-------------------- BEGINNING OF PAGE #1 -------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 239, 270, and 274

[Release Nos. 33-7153; 34-35546; IC-20974; File No. S7-10-95]

RIN 3235-AG43

Improving Descriptions of Risk by Mutual Funds and Other
Investment Companies

AGENCY:  Securities and Exchange Commission.

ACTION:  Concept Release; request for comments.

SUMMARY:  The Securities and Exchange Commission (the "SEC" or
"Commission") is seeking comments and suggestions on how to
improve the descriptions of risk provided to investors by mutual
funds and other management investment companies ("funds" or
"investment companies").  In order to encourage individual
investor comments and suggestions, the SEC is including in the
Release an appendix directed to investors, which the SEC intends
to reprint separately and distribute to investors.

DATES:  The SEC requests comments on or before July 7, 1995.

ADDRESSES:  Three copies of your comments should be submitted to
Jonathan G. Katz, Secretary, Securities and Exchange Commission,
450 Fifth Street, N.W., Washington, D.C.  20549.  All comment
letters should refer to File No. S7-10-95.  All comments received
will be available for public inspection and copying in the SEC's
Public Reference Room, 450 Fifth Street, N.W., Washington, D.C.
20549.  If you are an individual investor and do not have access
to a copier machine, you may send in one copy of your comments.

FOR FURTHER INFORMATION CONTACT:  Susan Nash, Senior Special
Counsel, (202) 942-0697, Paul B. Goldman, Chief Financial
Analyst, (202) 942-0510, Roseanne Harford, Senior Counsel, (202)
942-0689, Martha H. Platt, Senior Counsel, (202) 942-0725, in the
Division of Investment Management, or Craig McCann, Professional
Fellow, (202) 942-8032, Office of Economic Analysis.

SUPPLEMENTARY INFORMATION:

Executive Summary

     Today the SEC is continuing its efforts to enhance the
information that investors in funds receive to assist them in
making an informed investment decision.  In recent years, the SEC
has taken significant steps designed to improve the
understandability and comparability of fund disclosure of
performance and expenses.-[1]-  The SEC is now requesting comment
                    

-[1]-     See, e.g., Disclosure of Mutual Fund Performance and
          Portfolio Managers, Investment Company Act of 1940
          ("Investment Company Act") Rel. No. 19382 (Apr. 6,
          1993) [58 FR 19050 (Apr. 12, 1993)] (requiring mutual
          fund prospectuses or annual reports to discuss
          performance and provide line graph comparing fund
          performance to that of an appropriate market index over
          the last ten fiscal years; financial highlights table
          of prospectus revised to include total return
          information and generally to provide investors with
          information showing the performance of funds on a per
          share basis); Registration Form for Closed-End
          Management Investment Companies, Investment Company Act
                                                   (continued...)
 
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on how to improve risk disclosure for investment companies,
including ways to increase the comparability of disclosure about
funds' risk levels through quantitative measures or other
means.-[2]-
     Under existing SEC rules, a fund is required to discuss in
its prospectus the principal risk factors associated with
investing in the fund.-[3]-  Funds typically describe the risks
of investing in the fund by describing the risks of particular
investment policies that the fund may use and investments that
the fund may make.-[4]-  Lengthy and highly technical
                    

-[1]-(...continued)
          Rel. No. 19115 (Nov. 20, 1992) [57 FR 56826, 56829
          (Dec. 1, 1992)] (improvements to financial highlights
          table for closed-end funds; fee table providing
          standard format for expense information required in
          closed-end fund prospectuses); Advertising by
          Investment Companies, Investment Company Act Rel. No.
          16245 (Feb. 2, 1988) [53 FR 3868 (Feb. 10, 1988)]
          [hereinafter "Rel. 16245"] (mutual fund advertisements
          and sales literature containing performance data
          required to include uniformly computed performance
          data); Consolidated Disclosure of Mutual Fund Expenses,
          Investment Company Act Rel. No. 16244 (Feb. 1, 1988)
          [53 FR 3192 (Feb. 4, 1988)] (fee table required in
          mutual fund prospectuses).

-[2]-     The SEC requested comment on methods for disclosing
          risk in 1993 when it proposed rule amendments that
          would have given investors the option of purchasing
          mutual fund shares based on a short form prospectus. 
          Off-the-Page Prospectuses for Open-End Management
          Investment Companies, Investment Company Act Rel. No.
          19342 (Mar. 19, 1993) [58 FR 16141, 16145 (Mar. 25,
          1993)] [hereinafter "Rel. 19342"].  In particular, the
          SEC asked whether the short form prospectus should be
          required to contain a standardized presentation of the
          degree and kind of risk presented by a mutual fund
          relative to other mutual funds.  A limited number of
          comments were received on this topic, with the comments
          being almost evenly divided whether standardized risk
          disclosure should be required.  See Summary of Comment
          Letters Relating to Proposed Rule 482(g) Made in
          Response to Investment Company Act Release No. 19342,
          File No. S7-11-93, Jan. 27, 1994, at 17-18 [hereinafter
          "Summary of Comments:  Rel. 19342"].

-[3]-     Risk factors include those peculiar to the fund and
          those that apply generally to funds with similar
          investment policies and objectives or, in the case of
          closed-end funds, similar capital structures or trading
          markets.  Item 4(c), Form N-1A, & Guide 21, Disclosure
          of Risk Factors, Guidelines for Form N-1A [17 CFR
          239.15A & 274.11A] (mutual funds); Item 8.3.a., Form N-
          2 [17 CFR 239.14 & 274.11a-1] (closed-end funds).

-[4]-     See Form N-1A, Item 4(a)(ii) (requires concise
          description of mutual fund investment objectives and
          policies and brief discussion of how the fund proposes
          to achieve such objectives, including description of
          the securities in which the fund will invest and
          special investment practices or techniques that will be
                                                   (continued...)
 
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descriptions of permissible policies and investments that are
often used in meeting existing requirements may make it difficult
for investors to understand the total risk level of a fund.  The
SEC staff has found that funds typically provide only the most
general information on the risk level of the fund taken as a
whole and has encouraged funds to modify their existing
disclosure to enhance investor understanding of risks.-[5]-  The
SEC believes that it is now appropriate to explore whether SEC
disclosure requirements should be revised in order to improve the
communication of fund risks to investors and increase the
likelihood that investors will readily grasp the risks of
investing in a particular fund before they invest.
     Several factors make it important that the SEC explore
better ways of explaining fund risks to investors.  First,
average Americans are placing increasing reliance on funds to
meet important financial needs, such as retirement and college
expenses.-[6]-  Understanding the risks of various investment
products is one of the most important ingredients in creating an
overall investment strategy or portfolio to meet these financial
needs.-[7]-  Second, new ways of describing risks may improve
                    

-[4]-(...continued)
          employed); Form N-1A, Item 4(b) (requires discussion of
          types of investments, policies, and practices that will
          not constitute the "principal portfolio emphasis" of a
          mutual fund, but which place more than 5% of the fund's
          net assets at risk); Form N-2, Item 8.2. & 8.4.
          (similar requirements for closed-end funds).

-[5]-     See Memorandum dated Sept. 26, 1994, from Division of
          Investment Management to Chairman Levitt regarding
          Mutual Funds and Derivative Instruments 11 [hereinafter
          "Derivatives Report"]; Letter to Registrants from
          Carolyn B. Lewis, Assistant Director, Division of
          Investment Management 7 (Feb. 25, 1994) (both documents
          on file with the SEC's Public Reference Room).

-[6]-     According to a June 1994 survey sponsored by the
          Investment Company Institute, 31% of United States
          households owned shares in a mutual fund, up from 6% of
          households in 1980.  Investment Company Institute,
          Fundamentals (Sept. 1994); Investment Company
          Institute, 1994 Mutual Fund Fact Book 85 (34th ed.
          1994) [hereinafter "1994 ICI Fact Book"].  Mutual funds
          held 14.9% of all household discretionary assets as of
          June 30, 1994, up from 7.0% at the end of 1982. 
          Source:  Investment Company Institute.  Total mutual
          fund assets have grown from $292.9 billion at the end
          of 1983 to $2.16 trillion at the end of December 1994. 
          1994 ICI Fact Book, supra, at 26; Investment Company
          Institute Press Release, "December Mutual Fund Sales
          Total $39.9 Billion," Jan. 26, 1995, at 4.

