Date: 8/19/97 8:54 PM Jonathan G. Katz, Secretary Securities and Exchange Commission 450 Fifth Street NW Washington, DC 20549-6009 Dear Mr. Katz: I write to comment on the Commission's proposed changes to form N-1A, as described in releases 33-7398, 34-38346 and IC-22528. Although this letter arrives well after the end of the official comment period, I hope it will still be possible for the Commission to consider the comments it offers. Introduction and general comments. Over the past several years it has been my privilege to work with four management companies in writing simplified mutual fund prospectuses. The first of these projects was for Fidelity Investments, which initiated a complete rewrite and redesign of its prospectuses in 1991. The second project was for John Hancock Funds and was completed in 1996. Various features of this prospectus were granted no-action relief by the staff of the Division of Investment Management; some of these features are consistent with items in the Commission's proposed changes. The remaining two projects, for State Street Research Funds and for funds advised by J.P. Morgan, are still in progress. Prototypes developed in both of these projects have recently been submitted to the Division for comment. Although I speak on my own behalf in this letter and not on behalf of any client, my comments reflect many of the ideas embodied in their prospectuses, and the Commission may find it helpful to refer to these prospectuses (including the State Street Research and J.P. Morgan prototypes) in connection with this letter. In all of these projects, the biggest challenge has not been to create simpler language or a more appealing design, but to find the most effective ways of organizing and presenting information. This is an important task, because even a clean and well-written document will fail as a communication if it is "unfriendly" to the reader in other ways. To the extent that a document like the John Hancock prospectus is helpful to investors, it is because it uses both language and design to pursue some of the basic tenets of good communication: put information in a logical order; help readers find their way around the document; avoid unnecessary repetition. I believe the proposed changes to Form N-1A are a major step toward improving the usefulness and readability of mutual fund prospectuses. While the present form is already more conducive to good communication than is widely recognized (as the content of the Hancock no-action letter revealed), the proposed form would remove some of the hurdles that still remain. The proposed form also would permit the most important points in the prospectus to achieve greater prominence, by heightening their visibility as well as reducing the amount of material competing for the reader's attention. The following comments focus on various aspects of the proposal: Moving certain items to the back cover or the risk/return summary [Proposed Items 1(a)(1), 1(a)(3), 1(b)(1), 1(b)(2), 1(b)(3), 1(b)(4), 2(a), 2(c)(1)]. Generally, I believe these proposals are good because they would improve readability in two ways: by allowing the information to appear a more logical place, and by decreasing clutter on the front cover. As the Commission recognizes, the impact of a more inviting cover should not be underestimated. The cover creates the first impression of the document, and this impression inevitably influences the reader's decision about how much time and effort to commit to the prospectus. The more effort a document appears to demand, the less effort a reader will want to make. Of course, it is equally important that an attractive cover be followed by a document that is itself reader-friendly, particularly in its opening pages. Otherwise, any opportunity created by the cover is lost. Several comments on specific items: * I believe it would be beneficial to have the registrant name and the Investment Company Act file number accompany the portfolio description, rather than appear on the back cover. This is a more logical placement in the case of consolidated prospectuses, and would work for single-fund prospectuses as well. * Allowing fund companies some flexibility in the wording and typographic treatment of the 481(b)(1) disclaimer is a significant improvement. The meaning of the traditional wording is confusing, and numerous studies done since the legend was introduced have shown that blocks of text set entirely in upper case take longer to read and are more likely to be read incorrectly. I hope the Commission will, to the extent that this falls under its jurisdiction, allow similar flexibility for the disclaimers for money market funds, single-state money market funds, and bank-advised or bank-sold funds. I also hope the Commission will consider allowing the 481(b)(1) disclaimer to appear in the same place as these other disclaimers, i.e., effectively within the first two inside pages of the prospectus. All of these disclaimers are of a similar nature and significance, and could benefit in impact from being presented as a group. * The John Hancock letter permits reference to a "current SAI" rather than requiring that the date of the SAI be stated explicitly, and I hope the Commission will consider allowing this under the new form. * When the back cover describes the fund information that is available at the SEC's public reference room or Internet site, I believe it is important to state that these are "text-only copies." To the extent that a prospectus uses design elements to communicate (and not simply as text formatting), the difference in reader-friendliness between the designed version and the text-only EDGAR version may be substantial. * Because many investors may find it helpful to see a one-sentence description of the fund on the cover of the prospectus, I hope the Commission will allow this type of information to continue to appear on the cover at the investment company's option. Description of who may, and who may not, want to invest [2(c)(1)]. I strongly support the idea of requiring this disclosure, and of requiring that it be placed near the front of the prospectus. Risk/return bar chart and table [2(c)(2)]. I strongly support the concept of a bar chart showing fund annual returns for the past ten years and a table with 1/5/10-year average annual fund and broad-based index returns. The presentation of this information