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U.S. Securities and Exchange Commission

Division of Investment Management:
Letter to Investment Company Institute

October 17, 2003

Craig Tyle
General Counsel
Investment Company Institute
1401 H Street, NW
Washington, DC 20005

Re: Disclosure by Funds Investing in Government Sponsored Enterprises

Dear Mr. Tyle:

The attention of the staff has been drawn to a matter that prompts the following observations we ask you to share with your membership.

Certain members of Congress and others have become concerned about mutual funds that invest in securities issued by the Federal Home Loan Mortgage Corporation ("Freddie Mac") and similar U.S. Government-sponsored entities such as the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Banks ("FHLBs").1 Many investment companies, some using words like "federal" or "government"(or other words suggesting investment in U.S Government securities) in their names, invest in debt and mortgage-backed securities issued by Freddie Mac, Fannie Mae, and the FHLBs.2 Despite the fact that these investments are disclosed in a fund's registration statement, many investors may not be aware that their funds have these securities in their portfolios, or they assume that such securities are backed by the full faith and credit of the United States Government. Many investors may not know that entities such as Freddie Mac, Fannie Mae, and FHLBs, although chartered or sponsored by Congress, are not funded by Congressional appropriations and that the debt and mortgage-backed securities issued by them are neither guaranteed nor insured by the United States Government.

We believe that investment companies that invest in securities issued by U.S. Government-sponsored entities should prominently disclose in their prospectuses that, although the issuer may be chartered or sponsored by Acts of Congress, their securities are neither issued nor guaranteed by the United States Treasury. In particular, a registrant whose name implies a policy of investing in U.S. Government securities should be especially careful in its prospectus to distinguish the various types of U.S. Government securities. The prospectus should clearly disclose whether the securities of an agency, instrumentality, or corporation are: (1) supported by the full faith and credit of the United States, (2) supported by the ability to borrow from the Treasury, (3) supported only by the credit of the issuing agency, instrumentality, or corporation, or (4) supported by the United States in some other way.

An investment company that as a principal investment strategy invests in such securities should place this disclosure in the Risk/Return Summary of the Prospectus (Item 2 of Form N-1A). An investment company that has a relatively long and detailed Risk/Return Summary due to the inclusion of disclosure required by Item 4 of Form N-1A must take care to give prominence to such disclosure at the beginning of the Risk/Return Summary. The risks pertaining to debt and mortgage-backed securities generally and to specific types of securities, such as "interest-only" and "principal-only" securities, of course, should also be clearly described in the prospectus.

We have found that some registrants have reduced the prominence of these important disclosures by relegating them to the Statement of Additional Information or truncating the disclosure in the prospectus to such an extent that they may be easily missed by investors. These registrants should expect staff comments seeking prospectus disclosure as discussed in the preceding paragraphs.

We thank you in advance for your cooperation and that of your membership on this matter. If your members have any questions concerning appropriate disclosure, those questions should be addressed to the branch in the Office of Disclosure and Review that has historically reviewed their filings.


Paul F. Roye




Modified: 02/10/2004