ See Investment Company Act Release No. 9811 (June 8, 1977)
[42 FR 30379, 30380 (June 14, 1977)] (``1977 Advertising Proposing
Release'') (proposing rule 434d, subsequently renumbered as rule
482).
\14\ 15 U.S.C. 77j(b).
\15\ Section 24(b) of the Investment Company Act [15 U.S.C. 80a-
24(b)] requires the filing with the Commission of ``any
advertisement, pamphlet, circular, form letter, or other sales
literature'' for any registered investment company other than a
closed-end fund. Rule 24b-3 under the Investment Company Act [17 CFR
270.24b-3] relieves funds of the obligation to file advertisements
and other sales materials with the Commission if those materials are
filed with NASDR.
Members of the National Association of Securities Dealers, Inc.
(``NASD'') also must comply with rule 2210 of the NASD Conduct Rules
when sponsoring fund advertisements. Rule 2210 outlines general
standards for what may constitute misleading fund advertising and
specific requirements for advertising communications. Rules
2210(d)(1) and (2) of the NASD Conduct Rules.
\16\ See discussion in Section II.B., ``Applicability of
Antifraud Provisions to Fund Advertising,'' and Section II.C.,
``Enhanced Disclosure Under Rule 482,'' infra.
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We are using our exemptive authority under the Securities Act to
eliminate the ``substance of which'' requirement from rule 482 for the
securities of business development companies (``BDCs'') as well as
registered investment companies.\17\ Currently, BDCs and registered
investment companies are treated similarly under rule 482. We believe
that it is appropriate to extend the benefits that would result from
elimination of the ``substance of which'' requirement to BDCs, given
that elimination of this requirement should not diminish investor
protection. We note, however, that BDCs, unlike mutual funds, do not
continuously offer and sell their shares and do not make extensive use
of advertisements.
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\17\ Section 28 of the Securities Act [15 U.S.C. 77z-3].
Business development companies are a category of closed-end
investment companies that are not required to register under the
Investment Company Act. See section 2(a)(48) of the Investment
Company Act [15 U.S.C. 80a-2(a)(48)] (defining ``business
development company'').
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We are also adopting amendments removing the provisions of rule 134
that apply specifically to funds and are excluding both registered
investment companies and business development companies from relying on
rule 134.\18\ We believe that, with the elimination of the ``substance
of which'' requirement from rule 482, funds will no longer need to rely
on rule 134. Rule 134 will remain available to other issuers. We have
made technical modifications to our proposed amendments to rule 134 in
order to retain the existing introductory text of rule 134 for these
issuers.\19\ Rule 482, as amended, will provide funds with sufficient
flexibility to discuss topics, such as current economic conditions,
that are currently discussed in rule 134 advertisements but generally
not in the statutory prospectus. We believe that investor protection
will be increased if fund advertisements including this
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information are subject to rule 482 and, as a result, to liability
under section 12(a)(2) of the Securities Act.\20\
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\18\ 17 CFR 230.134. Rule 134, in contrast to rule 482, is a
content-based rule that specifies certain categories of information
that a fund may advertise. Currently, funds may advertise a broad
range of information under rule 134, other than performance
information. See Proposing Release, supra note 7, 67 FR at 36714.
\19\ See 17 CFR 230.134(e) (registered investment companies and
business development companies excluded from rule 134).
\20\ Because a rule 482 advertisement is a prospectus under
section 10(b) of the Securities Act, a rule 482 advertisement is
subject to section 12(a)(2) of the Securities Act [15 U.S.C.
77l(a)(2)], which imposes liability for materially false or
misleading statements in a prospectus or oral communication, subject
to a reasonable care defense. An action under section 12(a)(2) does
not require proof of scienter (i.e., an intent to defraud
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, antifraud claims by investors under
section 10(b) of the Securities Exchange Act of 1934 (``Exchange
Act'') [15 U.S.C. 78j(b)] require proof of scienter and investor
reliance. Under either type of claim, however, the plaintiff must
establish that the misrepresentation or omission is material. Rule
134 advertisements are subject to the antifraud provisions under the
Federal securities laws but do not create liability under section
12(a)(2) of the Securities Act because rule 134 advertisements are
not considered ``prospectuses.'' Rule 134 was adopted under section
2(a)(10)(b) of the Securities Act [15 U.S.C. 77b(a)(10)(b)], which
excepts certain communications from the definition of
``prospectus.''
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A number of commenters opposed the elimination of funds' ability to
rely on rule 134, objecting to the application of the more stringent
liability standard under section 12(a)(2) of the Securities Act to fund
advertisements that have in the past fallen within the scope of rule
134. Commenters argued that the limitations on the type of information
that may be included in rule 134 advertisements provide sufficient
protection against fraud or misleading statements so that the more
rigorous liability standard under section 12(a)(2) is not necessary. In
addition, they argued that, in the absence of evidence of significant
abuse, there is no reason to eliminate funds' ability to rely on rule
134 and impose the burden of increased liability.
We are not persuaded by these comments because we believe that the
standard of liability that attaches to a fund advertisement should not
depend on the content of the advertisement. Nor do we believe that
exactly the same content should be subject to different liability
standards depending on whether that content is included in a rule 134
advertisement or a rule 482 advertisement. Assuming that commenters are
correct that the limitations on the type of information that may be
included in rule 134 advertisements provide protection against fraud,
then it should not be problematic to apply a more rigorous liability
standard to this information. Further, our elimination of funds'
ability to rely on rule 134 is not intended to address significant past
abuses, but to help to prevent false and misleading advertisements in
the future. Finally, excluding investment companies from rule 134 is
consistent with the goal of regulatory simplification. With the
elimination of the ``substance of which'' requirement from rule 482,
any advertisement that could be presented under rule 134 may also be
presented under rule 482. The elimination of funds' ability to rely on
rule 134 will eliminate unnecessary complexity in the regulation of
fund advertising.
B. Applicability of Antifraud Provisions to Fund Advertising
We are adopting, with modifications suggested by the commenters,
amendments to the fund advertising rules that are intended to
reemphasize that fund advertisements are subject to the antifraud
provisions of the federal securities laws. When we initially proposed
rule 482 in 1977, we indicated that rule 482 advertisements would be
subject to section 12(a)(2) of the Securities Act and the antifraud
provisions of the federal securities laws.\21\ Since then, we have
reiterated that compliance with the ``four corners'' of rule 482 does
not alter the fact that funds, underwriters, and dealers are subject to
the antifraud provisions of the federal securities laws with respect to
fund advertisements.\22\
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\21\ 1977 Advertising Proposing Release, supra note, 42 FR at
30380.
\22\ Investment Company Act Release No. 16245 (Feb. 2, 1988) [53
FR 3868, 3878 n. 51 (Feb. 10, 1988)]. See also Investment Company
Act Release No. 24832 (Jan. 18, 2001) [66 FR 9002, 9008 (Feb. 5,
2001)] (compliance with rule 482 is not a safe harbor from antifraud
liability); Investment Company Act Release No. 15315 (Sept. 17,
1986) [51 FR 34384, 34391 (Sept. 26, 1986)] (in proposing amendments
to rule 482 to require the inclusion of a legend on advertisements,
Commission stated that it was ``not suggesting that the legend
information contains all the material information necessary to
prevent an ad from being misleading . . . [and] that whoever
sponsors the ad, be it the fund, the underwriter, or the dealer,
bears the primary responsibility for assuring that the ad is not
false or misleading''); 1977 Advertising Proposing Release, supra
note, 42 FR at 30380 (advertisements made pursuant to rule 434d
(subsequently renumbered as rule 482) would be subject to the
antifraud provisions of the securities laws); In the Matter of The
Dreyfus Corporation and Michael L. Schonberg, Investment Advisers
Act Release No. 1870 (May 10, 2000) (advertisements that comply with
rule 482 are subject to the general antifraud provisions of the
securities laws).
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To emphasize this principle, we are adding a note to newly adopted
paragraph (a) of rule 482 that states that an advertisement that
complies with rule 482 does not relieve the fund, underwriter, or
dealer of any obligations with respect to the advertisement under the
antifraud provisions of the federal securities laws. We also are adding
a similar note to the introductory paragraph of rule 34b-1 under the
Investment Company Act with respect to supplemental sales literature.
These notes include cross-references to rule 156 under the Securities
Act, which provides guidance about the factors to be weighed in
determining whether statements, representations, illustrations, and
descriptions contained in fund advertisements and sales literature are
misleading.\23\
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\23\ 17 CFR 230.156.
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As proposed, the language of the notes to rules 482 and 34b-1 would
have stated that compliance with the rules does not relieve the fund,
underwriter, or dealer of the obligation to ``ensure'' that the
advertisement is not false or misleading. One commenter objected to the
use of the term ``ensure,'' stating that it could potentially expand
the responsibility of funds, underwriters, and dealers because it might
imply that they are guarantors of the accuracy of statements contained
in advertisements. Our proposal incorporated language, including the
term ``ensure,'' similar to that used in an existing note to paragraph
(a)(3) of rule 482, and we did not intend to alter existing standards
of liability.\24\ In order to address the commenter's concern, however,
we have revised the language of the note to remove the term ``ensure''
and clarify that compliance with rules 482 and 34b-1 does not relieve
the fund, underwriter, or dealer of any obligations with respect to the
advertisement under the antifraud provisions of the federal securities
laws. This change is intended to clarify that the scope of a fund's,
underwriter's, or dealer's obligations under the antifraud provisions
is drawn from the federal securities laws and relevant precedents and
not from the language of rule 482 or 34b-1 itself.
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\24\ Note to current rule 482(a)(3) [17 CFR 230.482(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.'')
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Two commenters urged the Commission to confirm in the adopting
release that, notwithstanding the note to rule 482(a), performance
information in a rule 482 advertisement (as opposed to other
disclosures included in the advertisement) will not be deemed to be
false or misleading if it (i) is computed in accordance with the
methodology required by the rule; and (ii) complies with the
currentness requirements of the rule. We disagree with this position.
An advertisement that complies with rule
[[Page 57763]]
482 will be deemed to be an ``omitting prospectus'' under section 10(b)
of the Securities Act for the purposes of section 5(b)(1) of the
Securities Act.\25\ Rule 482, however, is not a safe harbor from
antifraud liability for any information included in a rule 482
advertisement, including performance information complying with the
requirements of the rule.
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\25\ Section 5(b)(1) of the Securities Act [15 U.S.C. 77e(b)(1)]
makes it unlawful to use interstate commerce to transmit any
prospectus relating to a security with respect to which a
registration statement has been filed unless the prospectus meets
the requirements of section 10 of the Securities Act. Section 10(b)
of the Securities Act [15 U.S.C. 77j(b)] permits the Commission to
adopt rules that provide for a prospectus that ``omits in part'' or
``summarizes'' information contained in the statutory prospectus.
Rule 482 was adopted under the authority of section 10(b) of the
Securities Act.
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In addition, we are amending rule 156 to provide further guidance
regarding the factors to be weighed in considering whether a statement
involving a material fact in investment company sales materials is or
might be misleading. As discussed in the Proposing Release, we are
concerned that the advertisement of past performance without an
adequate explanation of other facts may create unrealistic investor
expectations or even mislead potential investors.\26\ For that reason,
we are modifying the language of rule 156 to state more explicitly that
portrayals of past income, gain, or growth of assets may be misleading
where the portrayals omit explanations, qualifications, limitations, or
other statements necessary or appropriate to make these portrayals of
past performance not misleading.\27\ This language is intended to
address our concerns with fund performance advertisements that do not
provide adequate disclosure: (i) Of unusual circumstances that have
contributed to fund performance; (ii) that more current performance may
be lower than advertised performance; or (iii) that would permit an
investor to evaluate the significance of performance that is based on
selective dates.\28\ We remind funds and their underwriters and
dealers, however, that this language would address other circumstances
that we have not specifically enumerated and that each fund, and its
underwriters and dealers, is responsible for analyzing the facts and
circumstances concerning its advertisements and determining whether its
advertisements may be misleading.
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\26\ See Proposing Release, supra note 7, at Section I.B.,
``Performance Advertising Practices,'' 67 FR at 36715-16.
\27\ 17 CFR 230.156(b)(2)(i); Cf. 17 CFR 230.156(b)(1)(ii) (``A
statement could be misleading because of * * * [t]he absence of
explanations, qualifications, limitations or other statements
necessary or appropriate to make such statement not misleading * * *
'').
\28\ See Proposing Release, supra note 7, 67 FR at 36715-16
(discussing concerns about lack of disclosure relating to unusual
circumstances contributing to fund performance, currentness of
performance information, and selective use of performance figures).
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C. Enhanced Disclosure Under Rule 482
We are adopting, with modifications to address commenters'
concerns, additional amendments to rule 482 that will require enhanced
disclosure of certain information designed to encourage advertisements
that convey balanced information to prospective investors. Our
amendments require that funds that advertise performance information
make available to investors total returns that are current to the most
recent month-end. They also require that fund advertisements include
improved narrative information and present explanatory information more
prominently.
Availability of Month-End Performance Information
Currently, rule 482(g) requires all performance data contained in
any mutual fund advertisement to be as of the most recent practicable
date, provided that any advertisement containing total return
quotations is considered to have complied with the requirement if the
total return quotations are current to the most recent calendar quarter
ended prior to submission of the advertisement for publication.\29\ We
are adopting a second condition for a fund advertisement to be
considered to have complied with the requirement of rule 482 that
performance be as of the most recent practicable date. Specifically,
total return quotations current to the most recent month-end, and
available to investors within seven business days of the most recent
month-end, must be provided at a toll-free or collect telephone number
or on a Web site, unless the advertisement contains total return
quotations that are current to the most recent month ended seven
business days prior to the date of use of the advertisement.\30\ As a
result, investors who are provided advertisements highlighting a fund's
performance should have ready access to performance data that is
current to the most recent month-end and will not be forced to rely on
performance data that may be more than three months old at the time of
use by the investor.
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\29\ Current 17 CFR 230.482(g).
\30\ 17 CFR 230.482(g)(1)(ii) and (g)(2).
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We have modified the proposed new condition to require that month-
end performance information be available to investors within seven
business days, rather than three calendar days, of the most recent
month-end. A number of commenters objected to the three calendar-day
timeframe as too short to gather the necessary information,
particularly in cases in which funds are sold through intermediaries
such as insurance companies and fund supermarkets, which sell funds
from multiple complexes.\31\ Some commenters suggested longer
timeframes ranging up to seven business days. Other commenters
indicated that it could take ten business days or more to gather all of
the necessary information and that the Commission should adopt a
standard permitting month-end performance information to be provided
``as soon as reasonably practicable'' or within a ``reasonable time.''
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\31\ A fund supermarket is a program offered by a broker-dealer
or other financial institution through which its customers may
purchase and redeem shares of a variety of funds from different fund
complexes.
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We are persuaded by the comments that the proposed timeframe should
be extended to seven business days. Particularly in the case of
intermediary-sold funds, it could be difficult to gather, format, and
make available the necessary information in three calendar days. Based
on the comments, we believe that seven business days typically will
provide sufficient time for making month-end performance data
available. We recognize that there may be circumstances where more time
is needed. We note, however, that if a fund exceeds the seven business-
day timeframe in making month-end performance data available, it may
nonetheless be in compliance with the currentness provisions of rule
482, as long as the performance data contained in an advertisement is
``as of the most recent practicable date considering the type of
investment company and the media through which the data will be
conveyed.'' \32\
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\32\ 17 CFR 230.482(g).
