[Federal Register: April 23, 2004 (Volume 69, Number 79)]
[Rules and Regulations]
[Page 22299-22317]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23ap04-22]
[[Page 22299]]
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Part IV
Securities and Exchange Commission
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17 CFR Parts 239 and 274
Disclosure Regarding Market Timing and Selective Disclosure of
Portfolio Holdings; Final Rule
[[Page 22300]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 239 and 274
[Release Nos. 33-8408; IC-26418; File No. S7-26-03]
RIN 3235-AI99
Disclosure Regarding Market Timing and Selective Disclosure of
Portfolio Holdings
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Securities and Exchange Commission is adopting amendments
to Form N-1A under the Securities Act of 1933 and the Investment
Company Act of 1940 to require open-end management investment companies
to disclose in their prospectuses both the risks to shareholders of
frequent purchases and redemptions of investment company shares, and
the investment company's policies and procedures with respect to such
frequent purchases and redemptions. The Commission is also amending
Forms N-3, N-4, and N-6 to require similar prospectus disclosure for
insurance company separate accounts issuing variable annuity and
variable life insurance contracts. In addition, the Commission is
adopting amendments to Forms N-1A and N-3 to clarify that open-end
management investment companies and insurance company managed separate
accounts that offer variable annuities, other than money market funds,
are required to explain both the circumstances under which they will
use fair value pricing and the effects of using fair value pricing.
Finally, the Commission is requiring open-end management investment
companies and insurance company managed separate accounts that offer
variable annuities to disclose both their policies and procedures with
respect to the disclosure of their portfolio securities, and any
ongoing arrangements to make available information about their
portfolio securities.
DATES: Effective Date: May 28, 2004.
Compliance Date: All initial registration statements and post-
effective amendments to effective registration statements filed on Form
N-1A, N-3, N-4, or N-6 on or after December 5, 2004, must comply with
the amendments. Section II.D. of this release contains more information
on the compliance date.
FOR FURTHER INFORMATION CONTACT: Kieran G. Brown, Attorney, or David S.
Schwartz, Senior Counsel, Office of Disclosure Regulation, Division of
Investment Management, (202) 942-0721, at the Securities and Exchange
Commission, 450 Fifth Street, NW., Washington, DC 20549-0506.
SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission
(``Commission'') is adopting amendments to Forms N-1A,\1\ N-3,\2\ N-
4,\3\ and N-6,\4\ registration forms used by investment companies to
register under the Investment Company Act of 1940 (``Investment Company
Act'') and to offer their securities under the Securities Act of 1933
(``Securities Act'').\5\
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\1\ 17 CFR 239.15A; 17 CFR 274.11A.
\2\ 17 CFR 239.17a; 17 CFR 274.11b.
\3\ 17 CFR 239.17b; 17 CFR 274.11c.
\4\ 17 CFR 239.17c; 17 CFR 274.11d.
\5\ The Commission proposed these amendments in December 2003.
Investment Company Act Release No. 26287 (Dec. 11, 2003) [68 FR
70402 (Dec. 17, 2003)] (``Proposing Release'').
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Table of Contents
I. Introduction and Background
II. Discussion
A. Disclosure Concerning Frequent Purchases and Redemptions of
Fund Shares
B. Disclosure of Circumstances Under Which Funds Will Use Fair
Value Pricing and the Effects of Such Use
C. Selective Disclosure of Fund Portfolio Holdings
D. Compliance Date
III. Paperwork Reduction Act
IV. Cost/Benefit Analysis
V. Consideration of Effects on Efficiency, Competition, and Capital
Formation
VI. Final Regulatory Flexibility Analysis
VII. Statutory Authority
Text of Rule and Form Amendments
I. Introduction and Background
Millions of individual American investors hold shares of open-end
management investment companies (``mutual funds''), relying on these
funds for their retirements, their children's educations, and their
other basic financial needs.\6\ The tremendous number of mutual fund
investors reflects the trust that they have placed in both funds and
the regulatory protections provided by the federal securities laws.
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\6\ A management investment company is an investment company
other than a unit investment trust or face-amount certificate
company. See section 4 of the Investment Company Act [15 U.S.C. 80a-
4]. Management investment companies typically issue shares
representing an undivided proportionate interest in a changing pool
of securities, and include open-end and closed-end companies. See T.
Lemke, G. Lins, A. Smith III, Regulation of Investment Companies,
Vol. I, ch. 4, section 4.04, at 4-5 (2002). An open-end company is a
management company that is offering for sale or has outstanding any
redeemable securities of which it is the issuer.
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Recent scandals, however, have revealed instances where some in the
mutual fund industry, and some intermediaries that sell fund shares,
have violated the trust that has been placed in them and lost sight of
their obligations to investors under the federal securities laws. Many
of these abuses relate to ``market timing,'' including the overriding
of stated market timing policies by fund executives to benefit large
investors at the expense of small investors, or to benefit the fund's
investment adviser.\7\ Other abuses involve the selective disclosure by
some fund managers of their funds' portfolio holdings in order to curry
favor with large investors.\8\ This selective disclosure can facilitate
fraud and have severe, adverse ramifications for a fund's investors if
someone uses that portfolio information to trade against the fund, or
otherwise uses the information in a way that would harm the fund.\9\
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\7\ See, e.g., In re Massachusetts Financial Services Co.,
Investment Company Act Release No. 26347 (Feb. 5, 2004) (investment
adviser and two of its executives violated federal securities laws
by allowing widespread market timing trading in certain funds in
contravention of those funds' prospectus disclosures); In re
Alliance Capital Management, L.P., Investment Company Act Release
No. 26312 (Dec. 18, 2003) (investment adviser violated federal
securities laws by allowing market timing in certain of its mutual
funds in exchange for fee-generating investments in its hedge funds
and other mutual funds); In re James P. Connelly, Jr., Investment
Company Act Release No. 26209 (Oct. 16, 2003) (executive of an
investment adviser to a fund complex, in derogation of fund
disclosures, violated federal securities laws by approving
agreements that allowed select investors to market time certain
funds in the complex).
\8\ See, e.g., In the Matter of Alliance Capital Management,
L.P., Investment Advisers Act Release No. 2205 (Dec. 18, 2003) and
Investment Company Act Release No. 26312 (Dec. 18, 2003) (disclosure
of material nonpublic information about certain mutual fund
portfolio holdings permitted favored client to profit from market
timing). More than 30% of mutual fund complexes that responded to a
Commission examination request for information sent to 88 of the
largest such complexes appear to have disclosed portfolio
information in circumstances that may have provided certain fund
shareholders with the ability to make advantageous decisions to
place orders for fund shares.
\9\ See Section I, ``Introduction and Background,'' of the
Proposing Release for a fuller description of market timing and
selective disclosure abuses. Proposing Release, supra note 5, 68 FR
at 70402-70405.
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The Commission is extremely concerned by the abuses that have
surfaced in the mutual fund industry, and we have taken vigorous
enforcement action where violations of the federal securities laws have
been uncovered. We also believe, however, that regulatory reforms are
necessary to help prevent such abuses from occurring in the future.
Thus, the Commission has pursued an aggressive regulatory reform agenda
to address
[[Page 22301]]
these abuses.\10\ As part of this agenda, in December 2003, we proposed
rules intended to shed more light on market timing and selective
disclosure of portfolio holdings.
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\10\ Investment Company Act Release No. 26363 (Mar. 11, 2004)
[69 FR 12752 (Mar. 17, 2004)] (proposing requirements for enhanced
disclosure regarding portfolio managers of registered management
investment companies); Investment Company Act Release No. 26375A
(Mar. 5, 2004) [69 FR 11762 (Mar. 11, 2004)] (proposing mandatory
redemption fee on short-term trades); Investment Company Act Release
No. 26372 (Feb. 27, 2004) [69 FR 11244 (Mar. 9, 2004)] (adopting
requirements for expense disclosure in fund shareholder reports and
quarterly portfolio disclosure); Investment Company Act Release No.
26356 (Feb. 24, 2004) [69 FR 9726 (Mar. 1, 2004)] (proposing to
prohibit the use of brokerage commissions to finance distribution of
fund shares); Investment Company Act Release No. 26350 (Feb. 11,
2004) [69 FR 7852 (Feb. 19, 2004)] (proposing to require improved
disclosure regarding the reasons for fund directors' approval of
investment advisory contracts); Investment Company Act Release No.
26341 (Jan. 29, 2004) [69 FR 6438 (Feb. 10, 2004)] (proposing point-
of-sale disclosure and a new confirmation statement for brokers to
use when selling fund shares); Investment Company Act Release No.
26337 (Jan. 20, 2004) [69 FR 4040 (Jan. 27, 2004)] (proposing
requirement for investment adviser code of ethics); Investment
Company Act Release No. 26323 (Jan. 15, 2004) [69 FR 3472 (Jan. 23,
2004)] (proposing amendments to enhance independence of fund boards
of directors); Investment Company Act Release No. 26313 (Dec. 18,
2003) [68 FR 74820 (Dec. 24, 2003)] (requesting comment on measures
to improve disclosure of mutual fund transaction costs); Investment
Company Act Release No. 26299 (Dec. 17, 2003) [68 FR 74713 (Dec. 24,
2003)] (adopting rules requiring funds and advisers to adopt and
implement policies and procedures designed to prevent violations of
the federal securities laws); Investment Company Act Release No.
26298 (Dec. 17, 2003) [68 FR 74732 (Dec. 24, 2003)] (proposing
amendments that would require enhanced disclosure regarding
breakpoint discounts on front-end sales loads); Investment Company
Act Release No. 26288 (Dec. 11, 2003) [68 FR 70388 (Dec. 17, 2003)]
(proposing amendments to rules governing pricing of mutual fund
shares intended to prevent unlawful late trading in fund shares).
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The Commission received 47 comment letters relating to the
proposals from investors, participants in the fund industry, and
others. The commenters generally supported the Commission's proposals
to improve the disclosure provided to investors, although some
expressed concerns regarding portions of the disclosure or suggested
changes. Today, the Commission is adopting these proposals, with
modifications to address commenters' concerns.
With respect to market timing, the amendments that the Commission
is adopting will require improved disclosure in fund prospectuses of a
mutual fund's risks, policies, and procedures.\11\ The amendments will:
Require a mutual fund to describe in its
prospectus the risks, if any, that frequent purchases and redemptions
of fund shares may present for other shareholders;
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\11\ Market timing may take many forms. In this release, we have
used the term to refer to arbitrage activity involving the frequent
buying and selling of mutual fund shares in order to take advantage
of the fact that there may be a lag between a change in the value of
a mutual fund's portfolio securities and the reflection of that
change in the fund's share price.
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Require a mutual fund to state in its prospectus
whether or not the fund's board of directors has adopted policies and
procedures with respect to frequent purchases and redemptions of fund
shares and, if the board has not adopted any such policies and
procedures, state the specific basis for the view of the board that it
is appropriate for the fund not to have such policies and procedures;
Require a mutual fund to describe in its
prospectus any policies and procedures for deterring frequent purchases
and redemptions of fund shares, and in its Statement of Additional
Information (``SAI'') \12\ any arrangements to permit frequent
purchases and redemptions of fund shares; and
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\12\ The SAI is part of a fund's registration statement and
contains information about a fund in addition to that contained in
the prospectus. The SAI is required to be delivered to investors
upon request and is available on the Commission's Electronic Data
Gathering, Analysis, and Retrieval System.
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Require similar disclosure in prospectuses for
insurance company separate accounts offering variable insurance
contracts, with respect to frequent transfers among sub-accounts.
In addition, the amendments will clarify instructions to our
registration forms to require all mutual funds (other than money market
funds) and insurance company managed separate accounts that offer
variable annuities to explain in their prospectuses both the
circumstances under which they will use fair value pricing and the
effects of using fair value pricing. Fair valuation of a fund's
portfolio securities, which is required under certain circumstances,
can serve to foreclose certain arbitrage opportunities available to
market timers.
With respect to selective disclosure of portfolio holdings, the
amendments will require mutual funds and insurance company managed
separate accounts that offer variable annuities to disclose their
policies with respect to disclosure of portfolio holdings information.
The amendments will:
Require a fund to describe in its SAI any
policies and procedures with respect to the disclosure of the fund's
portfolio securities to any person and any ongoing arrangements to make
available information about the fund's portfolio securities to any
person; and
Require a fund to state in its prospectus that a
description of the policies and procedures is available in the fund's
SAI, and on the fund's website, if applicable.
II. Discussion
A. Disclosure Concerning Frequent Purchases and Redemptions of Fund
Shares
The Commission is adopting, with several modifications to reflect
commenters' concerns, amendments to Form N-1A, the registration form
used by mutual funds, that will require disclosure of both the risks to
fund shareholders of frequent purchases and redemptions of fund shares,
and a fund's policies and procedures with respect to such frequent
purchases and redemptions.\13\ Market timing strategies often involve
such frequent purchases and redemptions of fund shares. These
amendments are intended to require mutual funds to describe with
specificity the restrictions they place on frequent purchases and
redemptions, if any, and the circumstances under which any such
restrictions will not apply. Commenters generally supported the
proposed requirements, and agreed that the additional disclosure will
enable investors to assess mutual funds' risks, policies, and
procedures in this area and determine if a fund's policies and
procedures are in line with their expectations.\14\
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\13\ Item 6(e) of Form N-1A. The amendments to Form N-1A reflect
the recent adoption of amendments to the Form that renumber Items 7
(Shareholder Information), 12 (Description of the Fund and Its
Investments and Risks), and 18 (Purchase, Redemption, and Pricing of
Shares) as Items 6, 11, and 17, respectively. See Investment Company
Act Release No. 26372 (Feb. 27, 2004) [69 FR 11244 (Mar. 9, 2004)].
