October 16, 2002
Jonathan G. Katz, Secretary
Subject: File No. S7-33-02
Dear Mr. Katz:
This letter provides comments on the recently proposed rules (the "Rules") of the Securities and Exchange Commission ("SEC") regarding "Certification of Management Investment Company Shareholder Reports and Designation of Certified Shareholder Reports as Exchange Act Periodic Reporting Forms." We at A I M Advisors Inc. ("AIM")1 appreciate this opportunity to comment on the Rules and hope that the comments provided in this letter, as well as those provided by the Investment Company Institute ("ICI") and other mutual fund complexes, will be useful to the SEC.
In light of the recent corporate scandals involving apparent misappropriations, accounting fraud and other accounting irregularities, which we believe have undermined investor confidence, AIM fully supports the purposes that are intended to be achieved by the Sarbanes-Oxley Act of 2002 (the "Act"). We also recognize and appreciate the enormous pressure that has been placed on the SEC by Congress to adopt rules that will implement the Act in such a short period of time. However, we would stress the importance of carefully constructing the Rules in a manner that takes into account the existing regulatory framework of, as well as the internal controls involved with operating, registered investment companies. With this framework in mind, below are AIM's responses to the SEC's request for comments regarding the Rules.
SEC Request No. 1: Comment was requested on a proposal to require certified shareholder reports to be filed on Form N-CSR and to designate these reports as reports that are required under Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
We support the proposal to amend Rule 30b2-1 under the Investment Company Act of 1940, as amended (the "1940 Act"), to require registered management investment companies to file a report with the SEC on a new Form N-CSR. The new Form N-CSR would include a copy of any required shareholder report provided pursuant to Rule 30e-1 under the 1940 Act. We believe that this approach proposed by the SEC is consistent with the purpose of the certification requirement (as noted in the proposing release for the Rules, the "certification requirement was intended to improve the quality of the disclosure that a company provides about its financial condition in its periodic reports to investors").
We do not support the proposal to file the certification on both Form N-SAR and the proposed Form N-CSR. Instead, we suggest amending the certification requirement so that it applies only to new Form N-CSR. We believe that application of the certification requirement to both forms would not advance the purpose of the certification requirement, as noted above, and that the imposition of such a duplicative requirement on investment companies would be overly burdensome. Form N-SAR, as you are aware, is a data gathering form that is not sent to investors. The information contained in Form N-SAR: (1) does not contain financial statements and (2) is not compiled in a manner that could be easily read by an investor, even if read in conjunction with the financial statements of an investment company. As a result, we believe that certification of the N-SAR would not improve the quality of disclosure that investment companies provide about their financial condition in periodic reports to investors. Moreover, imposing the requirement to certify a document that is not supplied to investors is clearly not contemplated by the Act and is certainly more onerous than requirements that are being imposed upon operating companies. Therefore, we would recommend that the certification requirement be eliminated in Form N-SAR. For these same reasons, we believe that the certification requirement in Form N-SAR for unit investment trusts and small business investment companies should be eliminated also.
SEC Request No. 2: Comment was requested on the scope of the certification requirement.
We believe that the certification requirement should only apply to the financial statements, including the related notes to the financial statements and the condensed financial information, that is required to be included in the annual and semi-annual reports ("shareholder reports"). Any non-financial information that is contained in shareholder reports, including the Management's Discussion and Fund Performance ("MDFP") and the letter to shareholders, should not be covered by the certification required by the Act. We believe that subjecting voluntary and "opinion-type" information to the certification requirement will only have the effect of fund complexes choosing not to include voluntary information in shareholder reports that is otherwise relevant and of interest. In addition, subjective opinions of portfolio managers would have to be excluded from shareholder reports as it is not the type of information that can be certified. We believe that such a result is not in the best interest of investors.
SEC Request No. 3: Comment was requested on whether to amend Form N-SAR to require all registered investment companies to include the certification required by the Act regardless of whether they are subject to Section 13(a) or 15(d) of the Exchange Act. Comment was also requested on the proposal to require management investment companies to file certified shareholder reports on Form N-CSR regardless of whether they are subject to Section 13(a) or 15(d) of the Exchange Act.
