THE ASSOCIATION OF THE BAR
OF THE CITY OF NEW YORK
42 WEST 44TH STREET
NEW YORK, NY 10036-6689

COMMITTEE ON INVESTMENT MANAGEMENT REGULATION

JOHN E. BAUMGARDNER, JR., ESQ. CHAIR 125 BROAD STREET NEW YORK, NY 1004-2498 (212) 558-3866 FAX # (212) 558-3588 baumgardnerj@sullcrom.com

MARINA PEARLMAN, ESQ. SECRETARY 125 BROAD STREET NEW YORK, NY 1004-2498 (212) 558-3188 FAX # (212) 558-3588 pearlmanm@sullcrom.com

July 26, 2002

Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

Re:

File No. S7-17-02 Proposed Amendments to Investment Company Advertising Rules

Dear Mr. Katz:

        The Committee on Investment Management Regulation of the Association of the Bar of the City of New York (the “Committee”) is composed of lawyers with diverse perspectives on investment management issues, including members of law firms, and counsel to financial services firms, investment company complexes and investment advisers. A list of our current members is enclosed.

        The Committee believes that the Commission has raised a number of important issues concerning investment company advertising rules in Release No. 33-8101 (May 17, 2002) (the “Release”). The Commission invited specific comment on the proposed changes in Rule 134 under the Securities Act of 1933 (the “Securities Act”) and, by consensus, the Committee is commenting only on those changes.

        The Committee believes that Rule 134 should remain available to registered investment companies and business development companies, and that such issuers should be able to choose whether to publish advertisements with more limited information and without liability under Section 12 (a)(2) of the Securities Act or to publish advertisements without specific limitations on content but with such liability. The Committee also believes that experience under Rule 134 does not independently provide a basis for subjecting all investment company advertising to liability under Section 12(a)(2) or for making Rule 134 unavailable for investment companies. In addition, the Committee recommends that no changes be made in Rule 134 as a result of implementing changes in Rule 482.

        A principal proposal in the Release is the elimination of the “substance of which” requirement in Rule 482 under the Securities Act. The Release states that with the proposed elimination of that requirement, the Commission believes that funds will no longer need to rely on Rule 134.¹ The Release cites two bases for this proposition. First, Rule 482, as proposed to be amended, will provide funds with “sufficient flexibility” to discuss topics, such as current economic conditions, that are currently permitted in Rule 134 advertisements but not in the statutory prospectus. Second, investor protection will be enhanced if all advertisements are subject to Rule 482 and, consequently, liability under Section 12(a)(2) of the Securities Act.

        As a matter of policy and notwithstanding the proposed expansion of Rule 482, the Committee sees no reason to deny funds the ability to utilize a form of advertisement that has been specifically tailored to funds since 1972.² Other issuers, including companies engaged in continuous offerings of their securities, have the ability to use limited advertisements that are not deemed prospectuses. The Committee believes it is appropriate for a registered investment company to be able to distribute, at its option, an advertisement or notice with information permitted by paragraphs (a)(3) and (a)(13) of the Rule without having the document be considered a prospectus. If, however, a registered investment company desires to publish an advertisement with information, such as performance information, not permitted by Rule 134, it may do so in accordance with the expanded Rule 482. Registered investment companies which elect to be limited by Rule 134 ought not lose the benefit of Rule 134 merely because other investment companies do not wish to be so limited in the information their advertisements contain. Put another way, the differences in consequences from a liability perspective between advertisements under Rule 134 and those under Rule 482 are appropriate and retain vitality notwithstanding the proposed added flexibility in proposed Rule 482.

        Further, the Committee believes that, in light of the limited information that may be included in Rule 134 advertisements, investors are adequately protected against their misuse. As the Release recognizes, Rule 134 advertisements are subject to the antifraud provisions of the federal securities laws.³ While an action under the antifraud provisions may require proof of scienter and investor reliance, Rule 134 advertisements are nevertheless subject to substantive liability provisions protecting against material misrepresentations and omissions.⁴ In addition, while the experience of Committee members is more limited than that of the Commission, Committee members are unaware of wholesale or frequent abuse of Rule 134, or of regular or persistent complaints that Rule 134 advertisements are misleading.

        Finally, the Committee submits that the policy judgment in 1972 that the content of advertisements permitted under Rule 134 is not in fact comparable to, or intended as a substitute for, information contained in a prospectus or summary prospectus has been validated in practice. As a result, if use of Rule 134 is denied, investment companies would be treated less favorably than other issuers which engage in ongoing offerings of their securities, and investment companies would be denied the choice of content limitation or liability under Section 12(a)(2) without a discernible public benefit or in light of problems experienced under Rule 134 over the past 30 years.

        The Committee appreciates the opportunity to comment on the Release and we are available to respond to any questions from the Commission and its staff.

Very truly yours, /s/ John E. Baumgardner, Jr. John E. Baumgardner, Jr. Chair

Enclosure

Drafting Committee:

John E. Baumgardner, Jr.
John A. MacKinnon

The Association of the Bar of The City of New York
Committee on Investment Management Regulation

John E. Baumgardner, Jr. (Chair)	Sullivan & Cromwell
Marina Pearlman (Secretary)	Sullivan & Cromwell
Margaret A. Bancroft	Dechert
Edmund P. Bergan, Jr.	Alliance Capital Management L.P.
Kenneth J. Berman	Debevoise & Plimpton
Cynthia G. Cobden	Simpson Thacher & Bartlett
Stuart H. Coleman	Stroock & Stroock & Lavan
David Dickstein	Kirkpatrick & Lockhart LLP
Frank W. Giordano	Adjunct Professor - St. John's Law School
Joel H. Goldberg	Shearman & Sterling
William V. Healey	Prudential Investments Fund Management LLC
Mary Joan Hoene	Carter, Ledyard & Milburn
Lisa M. Hurley	BISYS
Mark N. Jacobs	The Dreyfus Corporation
Nora Jordan	Davis Polk & Wardwell
Philip L. Kirstein	Merrill Lynch Investment Managers
Burton M. Leibert	Willkie Farr & Gallagher
Arthur Lev	Four Point Partners
Leonard B. Mackey, Jr.	Clifford Chance Rogers & Wells LLP
John A. MacKinnon	Sidley Austin Brown & Wood LLP
Frank J. Nasta	J. & W. Seligman & Co. Incorporated
Michael R. Rosella	Paul, Hastings, Janosky & Walker LLP
Michael Rosenbaum	Citigroup Asset Management
Victoria E. Schonfeld	Wilmer, Cutler & Pickering
Nina O. Shenker	JP Morgan Chase & Company
Stuart M. Strauss	Mayer, Brown, Rowe & Maw
Robert M. Zakem	SunAmerica Asset Management

Endnotes

1		Text accompanying note 53.
2		As noted in the Release, Rule 134 was amended in 1972, 1974 and 1975 to expand the types of information that investment companies may include in Rule 134 advertisements. The 1975 amendment permitted the discussion of general economic conditions. Securities Act Release No. 5591 (June 16, 1975).
3		Text accompanying note 29.
4		Release at note 22.