SEC Division of Investment Management staff letter: Investment Company Registrant General Letter

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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Febniar 15, 1996

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:..d:Ce FebMrY. i ~r-I .iij tiL~'!t-'~'t""""M Ths letter is intended to assist investment company registrats in preparg disclosure filngs. These comments represent the views of the staf of the Division of Investment Management and are not necessariy those of the Securities and Exchange Commission. The comments in this letter apply to filgs made with the Division, including filgs on Forms N-IA, N-2, N-14 and S-6. This letter covers disclosure and procedura developments since February 3, 1995 when the staf issued its last letter to registrats. Accounting-related matters of interest to

registrats and their independent public accountants can be found in a letter dated Novem￾ber 2, 1995 from Lawrence A. Friend, Chief Accountant of the Division, addressed to Chief Financial Officers. Genera guidance to varable anuity, variable lie, and other insurace

company investment contract registrats can be found in a letter dated November 3, 1995 from Brenda D. Snee, Assistat Director, Offce of Insurance Products.
i. PROSPECTUS IMROVENT
In past letters to registrats, the staf has urged registrants to improve fund prospectuses by makg disclosure more concise, direct, and understandable. Some have responded by producing prospectuses that are signicantly more user-friendly and readable. We continue to encourage registrants to review their prospectuses with the goal of eliinating unnecessary legal terms, jargon, and verbose disclosure. In this regard, the staff directs registrats' attention to General Instruction G to Form N-1A and Genera Instruction for Part A: The Prospectus of Form N-2. The inormation in the prospectus should be clear, concise, and understadable; avoid the use of techncal or legal teriS, complex language, or excessive deta. The staf has assisted, and wil continue to assist, registrats who tae the intiative

to review, rewrite, and improve fund prospectuses. Registrants are encouraged to submit dras of revised prototype prospectuses for review by the staff priOl: to filg.
II. DISCLOSUR COMMNTS
A. Multiple Class Funds

The Commission has adopted Rule 18f-3 under the Investment Company Act of 1940 (the "1940 Act") which permits open-end investment companies to issue multiple classes of voting stock representing interests in the same portfolio. See Investment Company Act Release No. 20915 (Februar 23, 1995). In connection with Rule 18f-3, the Commission adopted amendments to Form N-1A designed to improve disclosure for multiple class funds. The staff has observed, however, that the disclosure of mutual funds offerig multiple classes in the same prospectus is, in some cases, neelessly long and complex, makg the

differences. between classes difcult to-understad. Registrts are encouraged to simpli the de&CfptiQn..of mllltip,le çlas~~~~ements, In addition, Item 24(6) of Form N-1A requires copies of any plan entere into by the registrat under Rule 18f-3, . includig any implementing agreement and pla amendments, to

be filed as' exhbits to the registration statement. A post-effective amendment for the purpose of filg exhbits and agrements pertg to the Rule 18f-3 plan may be filed under Rule 485(b) under the Securities Act of 1933 (the "1933 Act"). 1/ B. Registration Statements Fied on Form N-14 Item 16(12) of Form N-14 requires registrats filg registrtion statements on Form N-14 to file as an exhbit to the registrtion statement, or incorporate by reference, an opinon of counselor a copy of an Internal Revenue Service (" IR ") rulig supportg the

ta matters discussed in the registration st"atement. Opinons or ruligs may be filed either in the original filg or at effectiveness of the registration statement. . The sta recognies, however, that the closing of a reorgantion. usualy is contingent on the registrat receiving the ta opinon or IR rulig; therefore, the dosing of

the trasaction itself is satisfactory evidence that the ta opinon or rulig wãsobtaed.In such a circumstace, the sta wil not object if a registrat files the ta opinon or IR rulig afer the reorganation, if the registrat includes an undertg in the registration statement to file, by post-effective amendment, an opinon of counselor a copy of an IR rulig supportg the ta consequences of the proposed reorgantion withi a reasonable

time afer receipt of such opinon or rulig. Such post-effective amendment may be filed

under Rule 485(b) under the 1933 Act.
C. Closed-End Funds' Tender Offers

Closed-end funds often trade at a discount from net asset value. Some closed-end funds disclose in their prospectuses that, in order to minize or eliinate the discount, they wil offer to purchase their shares through tender offers or propose to shareholders at a later date conversions to open-end status. . Fund boards typicaly have the discretion to decide whether funds should purchase