     By the end of 1993, retirement assets accounted for 23% of
     mutual fund assets (excluding variable annuities), and
     mutual funds held almost $284 billion of the approximately
     $857 billion invested in individual retirement accounts
     ("IRAs") -- about 33% of total IRA assets.  1994 ICI Fact
     Book, supra, at 69.

-[7]-     See, e.g., Burton G. Malkiel, A Random Walk Down Wall
          Street ch. 13 (1990) [hereinafter "Random Walk"]; Susan
                                                   (continued...)
 
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investor understanding of the risks associated with the use by
some funds of increasingly complex instruments, such as
derivatives.-[8]-  Third, the number and types of funds have
proliferated, increasing fund investors' need for information
that will help them to compare and contrast alternatives.-[9]-
     The importance of risk disclosure was underscored last year
when some short-term government bond funds experienced losses as
interest rates increased sharply.-[10]-  Shareholders in these
funds expressed surprise at the losses, and several shareholder
lawsuits were filed.-[11]-  Whatever the legal merits of the
shareholder complaints may be, the SEC believes that these events
highlight the importance of clear, concise disclosure of risks.
     In this Release, the SEC requests that those submitting
comments discuss the specific goals of, and various alternatives
for improving, risk disclosure.  Comments are requested on the
relative merits of written and other presentations of risk,
including quantitative or numerical measures, graphs, tables, and
other pictorial representations.
     The Release describes and requests comment on several
specific quantitative measures of risk and risk-adjusted
performance, including standard deviation, semi-variance, beta,
duration, the Sharpe Ratio, the Treynor Ratio, and Jensen's
Alpha.  These measures of risk are potentially useful because
they may give investors a tool for balancing the potential
returns of a fund against the risks of the fund.  For instance,
if a fund has historical annual returns which are 2% above a
market index, historical risk measures may provide some
indication of the risks that were taken to produce the increased
returns.  Quantitative risk measurements may provide investors

                    

-[7]-(...continued)
          E. Kuhn, "What it Takes to Retire Today," Fortune, Dec.
          26, 1994, at 113; Joshua Shapiro, "The Discipline of
          Saving for College," New York Times, Sept. 10, 1994, at
          34.

-[8]-     See Testimony of Arthur Levitt, Chairman, U.S.
          Securities and Exchange Commission, Concerning Issues
          Affecting the Mutual Fund Industry, Before the
          Subcommittee on Telecommunications and Finance,
          Committee on Energy and Commerce, U.S. House of
          Representatives 18-19 (Sept. 27, 1994); Derivatives
          Report, supra note 5, at 11-12.

-[9]-     See, e.g., 1994 ICI Fact Book, supra note 6, at 30-31
          (increase from 564 mutual funds at the end of 1980 to
          4,558 at the end of 1993; mutual funds classified
          according to 21 investment objectives).

-[10]-    See, e.g., Leslie Eaton, "Paine Webber to Bail Out Fund
          Battered by Complex Investments," New York Times, July
          23, 1994, at A1; Robert McGough, "Piper Jaffray Acts to
          Boost Battered Fund," Wall Street Journal, May 23,
          1994, at C1.

-[11]-    See, e.g., Karen Donovan, "Derivatives Slump; Losers Go
          to Court," National Law Journal, Nov. 7, 1994, at A1;
          G. Bruce Knecht, "Minneapolis Investors Are Hurt By
          Local Firm They Knew As Cautious," Wall Street Journal,
          Aug. 26, 1994, at A1; John Waggoner, "Mutual Fund
          Losses Anger Novice Investors," USA Today, June 16,
          1994, at 1B.
 
-------------------- BEGINNING OF PAGE #5 -------------------

with tools to measure how funds have fared historically in the
relationship between risk and return.
     The Release also asks for comments addressing a number of
general topics related to quantitative risk measures.  These
include:

*         The benefits to be derived from quantitative measures
          versus the costs and burdens to the fund that must
          produce such information;

*         Quantitative measures currently used by fund managers
          to assess risk, and whether such internally used
          measures should be disclosed to investors;

*         Investor understanding of quantitative measures, and
          means to increase that understanding;

*         Standardizing the ways in which funds calculate
          quantitative measures to assure comparability and the
          validity of any underlying assumptions; and

*         Availability of quantitative risk information from
          third party providers (e.g., the financial press and
          rating services).

     Comments are also requested on whether funds should be
required to disclose a self-assessment of their risk level, using
an SEC-created standard scale or some other method.  In addition,
comments are requested on whether funds should describe to
investors the ways or strategies that fund managers use to
manage, understand, and monitor the risks of their funds.
     The SEC requests comments that address the specific
questions posed in this Release as well as alternative risk
disclosure methods and related matters.  Where possible, please
provide actual rule language that you believe would best express
your recommendation.          
     To encourage individual investor comments and suggestions on
this Release, the SEC for the first time has prepared a short
summary specifically directed to individual investors.  The
summary, which appears as an appendix to the Release, will be
reprinted in a format that leaves space for individual investors
to tell the SEC about their concerns and ideas and distributed
through investor groups and other means designed to reach
individual investors.

I.  The Goals of Risk Disclosure

     The SEC's goal is to improve disclosure of fund risks so
that investors will have the information they need to understand
the risk of any particular fund investment.  The best means for
achieving this aim may depend, in part, on the specific goals of
risk disclosure.  The SEC therefore requests comment on the
specific goals of risk disclosure, including the matters raised
below.
     The SEC asks persons submitting comments to define, as
precisely as possible, what "risks" should be disclosed to
investors.  To what extent are investors concerned with the
likelihood that they will lose principal, that their return will
not exceed a specified benchmark (such as the Standard & Poor's
("S&P") 500), or with the variability of their returns (or the
volatility of the value of their investment) over time?  How
should the relationship between risk and an investor's time
horizon shape the disclosure that is provided to investors?  For
example, is the same risk information useful to an investor with
an investment time horizon of less than one year and to an
 
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investor with an investment time horizon of twenty years?-[12]- 
How can the disclosure of risk help investors answer the
fundamental questions -- Is this investment suitable for me?  If
I have diversified my investments, how does this particular fund
fit into my diversification strategy?
     Comments are requested on the nature of risk comparisons
that are useful to investors.  For example, should risk
disclosure facilitate comparison among a broad range of
investment options, such as between funds and other investment
products?  Or is it sufficient to facilitate comparisons among
all funds and fund types, both equity and fixed income?  Or among
all equity funds, on the one hand, and all fixed income funds, on
the other?  Or only within groups of funds with similar
investment objectives and policies, such as short-term government
bond funds?
     Is improved disclosure of risks equally important for
equity, fixed income, and balanced or asset allocation funds?  Do
recent derivatives-related losses by some fixed income funds, and
the apparently greater use of derivatives by fixed income funds,
suggest that the need for improved disclosure of risks is greater
for fixed income funds?-[13]-  In light of the substantive limits
on permitted money market fund investments,-[14]- should risk
disclosure requirements for money market funds be different from
those applicable to other funds?-[15]-
                    

-[12]-    See Letter to Barry P. Barbash, Director, Division of
          Investment Management, from Paul Schott Stevens,
          General Counsel, Investment Company Institute 3-4 (Jan.
          19, 1995) [hereinafter "ICI Letter"] (on file with the
          SEC's Public Reference Room) (discussing different
          concepts of risk); Paul A. Samuelson, "The Long-Term
          Case for Equities and How it Can be Oversold," Journal
          of Portfolio Management 15-24 (Fall 1994) (raising
          questions about common wisdom that, for long-term
          investor, stocks will outperform bonds or cash).