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We are also modifying the proposed condition in order to permit
month-end performance information to be made available either at a
toll-free or collect telephone number or on a Web site. The proposed
rules would have required funds to make the information available by
toll-free or collect telephone number. A number of commenters argued
that funds should be permitted to make the information available
through the Internet. They argued that telephone access to month-end
information could be unnecessarily burdensome for both investors and
funds. They argued that
[[Page 57764]]
an automated system could be unwieldy, requiring the investor to
navigate through several series of menus and numerous prompts to
retrieve the requested information when, for example, an intermediary
offers numerous funds or a variable insurance contract issuer offers
multiple contracts with multiple underlying investment options. They
also argued that funds would incur significant expense in setting up
automated telephone systems or in using live telephone operators to
provide updated information, whereas most funds could use existing Web
sites as an efficient means of communicating month-end performance
data.
We are persuaded by these comments and are revising the proposal to
permit funds to make month-end data available at a toll-free or collect
telephone number or at a Web site.\33\ We were particularly concerned
that investors could become frustrated with navigating through multiple
telephone prompts to obtain information about the particular fund in
which they are interested. We were persuaded that funds should be
permitted to determine whether this information could be provided in a
more accessible, user-friendly format on a Web site. A single table
could, for example, contain performance information for multiple funds,
enabling an investor to find the relevant information at a glance. We
encourage funds and their intermediaries to take advantage of the
rule's flexibility to present month-end performance information through
a medium and in a format that is readily accessed and understood by
investors.
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\33\ 17 CFR 230.482(g)(1)(ii); 17 CFR 230.482(b)(3)(i).
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We remind funds that the availability of month-end performance
information by telephone or Web site does not alter the application of
the antifraud provisions of the federal securities laws to an
advertisement. The month-end information obtained through a telephone
call or Web site would not be considered part of the advertisement
itself and would not cure any materially misleading statement or
omission in the advertisement.
We wish to clarify that a fund advertisement may provide the
telephone number or Web site of a third-party intermediary as the
source for obtaining month-end performance information. The Proposing
Release stated that updated performance information should be available
from the fund itself and that other forms of distribution of this
information should supplement availability from the fund itself.\34\ We
recognize, however, that, in some cases, it may not be practical for
month-end performance information to be available from the fund itself.
For example, when a fund is sold through and advertised by a fund
supermarket, it may be most practical for the fund supermarket to
provide updated performance information to its customers. In the case
of a variable annuity contract, fund performance net of contract
charges is typically calculated by the insurance company sponsor rather
than the fund and updated contract performance may perhaps be most
appropriately provided by the insurance company.
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\34\ See Proposing Release, supra note , 67 FR at 36719.
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Several commenters asked us to clarify whether the narrative
disclosures that would normally be required in a rule 482 advertisement
would be required when updated month-end performance information is
provided through a toll-free or collect telephone number. These
disclosures include statements regarding factors that investors should
consider before investing, prospectus availability, limitations of past
performance information, and sales loads.\35\ These disclosures need
not be provided on a toll-free or collect telephone line that is
dedicated exclusively to providing updated month-end performance
information to investors calling in response to a rule 482 performance
advertisement because the investors would have received those
disclosures in the original advertisement. If, however, the telephone
number is used more broadly (e.g., for all incoming calls to a fund
group), the toll-free or collect telephone number should include the
narrative disclosures required by rule 482 because a caller may not
have seen the original advertisement with the required disclosures.
Similarly, if updated month-end performance information is provided on
a Web site, all of the narrative disclosures required by rule 482
should be included because the Web site is broadly accessible to the
public.
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\35\ 17 CFR 230.482(b)(1)(i), (b)(3)(i), and (b)(3)(ii).
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We are modifying the proposal to address the concerns of several
commenters who suggested that the Commission not require a fund that
advertises performance current to the most recent month-end also to
provide that information by toll-free or collect telephone number. The
commenters argued that, in such cases, providing a telephone number for
obtaining this information would confuse investors. Investors would
call the telephone number, only to be given the same information that
already appears in the advertisement. Accordingly, we are modifying the
proposal to provide that an advertisement containing total return
quotations is considered to have complied with the requirement that all
performance data be as of the most recent practicable date if the total
return quotations are current to the most recent month ended seven
business days prior to the date of use of the advertisement.\36\ A fund
advertisement including information meeting this standard need not
identify a toll-free or collect telephone number or a Web site where an
investor may obtain performance data current to the most recent month-
end.\37\
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\36\ 17 CFR 230.482(g)(2).
\37\ 17 CFR 230.482(b)(3)(i).
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We note that the exception from the requirement to provide month-
end performance information by toll-free or collect telephone number or
Web site applies only to advertisements that contain total return
quotations that are current to the most recent month ended seven
business days prior to the date of use of the advertisement. It is not
sufficient if the advertisement contains total return quotations that
are current to the most recent month ended seven business days prior to
the date of publication or submission for publication of the
advertisement if that standard is no longer met when the advertisement
is used. It also is not sufficient if the advertisement contains total
return quotations that are current to the most recent month ended seven
business days prior to the date of first use of the advertisement if
that standard is not met throughout the entire period of use of the
advertisement.\38\ Our intent is that an investor have access to
current month-end information at the time he or she reviews an
advertisement, either in the advertisement itself or through a toll-
free or collect telephone number or Web site.
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\38\ Note to rule 482(b)(3)(i) [17 CFR 230.482(b)(3)(i)]; note
to rule 482(g) [17 CFR 230.482(g)].
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Thus, a Web site that is continuously updated so that it always
contains total return quotations that are current to the most recent
month ended seven business days earlier need not identify a toll-free
or collect telephone number or a Web site where an investor may obtain
month-end performance data. Similarly, an advertisement in a daily
newspaper that appears on one particular day and contains total return
quotations that are current to the most recent month ended seven
business days prior to the date that the
[[Page 57765]]
advertisement appears need not identify a source where an investor may
obtain month-end performance data. By contrast, an advertisement
containing performance information for a group of funds that is
intended to be distributed to investors for an extended period (e.g.,
throughout a quarter) would be required to identify a toll-free or
collect telephone number or a Web site where an investor may obtain
month-end performance data even if the advertisement contains total
return quotations that are current to the most recent month ended seven
business days prior to the date on which the advertisement is first
distributed to investors.
In determining the date of use of an advertisement, consideration
should be given to all the facts and circumstances, such as the dates
on which the advertisement is first published and distributed, the last
date on which the advertisement is distributed, and, in the case of an
advertisement appearing in a periodical, the dates on which the next
issue of the periodical is first published and distributed. We would
encourage funds to provide month-end performance information by toll-
free or collect telephone number or Web site in any case where a
question about the date of use results in a question as to whether an
advertisement contains total return quotations that are current to the
most recent month ended seven business days prior to the date of use.
Two commenters stated that an advertisement that includes
performance information that is more current than the most recent
month-end also should not be required to provide a source for month-end
information. We disagree. When a fund chooses a date other than a
quarter or month-end for presenting performance, there is potential for
``cherry picking'' the date to provide particularly favorable
information. In such a case, we believe that month-end performance
information should be made available to investors as a check on any
such ``cherry picking'' and to provide investors with information from
different funds for comparable periods.
Improved Narrative Disclosure
Advertising that focused on extraordinary fund performance during
1999-2000 led to increasing concerns that some funds, when advertising
their performance, may resort to techniques that create unrealistic
investor expectations or may mislead potential investors. These
concerns have arisen again with the recent improvement in market
performance, as commentators have noted an increase in advertisements
highlighting favorable short-term performance.\39\ To address these
concerns, we are adopting, with modifications to address concerns
raised by commenters, changes to the narrative disclosure that is
required to accompany performance advertisements. These changes are
intended to help investors understand the limitations of past
performance data and enhance their ability to obtain updated
performance information. In particular, these amendments will require
funds to include the following information in rule 482 advertisements
that contain performance data: (i) A statement that past performance
does not guarantee future results; (ii) a statement that current
performance may be lower or higher than the performance data quoted;
and (iii) a toll-free or collect telephone number or a website where an
investor may obtain performance data current to the most recent month-
end, unless the advertisement includes total return quotations current
to the most recent month ended seven business days prior to the date of
use.\40\ An advertisement may combine two or more of these required
statements in a single sentence, provided that each of the required
disclosures is clear and easy to understand. Similarly, an
advertisement may use any language that clearly communicates the
information required to be disclosed.
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\39\ See supra note 9.
\40\ 17 CFR 230.482(b)(3)(i).
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We have modified the proposed required disclosure regarding the
availability of month-end performance data in two ways that parallel
modifications that we have made to the proposed requirements regarding
availability of month-end performance data. First, the rule as adopted
will permit identification of either a Web site or a toll-free or
collect telephone number where an investor may obtain current month-end
information. Second, an advertisement containing total return
quotations current to the most recent month ended seven business days
prior to the date of use would not be required to identify a toll-free
or collect telephone number or a Web site where an investor may obtain
performance data current to the most recent month end.\41\
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\41\ See ``Availability of Month-End Performance Information,''
supra.
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We are also adopting, with modifications suggested by a commenter,
an amendment to rule 482 that would direct prospective investors'
attention to a fund's charges and expenses. As proposed, the amendment
would have required a fund to note in its rule 482 advertisement that
information about charges and expenses is included in the statutory
prospectus. As adopted, the rule would require rule 482 advertisements
to include a statement that advises an investor to consider the fund's
investment objectives, risks, and charges and expenses carefully before
investing; explains that the prospectus contains this and other
information about the investment company; identifies a source from
which an investor may obtain a prospectus; and states that the
prospectus should be read carefully before investing.\42\ We were
persuaded by a commenter's argument that the proposed required
disclosures, while helpful, would not adequately direct investors'
attention to the important factors that they should consider. We agree
with the commenter that investors should consider a fund's objectives
and risks, and its charges and expenses, before investing because these
factors will directly affect future returns. We are concerned that the
many fund advertisements highlighting performance have focused
investors' attention on fund returns and that investors may be
overlooking other important fund features, particularly charges and
expenses, that may diminish a fund's returns.\43\
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\42\ 17 CFR 230.482(b)(1)(i). Similar disclosure will also be
required in an advertisement used with a profile pursuant to rule
498 under the Securities Act [17 CFR 230.498]. 17 CFR
230.482(b)(1)(ii).
Rule 482 currently does not require a fund to highlight the
importance of information regarding the fund's investment
objectives, risks, and charges and expenses. The rule does, however,
require an advertisement to identify a source from which an investor
may obtain a prospectus containing more complete information about
the fund, which should be read carefully before investing. Current
17 CFR 230.482(a)(3)(i). The rule also requires that a fund that
advertises performance data include some information about sales
loads and other non-recurring fees. Current 17 CFR 230.482(a)(6).
\43\ See Securities and Exchange Commission, Mutual Fund
Investing: Look at More Than a Fund's Past Performance (last
modified Jan. 24, 2000) http://www.sec.gov/investor/pubs/mfperform.htm
(cautioning investors to look beyond performance when
evaluating funds and to consider the costs relating to a fund
investment). See also NASD Notice to Members No. 98-107 (1998)
(reminding members of their obligation to ensure that discussions
concerning fees and expenses in fund advertising are fair, balanced,
and not misleading).
---------------------------------------------------------------------------
One commenter sought clarification as to how this provision would
apply in the context of variable insurance products in light of
recently adopted changes to disclosure requirements for variable
insurance prospectuses, which require disclosure of the range of
operating expenses of underlying funds in the contract prospectus, with
detailed information about the expenses of each underlying fund
required to be
[[Page 57766]]
disclosed in the fund's prospectus.\44\ A variable insurance product
advertisement should direct investors to both the contract prospectus
and the underlying fund prospectuses. Both the contract prospectus and
the underlying fund prospectuses contain information relating to the
product's investment objectives, risks, and charges and expenses as
well as other important information.
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\44\ Form N-4, Item 3 [17 CFR 239.17b; 17 CFR 274.11c]; Form N-
6, Item 3 [17 CFR 239.17c; 17 CFR 274.11d].
---------------------------------------------------------------------------
Presentation of Explanatory Information
We are adopting, with modifications suggested by commenters,
requirements that funds present certain information in their rule 482
advertisements more prominently. These prominence requirements are
designed to prevent advertisements from marginalizing or minimizing the
presentation of the required disclosure. The amendments will require
print advertisements to present required narrative disclosures in a
type size at least as large as and of a style different from, but at
least as prominent as, that used in the major portion of the
advertisement.\45\ This requirement will apply to the required
narrative disclosures about the prospectus and the performance
data.\46\ The amendments will also provide an exception to this
requirement, which was suggested by a commenter; i.e., when performance
data is presented in a type size smaller than that of the major portion
of the advertisement, the required narrative disclosure pertaining to
the performance data may appear in a type size no smaller than that of
the performance data.\47\ We were persuaded that, in such cases,
presenting the required performance-related narrative disclosure in a
type size larger than that of the performance data itself may be
distracting.
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\45\ 17 CFR 230.482(b)(5). The presentation requirements for
rule 482 are the same as those currently required under rule 134. 17
CFR 230.134(a)(iii). The presentation requirements would replace the
current rule 482 requirement that certain required disclosures be
``conspicuous.'' Current 17 CFR 230.482(a)(3).
\46\ 17 CFR 230.482(b)(1) and (3). The narrative disclosure
covered by the prominence requirement will also include, if
applicable, the ``subject to completion'' legend that will be
required by rule 482(b)(2) and, if the advertisement is used with a
profile under rule 498 under the Securities Act [17 CFR 230.498],
disclosure advising investors to consider the fund's investment
objectives, risks, and charges and expenses carefully before
investing, explaining that the profile contains this and other
information about the fund, describing the procedures for investing
in the fund, and indicating the availability of the prospectus. 17
CFR 230.482(b)(1)(ii) and (b)(2). In addition, the prominence
requirement will extend to disclosures specific to money market
funds. 17 CFR 230.482(b)(4).
\47\ 17 CFR 230.482(b)(5).
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The newly adopted type size and style requirements will apply to
print advertisements. We have modified the proposed requirement, as
suggested by a commenter, to clarify that if an advertisement is
delivered through an electronic medium, the type size and style
requirements may be satisfied by presenting the required narrative
disclosures in any manner reasonably calculated to draw investor
attention to them.\48\ This is consistent with rule 420(b) under the
Securities Act, which provides that prospectuses distributed through an
electronic medium may satisfy legibility requirements applicable to
printed documents by presenting all required information in a format
readily communicated to investors, and where indicated, in a manner
reasonably calculated to draw investor attention to the specific
information.\49\
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\48\ Id.
\49\ 17 CFR 230.420(b). Rule 420 applies to rule 482
advertisements. Note to rule 482(a) [17 CFR 230.482(a)]. See
Securities Act Release No. 7289 (May 9, 1996) [61 FR 24652, 24652
(May 15, 1996)] (amending Commission rules to provide that issuer,
when delivering electronic version of document, may comply with
requirements prescribing physical appearance of paper document by
(i) presenting the information in a format readily communicated to
investors; and (ii) where legends are required to be printed in red
ink or bold-face type, or in a different font size, presenting
legends in any manner reasonably calculated to draw attention to
them).
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We are adopting, as proposed, the requirement that radio and
television advertisements give the required narrative disclosures
emphasis equal to that used in the major portion of the
advertisement.\50\ Two commenters recommended that, with respect to
television advertisements, we clarify that the required narrative
disclosures need not be provided orally and that, instead, they may be
provided in written text on the television screen. We do not agree that
the required disclosures would have an emphasis equal to that of the
major portion of the advertisement if the required disclosures are in
written form, while the major portion of the advertisement is spoken.
If the required disclosures appear in writing on a television screen
during a spoken advertisement, we believe that they are more likely to
be overlooked, and not seen as a significant part of the advertisement,
than if they are included in the spoken presentation of the
advertisement.
---------------------------------------------------------------------------
\50\ 17 CFR 230.482(b)(5).