their shares or propose conversions, and the decisions generay are based on circumstaces existing at the time the decisions are made. Nevertheless, some prospectuses highlght the corporate actions to be taen but tend to minize their conditional nature. For example, a

number of prospectus summaries state the funds' intention to conduct tender offers or propose conversions without mentionig any conditions or qualying circumslaces. Often,

language appearg much later in the prospectuses quales these commitments and states that they may be subject to a varety of conditions. 1/ When the Commission adopted amendments to Rule 485 in 1994, it delegated authority to the Division to determine appropriate uses of Rule 485(b) in contexts other than those specifically enumerated in the rule. This comment and Comment H.B dealing with Form . N -14 filings authorize registrants to fie post-effective amendments under Rule 485(b) in accordance with that authority. See Investment Company Act Release No. 20486 (Aug. 17, that their post￾effective amendments otherwise meet the conditions for filing under Rule 485(b). 1994). Registrants availng themselves of this procedure should ensure

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In describing the commitments to conduct tender offers or propose conversions, registrats nee to convey the possibilty that the corporate actions may not occur.

Discussions of conditions or qualing circumstaces should not be lengthy or overly techncal. Funds should also review any advertsing or sales literature referrg to commitments to determine if they ma~ be misleadig to potential investors.
il. PROXIS

A. Proxy .Disclosure Requirements

The. staf has responded to a number of interpretive questions and reviewed proxy statements filed under the revised disclosure reuirements for fund proxy statements ("the revised rules"), which became effective in Januar, 1995. Generay, the qualty of disclosure under the new rules has been good and substatialy improves disclosure that would have been required under the old rules. We believe, however, that the following disclosure issues require clarcation.

1. Material Factors Discussion

Items 22(c)(1l) (approval of investment advisory contract) and 22 (d) (4) (approval of Rule 12b-l plan) of Schedule 14A require a discussion of the materi factors on which the board of ditors has based its decision to recommend an investment advisory contrct or

Rule 12b-1 plan for shareholder approval. Whe the revised rules do not dictate the form or content of the material factors' discussion, the instrctions to the Items state that a mere list of the factors considered by the board of directors is' not sufficient disclosure. The staf has given, and wil continue to give, comments on material factors discussions that do not include a clea, concise explanation of the bases for the directors' recommendation to shareholders (whether for a new contract or the renewal of an existig contrct). The

discussion should include the material factors underlying the recommendation, the relative importce or weight of each factor, and how each factor relates to the board's recommendation. The discussion also is required to reference, if appropriate, whether there are soft dollar argements that benefit the investment adviser. Registrats should avoid generaed discussions of brokerage argements that do npt directly address the specifc soft dollar argements that benefit their investment advisers.
2. Compensation Disclosure

Item 22(b)(6) in Schedule 14A requires proxy statements to include a table disclosing the amount of compensation paid to fund directors by a fund and, if applicable, the fund complex. The same compensation disclosure is required in registration statements. The staf's review of proxy statements (and registration statements) filed under the revised rules indicates that:
. In some cases, varation from the prescribed format may be necessar to

present the inormation in an understadable maner. Funds may present inormation in a diferent tabular format if it wil make the compensation inormation clearer. For example, a fund may var the format of the compensation table to accommodate a proxy statement that solicits votes from shareholders of more than one fund. However, al compensation inormation must be provided in the table (or the footnotes to the table) in the section of the proxy statement discussing the election of directors.