As indicated above, we do not believe that including the certification in Form N-SAR is consistent with the intent of the Act or the purpose of the certification requirement. We believe it would be appropriate to designate Form N-SAR as a filing made pursuant to the 1940 Act exclusively.
SEC Request No. 4: Comment was requested on the proposal to require all registered investment companies to maintain disclosure controls and procedures with respect to all filings under the Securities Act of 1933 ("Securities Act"), Exchange Act, and 1940 Act.
We believe that requiring investment companies to maintain disclosure controls and procedures with respect to all filings under the Securities Act and the 1940 Act would impose requirements that are beyond the scope and the intent of the Act and would be overly burdensome. Accordingly, we do not support such a proposal.
We believe it is consistent with the intent of the Act and the purpose of the certification requirement, as well as general disclosure standards under federal securities laws, to require investment companies to maintain appropriate internal controls, rather than "disclosure controls and procedures," to ensure the accuracy of the financial information contained in Exchange Act filings that contain financial statements.2
We have serious concerns about requiring the maintenance of "disclosure controls and procedures." These concerns are based on the lack of formal guidance as to the meaning and scope of this new concept introduced by the SEC, "disclosure controls and procedures." Although this term is defined in recently adopted Rule 30a-2(c), we believe that the definition is overly broad and vague, and is not particularly helpful in determining what sorts of disclosure controls and procedures will be required. We believe that this new term has created much confusion and uncertainty throughout the investment management industry. Section 302 of the Act specifically refers to having adequate "internal controls," a term commonly used and known in the investment management industry, to ensure that principal executive officers and principal financial officers are aware of material information. AIM and, I am quite certain, other asset management complexes have expended significant resources in an attempt to decipher the practical meaning of this new term. Nonetheless, through conversations with colleagues at other asset management firms and discussions with outside counsel, we feel comfortable in asserting that there is no clear consensus in the industry as to the practical meaning and scope of this new term.
Moreover, we have identified a source of confusion in recently adopted Rule 30a-2 with regard to the use of the term "disclosure controls and procedures." Rule 30a-2(a) requires that certain officers of investment companies make certain certifications in the Form N-SAR filed by such companies. Rule 30a-2(b)(4) requires that these certifications include a statement that the certifying officers are responsible for establishing and maintaining disclosure controls and procedures. Rule 30a-2(b)(4)(i) further requires these certifications to include a statement that the certifying officers have evaluated the effectiveness of such disclosure controls and procedures as of a date within 90 days prior to the filing date of the Form N-SAR. In addition, Rule 30a-2(b)(5) requires these certifications to include a statement that the certifying officers have disclosed, based on their most recent evaluation, to the investment company's auditors and the audit committee all significant deficiencies in the design or operation of internal controls which could adversely affect the investment company's ability to record, process, summarize, and report financial data, and that such certifying officers have identified for the auditors any material weaknesses in internal controls. We believe that it is unclear whether the term "most recent evaluation" in Rule 30a-2(b)(5) refers to the evaluation of the investment company's disclosure controls and procedures that is required to be made pursuant to Rule 30a-2(b)(4)(ii) or if it refers to a separate, unrelated evaluation of the investment company's internal controls. We request that the SEC resolve this confusion by clarifying what is meant by the reference to "most recent evaluation" in Rule 30a-2(b)(5).
We request that until the SEC provides more clarification as to the meaning and scope of this new term or until the SEC revises the certification, the SEC should extend the transitional provisions contained in the SEC's Release Nos. 33-8124, 34-46427, and IC-25722, which, in essence, required that certifying officers only make the first three certifications called for under Rule 30a-2(b)(1) to (3).
SEC Comment No. 5: Comment was requested on the anticipated compliance date.
We believe it would be appropriate to provide more than thirty (30) days after adoption of the Rules to allow investment companies to come into compliance with such Rules. We believe it would be appropriate to provide ninety (90) days after adoption of the Rules to allow investment companies to come into compliance with such Rules.
If you have any questions about the responses contained in this letter, please feel free to contact me at (713) 214-1191 or Dana Sutton, Treasurer to the funds within the AIM Family of Funds, at (713) 214-1162.
Thank you in advance for your consideration of the comments contained in this letter.