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In addition, we are adopting, as proposed, a requirement that the
narrative disclosures that specifically relate to fund performance be
presented in close proximity to the performance data in both print and
radio and television advertisements.\51\ In a print advertisement, this
information also would be required to appear in the body of the
advertisement and not in a footnote. Rule 482 currently requires that
performance advertisements identify the dates during which quoted
performance occurred.\52\ We are adopting, as proposed, a requirement
that this information be adjacent to, and have no less prominence than,
the performance quotation itself.\53\ These proximity requirements are
intended to help investors more readily find information necessary to
understand and evaluate the performance data shown, and to remind
investors of the limitations of performance data.
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\51\ Id. The disclosure subject to the proximity requirement
would include all of the disclosures required by paragraphs
(b)(3)(i) and (ii) of rule 482. 17 CFR 230.482(b)(3)(i) and (ii).
Paragraph (b)(3)(i) of rule 482 requires disclosure that the
performance data quoted represents past performance; that past
performance does not guarantee future results; in the case of a non-
money market fund, that the investment return and principal value of
an investment will fluctuate; that current performance may be lower
or higher than the performance data quoted; and a toll-free
telephone number or Web site where an investor may obtain month-end
performance data. Paragraph (b)(3)(ii) of rule 482 requires that, if
a sales load or any other nonrecurring fee is charged, the
advertisement must disclose the maximum amount of the load or fee.
In addition, if the sales load or fee is not reflected, the
advertisement must also disclose that the performance data does not
reflect its deduction, and that, if reflected, the load or fee would
reduce the performance quoted. Cf. Proposing Release, supra note 7,
67 FR at 36721 n. 82 (omitting to state explicitly that disclosures
of paragraph (b)(3)(ii) of rule 482 are covered by proximity
requirement).
\52\ Current 17 CFR 230.482(d)(1)(i), (e)(1)(iv), (e)(2)(v),
(e)(3)(iv), (e)(4)(vi), and (e)(5)(v).
\53\ 17 CFR 230.482(d)(1)(iv), (d)(2)(v), (d)(3)(iv),
(d)(4)(vi), (d)(5)(v), and (e)(1)(i).
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While the newly adopted prominence and proximity requirements apply
only to certain information expressly required by rule 482, we wish to
emphasize that the purpose of these requirements is to encourage fair
and balanced advertisements. In that regard, we encourage funds and
their underwriters and dealers to review their advertisements to ensure
that the format of all the information in an advertisement results in a
fair and balanced presentation. For example, an advertisement that
hypes extraordinary performance but contains only footnote disclosure
of unusual circumstances that have contributed to fund performance may
not result in a fair and balanced presentation.\54\
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\54\ See Section II.B., ``Applicability of Antifraud Provisions
to Fund Advertising,'' supra (discussing Commission's concerns with
inadequate disclosure in fund performance advertising of unusual
circumstances contributing to performance).
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[[Page 57767]]
Two commenters also recommended that for purposes of spoken
advertisements, such as those on radio and television, we clarify that
the proximity requirements would not require that the required
performance-related disclosures immediately follow any performance
information so long as they are given emphasis equal to that of the
major portion of the advertisement. In the case of spoken
advertisements, we believe that the required performance-related
disclosures should appear immediately after, immediately before, or
briefly separated from the performance information. Our goal is that
investors be readily able to understand the limitations of past
performance data, and we would be concerned if performance information
in a spoken advertisement were significantly separated from the
required disclosures. On the other hand, we recognize that, in a
relatively short, spoken advertisement, funds should have some
flexibility to determine the appropriate placement of the required
disclosures.
One commenter requested clarification of how the proximity
requirements would apply to advertisements consisting of lists of fund
performance information over multiple pages. The commenter stated that
we should not interpret the amendments to require that the required
disclosures be repeated on every page of such a listing, which could
result in the required disclosures being viewed as boilerplate and
ignored. We agree that, in the case of an advertisement that consists
of a list of performance data longer than one page in length, the
required performance-related disclosures may appear once, at the
beginning of the list, such as on the cover page or first page,
provided that the required disclosures are presented in conformity with
the prominence requirements of the rule.\55\
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\55\ This clarification is limited to advertisements consisting
of multi-page paper documents. Applicability of the presentation
requirements to Web sites consisting of multiple Web pages is
discussed infra.
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Several commenters requested clarification concerning the
applicability of the proximity requirements to Web site advertisements,
arguing that it should be sufficient if the required performance-
related disclosures appear either (i) on a screen that must be accessed
prior to the investor accessing the actual performance information, or
(ii) through a pop-up message or link on the screen that contains the
performance information. As a general matter, we disagree with this
interpretation of the proximity requirements and would expect the
required performance-related disclosures to appear on the same webpage
as the performance data to which the disclosures relate and in close
proximity to that data. This will provide investors who are reviewing a
Web site advertisement with access to the required disclosure that is
substantially equivalent to that provided through a paper advertisement
that meets the proximity requirements.
We are also adopting amendments to rule 34b-1 to clarify that the
newly adopted prominence and proximity requirements will apply to
supplemental sales literature.\56\
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\56\ 17 CFR 270.34b-1(a) and (b)(1)(i).
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D. Reorganization of Rule 482 and Technical Form Amendments
We are adopting, as proposed, amendments reorganizing rule 482 to
make it easier to use. We are also adopting, as proposed, amendments to
Forms N-1A, N-3, N-4, and N-6 to reflect the removal of the ``substance
of which'' requirement in rule 482.\57\ In addition, we are adopting
additional technical amendments to Forms N-3 and N-4, also to reflect
the removal of the ``substance of which'' requirement in rule 482.\58\
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\57\ See Item 21 of Form N-1A [17 CFR 239.15A; 17 CFR 274.11A];
Items 4 and 25 of Form N-3 [17 CFR 239.17a; 17 CFR 274.11b]; Items 4
and 21 of Form N-4 [17 CFR 239.17b; 17 CFR 274.11c]. The amendments
delete Item 25 of Form N-6 [17 CFR 239.17c; 17 CFR 274.11d].
Form N-1A is the registration form for open-end management
investment companies. Form N-3 is the registration form for separate
accounts organized as management investment companies that offer
variable annuity contracts. Form N-4 is the registration form for
separate accounts organized as unit investment trusts that offer
variable annuity contracts. Form N-6 is the registration form for
separate accounts that are registered as unit investment trusts and
that offer variable life insurance policies.
\58\ See General Instruction F and Item 28 of Form N-3 and
General Instruction F and Item 24 of Form N-4.
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E. Rule 482(a)(5)(i) Relating to Variable Insurance Products
Rule 482 generally prohibits a rule 482 advertisement from
containing or being accompanied by an application to purchase fund
shares.\59\ However, the rule contains an exception from the
prohibition against applications for unit investment trusts that offer
variable annuity or variable life insurance contracts.\60\ These
contracts permit investors to allocate premiums among a variety of
underlying mutual funds in which the unit investment trust invests. The
contract prospectuses contain descriptions of the underlying mutual
funds, which are considered rule 482 advertisements for the underlying
funds.\61\ The underlying funds are separately registered as management
investment companies on Form N-1A and offer their shares through
separate prospectuses. The exception from the prohibition on
applications for variable insurance contracts permits an application
for the contract (which provides for investor allocation of purchase
payments to specific underlying funds) to accompany the contract
prospectus, even though the contract prospectus constitutes a rule 482
advertisement for the underlying mutual funds and even though
prospectuses for the underlying funds do not accompany the contract
prospectus.\62\
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\59\ Current 17 CFR 230.482(a)(5); newly adopted 17 CFR
230.482(c).
\60\ Current 17 CFR 230.482(a)(5)(i); newly adopted 17 CFR
230.482(c)(1).
\61\ See Item 5(c) of Form N-4 and Item 4(c) of Form N-6
(requiring brief description of each underlying mutual fund offered
through the contract). See also Investment Company Act Release No.
14575 (June 14, 1985) [50 FR 26145, 26155 n. 48 and accompanying
text (June 25, 1985)] (describing treatment of underlying mutual
funds in contract prospectus as omitting prospectuses).
\62\ See Investment Company Act Release No. 15315 (Sept. 17,
1986) [51 FR 34384, 34391 n. 60 (Sept. 26, 1986)].
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By its terms, the exception permits a contract application to
accompany a rule 482 advertisement for the underlying funds only when
the rule 482 advertisement is a part of the contract prospectus itself.
As we noted in the Proposing Release, in recent years, members of the
variable insurance industry have argued that it should be permissible
for a contract prospectus and application to be accompanied by other
rule 482 advertisements for the underlying funds that are not a part of
the prospectus itself.\63\
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\63\ Proposing Release, supra note, 67 FR at 36723.
---------------------------------------------------------------------------
Advocates of this position argue that rule 482 permits either of
the following: (i) delivery of a rule 482 advertisement for an
underlying fund (without an application); and (ii) delivery of a
contract prospectus with an application. Therefore, they argue that,
under rule 482, delivery of a rule 482 advertisement for an underlying
fund (without an application) could be either preceded or followed by
delivery of a contract prospectus with an application. As a result,
they conclude that it should be permissible for a contract prospectus
and application to be accompanied by other rule 482 advertisements for
the underlying funds because whether the delivery of the additional
rule 482 advertisements is made together with the contract material or
separately from
[[Page 57768]]
it is a question of form rather than substance.
We solicited comment regarding whether it should be permissible for
a contract prospectus and application to be accompanied by other rule
482 advertisements for the underlying funds that are not a part of the
prospectus itself. Three commenters supported permitting the practice.
None opposed permitting the practice.
We agree that rule 482 advertisements for the underlying funds not
contained in the contract prospectus itself should be permitted to be
delivered simultaneously with the contract prospectus and the
accompanying contract application, and we are adopting a revision to
rule 482 to clarify that this practice is permitted.\64\ We are
persuaded that whether the delivery of the additional rule 482
advertisements is made together with the contract material or
separately from it is a question of form rather than substance.
---------------------------------------------------------------------------
\64\ 17 CFR 230.482(c)(1).
---------------------------------------------------------------------------
F. Compliance Dates
The amendment eliminating the ``substance of which'' requirement
from rule 482 will take effect on November 15, 2003. Fund
advertisements submitted for publication after March 31, 2004, should
comply with all other amendments adopted in this release. This
timeframe is consistent with the transition period requested by most
commenters. Some variable insurance commenters requested a 12-month
transition period, but, in light of the modifications we have made to
the proposal (e.g., month-end performance may be provided by Web site
rather than by telephone), we do not believe that such a lengthy
transition period is necessary.
III. Cost/Benefit Analysis
The Commission is sensitive to the costs and benefits associated
with its rules. To provide funds with the ability to disclose more
timely information in advertisements, the amendments adopted today
remove the ``substance of which'' requirement contained in rule 482
under the Securities Act, and rescind the provisions in rule 134 under
the Securities Act that apply to funds. In addition, the amendments
reinforce the antifraud protections in the fund advertising rules, and
require enhanced disclosure of certain information in fund
advertisements designed to encourage advertisements that convey
balanced information to prospective investors. Finally, the amendments
make certain organizational changes to rule 482 and technical
amendments to the registration forms.
In the Proposing Release, we provided an analysis of the costs and
benefits of the amendments then proposed, and we requested
comments.\65\ Three commenters commented directly on this cost/benefit
analysis, while others raised cost and benefit issues with regard to
specific substantive provisions without specifically mentioning the
cost/benefit analysis.
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\65\ See Proposing Release, supra note, at Section IV, ``Cost/
Benefit Analysis,'' 67 FR at 36723-26.
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A. Benefits
The amendments modify rule 482 of the Securities Act and related
rules and forms to provide more timely, informative, and balanced
information in fund advertising for the benefit of investors. The
amendments also simplify and clarify the advertising rules, thus,
reducing regulatory compliance costs, and these cost savings may be
passed on to investors.
1. Enhanced Disclosure of Information to Investors
Currently, the regulations concerning advertising include
significant disclosure requirements. The amendments, as adopted,
enhance the disclosure required to be provided to investors in fund
advertising in several respects:
[sbull] Availability of Monthly Performance Figures. Performance
advertisements will have to disclose a toll-free or collect telephone
number or a Web site where an investor may obtain performance data
current to the most recent month-end, unless the advertisement includes
total return quotations current to the most recent month ended seven
business days prior to the date of use.\66\ Easy access to and
awareness of this information will benefit investors not only by
providing potentially more timely performance data and reducing the
ability of funds to selectively use performance data, but also by
highlighting for investors the limitations of relying too heavily on
any one set of performance figures. In addition, availability of
updated monthly performance data will make it easier for investors to
compare performance among competing funds.
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\66\ 17 CFR 230.482(b)(3)(i).
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[sbull] Legend. If an advertisement provides performance figures,
the amendments require the inclusion of a legend stating that past
performance does not guarantee future results, and that current
performance may be lower or higher than the data quoted.\67\ This
legend will benefit investors by making them more aware of the
limitations of relying on performance data for investment decisions and
thus may result in more informed investment decisions.
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\67\ Id.
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[sbull] Availability of Information Regarding Investment
Objectives, Risks, and Charges and Expenses. Rule 482 advertisements
will have to highlight the availability of information concerning the
fund's investment objectives, risks, and charges and expenses.\68\ This
provision will benefit investors by directing them to important
information that could affect their returns, and will allow investors
to more easily compare the objectives, risks, and costs of competing
funds.
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\68\ 17 CFR 230.482(b)(1)(i). This disclosure would also be
required in an advertisement used with a profile pursuant to rule
498 under the Securities Act. 17 CFR 482(b)(1)(ii).
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[sbull] Prominence Requirements. Rule 482 advertisements will be
required to present certain disclosures, including those discussed
above, (i) in a size and type style at least as prominent as that used
in the major portion of the advertisement (or, in the case of
performance-related disclosures, in a type size no smaller than that of
the performance data when the performance data is presented in a type
size smaller than that of the major portion of the advertisement), or
(ii) in the case of radio or television advertisements, with emphasis
equal to that used in the major portion of the advertisement.\69\ These
provisions help to ensure that advertisers do not marginalize or
minimize the presentation of the required disclosure described above.
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\69\ 17 CFR 230.482(b)(5).
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[sbull] Proximity Requirement. In addition, the required
disclosures regarding performance data will have to be presented in the
body of the advertisement in close proximity to the performance data
and not in a footnote. With regard to television or radio
advertisements, the required disclosures will also have to be presented
in close proximity to the performance data.\70\ The length of and the
date of the last day in the base period used in computing yield
quotations, average annual total returns, after-tax returns, and other
performance measures will have to be adjacent to the performance
data.\71\ As with other disclosure requirements, this provision will
help investors to more easily find information necessary to evaluate
the performance figures shown and will
[[Page 57769]]
help to remind investors of the limitations of performance data.
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\70\ Id.
\71\ 17 CFR 230.482(d)(1)(iv), (d)(2)(v), (d)(3)(iv),
(d)(4)(vi), (d)(5)(v), and (e)(1)(i).
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The benefits of these enhanced disclosure requirements to investors
may be limited by the extent to which funds currently provide this
disclosure voluntarily. Staff discussions with members of the fund
industry indicate that most investment companies already comply with
many of the requirements of the amendments, by, for example,
calculating performance data on at least a monthly basis, inserting
warnings in advertisements that past performance is no guarantee of
future performance, and operating Web sites and telephone call banks.
Nevertheless, in the case of investment companies that do not
already voluntarily comply with the requirements of the amendments, the
enhanced disclosure requirements provide two benefits to investors. To
the extent investment decisions are made based on advertising, the
improved disclosure will result in investors making better informed
investment decisions, and therefore in a more efficient distribution of
assets by investors among different funds. The transparency resulting
from the enhanced disclosure in fund advertising may, in turn, also
contribute to increased competition among funds and result in a more
efficient allocation of resources among competing investment products.
Although it is not possible to precisely quantify the beneficial
effects of more efficient allocation of investors' assets and increased
competition, they may be significant, given the size of the mutual fund
industry.\72\
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\72\ See Investment Company Institute, 2001 Mutual Fund Fact
Book at 63.