. No entry'is reuired in the compensation table if a diector did not recive

compensation for service as a diector durig the most recnt fiscal period. In

addition, if there is no reortble inormation for a parcula requir category (for example, pension or retiement benefits accrued), funds may omit that column from the compensation table. B. Electronic Proxy Voting

Rule 14a-4(b)(1) of the proxy rules requires registrts to provide to sharholders, in the form of proxy, a meas of conferrg authority to vote on specifc matters. The sta has not objected to proxy solicitation material contag a supplementa method for shareholders to vote electronicaly by using a telephonic or other electronic voting system, if specifcàly permitted by applicable state law. In these cases, the registrat:
a) adopted a reasonable meas of veriying the authenticity of proxies trasmitted by telephone or otherwise (such as including a personal identifcation number on the proxy cad) ; b) provided the shareholder an opportnity to valdate an electronic vote to ensure that the vote was received correctly; c) determined that the supplementa electronic voting procedures provided for in the proxy are permissible under applicable state law; and d) retaed voting records, including the date of receipt of voting instructions and the name of the recipient.
C. Voting Results

Registrats are remided that the results of a vote of shareholders must be furnshed in the next annual or semi-annual shareholder report following a shareholder meeting or other shareholder vote. See Rule 30d-1(b) under the 1940 Act.
IV. FIING PROCEDURS
A. EDGAR Implementation and Fig Procedures
Investment company registrats must fie electronicaly via EDGAR (i) al registration statements, including amendments, under the 1933 Act and/or the 1940 Act; (ü) al proxy materials required to be filed with the Commission (except those for which confidential tr~atment is requested); (il) al reports, includig reports on Form N-SAR and annual and semi-anual reports to shareholders required to be filed with the Commission under Section 30 of the 1940 Act; and (iv) al other reports, forms, and schedules required to be filed by or with respect to investment companes under the Securities Exchange Act of

1934 (excet Form 13F). 21 Al correspondence related to electronic filgs also must be submitted electronicay.

1. Fiancial Data Schedules

Registrts are required to furnsh Financial Data Schedules as exhbits to electronic

filgs, including registrtion statements on Forms S-6, N-1, N-1A, N-2, N-3, N-4, and N-5; Form N-SAR; and cert proxy materials (as specifed in Item 22(a)(4) of Schedule 14A). 3./ The specifc EDGAR taggig requirements for investment company Financial Data Schedules are set forth in Appendi E of the EDGAR Filer Manual. M Appendi E should be read in conjunction with specifc investment company form requirements and Rule 483(e) under the 1933 Act which set forth the reuirements for the schedules.
2. Paper Copies

Registrats are reminded that Rule 902(g) of Regulation S- T requires electronic filers to provide a paper copy of their first electronic filg. Ths paper copy is not an offcial filg, and the legend required by Rule 902(g) should be placed on the cover page to indicate that fact. No signatures ar required. A computer pritout of an EDGAR filg is acceptable, but the confdential access codes must be removed or blaned out. The copy should be reeived by the Commission no later than six business days afer the electronic filg and may be maied to the address set forth in Rule 902 (g) .
3. Cover Letters

Where approprite, cover letters relating to a filg should be included as par of the electronic submission of the relevant filg. Cover letters provide inormation helpful to the review of the filg, including reuests for selective review. 5./ Cover letters always should include a typed letterhead, since letters that are "EDGARed" wil not include the letterhead prited on' firm or company stationery. Also, if they are not included in the letterhead, the name, address, and telephone number of the registrat's contact person(s) should be provided in the text of the letter. See Comment I.A of the Februar 22, 1993 Letter to 2/ See Rules 101, 902, and 903 of Regulation S-T (17 CFR Par 232.101, 902 and 903) and

Release 4.40 of the EDGAR Filer Manual (December 1995) and the Appendix thereto (the "EDGAR FilerManual"). 'J/ For circumstances under which this requirement would not be applicable, see Comment I.D

of the Letter to Registrants dated Februar 3, 1995.
1/ See, in paricular, pages E-2 and E-3 ("Filings Processed by the Division of Investment

Management: Investment Company Forms ") and pages E-43 through E-48 ("Investment Companies, Artcle 6 of Regulation S-X"). The EDGAR document header tag for a document containing a Financial Data Schedule wil always begin with the characters "EX-27" regardless of the item number of this exhibit within the relevant registration statement. See pages C-8 and C-9 of Appendix C of the EDGAR Filer Manual. S-/ Registrants should note that cover letters submitted under document tye "COVER" and

correspondence submitted under submission and/or document tye "CORRSP" are treated as non-public and are not disseminated. See the EDGAR Filer Manual, Section E, paragraph
4.12 ("Non-Public and Confidential Informtion ").