gives the investor an easy way to see what the fund has historically offered in the way of performance next to what this performance has "cost" in terms of volatility (as represented by fluctuations in year-to-year returns). However, I urge the Commission to re-examine its proposal to put the bar chart on a calendar year basis while keeping the average annual return figures on a fiscal year basis. For the risk/reward section to convey its message, the reader needs to perceive very clearly that risk and return are two sides of the same story. The two elements are already somewhat unequal in that one is a table, the other a chart (although I believe that this is in fact the best way to present the information in each case). Adding the discrepancy between the calendar and fiscal time periods would run contrary to the reader's natural expectations and significantly weaken the link between risk and reward. Circumstances suggest two possible options: 1. Present all risk/reward information by calendar year. This would allow for easy comparability among different prospectuses (and also with most other sources of market and investment information, which report on a calendar year basis). Because financial highlights would remain on a fiscal year basis, there would still be the potential for some confusion within a given prospectus, although this potential could be reduced if the Commission allows the highlights to be placed elsewhere in the document. The J.P. Morgan prototype prospectus utilizes this solution. 2. Present all risk/reward information by fiscal year. This has the advantage of allowing a given prospectus to be completely consistent in presenting its financial data, including the financial highlights. It also means that those funds whose fiscal year falls toward the end of the calendar year will not be forced to report old data, as they would under the proposal or under Option 1. (Calendar year data for such funds could be up to 11 months old when a prospectus appears and up to 23 months old by the time the next version appears.) The State Street Research prototype prospectus utilizes this solution. While Option 2 might appear to run counter to the goal of making prospectuses easy to compare, I believe that in practice there is no meaningful loss of comparability. What this section of the prospectus serves to communicate is a general picture of the historical risks and rewards of the fund. Over any peri od of years the general picture will be essentially the same, regardless of the whether the measurement is made by fiscal year or calendar year. Under Option 2, comparability of the most important aspect remains intact: one may still come away from this section with a sense of how the fund performs, in terms of risk and reward, compared to a broad-based market index, and one may easily compare this to the general picture of another fund, even if the two measure by somewhat different periods. In the meantime, the risk of confusion within each individual prospectus -- which I believe to be a very real risk -- would be substantially smaller. Above all, I hope that any debate on the relative merits of these two options is not allowed to obscure the main issue, which is that the risk and reward information can only impart the desired message if they are both reported on the same basis. Whether this basis is calendar or fiscal is less important. Moving certain items to the Statement of Additional Information [4(b), 4(b)(1), 4(d), 6(b), 7(d), 8(a)(2), 8(b), 11(a), 13(a), 13(e), 14(a), 15(a)(1), 15(b), 15(f), 15(g), 15(h), 17(a), 18(b), 18(c), Instruction 4]. I strongly support the Commission's efforts to move various items to the SAI. From the average investor's viewpoint, the usefulness of the items identified in the proposal is limited. At the same time the cost of including them in the prospectus -- in terms of potential impact on an investor's attentiveness and goodwill -- is relatively high, and their presence detracts from the visibility of other, more important information. Eliminating certain items [no citations]. For reasons similar to those stated just above, I strongly support the proposals to eliminate the requirements for including certain items, particularly the "read and keep" cover language, the disclosure of wire redemption charges in the fee table, the description of advertising performance calculations, the allocation of brokerage transactions based on fund sales, and issues pertaining to when a feeder fund might leave a master fund. Risk/return summary [2] and portfolio description [4(b)(1), 4(b)(2)]. I believe that shifting the focus of the portfolio description from a "laundry list" of securities and risks to a discussion of the portfolio as a whole (including investment style risk) is one of the most positive and significant changes in the proposal. This type of disclosure has the potential to improve investor understanding of the fund and to provide some investor education, while also allowing portfolio and risk language to be more concise and better organized. The proposed risk/return summary honors another tenet of good communication, that of comparability. Under the format proposed for this summary, investors would find it easier to compare different funds at a glance because the same type of information would appear in the same location with the same series of headings. The goal of comparability is clearly of great importance, and I wholeheartedly share the Commission's interest in promoting it. At the same time, I believe that imposing a mandatory, fixed-format risk/return summary would create problems for many investment companies, particularly those companies that are most interested in the cause of prospectus simplification. In view of the length of the relevant passages in existing simplified prospectuses, the summary of a simplified prospectus is likely to be nearly as long as the material it is summarizing. Not only would there be substantial overlap between the summary and the full discussion, but one would appear right after the other. The reader would thus be forced to encounter much of the same information, probably including verbatim repetitions, in the space of a few pages. This situation is highly unfriendly to the reader and would, I believe, perceptibly reduce the appeal and usefulness of simplified prospectuses. One strength of the summary is that, by