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2. Simplification and Clarification of Fund Advertising Rules
The amendments add clarifying language to rule 482 and rule 156
under the Securities Act and rule 34b-1 under the Investment Company
Act to reemphasize the applicability of the antifraud provisions of the
federal securities laws to fund advertisements. In addition, the
amendments reorganize rule 482 to make it easier for funds to apply, by
adding headings, reordering provisions, and clarifying certain
language.
The reemphasis of the applicability of the antifraud provisions may
help to deter presentation of misleading information in advertisements.
The amendments to reorganize rule 482 may aid funds and others in
understanding and complying with the advertising rules, making it
easier and cheaper for funds to advertise. Both of these improvements
may, in turn, contribute to an increased flow of accurate and useful
investment information to investors, which may lead to better-informed
investment decisions and amplify the previously discussed benefits of
efficient asset allocation.\73\ Although difficult to quantify, this
easing of regulation may provide some reduction of burden to the funds
that choose to advertise.
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\73\ The trade-off between lower advertising burdens and
increased advertising activity is complex and further complicated by
business cycles and marketing strategy among other factors. We
believe, however, that investors and funds will enjoy benefits in
any event--either resources will be saved in reducing the costs and
burdens of advertising or they will be spent to increase the amount
and timeliness of information provided to investors in advertising.
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3. Elimination of the ``Substance of Which'' Requirement and the
Rescission of Rule 134 Provisions That Apply to Funds
To simplify the current structure of fund advertising rules and to
provide funds the ability to disclose more timely information in
advertisements, the amendments also remove the provision contained in
rule 482 limiting advertisements only to that information the
``substance of which'' is in the statutory prospectus. We believe that,
with the elimination of the ``substance of which'' requirement from
rule 482, funds will no longer need to rely on rule 134. As a result,
the amendments also remove the provisions of rule 134 that apply
specifically to funds and exclude both registered investment companies
and business development companies from relying on rule 134.
The elimination of the ``substance of which'' requirement
eliminates requirements for funds to include or update advertising
related information in their prospectus or SAI, both in the initial
registration statements and in post-effective amendments, before
issuing an advertisement to the public. This will reduce filing costs
for funds, including both internal costs and external costs such as
outside legal fees. The amendments will also reduce the costs
associated with printing and distributing prospectuses and SAIs. The
elimination of unnecessary information from the prospectus or SAIs,
because it will remove distracting clutter, may make the remaining
information more understandable to investors.
Finally, the rescission of the rule 134 provisions that apply to
funds consolidates the regulation of most fund advertising in rule 482,
which will cover advertisements now covered by rule 134. This
simplification will contribute to the benefits of easier and cheaper
advertising as discussed in section III.A.2 (`` Simplification and
Clarification of Fund Advertising Rules'') above, principally by
removing the unnecessary restrictions on the content of the
advertisements and the unnecessary distinction with regard to their
legal classification. The transfer of fund advertising regulation from
rule 134 to rule 482 may also enhance investor protection by subjecting
fund advertisements formerly governed by rule 134 to potential civil
liability under section 12(a)(2) of the Securities Act.\74\
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\74\ The benefits of potential direct investor suits in both
remedying fraudulent advertising by funds and deterring such
advertising in the future are difficult to quantify, but may be
significant. The benefits will be reduced to the extent that the
potential liability increases litigation and insurance costs for
funds. However, because suits based on misleading advertising are
relatively rare, we continue to estimate that the associated costs
will be minimal.
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One commenter disagreed that there would be a benefit to funds as a
result of having to comply with only one advertising rule. The
commenter stated that, in its experience, there is no correlation
between the number of advertising rules and the costs of advertising.
We do not believe, however, that this commenter's particular experience
negates our conclusion with regard to the potential benefits of
simplifying the regulation of fund advertising. In compiling the cost/
benefit analysis, the staff found that some funds estimated no savings
resulting from the amendments intended to simplify and clarify the
advertising rules; these amendments included the rescission of rule 134
as it applies to funds, as well as other amendments such as the removal
of the ``substance of which'' requirement. On the other hand, the staff
also found that others did anticipate such a savings. Our estimate
below represents an average, overall benefit for all the amendments
intended to simplify and clarify the advertising rules and, as such,
takes into account those funds that foresee no benefits from the
simplification and clarification of the rules.
4. Quantification of Benefits
The Commission estimates that, on an annual basis, the amendments
will save funds approximately 1.96 burden hours, or $73.03, per
investment company in internal costs but only negligible amounts in
external costs. We estimate that 5,025 investment companies will be
affected by the amendments, and, thus, the Commission estimates that
the annual internal burden associated with rule 482 will decrease by
approximately 9,849 (1.96 hours per investment
[[Page 57770]]
company x 5,025 investment companies) burden hours.\75\ These burden
hours represent a monetary savings of approximately $366,974 (9,849
hours x $37.26 wage rate) per year.\76\
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\75\ The estimate of the number of investment companies is based
on data derived from the Commission's EDGAR filing system. The
estimate of the decrease in burden hours is based on information
gathered from the fund industry by the Commission staff and from the
staff's experience with the various advertising regulations.
\76\ These figures are based on a Commission estimate of 5025
investment companies and an estimated hourly wage rate of $37.26.
The estimated wage rate figure is based on published hourly wage
rates for in-house attorneys ($33.66), paralegals ($19.93), and
compliance examiners ($23.16) and the estimate, based on the
Commission staff's discussions with certain fund complexes, that
attorneys would account for 50% of hours spent on advertising
regulation and that paralegals and compliance examiners would
account for the remaining 50% in equal ratio, yielding a weighted
wage rate of $27.60 (($33.66 x .50) + ($19.93 x .25) + (23.16 x .25)
= $27.60). Securities Industry Association, Report on Office
Salaries in the Securities Industry 2000 (Sept. 2002); Securities
Industry Association, Report on Management & Professional Earnings
in the Securities Industry 2000 (Sept. 2002). This weighted wage
rate was then adjusted upward by 35% for overhead, reflecting the
costs of supervision, space, and administrative support, to obtain
the total per hour internal cost of $37.26 ($27.60 x 1.35 = $37.26).
The benefits estimated in this analysis differ from those
provided in the Proposing Release because of intervening changes in
the number of investment companies and the wage rates. Although the
Commission modified the proposed amendments, these modifications did
not affect our estimates of the benefits associated with the
amendments. Some commenters indicated that the cost of making
updated month-end information available by toll-free or collect
telephone number, as the proposal would have required, would be
significant. Nonetheless, the modification to the proposed
requirement to permit funds to make month-end performance data
available through a toll-free or collect telephone number or Web
site did not affect our estimates of costs or benefits. The staff
indicated in the Proposing Release that it expected the costs of
making updated month-end information available by toll-free or
collect telephone number would be negligible, because many, if not
most, funds already provide month-end or more current performance
information through those means. See Proposing Release, supra note
7, 67 FR at 36726.
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B. Costs
The Commission estimates that the costs of the amendments, in the
aggregate, will be minimal and limited in duration. The Commission
estimates that funds will incur one-time costs in modifying their
current rule 482 advertisements to meet the new disclosure and
presentation requirements, although many funds already provide the
disclosure that would be required. For example, funds may have to
modify their layouts and typesetting in order to convert existing
advertisements to meet the requirements of the rule, or alternatively,
replace existing advertisements more quickly than they otherwise would.
The requirement for funds to provide access to performance figures
that are current as of the last month end may also impose costs, some
of which will be ongoing, both to generate such figures on a monthly
basis and to provide the information by a toll-free or collect
telephone number or on a Web site. This could include costs for
computer time, accounting personnel, information technology staff, and
additional computer and telephone equipment. The cost/benefit analysis
in the Proposing Release estimated that the costs of making updated
performance information available would be negligible because many, if
not most, funds already provide this or more current performance
information through these means and, therefore, the marginal cost for
most funds for making updated performance information available is
expected to be negligible.
Several commenters, however, argued that the costs associated with
the proposed requirement that updated performance information be
provided by toll-free or collect telephone number would be
significant.\77\ Such costs, commenters stated, could include those of
setting up and maintaining an automated telephone system to provide the
updated performance data. While two commenters did provide some
specific estimates of their own anticipated costs of compliance with
this proposed requirement, none of the commenters gave cost figures
applicable to the industry as a whole.\78\ Moreover, none of the
commenters estimated the number of funds that would incur such costs.
The cost/benefit analysis in the Proposing Release reached its
conclusion, in part, because information gathered by the staff
indicated that many, if not most, funds already had toll-free telephone
systems and used them to distribute performance data that was at least
as current as the month-end. The information provided by the commenters
does not persuade us that our conclusion regarding aggregate costs was
incorrect.
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\77\ On the other hand, one commenter did not object to the
telephone-only requirement, indicating that making updated monthly
performance data available in the manner contemplated by the
proposal would be affordable for all funds, regardless of size.
\78\ One commenter estimated that the cost of installing an
automated voice response telephone system for an insurance company
to provide performance information about funds underlying variable
contracts would be $500,000. Another commenter cited that $500,000
estimate and added that the estimate is for hardware and software
requirements only and does not include personnel expenses and
further stated that expenses for companies that do not presently
have automated telephone systems would likely be several times
higher. It appears that the commenter that calculated the $500,000
estimate intended that this figure represent the cost the commenter
itself would incur and not a projection that every insurance company
or every fund would incur a $500,000 expense. Another commenter, a
fund supermarket, estimated the cost of updating its website to
provide toll-free numbers for the many funds offered would amount to
$70,000.
---------------------------------------------------------------------------
In any event, we have modified the proposal to address these
commenters' concerns. The amendments, as adopted, will not require
month-end performance data to be made available by toll-free or collect
telephone. Rather, funds may make the information available by toll-
free or collect telephone number or on the fund's Web site. In
addition, we have modified the proposal to provide that where the fund
advertisement includes total return quotations current to the most
recent month ended seven business days prior to the date of use, the
fund is not also required to make such data available by telephone or
through its website. We expect that both of these revisions to the
proposed amendments will further reduce any cost burden associated with
disclosing month-end performance data.
The elimination of the ``substance of which'' requirement and the
rescission of rule 134 as applicable to funds may require some funds to
incur costs to convert many of their rule 134 advertisements to rule
482 advertisements. These costs, however, should be minimal and non-
recurring, since the rule 482 requirements would permit advertisements
that are not significantly different from those currently permitted
under current rule 134.
One commenter expressed concern regarding the proposed language of
the new notes to rule 482(a) and rule 34b-1 stating that compliance
with the rules does not relieve the fund, underwriter, or dealer of the
obligation to ensure that the advertisement is not false or misleading.
The commenter was concerned that the new notes may expand liability for
independent directors in connection with fund advertisements, resulting
in a significant cost burden. However, as we indicate above,\79\ the
new notes are to make clear that liability for advertisements is based
on the federal securities laws and that the advertising rule amendments
are not intended to change the existing liability standards.
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\79\ See Section II.B., ``Applicability of Antifraud Provisions
to Fund Advertising,'' supra.
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With regard to the rescission of rule 134 as it applies to funds, a
number of commenters expressed concern over costs associated with the
higher standard of liability under rule 482, but did not provide any
specific figures or other quantitative analysis. As we note
[[Page 57771]]
above, however, suits based on misleading advertising are relatively
rare and we continue to estimate that the associated costs will be
minimal.\80\
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\80\ See supra note 74.
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We further note that the amendments, as adopted, extend the
compliance period to two full calendar quarters after adoption,
lowering conversion costs by allowing more time for planning and
enabling funds to come into compliance in the regular course of
quarterly advertising cycles. This extension reinforces our estimate
that such expenses will be minimal.
The Commission estimates the one-time switchover costs for each
investment company attributable to the amendments will be approximately
2.18 hours, or $81.23 (2.18 hours x $37.26 wage rate), in internal
costs, and $2,417 in external costs.\81\ In total this represents a
one-time cost of approximately 10,955 (2.18 hours x 5,025 investment
companies) internal burden hours (translating into approximately
$408,183 (10,955 hours x $37.26 wage rate) in internal costs) and
$12,145,425 ($2,417 cost per investment company x 5,025 investment
companies) in external costs.\82\
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\81\ These figures are based on averages derived from
information gathered from several members of the fund industry by
the Commission staff and from the staff's experience with the
various advertising rules. Internal costs include, for example, the
cost of reviewing all fund advertisements for compliance with the
revised rules. External costs include, for example, the costs of
typesetting and printing for new fund advertisements.
The costs estimate in this analysis differ from those provided
in the Proposing Release because of intervening changes in the
number of investment companies and the wage rates. Although the
Commission modified the proposed amendments, these modifications did
not affect our estimate of the costs associated with the amendments.
See supra note 76.
\82\ See discussion in notes 75 and 76, supra, regarding number
of investment companies, wage rates, and previous estimates of costs
and benefits.
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C. Conclusion
The Commission expects that the advertising rule amendments will
encourage more informed and efficient investing, while easing the
regulatory burden on fund advertising, and that these likely benefits
would justify the associated costs.
IV. Consideration of Effects on Efficiency, Competition, and Capital
Formation
Section 2(c) of the Investment Company Act, Section 2(b) of the
Securities Act, and Section 3(f) of the Exchange Act require the
Commission, when engaging in rulemaking that requires it to consider or
determine whether an action is necessary or appropriate in the public
interest, to consider, in addition to the protection of investors,
whether the action will promote efficiency, competition, and capital
formation.\83\
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\83\ 15 U.S.C. 77b(b), 78c(f), and 80a-2(c).
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In the Proposing Release, we requested comment on whether the
proposed amendments would promote efficiency, competition, and capital
formation. The Commission received one letter specifically addressing
the effect of the proposed amendments on competition. This commenter
objected to the rescission of rule 134 for funds on the grounds, among
others, that investment companies would be treated less favorably than
other issuers engaged in ongoing offerings of their securities that
would continue to be able to rely on rule 134.
The amendments the Commission is adopting today seek to improve
fund advertising by enhancing disclosure requirements and by
simplifying and clarifying the rules, including elimination of the
requirement that rule 482 advertisements contain only information the
``substance of which'' is included in the statutory prospectus. These
changes may improve efficiency. The rule simplifications may lower the
regulatory burden on funds engaged in advertising, freeing resources
for more productive uses. For example, funds would no longer have to
update their prospectuses or SAIs in order to change the types of
performance information in advertisements. The enhanced disclosure
requirements may provide greater and timelier access by investors to
updated performance figures, which would promote more efficient
allocation of investments by investors and more efficient allocation of
assets among competing funds. The amendments may also improve
competition, as enhanced disclosure may prompt funds to seek to provide
better-informed investors with improved products and services. Finally,
the effects of the amendments on capital formation are unclear.
Although we believe that the amendments would benefit investors, the
magnitude of the effect of the amendments on efficiency, competition,
and capital formation is difficult to quantify, particularly given that
most funds may already comply with at least some of the new disclosure
requirements.
V. Paperwork Reduction Act
A. Introduction
As explained in the Proposing Release, certain provisions of the
amendments contain ``collection of information'' requirements within
the meaning of the Paperwork Reduction Act of 1995 [44 U.S.C. 3501 et
seq.]. The titles for the existing collections of information are: (i)
``Form N-1A under the Investment Company Act of 1940 and Securities Act
of 1933, Registration Statement of Open-End Management Investment
Companies''; (ii) ``Form N-2--Registration Statement of Closed-End
Management Investment Companies'' \84\; (iii) ``Form N-3--Registration
Statement of Separate Accounts Organized as Management Investment
Companies''; (iv) ``Form N-4--Registration Statement of Separate
Accounts Organized as Unit Investment Trusts''; (v) ``Form N-6 Under
the Investment Company Act and the Securities Act of 1933, Registration
Statement of Insurance Company Separate Accounts Registered as Unit
Investment Trusts that Offer Variable Life Insurance Policies''; and
(vi) ``Rule 34b-1 of the Investment Company Act of 1940, Sales
Literature Deemed To Be Misleading.'' A new collection of information
has been created entitled ``Rule 482 under the Securities Act of 1933,
Advertising by an Investment Company.''\85\
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\84\ Although the amendments do not amend Form N-2, that form is
included in this Paperwork Reduction Act (``PRA'') summary because
the PRA burden for rule 482 has previously been included in the
various investment company registration statement forms affected by
rule 482, including Form N-2. As discussed below, the Commission has
transferred the PRA burden associated with rule 482 from all of
these registration statement forms to a new rule 482 category.
