UNITED STATES SECURITIES AND EXCHANGE COMMISSION DIVISION OF INVESTMENT MANAGEMENT WASHINGTON, D.C. 20549 October 2, 1998 Craig S. Tyle, Esq. General Counsel Investment Company Institute 1401 H Street, N.W. Washington, DC 20005-2148 Dear Mr. Tyle: In the time that has passed since the Commission adopted amendments to Form N-1A and the new profile rule, members of the fund industry have asked us a variety of questions seeking clarification or interpretations of certain new disclosure rules. In our May 19, 1998 letter to you, we answered a number of those questions. The purpose of this letter is to set out our views about various issues raised with us since we last wrote to you. We believe our responses will be of interest to the entire fund industry and ask that you distribute our letter to the membership of the Investment Company Institute. We also will make this letter and our May letter available on the Commission's web site (http://www.sec.gov/rules/othrindx.htm). For the convenience of the industry, we have used a question-and-answer format in this letter. We begin with issues arising with respect to Form N-1A. Form N-1A Bar Chart and Performance Table 1) Q: Should the disclosure of a fund's highest and lowest return for a quarter during the 10 calendar years or other period of the bar chart be for calendar quarters or fiscal quarters? A: Consistent with the other information in the bar chart and the performance table, the highest and lowest quarterly performance information should be based on calendar quarters. 2) Q: Item 2(c)(2)(ii) of Form N-1A requires that, if a fund's fiscal year is other than a calendar year, it must include year- to-date return information as of the end of the most recent quarter in a footnote to the bar chart. If such a fund does not have a full calendar year of performance information, must it provide year-to-date return information? A: No. As with the bar chart itself, year-to-date return information is not required, and is not permitted, until a fund has annual return information for at least one calendar year. 3) Q: May a load fund include in the performance table returns reflecting both the sales load and load-waived returns? A: No. Instruction 2(a) to Item 2(c)(2) requires calculation of average annual total returns in accordance with Item 21(b)(1). That Item requires a fund to include the maximum sales loads (including deferred sales loads) and recurring account fees in the calculation of average annual total returns. 4) Q: Must a money market fund include the performance table in its prospectus and, if so, must the table include a comparison to a broad-based securities market index? A: Item 2(c)(2)(iii) of Form N-1A requires a fund, including a money market fund, that has annual return information for at least one calendar year to include the performance table in its prospectus. While the performance table generally must include the returns of an appropriate broad-based securities market index, consistent with the requirements of Item 5, Management's Discussion of Fund Performance, a money market fund need not compare its performance to a broad-based securities market index. A money market fund may, at its option, include information for one or more other indices as permitted by Instruction 6 to Item 5(b). 5) Q: May a non-money market fund that does not disclose yield information in its risk/return summary provide a telephone number that investors can use to obtain current yield information? A: Yes. Instruction 2(d) to Item 2(c)(2) of Form N-1A requires a non-money market fund that discloses yield to provide a toll-free (or collect) telephone number that investors can use to obtain current yield information. This requirement does not preclude a non-money market fund that does not disclose yield in its prospectus from providing a telephone number for that purpose. Thus, a non-money market fund, like a money market fund, has the option of providing yield information in its prospectus or disclosing a telephone number that investors can use to obtain current yield information. ==========================================START OF PAGE 2====== Fee Table 6) Q: May funds with fees and/or expenses that are subject to reimbursements or waivers show the net amount of those fees or expenses in the fee table? A: Yes, under certain circumstances. If a fund's fees in the fee table are subject to a contractual limitation that requires reimbursement or waiver of expenses, a fund may add two lines to the fee table: one line showing the amount of the reimbursement or waiver, and a second line showing the fund's net expenses after subtracting the fee reimbursement or expense waiver from the total fund operating expenses. A fund should place these additional lines immediately under the "Total Annual Fund Operating Expenses" line of the fee table and should use appropriate descriptive captions. A footnote to the fee table should describe the contractual arrangement. A fund could, for example, use a format such as the following: Annual Fund Operating Expenses (expenses that are deducted from Fund assets) Management Fees xx % Distribution [and/or Service](12b-1) Fees xx % Other Expenses xx % ___________________ xx % ___________________ xx % ___________________ xx % Total Annual Fund Operating Expenses xx % Fee Waiver [and/or Expense Reimbursement] xx % Net Expenses xx % Fee waivers or expense reimbursements that are not contractually imposed may be disclosed only in a footnote to the fee table. The Commission stated in its release adopting amendments to Form N-1A ("Form N-1A Adopting Release") that disclosure of the gross level of fund operating expenses would give investors clearer information about the long-term costs of an investment in a fund.