providing prospectus writers with clear instructions and a fixed format, it will ease the burden for those companies that want to achieve compliance with minimum effort. However, requiring the summary for all prospectuses would increase the burden for those companies that are most inclined to engage in thorough simplification. It thus has the unwanted consequence of creating a disincentive to thorough simplification. I believe that one effective solution would be for the Commission to give the staff of the Division of Investment Management the ability to grant an exemption from the summary requirement for any prospectus that, in the staff's judgment, effectively met the information requirements of the summary in its full discussion. This solution would allow the Commission to offer an incentive to thorough simplification, while leaving in place the proposed summary as a means of achieving compliance-driven simplification. Removing the disincentive for thorough simplification will allow the market forces that have played a large role in these efforts to continue as an effective force for reform. This solution also has the benefit of allowing the staff a certain amount of latitude in its review process. Equally important, it achieves all of this without sacrificing the goal of comparability. The information in question would still be located in the same part of each prospectus (i.e., the first few pages) and could be in the same general order and format. On the subject of the format for the proposed summary and the profile I have two brief additional comments. First, I believe that requiring mandatory wording for the titles of each section is unnecessary; as long as the sections of the profile deal with the same subjects in the same order, readers will find it just as easy to make comparisons. (Comparability is likely to be far more affected by different fund companies' interpretations of the type and depth of discussion that is warranted in any given section.) Second, if the Commission does decide to impose mandatory wording, I believe that the question-and-answer format is not ideal, in part because it tends to become tiresome to the reader after the first few encounters. Fee table and expense example [3]. I support the effort to clarify the terms used in the fee table and the proposed changes in reporting, but hope the Commission will specify the points to be communicated rather than requiring the use of verbatim wording. I also hope the Commission will consider allowing master/feeder information to be left unmentioned in fee table footnotes, as such information demands a context that is only provided elsewhere in the document, where master/feeder arrangements are discussed. With regard to the example, I believe the proposed changes may not be enough to make it as useful to investors as other alternatives. One possible alternative, which appears in the J.P. Morgan prototype, is a graphic scale showing the fund's expenses alongside the average for the fund's peer group. Each asset class would have a scale that would accommodate the most expensive fund in the class. The concept may need refinement but would have the advantage of communicating useful information in a clear and intuitive format. I do not believe the example as currently constituted, or as modified by the proposal, is helpful enough to merit the space and attention it requires. Holidays [7(a)(2)]. As most funds follow the New York Stock Exchange in setting their business days, I hope the Commission will continue to allow fund companies simply to state this fact, rather than requiring a list of holidays. Sales charges [8(a)(1)]. I urge the Commission to drop the requirement to disclose sales charges as a percentage of the net amount invested. This measurement, although well-intentioned, does not relate to how investors think about their investment. Its presence is confusing and distracts from the presentation of a number they do understand intuitively: the amount that is coming "off the top" of their investment to pay a sales charge. Financial highlights [9]. I strongly support the Commission's efforts to address the readability issues presented by the financial highlights table as it is currently constituted. Allowing, or requiring, the table to be moved to the back of the prospectus is one effective option. I also hope the Commission will consider allowing investment companies to offer a more streamlined version of the highlights, which contains only the most useful items. I believe it is fairly easy to determine which items these are. At both State Street Research and J.P. Morgan, the prospectus teams identified the same items, unprompted by me. In the prototypes shown to the Commission by these firms, streamlined highlights are presented toward the front of the document, with full highlights in the back. This is one possible option, although another would be to allow streamlined highlights near the front as an alternative to full highlights in the back. Because the full highlights combine frequently used information with rarely used information, moving them to a different location does not entirely address the communications problems involved. With regard to Item 9(a), I hope the Commission will continue to allow the flexibility of having a simplified introduction to the financial highlights, as in the John Hancock prospectus, where the narrative is limited to language about the fund's auditors. All other information in 9(a) may effectively be conveyed elsewhere in the document or through the language and layout of the highlights table itself. Conclusion I strongly believe that the Commission and the staff of the Division of Investment Management are justified in their faith that the full prospectus (a term less pejorative than "long-form prospectus") can be an effective and frequently used tool for investors. In its responses to previous simplification efforts the staff has been receptive to new ideas and encouraging of simplification. The proposed changes to Form N-IA and the proposed Plain English guidelines offer vital support to a reform effort that has the potential to benefit all parties who use prospectuses. I look forward to the Commission's release of the new N-1A and to the new phase in prospectus reform that it inaugurates. Sincerely, Josiah Fisk Firehouse Financial Communications 15 Crowl Road New Salem, MA 01355-9552