KPMG LLP

February 14, 2003

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

File No. S7-51-02
Proposed Rule: Shareholder Reports and Quarterly Portfolio Disclosure of Registered Management Investment Companies
Release Nos. 33-8164; 34-47023; IC-25870

Dear Mr. Katz:

We appreciate the opportunity to comment on the Commission's proposed rule, Shareholder Reports and Quarterly Portfolio Disclosure of Registered Management Investment Companies, Release No. IC-25870 (Proposed Rules). We support the Commission's efforts to improve financial statement disclosures for registered investment companies (Funds). The Proposed Rules are intended, in part, to streamline the reporting of investment information included in reports to shareholders, making the information more useful and understandable to investors. We hope our comments presented below help the Commission achieve its goals, while reducing compliance burdens when it is consistent with the protection of investors and minimizing costs to shareholders.

Harmonization with Generally Accepted Accounting Principles (GAAP)

The Commission's proposed summary schedule of investments should be harmonized with the GAAP. On November 1, 2000, the American Institute of Certified Public Accountants (AICPA) adopted a new Audit and Accounting Guide, "Audits of Investment Companies"(the Audit Guide), which requires all investment companies to report a summarized schedule of investments in their financial statements.¹ The Commission's proposed summary schedule differs in some significant ways from the Audit Guide's required schedule. For example, the Proposed Rules would permit an exemption for money market funds from the requirement to include either a summary or complete schedule of investments in shareholder reports, while the Audit Guide requires all Funds to present a schedule of investments. Also, the Audit Guide requires investments to be presented by type, industry and country or geographic region, while the Proposed Rules stipulate presentation of investments in descending order by value.
If the Proposed Rules are adopted as proposed, we believe these differences would be confusing for preparers of financial statements, investors and other users, and would likely result in inconsistent reporting practices across the industry. Despite the SEC exemption, some money market funds may nevertheless present a schedule of investments in shareholder reports to comply with the Audit Guide. Other Funds electing to use a summary schedule of investments in shareholder reports may present investment type and category information in various ways as well.
We believe the Proposed Rules should be harmonized with the Audit Guide with the objective of requiring a uniform presentation that is in the best interest of shareholders, while minimizing costs. The following comments address the significant differences between the Proposed Rules and the Audit Guide and our recommendations for achieving this objective.
- All Funds should be required to include either a complete or summary schedule of investments in their reports to shareholders. The Audit Guide requires all investment companies, regardless of type, to report a schedule of investments in their financial statements.² The Commission has proposed an exemption for money market funds from including a summary or complete schedule of investments in shareholder reports, and seeks comment on whether other types of Funds should be afforded a similar exemption. We believe that information regarding a Fund's significant investments, including disclosures of significant categories of investments and concentrations of investment risks, is beneficial for a user of the financial statements to understand the Fund's financial position. Therefore, the Commission should require all Funds, including money market and index funds, to include either a complete or summary schedule of investments in financial statements that are part of shareholder reports.
- The Commission should require the summary schedule of investments to include significant categories of investments. The Commission has proposed that investments be presented in the summary schedule in order of descending value with a footnote indicating the type of instrument. This conflicts with requirements in paragraph 7.10 of the Audit Guide, which requires investments to be categorized by type of investment, industry and country or geographic region in the schedule of investments. While the Commission has proposed a graphical presentation of investment information by category in Management's Discussion of Fund Performance, we nevertheless believe the categories of a Fund's investments are appropriate to be presented in the summary schedule. In addition to being required by GAAP, this information allows users of the financial statements to understand a Fund's financial position. A listing of a Fund's 50 largest holdings and those securities with a fair value greater than 1% of net assets may not clearly illustrate a Fund's significant concentration in one particular industry, or that it is well diversified. We, therefore, recommend that the Commission require investments be categorized consistent with the Audit Guide rather than in descending order by value.
  Alternatively, the Commission could adopt other means of presenting investments in the summary schedule in order to allow categories of investments to be integrated into the schedule. For example, investments could be presented in descending order by value of category with each individual investment that is either one of the Fund's top 50 holdings or greater than 1% of net assets presented within its respective category. This presentation would provide significant information about both the Fund's diversification as well as significant individual securities, and we believe, would integrate the requirements of the Audit Guide.
- The Commission should not extend the use of a summary schedule of investments to securities other than investments in unaffiliated issuers at this time. The Audit Guide provides, in the absence of any regulatory requirement, for a Fund to report only those short sales, written options, futures contracts, forward contracts and any other investment- related liabilities, whose fair values constitute more than 1% of net assets or are one of the Fund's top 50 holdings. The Commission's Proposed Rules would permit the summary schedule of investments to apply only to investments in unaffiliated issuers. All other types of investments would continue to be presented in accordance with Rule 6-10 of Regulation S-X. The Commission has asked whether the use of the summary schedule of investments should be allowed for these other types of investments. We believe a complete presentation of investments in derivatives and affiliates provides a user of the financial statements with a better understanding of the nature of the Fund's investments, its hedging strategies, its use of leverage and the related potential risks and rewards. A derivative instrument may have a fair value that is less than 1% of net assets, while the potential losses relating to the notional amount of the derivative exceed 1% of net assets. Further, because the Commission intends to continue to require the complete schedule of investments be filed, information regarding affiliated investments and other derivatives would still need to be accumulated for reporting purposes and audited annually. Accordingly, the decision whether to extend the summary schedule to these instruments also should consider whether the anticipated savings in printing costs outweighs the benefits of all shareholders receiving complete disclosure. A complete presentation of investments in affiliates and derivative instruments normally involves an insignificant printing cost burden relative to the financial statements as a whole. We believe the actual savings in printing costs would not outweigh the benefits of continuing to require the complete presentation of these instruments in the financial statements distributed to shareholders.

