Eric D. Roiter
Senior Vice President and General Counsel
Fidelity Management & Research Company
82 Devonshire Street
Boston, MA 02109-3614

August 19, 2002

Via Electronic Mail

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

Re: Proposed Rule: Certification of Disclosure in Companies' Quarterly and Annual Reports (Release No. 34-46300; File No. S7-21-02)

Dear Mr. Katz:

On behalf of Fidelity Management & Research Company (FMR), I am writing in response to Securities Exchange Act Release No. 46300 regarding proposed certification of disclosure in companies' quarterly and annual reports. FMR is the investment manager for over 260 registered investment companies in the Fidelity Group of Funds with aggregate assets in excess of $660 billion. The Fidelity Group of Funds currently files over 500 semi-annual and annual reports on Form N-SAR each year and a comparable number of semi-annual and annual shareholder reports pursuant to Rule 30e-1 of the Investment Company Act of 1940 (the 1940 Act).

FMR strongly supports the goal of improving the accuracy, reliability and accountability of corporate disclosures. Over its 56-year history, FMR has consistently worked to provide shareholders of the Fidelity funds with useful, accurate and timely information so that shareholders can make informed investment decisions and understand how FMR is exercising its responsibilities in managing the funds. FMR is encouraged that some of the regulatory approaches that protect mutual fund investors embodied in the 1940 Act (such as codes of ethics) have been adapted for commercial and industrial companies subject to reporting obligations under the Securities Exchange Act of 1934 (the 1934 Act) by operation of provisions in the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley).

Given that the applicability of the certification requirements of Sarbanes-Oxley to mutual funds under the current reporting regime has been the subject of some uncertainty, FMR supports the approach taken by the Commission to seek the views of the mutual fund industry and investors as to how best to reconcile the policies underlying those requirements with the detailed regulatory reporting scheme to which mutual funds are subject. The balance of this letter discusses how the Commission may achieve this reconciliation, bearing in mind one fundamental point: The primary focus of Congress in adopting Sarbanes-Oxley was to address perceived inadequacies in corporate governance standards for companies historically governed in this area by state law. The mutual fund industry, in contrast to virtually all other industries, has long been subject to federal law - namely, the 1940 Act and the Commission's rules thereunder - which prescribes a comprehensive and effective scheme for corporate governance.

I. Under current law, the certification requirements of Sarbanes-Oxley would apply only to Form N-SAR.

The Release asks for commentators to address the appropriate location for Section 302 certification. To the extent that Section 13(a) or 15(d) of the 1934 Act imposes a reporting requirement on registered investment companies, Rule 30a-1 under the 1940 Act provides that this requirement shall be deemed satisfied "by the filing of semi-annual reports on Form N-SAR." Form N-SAR provides by its terms that the Commission is authorized to seek the information called for therein by Sections 13(a) and 15(d) of the 1934 Act, as well as Section 30(b) of the 1940 Act. Open-end funds make no other filings pursuant to Sections 13(a) and 15(d) of the 1934 Act. Accordingly, Form N-SAR reports are currently the only reports subject to the certification requirements of Sarbanes-Oxley.1

II. Annual reports as an alternative to Form N-SAR filings for Sarbanes-Oxley certification.

The alternative to Form N-SAR filings for certification is the annual shareholder report filed under Rule 30e-1 of the 1940 Act.2 Annual reports contain full portfolio holdings, performance data, various data supplied by regulated third-party service providers, management discussion and analysis of fund performance, statement of changes in financial position and a balance sheet. Each annual report includes extensive information provided to funds by outside companies, including pricing services, index providers (such as Lipper, Inc. and Standard & Poor's), and rating agencies (such as Standard & Poor's and Moody's). Some of this information is required to be included in annual reports, and some of it is voluntarily included by fund complexes in an attempt to aid investor comprehension of fund performance and portfolio composition.

FMR is concerned that if an entire annual report is subject to Section 302 certification, a fund's certifying officer may face substantial obstacles in attempting personally to verify some or all of the data voluntarily included in such reports. In such cases, the unintended (and undesirable) consequence of certification is likely to be that funds will omit data that is helpful to investors but not susceptible of cost-effective personal certification to the knowledge of the signing officer. FMR believes that mutual fund investors deserve more than a two-week comment process in order to preserve the free flow of information on the one hand, and to provide useful certifications on the other. FMR urges the Commission to engage in a full notice and comment rulemaking process, despite the August 29th statutory deadline, and if need be, to extend the compliance date (as opposed to the effective date) for certifications of mutual fund reports.