\85\ The amendments modify rule 482, which is part of Regulation
C under the Securities Act of 1933. Regulation C describes the
disclosure that must appear in registration statements under the
Securities Act and Investment Company Act. The PRA burden associated
with rule 482 was previously included in the various investment
company registration statement forms, not in Regulation C. However,
because the amendments eliminate the rationale for allocating the
PRA burden for rule 482 to the registration forms, the Commission
has transferred the burden associated with rule 482 to a new
category. The total PRA burden for each of the registration forms is
different from that included in the PRA submissions that preceded
this analysis because of the transfer of burden associated with rule
482, as well as the intervening changes in the number of filings.
However, the newly adopted amendments to the forms do not have any
effect on the burden hours for the forms.
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Form N-1A (OMB Control No. 3235-0307), Form N-2 (OMB Control No.
3235-0026), Form N-3 (OMB Control No. 3235-0316), Form N-4 (OMB Control
No. 3235-0318), and Form N-6 (OMB Control No. 3235-0503) were adopted
pursuant to section 5 of the Securities Act [15 U.S.C. 77e] and section
8(a) of the Investment Company Act [15 U.S.C. 80a-8(a)]. Rule 482 of
Regulation C (OMB Control No. 3235-0565) was adopted pursuant to
section 10(b) of the Securities Act [15 U.S.C.
[[Page 57772]]
77j(b)]. Rule 34b-1 (OMB Control No. 3235-0346) was adopted pursuant to
section 34(b) of the Investment Company Act [15 U.S.C. 80a-33(b)].\86\
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\86\ Although this release also amends rule 156, there are no
burden hours assigned to that rule by OMB and it has no OMB control
number.
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We published notice soliciting comments on the collection of
information requirements in the Proposing Release and submitted these
requirements to the Office of Management and Budget (``OMB'') for
review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. OMB
approved these collection requirements.
The amendments modify rule 482 under the Securities Act and related
rules and forms, to provide more timely, understandable, and balanced
information in fund advertising for the benefit of investors, while
simplifying and clarifying the advertising rules for the benefit of
funds.\87\ First, the amendments enhance the disclosure that funds must
provide in advertisements, including by highlighting the availability
of information concerning investment objectives, risks, and charges and
expenses, and requiring an amended legend stating that past performance
does not guarantee future results. The amendments also set forth
requirements to help ensure that funds present these and other required
disclosures at least as prominently as the material included in the
body of the advertisement. Second, if a fund advertisement includes
performance data, the fund must make month-end performance figures
available to investors by a toll-free or collect telephone number or on
a Web site, and disclose the availability of this month-end performance
data in the advertisement, unless the advertisement includes total
return quotations current to the most recent month ended seven business
days prior to the date of use. Third, the amendments add clarifying
language to rule 482 under the Securities Act and rule 34b-1 under the
Investment Company Act to reemphasize the separate applicability of the
antifraud provisions of the federal securities laws, and amend rule 156
under the Securities Act to provide further guidance regarding the
factors to be weighed in determining whether a statement involving a
material fact in investment company sales literature is or might be
misleading. Fourth, the amendments (i) remove the provision contained
in rule 482 that limits rule 482 advertisements to only that
information the ``substance of which'' is in the statutory prospectus,
and (ii) rescind the provisions in rule 134 under the Securities Act
that apply to funds. Fifth, the amendments clarify portions of rule 482
(without changing their content) by adding headings, reordering
provisions, and simplifying certain provisions. Finally, the amendments
make technical and conforming changes to Forms N-1A, N-3, N-4, and N-6.
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\87\ The Commission is adopting amendments to rules 134, 156,
and 482 under the Securities Act, rule 34b-1 under the Investment
Company Act, and Forms N-1A, N-3, N-4, and N-6 under the Investment
Company Act and Securities Act.
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Compliance with the disclosure requirements is mandatory. Responses
to the disclosure requirements will not be kept confidential. An agency
may not conduct or sponsor, and a person is not required to respond to,
a collection of information unless it displays a currently valid
control number.
B. The Registration Forms Burden
Previously, the PRA burdens imposed by rule 482 were accounted for
under the various registration forms used by investment companies
affected by the rule: Form N-1A, Form N-2, Form N-3, Form N-4, and Form
N-6. We have transferred the burden hours associated with rule 482 from
these forms to a separate rule 482 category as follows:
------------------------------------------------------------------------
Hours
Form transferred
(hours)
------------------------------------------------------------------------
Form N-1A................................................. 177,514
Form N-2.................................................. 1,014
Form N-3.................................................. 792
Form N-4.................................................. 36,630
Form N-16................................................. 9,065
-------------
Total hours transferred to new rule 482 category.......... 225,015
------------------------------------------------------------------------
The information required to be filed with the Commission pursuant to
the information collections contained in the registration forms permits
the verification of compliance with securities law requirements and
assures the public availability and dissemination of the information.
1. Form N-1A
The purpose of Form N-1A is to meet the registration and disclosure
requirements of the Securities Act and the Investment Company Act and
to provide investors with information necessary to evaluate an
investment in the fund. The respondents to this information collection
are open-end funds registering with the Commission. Compliance with the
disclosure requirements on Form N-1A is mandatory. Responses to the
disclosure requirements are not confidential.
The previous hour burden for preparing an initial Form N-1A filing
was 824 burden hours per portfolio, and the Commission attributed 23 of
these burden hours per portfolio to compliance with rule 482, reducing
the remaining burden hours per portfolio to 801.\88\ The previous
annual hour burden for preparing post-effective amendments on Form N-1A
was 122 hours per portfolio, and the Commission attributed 23 of these
burden hours per portfolio to compliance with rule 482, reducing the
remaining burden hours per portfolio to 99. The Commission estimated
that, on an annual basis, 193 portfolios file initial registration
statements on Form N-1A and 7,525 file post-effective amendments on
Form N-1A. Thus, the burden hours attributable to rule 482 transferred
from Form N-1A to the new rule 482 collection of information amounted
to 177,514 ((23 hours x 193 portfolios) + (23 hours x 7,525
portfolios)). After shifting the rule 482 burden hours to a new
collection of information, the total burden hours that remain allocated
to Form N-1A for all purposes unassociated with rule 482 amount to
899,568 ((801 hours x 193 portfolios) + (99 hours x 7,525 portfolios)).
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\88\ The estimate of the burden hours attributable to compliance
with rule 482 for filings on Forms N-1A, and Form N-2 were based on
information supplied to the Commission staff by members of the fund
industry and the staff's experience with these registration forms.
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Except for the transfer of PRA burden from Form N-1A to the new
collection of information for rule 482, the Commission estimates no
effect on the remaining PRA burden for Form N-1A from the amendments.
The change in PRA burden resulting from the amendments is accounted for
under the new rule 482 collection of information.
2. Form N-2
The purpose of Form N-2 is to meet the registration and disclosure
requirements of the Securities Act and the Investment Company Act and
to enable funds to provide investors with information necessary to
evaluate an investment in the fund. The respondents to this information
collection are closed-end funds registering with the Commission.
Compliance with the disclosure requirements of Form N-2 is mandatory.
Responses to the disclosure requirements are not confidential.
The previous hour burden for preparing an initial registration
statement on Form N-2 was 542.4 burden hours per filing, and the
previous hour burden for preparing a post-effective amendment on Form
N-2
[[Page 57773]]
was 107.4 hours per filing. The Commission attributed 5.7 of these
burden hours per filing to compliance with rule 482, reducing the
burden hours per filing to 536.7 and 101.7, respectively. The
Commission estimated that, on an annual basis, 140 respondents file an
initial registration statement on Form N-2 and 38 file post-effective
amendments on Form N-2. Thus, the burden hours attributable to rule 482
transferred from Form N-2 to the new rule 482 collection of information
amounted to 1,014 ((5.7 hours x 140 filings) + (5.7 hours x 38
filings)). After shifting the rule 482 burden hours to a new collection
of information, the total burden hours that remain allocated to Form N-
2 for all purposes unassociated with rule 482 amount to 79,003 ((536.7
hours x 140 filings) + (101.7 hours x 38 filings)).
Except for the transfer of PRA burden from Form N-2 to the new
collection of information for rule 482, the Commission estimates no
effect on the remaining Form N-2 PRA burden from the amendments. The
change in PRA burden resulting from the amendments is accounted for
under the new rule 482 collection of information.
3. Form N-3
The purpose of Form N-3 is to meet the registration and disclosure
requirements of the Securities Act and the Investment Company Act and
to enable funds to provide investors with information necessary to
evaluate an investment in the fund. The respondents to this information
collection are separate accounts, organized as management investment
companies and offering variable annuities, registering with the
Commission. Compliance with the disclosure requirements of Form N-3 is
mandatory. Responses to the disclosure requirements are not
confidential.
The previous annual hour burden for preparing an initial
registration statement on Form N-3 was 910.5 hours per portfolio, and
the Commission attributed 3.3 of these burden hours per portfolio to
compliance with rule 482, reducing the remaining burden hours per
portfolio to 907.2.\89\ The previous annual hour burden for preparing
post-effective amendments on Form N-3 was 151.7 hours per portfolio,
and the Commission attributed 3.3 of these burden hours per portfolio
to rule 482, reducing the remaining burden hours per portfolio to
148.4. The Commission estimated that, on an annual basis, no initial
registration statements are filed on Form N-3 and 60 post-effective
amendments, including 240 portfolios, are filed on Form N-3. Thus, the
burden hours attributable to rule 482 transferred from Form N-3 to the
new rule 482 collection of information amounted to 792 (3.3 hours x 240
portfolios). After shifting the rule 482 burden hours to a new
collection of information, the total burden hours that remain allocated
to Form N-3 for all purposes unassociated with rule 482 amount to
35,616 (148.4 x 240 portfolios) hours.
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\89\ Estimates of the burden hours attributable to rule 482 for
Forms N-3, N-4, and N-6 were derived by estimating the total burden
hours for compliance with rule 482 for all variable insurance
separate accounts, based on the staff's discussions with a member of
the variable insurance products industry that issues both variable
annuities and variable life insurance policies. We then converted
this estimated number of burden hours associated with rule 482 into
a percentage of the total burden hours associated with Forms N-3, N-
4, and N-6 collectively. We allocated the rule 482 burden to each
form by multiplying the total burden of each form by this
percentage. However, we excluded burden hours attributable to
initial filings on Form N-3 because we anticipated no such filings.
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Except for the transfer of PRA burden from Form N-3 to the new
collection of information for rule 482, the Commission estimates no
effect on the remaining PRA burden for Form N-3 resulting from the
amendments. The change in PRA burden resulting from the amendments is
accounted for under the new rule 482 PRA collection of information.
4. Form N-4
The purpose of Form N-4 is to meet the registration and disclosure
requirements of the Securities Act and the Investment Company Act and
to enable separate accounts issuing variable annuity contracts to
provide investors with information necessary to evaluate an investment
in a contract. The respondents to this information collection are
separate accounts, organized as unit investment trusts and offering
variable annuities, registering with the Commission. Compliance with
the disclosure requirements of Form N-4 is mandatory. Responses to the
disclosure requirements are not confidential.
The previous hour burden for preparing an initial Form N-4 filing
was 298 burden hours per filing, and the Commission attributed 24.8 of
these burden hours per filing to rule 482, reducing the remaining
burden hours per filing to 273.2.\90\ The previous annual hour burden
for preparing post-effective amendments on Form N-4 was 219.8 hours per
filing, and the Commission attributed 24.8 of these burden hours per
filing to rule 482, reducing the remaining burden hours per filing to
195. The Commission estimated that, on an annual basis, 157 respondents
file initial registration statements on Form N-4 and 1320 respondents
file post-effective amendments on Form N-4. Thus, the burden hours
attributable to rule 482 transferred from Form N-4 to the new rule 482
collection of information amount to 36,630 ((24.8 hours x 157 filings)
+ (24.8 hours x 1320 filings)). After shifting the rule 482 burden
hours to a new collection of information, the total hour burden that
remains allocated to Form N-4 for all purposes unassociated with rule
482 amount to 300,292 ((273.2 hours x 157 filings) + (195 hours x 1320
filings)).
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\90\ See discussion in note 89, supra.
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Except for the transfer of PRA burden from Form N-4 to the new
collection of information for rule 482, the Commission estimates no
effect on the remaining PRA burden for Form N-4 resulting from the
amendments. The change in PRA burden resulting from the amendments is
accounted for under the new rule 482 PRA collection of information.
5. Form N-6
The purpose of Form N-6 is to meet the registration and disclosure
requirements of the Securities Act and the Investment Company Act and
to enable separate accounts issuing variable life insurance policies to
provide investors with information necessary to evaluate an investment
in a policy. The respondents to this information collection are
separate accounts, organized as unit investment trusts and offering
variable life insurance policies, registering with the Commission.
Compliance with the disclosure requirements of Form N-6 is mandatory.
Responses to the disclosure requirements are not confidential.
The previous hour burden for preparing an initial registration
statement on Form N-6 was 800 burden hours per filing and the hour
burden for a post-effective amendment on Form N-6 was 100 hours per
post-effective amendment filed as an annual update, and 10 hours per
post-effective amendment filed for other purposes. The Commission
attributed 35 of these burden hours per filing to compliance with rule
482 for both initial registration statements and post-effective
amendments that are annual updates.\91\ The Commission estimated no
burden hours associated with rule 482 for additional post-effective
amendments that are not annual updates. The Commission estimated that,
on an annual basis, 59 initial registration
[[Page 57774]]
statements will be filed on Form N-6 and 500 post-effective amendments
will be filed on Form N-6, 200 as annual updates and 300 as additional
post-effective amendments.\92\ Thus, the burden hours attributable to
rule 482 transferred from Form N-6 to the new rule 482 collection of
information amounted to 9,065 ((35 hours x 59 filings) + (35 hours x
200 filings)). The total hour burden that remains allocated to Form N-6
for all purposes unassociated with rule 482 is 61,135 ((765 hours x 59
filings) + (65 hours x 200 filings) + (10 hours x 300 filings)) hours.
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\91\ See discussion in note 89, supra.
\92\ Based on its analysis of data from the EDGAR filing system
from 2000-2001, the Commission estimated that there are
approximately 200 variable life insurance policies, with respect to
which at least one post-effective amendment must be filed per year.
In addition, the Commission estimated, also based on EDGAR filing
data, that 300 additional post-effective amendments are filed for
these variable life insurance policies each year, generally to make
non-material changes to their registration statements.
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Except for the transfer of PRA burden from Form N-6 to the new
collection of information for rule 482, the Commission estimates no
effect on the remaining PRA burden for Form N-6 resulting from the
amendments. The change in PRA burden resulting from the amendments is
accounted for under the new rule 482 PRA collection of information.
C. Change in Burden Attributable to Amendments
The information required by the amendments to the advertising rules
is primarily for the use and benefit of investors. The Commission is
concerned that investors receive information in advertisements that is
accurate, balanced, timely, not misleading, and otherwise appropriate
and helpful in making investment decisions. The additional information
that is required to be disclosed to investors pursuant to the
collection of information provisions of the rules affected by the
amendments, addresses these concerns regarding investor protection.