\14\ Under rule 38a-1 under the Investment Company Act [17 CFR
270.38a-1], a fund must have procedures reasonably designed to
ensure compliance with its disclosed policies regarding market
timing. See Investment Company Act Release No. 26299 (Dec. 17, 2003)
[68 FR 74714, 74720 (Dec. 24, 2003)].
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1. Description of the Risks of Frequent Purchases and Redemptions of
Fund Shares
We are adopting, as proposed, amendments that will require a mutual
fund's prospectus to describe the risks, if any, that frequent
purchases and redemptions of fund shares may present for other
shareholders of the fund.\15\ These risks may include, among other
things, dilution in the value of fund shares held by long-term
shareholders, interference with the efficient management of the fund's
portfolio, and increased brokerage and administrative
[[Page 22302]]
costs. The disclosure should be specific to the fund, taking into
account its investment objectives, policies, and strategies. For
example, we would generally expect a fund that invests in overseas
markets to describe, among other things, the risks of time-zone
arbitrage.
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\15\ Item 6(e)(1) of Form N-1A.
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2. Adoption of Policies and Procedures by Fund's Board
We are also adopting, as proposed, amendments that require a mutual
fund's prospectus to state whether the fund's board of directors has
adopted policies and procedures with respect to frequent purchases and
redemptions of fund shares by fund shareholders.\16\ If the fund's
board of directors has not adopted any such policies and procedures,
the fund's prospectus will be required to include a statement of the
specific basis for the view of the board that it is appropriate for the
fund not to have such policies and procedures.\17\
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\16\ Item 6(e)(2) of Form N-1A.
\17\ Item 6(e)(3) of Form N-1A.
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3. Description of Fund Policies and Procedures With Respect to Frequent
Purchases and Redemptions
We are adopting, with one modification, a requirement that the
fund's prospectus include a description of policies and procedures
adopted by the board with respect to frequent purchases and
redemptions, including:
Whether or not the fund discourages frequent
purchases and redemptions of fund shares by fund shareholders;
Whether or not the fund accommodates frequent
purchases and redemptions of fund shares by fund shareholders; and
Any policies and procedures of the fund for
deterring frequent purchases and redemptions of fund shares by fund
shareholders.
The description of the mutual fund's policies and procedures, if
any, for deterring frequent purchases and redemptions of fund shares by
fund shareholders will be required to include any restrictions imposed
by the fund to prevent or minimize such frequent purchases and
redemptions, including:
Any restrictions on the volume or number of
purchases, redemptions, or exchanges that a shareholder may make within
a given time period;
Any exchange fee or redemption fee;
Any costs or administrative or other fees or
charges that are imposed on shareholders deemed to be engaged in
frequent purchases and redemptions of fund shares, together with a
description of the circumstances under which such costs, fees, or
charges will be imposed;
Any minimum holding period that is imposed
before an investor may make exchanges into another fund;
Any restrictions imposed on exchange or purchase
requests submitted by overnight delivery, electronically, or via
facsimile or telephone; and
Any right of the fund to reject, limit, delay,
or impose other conditions on exchanges or purchases or to close or
otherwise limit accounts based on a history of frequent purchases and
redemptions of fund shares, including the circumstances under which
such right will be exercised.
The amendments will require a fund's policies and procedures for
deterring frequent purchases and redemptions, including any
restrictions imposed to prevent or minimize such frequent purchases and
redemptions, to be described with specificity.\18\ For example, a fund
might state that a 2% redemption fee will be applied to all redemptions
within five days after purchase or, in describing any restrictions on
the volume or number of purchases, redemptions, or exchanges that a
shareholder may make within a given time period, a fund might state
that it prohibits more than five round-trips in and out of a particular
fund per year. A fund will also be required to indicate whether each
restriction applies uniformly in all cases, or whether the restriction
will not be imposed under certain circumstances. If any restriction
will not be imposed under certain circumstances, the fund will be
required to describe with specificity the circumstances under which the
restriction will not be imposed.
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\18\ Item 6(e)(4)(iii) of Form N-1A. A fund need not repeat this
disclosure to the extent that it is provided in the prospectus in
response to other Items of Form N-1A, including Items 3 (redemption
and exchange fees), 6(c) (restrictions on redemptions, and
redemption charges), and 7(a)(2) (exchange privileges).
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Commenters were divided on whether funds' policies, procedures, and
restrictions on purchases and redemptions should be required to be
described with specificity. Many commenters, including a number of
investors and intermediaries, argued that requiring specific disclosure
of a fund's policies, procedures, and restrictions is important in
order to put investors on notice of what types of activities the fund
considers harmful, and to encourage funds to apply their restrictions
uniformly. On the other hand, several commenters from the fund industry
argued that the specificity requirement could have the unintended
effect of assisting investors who wished to engage in frequent
purchases and redemptions, and could deprive funds of flexibility in
administering their policies and procedures to deter frequent purchases
and redemptions. In addition, one commenter asked for clarification
that a fund may reserve the right to reject any trade for any reason,
because it is not possible to identify all types of potentially abusive
trading in advance.
On balance, we continue to believe that it is important that a
fund's prospectus describe with specificity its policies, procedures,
and restrictions with respect to frequent purchases and redemptions of
fund shares. We believe that requiring specificity in this disclosure
will help investors both to assess mutual funds' policies and
procedures with respect to frequent purchases and redemptions, and to
assess whether such policies and procedures are in line with their
expectations. We agree with those commenters who argued that requiring
specific disclosure may discourage funds from applying or waiving their
restrictions arbitrarily. We also believe, however, that funds will be
able to more effectively deter abusive market timing if they have some
flexibility to address abuses as they arise. To that end, a fund may
reserve the right to reject a purchase or exchange request for any
reason, provided that it discloses this policy in its prospectus.
We are removing the proposed requirement that a fund describe its
policies and procedures for detecting frequent purchases and
redemptions of fund shares.\19\ Many commenters who addressed this
issue recommended either removing this requirement, or permitting the
disclosure to be general in nature. These commenters argued that
disclosure about how the fund detects frequent purchases and
redemptions could be harmful to the fund, in that it might provide
investors seeking to engage in market timing through frequent purchases
and redemptions with a ``road map'' on how to avoid detection. Further,
commenters argued that this disclosure would be of marginal utility to
most investors. We agree.
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\19\ Proposed Item 7(e)(4)(iv) of Form N-1A.
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In connection with removing this proposed requirement, we are
adding a statement clarifying that a fund's disclosure regarding
whether its restrictions to prevent or minimize frequent purchases and
redemptions are uniformly applied must indicate whether each such
restriction applies to
[[Page 22303]]
trades that occur through omnibus accounts at intermediaries, such as
investment advisers, broker dealers, transfer agents, third party
administrators, and insurance companies.\20\ We continue to believe
that investors should be informed about how a fund applies its
restrictions on frequent purchases and redemptions to persons trading
through omnibus accounts, which would have been addressed by the
proposed disclosure regarding policies and procedures for detecting
frequent purchases and redemptions. The overall effectiveness of a
fund's restrictions on frequent purchases and redemptions may depend
significantly on how effectively the fund can deter frequent purchases
and redemptions made through such omnibus accounts.\21\
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\20\ Item 6(e)(4)(iii) of Form N-1A.
Persons that are not registered as broker-dealers need to
consider whether the securities activities that they are undertaking
are brokerage activities that require them to register as broker-
dealers. Section 3(a)(4) of the Securities Exchange Act of 1934
(``Exchange Act'') defines a broker as a person engaged in the
business of effecting transactions in securities. It includes
several exceptions for certain bank activities. Section 15 of the
Exchange Act essentially makes it unlawful for a broker or dealer
``to effect any transactions in, or to induce or attempt to induce
the purchase or sale of, any security (other than an exempted
security or commercial paper, bankers' acceptances, or commercial
bills)'' unless the broker or dealer is registered with the
Commission.
\21\ As part of our recent proposal for a mandatory redemption
fee on short-term trades, we proposed a requirement that, on at
least a weekly basis, each financial intermediary provide to a fund
the Taxpayer Identification Number (``TIN'') and the amount and
dates of all purchases, redemptions, or exchanges for each
shareholder within an omnibus account. Investment Company Act
Release No. 26375A (Mar. 5, 2004) [69 FR 11762, 11766 (Mar. 11,
2004)] (proposed rule 22c-2(c) under the Investment Company Act).
This information would assist funds in detecting market timers who a
fund has prohibited from purchasing fund shares and who attempt to
enter the fund through a different account. See also Jonas Max
Ferris, Next Scandal: Brokers?, The Street.Com, Nov. 26, 2003
(noting that although omnibus account structure has many benefits,
it can be used to hide questionable trades by market timers);
Kathleen Pender, 401(k) Plans Face Scrutiny, San Francisco
Chronicle, Oct. 23, 2003, at B1 (discussing difficulty of mutual
funds knowing when 401(k) participants are engaging in market timing
because each retirement plan is usually one omnibus account).
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4. Inclusion of Disclosure Regarding Frequent Purchases and Redemptions
in Prospectus
The amendments that we are adopting also clarify, as proposed, that
the new disclosure that will be required within the prospectus
regarding frequent purchases and redemptions of fund shares may not be
omitted from the prospectus in reliance on Item 6(g), formerly
designated as Item 6(f).\22\ Item 6(g) permits funds to omit from the
prospectus certain information concerning purchase and redemption
procedures if, among other things, the information is included in a
separate document that is incorporated by reference into, and filed and
delivered with, the prospectus. We believe that the information
required by new Item 6(e) is more appropriately included in the same
document as the prospectus.
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\22\ Item 6(g) of Form N-1A.
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5. Description of Arrangements Permitting Frequent Purchases and
Redemptions
We are adopting, substantially as proposed, the requirement that a
mutual fund describe any arrangements with any person to permit
frequent purchases and redemptions of fund shares, except that we are
moving the required disclosure to the fund's SAI and requiring a cross-
reference to this disclosure in the fund's prospectus.\23\ The
description of arrangements to permit frequent purchases and
redemptions must include the identity of the persons permitted to
engage in frequent purchases and redemptions and any compensation or
other consideration received by the fund, its investment adviser, or
any other party pursuant to such arrangements.\24\ Several commenters
objected to this proposed requirement, and in particular to the
proposed requirement for specific identification of persons permitted
to engage in frequent purchases and redemptions. These commenters
argued that specific identification of these investors may violate such
investors' privacy, and that a long list of names would not be useful
to investors and might tend to obscure other, more basic information
that is more important to an investment decision. In particular, these
commenters suggested that identification of these investors would not
be useful in the case of investors who are trading through a defined
contribution plan or similar plan that has an arrangement with the fund
to permit frequent purchases and redemptions.
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\23\ Items 6(e)(5) and 17(e) of Form N-1A.
\24\ An instruction clarifies that the consideration required to
be disclosed includes any agreement to maintain assets in the fund
or in other investment companies or accounts managed by the
investment adviser or by any affiliated person of the investment
adviser. Instruction 1 to Item 17(e) of Form N-1A.
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We believe that disclosure of the persons who have arrangements
with a fund to permit frequent purchases and redemptions is necessary
in order to help investors assess the risks to fund shareholders of
frequent purchases and redemptions. We are, however, modifying the
requirement to permit a fund that has an arrangement to permit frequent
purchases and redemptions by a group of individuals, such as the
participants in a defined contribution plan that meets the requirements
for qualification under Section 401(k) of the Internal Revenue Code, to
identify the group rather than identifying each individual group
member. In addition, in order to address concerns that the description
of the arrangements might be lengthy, and therefore that inclusion of
this information in the prospectus might tend to obscure other, more
basic information in the prospectus, we are permitting this disclosure
to be included in the SAI.\25\ A fund that includes this disclosure in
its SAI will be required to include a statement in its prospectus,
adjacent to the other disclosure regarding frequent purchases and
redemptions, that the fund's SAI includes a description of all
arrangements with any person to permit frequent purchases and
redemptions of fund shares.\26\
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\25\ Item 17(e) of Form N-1A.
\26\ Item 6(e)(5) of Form N-1A.
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We reemphasize, as we stated in the Proposing Release, that a
mutual fund that enters into an arrangement with any person to permit
frequent purchases and redemptions of fund shares may only do so
consistent with the antifraud provisions of the federal securities laws
and the fiduciary duties of the fund and its investment adviser.
Disclosure provided pursuant to these amendments will not make lawful
conduct that is otherwise unlawful. For example, disclosure will not
render lawful an arrangement whereby an investment adviser permits
frequent purchases and redemptions of a mutual fund's shares in return
for consideration that benefits the adviser, such as an agreement to
maintain assets in other accounts managed by the adviser.
