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U.S. Securities and Exchange Commission

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 239 and 274

[Release Nos. 33-8393A; 34-49333A; IC-26372A; File No. S7-51-02]

RIN 3235-AG64

SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE OF REGISTERED MANAGEMENT INVESTMENT COMPANIES; TECHNICAL AMENDMENT

AGENCY: Securities and Exchange Commission.

ACTION: Final rule; Technical amendment to a form.

SUMMARY: The Securities and Exchange Commission is adopting a technical amendment to Item 21(d)(1) of Form N-1A, which was published in the Federal Register on Tuesday, March 9, 2004 (69 FR 11244). The amendment corrects an instruction to the requirement for a registered open-end management investment company to include in its shareholder reports disclosure of fund expenses borne by shareholders during the reporting period.

EFFECTIVE DATE: August 12, 2004.

FOR FURTHER INFORMATION CONTACT: John Faust, Attorney, Office of Disclosure Regulation, Division of Investment Management, (202) 942-0721, at the Securities and Exchange Commission, 450 Fifth Street NW, Washington, DC 20549 0506.

SUPPLEMENTARY INFORMATION:

I. BACKGROUND

The Securities and Exchange Commission ("Commission") recently issued a release adopting amendments to Form N-1A that require registered open-end management investment companies to disclose in their reports to shareholders fund expenses borne by shareholders during the reporting period ("Adopting Release").1 The amendments require shareholder reports to include: (1) the cost in dollars associated with an investment of $1,000, based on the fund's actual expenses and return for the period; and (2) the cost in dollars associated with an investment of $1,000, based on the fund's actual expenses for the period and an assumed return of 5 percent per year. The requirements for the expense examples include an instruction to round all dollar figures to the nearest dollar.2

The purpose of the expense examples is to increase investors' understanding of the fees that they pay on an ongoing basis for investing in a fund, and to facilitate comparison of ongoing expenses among funds.3 In adopting the requirement for the expense examples, we required the examples to be based on an initial investment of $1,000, rather than $10,000 as proposed, but did not reconsider the rounding instruction.4 Subsequent to the adoption of the rule, we have become aware that, in some cases, rounding expenses paid on a $1,000 investment to the nearest dollar may result in insufficiently precise expense figures. Such figures would not facilitate investors' ability to estimate their own expenses and to compare the costs of different funds. This will tend to affect funds with relatively low expense ratios disproportionately. For example, an investor in a fund with an annual expense ratio of 0.10% would pay $0.51 in expenses for a $1,000 initial investment over a half-year period (assuming a 5% annual return for the period). An investor in a fund with an annual expense ratio of 0.29% would pay $1.47 in expenses for a $1,000 investment over a half-year period (assuming a 5% annual return for the period). However, under the requirements we adopted, these two funds would both show rounded expenses of $1.00, even though the expense ratio for the second fund is almost three times as large as that of the first fund. In addition, an investor who used this $1.00 expense figure to estimate his or her own expenses for an investment in either of the two funds would significantly underestimate or overestimate expenses. For example, an investor with a $25,000 initial investment in each of the two funds would calculate his or her expenses to be $25.00 ($25,000/$1,000 x $1.00) for each fund, while a calculation based on expense figures rounded to the nearest cent would result in estimates of $12.75 ($25,000/$1,000 x $0.51) and $36.75 ($25,000/$1,000 x $1.47), respectively.

The Commission is adopting a technical amendment to Instruction 1(a) of Item 21(d)(1) of Form N-1A to require funds to round all figures in the table of expense examples to the nearest cent. In light of the change to the initial investment amount, we have concluded that it is appropriate to require rounding to the nearest cent, rather than the nearest dollar.

II. CERTAIN FINDINGS

Under the Administrative Procedure Act ("APA"), notice of proposed rulemaking is not required when the agency, for good cause, finds "that notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest.5" The Commission is making a technical amendment to Form N-1A to effect the intent of the Commission as expressed in both the proposing and adopting releases. This amendment will make a minor change in the presentation of the expense example in shareholder reports, which will have no effect on the burden on funds of performing the calculation required. For the foregoing reasons, the Commission finds that publishing the changes for comment is unnecessary.6

The APA also generally requires that an agency publish an adopted rule in the Federal Register 30 days before it becomes effective.7 However, an agency may forgo the 30-day requirement if it finds good cause for doing so.8 For the same reasons that the notice and comment period is not required, the Commission finds good cause for the amendment to take effect immediately. The Adopting Release required all fund reports to shareholders for periods ending on or after July 9, 2004, to comply with the amendments in that release, including the requirement for expense examples.9 Therefore, any such shareholder report transmitted on or after the date of this release must also comply with this amendment.

III. STATUTORY AUTHORITY

The Commission is adopting amendments to Form N 1A pursuant to authority set forth in sections 5, 6, 7, 10, 19(a), and 28 of the Securities Act of 1933 [15 U.S.C. 77e, 77f, 77g, 77j, 77s(a), and 77z-3]; sections 10(b), 13, 15(d), and 23(a) of the Securities Exchange Act of 1934 [15 U.S.C. 78j(b), 78m, 78o(d), and 78w(a)]; and sections 6(c), 8, 24(a), 30, and 38 of the Investment Company Act of 1940 [15 U.S.C. 80a-6(c), 80a-8, 80a-24(a), 80a-29, and 80a-37].

List of Subjects

17 CFR Part 239

Reporting and recordkeeping requirements, Securities.

17 CFR Part 274

Investment companies, Reporting and recordkeeping requirements, Securities.

TEXT OF FORM AMENDMENT

For the reasons set out in the preamble, Title 17, Chapter II of the Code of Federal Regulations is amended as follows:

PART 239 - FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

1. The general authority citation for Part 239 continues to read as follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77sss, 78c, 78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 79l, 79m, 79n, 79q, 79t, 80a-8, 80a-24, 80a-26, 80a-29, 80a-30, and 80a-37, unless otherwise noted.

* * * * *

PART 274 - FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

2. The authority citation for part 274 continues to read as follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m, 78n, 78o(d), 80a 8, 80a-24, 80a-26, and 80a-29, unless otherwise noted.

* * * * *

3. Instruction 1(a) to Item 21(d)(1) of Form N-1A (referenced in 239.15A and 274.11A) is amended to read as follows:

Note: The text of Form N-1A does not and this amendment will not appear in the Code of Federal Regulations.

Form N-1A

* * * * *

Item 21. Financial Statements

* * * * *

(d) * * *

(1) * * *

Instructions.

1. General.

(a) Round all figures in the table to the nearest cent.

* * * * *

By the Commission.

Margaret H. McFarland
Deputy Secretary

Dated: August 9, 2004


Endnotes

Form N-1A is the registration form used by open-end management investment companies to register under the Investment Company Act of 1940 and to offer their shares under the Securities Act of 1933.


http://www.sec.gov/rules/final/33-8393a.htm


Modified: 08/09/2004