1. Rule 34b-1
Rule 34b-1, as amended, contains collection of information
requirements. The rule applies to supplemental sales literature, i.e.,
sales literature that is preceded or accompanied by the statutory
prospectus, and requires the inclusion of standardized performance data
in sales literature that includes performance data. Compliance with
rule 34b-1 is mandatory for every registered investment company that
issues supplemental sales literature. Responses to the disclosure
requirements will not be kept confidential.
We estimated that approximately 37,000 responses are filed annually
pursuant to rule 34b-1, and the burden per response is 2.9 hours. The
amendments change rule 34b-1 to add language to clarify the
Commission's present interpretation of its rules, namely, that
compliance with rule 34b-1 does not relieve the fund, underwriter, or
dealer of any obligations with respect to the sales literature under
the antifraud provisions of the federal securities laws. This added
language merely confirms the present state of the law and imposes no
additional burden hours. In addition, the amendments to rule 34b-1 make
the newly adopted changes in the narrative disclosure and presentation
requirements under rule 482 applicable to supplemental sales
literature, but these narrative disclosure and presentation
requirements also will impose no additional burden for purposes of rule
34b-1.\93\
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\93\ The secondary effect on the burden attributable to rule
34b-1 due to the amendments to rule 482 is estimated to be
negligible. Both before and after the amendments, rule 34b-1
requires any performance data included in supplemental sales
literature to be accompanied by performance data computed using the
standardized formulas for advertising performance under rule 482. We
estimate that the changes in types of disclosure and presentation
that would be required by the amendments to rule 482 would not
affect the amount of review necessary for funds to ensure compliance
with rule 34b-1. Therefore, all changes in burden associated with
the amendments are accounted for under the category associated with
the principal rule generating the burden, i.e., the new rule 482
collection of information.
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2. Rule 482
Rule 482, as amended, contains collection of information
requirements in that it permits a fund to advertise information subject
to certain disclosure requirements. Compliance with rule 482 is
mandatory for every fund that issues rule 482 advertisements. Responses
to the disclosure requirements will not be kept confidential.
The Commission currently estimates that 41,484 responses are filed
annually by 5,025 funds pursuant to rule 482. The burden associated
with rule 482 was previously included in the collections of information
for the investment company registration statement forms, but at the
time of the Proposing Release the Commission transferred this PRA
burden to a new rule 482 collection of information. The Commission then
adjusted this amount to account for the estimated savings of 6,890
burden hours associated with the proposed amendments to arrive at a
total annual burden for rule 482 of 218,125.\94\
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\94\ The Commission calculated this adjustment at the proposing
stage by estimating a burden hour annual increase per investment
company of 0.727 hours and a burden hour annual decrease per
investment company of 1.96, and then multiplying these figures by
the then current number of investment companies (5,587) to arrive at
an estimated net decrease of approximately 6,890 total annual burden
hours (0.727 x 5,587-1.96 x 5,587 = -6,889). The Commission then
subtracted this estimated annual net decrease from the rule 482
burden hours that had been transferred from the registration forms,
yielding the total annual rule 482 burden of 218,125 (225,015 hours
transferred--6,890 decrease = 218,125), which was used in the
Proposing Release.
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The Commission's per-investment-company burden estimates calculated
at the time of the Proposing Release remain unchanged.\95\ However, the
Commission is adjusting the total annual burden hours associated with
rule 482 to reflect a decrease in the number of investment companies
from 5,587 to the current number of 5,025. The Commission estimates an
increase of 3,653 (0.727 hours per fund x 5,025 funds) annual burden
hours will be required to comply with the amendments as adopted, as a
result of one-time switchover cost of 10,959 burden hours amortized
over a three-year period. The Commission also estimates a decrease of
9,849 annual burden hours (1.96 hours per fund x 5,025 funds) resulting
from the amendments as adopted due to the simplification and
clarification of rule 482, including the removal of the ``substance of
which'' requirement. The net result would be an annual decrease of
approximately 6,196 (3,653 hours increase - 9,849 hours decrease)
hours.\96\ The current estimate of the total annual burden for rule
482, as amended, is 218,819.\97\
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\95\ The estimates of changes in the burden hours per investment
company attributable to rule 482 are based on a survey of
information conducted by the Commission staff of members of the
mutual fund and variable insurance products industry at the time of
the Proposing Release. The Commission estimates no change in these
per-investment-company burden rates due to changes to the amendments
between the proposing stage and this adoption.
\96\ This estimated net decrease of 6,196 hours compares to an
estimated net decrease of 6,890 in the Proposing Release. The
difference of 694 hours is a result of the change in the number of
investment companies since the time of the Proposing Release.
\97\ 218,125 total hours (Proposing Release estimate) + 694
hours (lower net decrease) as explained in note , supra.
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VI. Final Regulatory Flexibility Analysis
This Final Regulatory Flexibility Analysis (``Analysis'') has been
prepared in accordance with 5 U.S.C. 604, and relates to the
Commission's
[[Page 57775]]
rule and form amendments under the Securities Act and the Investment
Company Act to provide investment companies with the ability to
disclose more timely information in advertisements and to reinforce the
antifraud protections that apply to investment company advertisements.
The amendments implement a provision of NSMIA \98\ by eliminating the
requirement in rule 482 under the Securities Act that investment
company advertisements contain only information the ``substance of
which'' is included in the statutory prospectus. The amendments also
require enhanced disclosure in investment company advertisements and
are designed to encourage advertisements that convey balanced
information to prospective investors, particularly with respect to past
performance. The Commission is also rescinding the provisions in rule
134 under the Securities Act that apply to investment companies.
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\98\ National Securities Markets Improvement Act of 1996, Pub.
L. No. 104-290, 110 Stat. 3416, 3428, Section 204.
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The Commission prepared an Initial Regulatory Flexibility Analysis
(``IRFA'') in accordance with 5 U.S.C. 603. The Proposing Release
included the IRFA and solicited comments on it. The Commission received
one comment specifically addressing the IRFA.
A. Reasons for and Objectives of Amendments
The Commission amended the advertising regulations described above
to achieve two separate objectives. First, the Commission is
simplifying and clarifying the rules governing fund advertising.
Specifically, the amendments remove the ``substance of which''
requirement of rule 482 and rescind the provisions of rule 134 that
apply to investment companies, following Congress' directive in NSMIA
to adopt rules or regulations allowing funds the use of a section 10(b)
prospectus that may include information the substance of which is not
included in the statutory prospectus.\99\ We are also adopting
technical amendments to reorganize and clarify the language of rule
482. These simplifying and clarifying amendments will aid funds and
others in understanding and complying with the advertising rules,
making it easier and cheaper for funds to advertise.
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\99\ Id.
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Second, the Commission is enhancing the disclosure required in rule
482 advertising. Specifically, we are requiring rule 482 advertisements
to: (i) Highlight the availability of certain additional information,
such as that regarding objectives, risks, charges, and expenses, as
well as updated monthly performance figures; (ii) provide an amended
legend; and (iii) present certain required disclosure with prominence
equal to the major portion of the advertisement. We are adopting these
amendments because of our concern about fund performance advertising
that could create unrealistic investor expectations or even mislead
potential investors. The enhanced disclosure requirements will help to
ensure that investors find advertising clear, easy to use, and
balanced, and that investors are made aware of important and timely
information necessary to make informed investment decisions.
B. Significant Issues Raised by Public Comment
The Commission requested comment with respect to the IRFA prepared
and published with the Proposing Release. Two commenters indicated that
the cost of complying with the proposed requirement that updated
information be made available through a toll-free or collect telephone
number would be particularly burdensome for smaller fund complexes,
stating that some smaller complexes do not already have automated voice
response systems. The commenters cited costs of buying and maintaining
an automated telephone system or dedicating employees to provide the
required information. One of these commenters, the only commenter who
specifically addressed the IRFA, also stated that the IRFA likely
underestimated the costs that small fund complexes would incur from
having to satisfy the requirement that updated monthly information be
provided by a toll-free or collect telephone number.\100\ One commenter
indicated that making updated monthly performance data available in the
manner contemplated by the proposal would be affordable for all funds,
regardless of size.
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\100\ The commenter stated that the only costs that the IRFA
discussed for small entities were those of actual production and
review of advertising. However, the IRFA also refers to other one-
time switchover costs that would result from the rule and recognizes
that these costs may have a relatively greater effect on small
entities. The IRFA states that among these costs are those of making
available updated monthly performance data by a toll-free telephone
number. Proposing Release, supra note , 67 FR at 36731.
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None of the commenters provided additional data or figures to
quantify this cost.\101\ The commenters did not indicate either the
number of small funds that would need to set up a telephone system
(versus those that already have such a system in place that could be
adapted to meet the proposed requirements) or how much small funds may
have to pay to establish and maintain such systems.
---------------------------------------------------------------------------
\101\ One commenter estimated the cost of implementing an
automatic voice response system for fund performance at $500,000.
Another commenter cited this estimate and stated that it is for
hardware and software requirements only and does not include
personnel expenses. The commenter also stated that expenses for
companies that do not presently have automated telephone systems
would likely be several times higher than the estimate provided.
Neither of these commenters specifically addressed the issue of
costs incurred by small entities. Both were focusing on the costs of
a system that insurance companies would use to provide information
about funds underlying their variable insurance products.
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C. Small Entities Subject to the Rule
For purposes of the Regulatory Flexibility Act, an investment
company is a small entity if it, together with other investment
companies in the same group of related investment companies, has net
assets of $50 million or less as of the end of its most recent fiscal
year.\102\ Approximately 237 out of 5025 investment companies meet this
definition.\103\
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\102\ 17 CFR 270.0-10.
\103\ This estimate is based on figures compiled by the
Commission staff regarding investment companies registered on Form
N-1A, N-2, N-3, N-4, and N-6. In determining whether an insurance
company separate account is a small entity for purposes of the
Regulatory Flexibility Act, the assets of insurance company separate
accounts are aggregated with the assets of their sponsoring
insurance companies. 17 CFR 270.0-10(b). Currently, no insurance
company separate account filing on Form N-3, Form N-4, or Form N-6
qualifies as a small entity.
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The Commission estimates, based on the staff's discussions with
members of the fund industry, that approximately two-thirds of small
entity funds do not advertise and, thus, do not incur any burdens or
costs associated with rule 482. For small entity funds that do
advertise, the Commission estimates an internal hour burden of
approximately 80 hours per small entity fund. This represents
approximately 6,320 (80 hours x 79 small entities) hours, or $235,483
(6,320 hours x $37.26 wage rate) in internal costs, for all small
entities. The Commission estimates that the external cost burden
associated with rule 482 for small entities, as with other funds, is
negligible. To the extent small entities currently advertise, the
burden and costs may affect them to a greater extent because small
entities are unable to take advantage of economies of scale available
to larger fund complexes.\104\
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\104\ We note, however, that to the extent that the amendments
reduce the regulatory burden of advertising, small entities may be
encouraged to increase their advertising activity.
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[[Page 57776]]
D. Reporting, Recordkeeping, and Other Compliance Requirements
The amendments will modify the disclosure requirements applicable
to rule 482 advertisements. Advertisements will have to contain an
amended legend, an explanation about where information about investment
objectives, risks, and charges and expenses can be found, and, if
performance figures are used, information about where updated
performance information can be found, unless the advertisement includes
total return quotations current to the most recent month ended seven
business days prior to the date of use. In addition, the required
disclosure will generally have to be given as much prominence in the
advertisement as the major portion of the advertisement. The amendments
will also rescind the requirements of rule 134 as they apply to funds,
but we expect that this will not result in any appreciable change in
the disclosure that funds make in their advertisements because present
rule 134 advertisements will generally become rule 482 advertisements.
The Commission has considered the potential effect that the
amendments will have on the preparation of advertisements. Without
regard to the size of the entity, we estimate that the amendments will
result in a net decrease of 1.23 hours, or $45.83 (1.23 hours x $37.26
wage rate), per investment company per year in internal costs and a net
increase of $805.67 per investment company per year in external
costs.\105\
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\105\ These figures are based on the Commission staff's
discussions with several fund complexes. With regard to internal
costs, they represent the net of the amortized one-time switchover
cost of .727 hours per fund per year and the decrease in burden
associated with rule 482, for purposes of the Paperwork Reduction
Act, of 1.96 hours per fund per year. With regard to external costs,
the $805.67 figure represents one-time switchover costs amortized
over three years.
The estimate provided here differs from that provided in the
Initial Regulatory Flexibility Analysis in the Proposing Release
because of a change in the number of small entities and the wage
rate used. See supra note 76. Although the Commission
modified the proposed amendments, these modifications did not affect
our estimate of the burden on small entities.
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The Commission estimates some one-time switchover costs and burdens
that will be imposed on all funds, but which may have a relatively
greater impact on smaller firms. These costs include the costs of
altering existing advertisements, including those now covered by rule
134, to comply with the new provisions of rule 482; generating
performance figures on a monthly basis; and making available the
updated monthly performance data through a toll-free or collect
telephone number or a Web site when required. The costs of making
updated performance data available could include expenses for computer
time, legal and accounting fees, information technology staff, and
additional computer and telephone equipment. However, we believe, based
on consultation with a number of fund complexes, that many funds that
presently advertise already provide performance information on a basis
at least as current as monthly through these means and, therefore,
expect the marginal cost increases for most funds to be minimal.
The Commission anticipates that the amendments will also provide
ongoing reductions in the compliance burden for all funds by clarifying
the language of rule 482, eliminating the ``substance of which''
requirement, and simplifying fund advertising requirements through
rescission of rule 134 for fund advertising. These changes will effect
savings primarily by reducing the time and money funds now spend on
legal review and amending their prospectuses and SAIs to comply with
the ``substance of which'' requirement in current rule 482.
E. Agency Action To Minimize Effect on Small Entities
The Regulatory Flexibility Act directs us to consider significant
alternatives that would accomplish our stated objective, while
minimizing any significant adverse impact on small entities. In
connection with the amendments, the Commission considered the following
alternatives: (a) The establishment of differing compliance or
reporting requirements or timetables that take into account the
resources available to small entities; (b) the clarification,
consolidation, or simplification of compliance and reporting
requirements under the amendments for small entities; (c) the use of
performance rather than design standards; and (d) an exemption from
coverage of the amendments, or any part thereof, for small entities.
The Commission believes at the present time that special compliance
or reporting requirements for small entities, or an exemption from
coverage for small entities, would not be appropriate or consistent
with investor protection. The disclosure amendments will provide
shareholders and the public with more balanced information about a
fund's performance. Different disclosure requirements for small
entities, such as reducing the level of disclosure that small entities
would have to provide shareholders in advertising, may create the risk
that shareholders would not receive balanced information about a fund's
performance or would receive confusing, false, or misleading
information. In addition, applying different standards for advertising
by small and large funds might impede investors' ability to adequately
compare funds. We believe it is important for the enhanced advertising
disclosure required by the amendments to be provided to investors by
all funds, not just funds that are not considered small entities.
The Commission also notes that current advertising requirements,
and its disclosure rules in general, do not distinguish between small
entities and other funds. In addition, we believe that it would be
inappropriate to impose a different timetable on small entities for
complying with the requirements.\106\ Further clarification,
consolidation, or simplification of the proposals for funds that are
small entities may be inconsistent with investor protection. We do not
consider using performance rather than design standards to be
consistent with our statutory mandate of investor protection in the
present context.
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\106\ The Commission has expanded the proposed compliance period
from 90 days from the effective date to the end of the second full
calendar quarter after adoption. This revision should lessen any
burden for small entities, as well as other funds.