[1] The Commission was concerned that allowing a fund to show operating expenses net of the waiver or reimbursement would lead investors to focus on costs resulting from temporary or discretionary waiver and reimbursement arrangements rather than long-term costs. In meeting the provisions of Form N-1A, a fund for which the investment adviser (or other party) intends to reimburse expenses or waive fees, but is not contractually obligated to do so, may include a footnote to the fee table showing fund operating expenses net of waivers or reimbursements. We recognize that circumstances may require modifications to the fee table. When such circumstances arise, we will work with a fund as it develops a presentation that is appropriate for the fund and meets the spirit of the new requirements. **FOOTNOTES** [1]: Investment Company Act Release No. IC-23064 (Mar. 13, 1998) [63 FR 13916, 13925]. ==========================================START OF PAGE 3====== Purchase and Sale Information 7) Q: The Form N-1A Adopting Release states that "as long as the purchase and sale information in a fund's prospectus is not reduced below the minimum [disclosure] required by Form N-1A, the fund would be able to create and use a separate purchase and sale disclosure document as supplemental sales literature."[2] What is the minimum disclosure required in the prospectus? A: The minimum disclosure required in a prospectus depends upon the facts and circumstances specific to a particular fund. The following types of disclosures, however, are examples of those that would not be required to appear in the prospectus: (1) a description of every possible way to purchase or redeem fund shares; (2) a description of every restriction or process related to purchasing or redeeming fund shares (e.g., requirements that checks be drawn in U.S. dollars, and disclosure about share certificates); and (3) detailed information about various types of accounts, such as different types of tax-deferred accounts. Among the information that would be required is disclosure of any material restrictions that a fund imposes on the right of redemption and disclosure of minimum investment requirements. 8) Q: Item 18(a) of Form N-1A provides that a fund may incorporate purchase and redemption information required by Item 18(a) into its Statement of Additional Information ("SAI") by reference to a separate disclosure document that may be provided to investors with the SAI or separately. If a fund elects to provide purchase and redemption information in a separate disclosure document that it incorporates by reference into the SAI, can the SAI, in turn, be incorporated by reference into the fund's prospectus without violating the Commission's rule that restricts double incorporation by reference? Are the delivery requirements for this separate document the same as for the complete SAI? A: Rule 10(d) [17 CFR 229.10(d)] generally prohibits double incorporation by reference -- an incorporation by reference that is twice removed from the primary document. Funds that choose to incorporate the SAI into the prospectus should include, rather than incorporate, the information required by Item 18(a) in a separate section of the SAI and provide that section individually and apart from the SAI to investors who request additional purchase and redemption information. Since the purchase and redemption information would be a separable section of the SAI and not a separate document, the fund would avoid double incorporation by reference when the SAI is incorporated by reference into the prospectus. Item 1 of Form N-1A requires a fund that receives a request for the SAI or the shareholder report to send the requested document within 3 business days of receipt of the request. The same delivery requirement would apply to a request for a separate section of the SAI containing additional information on purchase and redemption procedures. We note that a fund that chooses to use these SAI disclosure options must provide a complete SAI to investors who request the SAI and do not limit their request to information on purchase and redemption procedures. Compliance 9) Q: May a post-effective amendment that is not yet required to comply with amended Form N-1A reflect some, but not all, of the amended requirements? A: Generally, no. The staff would not object, however, if, prior to updating its entire registration statement, a fund chose to: (i) move the 10-year financial highlights table from the front of the prospectus and delete average commission rate information from that table; (ii) move from the prospectus to the SAI disclosure about technical, legal, or operational matters as permitted by Form N-1A, as amended; (iii) omit, as exhibits to its registration statement, model retirement plans used to offer fund