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Outline of Comments on
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| 1. | BenefitsCorp Equities, Inc. | BenefitsCorp |
| 2. | Capital Research and Management Company | Capital Research |
| 3. | Charles Schwab & Co., Inc. | Schwab |
| 4. | The Dreyfus Corporation | Dreyfus |
| 5. | Fidelity Investments | Fidelity |
| 6. | GE Life and Annuity Assurance Company and GE Capital Life Assurance Company of New York | GE |
| 7. | Janus Capital Management LLC | Janus |
| 8. | Metropolitan Life Insurance Company | MetLife |
| 9. | The Northern Trust Company | Northern Trust |
| 10. | OppenheimerFunds, Inc. | Oppenheimer |
| 11. | Ronald W. Beasley, Inc. | Beasley |
| 12. | The Vanguard Group, Inc. | Vanguard |
Fund Service Providers
| 1. | Confluence Technologies, Inc. | Confluence |
Professional and Trade Associations
| 1. | Association for Investment Management and Research, U.S. Advocacy Committee | AIMR |
| 2. | Committee of Annuity Insurers | CAI |
| 3. | Investment Company Institute | ICI |
| 4. | Investment Counsel Association of America I | ICAA-I |
| 5. | Investment Counsel Association of America II | ICAA-II |
| 6. | National Association for Variable Annuities | NAVA |
| 7. | North American Securities Administrators Association, Inc. | NASAA |
| 8. | Securities Industry Association | SIA |
Law Firms/Law Professors/Bar Associations
| 1. | American Bar Association, Subcommittee on Investment Companies and Investment Advisers | ABA |
| 2. | The Association of the Bar of the City of New York, Committee on Investment Management Regulation | NYC Bar |
| 3. | Stephen Calkins (Wayne State Univ.) | Calkins |
| 4. | Mayer, Brown, Rowe & Maw | Mayer |
| 5. | Ropes & Gray | Ropes |
Individual Investors
| 1. | William Carroll | Carroll |
| 2. | Jeff Goodall | Goodall |
| 3. | Joseph M. Jaros, Jr. | Jaros |
OUTLINE OF COMMENTS ON PROPOSED AMENDMENTS TO INVESTMENT COMPANY ADVERTISING RULES
On May 17, 2002, the Securities and Exchange Commission (the "Commission") proposed rule and form amendments to provide registered investment companies and business development companies with the ability to disclose more timely information in advertisements and to reinforce the antifraud protections that apply to investment company advertisements. The proposed amendments would implement a provision of the National Securities Markets Improvement Act of 1996 by permitting the use of a prospectus under section 10(b) of the Securities Act with respect to securities issued by an investment company that includes information the substance of which is not included in the investment company's statutory prospectus. The proposed amendments also would require enhanced disclosure in investment company advertisements and were designed to encourage advertisements that convey balanced information to prospective investors, particularly with respect to past performance.
The comment period closed on July 31, 2002. The Commission received 29 comment letters, including three from individual investors,1 five from commenters associated with the legal profession (bar associations, law firms, or law professors),2 eight from professional or trade associations,3 and thirteen from members of the fund industry and service providers.4 The following outline summarizes the commenters' views.
The commenters generally supported the Commission's proposal to amend the advertising rules, although some commenters expressed concerns regarding portions of the proposals or suggested changes. None of the individual investors objected to any portion of the proposals, and two of the investors expressly supported the proposals.5 A significant number of other commenters objected to various elements of the proposed amendments, including the proposals to: (1) rescind rule 134 for investment companies, (2) require that toll-free telephone be the exclusive medium for making updated monthly performance figures available, and (3) require that updated monthly performance figures be made available within three calendar days of the month end.6 In addition, many of the commenters also suggested changes or requested clarifications regarding certain aspects of provisions that they did not oppose.7
SUMMARY: The Commission proposed to amend rule 482 to remove the requirement that a rule 482 advertisement contain only information the substance of which is included in the statutory prospectus.
Ten commenters addressed this specific issue. Each of these commenters favored the Commission's proposal. While some of these commenters noted that the elimination of the "substance of which" requirement was mandated by statute, the commenters specifically addressing this proposal stated that the amendment generally would result in greater flexibility for funds and improved shareholder communication.8
One commenter, responding to a specific request in the proposing release for comments, commented that no additional restrictions or conditions on the content of rule 482 advertisements would be necessary in view of the antifraud and prospectus liability protections.9
SUMMARY: The Commission proposed to remove the provisions of rule 134 that apply specifically to funds and to exclude both registered investment companies and business development companies from relying on rule 134.