6. Applicability of Requirements to Exchange Traded Funds
As adopted, the amendments to Form N-1A will apply to all mutual
funds. Some commenters argued that exchange traded funds (``ETFs'')
should be excluded from the proposed disclosure requirements. These
commenters argued that market timing is generally not an issue for ETFs
because, unlike traditional mutual funds, ETFs sell and redeem their
shares at net asset value (``NAV'') only in large blocks, generally in
exchange for a basket of securities that mirrors the composition of the
ETF's portfolio, plus a small amount of cash. Further, the commenters
noted, shares issued by ETFs are listed for trading on stock exchanges,
which allows retail investors to purchase and
[[Page 22304]]
sell individual ETF shares among themselves at market prices throughout
the day.\27\ However, we note that, in those cases when an ETF
purchases and redeems its shares in cash rather than ``in kind,''
frequent purchases and redemptions may present risks for long-term
shareholders of ETFs that are similar to the risks that frequent
purchases and redemptions present for long-term mutual fund
shareholders. Accordingly, we have determined not to exclude ETFs from
the proposed disclosure requirements. If an ETF's board has determined
that there are no risks to fund shareholders as a result of frequent
purchases and redemptions of ETF shares, and therefore has determined
not to adopt policies and procedures with respect to frequent purchases
and redemptions of fund shares, the fund may reflect these facts in its
disclosure.
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\27\ See Investment Company Act Release No. 25258 (Nov. 8, 2001)
[66 FR 57614, 57614-57615 (Nov. 15, 2001)] (describing ETFs).
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7. Amendments to Registration Forms for Variable Insurance Products
We are also adopting requirements for similar disclosure in Forms
N-3,\28\ N-4,\29\ and N-6,\30\ the registration forms for insurance
company separate accounts that issue variable annuity and variable life
insurance contracts, with respect to both the risks of frequent
transfers of contract value among sub-accounts, and the separate
account's policies and procedures with respect to such frequent
transfers. As discussed in the Proposing Release, these disclosure
requirements are similar to those applicable to mutual funds with
respect to frequent purchases and redemptions, with modifications to
address the different structure of these issuers.\31\ We note that we
are making the same modifications to the proposed requirements for
Forms N-3, N-4, and N-6 that we are making with respect to Form N-
1A.\32\
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\28\ Item 8(e) of Form N-3. Form N-3 is used by all insurance
company separate accounts offering variable annuity contracts that
are registered under the Investment Company Act as management
investment companies.
\29\ Item 7(e) of Form N-4. Form N-4 is used by all insurance
company separate accounts offering variable annuity contracts that
are registered under the Investment Company Act as unit investment
trusts. See section 4(2) of the Investment Company Act [15 U.S.C.
80a-4(2)] (defining ``unit investment trust'').
\30\ Item 6(f) of Form N-6. Form N-6 is used by all insurance
company separate accounts offering variable life insurance policies
that are registered under the Investment Company Act as unit
investment trusts.
\31\ Proposing Release, supra note 5, 68 FR at 70407.
\32\ Similar to the modification we are making to Item
6(e)(4)(iii) of Form N-1A, we are adding a statement clarifying that
a separate account's disclosure regarding whether its restrictions
to prevent or minimize frequent transfers among sub-accounts are
uniformly applied must indicate whether each such restriction
applies to trades that occur through omnibus accounts at
intermediaries, such as investment advisers, broker dealers,
transfer agents, and third party administrators. See Item
8(e)(iv)(C) of Form N-3; Item 7(e)(iv)(C) of Form N-4; Item
6(f)(4)(iii) of Form N-6. In some cases, this disclosure may not be
relevant to insurance company separate accounts issuing variable
insurance contracts because the contracts are held in the name of
the contractowner and not an intermediary.
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Separate accounts funding a variable insurance contract are
generally divided into a number of sub-accounts, each of which invests
in a different underlying mutual fund. Several commenters argued that
certain aspects of the proposed disclosure requirements did not
sufficiently take account of the unique nature of variable insurance
contracts, in particular their two-tier structure. These commenters
raised three concerns. First, they argued that the disclosure
requirements will cause underlying funds to adopt new policies and
procedures restricting frequent transfers. According to the commenters,
these new policies and procedures of the underlying funds will be
inconsistent with one another, and the separate accounts' prospectus
disclosure of these policies and procedures will therefore be
voluminous and potentially confusing. Second, the commenters noted that
the insurance company depositors for separate accounts will have the
task of administering the policies and procedures of the underlying
funds, and that in many cases an insurance company will not be able to
administer all of the different variations of policies and procedures,
and may as a result decide to limit the number of funds that the
separate account offers. Third, the commenters argued that the ability
of an insurance company to adopt corresponding restrictions on
contractowners' rights to engage in frequent transfers unilaterally at
the separate account level will be limited by state insurance law and
by provisions in existing contracts. In order to address these
concerns, commenters asked that disclosure by both the separate account
and the underlying fund be permitted to be general, or, in the
alternative, that we clarify that underlying funds may rely on the
restrictions on frequent transfers adopted by the insurance company
depositor at the separate account level.
We believe that it is important for issuers of variable insurance
contracts to provide disclosure regarding their policies and procedures
with respect to transfers of contract value that is as specific as the
disclosure that will be required for mutual funds with respect to
frequent purchases and redemptions of fund shares. Market timing of
mutual funds through a variable annuity or variable life insurance
contract, in the form of tax-free transfers of contract value among
sub-accounts,\33\ can be as detrimental for investors in variable
insurance products as market timing can be for investors in mutual
funds. With respect to the concerns raised about the possible
inconsistency of policies and procedures of different underlying funds
and about potential limits on an insurer's ability to restrict
transfers at the separate account level, we note that the disclosure
requirements do not require issuers of variable insurance contracts, or
underlying funds, to adopt any particular restrictions on transfers of
contract value. It is the responsibility of insurance company
depositors for separate accounts and underlying funds to adopt and
implement appropriate and workable policies, procedures, and
restrictions with respect to frequent transfers among sub-accounts. The
rules that we are adopting simply require disclosure of these policies,
procedures, and restrictions in the variable insurance contract
prospectus and the underlying fund prospectus.
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\33\ Increases in the cash values of variable annuity and
variable life insurance contracts--known as the ``inside buildup''--
are tax-deferred until the contract's surrender or maturity. See
I.R.C. 7702(g) (1986).
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B. Disclosure of Circumstances Under Which Funds Will Use Fair Value
Pricing and the Effects of Such Use
The Commission is adopting, with one modification to address
commenters' concerns, proposed amendments to the Instruction to Item
6(a)(1) of Form N-1A, and adding a corresponding Instruction to Form N-
3, to clarify that all mutual funds and managed separate accounts that
offer variable annuities, other than money market funds, are required
to explain briefly in their prospectuses both the circumstances under
which they will use fair value pricing and the effects of using fair
value pricing.\34\ We are adopting these amendments to clearly reflect
that funds are required to use fair value prices any time that market
quotations for their portfolio securities are not readily available
(including
[[Page 22305]]
when they are not reliable).\35\ Money market funds will not be subject
to the requirement to disclose the circumstances under which they will
use fair value pricing and the effects of such use, because such funds
are subject to rule 2a-7 under the Investment Company Act, which
contains its own detailed pricing requirements.\36\ Commenters
generally supported this proposed amendment.
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\34\ Instruction to Item 6(a)(1) of Form N-1A; Instruction to
Item 11(c) of Form N-3. We are not amending Forms N-4 and N-6
because these forms are used by insurance company separate accounts
that are organized as unit investment trusts and typically hold only
securities issued by underlying mutual funds. These underlying
mutual funds are responsible for valuing their own portfolio
securities, including, as required, through fair valuation.
\35\ See Investment Company Act Release No. 14244 (Nov. 21,
1984) [49 FR 46558, 46559-46660 n.7 (Nov. 27, 1984)] (proposing
amendments to rule 22c-1).
\36\ Rule 2a-7(c) under the Investment Company Act [17 CFR
270.2a-7(c)] (describing the requirements for calculating the share
price of money market funds using the amortized cost and penny-
rounding methods).
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The required disclosure regarding the circumstances under which a
fund will use fair value pricing should be specific to the fund. For
example, if a fund invests exclusively in frequently traded exchange
listed securities of large capitalization domestic issuers and
calculates its NAV as of the time the exchange typically closes, there
may be very limited circumstances in which it will use fair value
pricing (e.g., if the exchange on which a portfolio security is
principally traded closes early or if trading in a particular portfolio
security was halted during the day and did not resume prior to the
fund's NAV calculation). By contrast, if a fund invests primarily in
securities that are traded on overseas markets, we would expect a
fuller discussion of the circumstances under which the fund will use
fair value pricing, such as specific events occurring after the close
of the overseas exchange that would cause the fund to use fair value
pricing.\37\ The instruction we are adopting will also require a fund
to explain the effects of using fair value pricing, similar to the
current instruction.\38\
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\37\ We note that rule 38a-1 under the Investment Company Act
[17 CFR 270.38a-1] requires funds to adopt policies and procedures
that require a fund to monitor for circumstances that may
necessitate the use of fair value prices, establish criteria for
determining when market quotations are no longer reliable for a
particular portfolio security, provide a methodology or
methodologies by which the fund determines the current fair value of
the portfolio security, and regularly review the appropriateness and
accuracy of the method used in valuing securities and make any
necessary adjustments. See Investment Company Act Release No. 26299
(Dec. 17, 2003) [68 FR 74713, 74718 (Dec. 24, 2003)].
\38\ See Investment Company Act Release No. 23064 (Mar. 13,
1998) [63 FR 13916 (Mar. 23, 1998)] (adopting Instruction to Item
7(a)(1) of Form N-1A requiring a brief explanation of the
circumstances and the effects of using fair value pricing). In the
Proposing Release, we stated that we would expect that the
description of the effects of using fair value pricing would be fund
specific, e.g., minimizing the possibilities for time-zone
arbitrage, in the case of a fund investing in overseas markets. See
Proposing Release, supra note 5, 68 FR at 70408. As one commenter
noted, minimizing the possibilities for time-zone arbitrage may be
more appropriately characterized as an objective of fair value
pricing than a guaranteed result or effect.
---------------------------------------------------------------------------
A number of commenters expressed concern that requiring specific
disclosure of the circumstances under which a fund will use fair value
pricing might help arbitrageurs to identify circumstances in which they
could take unfair advantage of a fund's pricing policies. In addition,
one such commenter argued that limiting funds to specific formulas that
can be changed only by registration statement amendments or supplements
may prove unworkable in volatile markets or business emergencies. These
commenters recommended that the Commission require only general
disclosure of the circumstances under which a fund will use fair value
pricing. We wish to clarify that neither the requirement we are
adopting, nor the current requirement, requires disclosure of the
specific methodologies and formulas that a fund uses to determine fair
value prices. For example, if a fund has a policy to fair value price
securities traded on overseas markets in the event that there is a
specific percentage change in the value of one or more domestic
securities indices following the close of the overseas markets, the
fund will not be required to disclose the specific percentage change
that would trigger fair valuation. In addition, a fund's disclosure
need not be so specific that the fund may not adjust the triggering
events from time to time in response to market events or other causes.
Our amendments will require the fair value pricing disclosure to be
included in a fund's prospectus, as proposed. Some commenters suggested
that the required information about fair value pricing may be more
appropriately included in a fund's SAI. In addition, some commenters
suggested that the location of the disclosure should depend on the
significance of market timing as a potential problem for the fund;
thus, in cases where market timing is a more important concern, such as
foreign stock funds that are subject to time-zone arbitrage, the
information should be included in the prospectus itself. We continue to
believe, however, that information about the circumstances under which
a fund will use fair value pricing and the effects of using fair value
pricing should be included in the prospectus together with other key
information about a fund. We also believe that it is preferable for
investors if the information is uniformly located in one document,
rather than located in the prospectus for some funds and the SAI for
others. In addition, the instruction requires the disclosure regarding
fair value pricing to be brief, and, as noted above, funds will not be
required to provide detailed information about their fair value pricing
methodologies and formulas.
One commenter also requested clarification regarding how the
instruction would apply in the case of a mutual fund that invests in
other mutual funds, such as a fund of funds. The commenter noted that
each mutual fund in which a fund is invested will have to include in
its own prospectus a brief explanation of the circumstances under which
it will use fair value pricing and the effects of such use. We are
adding language to the instruction to clarify that, with respect to any
portion of a fund's assets that are invested in one or more mutual
funds, the fund may briefly explain that the fund's NAV is calculated
based upon the NAVs of the mutual funds in which the fund invests, and
that the prospectuses for those funds explain the circumstances under
which they will use fair value pricing and the effects of using fair
value pricing.\39\
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\39\ Instruction to Item 6(a)(1) of Form N-1A; Instruction to
Item 11(c) of Form N-3.
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C. Selective Disclosure of Fund Portfolio Holdings
We are adopting, with modifications to address commenters'
concerns, amendments to Form N-1A that will require mutual funds to
disclose both their policies and procedures with respect to the
disclosure of their portfolio securities and any ongoing arrangements
to make available information about their portfolio securities.\40\ We
are also adopting parallel amendments to Form N-3 for managed separate
accounts that issue variable annuities.\41\ These amendments are
intended to provide greater transparency of fund practices with respect
to the disclosure of the fund's portfolio holdings, and to reinforce
funds' and advisers' obligations to
[[Page 22306]]
prevent the misuse of material, nonpublic information.
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\40\ Items 4(d) and 11(f) of Form N-1A. A fund's compliance
policies and procedures under rule 38a-1 under the Investment
Company Act should address potential misuses of nonpublic
information, including the disclosure to third parties of material
information about the fund's portfolio, its trading strategies, or
pending transactions. Investment Company Act Release No. 26299 (Dec.
17, 2003) [68 FR 74714, 74719 (Dec. 24, 2003)].
\41\ Items 5(f) and 19(e) of Form N-3. We are not amending Forms
N-4 and N-6 because these forms are used by insurance company
separate accounts that are organized as unit investment trusts,
which typically hold only securities issued by underlying mutual
funds.