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We note, however, that we have modified our proposal in several
ways that will reduce burdens on funds, including small funds, and will
address the concerns raised by the commenters referenced above. As
adopted, the amendments will not require funds to provide updated
month-end performance data by toll-free or collect telephone. Rather,
funds will be permitted to choose whether to make the month-end
information available by telephone or on the fund's Web site. In
general, commenters indicated that making the information available
over a fund Web site would be less burdensome than using a telephone
system. In addition, we have modified the proposal to provide that if
the advertisement includes total return quotations current to the most
recent month ended seven business days prior to the date of use, the
fund is not required to make such data available by telephone or on its
Web site. We expect that both of these revisions to the proposed
amendments will reduce the cost burden for all funds, including small
entities.
VII. Statutory Authority
The Commission is adopting amendments to rule 134 pursuant to
[[Page 57777]]
authority set forth in sections 2(a)(10) and 19(a) of the Securities
Act [15 U.S.C. 77b(a)(10) and 77s(a)]. The Commission is adopting
amendments to rule 156 pursuant to authority set forth in section 19(a)
of the Securities Act [15 U.S.C. 77s(a)] and sections 10(b) and 23(a)
of the Exchange Act [15 U.S.C. 78j(b) and 78w(a)]. The Commission is
adopting amendments to rule 482 pursuant to authority set forth in
sections 5, 10(b), 19(a), and 28 of the Securities Act [15 U.S.C. 77e,
77j(b), 77s(a), and 77z-3] and sections 24(g) and 38(a) of the
Investment Company Act [15 U.S.C. 80a-24(g) and 80a-37(a)]. The
Commission is adopting amendments to rule 34b-1 pursuant to authority
set forth in sections 34(b) and 38(a) of the Investment Company Act [15
U.S.C. 80a-33(b) and 80a-37(a)]. The Commission is adopting amendments
to Form N-1A, Form N-3, Form N-4, and Form N-6 pursuant to authority
set forth in sections 5, 6, 7, 10, and 19(a) of the Securities Act [15
U.S.C. 77e, 77f, 77g, 77j, and 77s(a)] and sections 8, 24(a), 30, and
38 of the Investment Company Act [15 U.S.C. 80a-8, 80a-24(a), 80a-29,
and 80a-37].
List of Subjects
17 CFR Part 230
Advertising, Investment companies, Reporting and recordkeeping
requirements, Securities.
17 CFR Part 239
Reporting and recordkeeping requirements, Securities.
17 CFR Parts 270 and 274
Investment companies, Reporting and recordkeeping requirements,
Securities.
Text of Rule and Form Amendments
0
For the reasons set out in the preamble, the Commission amends Title
17, Chapter II, of the Code of Federal Regulations as follows.
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
0
1. The general authority citation for Part 230 is revised to read as
follows:
Authority: 15 U.S.C. 77b, 77c, 77d, 77f, 77g, 77h, 77j, 77r,
77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78t, 78w,
78ll(d), 78mm, 79t, 80a-8, 80a-24, 80a-28, 80a-29, 80a-30, and 80a-
37, unless otherwise noted.
* * * * *
0
2. Section 230.134 is amended by:
0
a. Removing the authority citation following Sec. 230.134;
0
b. Removing paragraphs (a)(3)(iii) and (a)(13);
0
c. Redesignating paragraphs (a)(3)(iv) and (a)(14) as paragraphs
(a)(3)(iii) and (a)(13), respectively;
0
d. In newly redesignated paragraph (a)(13)(ii), revising the reference
``(a)(14)(i)'' to read ``(a)(13)(i)''; and
0
e. Revising paragraph (e) to read as follows:
Sec. 230.134 Communications not deemed a prospectus.
* * * * *
(e) This Sec. 230.134 does not apply to a notice, circular,
advertisement, letter, or other communication relating to an investment
company registered under the Investment Company Act of 1940 (15 U.S.C.
80a-1 et seq.) or a business development company as defined in section
2(a)(48) of the Investment Company Act (15 U.S.C. 80a-2(a)(48)).
0
3. Section 230.156 is amended by:
0
a. Removing the authority citation following Sec. 230.156; and
0
b. Revising paragraph (b)(2)(i) to read as follows:
Sec. 230.156 Investment company sales literature.
* * * * *
(b) * * *
(2) * * *
(i) Portrayals of past income, gain, or growth of assets convey an
impression of the net investment results achieved by an actual or
hypothetical investment which would not be justified under the
circumstances, including portrayals that omit explanations,
qualifications, limitations, or other statements necessary or
appropriate to make the portrayals not misleading; and
* * * * *
0
4. Section 230.482 is revised to read as follows:
Sec. 230.482 Advertising by an investment company as satisfying
requirements of section 10.
(a) Scope of rule. This section applies to an advertisement or
other sales material (advertisement) with respect to securities of an
investment company registered under the Investment Company Act of 1940
(15 U.S.C. 80a-1 et seq.) (1940 Act), or a business development
company, that is selling or proposing to sell its securities pursuant
to a registration statement that has been filed under the Act. This
section does not apply to an advertisement that is excepted from the
definition of prospectus by section 2(a)(10) of the Act (15 U.S.C.
77b(a)(10)), or a Profile under Sec. 230.498. An advertisement that
complies with this section, which may include information the substance
of which is not included in the prospectus specified in section 10(a)
of the Act (15 U.S.C 77j(a)), 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)).
Note to paragraph (a): The fact that an advertisement complies
with this section does not relieve the investment company,
underwriter, or dealer of any obligations with respect to the
advertisement under the antifraud provisions of the federal
securities laws. For guidance about factors to be weighed in
determining whether statements, representations, illustrations, and
descriptions contained in investment company advertisements are
misleading, see Sec. 230.156. In addition, an advertisement that
complies with this section is subject to the legibility requirements
of Sec. 230.420.
(b) Required disclosure. This paragraph describes information that
is required to be included in an advertisement in order to comply with
this section.
(1) Availability of additional information. An advertisement must
include a statement that:
(i) Advises an investor to consider the investment objectives,
risks, and charges and expenses of the investment company carefully
before investing; explains that the prospectus contains this and other
information about the investment company; identifies a source from
which an investor may obtain a prospectus; and states that the
prospectus should be read carefully before investing; or
(ii) If used with a Profile, advises an investor to consider the
investment objectives, risks, and charges and expenses of the
investment company carefully before investing; explains that the
accompanying Profile contains this and other information about the
investment company; describes the procedures for investing in the
investment company; and indicates the availability of the investment
company's prospectus.
(2) Advertisements used prior to effectiveness of registration
statement. An advertisement that is used prior to effectiveness of the
investment company's registration statement or the determination of the
public offering price (in the case of a registration statement that
becomes effective omitting information from the prospectus contained in
the registration statement in reliance upon Sec. 230.430A) must
include the ``Subject to Completion'' legend required by Sec.
230.481(b)(2).
(3) Advertisements including performance data. An advertisement
that includes performance data of an open-end management investment
company or a separate account
[[Page 57778]]
registered under the 1940 Act as a unit investment trust offering
variable annuity contracts (trust account) must include the following
(i) A legend disclosing that the performance data quoted represents
past performance; that past performance does not guarantee future
results; that the investment return and principal value of an
investment will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost; and that current
performance may be lower or higher than the performance data quoted.
The legend should also identify either a toll-free (or collect)
telephone number or a Web site where an investor may obtain performance
data current to the most recent month-end unless the advertisement
includes total return quotations current to the most recent month ended
seven business days prior to the date of use. An advertisement for a
money market fund may omit the disclosure about principal value
fluctuation; and
Note to paragraph (b)(3)(i): The date of use refers to the date
or dates when an advertisement is used by investors, not the date on
which an advertisement is published or submitted for publication.
The date of use refers to the entire period of use by investors and
not simply the first date on which an advertisement is used.
(ii) If a sales load or any other nonrecurring fee is charged, the
maximum amount of the load or fee, and if the sales load or fee is not
reflected, a statement that the performance data does not reflect the
deduction of the sales load or fee, and that, if reflected, the load or
fee would reduce the performance quoted.
(4) Money market funds. An advertisement for an investment company
that holds itself out to be a money market fund must include 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.
A money market fund that does not hold itself out as maintaining a
stable net asset value may omit the second sentence of this statement.
(5) Presentation. In a print advertisement, the statements required
by paragraphs (b)(1) through (b)(4) of this section must be presented
in a type size at least as large as and of a style different from, but
at least as prominent as, that used in the major portion of the
advertisement, provided that when performance data is presented in a
type size smaller than that of the major portion of the advertisement,
the statements required by paragraph (b)(3) of this section may appear
in a type size no smaller than that of the performance data. If an
advertisement is delivered through an electronic medium, the legibility
requirements for the statements required by paragraph (b)(1) through
(b)(4) of this section relating to type size and style may be satisfied
by presenting the statements in any manner reasonably calculated to
draw investor attention to them. In a radio or television
advertisement, the statements required by paragraph (b)(1) through
(b)(4) of this section must be given emphasis equal to that used in the
major portion of the advertisement. The statements required by
paragraph (b)(3) of this section must be presented in close proximity
to the performance data, and, in a print advertisement, must be
presented in the body of the advertisement and not in a footnote.
(6) Commission legend. An advertisement that complies with this
section need not contain the Commission legend required by Sec.
230.481(b)(1).
(c) Use of applications. An advertisement that complies with this
section may not contain or be accompanied by any application by which a
prospective investor may invest in the investment company, except that:
(1) Variable annuity and variable life insurance contracts. 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 variable annuity
or variable life insurance contracts may contain a contract application
although the prospectus includes, or is accompanied by, information
about an investment company in which the unit investment trust invests
that, pursuant to this section, is deemed a prospectus under section
10(b) of the Act (15 U.S.C. 77j(b)); and
(2) Profile. An advertisement that complies with this section 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.
(d) Performance data for non-money market funds. In the case of an
open-end management investment company or a trust account (other than a
money market fund referred to in paragraph (e) of this section), any
quotation of the company's performance contained in an advertisement
shall be limited to quotations of:
(1) Current yield. A current yield that:
(i) Is based on the methods of computation prescribed in Form N-1A
(Sec. Sec. 239.15A and 274.11A of this chapter), N-3 (Sec. Sec.
239.17a and 274.11b of this chapter), or N-4 (Sec. Sec. 239.17b and
274.11c of this chapter);
(ii) Is accompanied by quotations of total return as provided for
in paragraph (d)(3) of this section;
(iii) Is set out in no greater prominence than the required
quotations of total return; and
(iv) Adjacent to the quotation and with no less prominence than the
quotation, identifies the length of and the date of the last day in the
base period used in computing the quotation.
(2) Tax-equivalent yield. A tax-equivalent yield that:
(i) Is based on the methods of computation prescribed in Form N-1A
(Sec. Sec. 239.15A and 274.11A of this chapter), N-3 (Sec. Sec.
239.17a and 274.11b of this chapter), or N-4 (Sec. Sec. 239.17b and
274.11c of this chapter);
(ii) Is accompanied by quotations of yield as provided for in
paragraph (d)(1) of this section and total return as provided for in
paragraph (d)(3) of this section;
(iii) Is set out in no greater prominence than the required
quotations of yield and total return;
(iv) Relates to the same base period as the required quotation of
yield; and
(v) Adjacent to the quotation and with no less prominence than the
quotation, identifies the length of and the date of the last day in the
base period used in computing the quotation.
(3) Average annual total return. Average annual total return for
one, five, and ten year periods, except that if the company's
registration statement under the Act (15 U.S.C. 77a et seq.) has been
in effect for less than one, five, or ten years, the time period during
which the registration statement was in effect is substituted for the
period(s) otherwise prescribed. The quotations must:
(i) Be based on the methods of computation prescribed in Form N-1A
(Sec. Sec. 239.15A and 274.11A of this chapter), N-3 (Sec. Sec.
239.17a and 274.11b of this chapter), or N-4 (Sec. Sec. 239.17b and
274.11c of this chapter);
(ii) Be current to the most recent calendar quarter ended prior to
the submission of the advertisement for publication;
(iii) Be set out with equal prominence; and
(iv) Adjacent to the quotation and with no less prominence than the
quotation, identify the length of and the last day of the one, five,
and ten year periods.
(4) After-tax return. For an open-end management investment
company,
[[Page 57779]]
average annual total return (after taxes on distributions) and average
annual total return (after taxes on distributions and redemption) for
one, five, and ten year periods, except that if the company's
registration statement under the Act (15 U.S.C. 77a et seq.) has been
in effect for less than one, five, or ten years, the time period during
which the registration statement was in effect is substituted for the
period(s) otherwise prescribed. The quotations must:
(i) Be based on the methods of computation prescribed in Form N-1A
(Sec. Sec. 239.15A and 274.11A of this chapter);
(ii) Be current to the most recent calendar quarter ended prior to
the submission of the advertisement for publication;
(iii) Be accompanied by quotations of total return as provided for
in paragraph (d)(3) of this section;
(iv) Include both average annual total return (after taxes on
distributions) and average annual total return (after taxes on
distributions and redemption);
(v) Be set out with equal prominence and be set out in no greater
prominence than the required quotations of total return; and
(vi) Adjacent to the quotations and with no less prominence than
the quotations, identify the length of and the last day of the one,
five, and ten year periods.
(5) Other performance measures. Any other historical measure of
company performance (not subject to any prescribed method of
computation) if such measurement:
(i) Reflects all elements of return;
(ii) Is accompanied by quotations of total return as provided for
in paragraph (d)(3) of this section;
(iii) In the case of any measure of performance adjusted to reflect
the effect of taxes, is accompanied by quotations of total return as
provided for in paragraph (d)(4) of this section;
(iv) Is set out in no greater prominence than the required
quotations of total return; and
(v) Adjacent to the measurement and with no less prominence than
the measurement, identifies the length of and the last day of the
period for which performance is measured.
(e) Performance data for money market funds. In the case of a money
market fund:
(1) Yield. Any quotation of the money market fund's yield in an
advertisement shall be based on the methods of computation prescribed
in Form N-1A (Sec. Sec. 239.15A and 274.11A of this chapter), N-3
(Sec. Sec. 239.17a and 274.11b of this chapter), or N-4 (Sec. Sec.
239.17b and 274.11c of this chapter) and may include:
(i) A quotation of current yield that, adjacent to the quotation
and with no less prominence than the quotation, identifies the length
of and the date of the last day in the base period used in computing
that quotation;
(ii) A quotation of effective yield if it appears in the same
advertisement as a quotation of current yield and each quotation
relates to an identical base period and is presented with equal
prominence; or
(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.
(2) Total return. Accompany any quotation of the money market
fund's total return in an advertisement with a quotation of the money
market fund's current yield under paragraph (e)(1)(i) of this section.
Place the quotations of total return and current yield next to each
other, in the same size print, and if there is a material difference
between the quoted total return and the quoted current yield, include a
statement that the yield quotation more closely reflects the current
earnings of the money market fund than the total return quotation.
(f) Advertisements that make tax representations. An advertisement
for an open-end management investment company (other than a company
that is permitted under Sec. 270.35d-1(a)(4) of this chapter to use a
name suggesting that the company's distributions are exempt from
federal income tax or from both federal and state income tax) that
represents or implies that the company is managed to limit or control
the effect of taxes on company performance must accompany any quotation
of the company's performance permitted by paragraph (d) of this section
with quotations of total return as provided for in paragraph (d)(4) of
this section.
(g) Timeliness of performance data. All performance data contained
in any advertisement must be as of the most recent practicable date
considering the type of investment company and the media through which
the data will be conveyed, except that any advertisement containing
total return quotations will be considered to have complied with this
paragraph provided that:
(1)(i) The total return quotations are current to the most recent
calendar quarter ended prior to the submission of the advertisement for
publication; and
(ii) Total return quotations current to the most recent month ended
seven business days prior to the date of use are provided at the toll-
free (or collect) telephone number or Web site identified pursuant to
paragraph (b)(3)(i) of this section; or
(2) The total return quotations are current to the most recent
month ended seven business days prior to the date of use of the
advertisement.
Note to paragraph (g): The date of use refers to the date or
dates when an advertisement is used by investors, not the date on
which an advertisement is published or submitted for publication.