Seven commenters opposed the proposal. They objected to the amendment of rule 134 on the grounds that it created potential increased liability.10 Specifically, they argued that:
In addition, one commenter suggested not only that rule 134 should be retained, but that it be expanded to allow the presentation of standardized performance information.18 Another commenter disagreed with the Commission's suggestion that the cost of advertising compliance would be reduced as a result of having to comply with only one advertising rule.19
One commenter stated that it did not oppose the proposal, agreeing that rule 482 would be sufficient to regulate most fund advertising.20 This commenter, however, suggested that if the Commission did rescind those portions of rule 134 regarding investment companies, it confirm that funds may rely on rule 135a and include the name of the fund sponsor in a rule 135a advertisement.
SUMMARY: The Commission proposed to amend the fund advertising rules in order to reemphasize that fund advertisements are subject to the antifraud provisions of the federal securities laws. Specifically, the Commission proposed adding notes to rules 482 and 34b-1 stating that an advertisement that complies with the rule does not relieve the fund, underwriter, or dealer of the obligation to ensure that the advertisement is not false or misleading. In addition, the Commission proposed to amend rule 156 to provide further guidance regarding the factors to be weighed in considering whether a statement involving a material fact in investment company sales materials is or might be misleading. The Commission proposed to modify the language of rule 156 to state more explicitly that portrayals of past income, gain, or growth of assets may be misleading where the portrayals omit explanations, qualifications, limitations, or other statements necessary or appropriate to make these portrayals of past performance not misleading.
Six commenters supported the proposal, although some of these suggested particular changes or requested clarification.21 These suggestions and clarifications were as follows.
Two commenters urged the Commission to exclude performance figures from the antifraud rules. That is, they sought regulations that would deem performance figures calculated in conformity with and current under rule 482 not to be false or misleading, but otherwise would subject the rest of the elements of an advertisement to the antifraud provisions.22
The same two commenters suggested changing the proposed amendment to the language of rule 156, which would consider as misleading "portrayals that omit explanations, qualifications, limitations, or other statements necessary or appropriate to make the portrayals not misleading." The commenters felt that better language would read "necessary and appropriate" or simply "necessary" because the rule could otherwise be read to require disclosure of information that may be "appropriate," even though such information is not necessary or essential to ensure that the advertisement is not misleading.23
One commenter requested that the proposed language amending rule 482 clarify that independent directors would not be included in any liability under section 12(a)(2) of the Securities Act in connection with a fund's rule 482 advertising.24
Finally, one commenter recommended changing the proposed language in the notes to rules 482 and 34b-1, which states that compliance with each rule does not relieve the investment company, underwriter, or dealer of the obligation to ensure that the sales literature is not false or misleading. The commenter objected to the use of the word "ensure," which it felt cast the investment companies, underwriters, or dealers as guarantors, when these persons have a reasonable care defense under section 12 of the Securities Act. The same commenter suggested that the Commission clarify its intent in this regard in a manner "short of codification," suggesting inclusion of guidance in the adopting release.25
SUMMARY: The Commission proposed the following amendments to enhance the disclosure that funds are required to provide in advertisements, particularly with regard to performance information.