-[13]-    See supra notes 10 and 11 and accompanying text.  A
          recent industry survey of non-money market funds
          indicated that the level of derivatives use varied by
          fund type, with fixed income funds accounting for 84%
          of the total market value of all derivatives held by
          reporting funds and 62% of the total notional amount. 
          Investment Company Institute, Derivative Securities
          Survey 6 (Feb. 1994).  Survey respondents included 52
          fund complexes with 1,728 non-money market funds
          holding aggregate net assets of $958 billion (76% of
          industry assets in non-money market funds).  Id. at 4.

-[14]-    Mutual funds are prohibited from calling themselves
          money market funds unless they comply with the risk-
          limiting provisions of rule 2a-7 under the Investment
          Company Act.  These provisions are designed to limit a
          fund's exposure to credit, interest rate, and currency
          risks.  17 CFR 270.2a-7(b), (c)(2)-(4), & (d).

-[15]-    Losses in the value of certain adjustable rate notes
          held by some money market funds recently resulted in
          the funds' advisers electing to take actions designed
          to prevent the funds' per share net asset values from
          falling below $1.00; and one small, institutional money
          market fund liquidated and redeemed its shares at less
          than $1.00 as a result of such losses.  See, e.g., "A
                                                   (continued...)
 
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     Comments are also requested on the degree of detail
regarding fund risk that ideally would be communicated to
investors.  In meeting existing disclosure requirements, funds
often describe the purposes of using particular types of
instruments and the risks associated with each type, but
typically provide only the most general information on the risk
level of the fund taken as a whole.-[16]-  Should disclosure
convey the risks of each particular type of instrument held by a
fund, the risks of broader classes of instruments (for instance,
derivatives as a group), the risks of the fund's portfolio as a
whole, or some combination of the foregoing?  Should the focus of
disclosure be shifted from the characteristics of particular
securities to the nature of the investment management services
offered, including the objectives of a fund manager and the
associated risks and rewards?  Do investors need to understand
separately the different types of risk, such as market, credit,
legal, and operational risks, or is it the aggregate effect of
different types of risk that is important to an investment
decision?

II.  Narrative and Non-Narrative Risk Disclosure Options

     The SEC currently requires fund prospectuses to include
narrative descriptions of risk,-[17]- and the SEC is interested
in the potential for improving risk disclosure through changes to
the narrative disclosure requirements and the use of non-
narrative forms of disclosure.  The SEC therefore asks persons
submitting comments to discuss the contributions that both
narrative and non-narrative forms of disclosure can make to
investor understanding of risk and to provide the SEC with the
findings of any relevant market research on the effective
communication of risk.
     At present, a number of funds voluntarily supplement
narrative descriptions of risk through means such as quantitative
measures, graphs, tables, and other pictorial representations. 
For example, some funds provide quantitative risk measures like
those described in section III.A. of this Release.  Another
method used is a line graph that shows relative risk and return
levels for the fund and some benchmark, such as Treasury bills or
a market index such as the S&P 500.  Another method is a bar
graph that shows consistency of returns for the fund and a market
index (as measured by monthly rates of return over the life of
                    

-[15]-(...continued)
          History of Stepping up to the Plate," Fund Action,
          Sept. 12, 1994, at 9; Brett D. Fromson, "Losses on
          Derivatives Lead Money Fund to Liquidate," Washington
          Post, Sept. 28, 1994, at F1.  These losses, however,
          raise concerns about the appropriateness of the funds'
          investments in some types of adjustable rate securities
          and not merely risk disclosure concerns.  See Revisions
          to Rules Regulating Money Market Funds, Investment
          Company Act Rel. No. 19959,   II.D.2.d. (Dec. 17, 1993)
          [58 FR 68585, 68601-02 (Dec. 28, 1993)] [hereinafter
          "Rel. 19959"] (certain types of adjustable rate notes
          not appropriate investments for money market funds). 
          See also Letter from Barry P. Barbash, Director,
          Division of Investment Management, to Paul Schott
          Stevens, General Counsel, Investment Company Institute
          (June 30, 1994) (on file with the SEC's Public
          Reference Room).

-[16]-    See Derivatives Report, supra note 5, at 11.

-[17]-    See supra notes 3 and 4 and accompanying text.
 
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the fund).  Finally, some fund families use pictures to show the
relative risks of the various funds within the family.
     The SEC believes that quantitative measures, graphs, tables,
and other pictorial representations may assist investors in
understanding and comparing funds.  The SEC currently requires
disclosure of quantitative information in tabular form in the
areas of fund performance and expenses.-[18]-  Recently, the SEC
adopted rules that require graphic depictions of information to
facilitate investor understanding of fund performance.-[19]-  The
SEC now requests comment on the relative merits and usefulness of
various formats for investment company risk disclosure, including
quantitative measures, graphs, tables, and other pictorial
representations.  To what extent should these methods be used to
supplement, or replace, current narrative risk disclosure?

III.  Quantitative Measures of Risk

     A.   Specific Historical Quantitative Measures of Risk and
          Risk-Adjusted Performance

     This section of the Release discusses several historical
quantitative measures of risk and risk-adjusted performance that
could be used for fund disclosure, and the following section
raises a number of general questions about quantitative measures.
Comments are requested regarding whether the SEC should require
fund disclosure of any one or a combination of the enumerated
measures or any other measures.  Persons submitting comments are
also asked to consider each of the enumerated quantitative
measures, and any other measures they may wish to suggest, in the
context of the general questions raised in the following section.
     Historical measures of risk and risk-adjusted performance
are generally calculated from past portfolio returns and, in some
cases, past market returns.  There are two broad classes of
historical risk measures, referred to in this Release as total
risk measures and market risk measures.  In addition, there is a
third class of measures, risk-adjusted measures of performance. 
(Unless the context indicates otherwise, risk-adjusted measures
of performance are included in "quantitative risk measures" and
similar terms and phrases used in this Release.)  These three
classes of measures are described below, and examples of each are
provided.  Comments are requested on the relative advantages and
disadvantages of the three classes of measures and of specific
measures within each class.

     1.   Measures of Total Risk
     Total risk measures, including standard deviation and semi-
variance, quantify the total variability of a portfolio's returns
around, or below, its average return.
                    

-[18]-    For mutual funds, see Form N-1A, Items 2 (Synopsis), 3
          (Condensed Financial Information), and 5A (Management's
          Discussion of Fund Performance).  For closed-end funds,
          see Form N-2, Items 3 (Fee Table and Synopsis) and 4
          (Financial Highlights).  See also supra note 1 and
          accompanying text.  A closed-end fund is also required
          to include in its prospectus a table quantifying the
          effects of leverage on returns to investors.  Form N-
          2, Item 8.3.b.(3) (General Description of the
          Registrant, Risk Factors, Effects of Leverage).

-[19]-    See supra note 1.  The SEC also recently adopted rules
          requiring graphic depictions of issuer performance by
          public companies that are not investment companies.
          Executive Compensation Disclosure, Securities Exchange
          Act Rel. No. 31327 (Oct. 16, 1992) [57 FR 48126 (Oct.
          21, 1992)].
 
-------------------- BEGINNING OF PAGE #9 -------------------

*         Standard Deviation of Total Return.  The risk
          associated with a portfolio can be viewed as the
          volatility of its returns, measured by the standard
          deviation of those returns.-[20]-  For example, a
          fund's historical risk could be measured by computing
          the standard deviation of its monthly total returns
          over some prior period, such as the past three years. 
          The larger the standard deviation of monthly total
          returns, the more volatile, i.e., spread out around the
          fund's average monthly total return, the fund's monthly
          total returns have been over the prior period. 
          Standard deviation of total return can be calculated
          for funds with different objectives, ranging from
          equity funds to fixed income funds to balanced funds,
          and can be measured over different time frames.  For
          example, a fund could calculate standard deviation of
          monthly returns over the prior three years or yearly
          returns over the prior ten years.

*         Semi-variance.  Standard deviation measures both "good"
          and "bad" outcomes, i.e., the variability of returns
          both above and below the average return.  To the
          individual investor, however, risk may be synonymous
          with "bad" outcomes.-[21]-  Semi-variance, which can be
          used to measure the variability of returns below the
          average return, reflects this view of risk.-[22]-  A
          fund with a larger semi-variance has returns that are
          more spread out below the average return.