The date of use refers to the entire period of use by investors and
not simply the first date on which an advertisement is used.
(h) Filing. An advertisement that complies with this section need
not be filed as part of the registration statement filed under the Act.
Note to paragraph (h): These advertisements, unless filed with
NASD Regulation, Inc., are required to be filed in accordance with
the requirements of Sec. 230.497.
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
0
5. The authority citation for part 239 continues to read in part as
follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77sss, 78c,
78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d), 79e, 79f, 79g, 79j,
79l, 79m, 79n, 79q, 79t, 80a-8, 80a-24, 80a-26, 80a-29, 80a-30, and
80a-37, unless otherwise noted.
* * * * *
PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940
0
6. The authority citation for part 270 continues to read in part as
follows:
Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, and 80a-
39, unless otherwise noted.
* * * * *
0
7. Section 270.34b-1 is amended by:
0
a. Adding a note following the introductory text of Sec. 270.34b-1;
0
b. Revising paragraph (a);
0
c. Revising paragraph (b)(1)(i);
0
d. Revising the reference ``(d)(1)(i) of Sec. 230.482'' in paragraph
(b)(1)(ii)(A) to read ``(e)(1)(i) of Sec. 230.482'';
0
e. Revising the reference ``Sec. 230.482(d)(1)(iii)'' in paragraph
(b)(1)(ii)(B) to read ``Sec. 230.482(e)(1)(iii)'';
0
f. Revising the reference ``(d)(1)(i) of Sec. 230.482'' in the first
sentence of paragraph (b)(1)(ii)(C) to read ``(e)(1)(i) of Sec.
230.482'';
[[Page 57780]]
0
g. Revising the reference ``(e)(3) of Sec. 230.482'' in paragraph
(b)(1)(iii)(A) to read ``(d)(3) of Sec. 230.482'';
0
h. Revising the reference ``(e)(4) of Sec. 230.482'' in paragraph
(b)(1)(iii)(B) to read ``(d)(4) of Sec. 230.482'';
0
i. Revising the reference ``(e)(4) of Sec. 230.482'' in paragraph
(b)(1)(iii)(C) to read ``(d)(4) of Sec. 230.482'';
0
j. Revising the reference ``(e)(1) of Sec. 230.482'' in paragraph
(b)(1)(iii)(D) to read ``(d)(1) of Sec. 230.482'';
0
k. Revising the references ``(e)(2)'' and ``(e)(1) of Sec. 230.482''
in paragraph (b)(1)(iii)(E) to read ``(d)(2)'' and ``(d)(1) of Sec.
230.482'', respectively;
0
l. Revising the reference ``paragraph (f) of Sec. 230.482'' in
paragraph (b)(2) to read ``paragraph (g) of Sec. 230.482''; and
0
m. Revising the reference ``(e)(3)(ii), (e)(4)(ii)'' in paragraph
(b)(3) to read ``(d)(3)(ii), (d)(4)(ii)'.
The addition and revisions read as follows:
Sec. 270.34b-1 Sales literature deemed to be misleading.
* * * * *
Note to introductory text of Sec. 270.34b-1: The fact that the
sales literature includes the information specified in paragraphs
(a) and (b) of this section does not relieve the investment company,
underwriter, or dealer of any obligations with respect to the sales
literature under the antifraud provisions of the federal securities
laws. For guidance about factors to be weighed in determining
whether statements, representations, illustrations, and descriptions
contained in investment company sales literature are misleading, see
Sec. 230.156 of this chapter.
(a) Sales literature for a money market fund shall contain the
information required by paragraph (b)(4) of Sec. 230.482 of this
chapter, presented in the manner required by paragraph (b)(5) of Sec.
230.482 of this chapter.
(b)(1) * * *
(i) In any sales literature that contains performance data for an
investment company, include the disclosure required by paragraph (b)(3)
of Sec. 230.482 of this chapter, presented in the manner required by
paragraph (b)(5) of Sec. 230.482 of this chapter.
* * * * *
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940
0
8. The authority citation for Part 274 continues to read in part as
follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m,
78n, 78o(d), 80a-8, 80a-24, 80a-26, and 80a-29, unless otherwise
noted.
Note: The text of Forms N-1A, N-3, N-4, and N-6 does not, and
these amendments will not, appear in the Code of Federal
Regulations.
9. Item 21 of Form N-1A (referenced in Sec. Sec. 239.15A and
274.11A) is amended by:
a. Revising the introductory text of paragraphs (a) and (b); and
b. Removing paragraphs (a)(5) and (b)(7), to read as follows:
Form N-1A
* * * * *
Item 21. Calculation of Performance Data
(a) Money Market Funds. Yield quotation(s) for a Money Market Fund
included in the prospectus should be calculated according to paragraphs
(a)(1)-(4).
* * * * *
(b) Other Funds. Performance information included in the prospectus
should be calculated according to paragraphs (b)(1)-(6).
* * * * *
10. General Instruction F of Form N-3 (referenced in Sec. Sec.
239.17a and 274.11b) is amended by:
a. Removing General Instruction F.2; and
b. Redesignating General Instruction F.1 as General Instruction F.
11. Item 4 of Form N-3 (referenced in Sec. Sec. 239.17a and
274.11b) is amended by:
a. Removing Item 4(c); and
b. Redesignating Item 4(d) as Item 4(c).
12. Item 25 of Form N-3 (referenced in Sec. Sec. 239.17a and
274.11b) is amended by:
a. Removing Instruction 5 to paragraph (a); and
b. Revising paragraphs (a) and (b), and Instruction 6 to paragraph
(b)(i), to read as follows:
Form N-3
* * * * *
Item 25. Calculation of Performance Data
(a) Money Market Accounts. Yield quotation(s) included in the
prospectus for an account or sub-account that holds itself out as a
``money market'' account or sub-account should be calculated according
to paragraphs (a)(i)-(ii).
(i) Yield Quotation. Based on the 7 days ended on the date of the
most recent balance sheet of the Registrant included in the
registration statement, calculate the yield by determining the net
change, exclusive of capital changes and income other than investment
income, in the value of a hypothetical pre-existing account having a
balance of one accumulation unit of the account or sub-account at the
beginning of the period, subtracting a hypothetical charge reflecting
deductions from contractowner accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain
the base period return, and then multiplying the base period return by
(365/7) with the resulting yield figure carried to at least the nearest
hundredth of one percent.
(ii) Effective Yield Quotation. Based on the 7 days ended on the
date of the most recent balance sheet of the Registrant included in the
registration statement, calculate the effective yield, carried to at
least the nearest hundredth of one percent, by determining the net
change, exclusive of capital changes and income other than investment
income, in the value of a hypothetical pre-existing account having a
balance of one accumulation unit of the account or sub-account at the
beginning of the period, subtracting a hypothetical charge reflecting
deductions from contractowner accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain
the base period return, and then compounding the base period return by
adding 1, raising the sum to a power equal to 365 divided by 7, and
subtracting 1 from the result, according to the following formula:
EFFECTIVE YIELD = [(BASE PERIOD RETURN +1) 365/7] - 1.
Instructions:
* * * * *
(b) Other Accounts. Performance information included in the
prospectus should be calculated according to paragraphs (b)(i)-(iii).
(i) Average Annual Total Return Quotation. For the 1-, 5-, and 10-
year periods ended on the date of the most recent balance sheet of the
Registrant included in the registration statement, calculate the
average annual total return by finding the average annual compounded
rates of return over the 1-, 5-, and 10-year periods that would equate
the initial amount invested to the ending redeemable value, according
to the following formula:
P(1+T)n = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1-, 5-, or 10-year periods at the end of the 1-,
5-, or 10-year periods (or fractional portion).
[[Page 57781]]
Instructions:
* * * * *
6. Total return information in the prospectus need only be current
to the end of the Registrant's most recent fiscal year.
(ii) Yield Quotation. Based on a 30-day (or one month) period ended
on the date of the most recent balance sheet of the Registrant included
in the registration statement, calculate yield by dividing the net
investment income per accumulation unit earned during the period by the
maximum offering price per unit on the last day of the period,
according to the following formula:
[GRAPHIC] [TIFF OMITTED] TR06OC03.002
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of accumulation units outstanding during
the period.
d = the maximum offering price per accumulation unit on the last day of
the period.
Instructions:
* * * * *
(iii) Non-Standardized Performance Quotation. A Registrant may
calculate performance using any other historical measure of performance
(not subject to any prescribed method of computation) if the
measurement reflects all elements of return.
* * * * *
13. Item 28 of Form N-3 (referenced in Sec. Sec. 239.17a and
274.11b) is amended by:
a. Adding the word ``and'' after the semicolon at the end of Item
28(b)(15);
b. Removing Item 28(b)(16);
c. Redesignating Item 28(b)(17) as Item 28(b)(16); and
d. Revising Instruction 1 to Item 28 to read as follows:
Form N-3
* * * * *
Item 28.
* * * * *
(b) * * *
(15) copies of any agreements or understandings made in
consideration for providing the initial capital between or among the
Registrant, the Insurance Company, underwriter, adviser, or initial
contractowners and written assurances from the Insurance Company or
initial contractowners that the purchases were made for investment
purposes without any present intention of redeeming; and
(16) copies of any codes of ethics adopted under Rule 17j-1 under
the 1940 Act [17 CFR 270.17j-1] and currently applicable to the
Registrant (i.e., the codes of the Registrant and its investment
advisers and principal underwriters). If there are no codes of ethics
applicable to the Registrant, state the reason (e.g., the Registrant is
a Money Market Fund).
Instructions:
1. Subject to the Rules regarding incorporation by reference and
Instruction 2 below, the foregoing exhibits shall be filed as part of
the Registration Statement. Exhibits numbered 5, 12, 13, and 14 above
need be filed only as part of a 1933 Act Registration Statement.
Exhibits shall be lettered or numbered for convenient reference.
Exhibits incorporated by reference may bear the designation given in a
previous filing. Where exhibits are incorporated by reference, the
reference shall be made in the list of exhibits.
* * * * *
14. General Instruction F of Form N-4 (referenced in Sec. Sec.
239.17b and 274.11c) is amended by:
a. Removing General Instruction F.2; and
b. Redesignating General Instruction F.1 as General Instruction F.
15. Item 4 of Form N-4 (referenced in Sec. Sec. 239.17b and
274.11c) is amended by:
a. Removing Item 4(b); and
b. Redesignating Item 4(c) as Item 4(b).
16. Item 21 of Form N-4 (referenced in Sec. Sec. 239.17b and
274.11c) is amended by:
a. Removing Instruction 5 to paragraph (a); and
b. Revising paragraphs (a) and (b), and Instruction 6 to paragraph
(b)(i), to read as follows:
Form N-4
* * * * *
Item 21. Calculation of Performance Data
(a) Money Market Funded Sub-Accounts. Yield quotation(s) included
in the prospectus for an account or sub-account that holds itself out
as a ``money market'' account or sub-account should be calculated
according to paragraphs (a)(i)--(ii).
(i) Yield Quotation. Based on the 7 days ended on the date of the
most recent balance sheet of the Registrant included in the
registration statement, calculate the yield by determining the net
change, exclusive of capital changes and income other than investment
income, in the value of a hypothetical pre-existing account having a
balance of one accumulation unit of the account or sub-account at the
beginning of the period, subtracting a hypothetical charge reflecting
deductions from contractowner accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain
the base period return, and then multiplying the base period return by
(365/7) with the resulting yield figure carried to at least the nearest
hundredth of one percent.
(ii) Effective Yield Quotation. Based on the 7 days ended on the
date of the most recent balance sheet of the Registrant included in the
registration statement, calculate the effective yield, carried to at
least the nearest hundredth of one percent, by determining the net
change, exclusive of capital changes and income other than investment
income, in the value of a hypothetical pre-existing account having a
balance of one accumulation unit of the account or sub-account at the
beginning of the period, subtracting a hypothetical charge reflecting
deductions from contractowner accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain
the base period return, and then compounding the base period return by
adding 1, raising the sum to a power equal to 365 divided by 7, and
subtracting 1 from the result, according to the following formula:
EFFECTIVE YIELD = [(BASE PERIOD RETURN +1) 365/7]-1.
Instructions:
* * * * *
(b) Other Sub-Accounts. Performance information included in the
prospectus should be calculated according to paragraphs (b)(i)--(iii).
(i) Average Annual Total Return Quotation. For the 1-, 5-, and 10-
year periods ended on the date of the most recent balance sheet of the
Registrant included in the registration statement, calculate the
average annual total return by finding the average annual compounded
rates of return over the 1-, 5-, and 10-year periods that would equate
the initial amount invested to the ending redeemable value, according
to the following formula:
P(1+T) \n\ = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of the 1-, 5-, or 10-
[[Page 57782]]
year periods at the end of the 1-, 5-, or 10-year periods (or
fractional portion).
Instructions:
* * * * *
6. Total return information in the prospectus need only be current
to the end of the Registrant's most recent fiscal year.
(ii) Yield Quotation. Based on a 30-day (or one month) period ended
on the date of the most recent balance sheet of the Registrant included
in the registration statement, calculate yield by dividing the net
investment income per accumulation unit earned during the period by the
maximum offering price per unit on the last day of the period,
according to the following formula:
[GRAPHIC] [TIFF OMITTED] TR06OC03.001
Where:
a = net investment income earned during the period by the portfolio
company attributable to shares owned by the sub-account.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of accumulation units outstanding during
the period.
d = the maximum offering price per accumulation unit on the last day of
the period.
Instructions:
* * * * *
(iii) Non-Standardized Performance Quotation. A Registrant may
calculate performance using any other historical measure of performance
(not subject to any prescribed method of computation) if the
measurement reflects all elements of return.
* * * * *
19. Item 24 of Form N-4 (referenced in Sec. Sec. 239.17b and
274.11c) is amended by:
a. Adding the word ``and'' after the semicolon at the end of Item
24(b)(11);
b. Removing Item 24(b)(13); and
c. Revising Instruction 1 to Item 24.
The revisions read as follows:
Form N-4
* * * * *
Item 24
* * * * *
(b) * * *
(11) all financial statements omitted from Item 23; and
(12) copies of any agreements or understandings made in
consideration for providing the initial capital between or among the
Registrant, the depositor, underwriter, or initial contractowners and
written assurances from the depositor or initial contractowners that
the purchases were made for investment purposes without any present
intention of redeeming.
Instructions:
1. Subject to the Rules regarding incorporation by reference and
Instruction 2 below, the foregoing exhibits shall be filed as part of
the Registration Statement. Exhibits numbered 3, 9, 10, and 11 above
need to be filed only as part of a 1933 Act Registration Statement.
Exhibits shall be lettered or numbered for convenient reference.
Exhibits incorporated by reference may bear the designation given in a
previous filing. Where exhibits are incorporated by reference, the
reference shall be made in the list of exhibits.
* * * * *
20. General Instruction B.2.(b) of Form N-6 (referenced in
Sec. Sec. 239.17c and 274.11d) is amended by revising the reference
``Items 27(c), (k), (l), (n), and (o)'' to read ``Items 26(c), (k),
(l), (n), and (o)''.
21. Item 25 of Form N-6 (referenced in Sec. Sec. 239.17c and
274.11d) is removed.
22. Form N-6 (referenced in Sec. Sec. 239.17c and 274.11d) is
further amended by:
a. Redesignating Items 26 through 34 as Items 25 though 33;
b. Revising the reference ``Item 26'' in paragraph (j) of newly
redesignated Item 25 to read ``Item 25''; and
c. Revising the reference ``Item 26'' in paragraphs (l) and (m) of
newly redesignated Item 26 to read ``Item 25''.
By the Commission.
Dated: September 29, 2003.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-25114 Filed 10-3-03; 8:45 am]
BILLING CODE 8010-01-P