---------------------------------------------------------------------------
We reemphasize, as we stated in the Proposing Release, that a
mutual fund or investment adviser that discloses the fund's portfolio
securities may only do so consistent with the antifraud provisions of
the federal securities laws and the fund's or adviser's fiduciary
duties. Disclosure provided pursuant to these amendments would not make
lawful conduct that is otherwise unlawful. Divulging nonpublic
portfolio holdings to selected third parties is permissible only when
the fund has legitimate business purposes for doing so and the
recipients are subject to a duty of confidentiality, including a duty
not to trade on the nonpublic information.\42\ Examples of instances in
which selective disclosure of a fund's portfolio securities may be
appropriate, subject to confidentiality agreements and trading
restrictions, include disclosure for due diligence purposes to an
investment adviser that is in merger or acquisition talks with the
fund's current adviser, disclosure to a newly hired investment adviser
or sub-adviser prior to commencing its duties, or disclosure to a
rating agency for use in developing a rating.
---------------------------------------------------------------------------
\42\ Cf. Investment Company Act Release No. 24209 (Dec. 20,
1999) [64 FR 72590, 72595 (Dec. 28, 1999)] (proposing exemption from
Regulation FD for disclosure of material information to persons who
have expressly agreed to maintain the information in confidence, and
noting that such a confidentiality agreement would also include an
agreement not to trade on the nonpublic information).
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1. Policies and Procedures
Under the amendments we are adopting, a fund will be required to
describe its policies and procedures with respect to the disclosure of
its portfolio securities in its SAI, and to state in its prospectus
that a description of the fund's policies and procedures is available
in its SAI and, if applicable, on its Web site (i.e., if the fund posts
this description on its Web site).\43\ Commenters generally supported
these proposed requirements, including the proposed inclusion of the
fund's policies and procedures in the SAI.
---------------------------------------------------------------------------
\43\ Items 4(d) and 11(f)(1) of Form N-1A; Items 5(f) and
19(e)(i) of Form N-3.
---------------------------------------------------------------------------
Under our amendments, the SAI description of the mutual fund's
policies and procedures with respect to the disclosure of its portfolio
securities will be required to include:
How the policies and procedures apply to
disclosure to different categories of persons, including individual
investors, institutional investors, intermediaries that distribute the
fund's shares, third-party service providers, rating and ranking
organizations, and affiliated persons of the fund;\44\
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\44\ Item 11(f)(1)(i) of Form N-1A. With respect to managed
separate accounts issuing variable annuity contracts registered on
Form N-3, the categories will include contractowners, participants,
annuitants, and beneficiaries. Item 19(e)(i)(A) of Form N-3.
---------------------------------------------------------------------------
Any conditions or restrictions placed on the use
of information about portfolio securities that is disclosed, including
any requirement that the information be kept confidential or
prohibitions on trading based on the information, and any procedures to
monitor the use of this information;\45\
---------------------------------------------------------------------------
\45\ Item 11(f)(1)(ii) of Form N-1A; Item 19(e)(i)(B) of Form N-
3.
---------------------------------------------------------------------------
The frequency with which information about
portfolio securities is disclosed, and the length of the lag, if any,
between the date of the information and the date on which the
information is disclosed;\46\
---------------------------------------------------------------------------
\46\ Item 11(f)(1)(iii) of Form N-1A; Item 19(e)(i)(C) of Form
N-3.
---------------------------------------------------------------------------
Any policies and procedures with respect to the
receipt of compensation or other consideration by the fund, its
investment adviser, or any other party in connection with the
disclosure of information about portfolio securities;\47\
---------------------------------------------------------------------------
\47\ Item 11(f)(1)(iv) of Form N-1A. With respect to managed
separate accounts issuing variable annuity contracts registered on
Form N-3, this description will also be required to include any
policies and procedures with respect to the receipt of compensation
or other consideration by the sponsoring insurance company. Item
19(e)(i)(D) of Form N-3. See Section II.C.2., ``Arrangements to Make
Portfolio Holdings Available,'' below (discussing restrictions on
receipt of consideration in connection with disclosure of portfolio
holdings).
---------------------------------------------------------------------------
The individuals or categories of individuals who
may authorize disclosure of the fund's portfolio securities;\48\
---------------------------------------------------------------------------
\48\ Item 11(f)(1)(v) of Form N-1A; Item 19(e)(i)(E) of Form N-
3.
---------------------------------------------------------------------------
The procedures that the fund uses to ensure that
disclosure of information about portfolio securities is in the best
interests of fund shareholders, including procedures to address
conflicts between the interests of fund shareholders, on the one hand,
and those of the fund's investment adviser; principal underwriter; or
any affiliated person of the fund, its investment adviser, or its
principal underwriter, on the other;\49\ and
---------------------------------------------------------------------------
\49\ Item 11(f)(1)(vi) of Form N-1A. With respect to managed
separate accounts issuing variable annuity contracts registered on
Form N-3, this description will be required to include the
procedures that are used to ensure that disclosure of information
about portfolio securities is in the best interests of
contractowners, participants, annuitants, and beneficiaries,
including procedures to address conflicts between the interests of
such persons, on the one hand, and those of the separate account's
investment adviser or principal underwriter; the sponsoring
insurance company; or any affiliated person of the separate account,
its investment adviser or principal underwriter, or the sponsoring
insurance company, on the other. Item 19(e)(i)(F) of Form N-3.
---------------------------------------------------------------------------
The manner in which the board of directors
exercises oversight of disclosure of the fund's portfolio
securities.\50\
---------------------------------------------------------------------------
\50\ Item 11(f)(1)(vii) of Form N-1A; Item 19(e)(i)(G) of Form
N-3.
---------------------------------------------------------------------------
A mutual fund's disclosure of its policies and procedures with
respect to the disclosure of its portfolio securities will be required
to include any policies and procedures of the fund's investment
adviser, or any other third party, that the fund uses or that are used
on the fund's behalf.\51\
---------------------------------------------------------------------------
\51\ Instruction to Item 11(f)(1) of Form N-1A; Instruction to
Item 19(e)(i) of Form N-3.
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We are clarifying that a fund may satisfy the requirement to
disclose the persons who may authorize disclosure of the fund's
portfolio holdings by describing either the individuals or categories
of individuals who may authorize disclosure.\52\ We agree with one
commenter that disclosure of these persons by category may provide
investors with more relevant information than the names of select
individuals. We emphasize, however, that funds will be required to
identify either individuals (e.g., a fund's chief executive officer) or
categories of individuals (e.g., a fund's executive officers) and not
entities or categories of entities. Thus, it would not suffice for a
fund to disclose that the fund's investment adviser or its service
providers may authorize disclosure of portfolio holdings.
---------------------------------------------------------------------------
\52\ Item 11(f)(1)(v) of Form N-1A; Item 19(e)(i)(E) of Form N-
3.
---------------------------------------------------------------------------
2. Arrangements To Make Portfolio Holdings Available
We are also adopting, with modifications, a requirement that a
mutual fund describe in its SAI any ongoing arrangements to make
available information about the fund's portfolio securities to any
person, including the identity of the persons who receive information
pursuant to such arrangements and any compensation or other
consideration received by the fund, its investment adviser, or any
other party in connection with each such arrangement.\53\ An
instruction to this requirement clarifies that the consideration
required to be disclosed includes any agreement to maintain assets in
the fund or in other investment
[[Page 22307]]
companies or accounts managed by the fund's investment adviser or by
any affiliated person of the investment adviser.\54\ As indicated
above, however, divulging portfolio holdings to selected third parties
is permissible only when the fund has legitimate business purposes for
doing so. The Commission is not aware of any situation where the
receipt of consideration by the fund's investment adviser or its
affiliates in connection with an arrangement to make available
information about the fund's portfolio securities would be a legitimate
business purpose. With respect to any ongoing arrangements, a fund will
also be required to describe:
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\53\ Item 11(f)(2) of Form N-1A. With respect to managed
separate accounts issuing variable annuity contracts registered on
Form N-3, disclosure of any compensation or other consideration
received by the sponsoring insurance company will also be required.
Item 19(e)(ii) of Form N-3.
\54\ Instruction 1 to Item 11(f)(2) of Form N-1A. With respect
to managed separate accounts issuing variable annuity contracts
registered on Form N-3, the consideration required to be disclosed
will also include any agreement to maintain assets in other
investment companies or accounts managed or sponsored by the
sponsoring insurance company of the registrant or by an affiliated
person of such sponsoring insurance company. Instruction 1 to Item
19(e)(ii) of Form N-3.
---------------------------------------------------------------------------
Any conditions or restrictions placed on the use
of information about portfolio securities that is disclosed, including
any requirement that the information be kept confidential or
prohibitions on trading based on the information, and any procedures to
monitor the use of this information;
The frequency with which information about
portfolio securities is disclosed, and the length of the lag, if any,
between the date of the information and the date on which the
information is disclosed; and
The individuals or categories of individuals who
may authorize disclosure of the fund's portfolio securities.\55\
---------------------------------------------------------------------------
\55\ Item 11(f)(2) of Form N-1A; Item 19(e)(ii) of Form N-3.
---------------------------------------------------------------------------
Several commenters objected to the application of the proposed
requirement for disclosure of ongoing arrangements to a number of
different types of potential recipients of portfolio holdings
information, including third-party providers of auditing, custody,
proxy voting, and other services for the fund, as well as rating and
ranking organizations. These commenters argued that detailed
information about the fund's sharing of portfolio holdings information
with these third-party service providers, where necessary to enable the
provider to perform services for the fund, would not be useful to
investors. The commenters also argued that a fund could have
arrangements to provide portfolio holdings information to other types
of recipients, such as financial planners for use in providing asset
allocation services to their clients, or institutional investors who
are considering whether to invest in a fund, and that individual
identification of these recipients would be burdensome and could raise
confidentiality concerns.
We have determined not to modify the proposed requirement as
suggested by these commenters, because we believe that investors have a
significant interest in knowing how widely and with whom the fund
shares its portfolio holdings information. Further, we do not believe
that the required disclosure of arrangements to make available
information about the fund's portfolio securities will be overly
burdensome, because circumstances in which the fund may have legitimate
business purposes for entering into an arrangement to selectively
disclose its portfolio holdings information typically would be limited.
In most cases, these arrangements would be with a relatively small
number of service providers to the fund.
One commenter recommended that the Commission clarify that any
arrangement in which a fund provides publicly available portfolio
holdings information to any person would not be covered by the
requirement to disclose ongoing arrangements. Another commenter asked
that the Commission confirm that posting information to a Web site
constitutes public disclosure.
We are adding two exceptions from the requirement to describe
ongoing arrangements which we believe will address these commenters'
concerns. First, a mutual fund will not be required to describe an
ongoing arrangement to make available information about the fund's
portfolio securities if, not later than the time that the fund makes
available the portfolio securities information to any person pursuant
to the arrangement, the fund discloses the information in a publicly
available filing with the Commission that is required to include the
information.\56\ A fund may not satisfy this exception by making a
voluntary filing of its portfolio information with the Commission,
e.g., a filing on Form N-Q to disclose month-end portfolio holdings.
---------------------------------------------------------------------------
\56\ Instruction 2 to Item 11(f)(2) of Form N-1A; Instruction 2
to Item 19(e)(ii) of Form N-3. Currently, filings that are required
to include portfolio securities information would include a fund's
required semi-annual filings on Form N-CSR [17 CFR 249.331; 17 CFR
274.128] and required filings for the first and third fiscal
quarters on Form N-Q [17 CFR 249.332; 17 CFR 274.130].
---------------------------------------------------------------------------
Second, a fund will not be required to describe an ongoing
arrangement to make available information about its portfolio
securities if it (i) makes that information available on its Web site;
and (ii) discloses in its prospectus the availability of the
information on its Web site.\57\ Specifically, a fund will not be
required to describe such an arrangement if it makes the portfolio
securities information available to any person pursuant to the
arrangement no earlier than the day next following the day on which the
fund makes the information available on its website in the manner
specified in its prospectus.\58\ In order to rely on this exception, a
fund will be required to disclose in its current prospectus that the
portfolio securities information will be available on its website,
including (i) the nature of the information that will be available,
including both the date as of which the information will be current
(e.g., month-end) and the scope of the information (e.g., complete
portfolio holdings, largest 20 holdings); (ii) the date when the
information will first become available and the period for which the
information will remain available, which shall end no earlier than the
date on which the fund files a Form N-CSR or Form N-Q for the period
that includes the date as of which the Web site information is current;
and (iii) the location on the fund's website where either the
information or a prominent hyperlink (or series of prominent
hyperlinks) to the information will be available.\59\
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\57\ Instruction 3 to Item 11(f)(2) of Form N-1A; Instruction 3
to Item 19(e)(ii) of Form N-3.
\58\ Instruction 3(a) to Item 11(f)(2) of Form N-1A; Instruction
3.a. to Item 19(e)(ii) of Form N-3.
\59\ Instruction 3(b) to Item 11(f)(2) of Form N-1A; Instruction
3.b. to Item 19(e)(ii) of Form N-3.
---------------------------------------------------------------------------
These exceptions will permit a fund to omit disclosure of
arrangements to make portfolio information available in these two
specific situations, when the information is, in any event, either
publicly available in a required filing with the Commission or readily
accessible on the fund's Web site.\60\ This will permit a fund, for
example, to e-mail its portfolio holdings information regularly to
investors who had requested this information without being required to
disclose the names of all the investors on the e-mail list, provided
that the information is also available through one of the two means
specified in the rule.