     2.   Measures of Market Risk

     Individual securities, and portfolios of securities, are
generally subject to two sources of risk:  (i) risk attributable
to firm-specific factors, including research and development,
marketing, and quality of management; and (ii) risk attributable
to general economic conditions, including the inflation rate,
interest rates, and exchange rates.-[23]-  According to academic
literature in Finance, firm-specific risk can be reduced or
eliminated through portfolio diversification, but the risk
                    

-[20]-    William F. Sharpe, Gordon J. Alexander, and Jeffery V.
          Bailey, Investments 178 (5th ed. 1995) [hereinafter
          "Sharpe, Alexander, & Bailey"].  If the returns earned
          by a portfolio are "normally" distributed, that is, in
          the shape of a bell curve, approximately 95% of the
          actual returns will fall within two standard deviations
          of the average return.  Random Walk, supra note 7, at
          219.  For example, for a fund with an average monthly
          return of 1% and a standard deviation of 4%, 95% of the
          fund's monthly returns would fall between -7% (1% - (2
          x 4%)) and 9% (1% + (2 x 4%)) if the returns were
          "normally" distributed.  See Sharpe, Alexander, &
          Bailey, supra, at 177.

-[21]-    See Sharpe, Alexander, & Bailey, supra note 20, at 178;
          Allan Flader, "Deviating from the Standard," Financial
          Planning, June 1994, at 148.

-[22]-    Funds' risk levels would be ranked in the same order
          using semi-variance and standard deviation if the
          distribution of fund returns were symmetric.  Sharpe,
          Alexander, & Bailey, supra note 20, at 178.

-[23]-    Zvi Bodie, Alex Kane, and Alan J. Marcus, Investments
          197 (2d ed. 1993) [hereinafter "Bodie, Kane, &
          Marcus"].
 
-------------------- BEGINNING OF PAGE #10 -------------------

attributable to general economic conditions, so-called "market
risk," cannot be eliminated through diversification.-[24]- 
Unlike standard deviation and variance, which measure portfolio
risk from both sources, the measures described in this section
are measures of market risk.  The SEC requests comment on
whether, given that most fund portfolios are diversified, it is
appropriate to focus on market risk when measuring fund risks.

*         Beta.  Beta measures the sensitivity of a security's,
          or portfolio's, return to the market's return.  The
          market's beta is by definition equal to 1.  Portfolios
          with betas greater than 1 are more volatile than the
          market, and portfolios with betas less than 1 are less
          volatile than the market.  For example, if a portfolio
          has a beta of 2, a 10% market return would result in a
          20% portfolio return, and a 10% market loss would
          result in a 20% portfolio loss (excluding the effects
          of any firm-specific risk that has not been eliminated
          through diversification).-[25]-
               The calculation of a fund's historical beta
          requires the selection of a benchmark market index, and
          persons supporting the use of beta are asked to address
          how the benchmark should be selected and whether a
          single benchmark should be used for all funds.  If a
          single benchmark should be selected, what should it be?

          If a single benchmark is not used, how should the lack
          of comparability of betas for funds using different
          benchmarks be addressed?  Beta is generally used in
          connection with equity securities, and persons
          submitting comments are asked to address whether or not
          the use of beta should be limited to equity funds.

-[24]-    Bodie, Kane, & Marcus, supra note 23, at 197-99;
          Sharpe, Alexander, & Bailey, supra note 20, at 212-17.

-[25]-    Sharpe, Alexander, & Bailey, supra note 20, at 211;
          Frank J. Fabozzi and Franco Modigliani, Capital
          Markets:  Institutions and Instruments 136-40 (1992)
          [hereinafter "Fabozzi & Modigliani"].
 
-------------------- BEGINNING OF PAGE #11 -------------------

          Duration.-[26]-  Duration is a measure of the price
          sensitivity of a bond, or bond portfolio, to interest
          rate changes.-[27]-  There are different types of
          duration,-[28]- and persons supporting the use of
          duration are asked to be specific regarding the
          duration measure that they support.  Would so-called
          "modified duration," which can be interpreted as the
          percentage change in the price of a bond, or bond
          portfolio, for a 100 basis point change in yield, be
          particularly useful?-[29]-
               The use of duration has several limitations, and
          persons submitting comments are asked to address each
          of these.  First, duration is only meaningful for bonds
          and portfolios of bonds and therefore cannot be used to
          measure the risk of equity funds and has limited
          applicability to balanced funds.  Second, duration
          measures interest rate risk only and not other risks to
          which bonds are subject, e.g., credit risks and, in the
          case of non-dollar denominated bonds, currency risks. 
          Third, duration is difficult to calculate precisely for
          bonds with prepayment options, e.g., mortgage-backed
          securities, because the calculation requires


-[26]-    The SEC previously requested comment on duration as a
          measure of interest rate risk for securities held by
          money market funds.  See Rel. 19959, supra note 15,  
          II.D.2.d., 58 FR at 68602.  In response to that
          request, several persons submitting comments expressed
          support for the use of duration or other price
          volatility tests; one person specifically opposed a
          duration requirement on the grounds that the costs
          funds would incur would outweigh benefits to investors.

          See Summary of Comment Letters on Proposed Amendments
          to Rules Regulating Money Market Funds Made in Response
          to Investment Company Act Rel. 19959, File No. S7-34-
          93, Nov. 10, 1994, at 63-64.

-[27]-    Bodie, Kane, & Marcus, supra note 23, at 473-74. 
          Duration measures the weighted average maturity of a
          bond's, or bond portfolio's, cash flows, i.e.,
          principal and interest payments.  A zero-coupon bond's
          duration, for example, is the same as its maturity
          because its sole cash flow is the payment made at
          maturity.  By contrast, a bond bearing interest payable
          periodically has a duration that is shorter than its
          maturity because the periodic interest payments reduce
          the weighted average maturity of the bond's cash flows
          below the final maturity of the bond.  Id.

-[28]-    For a discussion of the computation and interpretation
          of so-called "Macaulay duration" and "modified
          duration," see Bodie, Kane, & Marcus, supra note 23, at
          473-75, and Fabozzi & Modigliani, supra note 25, at
          393-98.

-[29]-    Fabozzi & Modigliani, supra note 25, at 397.  For
          example, if a bond portfolio has a modified duration of
          7 and yield increases by 100 basis points, the
          estimated decrease in the value of the portfolio would
          be 7%.
 
-------------------- BEGINNING OF PAGE #12 -------------------

          assumptions about prepayment rates.-[30]-  Fourth, bond
          value changes resulting from interest rate changes are
          sometimes poorly predicted by duration.-[31]-

               The SEC staff takes the position that, for a fund
          with a name or investment objective that refers to the
          maturity of the fund's portfolio, such as "short-term"
          or "long-term," the dollar-weighted average portfolio
          maturity of the portfolio must reflect that
          characterization.-[32]-  The SEC requests comment on
          whether, separate and apart from duration's potential
          use as a quantitative risk measure, a fund's name or
          investment objective that refers to the maturity of its
          portfolio should be required to be consistent with the
          fund's duration.




-[30]-    See James Hom and Gary Arne, Standard & Poor's,
          "Prepayments and Model Error in Fund Risk Ratings,"
          CreditReview, Jan. 16, 1995, at 17-18; John
          Rekenthaler, Commentary:  "Duration Arrives,"
          Morningstar Mutual Funds, Jan. 21, 1994, at 1-2.

-[31]-    Duration is less useful as a measure of interest rate
          risk when the following conditions are not met:  (1)
          the yield curve is flat (i.e., interest rates for all
          maturities of bonds are the same), (2) changes in yield
          are small, and (3) yield shifts are parallel (i.e., the
          Treasury yields of all maturities change by equal
          numbers of basis points).  See Fabozzi & Modigliani,
          supra note 25, at 396-401.

-[32]-    See, e.g., Form N-7 for Registration of Unit Investment
          Trusts Under the Securities Act of 1933 and the
          Investment Company Act of 1940, Investment Company Act
          Rel. No. 15612 (Mar. 9, 1987) [52 FR 8268, 8301 (Mar.
          17, 1987)] (guide to proposed registration form for
          unit investment trusts publishing staff position on
          portfolio maturity).