Registrats for other tyes of inormation that may be appropritely included in cover

letters.
,4. Exendi Effeciveness of Rule 48S(a) Figs

Registrts filg post-effective amendments under Rule 485(b) under the 1933 Act to

extend the. effective date of a post-effective amendment filed pursuat to Rule 485(a) should 485B24E, II or (i) submit such filgs under EDGAR submission tye "485BPOS, II 485B24F , II as appropriate; and (ü) following accetace of the submission, noti the sta by correspondence ("CORRP" submission) of the Rule 485(b) filg. These proedre wil be superseded when new EDGAR submission tys designed spifcay for ths purpose become avaible. ,,,' s. Avoidig Common Problems

Registrats can avoid many common problems associated with the process of makg electronic filgs with the Commssion by (i) including the corrt "CIK" number when makg check or wire payment of filg fees through Mellon Ban, in accordace with Rule 3a of the Commission's Informal and Other Procedures, and (ü) establishig and using a CompuServe maibox to receive and carefully review Commssion notices of filg acceptace or suspension. These notices provide inormation about the type of filg (live, test, or confirming copy), the date and time of receipt, error messages for suspnde filgs, and the official filg dates assigned to accepted live filgs.

6. Facing Sheets

Registrats are remided to check the approprite box( es) on the facing sheet of amendments filed under Rule 485 and to make sure that al submission and document header

tags correspondig to those boxes are prepared correctly.

7. EDGAR Contacts
   Apar from questions in the specifc areas enumerated below, registrts generay

should direct their EDGAR questions to their regular processing braches or reviewers, who, wil provide the answers or, in appropriate cases, refer them to the EDGAR Brach.

Registrats new to the EDGAR filg process, however, should dit their questions to the

EDGAR Brach at 202-942-0591. In addition, questions concerng Regulation S-T and

related EDGAR rules provisions may be directed to either Anthony A. Vertno at 202~942 0591 or Ruth A. Sanders at 202-942-0633.

Financial Data Anthony Evangelista 202-942-0636

Schedules Asst. Chief Accountat

Rule 24f-2 Carolyn Miler 202-942-0510

Notices Senior Financial Analyst

Form N-SAR N-SAR Inquir Line 202-942-0513
B. Registering Additional Shares under Rule 24f-2

The Commission recntly amended Rule 24f-2 under the 1940 Act to provide that a

Rule 24f-2 Notice is deemed timely filed if the fund establishes that it trsmitted the notice

to a thid par company or governenta entity that guarte delivery no later than the filg deadle. QI By providing a meas for funds to ensure that they are not penaled for the faiure of a thid pary to timely file their Rule 24f-2 Notices, the Commssion expected the amendments to eliate the nee for funds to seek exemptions from the reuirements of Rule 24f-2. Registrats are remided that they must use new Form 24F-2 for fig Rule 24f-2 Notices for periods endig on or afer October 10, 1995. Also, as provided in amended Rule 24f-2 and new Form 24F-2, registrts caculatig the registration fee due by deducting the amount of shares reeemed durig the fisca yea from the amount of shars sold durig the period must include shares issued in connection with dividend reinvestment plans when determing the amount of shares sold and redeemed.
C. De-Registerig Funds

The staff has noted a number of cases in which funds that have trsferred al of

their assets in a reorgantion subsequently faied to de-register. A registrt whose assets have been trsferred to another fund and which ceases operations as. an investment

company must file an application pursuant to Section 8(t) and Rule 8f-1 for an order declarg that the company has ceased to be an investment company. Applications should be

filed on Form N-8F withi a resonable time afer the reorgantion. Registrats also are

reminded to provide, by establishig a reserve accunt or otherwise, for the payment of costs of the Form N-8F application proceeings and for the prepartion and filg of a fmal

N-SAR on behal of a fund that has ceased operations.

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Ths letter is intended to assist registrats in preparg filgs in 1996; it is not intended to replace the disclosure comment process. You should direct any questions about specifc company filgs to the sta member responsible for reviewing that company's documents. Sincerely, ') ¡/j lji . Ii (jyw ~ . ~ 'êAArl(e ¿arolyn B. Lewis Bar Dl. Miler Assistat Director Assistat Director fl/ Investment Company Act Release No. 21332 (Sept. 1, 1995).