---------------------------------------------------------------------------
\60\ Except where specifically provided by Commission rule,
making information accessible on a website is not necessarily
adequate disclosure under the federal securities laws.
---------------------------------------------------------------------------
D. Compliance Date
The effective date for these amendments is May 28, 2004. All
initial registration statements on Forms N-1A, N-3, N-4, and N-6, and
all post-effective amendments to effective registration statements on
these forms,
[[Page 22308]]
filed on or after December 5, 2004, must include the disclosure
required by the amendments. We are selecting this compliance date in
order to coordinate with the compliance date for new rule 38a-1 under
the Investment Company Act, which is October 5, 2004. Rule 38a-1
requires fund boards to adopt policies and procedures with respect to
market timing, pricing of portfolio securities, and misuses of
nonpublic information, including the disclosure to third parties of
material information about the fund's portfolio.\61\ A compliance date
of December 5, 2004, will provide sufficient time for funds and their
boards to review and update their policies and procedures in connection
with the implementation of rule 38a-1, and to draft new disclosure to
reflect these updated policies and procedures. Generally, a fund should
file its first post-effective amendment complying with the new
disclosure requirements pursuant to rule 485(a) under the Securities
Act because such post-effective amendments typically will involve a
number of material changes that do not fall within the scope of rule
485(b).\62\
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\61\ See Investment Company Act Release No. 26287 (Dec. 11,
2003) [68 FR 70402 (Dec. 17, 2003)].
\62\ A post-effective amendment may only be filed under rule
485(b) [17 CFR 230.485(b)] if it is filed for one or more specified
purposes, including to make non-material changes to the registration
statement. A post-effective amendment filed for any purpose not
specified in rule 485(b) must be filed pursuant to rule 485(a) under
the Securities Act [17 CFR 230.485(a)]. A post-effective amendment
filed under rule 485(b) may become effective immediately upon
filing, while a post-effective amendment filed under rule 485(a)
generally becomes effective either 60 days or 75 days after filing,
unless the effective date is accelerated by the Commission.
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III. Paperwork Reduction Act
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 collections of information are: (1) ``Form N-
1A under the Investment Company Act of 1940 and Securities Act of 1933,
Registration Statement of Open-End Management Investment Companies'';
(2) ``Form N-3--Registration Statement of Separate Accounts Organized
as Management Investment Companies''; (3) ``Form N-4--Registration
Statement of Separate Accounts Organized as Unit Investment Trusts'';
and (4) ``Form N-6 under the Investment Company Act of 1940 and the
Securities Act of 1933, Registration Statement of Insurance Company
Separate Accounts Registered as Unit Investment Trusts that Offer
Variable Life Insurance Policies.'' 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 OMB control number.
Form N-1A (OMB Control No. 3235-0307), 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 8(a) of the
Investment Company Act [15 U.S.C. 80a-8(a)] and section 5 of the
Securities Act [15 U.S.C. 77e]. We published notice soliciting comments
on the collection of information requirements in the Proposing Release
and submitted these proposed collections of information 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 the collections of
information for the amendments to Forms N-1A, N-3, N-4 and N-6. We
received no comments on the proposed collection of information
requirements.
The amendments adopted in this release will amend Form N-1A to
require mutual funds to provide improved disclosure regarding their
policies and procedures with respect to frequent purchases and
redemptions of fund shares. The amendments will also amend Forms N-3,
N-4, and N-6 to require similar disclosure in prospectuses for
insurance company separate accounts offering variable insurance
contracts, with respect to frequent transfers among sub-accounts. In
addition, the Commission is adopting amendments to instructions to
Forms N-1A and N-3 that clarify that all mutual funds and managed
separate accounts that issue variable annuities (other than money
market funds) are required to explain in their prospectuses the
circumstances under which they will use fair value pricing, and the
effects of using fair value pricing. Finally, the Commission is
adopting amendments to Form N-1A to require disclosure regarding mutual
funds' policies and procedures with respect to the selective disclosure
of their portfolio holdings to any person, and parallel amendments to
Form N-3 for managed separate accounts that issue variable annuities.
Form N-1A
Form N-1A, including the amendments, contains collection of
information requirements. The likely respondents to this information
collection are open-end funds registering with the Commission.
Compliance with the disclosure requirements of Form N-1A is mandatory.
Responses to the disclosure requirements are not confidential.
We continue to estimate that the amendments will increase the hour
burden per portfolio per filing of an initial registration statement by
10 hours and will increase the hour burden per portfolio per filing of
a post-effective amendment to a registration statement by 4 hours. The
estimated total annual hour burden for all funds for preparation and
filing of initial registration statements and post-effective amendments
to Form N-1A is 1,142,296 hours.\63\
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\63\ This estimate differs from the estimate of 1,107,078 hours
contained in the Proposing Release due to the following additional
annual hour burdens for Form N-1A that were not taken into account
in the Proposing Release: 2,252 hours resulting from the proposed
rules relating to sales load breakpoint disclosure; 1,968 hours
resulting from the proposed rules relating to disclosure of sales
loads and revenue sharing in connection with the proposals for new
mutual fund confirmation and point of sale disclosure; and 30,998
hours resulting from proposed amendments relating to portfolio
manager disclosure. The estimate is based on the following
calculation: (822.5 hours per portfolio per initial registration
statement x 483 portfolios) + (108.5 hours per portfolio per post-
effective amendment x 6,542 portfolios) + 2,252 hours + 1,968 hours
+ 30,998 hours = 1,142,296 hours.
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Form N-3
Form N-3, including the amendments, contains collection of
information requirements. The likely respondents to this information
collection are separate accounts, organized as management investment
companies offering variable annuities, registering with the Commission
on Form N-3. Compliance with the disclosure requirements of Form N-3 is
mandatory. Responses to the disclosure requirements are not
confidential.
We continue to estimate that the amendments will increase the hour
burden per portfolio per filing of an initial registration statement on
Form N-3 by 10 hours and will increase the hour burden per portfolio
per filing of a post-effective amendment to a registration statement on
Form N-3 by 4 hours. The estimated total annual hour burden for all
funds for preparation and filing of initial registration statements and
post-effective amendments on Form N-3 is 34,832 hours.\64\
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\64\ This estimate differs from the estimate of 34,662 hours
contained in the Proposing Release due to an additional annual hour
burden of 170 hours for Form N-3 resulting from proposed amendments
relating to portfolio manager disclosure that was not taken into
account in the Proposing Release. The estimate is based on the
following calculation: (11,144.4 hours for filing initial
registration statements) + (23,517.8 hours for filing post-effective
amendments) + 170 hours = 34,832 hours.
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[[Page 22309]]
Form N-4
Form N-4, including the amendments, contains collection of
information requirements. The likely respondents to this information
collection are separate accounts, organized as unit investment trusts
that offer variable annuity contracts, registering with the Commission
on Form N-4. Compliance with the disclosure requirements of Form N-4 is
mandatory. Responses to the disclosure requirements are not
confidential.
We continue to estimate that the amendments will increase the hour
burden per filing of an initial registration statement on Form N-4 by 5
hours and will increase the hour burden per filing of a post-effective
amendment to a registration statement on Form N-4 by 2 hours. The
estimated total annual hour burden for separate accounts for
preparation and filing of initial registration statements and post-
effective amendments on Form N-4 is 288,701 hours.\65\
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\65\ This estimate is the same as the estimate in the Proposing
Release. This estimate is based on the following calculation:
(43,717 hours for filing initial registration statements) + (244,984
hours for filing post-effective amendments) = 288,701 hours.
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Form N-6
Form N-6, including the amendments, contains collection of
information requirements. The likely respondents to this information
collection are separate accounts, organized as unit investment trusts
that offer variable life insurance policies, registering with the
Commission on Form N-6. Compliance with the disclosure requirements of
Form N-6 is mandatory. Responses to the disclosure requirements are not
confidential.
We continue to estimate that the amendments will increase the hour
burden per filing of an initial registration statement on Form N-6 by 5
hours, and will increase the hour burden per filing of a post-effective
amendment that is an annual update on Form N-6 by 2 hours. The
estimated total annual hour burden for separate accounts for
preparation and filing of initial registration statements and post-
effective amendments on Form N-6 is 52,100 hours.\66\
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\66\ This estimate is the same as the estimate in the Proposing
Release. This estimate is based on the following calculation:
(38,512 hours for filing initial registration statements) + (10,088
hours for filing post-effective amendments that are annual updates)
+ (3,500 hours for other post-effective amendments) = 52,100 hours.
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IV. Cost/Benefit Analysis
The Commission is sensitive to the costs and benefits imposed by
its rules. The amendments that the Commission is adopting will require
mutual funds to provide enhanced disclosure about their policies and
procedures with respect to frequent purchases and redemptions of fund
shares. Specifically, the amendments:
Require a mutual fund to describe in its
prospectus the risks, if any, that frequent purchases and redemptions
of fund shares may present for other shareholders;
Require a mutual fund to state in its prospectus
whether or not the fund's board of directors has adopted policies and
procedures with respect to frequent purchases and redemptions of fund
shares and, if the board has not adopted any such policies and
procedures, state the specific basis for the view of the board that it
is appropriate for the fund not to have such policies and procedures;
Require a mutual fund to describe in its
prospectus any policies and procedures for deterring frequent purchases
and redemptions of fund shares, and in its SAI any arrangements to
permit frequent purchases and redemptions of fund shares; and
Require similar disclosure in prospectuses for
insurance company separate accounts offering variable insurance
contracts, with respect to frequent transfers among sub-accounts.
The Commission is also adopting amendments to clarify instructions
to its registration forms for mutual funds and insurance company
managed separate accounts that offer variable annuities to require that
all such funds (other than money market funds) explain in their
prospectuses both the circumstances under which they will use fair
value pricing and the effects of using fair value pricing.
In addition, the amendments require mutual funds, and insurance
company managed separate accounts that offer variable annuities, to
disclose their policies with respect to the disclosure of portfolio
holdings information. The amendments:
Require a fund to describe in its SAI any
policies and procedures with respect to the disclosure of the fund's
portfolio securities to any person and any ongoing arrangements to make
available information about the fund's portfolio securities to any
person; and
Require a fund to state in its prospectus that a
description of the policies and procedures is available in the fund's
SAI, and on the fund's website, if applicable.
A. Benefits
The amendments we are adopting to our registration forms will
benefit investors in a number of respects. First, the amendments will
benefit fund investors by providing them with more detailed information
about mutual fund practices relating to frequent purchases and
redemptions of fund shares (or, in the case of insurance company
separate accounts offering variable insurance products, frequent
transfers of contract value among sub-accounts). The amendments are
intended to require mutual funds and insurance company separate
accounts to describe with specificity the restrictions they place on
frequent purchases and redemptions (or frequent transfers among sub-
accounts), if any, and the circumstances under which each such
restriction will not apply. Market timing arbitrage strategies often
involve such frequent purchases and redemptions of mutual fund shares
or frequent transfers among sub-accounts of insurance company separate
accounts. By increasing transparency of funds' policies and procedures
in this area, the amendments are designed to help restore investor
confidence in the fairness of fund operations and in the practices and
procedures of intermediaries selling fund shares. This additional
disclosure will enable investors to assess funds' risks, policies, and
procedures in this area and determine if a fund's policies and
procedures are in line with the investor's expectations. In addition,
increasing transparency regarding arrangements to permit frequent
purchases and redemptions of fund shares (or frequent transfers among
sub-accounts) and selective disclosure of portfolio holdings
information may benefit fund shareholders by deterring arrangements
motivated by considerations of the interests of the fund's adviser
rather than the interests of fund shareholders.
Second, the amendments to Forms N-1A and N-3 relating to fair value
pricing will benefit investors by clarifying that all mutual funds and
managed separate accounts that offer variable annuities, other than
money market funds, are required to explain both the circumstances
under which they will use fair value pricing and the effects of using
such pricing. These amendments will clearly reflect that funds are
required to use fair value prices any time that market quotations for
their portfolio securities are not readily available (including when
they are not reliable). Fair valuation of a fund's portfolio
securities, which is required under certain circumstances, can serve to
foreclose arbitrage opportunities available to market timers.
Finally, the amendments to Forms N-1A and N-3 relating to funds'
policies and procedures with respect to the
[[Page 22310]]
selective disclosure of portfolio holdings information may benefit
investors by providing greater transparency of fund practices relating
to the disclosure of the fund's portfolio holdings, and by reinforcing
funds' and advisers' obligations to prevent the misuse of material,
non-public information.
B. Costs
The amendments will impose new requirements on mutual funds to
provide disclosure of their policies and procedures with respect to
frequent purchases and redemptions of fund shares (or frequent
transfers of contract value among sub-accounts, in the case of
insurance company separate accounts offering variable insurance
contracts), and selective disclosure of portfolio holdings information.
We estimate that complying with the new disclosure requirements will
entail a relatively small financial burden. The information regarding a
fund's policies and procedures in these areas should be readily
available to management and the board of directors of a fund.
Therefore, we expect that the cost of compiling and reporting this
information should be limited.