-[33]-    The SEC has solicited comment on risk-adjusted measures
          of performance on two prior occasions.  In 1990, the
          SEC requested comment on whether mutual funds should be
          required to adjust performance figures to reflect risk
          for purposes of Item 5A of Form N-1A.  See Disclosure
          and Analysis of Mutual Fund Performance Information;
          Portfolio Manager Disclosure, Investment Company Act
          Rel. No. 17294 (Jan. 8, 1990) [55 FR 1460, 1464 (Jan.
          16, 1990)].  See also Summary of Comments on Proposed
          Amendments to Form N-1A, File S7-1-90, at 23-24
          (summarizing views of the nine persons submitting
          comments who addressed risk adjustment of performance,
          all of whom opposed it).

     In 1986, the SEC requested comment on how mutual funds could
     present risk-adjusted performance information in
     advertisements prepared in accordance with rule 482 under
                                                   (continued...)
 
-------------------- BEGINNING OF PAGE #13 -------------------
     3.   Risk-Adjusted Measures of Performance-[33]-

     Risk-adjusted measures of performance were developed in the
1960s to compare the quality of investment management.  Three
widely-used risk-adjusted measures are:

*         Sharpe Ratio.-[34]-  Also known as the Reward-to-
          Variability Ratio, this is the ratio of a fund's
          average return in excess of the risk-free rate of
          return ("average excess return")-[35]- to the standard
          deviation of the fund's excess returns.  It measures
          the returns earned in excess of those that could have
          been earned on a riskless investment per unit of total
          risk assumed.
 
*         Treynor Ratio.-[36]-  Also known as the Reward-to-
          Volatility Ratio, this is the ratio of a fund's average
          excess return to the fund's beta.  It measures the
          returns earned in excess of those that could have been
          earned on a riskless investment per unit of market risk
          assumed.  Unlike the Sharpe Ratio, the Treynor Ratio
          uses market risk (beta), rather than total risk
          (standard deviation), as the measure of risk.
          Jensen's Alpha.-[37]-  This is the difference between a
          fund's actual returns and those that could have been
          earned on a benchmark portfolio with the same amount of
          market risk, i.e., the same beta, as the

-[33]-(...continued)
     the Securities Act of 1933 [17 CFR 230.482].  See
     Advertising by Investment Companies; Proposed Rules and
     Amendments to Rules, Forms, and Guidelines, Investment
     Company Act Rel. No. 15315 (Sept. 17, 1986) [51 FR 34384,
     34390 (Sept. 26, 1986)].  See also Summary of Comments on
     Mutual Fund Advertising Proposals, File No. S7-23-86, Mar.
     31, 1987, at 69-70 (summarizing views of the thirteen
     persons submitting comments who addressed the issue,
     including nine who supported it and one who opposed it).

-[34]-    See William F. Sharpe, "The Sharpe Ratio," 21 Journal
          of Portfolio Management 49-58 (Fall 1994); William F.
          Sharpe, "Mutual Fund Performance," 39 Journal of
          Business 119-38 (Jan. 1966); Sharpe, Alexander, &
          Bailey, supra note 20, at 935-37; Edwin J. Elton &
          Martin J. Gruber, Modern Portfolio Theory and
          Investment Analysis 648-52 (4th ed. 1991) [hereinafter
          "Elton & Gruber"].

-[35]-    The yield on 90-day Treasury bills is often used as a
          proxy for the risk-free rate of return.

-[36]-    See Jack L. Treynor, "How to Rate Management of
          Investment Funds," 43 Harvard Business Review 63-75
          (Jan.-Feb. 1965); Sharpe, Alexander, & Bailey, supra
          note 20, at 934-35; Elton & Gruber, supra note 34, at
          657-58.

-[37]-    Michael C. Jensen, "The Performance of Mutual Funds in
          the Period 1945-1964," 23 Journal of Finance 389-416
          (May 1968); Michael C. Jensen, "Risk, the Pricing of
          Capital Assets, and the Evaluation of Investment
          Portfolios," Journal of Business, (Apr. 1969); Sharpe,
          Alexander, & Bailey, supra note 20, at 927-34.
 
-------------------- BEGINNING OF PAGE #14 -------------------

          portfolio.-[38]-  Jensen's Alpha measures the ability
          of active management to increase returns above those
          that are purely a reward for bearing market risk.

     B.   General Issues

     This section of the Release raises a number of general
questions about quantitative risk measures.  Persons submitting
comments are asked to address these questions, particularly in
the context of specific quantitative measures.

     1.   Benefits of Quantitative Risk Measures
     The SEC asks for comments on the potential benefits that
could be derived from fund disclosure of quantitative risk
measures.  Comments are also requested on associated costs and
burdens.
     Would quantitative risk measures, including risk-adjusted
measures of performance, help investors to evaluate historical
performance and investment management expertise?  The SEC
requires that fund prospectuses include standardized return
information,-[39]- even though past returns are not necessarily
indicative of future returns.  Persons submitting comments are
asked to address whether quantitative disclosure of the risk
level incurred to produce stated returns may provide investors
with a better tool to understand past fund performance and
management.-[40]-  Historical data could, for example, help
investors distinguish among funds that have achieved comparable
rates of return with significantly different levels of risk. 
Would it be helpful to investors for funds to present one or more
risk measures together with fund performance data in the
financial highlights table?-[41]-  Would a risk measure that
covers the same periods currently required for reporting total
returns in the financial highlights table in fund prospectuses or
in mutual fund advertisements be useful to investors?-[42]-

                    

-[38]-    For an equity fund, the benchmark portfolio could be
          comprised of a market index, e.g., the S&P 500, and a
          risk-free asset, e.g., 90-day Treasury bills.  Sharpe,
          Alexander, & Bailey, supra note 20, at 798.

-[39]-    Form N-1A, Item 3; Form N-2, Item 4.

-[40]-    For discussions of the importance of risk as a
          component of performance evaluation, see Sharpe,
          Alexander, & Bailey, supra note 20, at 917-49, and
          Bodie, Kane, & Marcus, supra note 23, at 796-826.

     Funds are currently required to disclose historical returns
     for each of the last ten fiscal years (or, if less, the life
     of the fund).  See Form N-1A, Item 3.  This data shows
     variability of past annual returns and therefore provides
     some guidance regarding past risk.

-[41]-    See Form N-1A, Item 3; Form N-2, Item 4 (financial
          highlights table).

-[42]-    See Form N-1A, Item 3 & Form N-2, Item 4 (fund
          financial highlights tables cover each of last ten
          fiscal years); rule 34b-1 under the Investment Company
          Act [17 CFR 270.34b-1] & rule 482(e)(3) under the
          Securities Act [17 CFR 230.482(e)(3)] (non-money market
          mutual fund advertisements and sales literature
          containing performance information required to contain
          average annual total return for one, five, and ten
          years).
 
-------------------- BEGINNING OF PAGE #15 -------------------

     Would quantitative risk measures be useful to investors as
indicators or guides to future fund risk levels, enhancing
investors' ability to compare risks assumed by investing in
different funds?  The SEC requests any research related to the
degree of correlation between historical measures of a fund's
risk and expected future levels of risk.

     2.   Risk Measures Currently Used by Investment Companies

     The SEC requests comment on whether quantitative risk
measures that are currently used by investment companies for
internal purposes, such as portfolio management, evaluation or
compensation of portfolio managers, and reports by management to
the board of directors, could be adapted for disclosure purposes.
This approach could have two potential advantages:  first, the
measures currently used by investment companies presumably have
been determined to be the most useful by fund managers, who are
in the best position to understand and analyze fund risk; and,
second, use of these measures for disclosure purposes should
impose relatively small additional costs on funds.  The SEC
therefore requests that persons submitting comments identify
which quantitative risk measures funds use internally and for
what purposes.
     The SEC also asks persons submitting comments to discuss the
extent to which quantitative risk measures used by investment
companies for internal purposes would be useful to investors. If
such measures would not be useful to investors, why not?  How
might internal measures be adapted to avoid or overcome these
problems?