1. Month-end Performance Data
One commenter stated that it would be both technologically feasible and affordable to make month-end performance information available to investors as contemplated by the proposal.26 One commenter opposed the proposal regarding the provision of month-end data in its entirety.27 Another commenter suggested that providing updated month-end data for periods longer than one year, i.e., five years, ten years, or the life of the fund, would not be necessary in most cases to alert investors that current short term performance has been poor or negative.28
Fourteen commenters suggested that the proposed requirement for funds to update month-end performance three calendar days after the most recent month-end did not allow sufficient time for funds to comply for practical reasons. 29 Some of these commenters opposed imposition of a definitive timeframe, stating that the rule should permit funds to make updates available as soon as reasonably practicable.30 Other commenters recommended specific time periods greater than three calendar days. These proposals ranged from three business days31 to a calendar week32 to five business days33 to seven business days.34
Aside from those regarding the three-day period, other objections to the proposal concerning month-end performance data related to the medium by which the performance data must be conveyed to shareholders. In general, commenters suggested that the proposed amendment allow funds a choice of medium, specifically telephone and/or Internet, rather than requiring telephone access to month-end performance numbers.35 One commenter supported Internet access, but stated that Internet access alone would not be sufficient and suggested telephone access also.36 Four commenters representing variable insurance products stated that telephone access to month-end performance numbers would be impracticable for variable insurance products.37 One commenter stated that telephone access to month-end performance numbers would be impracticable for funds sold through financial intermediaries.38
Five commenters objected to the requirement that investors be referred to a toll-free telephone number when an advertisement already contains the most recent month-end figures.39
2. Narrative Disclosures and Prominence Requirements
One commenter supported the proposed disclosure requirements, but also recommended that the Commission expand the requirements to include disclosure referring to a fund's objectives and risks, sales charges, and annual expenses.40 Two commenters suggested that the proposed disclosure requirements are not necessary for advertisements directed toward institutional investors.41 Two commenters requested clarification with regard to the required disclosures that past performance does not guarantee future results and that current performance may be lower or higher than the performance data quoted-specifically, they recommended that the Commission clarify that funds would not have to use separate statements for each of the two required items and that funds would have flexibility to use alternative language that communicates the concepts.42 Three commenters requested certain clarifications regarding the disclosure requirements for telephone updates of performance data.43 Another commenter indicated that it interpreted the proposed amendments not to require that narrative disclosures required by rule 482 be repeated in telephone updates of performance data.44 Three commenters supported the proposed requirements for placement of required narrative disclosure45 and one opposed, stating that funds should have latitude to determine format and placement of information, based on circumstance and physical constraints of the advertisement.46 Four commenters opposed the proposed type size and style requirements47 and one supported the proposed requirements.48 Three commenters requested clarification of the application of the narrative disclosure and prominence requirements in radio, television, and Internet advertisements.49
SUMMARY: The Commission proposed reorganizing rule 482 to make it easier to use. The Commission also proposed revising Forms N-1A, N-3, N-4 and N-6 to reflect the removal of the "substance of which" requirement in rule 482
There were no comments related to the reorganization of rule 482. One commenter wrote in support of the proposed form amendments to reflect the removal of the "substance of which" requirement in rule 482.50
SUMMARY: The Commission requested comment generally on whether the framework for the regulation of mutual fund advertising could be modified.
Two commenters supported the present system of regulating fund advertising.51 One commenter stated that the Commission should work toward developing a framework that would recognize a distinction between advertisements directed toward retail investors and advertisements directed toward institutional investors.52 The same commenter also stated that the framework should better address the increased role of the internet in mutual fund advertising.53 Two commenters urged the Commission to consider changes to the regulation of investment adviser advertisements.54
Finally, several commenters made general suggestions or asked for clarification regarding subjects that were not directly related to the request for comment on the framework of regulation. For example, one industry commenter requested clarification with regard to the use of non-English sales materials and the delivery of translated prospectuses and profile-like documents to defined contribution plan participants.55
SUMMARY: The Commission also solicited comment on a provision of rule 482 relating to variable insurance contracts. Rule 482 generally prohibits a rule 482 advertisement from containing or being accompanied by an application to purchase fund shares, but an exception permits an application for a variable insurance contract to accompany the contract prospectus, even though the contract prospectus constitutes a rule 482 advertisement for the underlying mutual funds and even though prospectuses for the underlying funds do not accompany the contract prospectus. In particular, the Commission asked whether rule 482 advertisements for the underlying funds that are not contained in the contract prospectus itself should be permitted to be delivered simultaneously with the contract prospectus and accompanying purchase application.
Three commenters urged the Commission to retain the exception granted for variable insurance contracts.56 These commenters also stated that the Commission should permit rule 482 advertisements for underlying funds not contained in the insurance contract prospectus itself to be delivered simultaneously with the contract prospectus and accompanying purchase application, without simultaneous delivery of the underlying fund prospectuses. However, one of the three commenters suggested that if this practice is permitted, the Commission should amend rule 482 to require the insurance contract prospectus to include (1) a table of all underlying mutual fund charges and (2) the investment objective of each underlying mutual fund available under the variable insurance contract.57
SUMMARY: The Commission proposed the amendments to the advertising rules with two separate compliance dates. First, the elimination of the requirement that rule 482 advertisements contain only information the substance of which is included in the statutory prospectus would go into effect immediately upon the effective date of the amendments. Second, the Commission indicated that it expected to require fund advertisements used ninety days or more after the effective date of the amendments to comply with the amendments.