shares, schedules showing the calculation of performance information, and voting trust agreements; or (iv) omit the table showing the number of holders of each class of fund shares from Part C of its registration statement. Three-Day Mailing Requirement 10) Q: Must a fund ensure that a third-party intermediary selling its shares complies with the requirement to send the SAI, annual or semi-annual report (and, in the case of the profile, the prospectus) to an investor within 3 business days of receipt of a request? A: Yes, if the third-party intermediary is named in the prospectus (or profile) or otherwise acts as an agent of the fund. In the Form N-1A Adopting Release and the release adopting the profile rule ("Profile Adopting Release"),[3] the Commission stated that funds are required to mail SAIs and prospectuses to investors within 3 days of a request because prompt delivery of the those documents to investors is essential to the disclosure formats contemplated by Form N-1A and the profile. Recognizing that many funds are distributed through financial intermediaries and that investors may look to those intermediaries to provide information, the Commission allowed a fund to indicate in its prospectus or profile that an investor may obtain an SAI or shareholder report (or, in the case of the profile, the prospectus) from a financial intermediary. When a financial intermediary is named in the prospectus (or profile) as a party to contact in order to obtain information or when a financial intermediary otherwise acts as an agent for a fund, the fund remains obligated to ensure that the information is sent to investors within 3 business days of receipt of a request. In those cases, the fund can contract with intermediaries to ensure their compliance with the 3-day mailing requirement. A fund, however, is not responsible for ensuring that a third-party intermediary complies with the 3-day mailing requirement if: (1) the third-party intermediary is not an agent of the fund; (2) the prospectus or profile provides the fund's toll-free (or collect) telephone number for investors to call to obtain a copy of the specified documents from the fund; (3) the prospectus or profile does not mention that intermediary as a source for obtaining these documents and does not generally instruct investors to contact an intermediary to obtain documents; and (4) an investor directly contacts the third-party intermediary to request one or more of these documents. Rule 498 Profile Filings 11) Q: Must a fund that has previously filed a definitive form of profile with the Commission subsequently file the updates to the bar chart and performance table as required by rule 498(c)(2)(iii)? A: Yes. Rules 497(k)(1)(iii)(A) and (B), respectively, require a fund that has filed a definitive form of profile with the Commission to file any subsequent material and non-material changes to the information disclosed under rules 498 (c)(2)(i)- (iii). The Instruction to rule 498(c)(2)(iii) gives a fund the option to reflect updated performance information to the bar chart and the performance table by affixing a label or sticker to the profile or by other reasonable means. If a fund updates the bar chart and the performance table in accordance with the Instruction, the fund should file the label, sticker, or "other reasonable means" of updating performance information under the applicable sub-paragraph of rule 497(k)(1)(iii). If a fund reflects updated performance information to the bar chart and the performance table by reprinting and distributing the entire form of profile, however, the fund should refile the complete, revised definitive form of profile under the applicable sub-paragraph of rule 497(k)(1)(iii). 12) Q: Under what sub-paragraph of rule 497(k)(1)(iii) must a fund that has previously filed a definitive form of profile with the Commission file routine updates to the bar chart, the performance table, and the fee table required by rule 498(c)(2)? A: Those kinds of updates should be filed under rule 497(k)(1)(iii)(B). A fund should submit routine updates to the bar chart, the performance table, and the fee table in the profile on EDGAR form type 497K3B. 13) Q: If a fund has filed a definitive form of profile with the Commission and subsequently tailors the definitive profile for use by investors in participant-directed defined contribution plans, must the fund file a new form of profile under rule 497(k)(1)(i) and observe a 30-day waiting period? A: No. Rule 498(d) permits a registrant to modify certain information included in a profile to be used for a fund that is offered as an investment option for certain defined contribution plans, tax-deferred arrangements, or variable contracts. If a profile modified under rule 498(d) contains material changes to the information disclosed under rules 498(c)(2)(i)-(iii), the fund must file the revised definitive form of profile under rule 497(k)(1)(iii)(A) on EDGAR form type 497K3A. Conversely, if a profile modified under rule 498(d) contains non-material changes to the information disclosed under rules 498(c)(2)(i)-(iii) (e.g., routine updates to the bar chart, performance table, and fee table; omission of, or changes to, the disclosure required by rules 498(c)(2)(vi)-(ix); changes to