     3.   Investor Understanding of Quantitative Risk Measures

     Persons submitting comments are asked to discuss the
difficulties that investors would face in properly interpreting
various quantitative risk measures, such as understanding what
aspects of risk are measured, the limits on predictive utility of
risk measures, and the importance of investment time horizon in
determining how much risk to assume.  Are the difficulties
significantly greater than those associated with the proper
interpretation of yield and return figures?  Is there a potential
problem of investor over-reliance on quantitative risk measures,
and, if so, what could be done to protect against such over-
reliance?
     Comments are also requested regarding which quantitative
risk measures would be easiest for investors to use properly and
how quantitative measures can be made more understandable to
investors.  One possibility is to provide some form of
interpretation of raw numbers.  For example, standard deviations
could be divided by the standard deviation for some benchmark
such as the S&P 500.  Another possibility is to convert raw
numbers into a classification scale, such as one to ten or "very
low" to "very high" risk.  Another possibility would be to
represent the level of fund volatility graphically, rather than
through computation of standard deviation.  Would it be helpful,
for example, if funds were required to include a bar graph
showing total returns for each of the last 10 years to provide
investors a picture of the extent to which annual returns varied
over that period and the frequency with which the returns were
negative or below some benchmark?  Would a chart like the
following be helpful?

Using historical numbers, the following illustrates the fund's
estimated variability of quarterly returns over the noted periods
(i.e., approximately 95% of the time, the fund's quarterly
returns fell within these ranges).

 
-------------------- BEGINNING OF PAGE #16 -------------------
       10 year                  5-year                  3-year
       -5% to 9%              -4% to 8%             -5% to 8%


Are there narrative disclosures that can help investors to
understand risk measures?  Persons submitting comments are asked
to report the results of any experience with, or research on, the
relative effectiveness of alternative means of presenting
quantitative information.

     4.   Historical Measures v. Portfolio-Based Measures v. Risk
          Objectives or Targets

     There are three approaches to the use of quantitative risk
measures:  historical, portfolio-based, and risk objectives or
targets.  The SEC asks for comments on the relative merits and
limitations of these three approaches.
     The simple historical approach to quantitative risk measures
is outlined in section III.A., above.  This method generally uses
actual past returns of a fund to compute a measure of risk for
the fund.  An alternative is a portfolio-based computation, which
calculates a portfolio risk measure based on the particular
securities in the portfolio as of a specified measurement
date.-[43]-  This method, too, is historical in that the
computation (i) uses the portfolio composition as of a specified
measurement date, and (ii) the computation is based on historical
behavior of the securities in the portfolio.
     There are at least two important limitations of using
portfolio-based measures for fund disclosure:  first, a fund may
be invested in newly introduced financial instruments that have
little or no history, and for which historical behavior must be
estimated, and, second, portfolio-based measures, which are
derived from portfolio composition on one particular date, may be
less representative of the risk of a managed portfolio over time
than a simple historical measure derived from fund returns over a
period of time.
     The SEC seeks comment on whether the SEC should require
funds generally to disclose portfolio-based risk measures.-[44]-
 
The SEC also asks for comments on whether such measures could be
useful for new funds that do not have sufficient operating
history to make use of a simple historical measure meaningful,
funds that change their investment objectives or policies, funds
that change investment advisers or portfolio managers, or merged
funds comprised of different funds with different operating
histories and different past risk levels.-[45]-
                    

-[43]-    See, e.g., Comptroller of the Currency, Risk Management
          of Financial Derivatives 49-53 (Oct. 1994); J.P.
          Morgan, Introduction to RiskMetricsTM (2d ed.) (Oct.
          25, 1994); Group of Thirty, Derivatives:  Practices and
          Principles 10-11 (July 1993).

-[44]-    The Investment Company Institute has suggested that
          portfolio-based measures would be of limited relevance
          at best in an actively managed portfolio, would ignore
          the role of portfolio management, and would be
          burdensome to compute.  ICI Letter, supra note 12, at 8
          n.10.

-[45]-    Issues have arisen with respect to fund advertisement
          of performance information in similar circumstances. 
          See IDS Financial Corp. (pub. avail. Dec. 19, 1994)
          (acquisition of other funds' assets); North American
          Security Trust (pub. avail. Aug. 5, 1994) (combination
                                                   (continued...)
 
-------------------- BEGINNING OF PAGE #17 -------------------

     Another approach to risk measures is requiring funds to
announce risk objectives or targets.  Any of the risk and risk-
adjusted performance measures could be used by funds in this
manner.  For example, a fund could announce its intention to
follow a strategy that would yield a standard deviation of 10%-
12% per year, a beta of 1.50-1.75 with respect to the S&P 500, or
a duration of 7-9 years.  Comments are requested regarding the
relative merits of this approach as compared to the simple
historical and portfolio-based approaches.  Persons submitting
comments are asked to address specifically the relative merits
for funds with significant operating histories, new funds, funds
that change their investment objectives or policies, funds that
change investment advisers or portfolio managers, or merged funds
comprised of different funds with different operating histories
and different past risk levels.  Persons supporting the use of
simple historical measures by relatively new funds, funds that
change their investment objectives or policies or their
investment advisers or portfolio managers, or merged funds are
also asked to address whether narrative disclosure should be
required to explain the limits on the usefulness of the
disclosure resulting from the funds' circumstances.

     5.   Computation Issues
     Comments are requested on the following issues related to
computation of quantitative risk measures and on any other
relevant computation issues.  What length of fund operating
history is required to make particular historical risk measures
useful?  What requirements should be imposed on funds without
this operating history?  For example, if 18 months of operations
are required to calculate a meaningful standard deviation figure,
should funds that have been operating for less than 18 months be
required to disclose the standard deviation of an appropriate
market index or peer group of funds and explain any differences
they expect between the fund's standard deviation and that of the
index or peer group?
     For risk measures that require the use of a benchmark market
index, what issues, if any, are associated with the selection of
an appropriate benchmark?  How should the SEC address the need to
use assumptions to calculate certain risk measures, such as the
prepayment assumptions that may be required to calculate
duration?  Can various quantitative risk measures be manipulated
and how do the various measures differ in their susceptibility to
manipulation?  How can the potential for such manipulation be
reduced or eliminated?  For instance, is there some combination

                    

-[45]-(...continued)
          of two funds); The Managers Core Trust (pub. avail.
          Jan. 28, 1993) (newly formed hub fund); Unified Funds
          (pub. avail. Apr. 23, 1991) (changed investment
          adviser); John Hancock Asset Allocation Trust (pub.
          avail. Jan. 3, 1991) (change from money market fund to
          asset allocation fund); Founders Funds, Inc. (pub.
          avail. Oct. 15, 1990) (change from unit investment
          trust to mutual fund); Zweig Series Trust (pub. avail.
          Jan. 10, 1990) (changed investment adviser);
          Philadelphia Fund, Inc. (pub. avail. Oct. 17, 1989)
          (changed investment adviser); Commonwealth Funds (pub.
          avail. June 14, 1989) (combination of two funds);
          Investment Trust of Boston Funds (pub. avail. Apr. 13,
          1989) (changed investment adviser); The Fairmont Fund
          Trust (pub. avail. Dec. 9, 1988) (changed investment
          objective); and Growth Stock Outlook Trust, Inc. (pub.
          avail. Apr. 15, 1986) (new fund).
 
-------------------- BEGINNING OF PAGE #18 -------------------

of risk measures the SEC could require that would not be
susceptible to simultaneous manipulation?
     Persons submitting comments are also asked to describe as
specifically as possible the computation method they would
recommend for any quantitative risk measure they favor.  For
example, persons favoring standard deviation should specify
whether monthly returns, quarterly returns, or returns over some
other periods should be used.  As another example, persons
favoring beta should describe the benchmark or benchmarks that
should be used.  Persons submitting comments are also asked to
discuss the benefits and limitations associated with their
recommended method of computation.