No commenters opposed the proposed compliance date for elimination of the "substance of which" requirement. Two commenters wrote in support of this compliance date.58
Six commenters opposed the 90-day compliance period, all on the grounds that the time period was unrealistically short given such factors as the need to modify telephone and information systems, sometimes in conjunction with third-party vendors.59 Three of these commenters simply requested additional time measured from the same date, i.e., the effective date of the amendments-two requested 12 months or more,60 while one believed the compliance period should be extended to 180 days.61 The other three commenters believed that the compliance period ought to run from a calendar quarter end, to reflect the fact that funds generally update their advertisements on a quarterly basis, in order to comply with the currentness provisions of rule 482.62 These commenters argued that any arbitrary period of days would in practice force compliance by the immediately preceding calendar quarter end. Instead, these commenters suggested requiring compliance by the end of the second full quarter following adoption of the amendments.
Three of the commenters commented directly on the Cost/Benefit Analysis. One commenter expressed concern regarding the proposed language of the new notes to rules 482(a) and 34b-1, which states that compliance with the rules does not relieve the fund, underwriter, or dealer of the obligation to ensure that the advertisement or sales literature is not false or misleading. The commenter was concerned that the new notes could expand liability for independent directors in connection with fund advertisements, resulting in a significant cost burden.63 With regard to the rescission of rule 134, one commenter disagreed with the Commission's view that there would be a benefit to funds as a result of having to comply with only one advertising rule. The commenter stated that, in its experience, there is no correlation between the number of advertising rules and the costs of advertising.64 Finally, one commenter stated that the benefits cited in the Cost/Benefit Analysis of simplification and clarification of fund advertising regulation would apply equally to simplification and clarification of regulation of advertising by advisers and urged the Commission to commence a rulemaking to address adviser advertising issues.65
Several other commenters also raised issues relating to the costs of the proposed amendments, without specifically referencing the Cost/Benefit Analysis. Nine commenters cited increased costs as an argument against the proposed requirement that funds use toll-free telephone numbers as the medium for updated monthly performance figures.66 Two of these commenters provided specific dollar amounts related to these costs.67 On the other hand, one commenter indicated that making updated monthly performance data available in the manner contemplated by the proposal would be affordable for all funds, regardless of size.68
There were no comments related to the Paperwork Reduction Act Analysis.
Two commenters indicated that the cost of providing updated performance information through a toll-free (or collect) telephone number would be particularly burdensome for smaller fund complexes, stating that some smaller complexes do not already have automated voice response systems.69 One of these commenters stated that the Initial Regulatory Flexibility Analysis "likely underestimates" the costs that would be incurred for smaller fund complexes in complying with the toll-free (or collect) telephone number requirement.70
One commenter specifically addressed the effect of the proposed amendments on efficiency, competitiveness, and capital formation. This commenter objected to the rescission of rule 134 for funds on the grounds, among others, that investment companies would be treated less favorably than other issuers engaged in ongoing offerings of their securities that would continue to be able to rely on rule 134.71
_______________________
| 1 | William Carroll, Jeff Goodall, and Joseph M. Jaros, Jr. |
| 2 | The American Bar Association, Subcommittee on Investment Companies and Investment Advisers (ABA); The Association of the Bar of the City of New York, Committee on Investment Management Regulation (NYC Bar); Stephen Calkins, Wayne State University (Calkins); Mayer Brown Rowe & Maw (Mayer); and Ropes & Gray (Ropes). |