III. The Commission should clarify the scope of the Sarbanes-Oxley Section 302 certification.

FMR believes that there is a critical distinction between internal controls of the fund and those of its agents. It may be appropriate for a fund's certifying officer to certify in respect of controls implemented to ensure compliance with procedures and policies adopted by a fund's board or required by the 1940 Act, including, for example a fund's fair valuation procedures. But FMR believes that it is inappropriate to expect a fund's officers to certify to the internal controls of regulated third-party service providers in the same way that the fund officer can certify to the fund's internal controls.3 Fund service providers are already heavily regulated by other statutory and regulatory regimes.4 In each case, service providers have contractual responsibilities to the funds. In light of these factors, fund officers - as a practical matter - must and should rely on review and testing of the service providers' control environments by the fund's auditors. Therefore, fund certifying officers can appropriately be charged with the duties of: (A) designing, establishing and evaluating the fund's internal controls; (B) designing internal controls in respect of service providers that require the fund's auditors to report to the certifying officers on the service providers' control environments; and (C) evaluating the fund auditor's reports on the service providers' control environments. In summary, it would simply be inefficient, duplicative and unduly burdensome to require mutual fund officers to conduct independent reviews of the internal controls of regulated service providers.

Additionally, FMR strongly encourages the Commission to clarify that Section 302(a)(4) does not impose a strict liability standard on fund certifying officers and that fund officers are required to certify that they have undertaken due diligence in relation to internal controls. The Commission should use its rulemaking authority to clarify that fund certifying officers who undertake reasonable efforts to establish and maintain, design, and timely evaluate a fund's internal controls (i) have discharged their duties under Section 302(a)(4)(A) through (D) and (ii) should be able to rely on the results of those internal controls as a basis for certification under Section 302(a)(2) and (3).

For these reasons, the Commission should use its rulemaking authority to assure that a fund officer's certification of internal controls is adapted to the investment company environment. It should distinguish between fund internal controls and the fund's supervision through its auditors of its service providers' control environments.

IV. FMR requests that the Commission include a transition period in any new rules under Section 302 of Sarbanes-Oxley, or instead implement a new rulemaking procedure for investment company certification.

FMR recognizes that Section 302(c) of Sarbanes-Oxley mandates that the rules required by Section 302 of Sarbanes-Oxley shall be effective not later than August 29, 2002. However, given the complexity of the issues presented by the application of Section 302 of Sarbanes-Oxley to investment companies, FMR strongly recommends that the Commission delay compliance with any rules applicable to investment companies for at least 120 days following the adoption of those rules. Alternatively, FMR strongly suggests that the Commission propose and adopt new rules requiring appropriate certification of reports from mutual fund officers pursuant to its rulemaking authority under the 1940 Act. One benefit of this approach is that the Commission will be able to satisfy Congress's concerns with respect to operating companies in a timely fashion, and then turn to investment company certification in a more deliberative manner, thereby ensuring that mutual fund investors are not harmed by unanticipated deleterious effects of well-intentioned regulations.

* * *

We appreciate the opportunity to comment on this important rule proposal. Please contact me at (617) 563-7000 should you have any questions concerning FMR's views.

Sincerely yours,

/s/ Eric D. Roiter

Eric D. Roiter

cc: Paul F. Roye, Director
Cynthia M. Fornelli, Deputy Director
Division of Investment Management

1 If certification of N-SAR reports is to be required, FMR urges the Commission to use its rulemaking authority to focus certification on only those items of Form N-SAR that are analogous to information required by Form 10-K. Specifically, certification should be limited to Items 72 through 74, and Sub-Items 77A through M. Items 72, 73 and 74 detail certain financial information about a fund, and Sub-items 77A through 77M contain other categories of information roughly analogous to that included by operating companies in Form 10-K, such as Submission of matters to a vote of security holders, Terms of new or amended securities, Mergers, Legal Proceedings, etc. We appreciate that Form N-SAR was designed in 1985 - long before certification was contemplated - and that it would be best to improve upon the Form if the Commission determines to subject Form N-SAR filings to Sarbanes-Oxley certification. We would be pleased to work with the Commission to that end.
2 Investment company annual reports are not currently filed pursuant to the 1934 Act, and therefore they are not now subject to Section 302 of Sarbanes-Oxley. FMR questions whether certification of reports under Section 30(e) of the 1940 Act should extend to semi-annual reports, as Section 302 of Sarbanes-Oxley mandates certification only for "each annual or quarterly report," not for semi-annual reports. From a policy point of view, it would be anomalous to burden mutual funds with twice yearly certifications of the equivalent of their annual reports - when operating companies are required to do so only annually.
3 An example may be helpful. FMR believes that a fund's fair value NAV procedures are a kind of internal control of the fund that a fund officer can certify much in the way that Sarbanes-Oxley contemplates internal control certification for operating companies. But, FMR believes that the custodian's asset segregation procedures are an example of one of the many service provider control procedures that are fundamentally different, and need to be treated differently under any investment company certification regime.
4 Fund transfer agents are regulated under the 1934 Act; fund custodians are banks or broker-dealers and are regulated under applicable state and federal banking or broker/dealer laws; and fund investment advisers are regulated by the Investment Advisers Act of 1940.