The amendments will require additional prospectus disclosure by a
mutual fund regarding its policies and procedures relating to frequent
purchases and redemptions by fund shareholders and additional
prospectus disclosure by an insurance company separate account that
issues variable insurance contracts regarding its policies and
procedures relating to frequent transfers among sub-accounts. In
addition, the amendments will require disclosure in the SAI for these
registrants of arrangements to permit frequent purchases and
redemptions (or frequent transfers among sub-accounts, in the case of
insurance company separate accounts issuing variable insurance
contracts). In addition, the amendments will require each mutual fund
and insurance company managed separate account to describe in its SAI
any policies and procedures regarding the disclosure of the fund's
portfolio holdings information, and to state in its prospectus that a
description of those policies and procedures is available in the fund's
SAI.\67\ These costs may include both internal costs (for attorneys and
other non-legal staff of a fund, such as computer programmers, to
prepare and review the required disclosure) and external costs (for
printing and typesetting of the disclosure).\68\ For purposes of the
Paperwork Reduction Act, we have estimated that the new disclosure
requirements will add 35,545 hours to the burden of completing Forms N-
1A, N-3, N-4, and N-6.\69\ We estimate that this additional burden will
equal total internal costs of $2,977,605 annually, or approximately
$784 per fund.\70\
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\67\ The amendments clarifying mutual funds' and insurance
company managed separate accounts' disclosure requirements with
respect to fair value pricing are not expected to result in any
significant costs.
\68\ We note that, with respect to the amendments regarding
mutual funds' policies and procedures with respect to frequent
purchases and redemptions and insurance company separate accounts'
policies and procedures with respect to frequent transfers among
sub-accounts, in many cases funds currently provide disclosure in
their prospectuses or elsewhere of the limitations that they place
on frequent trading in order to discourage market timing.
\69\ This represents 30,998 additional hours for Form N-1A, 728
additional hours for Form N-3, 3,269 additional hours for Form N-4,
and 550 additional hours for Form N-6.
\70\ These figures are based on a Commission estimate that
approximately 3,800 investment companies will be subject to the
amendments and an estimated hourly wage rate of $83.77. The estimate
of the number of investment companies is based on data derived from
the Commission's EDGAR filing system. The estimated wage rate is a
blended rate, based on published hourly wage rates for assistant/
associate general counsels ($82.05) and programmers ($42.05) in New
York City, and the estimate that professional and non-professional
staff will divide time equally on compliance with the disclosure
requirements, yielding a weighted wage rate of $62.05
(($82.05x.50)+(42.05x.50))= $62.05). See Securities Industry
Association, Report on Management & Professional Earnings in the
Securities Industry 2003 (Sept. 2003). 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 $83.77 ($62.05x1.35)=$83.77). This
estimate differs from the estimate in the Proposing Release, which
was based on published compensation for compliance attorneys
($37.60) and programmers ($29.44) outside New York City, contained
in the Securities Industry Association's Report on Management and
Professional Earnings in the Securities Industry 2002.
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The external costs of providing the new prospectus disclosure
relating to frequent purchases and redemptions of mutual fund shares
and frequent transfers among sub-accounts of insurance company separate
accounts may or may not be significant, depending on the complexity of
a fund's policies and procedures in these areas, the extent to which
restrictions on frequent purchases and redemptions or transfers among
sub-accounts apply uniformly in all cases or will not be imposed under
certain circumstances, and the extent to which a fund currently
provides specific disclosure in this area. We expect that the external
costs of providing disclosure regarding arrangements to permit frequent
purchases and redemptions of mutual fund shares and frequent transfers
among sub-accounts of insurance company separate accounts will be
minimal, because this disclosure will be included in the SAI, which is
delivered to investors upon request. We also expect that the external
costs of providing the new disclosure relating to each mutual fund's
and insurance company managed separate account's policies and
procedures with respect to disclosure of portfolio holdings information
will be minimal, because the required description of a fund's policies
and procedures with respect to the disclosure of the fund's portfolio
securities to any person and any ongoing arrangements to make available
information about the fund's portfolio securities will be required in
the fund's SAI.\71\
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\71\ A fund will be required to state in its prospectus that a
description of its policies and procedures is available in the
fund's SAI, and on the fund's website, if applicable.
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V. Consideration of Effects on Efficiency, Competition, and Capital
Formation
Section 2(c) of the Investment Company Act [15 U.S.C. 80a-2(c)] and
section 2(b) of the Securities Act [15 U.S.C. 77(b)] 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.
The amendments are intended to provide greater transparency for
mutual fund shareholders regarding a fund's policies and procedures
with respect to frequent purchases and redemptions of fund shares (or
frequent transfers of contract value among sub-accounts, in the case of
insurance company separate accounts offering variable insurance
contracts), and selective disclosure of portfolio holdings
information.\72\ These changes may improve efficiency. The enhanced
disclosure requirements are intended to enable shareholders to make a
more informed assessment as to whether a particular fund is in line
with shareholders' investment objectives, which could 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 compete
to provide investors with policies and
[[Page 22311]]
procedures that effectively protect long-term investors from harmful
market timing, and from the misuse of portfolio holdings information
through selective disclosure. Finally, the effects of the amendments on
capital formation are unclear.
---------------------------------------------------------------------------
\72\ The amendments clarifying mutual funds' and insurance
company managed separate accounts' disclosure requirements with
respect to fair value pricing are not expected to have a significant
effect on efficiency, competition, and capital formation.
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Although, as noted above, we believe that the amendments will
benefit investors, the magnitude of the effect of the amendments on
efficiency, competition, and capital formation, and the extent to which
they will be offset by the costs of the amendments, are difficult to
quantify. We note that, with respect to the amendments regarding funds'
policies and procedures with respect to frequent purchases and
redemptions (or frequent transfers among sub-accounts), in many cases
funds currently provide disclosure in their prospectuses or elsewhere
of the limitations that they place on frequent trading in order to
discourage market timing.
We received one comment on the possible effects of the proposed
amendments on competition, from a trade association affiliated with the
variable life insurance industry. The commenter urged the Commission to
modify the rule to prevent any anticompetitive impact, by implementing
constructive market timing solutions that operate fairly across all
product platforms. As discussed above, we believe that is important for
issuers of variable insurance contracts to provide disclosure regarding
their policies and procedures with respect to transfers of contract
value that is as specific as the disclosure that will be required for
mutual funds with respect to frequent purchases and redemptions of fund
shares. Market timing of mutual funds through a variable annuity or
variable life insurance contract, in the form of tax-free transfers of
contract value among sub-accounts, can be as detrimental for investors
in variable insurance products as market timing can be for investors in
mutual funds.
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 form
amendments under the Securities Act and the Investment Company Act that
require funds to provide additional disclosure about their policies and
procedures with respect to frequent purchases and redemptions of mutual
fund shares (or, with respect to insurance company separate accounts,
frequent transfers among sub-accounts) and selective disclosure of fund
portfolio holdings to any person. An Initial Regulatory Flexibility
Analysis (``IRFA''), which was prepared in accordance with 5 U.S.C.
603, was published in the Proposing Release.
A. Reasons for, and Objectives of, the Amendments
Sections I and II of this Release describe the reasons for and
objectives of the amendments. As discussed in detail above, the
amendments adopted by the Commission include disclosure reforms
intended to shed more light on market timing and selective disclosure
of portfolio holdings information.
B. Significant Issues Raised by Public Comment
In the IRFA for the proposed amendments, we requested comment on
any aspect of the IRFA, including the number of small entities that
would be affected by the proposed amendments, the likely impact of the
proposal on small entities, and the nature of any impact, and we asked
commenters to provide any empirical data supporting the extent of the
impact. We received no comment letters specifically on the IRFA, but
one commenter requesting an extension of the compliance date stated
that the Commission should be mindful of the costs that would be
incurred by small mutual funds if successive disclosure changes are
required, particularly in light of the compliance costs these funds
face currently.
C. Small Entities Subject to the Rule
The amendments adopted by the Commission will affect registered
investment companies that are small entities. 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.\73\ Approximately 145
investment companies registered on Form N-1A meet this definition.\74\
We estimate that few, if any, registered separate accounts registered
on Form N-3, N-4, or N-6 are small entities.\75\
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\73\ 17 CFR 270.0-10.
\74\ This estimate is based on analysis by the Division of
Investment Management staff of information from databases compiled
by third-party information providers, including Morningstar, Inc.
and Lipper.
\75\ This estimate is based on figures compiled by Division of
Investment Management staff regarding separate accounts registered
on Forms 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. Rule 0-10(b) under the Investment Company Act
[17 CFR 270.0-10(b)].
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D. Reporting, Recordkeeping, and Other Compliance Requirements
The amendments will require a mutual fund to disclose in its
prospectus both the risks to shareholders of the frequent purchase and
redemption of fund shares, and the fund's policies and procedures with
respect to frequent purchases and redemptions of fund shares. The
amendments will require similar prospectus disclosure for insurance
company separate accounts issuing variable insurance contracts. The
amendments also clarify that all mutual funds and insurance company
managed separate accounts that issue variable annuities, other than
money market funds, are required to explain both the circumstances
under which they will use fair value pricing, and the effects of using
fair value pricing. Finally, the amendments require mutual funds and
insurance company managed separate accounts that issue variable
annuities to disclose their policies and procedures with respect to the
disclosure of their portfolio securities to any person and any ongoing
arrangements to make available information about their portfolio
securities.
The Commission estimates some one-time formatting and ongoing costs
and burdens that will be imposed on all funds, including funds that are
small entities. We note, however, that in many cases funds currently
provide disclosure in their prospectuses of the limitations that they
place on frequent trading in order to discourage market timing. For
purposes of the Paperwork Reduction Act, we have estimated that the new
disclosure requirements will increase the hour burden per portfolio per
filing of an initial registration statement on Forms N-1A and N-3 by 10
hours each and will increase the hour burden per portfolio per filing
of a post-effective amendment to a registration statement on each such
form by 4 hours. For purposes of the Paperwork Reduction Act, we have
estimated that the new disclosure requirements will increase the hour
burden per portfolio per filing of an initial registration statement on
Forms N-4 and N-6 by 5 hours each and will increase the hour burden per
portfolio per filing of a post-effective amendment to a registration
statement on each such form by 2 hours. We estimate that this
additional burden will increase total internal costs per fund by
approximately $838 annually per portfolio for funds filing initial
registration statements, and $335
[[Page 22312]]
annually per portfolio for funds filing post-effective amendments, on
Forms N-1A and N-3. We estimate that this additional burden will
increase total internal costs per separate account by approximately
$419 annually for filing an initial registration statement, and $168
annually for filing a post-effective amendment, on Forms N-4 and N-
6.\76\
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\76\ These figures are based on an estimated hourly wage rate of
$83.77. See supra note 70.
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The external costs of providing the new prospectus disclosure
relating to frequent purchases and redemptions of mutual fund shares
and frequent transfers among sub-accounts of insurance company separate
accounts that issue variable insurance contracts may or may not be
significant, depending on the complexity of a fund's policies and
procedures in these areas, the extent to which restrictions on frequent
purchases and redemptions or frequent transfers among sub-accounts
apply uniformly in all cases or will not be imposed under certain
circumstances, and the extent to which a fund currently provides
specific disclosure in this area. We expect that the external costs of
providing disclosure regarding arrangements to permit frequent
purchases and redemptions of mutual fund shares and frequent transfers
among sub-accounts of insurance company separate accounts will be
minimal, because this disclosure will be included in the SAI, which is
delivered to investors upon request. We also expect that the external
costs of providing the new disclosure relating to a mutual fund's or
insurance company managed separate account's policies and procedures
with respect to disclosure of portfolio holdings information will be
minimal, because the required description of a fund's policies and
procedures with respect to the disclosure of the fund's portfolio
securities to any person and any ongoing arrangements to make available
information about the fund's portfolio securities will be required in
the fund's SAI.\77\
---------------------------------------------------------------------------
\77\ The amendments clarifying mutual funds' and insurance
company managed separate accounts' disclosure requirements with
respect to fair value pricing are not expected to result in any
significant costs.
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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 issuers. In
connection with the proposed amendments, the Commission considered the
following alternatives: (i) The establishment of differing compliance
or reporting requirements or timetables that take into account the
resources available to small entities; (ii) the clarification,
consolidation, or simplification of compliance and reporting
requirements under the proposed amendments for small entities; (iii)
the use of performance rather than design standards; and (iv) an
exemption from coverage of the proposed 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 with greater transparency with respect to mutual funds'
policies and procedures regarding frequent purchases and redemptions of
fund shares (and, in the case of insurance company separate accounts
that issue variable insurance contracts, frequent transfers among sub-
accounts) and mutual funds' and insurance company managed separate
accounts' policies and procedures regarding selective disclosure of
their portfolio holdings. Different disclosure requirements for funds
that are small entities may create the risk that the shareholders in
these funds would not be as able as investors in larger funds to assess
a fund's risks, policies, and procedures with respect to frequent
purchases and redemptions of fund shares, as well as a fund's practices
with respect to the disclosure of its portfolio holdings. We believe it
is important for the disclosure that will be required by the amendments
to be provided to shareholders by all funds, not just funds that are
not considered small entities.
We have endeavored through these amendments to minimize the
regulatory burden on all funds, including small entities, while meeting
our regulatory objectives. For example, we have modified our proposal
to extend the compliance date to December 5, 2004, to coordinate with
the compliance date for new rule 38a-1 under the Investment Company
Act. In addition, we have modified our proposals to include disclosure
of arrangements by a fund to permit frequent purchases and redemptions
in the SAI, rather than the prospectus. Small entities should benefit
from the Commission's reasoned approach to the amendments to the same
degree as other investment companies. Further clarification,
consolidation, or simplification of the amendments for funds that are
small entities would be inconsistent with the Commission's concern for
investor protection. Finally, we do not consider using performance
rather than design standards to be consistent with our statutory
mandate of investor protection in the present context. Based on our
past experience, we believe that the disclosure required by the
amendments will be more useful to investors if there are enumerated
informational requirements.