     6.   Effects on Portfolio Management

     The SEC recognizes that requiring disclosure of a
quantitative risk measure may affect portfolio management, e.g.,
causing fund managers to adopt more conservative investment
strategies.  Comments are requested regarding whether, and how,
disclosure of a quantitative risk measure might influence
portfolio management and evaluating the associated benefits and
detriments.

     7.   Third Party Providers of Quantitative Risk Information

     The financial press and other third parties currently
disseminate some quantitative information regarding fund risks. 
The available information includes measures such as those
described in section III.A., including standard deviation, beta,
and duration.-[46]-  In addition, some organizations disseminate
fund performance ratings that take risk into account-[47]- or
fund risk ratings.-[48]-  This data is made available either
through reports and other documents published by the
organizations that collect and calculate the measures or through
periodicals and newspapers covering financial issues.
     The SEC asks persons submitting comments to address the
SEC's role with respect to disclosure of quantitative risk
information in light of the availability of fund risk information
from the financial press and other third parties.  Is there, for
example, helpful risk information that third party providers do
not make available?  Would SEC-required disclosure be important
to ensure that all investors have access to some quantitative
risk information and to help educate investors about the
importance of such information?  Would SEC-required disclosure be
                    

-[46]-    See, e.g., CDA/Wiesenberger, Mutual Funds Update, Dec.
          31, 1994; Morningstar Mutual Funds, Dec. 9, 1994; The
          Value Line Mutual Fund Survey, Part 2, Ratings &
          Reports, Feb. 21, 1995.  Value Line also ranks mutual
          funds in five risk categories, based on historical
          standard deviation.  How to Use The Value Line Mutual
          Fund Survey, A Subscriber's Guide (1994), at 4-5. 

-[47]-    See, e.g., Business Week, Feb. 14, 1994, at 78-79;
          Forbes, Aug. 29, 1994, at 174; CDA/Wiesenberger,
          Investment Companies Yearbook 1994 441  (1994);
          Morningstar Mutual Fund Performance Report, Jan. 1995,
          at 3; How to Use The Value Line Mutual Fund Survey, A
          Subscriber's Guide (1994), at 4-5.

-[48]-    These ratings are based on an analysis of factors such
          as currency, interest rate, liquidity, and mortgage
          prepayment risks; hedging; leverage; and the use of
          derivatives.  See "Bond Fund Risks Revealed," Fitch
          Research Special Report, Oct. 17, 1994, at 1; Gary
          Arne, Standard & Poor's, CreditReview, Jan. 16, 1995,
          at 12. 
 
-------------------- BEGINNING OF PAGE #19 -------------------

important to facilitate comparability among funds by ensuring
that standardized quantitative risk information will be available
for all funds?  Would SEC-required disclosure of a quantitative
risk measure be helpful wherever historic returns are reported to
indicate to investors the risks incurred to generate those
returns?
     Persons submitting comments are also asked to address
whether the SEC should take any steps to facilitate the provision
of fund risk information by the financial press and other third
parties.  For example, should the SEC require more frequent
disclosure of fund portfolio holdings or more detailed
descriptions of fund portfolio holdings to facilitate third party
risk analyses?  If so, what information should the SEC require
funds to make available and with what frequency?  The SEC is
currently authorized to require funds to file with the SEC "such
information . . . as the SEC may require, on a semi-annual or
quarterly basis, to keep reasonably current the information and
documents contained in the [funds' Investment Company Act of
1940] registration statement[s] . . . ."-[49]-  Persons
submitting comments are asked to address whether statutory
amendments would be required to implement any recommendations
they make in response to this paragraph.
     Last year, the SEC requested comment regarding whether it
should encourage or require disclosure of third party fund risk
ratings in prospectuses, sales literature, and
advertisements.-[50]-  Persons who wish to address that issue in
the context of today's broad inquiry into improved risk
disclosure are invited to do so.

IV.  Narrative Disclosure Options

     The SEC asks for comment on the usefulness to investors of
narrative risk disclosure currently found in prospectuses.-[51]-
 
The SEC also asks persons submitting comments to describe ways of
improving narrative risk disclosure that will not increase, and
may reduce, technical information that may be of limited utility
to investors.  For example, should prospectus disclosure focus on
the broad investment strategies of a fund rather than the
particular investments used to implement the strategy?
     Can disclosure of fund risks be improved through increased
focus on the policies and investments actually used by a fund as
opposed to all permissible policies and investments?  For
example, should a fund describe the policies and investments that
have been used during some prior period, such as the preceding
year, or that the fund intends to use during some future period,
such as the following year, and simply list the other permitted
policies and investments?  Or should funds be required to provide
a table or grid that indicates whether, and the extent to which,
the policies and investments authorized to be used were used
during some prior period, such as the preceding year?  If a fund
intends to alter the mix of policies and investments, should it
be required to describe the projected change?  In addressing the
questions of this paragraph, persons submitting comments should
consider the possibilities of placing various information in the


                    

-[49]-    Investment Company Act   30(b) [15 U.S.C. 80a-29(b)].

-[50]-    Nationally Recognized Statistical Rating Organizations,
          Securities Act Rel. No. 7085 (Aug. 31, 1994) [59 FR
          46314 (Sept. 7, 1994)].  The SEC is currently studying
          the comment letters received.

-[51]-    See discussion supra notes 3-5 and accompanying text.
 
-------------------- BEGINNING OF PAGE #20 -------------------

prospectus,-[52]- annual report, and statement of additional
information.  For example, should the prospectus focus on the
policies and investments the fund has actually made and that it
may make in the reasonably foreseeable future, with the complete
list of permissible investments and policies to be disclosed in
the statement of additional information?  As another example,
should periodic reports be enhanced to include more information
about what policies and investments the fund has, in fact,
pursued and what risks were actually taken?
     Can risks be accurately depicted through narrative
disclosure apart from technical descriptions of particular types
of investments?  Would investors find it useful for funds to
provide in their prospectuses a summary of the risk
characteristics of the portfolio as a whole either in lieu of or
in addition to disclosure of the characteristics of particular
types of permissible investments?  If a risk summary would be
useful, what risks should it address?  For example, should the
SEC require a fund that invests a specified level, e.g., 5% or
10% or 25%, of its net assets in a particular manner, e.g.,
securities of non-U.S. companies, to discuss the related risks,
e.g., exchange rate fluctuations?-[53]-
     A mutual fund's Management's Discussion of Fund Performance
("Management's Discussion"), contained in the prospectus or
annual report, is currently required to discuss the factors,
including the market conditions and the investment techniques and
strategies, that materially affected the fund's performance
during the previous fiscal year.-[54]-  The SEC requests comments
regarding whether narrative risk disclosure can be improved
through amendments to the requirements for the Management's
Discussion.  Should the SEC, for example, explicitly require the
Management's Discussion to address the risks assumed during the
previous fiscal year and the effects of those risks on fund
performance?  Should the requirement for the Management's
Discussion be extended to money market funds?  If the
Management's Discussion is a useful vehicle for risk disclosure,
how should disclosure be accomplished for closed-end funds, which
are not subject to the Management's Discussion requirements?

V.  Self-Assessment of Risk

     Another alternative upon which the SEC seeks comment is
self-assessment by funds of their aggregate risk level.  One
approach might be to describe where the fund fits on a risk scale
from low risk, for instance, a money market fund, to moderate
risk, for instance, a growth and income fund investing in S&P 500
                    

-[52]-    Mutual funds generally offer their shares on a
          continuous basis and, as a result, are required to file
          periodic "post-effective" amendments to their
          registration statements in order to maintain a
          "current" prospectus required by section 10(a)(3) of
          the Securities Act [15 U.S.C. 77j(a)(3)].  Post-
          effective amendments also satisfy the requirement that
          mutual funds amend their Investment Company Act
          registration statements annually [17 CFR 270.8b-16]. 
          Because closed-end funds do not generally offer their
          shares to the public on a continuous basis, they
          generally do not update their prospectuses
          periodically.

-[53]-    Cf. Form N-1A, Item 4(b)(ii) (greater prospectus
          disclosure required for investment practices that place
          more than 5% of a fund's net assets at risk).