Method of Filing the Complete Schedule of Investments

The Commission should require the complete schedule of investments to be included or incorporated by reference into a Fund's registration statement. As proposed, the complete schedule of investment would be filed in the Form N-CSR and be audited as of the end of a Fund's fiscal year. The Proposed Rules would save a Fund the cost associated with printing the complete schedule of investments in its shareholder report, while recognizing the importance of making the information available to investors. We agree with the Commission's approach. However, we also believe the Commission should require the complete schedule of investments to be included or incorporated by reference into Item 21(b)(1) in Part B of Form N-1A. The complete schedule of investments supports the most significant element of a Fund's financial statements and should, therefore, be part of a Fund's registration statement. We believe inclusion of the complete schedule of investments in a Fund's statement of additional information (SAI) should be a condition to use of the summary schedule of investments in reports to shareholders under Rule 30e-1 of the Investment Company Act of 1940 (the 1940 Act). This would be consistent with the purpose of the SAI, which is to provide additional information about the Fund that investors may find useful.

Consistency of Reporting to Shareholders

The Commission should require Funds to report a summary or a complete schedule of investments in reports to shareholders in a consistent format for a complete fiscal year. As proposed, Item 21(b)(1) of Form N-1A allows a Fund to elect whether it will report a summary schedule of investments in its shareholder reports. We believe a shareholder report covering more than one Fund should not be required to present the same type of portfolio schedule (summary or complete) for all Funds presented, provided the information is not presented in a misleading manner. This would be consistent with disclosure practices today in financial statements covering multiple Funds where certain Funds may present a statement of net assets and others present a statement of assets and liabilities with a schedule of investments. However, the election to report a summary or complete schedule of investments in shareholder reports should be conditioned on use of the same method of reporting for at least one complete fiscal year. We believe that continuous changes in reporting method would likely confuse investors.

