December 12, 2003

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

Re: File No. S7-51-02

Dear Mr. Katz:

The Accounting Standards Executive Committee (AcSEC) Planning Subcommittee (PSC) of the American Institute of Certified Public Accountants and the Investment Companies Expert Panel (Expert Panel) appreciate the opportunity to comment on the Securities and Exchange Commission (SEC) Proposed Rule: Shareholder Reports and Quarterly Portfolio Disclosure of Registered Management Investment Companies (Proposed Rule). In particular, our letter focuses on the summary schedule of investments contained in the Proposed Rule.

The PSC and the Expert Panel support the SEC's objective to improve financial statement disclosures for registered investment companies so that the information is more useful and understandable to investors. Additionally, we acknowledge the need to address the concerns of financial statement preparers about minimizing the costs associated with the complete schedule of investments in shareholder reports. We believe that the best way to achieve those objectives is to conform the SEC's requirements for a summarized schedule of investments to the requirements of AICPA Audit and Accounting Guide, Audits of Investment Companies (Guide). We are concerned that the Proposed Rule, which differs in a number of respects from the Guide, will create confusion for investors.

Background Information About the Guide

When AcSEC added a project to its agenda in the 1990's to revise the Guide, its objectives included providing useful information to investors at a reasonable cost to preparers. The Guide's Exposure Draft proposed to remove the requirement from the prior Guide for a complete schedule of investments and replaced that with a requirement for a summarized schedule of investments that would be presented for all investment companies, other than investment partnerships, regardless of the types of investments held.

The Exposure Draft was subject to the AICPA's due process required for all significant changes to the Guide. At that time interested parties, including the SEC staff, had the opportunity to express their views about whether the summarized schedule of investments should appear in the financial statements of any type of investment company. Neither at the time the Guide was exposed for public comment nor subsequently has any evidence come to the attention of AcSEC, the PSC, or the Expert Panel to suggest that the benefits provided by the summarized schedule of investments in understanding an investment company's financial position were either insignificant or outweighed by its costs. We believe that the Guide's required summarized schedule of investments should not be modified or eliminated unless it is no longer useful. Regardless, if AcSEC concluded that changes to the Guide were warranted, those changes would require a similar due process to ensure that the needs of financial statement users are met. Additionally, we observe that the Proposed Rule would continue to require funds to file a complete audited schedule of investments with the SEC. Therefore, it would appear that the SEC recognizes the significance of the schedule of investments to understanding fund financial statements.

Comments on Proposed Rule

We are concerned that the proposed rule, as currently drafted, differs in that it is less rigorous and conflicts with the summarized schedule of investments required under generally accepted accounting principles (GAAP) as set forth in the Guide. As a result, we are unable to support the proposed rule as currently drafted. Those differences and our specific concerns are detailed as follows:

• The Proposed Rule would exempt money market funds from including any schedule of investments — even a summarized one — in the shareholder reports. Additionally, we understand that the SEC will consider whether other types of funds should also be afforded a similar exemption. The Guide requires all investment companies that are under its scope to include a summarized schedule of investments in their financial statements.
   
  If a money market fund does not comply with GAAP as stated in the Guide, the auditors of the fund's financial statements would be required to issue a qualified opinion under generally accepted auditing standards. It has been the SEC's practice to reject the filing of auditor reports qualified for non-compliance with GAAP. Therefore, should the SEC adopt the Proposed Rule, as currently drafted, money market funds still would be required to present the summarized schedule in accordance with the Guide.
   
  We believe that the more appropriate course of action, supported by recent public due process, is that the rule should require all investment companies to present the summarized schedule of investments required by the Guide.
   
• The Proposed Rule would require the presentation of investments in the summarized schedule of investments in descending order by value with a footnote indicating the type of investment, whereas the Guide requires investments to be categorized by type and related industry, country or geographic region in the schedule of investments. The Proposed Rule also would require a graphical presentation of the investment information in Management's Discussion of Fund Performance (MDFP).
   
  We are concerned that a fund following the Proposed Rule might not present the classification of the fund's investments in the fund's financial statements, but in MDFP. While it theoretically would be possible to incorporate classification information into the audited financial statements by reference from MDFP, doing so would be cumbersome, duplicative, and potentially confusing to readers. We believe that meaningful information about a Fund's investments should be presented in the schedule of investments as required by the Guide and, if desired, supplemented by a graphical presentation.
   
• The Proposed Rule would permit the summary schedule of investments to apply only to investments in unaffiliated issuers and would require all other types of investments to continue to be presented in accordance with Regulation S-X, whereas the Guide requires a fund to report all investments in which fair values constitute more than 1% of net assets or are one of the fund's top 50 holdings.
   
  We are concerned that the Proposed Rule would permit preparers of financial statements to present summary listings of investments in unaffiliated issuers, but would require full listings of affiliated investments. Many affiliates result only from the statutory definition of ownership of more than 5% of a company's voting securities and the companies are not otherwise related parties as defined by GAAP. As a result, that presentation would not allow readers of the financial statements to place affiliated investments in their proper context in relation to a fund's investment strategy and related risk. Therefore, we believe that the proposed schedule should provide a consistent summary presentation of a fund's affiliated and unaffiliated investments.

We understand the SEC's objective is to provide a set of rules that retain the spirit of the Guide and at the same time address the concerns of financial statement preparers about the costs associated with printing the complete schedule of investments in shareholder reports. However, in attempting to achieve that objective the Proposed Rule, as currently drafted, appears to attempt to supercede GAAP because the Proposed Rule is less rigorous and conflicts with current GAAP requirement. As previously indicated, we believe that based on the AICPA's due process performed in the most recent comprehensive review and revision of the Guide, the information currently required by GAAP provides meaningful information for readers of fund financial statements. Therefore, we believe that the Guide's required summarized schedule of investments should not be modified or eliminated unless the usefulness of the disclosures required by the schedule has diminished.

Additionally, we believe if the Proposed Rule is adopted as drafted, it will create two different and inconsistent, reporting requirements, likely creating additional burdens for preparers and confusion for preparers and users alike. Accordingly, we believe that a uniform presentation, based on the Guide's required summarized schedule of investments, would be in the best interest of financial statement preparers and users.

Separately, we agree with the SEC's proposal to require the inclusion of a complete schedule of investments in Form N-CSR and its distribution only to investors that request it. This proposal achieves a proper balance of removing the burden and cost of printing and delivering information of marginal relevance in general-distribution reports, while still making more detailed information available to those who are interested in it.

We appreciate the opportunity to submit our comments and would be pleased to discuss them with you at your convenience.

Mark Bielstein, Chair
Accounting Standards
Executive Committee

Alan Latshaw, Chair
Investment Companies
Expert Panel