August 1, 2006
Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
100 F. Street, NE
Washington, DC 20549-1090
Re: NASD Proposed Rule Change Relating to Disclosure of Fees
and Expenses in Mutual Fund Performance Sales Material
File Number SR-NASD-2004-043
Dear Mr. Katz:
Saturna Capital Corporation appreciates the opportunity to comment on the SEC's recent action approving the Proposed Rule Change, referenced above. Saturna Capital is a registered investment adviser that advises private clients and seven no-load mutual funds.
Relating to the Proposed Rule Change, we believe what matters to investors is the return that they receive -- the "bottom line." When disclosure also focuses on the expense ratio, investors can get confused about its value as a metric - because of course the expense ratio has already reduced the total return and should not be portrayed as a separate cost.
The implication of the Proposed Rule is that low expense ratios are always in an investor's best interest. This misconception is of particular importance for funds, such as some of those managed by Saturna Capital, that have performance-based management fees. Performance-fee funds generally have higher expense ratios when fund results are good, and a lower ratios when results are below average. When an investor compares funds on the basis of expense ratios, as invited under the Proposed Rule, he may well be attracted to the one with a lower ratio, wrongfully thinking that such a choice is in his best interests, when sometimes that will not be the case.
We also respectfully disagree with the decision to require disclosure of expense ratios gross of reimbursements and fee waivers. We believe that this can lead to misleading information being imparted to investors by the Proposed Rule's not focusing on actual expense ratios. Requiring disclosure in the text box of a possibly mythical expense ratio fails the reality test.
It is said that this can be remedied by also disclosing the net ratio with appropriate explanations. We respectfully submit that including the actual expense ratio in the box, along with the information regarding waivers and reimbursements that produced that net ratio would give the investor the most accurate information, while avoiding possible misconception from the use of a gross expense ratio.
If you have any questions about our comments or need additional information, please contact me at 1-800-728-8762 ex. 601.
Nicholas F. Kaiser
President and CEO