VII. Statutory Authority
The Commission is adopting amendments to Forms N-1A, N-3, N-4, and
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, 22, 24(a), 30, and 38 of the Investment Company Act [15
U.S.C. 80a-8, 80a-22, 80a-24(a), 80a-29, and 80a-37].
List of Subjects
17 CFR Part 239
Reporting and recordkeeping requirements, Securities.
17 CFR Part 274
Investment companies, Reporting and recordkeeping requirements,
Securities.
Text of Rule and Form Amendments
0
For the reasons set out in the preamble, Title 17, Chapter II, of the
Code of Federal Regulations is amended as follows.
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
0
1. 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 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940
0
2. 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 do not, and
these amendments will not, appear in the Code of Federal
Regulations.
0
3. Form N-1A (referen
[[Page 22313]]
ced in Sec. Sec. 239.15A and 274.11A) is amended by:
0
a. In Instruction 6 to Item 1(b)(1), revising the reference ``Item
6(f)'' to read ``Item 6(g)'';
0
b. In Instruction 6 to Item 1(b)(1), revising the reference ``Item
6(f)(3)'' to read ``Item 6(g)(3)'';
0
c. In Item 4, revising the title and adding new paragraph (d);
0
d. In Item 6, revising the Instruction to paragraph (a)(1);
0
e. In Item 6, redesignating paragraphs (e) and (f) as paragraphs (f)
and (g), respectively;
0
f. In Item 6, adding paragraph (e);
0
g. In newly redesignated Item 6(f)(2)(i), revising the reference
``paragraph (e)(1)'' to read ``paragraph (f)(1)'';
0
h. In newly redesignated paragraph (g) of Item 6, revising the
introductory text;
0
i. In paragraph (a)(2) of Item 7, revising the reference ``Item 6(f)''
to read ``Item 6(g)'';
0
j. In Item 11, adding paragraph (f); and
0
k. In Item 17, adding paragraph (e).
The additions and revisions read as follows:
Form N-1A
* * * * *
Item 4. Investment Objectives, Principal Investment Strategies, Related
Risks, and Disclosure of Portfolio Holdings
* * * * *
(d) Portfolio Holdings. State that a description of the Fund's
policies and procedures with respect to the disclosure of the Fund's
portfolio securities is available (i) in the Fund's SAI; and (ii) on
the Fund's website, if applicable.
* * * * *
Item 6. Shareholder Information
(a) * * *
(1) * * *
Instruction: A Fund (other than a Money Market Fund) must provide a
brief explanation of the circumstances under which it will use fair
value pricing and the effects of using fair value pricing. With respect
to any portion of a Fund's assets that are invested in one or more
open-end management investment companies that are registered under the
Investment Company Act, the Fund may briefly explain that the Fund's
net asset value is calculated based upon the net asset values of the
registered open-end management investment companies in which the Fund
invests, and that the prospectuses for these companies explain the
circumstances under which those companies will use fair value pricing
and the effects of using fair value pricing.
* * * * *
(e) Frequent Purchases and Redemptions of Fund Shares.
(1) Describe the risks, if any, that frequent purchases and
redemptions of Fund shares by Fund shareholders may present for other
shareholders of the Fund.
(2) State whether or not the Fund's board of directors has adopted
policies and procedures with respect to frequent purchases and
redemptions of Fund shares by Fund shareholders.
(3) If the Fund's board of directors has not adopted any such
policies and procedures, provide a statement of the specific basis for
the view of the board that it is appropriate for the Fund not to have
such policies and procedures.
(4) If the Fund's board of directors has adopted any such policies
and procedures, describe those policies and procedures, including:
(i) Whether or not the Fund discourages frequent purchases and
redemptions of Fund shares by Fund shareholders;
(ii) Whether or not the Fund accommodates frequent purchases and
redemptions of Fund shares by Fund shareholders; and
(iii) Any policies and procedures of the Fund for deterring
frequent purchases and redemptions of Fund shares by Fund shareholders,
including any restrictions imposed by the Fund to prevent or minimize
frequent purchases and redemptions. Describe each of these policies,
procedures, and restrictions with specificity. Indicate whether each of
these restrictions applies uniformly in all cases or whether the
restriction will not be imposed under certain circumstances, including
whether each of these restrictions applies to trades that occur through
omnibus accounts at intermediaries, such as investment advisers,
broker-dealers, transfer agents, third party administrators, and
insurance companies. Describe with specificity the circumstances under
which any restriction will not be imposed. Include a description of the
following restrictions, if applicable:
(A) Any restrictions on the volume or number of purchases,
redemptions, or exchanges that a shareholder may make within a given
time period;
(B) Any exchange fee or redemption fee;
(C) Any costs or administrative or other fees or charges that are
imposed on shareholders deemed to be engaged in frequent purchases and
redemptions of Fund shares, together with a description of the
circumstances under which such costs, fees, or charges will be imposed;
(D) Any minimum holding period that is imposed before an investor
may make exchanges into another Fund;
(E) Any restrictions imposed on exchange or purchase requests
submitted by overnight delivery, electronically, or via facsimile or
telephone; and
(F) Any right of the Fund to reject, limit, delay, or impose other
conditions on exchanges or purchases or to close or otherwise limit
accounts based on a history of frequent purchases and redemptions of
Fund shares, including the circumstances under which such right will be
exercised.
(5) If applicable, include a statement, adjacent to the disclosure
required by paragraphs (e)(1) through (e)(4) of this Item, that the SAI
includes a description of all arrangements with any person to permit
frequent purchases and redemptions of Fund shares.
* * * * *
(g) Separate Disclosure Document. A Fund may omit from the
prospectus information about purchase and redemption procedures
required by Items 6(b)-(d) and 7(a)(2), other than information that is
also required by Item 6(e), and provide it in a separate document if
the Fund:
* * * * *
Item 11. Description of the Fund and Its Investments and Risks
* * * * *
(f) Disclosure of Portfolio Holdings.
(1) Describe the Fund's policies and procedures with respect to the
disclosure of the Fund's portfolio securities to any person, including:
(i) How the policies and procedures apply to disclosure to
different categories of persons, including individual investors,
institutional investors, intermediaries that distribute the Fund's
shares, third-party service providers, rating and ranking
organizations, and affiliated persons of the Fund;
(ii) Any conditions or restrictions placed on the use of
information about portfolio securities that is disclosed, including any
requirement that the information be kept confidential or prohibitions
on trading based on the information, and any procedures to monitor the
use of this information;
(iii) The frequency with which information about portfolio
securities is disclosed, and the length of the lag, if any, between the
date of the information and the date on which the information is
disclosed;
(iv) Any policies and procedures with respect to the receipt of
compensation or other consideration by the Fund, its
[[Page 22314]]
investment adviser, or any other party in connection with the
disclosure of information about portfolio securities;
(v) The individuals or categories of individuals who may authorize
disclosure of the Fund's portfolio securities (e.g., executive officers
of the Fund);
(vi) The procedures that the Fund uses to ensure that disclosure of
information about portfolio securities is in the best interests of Fund
shareholders, including procedures to address conflicts between the
interests of Fund shareholders, on the one hand, and those of the
Fund's investment adviser; principal underwriter; or any affiliated
person of the Fund, its investment adviser, or its principal
underwriter, on the other; and
(vii) The manner in which the board of directors exercises
oversight of disclosure of the Fund's portfolio securities.
Instruction: Include any policies and procedures of the Fund's
investment adviser, or any other third party, that the Fund uses, or
that are used on the Fund's behalf, with respect to the disclosure of
the Fund's portfolio securities to any person.
(2) Describe any ongoing arrangements to make available information
about the Fund's portfolio securities to any person, including the
identity of the persons who receive information pursuant to such
arrangements. Describe any compensation or other consideration received
by the Fund, its investment adviser, or any other party in connection
with each such arrangement, and provide the information described by
paragraphs (f)(1)(ii), (iii), and (v) of this Item with respect to such
arrangements.
Instructions:
1. The consideration required to be disclosed by Item 11(f)(2)
includes any agreement to maintain assets in the Fund or in other
investment companies or accounts managed by the investment adviser or
by any affiliated person of the investment adviser.
2. The Fund is not required to describe an ongoing arrangement to
make available information about the Fund's portfolio securities
pursuant to this Item, if, not later than the time that the Fund makes
the portfolio securities information available to any person pursuant
to the arrangement, the Fund discloses the information in a publicly
available filing with the Commission that is required to include the
information.
3. The Fund is not required to describe an ongoing arrangement to
make available information about the Fund's portfolio securities
pursuant to this Item if:
(a) the Fund makes the portfolio securities information available
to any person pursuant to the arrangement no earlier than the day next
following the day on which the Fund makes the information available on
its website in the manner specified in its prospectus pursuant to
paragraph (b); and
(b) the Fund has disclosed in its current prospectus that the
portfolio securities information will be available on its website,
including (1) the nature of the information that will be available,
including both the date as of which the information will be current
(e.g., month-end) and the scope of the information (e.g., complete
portfolio holdings, Fund's largest 20 holdings); (2) the date when the
information will first become available and the period for which the
information will remain available, which shall end no earlier than the
date on which the Fund files its Form N-CSR or Form N-Q with the
Commission for the period that includes the date as of which the
website information is current; and (3) the location on the Fund's
website where either the information or a prominent hyperlink (or
series of prominent hyperlinks) to where the information will be
available.
* * * * *
Item 17. Purchase, Redemption, and Pricing of Shares
* * * * *
(e) Arrangements Permitting Frequent Purchases and Redemptions of
Fund Shares. Describe any arrangements with any person to permit
frequent purchases and redemptions of Fund shares, including the
identity of the persons permitted to engage in frequent purchases and
redemptions pursuant to such arrangements, and any compensation or
other consideration received by the Fund, its investment adviser, or
any other party pursuant to such arrangements.
Instructions:
1. The consideration required to be disclosed by Item 17(e)
includes any agreement to maintain assets in the Fund or in other
investment companies or accounts managed by the investment adviser or
by any affiliated person of the investment adviser.
2. If the Fund has an arrangement to permit frequent purchases and
redemptions by a group of individuals, such as the participants in a
defined contribution plan that meets the requirements for qualification
under Section 401(k) of the Internal Revenue Code (26 U.S.C. 401(k)),
the Fund may identify the group rather than identifying each individual
group member.
* * * * *
0
4. Form N-3 (referenced in Sec. Sec. 239.17a and 274.11b) is amended
by:
0
a. In Item 5, adding paragraph (f);
0
b. In Item 8, adding paragraph (e);
0
c. In Item 11, adding an Instruction to paragraph (c);
0
d. In Item 19, adding paragraph (e); and
0
e. In Item 23, adding paragraph (f).
The additions read as follows:
Form N-3
* * * * *
Item 5. General Description of Registrant and Insurance Company
* * * * *
(f) State that a description of the Registrant's policies and
procedures with respect to the disclosure of the Registrant's portfolio
securities is available (A) in the Registrant's Statement of Additional
Information; and (B) on the Registrant's website, if applicable.
* * * * *
Item 8. General Description of Variable Annuity Contracts
* * * * *
(e)(i) Describe the risks, if any, that frequent transfers of
contract value among sub-accounts of the Registrant may present for
other contractowners and other persons (e.g., participants, annuitants,
or beneficiaries) who have material rights under the variable annuity
contracts.
(ii) State whether or not the Registrant's board of managers has
adopted policies and procedures with respect to frequent transfers of
contract value among sub-accounts of the Registrant.
(iii) If the Registrant's board of managers has not adopted any
such policies and procedures, provide a statement of the specific basis
for the view of the board that it is appropriate for the Registrant not
to have such policies and procedures.
(iv) If the Registrant's board of managers has adopted any such
policies and procedures, describe those policies and procedures,
including:
(A) whether or not the Registrant discourages frequent transfers of
contract value among sub-accounts of the Registrant;
(B) whether or not the Registrant accommodates frequent transfers
of contract value among sub-accounts of the Registrant; and
(C) any policies and procedures of the Registrant for deterring
frequent
[[Page 22315]]
transfers of contract value among sub-accounts of the Registrant,
including any restrictions imposed by the Registrant to prevent or
minimize frequent transfers. Describe each of these policies,
procedures, and restrictions with specificity. Indicate whether each of
these restrictions applies uniformly in all cases or whether the
restriction will not be imposed under certain circumstances, including
whether each of these restrictions applies to trades that occur through
omnibus accounts at intermediaries, such as investment advisers,
broker-dealers, transfer agents, and third party administrators.
Describe with specificity the circumstances under which any restriction
will not be imposed. Include a description of the following
restrictions, if applicable:
(1) any restrictions on the volume or number of transfers that may
be made within a given time period;
(2) any transfer fee;
(3) any costs or administrative or other fees or charges that are
imposed on persons deemed to be engaged in frequent transfers of
contract value among sub-accounts of the Registrant, together with a
description of the circumstances under which such costs, fees, or
charges will be imposed;
(4) any minimum holding period that is imposed before a transfer
may be made from a sub-account into another sub-account of the
Registrant;
(5) any restrictions imposed on transfer requests submitted by
overnight delivery, electronically, or via facsimile or telephone; and
(6) any right of the Registrant to reject, limit, delay, or impose
other conditions on transfers or to terminate or otherwise limit
contracts based on a history of frequent transfers among sub-accounts,
including the circumstances under which such right will be exercised.
(v) If applicable, include a statement, adjacent to the disclosure
required by paragraphs (e)(i) through (e)(iv) of this Item, that the
Statement of Additional Information includes a description of all
arrangements with any person to permit frequent transfers of contract
value among sub-accounts of the Registrant.