Technical Modifications to the Schedule of Investments

The Commission should consider certain technical modifications to the disclosures in the proposed summary and complete schedule of investments. The schedule of investments required by Article 12 of Regulation S-X contains certain outdated disclosures that we believe should be modified.
- Funds are required to indicate by footnote each security that is non-income producing. We believe identifying each non-income producing security, either in a summary or complete schedule of investments, does not provide meaningful information to shareholders. Instead, aggregate disclosure of the percentage of the total value of net assets comprised of non-income producing securities as of the balance sheet date would provide investors relevant and useful information about the nature of a Fund's investments.
- Funds are required to disclose detailed information regarding individual restricted securities as well as the percentage of the total value of net assets comprised of restricted securities as of the balance sheet date. This disclosure requirement was adopted before the institutional market developments of securities subject to Section 4(2) and Rule 144A of the Securities Act of 1933. While Section 4(2) and Rule 144A securities are legally restricted securities, they nevertheless may be sold to qualified institutional buyers without registration. We believe the Commission should require aggregate disclosure of illiquid securities and securities valued in good faith by the board of directors, regardless of whether the security is legally restricted. While the Commission has never defined the term "illiquid", Section 22(e) of the 1940 Act, which requires mutual funds to maintain sufficient portfolio liquidity to be able to honor share redemption requests within seven days after the tender of the shares for redemption, provides a framework. The staff of the Division of Investment Management has defined the term "illiquid asset" in Guide 4 to Form N-1A as, "any asset which may not be sold or disposed of in the ordinary course of business within seven days at approximately the value at which the mutual fund has valued the investment." We believe disclosure of securities meeting this definition would be more meaningful to shareholders than current disclosure requirements. In addition, information relating to securities valued in good faith by the board of directors would alert the reader to the level of subjectivity involved with a Fund's valuation.

Disclosure of Fund Expenses

The disclosure of Fund expenses in an annual report should be based on expenses that were incurred during the year. As proposed, if there are increases or decreases in operating expenses during the reporting period (or that occurred or would be expected to occur during the current fiscal year) that would materially affect the information in the disclosure of the shareholder expense example, a Fund would be required to disclose in a footnote to the example the expense information using the current fees as if they had been in effect throughout the entire reporting period. While we agree that disclosure of a material change in the Fund's expense contracts would be a relevant discussion point in Management's Discussion of Fund Performance, we do not agree with the presentation of pro forma or forecasted shareholder expenses as a footnote to the example in the Fund's annual report. Instead, disclosure of estimated shareholder expenses based on material changes in operating expenses would be more appropriately disclosed following the fee table in a Fund's prospectus.

Disclosure of Index Fund Tracking Errors

Tracking error is a measure of Fund performance and if required by the Commission should be disclosed in Management's Discussion of Fund Performance. We believe a tracking error does not provide information relevant to the accuracy of a Fund's financial position, results of operations or historical performance and therefore, would not be an appropriate disclosure in the financial statements. However, a tracking error provides information as to whether a Fund is meeting its investment objective and, therefore, may be useful to investors in Management's Discussion of Fund Performance. We understand that there is no single recognized method to measure an index fund tracking error. If the Commission determines that disclosure is appropriate, we recommend that the Commission seek further comment on a uniform standard.

If you have any questions about our comments please contact Sam Ranzilla at (212) 909-5837 or Kenneth Robins at (212) 909-5662.

Very truly yours,
/s/ KPMG LLP

cc: Paul F. Roye, Director - Division of Investment Management
Susan Nash, Associate Director - Division of Investment Management
Brian D. Bullard, Chief Accountant - Division of Investment Management

____________________________

¹ See American Institute of Certified Public Accountants Audit and Accounting Guide, "Audits of Investment Companies", (with conforming changes as of May 1, 2002), paragraph 7.10 (May 2002).
² See American Institute of Certified Public Accountants Audit and Accounting Guide, "Audits of Investment Companies", (with conforming changes as of May 1, 2002), paragraphs 7.10 and 7.12 (May 2002).