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February 14, 2003 Via Electronic Mail Mr. Jonathan G. Katz
Re: Proposed Rules on Disclosure of Portfolio Holdings (File No. S7-51-02) Dear Mr. Katz: The College Retirement Equities Fund ("CREF"), with its companion organization Teachers Insurance and Annuity Association of America (together, "TIAA-CREF"), are pleased to submit comments on the proposal by the Securities and Exchange Commission to improve investment company ("fund") disclosure of portfolio investments and expenses. We fully support the SEC's proposal and believe that the SEC has succeeded in striking the right balance between providing funds investors who want it more frequent access to complete portfolio holdings information, without imposing significant costs on funds or facilitating predatory trading practices. We believe that by permitting a summary portfolio holdings schedule to be included in annual and semi-annual reports, the proposal would enable funds to provide investors more meaningful and understandable information about a fund's portfolio, while significantly reducing fund costs. We also applaud the SEC's efforts to highlight the important impact fund expenses can have on portfolio performance by requiring additional information on expenses in the annual and semi-annual reports. Background CREF is a membership corporation registered with the SEC as an investment company. Its companion organization, TIAA, is a non-profit stock life insurance company. Together, TIAA-CREF comprises the principal retirement system for the nation's education and research communities. TIAA-CREF serves over 2.5 million people at over 15,000 United States institutions and jointly manages over $249 billion in assets. In addition to offering low cost fixed and variable annuities, we offer a series of retail and institutional mutual funds that are also registered investment companies with the SEC. As one of the nation's largest institutional investors, CREF holds shares in over 5,000 portfolio companies. Comments on Proposed Rules Summary Portfolio Schedule. We commend the SEC for its thoughtful proposal to allow funds to include a summary portfolio schedule listing its top fifty holdings in lieu of a complete portfolio schedule in their reports delivered to investors twice a year. We believe that permitting funds to use a summary portfolio holdings schedule would provide investors with more useful information about the fund's portfolio holdings, and help investors to better focus on a fund's most significant holdings in evaluating its risk profile and investment strategy. Significantly to us, this more user-friendly approach would also substantially reduce the costs of printing and mailing of our annual and semi-annual reports, savings that can be passed along to our investors. To give an idea of the scope of these potential savings, the recent statement of investments sent to CREF participants for the CREF Stock Account alone ran approximately 35 pages, and the statements of investments for all eight CREF Accounts in total ran over 100 pages. Since we are currently required to include these complete statements in annual and semi-annual reports sent to over two million people, the printing and mailing cost for inclusion of these full statements are significant1. We believe that relatively few investors peruse these statements fully. Therefore, we welcome the prospect of eliminating this significant expense. We acknowledge that there are some investors who will be interested in monitoring fund portfolios as a whole, or in reviewing particular issues or industry sector. We believe that the SEC has fairly addressed this by requiring funds to post their complete holdings on the Internet and to make them available to investors upon request. Tabular or Graphic Presentation of Portfolio Holdings. We believe that the SEC's proposal to require a tabular or graphic presentation of fund investments by identifiable category (e.g., type of security, industry sector, geographic region, credit quality, or maturity) in fund shareholder reports furthers the laudable goal of making these reports more effective vehicles for communicating information to investors. We, as many funds, already include this type of presentation in our reports as a concise and user-friendly way of depicting a fund's portfolio composition. As allowed under the current proposal, we currently depict different funds in different ways, depending on the fund's investment objective and investment mix. We believe that it is important that the final SEC rule continue to allow funds the flexibility to establish the categories and the format most appropriate to the attributes of a given fund. Quarterly Filing of Complete Portfolio Schedule. We fully support the SEC's proposal to require funds to publicly disclose, with a 60-day lag, their complete portfolio holdings in an SEC filing every quarter, rather than twice a year. We agree that providing more frequent access to portfolio holdings information would enable interested investors to monitor whether, and how, a fund is complying with its stated investment objective, expose any possible "style drift" and promote greater overall fund transparency. We do have concerns that more frequent public disclosure of our full portfolio holdings could harm our investors by facilitating the ability of outside investors to trade ahead of our funds or free ride on a our investment strategies, i.e., obtain for free the benefits of our research and investment strategies that are paid for by our investors. However, we believe that the 60-day delay proposed by the SEC adequately addresses this concern. Disclosure of Fund Expenses. TIAA-CREF has always been committed to keeping its costs low to ensure that more of our participants' money is working for them. Given our low cost philosophy, we applaud the SEC's efforts to highlight the important impact fund expenses can have on portfolio performance. We believe that requiring funds to disclose in annual and semi-annual reports the costs borne by investors during the reporting period will enhance investor understanding of the nature and effect of these costs. This is particularly important in a difficult investment climate, where expense charges can have a significant effect on already lower returns. We believe that the SEC proposal provides investors with a good tool for analyzing the impact actual expenses have on a fund. We do not believe that it is necessary, given the potential costs and burdens, to mandate that funds provide expense information on an individualized basis in account statements, as proposed by the GAO report on the subject. We would encourage the SEC in finalizing the proposal to take steps to ensure that all costs borne by investors, including sales charges and redemption fees, are prominently disclosed in or along with the expense example so that investors can fully understand the expenses they are paying relative to investments in other funds. Conclusion We commend the SEC for taking the initiative to provide investors with more meaningful and understandable information about a fund's portfolio investments and expenses. We would welcome the opportunity to discuss our thoughts on this important initiative with the SEC staff.
cc: The Honorable Harvey L. Pitt
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