* * * * *
Item 11. Purchases and Contract Value
* * * * *
(c) * * *
Instruction: A Registrant (other than a money market fund or sub-
account) must provide a brief explanation of the circumstances under
which it will use fair value pricing and the effects of using fair
value pricing. With respect to any portion of a Registrant's assets
that are invested in one or more open-end management investment
companies that are registered under the Investment Company Act, the
Registrant may briefly explain that the Registrant's net asset value is
calculated based upon the net asset values of the registered open-end
management investment companies in which the Registrant invests, and
that the prospectuses for these companies explain the circumstances
under which those companies will use fair value pricing and the effects
of using fair value pricing.
* * * * *
Item 19. Investment Objectives and Policies
* * * * *
(e)(i) Describe the Registrant's policies and procedures with
respect to the disclosure of the Registrant's portfolio securities to
any person, including:
(A) how the policies and procedures apply to disclosure to
different categories of persons, including contractowners,
participants, annuitants, beneficiaries, institutional investors,
intermediaries that distribute the Registrant's contracts, third-party
service providers, rating and ranking organizations, and affiliated
persons of the Registrant;
(B) any conditions or restrictions placed on the use of information
about portfolio securities that is disclosed, including any requirement
that the information be kept confidential or prohibitions on trading
based on the information, and any procedures to monitor the use of this
information;
(C) the frequency with which information about portfolio securities
is disclosed, and the length of the lag, if any, between the date of
the information and the date on which the information is disclosed;
(D) any policies and procedures with respect to the receipt of
compensation or other consideration by the Registrant, its investment
adviser, the Insurance Company, or any other party in connection with
the disclosure of information about portfolio securities;
(E) the individuals or categories of individuals who may authorize
disclosure of the Registrant's portfolio securities (e.g., executive
officers of the Registrant's investment adviser);
(F) the procedures that the Registrant uses to ensure that
disclosure of information about portfolio securities is in the best
interests of contractowners, participants, annuitants, and
beneficiaries, including procedures to address conflicts between the
interests of such persons, on the one hand, and those of the
Registrant's investment adviser or principal underwriter; the Insurance
Company; or any affiliated person of the Registrant, its investment
adviser or principal underwriter, or the Insurance Company, on the
other; and
(G) the manner in which the board of managers exercises oversight
of disclosure of the Registrant's portfolio securities.
Instruction: Include any policies and procedures of the
Registrant's investment adviser, or any other third party, that the
Registrant uses, or that are used on the Registrant's behalf, with
respect to the disclosure of the Registrant's portfolio securities to
any person.
(ii) Describe any ongoing arrangements to make available
information about the Registrant's portfolio securities to any person,
including the identity of the persons who receive information pursuant
to such arrangements. Describe any compensation or other consideration
received by the Registrant, its investment adviser, the Insurance
Company, or any other party in connection with each such arrangement,
and provide the information described by paragraphs (e)(i)(B), (C), and
(E) of this Item with respect to such arrangements.
Instructions:
1. The consideration required to be disclosed by Item 19(e)(ii)
includes any agreement to maintain assets in the Registrant or in other
investment companies or accounts managed or sponsored by the investment
adviser, the Insurance Company, or any affiliated person of the
investment adviser or the Insurance Company.
2. The Registrant is not required to describe an ongoing
arrangement to make available information about the Registrant's
portfolio securities pursuant to this Item, if, not later than the time
that the Registrant makes the portfolio securities information
available to any person pursuant to the arrangement, the Registrant
discloses the information in a publicly available filing with the
Commission that is required to include the information.
3. The Registrant is not required to describe an ongoing
arrangement to make available information about the Registrant's
portfolio securities pursuant to this Item if:
a. the Registrant makes the portfolio securities information
available to any person pursuant to the arrangement no earlier than the
next day following the day on which the Registrant makes the
information available on its website in the manner specified in its
prospectus pursuant to paragraph b.; and
b. the Registrant has disclosed in its current prospectus that the
portfolio securities information will be available
[[Page 22316]]
on its website, including (1) the nature of the information that will
be available, including both the date as of which the information will
be current (e.g., month-end) and the scope of the information (e.g.,
complete portfolio holdings, Registrant's largest 20 holdings); (2) the
date when the information will first become available and the period
for which the information will remain available, which shall end no
earlier than the date on which the Registrant files its Form N-CSR or
Form N-Q with the Commission for the period that includes the date as
of which the website information is current; and (3) the location on
the Registrant's website where either the information or a prominent
hyperlink (or series of prominent hyperlinks) to the information will
be available.
* * * * *
Item 23. Purchase and Pricing of Securities Being Offered
* * * * *
(f) Describe any arrangements with any person to permit frequent
transfers of contract value among sub-accounts of the Registrant,
including the identity of the persons permitted to engage in frequent
transfers pursuant to such arrangements, and any compensation or other
consideration received by the Registrant, its investment adviser, the
Insurance Company, or any other party pursuant to such arrangements.
Instructions:
1. The consideration required to be disclosed by Item 23(f)
includes any agreement to maintain assets in the Registrant or in other
investment companies or accounts managed or sponsored by the investment
adviser, the Insurance Company, or any affiliated person of the
investment adviser or the Insurance Company.
2. If the Registrant has an arrangement to permit frequent
transfers of contract value among sub-accounts of the Registrant by a
group of individuals, such as the participants in a defined
contribution plan that meets the requirements for qualification under
Section 401(k) of the Internal Revenue Code (26 U.S.C. 401(k)), the
Registrant may identify the group rather than identifying each
individual group member.
* * * * *
0
5. Form N-4 (referenced in Sec. Sec. 239.17b and 274.11c) is amended
by:
0
a. In Item 7, adding paragraph (e); and
0
b. In Item 19, adding paragraph (c).
The additions read as follows:
Form N-4
* * * * *
Item 7. General Description of Variable Annuity Contracts
* * * * *
(e)(i) Describe the risks, if any, that frequent transfers of
contract value among sub-accounts of the Registrant may present for
other contractowners and other persons (e.g., participants, annuitants,
or beneficiaries) who have material rights under the variable annuity
contracts.
(ii) State whether or not the Registrant or depositor has policies
and procedures with respect to frequent transfers of contract value
among sub-accounts of the Registrant.
(iii) If neither the Registrant nor the depositor has any such
policies and procedures, provide a statement of the specific basis for
the view of the depositor that it is appropriate for the Registrant and
depositor not to have such policies and procedures.
(iv) If the Registrant or depositor has any such policies and
procedures, describe those policies and procedures, including:
(A) whether or not the Registrant or depositor discourages frequent
transfers of contract value among sub-accounts of the Registrant;
(B) whether or not the Registrant or depositor accommodates
frequent transfers of contract value among sub-accounts of the
Registrant; and
(C) any policies and procedures of the Registrant or depositor for
deterring frequent transfers of contract value among sub-accounts of
the Registrant, including any restrictions imposed by the Registrant or
depositor to prevent or minimize frequent transfers. Describe each of
these policies, procedures, and restrictions with specificity. Indicate
whether each of these restrictions applies uniformly in all cases or
whether the restriction will not be imposed under certain
circumstances, including whether each of these restrictions applies to
trades that occur through omnibus accounts at intermediaries, such as
investment advisers, broker-dealers, transfer agents, and third party
administrators. Describe with specificity the circumstances under which
any restriction will not be imposed. Include a description of the
following restrictions, if applicable:
(1) any restrictions on the volume or number of transfers that may
be made within a given time period;
(2) any transfer fee;
(3) any costs or administrative or other fees or charges that are
imposed on persons deemed to be engaged in frequent transfers of
contract value among sub-accounts of the Registrant, together with a
description of the circumstances under which such costs, fees, or
charges will be imposed;
(4) any minimum holding period that is imposed before a transfer
may be made from a sub-account into another sub-account of the
Registrant;
(5) any restrictions imposed on transfer requests submitted by
overnight delivery, electronically, or via facsimile or telephone; and
(6) any right of the Registrant or depositor to reject, limit,
delay, or impose other conditions on transfers or to terminate or
otherwise limit contracts based on a history of frequent transfers
among sub-accounts, including the circumstances under which such right
will be exercised.
(v) If applicable, include a statement, adjacent to the disclosure
required by paragraphs (e)(i) through (e)(iv) of this Item, that the
Statement of Additional Information includes a description of all
arrangements with any person to permit frequent transfers of contract
value among sub-accounts of the Registrant.
* * * * *
Item 19. Purchase of Securities Being Offered
* * * * *
(c) Describe any arrangements with any person to permit frequent
transfers of contract value among sub-accounts of the Registrant,
including the identity of the persons permitted to engage in frequent
transfers pursuant to such arrangements, and any compensation or other
consideration received by the Registrant, the depositor, or any other
party pursuant to such arrangements.
Instructions:
1. The consideration required to be disclosed by Item 19(c)
includes any agreement to maintain assets in the Registrant or in other
investment companies or accounts managed or sponsored by the depositor,
any investment adviser of a portfolio company, or any affiliated person
of the depositor or of any such investment adviser.
2. If the Registrant has an arrangement to permit frequent
transfers of contract value among sub-accounts of the Registrant by a
group of individuals, such as the participants in a defined
contribution plan that meets the requirements for qualification under
Section 401(k) of the Internal Revenue Code (26 U.S.C. 401(k)), the
Registrant may identify the group rather than identifying each
individual group member.
* * * * *
0
6. Form N-6 (referenced in Sec. Sec. 239.17c and 274.11d) is amended
by:
0
a. In Item 6, adding paragraph (f); and
[[Page 22317]]
0
b. In Item 19, adding paragraph (d).
The additions read as follows:
Form N-6
* * * * *
Item 6. General Description of Contracts
* * * * *
(f) Frequent Transfers Among Sub-Accounts of the Registrant.
(1) Describe the risks, if any, that frequent transfers of Contract
value among sub-accounts of the Registrant may present for other
Contractowners and other persons (e.g., the insured or beneficiaries)
who have material rights under the Contract.
(2) State whether or not the Registrant or Depositor has policies
and procedures with respect to frequent transfers of Contract value
among sub-accounts of the Registrant.
(3) If neither the Registrant nor the Depositor has any such
policies and procedures, provide a statement of the specific basis for
the view of the Depositor that it is appropriate for the Registrant and
Depositor not to have such policies and procedures.
(4) If the Registrant or Depositor has any such policies and
procedures, describe those policies and procedures, including:
(i) whether or not the Registrant or Depositor discourages frequent
transfers of Contract value among sub-accounts of the Registrant;
(ii) whether or not the Registrant or Depositor accommodates
frequent transfers of Contract value among sub-accounts of the
Registrant; and
(iii) any policies and procedures of the Registrant or Depositor
for deterring frequent transfers of Contract value among sub-accounts
of the Registrant, including any restrictions imposed by the Registrant
or Depositor to prevent or minimize frequent transfers. Describe each
of these policies, procedures, and restrictions with specificity.
Indicate whether each of these restrictions applies uniformly in all
cases or whether the restriction will not be imposed under certain
circumstances, including whether each of these restrictions applies to
trades that occur through omnibus accounts at intermediaries, such as
investment advisers, broker-dealers, transfer agents, and third party
administrators. Describe with specificity the circumstances under which
any restriction will not be imposed. Include a description of the
following restrictions, if applicable:
(A) any restrictions on the volume or number of transfers that may
be made within a given time period;
(B) any transfer fee;
(C) any costs or administrative or other fees or charges that are
imposed on persons deemed to be engaged in frequent transfers of
Contract value among sub-accounts of the Registrant, together with a
description of the circumstances under which such costs, fees, or
charges will be imposed;
(D) any minimum holding period that is imposed before a transfer
may be made from a sub-account into another sub-account of the
Registrant;
(E) any restrictions imposed on transfer requests submitted by
overnight delivery, electronically, or via facsimile or telephone; and
(F) any right of the Registrant or Depositor to reject, limit,
delay, or impose other conditions on transfers or to terminate or
otherwise limit Contracts based on a history of frequent transfers
among sub-accounts, including the circumstances under which such right
will be exercised.
(5) If applicable, include a statement, adjacent to the disclosure
required by paragraphs (f)(1) through (f)(4) of this Item, that the
Statement of Additional Information includes a description of all
arrangements with any person to permit frequent transfers of Contract
value among sub-accounts of the Registrant.
* * * * *
Item 19. Additional Information About Operation of Contracts and
Registrant
* * * * *
(d) Describe any arrangements with any person to permit frequent
transfers of Contract value among sub-accounts of the Registrant,
including the identity of the persons permitted to engage in frequent
transfers pursuant to such arrangements, and any compensation or other
consideration received by the Registrant, the Depositor, or any other
party pursuant to such arrangements.
Instructions:
1. The consideration required to be disclosed by Item 19(d)
includes any agreement to maintain assets in the Registrant or in other
investment companies or accounts managed or sponsored by the Depositor,
any investment adviser of a Portfolio Company, or any affiliated person
of the Depositor or of any such investment adviser.
2. If the Registrant has an arrangement to permit frequent
transfers of Contract value among sub-accounts of the Registrant by a
group of individuals, such as the participants in a defined
contribution plan that meets the requirements for qualification under
Section 401(k) of the Internal Revenue Code (26 U.S.C. 401(k)), the
Registrant may identify the group rather than identifying each
individual group member.
* * * * *
Dated: April 16, 2004.
By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-9150 Filed 4-22-04; 8:45 am]
BILLING CODE 8010-01-P