the profile legend), the fund must file the revised definitive form of profile under rule 497(k)(1)(iii)(B) on EDGAR form type 497K3B. In each instance, the definitive form of profile reflecting modifications under rule 498(d) must be filed with the Commission no later than the fifth business day after the profile's first date of use. 14) Q: If a fund uses a separate application to purchase fund shares with the profile, must the fund file that application with the Commission? A: Yes. A fund that uses a separate application with the profile must file the application with its profile in three circumstances: (1) when it files its first profile under rule 497(k)(1)(i) (EDGAR form type 497K1), (2) when it files its definitive form of profile under rule 497(k)(1)(ii) (EDGAR form type 497K2), and (3) whenever it revises the form of application used with the profile. In this case, the profile should be refiled with the revised application under rule 497(k)(1)(iii)(B) (EDGAR form type 497K3B). Registrants are reminded that, under rule 498(c)(3), an application used with a profile must note with equal prominence that an investor has the option of purchasing fund shares after reviewing the profile or after requesting and reviewing the fund's prospectus (and other information). Specific Requirements 15) Q: May a fund modify the legend required by rule 498(c)(1)(iv) that should appear on the cover page or at the beginning of the profile? A: No. In contrast to the disclosure required by rule 498(c)(2)(ii) which allows some flexibility in the wording of a required legend, a fund must include the rule 498(c)(1)(iv) legend verbatim on the cover page or at the beginning of the profile. **FOOTNOTES** [2]: 63 FR at 13932-13933. [3]: Investment Company Act Release No. IC-23065 (Mar. 13, 1998) [63 FR 13968] (adopting profile rule). ==========================================START OF PAGE 4====== 16) Q: If a fund reprints its profile when it updates its performance, should the reprinted profile reflect the date that the profile was first used, and the date that the profile was revised, or should the profile reflect only the date of the reprint? A: The profile should reflect only the date of the reprint. 17) Q: What is contemplated by the requirement to provide a brief summary of services available to typical investors in a fund (see rule 498(c)(2)(ix) and related Instruction)? A: A fund may comply with this requirement by listing the services commonly used by a typical fund investor. We recognize that available services vary among different fund groups and therefore believe it is appropriate to provide funds with flexibility to determine which services to disclose. 18) Q: If a fund group decides to include more than one fund in a profile, does the same combination of funds that is described in the profile have to appear in a prospectus for the funds? A: No. There is no requirement that profiles maintain a one-to-one correlation with prospectuses. For example, a single profile may be used to offer multiple funds, each having a separate prospectus; or multiple profiles may be used to offer funds included in a single prospectus. 19) Q: May a fund include information in the profile other than the disclosure specified by rules 498(c)(2)(i)-(ix)? A: Generally, no. The profile is intended to be a standardized summary of key information in a fund's prospectus. Consistent with this purpose, rule 498(b) limits profile disclosure to information required or not precluded by paragraph (c) of the rule. Based on the limitations imposed by rule 498(b), a fund could not include in the profile, for example, a list of the fund's top ten portfolio holdings, cumulative performance information, or a discussion of the potential rewards of investing in the fund, since these items are inconsistent with maintaining the profile as a standardized summary. Funds are reminded, however, that they must include sufficient information in the profile necessary to avoid material misstatements or materially misleading disclosure. ==========================================START OF PAGE 5====== 20) Q: May a fund include in a profile performance information appearing in a fund's prospectus under the Nicholas Applegate[4] and Bramwell[5] no-action letters? A: No, for the reasons outlined in our answer to question 19. Performance information that is consistent with the Nicholas Applegate and Bramwell no-action letters is neither required nor permitted by rule 498 and may not be included in a profile. 21) Q: If a fund's fiscal year is other than a calendar year, the fund must include its year-to-date return information as of the end of the most recent quarter in a footnote to the bar chart in the prospectus. See rule 498(c)(2)(iii) (incorporating Item 2(c)(2)(ii) of Form N-1A). Given that the profile is updated quarterly, is it necessary for a fund to include the footnote to the bar chart in the profile? A: No. Because the performance table is updated quarterly, a fund may omit the footnote to the bar chart in a profile. 22) Q: Rule 498(c)(2)(iii) requires funds to "[u]pdate the return information as of the end of each succeeding calendar quarter as soon as practicable after the completion of the quarter." Which return information must be updated quarterly? A: As indicated in the Profile Adopting Release, a fund must update quarterly the return information in its performance table (i.e., the fund's average annual total returns and the returns of any index included in the table).