| 3 | Association for Investment Management and Research (AIMR); Committee of Annuity Insurers (CAI); Investment Company Institute (ICI); Investment Counsel Association of America I & II (ICAA-I & -II); National Association for Variable Annuities (NAVA); Securities Industry Association (SIA); and North American Securities Administrators Association, Inc. (NASAA). |
| 4 | BenefitsCorp Equities, Inc. (BenefitsCorp); Capital Research and Management Company (Capital Research); Charles Schwab & Co., Inc. (Schwab); The Dreyfus Corporation (Dreyfus); Fidelity Investments (Fidelity); GE Life and Annuity Assurance Company and GE Capital Life Assurance Company of New York (GE); Janus Capital Management LLC (Janus); Metropolitan Life Insurance Company (MetLife); The Northern Trust Company (Northern Trust); OppenheimerFunds, Inc. (Oppenheimer); Ronald W. Beasley, Inc. (Beasley); The Vanguard Group, Inc. (Vanguard); and Confluence Technologies, Inc. (Confluence). |
| 5 | Jaros and Carroll. |
| 6 | For example, Mayer, NYC Bar, Oppenheimer, ICI, Ropes, SIA, Fidelity, and Vanguard. |
| 7 | For example, Northern Trust, Mayer, Metlife, Oppenheimer, ICI, Dreyfus, NAVA, CAI, Vanguard, Schwab, AIMR, GE, and ABA. |
| 8 | Oppenheimer, ICI, Capital Research, CAI, Schwab, AIMR, SIA, Fidelity, Janus, and GE. |
| 9 | CAI. |
| 10 | Mayer, NYC Bar, Oppenheimer, ICI, Ropes, SIA, and Fidelity. Schwab strongly supported the ICI comments, presumably including those regarding rule 134, but did not comment on the amendments to rule 134 directly. |
| 11 | Mayer, NYC Bar, Oppenheimer, and SIA. |
| 12 | Mayer, NYC Bar, Oppenheimer, ICI, and SIA. |
| 13 | Mayer, Oppenheimer, ICI, and Fidelity. |
| 14 | Ropes |
| 15 | NYC Bar. |
| 16 | SIA. |
| 17 | Ropes. Ropes argued that imposing Section 12 liability would make the fund itself, and ultimately shareholders, liable as the seller, although such liability is more appropriately placed on a fund's principal underwriter. |
| 18 | Ropes. |
| 19 | Fidelity. |
| 20 | Vanguard. |
| 21 | Oppenheimer, ICI, Schwab, SIA, Capital Research, and Fidelity. In addition, the ABA submitted technical comments regarding the language of the proposed amendments, suggesting support for the intent of the proposal and further suggesting that the Commission express its intent in a manner "short of codification," such as through guidance in the adopting release. |
| 22 | Oppenheimer and ICI. Schwab did not comment on this specifically, but did express its strong support for the ICI letter. |
| 23 | Id. |
| 24 | Mayer. |
| 25 | ABA. |
| 26 | Confluence. |
| 27 | Fidelity. |
| 28 | Northern Trust. |
| 29 | Northern Trust, Metlife, Oppenheimer, Dreyfus, Capital Research, Vanguard, BenefitsCorp, Schwab, SIA, Fidelity, NAVA, ICI, CAI and GE. |
| 30 | ICI, Oppenheimer, Vanguard, Schwab, and Fidelity. |
| 31 | Capital Research. |
| 32 | GE. |
| 33 | Northern Trust, NAVA, and CAI. |
| 34 | MetLife. |
| 35 | Schwab, AIMR, CAI, NAVA Calkins, Northern, ICI, Oppenheimer, Fidelity, GE, and Metlife. |
| 36 | Vanguard. |
| 37 | CAI, GE, MetLife, and NAVA. |
| 38 | Janus. |
| 39 | ICI, Oppenheimer, Vanguard, Schwab, and Fidelity. |
| 40 | Vanguard. |
| 41 | ICI and Vanguard. |
| 42 | ICI and Oppenheimer. |
| 43 | NAVA, Vanguard, and Oppenheimer. |
| 44 | ICI. |
| 45 | ICI, Oppenheimer, and Vanguard. |
| 46 | Fidelity. |
| 47 | ICI, Oppenheimer, Janus, and Fidelity. |
| 48 | Vanguard. |
| 49 | ICI, Oppenheimer, and Vanguard. |
| 50 | Fidelity. |
| 51 | Oppenheimer and ICI. |
| 52 | Fidelity. |
| 53 | Id. |
| 54 | ICAA and SIA. |
| 55 | Capital Research. |
| 56 | Metlife, CAI, and NAVA. |
| 57 | Metlife. |
| 58 | ICI and Fidelity. |
| 59 | Metlife, Oppenheimer, ICI, CAI, Vanguard, and Fidelity. |
| 60 | Metlife and CAI. |
| 61 | Vanguard. |
| 62 | Oppenheimer, ICI, and Fidelity. |
| 63 | Mayer. |
| 64 | Fidelity. |
| 65 | ICAA. |
| 66 | Oppenheimer, ICI, GE, Calkins, Fidelity, NAVA, Schwab, MetLife, and CAI. |
| 67 | GE and Schwab. The NAVA comment letter cited the figure provided by GE and added that that estimate is for hardware and software requirements only and does not include personnel expenses. The NAVA comment letter also stated that expenses for companies that do not presently have automated telephone systems would likely be several times higher than the estimate provided by GE. |
| 68 | Confluence. |
| 69 | ICI and Oppenheimer. |
| 70 | ICI. |
| 71 | NYC Bar. |
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