CAPITAL RESEARCH AND MANAGEMENT COMPANY
333 South Hope Street, Los Angeles, California 90071 Telephone (213) 486-9652 Fax (213) 486-9041
June 9, 1997
Mr. Jonathan Katz, Secretary
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-6009
RE: Proposed Amendments to Form N-1A
File No. S7-10-97
Dear Mr. Katz:
Capital Research and Management Company ("CRMC"), the investment adviser to the twenty-eight mutual funds in The American Funds Group, appreciates the opportunity to comment on the Commission's proposed amendments to Form N-1A.
We applaud the Commission and its staff for the important strides made with these amendments. We are generally pleased with the direction in which mutual fund disclosure is headed and our comments focus on areas which we believe are of particular concern to investors.
I. Item 1 - Front and Back Cover Pages
Under the proposed amendments a fund would be required to inform investors that additional information regarding the fund's investments is contained in the fund's annual report and that the report is available without charge upon request by calling a toll-free number. It is proposed that this information be included in the Risk/Return Summary as part of a fund's discussion of its investment objectives and principal strategies.
A. Availability of Information on Fund's Investments
While we agree that informing investors of the availability of this information is important, we believe this information can be included on the back cover, rather than inside the prospectus. As proposed, the back cover would already contain information on how an investor can obtain the Statement of Additional Information (SAI) and annual report. Expanding disclosure on the use of the annual report would not overburden the back cover and would facilitate uniformity. Putting all of this information in one place makes it not only easier to find, but also teaches investors that they can look for this information in the same place in the future.
If the Commission decides to require the legend as part of a fund's discussion of its investment objectives and principal strategies we recommend the legend be modified in the following manner, the result we believe is more concise and effective in conveying the message desired:
1. Alternative Legend
II. Item 2 - Risk/Return Summary
You may obtain additional information about the fund's investments, including management's discussion of recent fund performance, by calling and requesting (at no cost) the fund's annual and semi-annual reports to shareholders.
The Commission is proposing that a Risk/Return Summary ("Summary") be included at the beginning of a fund's prospectus. The information included in the Summary would be required to appear in a specific sequence and be in question-and-answer format in order to facilitate comparisons among different funds. We believe an investor's ability to compare fund prospectuses is not lessened if funds use substantially similar headings that are not necessarily in question-and-answer form. For example, we believe reducing the heading to the key words contained in the Commission's proposed questions (
"Fund Goals" in place of "What are the fund's goals?") more effectively communicates the same information, but uses fewer words and avoids repetition. Accordingly, we recommend that funds be given the flexibility to use headings that are substantially similar to the ones proposed.
A. Question-and-Answer Format
We would also recommend that if a fund is using a profile (as proposed under Rule 498), the fund be required to use the same headings in both the profile and the prospectus. This will prevent confusion in cases where investors are reviewing both the profile and the prospectus of the same fund.
As part of the narrative risk disclosure, a fund would be required to identify for whom the fund may be an appropriate or inappropriate investment. Providing meaningful information about who the fund is an appropriate or inappropriate investment for is difficult without knowing the personal financial history of each investor (
the investor's age, financial goals, other portfolio holdings, etc.). In this regard, we hope that the Commission will not require disclosure that would discourage investors from seeking investment advice from a financial adviser who could better address an individual investor's financial situation. Accordingly, we suggest that it should be sufficient in complying with this requirement to discuss factors an investor should consider before investing in the fund and/or recommend that investors speak to a broker in deciding whether the fund is an appropriate investment for them.
B. Risks - Narrative Risk Disclosure
Under the proposal, a bar chart showing a fund's annual returns for each of the last ten calendar years, if applicable, would be required. It is our understanding that the purpose of the bar chart is to show variability of returns and to foster meaningful comparisons between funds. Inclusion of sales charges does not further either purpose and would be difficult to reflect in a bar chart showing annual returns. Therefore, in order to clearly depict what the bar chart is intended to show we recommend that returns be shown at net asset value.
C. Risk/Return Bar Chart
III. Item 3 - Fee Table
A. "12b-1 Fees"
The Commission is proposing to change the caption for 12b-1 fees in the fee table to "Marketing (12b-1) Fees." This caption is incomplete in some cases as 12b-1 fees can be used for purposes other than marketing, such as distribution and servicing. Therefore, we suggest allowing funds to use other words, such as "distribution" or "servicing," in conjunction with the term "12b-1." This will allow funds to more accurately describe the manner in which 12b-1 fees are being used and retains the term "12b-1," which many investors have become familiar with.
The Commission is proposing to change the initial hypothetical investment in the Example from $1,000 to $10,000. This is a fairly significant increase and as such we believe that a fund should also be allowed to include as part of the Example average yearly expenses. This proposal would provide investors with additional expense clarification and would nicely parallel the requirement of providing average annual returns. Accordingly, as expenses are an area of concern for investors and this information will only aid their understanding of them, we strongly recommend that funds be given the flexibility to provide information on average yearly expenses as part of the Example.
B. Fee Table Example
IV. Item 4 - Investment Strategies and Risk Disclosure
A. Portfolio Turnover
We support the Commission's proposal to require prospectus disclosure if a fund anticipates portfolio turnover in the coming year of 100% or more.
Under the proposed amendments a fund would be required to disclose the risks to which the whole portfolio would be subject and discuss circumstances that are reasonably likely to adversely affect a fund's net asset value, yield, or total return. As proposed, the Commission would require a fund to disclose the same information in the Risk/Return Summary. We believe repeating this information is not necessary and would not be helpful to investors. Additional disclosure in this area should only be provided if a fund would like to elaborate beyond what is already disclosed in the Summary.
The Commission has requested comment on whether it would be helpful to disclose how the fund's net asset value is calculated. We believe that it would not be helpful to add such disclosure. How a fund's net asset value is determined will not aid most investors in making an investment decision, accordingly this information should be contained in the SAI.
V. Item 7 - Shareholder Information
A. Purchase and Redemption Information - Pricing of Shares
The Commission is proposing moving disclosure of a fund's principal underwriter, transfer agent and administrative and business manager to the SAI. We support this proposal, but believe this requirement should be permissive, as disclosure of a fund's transfer agent in the prospectus may be important in some cases.
B. Principal Underwriters and Service Providers
We support retaining disclosure concerning transfers of shares held in street name accounts in the prospectus.
C. Account Transfers
VI. Item 9 - Financial Highlights Information
Finally, we support the Commission's proposal to move the financial highlights table to the back of the prospectus and to require a narrative explanation of the table. The financial highlights table provides the background for other investment related disclosure contained in the prospectus. Therefore, it is more logical and the prospectus flows better if the table is moved to the end of the prospectus, reinforcing information investors have already read.
Thank you very much for considering CRMC's comments in this important area of prospectus disclosure. If you have any questions please contact the undersigned at (213) 486-9652, Michael Downer at (213) 486-9425, or Stuart Strachan at (213) 486-9345.
Kristine M. Nishiyama
For money market funds and funds that provide management's discussion of fund performance in the prospectus, the legend could be modified to read:
You may obtain additional information about the fund's investments by calling and requesting (at no cost) the fund's annual and semi-annual reports to shareholders.