[6] 23) Q: Under rule 498(c)(2)(iii), at what point must a new fund include the performance table in its profile? A: A fund that has annual returns for at least one calendar year must include the performance table in the profile. See rule 498(c)(2)(iii) (incorporating Item 2(c)(2)(iii) of Form N-1A). 24) Q: The Instruction to rule 498(c)(2)(iii) provides that a fund may update the performance table by affixing a label or sticker, or by other reasonable means. Based on this Instruction, could a fund update the performance table by including the updated performance information in a cover letter introducing the profile? A: No. Although the Instruction to rule 498(c)(2)(iii) states that a fund may update performance information by affixing a label or sticker, or by other reasonable means, a profile may not incorporate information by reference to another document. Cross-references in a profile to another document are also restricted. These restrictions were intended to ensure that the profile is a self-contained disclosure document. For these reasons, we believe that a fund may not update its profile with a separate document, even if that separate document is a letter that accompanies the profile. 25) Q: Instruction 2(c) to Item 2(c)(2) of Form N-1A states that, if a fund selects an index that is different from the index used in the performance table for the immediately preceding period, the fund must explain the reason(s) for the selection of a different index and provide information for both the newly selected and the former index. Given that rule 498(c)(2)(iii) incorporates Item 2(c)(2)(iii) of Form N-1A, must a fund that changes an index previously used in the profile's performance table comply with the Form N-1A Instruction? A: No. Consistent with the profile's intended purpose as a standardized summary of key information in a fund's prospectus, we would not object if a fund omitted the explanation and information specified in Instruction 2(c) to Item 2(c)(2) of Form N-1A from the performance table in the profile. 26) Q: Must a fund describe all sales load waivers in the profile? A: No. Under rules 498(c)(2)(vi) and (vii), a fund that offers them should include a statement that waivers are available for initial sales loads and for sales loads or charges assessed upon redemption. It need mention specifically only those waivers that would apply to a typical purchaser. Using the Profile with Rule 482 Materials 27) Q: If an advertisement designed to meet the requirements of rule 482 under the Securities Act of 1933 does not accompany a profile, may the advertisement include language inviting an investor to request and read a profile prior to investment? A: Funds may add language to a rule 482 advertisement that invites an investor to request a profile or a prospectus, so long as the advertisement refers to both the profile and the prospectus and the reference to the profile is no more prominent than the reference to the prospectus. **FOOTNOTES** [4]: Nicholas-Applegate Mutual Funds (pub. avail. Aug. 6, 1996) (fund to include in its prospectus performance information of private accounts managed by the fund's investment adviser that had substantially similar investment objectives, policies, and strategies). [5]: Bramwell Growth Fund (pub. avail. Aug. 7, 1996) (fund to include in its prospectus standardized total return information of another registered investment company previously managed by the fund's portfolio manager that had substantially similar investment objectives and policies). [6]: 63 FR 13977. ==========================================START OF PAGE 6====== 28) Q: May rule 482 material be bound to or wrapped around the profile? A: Yes, if it is clear that the wrapper is not part of the profile and each document complies with the rule regulating its content as a stand-alone document. 29) Q: Assume that a full page of newspaper copy combines a profile with a rule 482 advertisement for the same fund. Should the profile be separated from the rule 482 advertisement? A: Yes. As discussed in response to question 24, the Commission intended that the profile be a short, summary, self- contained disclosure document. In our view, in light of this purpose, rule 482 advertisements and profiles should not appear as a single document in newspaper copy. We would not object, however, if both documents are used together in newspaper copy so long as the boundaries of each document are distinct and each document includes its required content. * * * We hope this information will be helpful to members of the Investment Company Institute and others as they prepare profiles and registration statements on Form N-1A, as amended. In the future, we intend to provide additional guidance as necessary. If you have any questions, please contact the Office of Disclosure and Review, Division of Investment Management at (202) 942-0586. Questions about specific filings should be directed to the staff member responsible for reviewing that fund's documents. Sincerely, Barry D. Miller Associate Director