-[54]-    Form N-1A, Item 5A.
 
-------------------- BEGINNING OF PAGE #21 -------------------

stocks and high quality bonds, to high risk, for instance, an
emerging market fund.-[55]-  Some fund complexes currently place
various funds within the complex on a risk scale, and the SEC
requests comment on whether such an approach would be useful for
comparing funds from different complexes.  If risk self-
assessment is used, should the SEC create a standard scale? 
Persons supporting an SEC-created scale are asked to describe
specifically what that scale should be, with particular attention
to designing the scale to promote a high degree of uniformity in
funds' self-assessments.  Persons who favor a self-assessment
approach but not an SEC-created scale are asked to address how
the approach will foster meaningful investor comparisons among
funds.
     Comments are also requested on whether funds should be
required to provide self-assessments of their exposures to
various types of risk, with the results presented in chart or
table format.  Bond funds, for example, might rate their interest
rate risk, credit risk, prepayment risk, and currency risk on a
scale of low to medium to high.  

VI.  Risk Management Procedures

     The disclosure options described in this Release have
focused on improved disclosure of the level of risk incurred by a
fund.  Persons submitting comments are also asked to consider
whether disclosure of fund risk management procedures should be
required.  Such disclosure could be narrative.  For example,
should funds be required to disclose the extent and nature of
involvement by the board of directors in the risk management
process?  As another example, should funds describe the "stress-
testing" they do to determine how the portfolio will behave in
various market conditions?  Alternately, such disclosure could be
quantitative in format.  For example, if the SEC requires
disclosure of a quantitative risk objective or target, funds
could be required to disclose the funds' actual risk level in
subsequent periods and compare it with the previously-provided
objective or target and explain the reasons for divergence.

VII.  Liability Issues

     Persons submitting comments are asked to address the
appropriate scope of, and limits on, the liability of funds,
investment advisers, and others for various risk disclosures. 
Persons submitting comments should specify any forms of risk
disclosure that they believe raise particularly significant
liability concerns, explain the concerns, and suggest means for
mitigating the concerns.

VIII.  Regulatory Flexibility Act

     According to the SEC's rules and unless otherwise defined
for a particular rulemaking proceeding, an investment company
with net assets of $50 million or less at the end of its most
recent fiscal year is a "small entity" for purposes of the
Regulatory Flexibility Act.-[56]-  The SEC requests persons
submitting comments to describe and project fund costs to provide
the various disclosures described in this Release, and any other
disclosure that persons submitting comments may wish to discuss,
and address whether requiring the disclosure would have a
                    

-[55]-    In Rel. 19342, supra note 2, the SEC requested comment
          on this approach and other formats for disclosing risk,
          including numerical scales and other visual or symbolic
          representations.  A limited number of persons
          submitting comments addressed these specific methods
          for standardizing risk disclosure.  Summary of
          Comments:  Rel. 19342, supra, note 2, at 17-18.

-[56]-    Investment Company Act rule 0-10 [17 CFR 270.0-10].
 
-------------------- BEGINNING OF PAGE #22 -------------------

significant economic impact on small entities.  If so, the SEC
asks persons submitting comments to describe that impact
specifically.  Persons submitting comments also are asked to
suggest methods for improving disclosure of fund risks without
imposing significant costs on funds, specifically without having
a significant economic impact on funds that are small entities.
IX.  Conclusion
     The SEC is seeking comments and suggestions on a number of
specific issues related to fund disclosure of risks.  Persons
submitting comments are encouraged, however, to address any other
matters that they believe merit examination.

By the Commission.


                                   Jonathan G. Katz
                                   Secretary


Dated:  March 29, 1995
 
-------------------- BEGINNING OF PAGE #23 -------------------
                             APPENDIX
               SEC REQUEST FOR INVESTOR SUGGESTIONS
   ON HOW TO IMPROVE THE DESCRIPTIONS OF RISK IN MUTUAL FUNDS 

     The U.S. Securities and Exchange Commission ("the SEC"), the
federal government agency that oversees mutual funds, wants to
hear from investors on how the descriptions of risk in mutual
funds may be improved.  When investors choose a mutual fund, they
should understand the risks of the fund before they invest and
not be surprised if the value of their investment rises and falls
significantly.
     The risks and potential rewards of investing in any mutual
fund are explained in a written document provided by the mutual
fund called a "prospectus."  The prospectus contains information
that is important to making an informed decision when choosing a
mutual fund.
     The SEC is concerned that the descriptions of risk in mutual
fund prospectuses are not as helpful or as clear as they could
be.  The SEC is seeking ideas and suggestions on how these
descriptions of risk may be improved.  Your ideas and suggestions
may shape how risks are explained in the future and help
investors make better investment choices.    
     Here are a series of questions and examples on how the
descriptions of risk may be improved.  We urge you to respond,
whether you answer one question or all, or just have general
comments.  Feel free to use this form or write a separate letter
marked "File No. S7-10-95."
     Please mail your comments to the SEC no later than July 7,
1995.  Directions for sending your comments to the SEC are
provided at the end of this document.  The SEC will make your
comments and other comments received by the SEC available to the
public.

HOW DO YOU LEARN ABOUT MUTUAL FUND RISKS?  The SEC would like to
know how you learn about the risks of a mutual fund before you
invest in the fund.

*         Do you learn about mutual fund risks from the fund
          prospectus, a broker or bank representative, an
          investment adviser, a family member or friend,
          magazines, newspapers, or other publications?  If you
          use more than one of these sources, please list all of
          the sources that you use.

*         What information do you find most useful in evaluating
          mutual fund risks?  What can the SEC do to provide
          information about the risks of investing in mutual
          funds that other sources of information do not do?

HOW WELL DO MUTUAL FUND PROSPECTUSES DESCRIBE THE RISKS OF
INVESTING?  The SEC would like to know if you find the way mutual
fund prospectuses describe the risks of investing to be helpful.

*         Do mutual fund prospectuses give you a good idea of the
          risks of investing?  What do you like about the way
          mutual funds describe risk in their prospectuses and
          what would you like funds to do differently?

*         Would you like all mutual fund prospectuses to contain
          a summary of the risks of investing in the fund?  If
          so, what would you like to see in the summary?

*         Provide copies of any mutual fund descriptions of risk
          that you believe are very helpful or unhelpful.  Tell
 
 ------------------- BEGINNING OF PAGE #24 -------------------

          the SEC what you like or don't like about the
          descriptions.

WHAT DO YOU WANT TO KNOW ABOUT RISK?  Risk means different things
to different people.  The SEC would like to know how you define
risk.

*         Do you define risk as:

          (1) the chance that you will lose part of your
          investment;

          (2) the chance that your investment will earn less than
          a certain amount, for example, a fixed percentage, such
          as 5% per year, or the return on a no-risk investment,
          such as a bank CD or U.S. treasury bill, or the return
          on a stock or bond index, such as the Standard & Poor's
          500 stock index; or

          (3) the variability in your fund's return, that is, the
          month-to-month or year-to-year ups and downs in your
          fund's share price or its distributions?

          Or do you define risk in some other way?

*         In choosing a mutual fund, are you most interested in
          comparing the risks of investing in the fund to the
          risks of putting your money in:

          (1) investments that are not mutual funds, for example,
          bank CDs or individual stocks and bonds;

          (2) other mutual funds of all types;

          (3) mutual funds of the same broad type, for example,
          stock funds or bond funds; or

          (4) mutual funds with the same investment objective,
          for example, short-term bond funds?

*         Is your need for information about the risks of
          investing in mutual funds greater for stock funds or
          bond funds, or is your need for information about risk
          the same in both cases?  Explain. 

WOULD YOU LIKE RISK TO BE DESCRIBED WITH NUMBERS, GRAPHS, OR
TABLES?  The SEC is looking at a variety of ways that mutual
funds could tell investors about risk in addition to, or instead
of, descriptions in words.  The SEC would like your ideas and
suggestions about which of those ways would be most helpful to
you.

*         Do you find information most helpful when it is in the
          form of written descriptions, numbers, graphs, tables,
          charts, pictures, or some other form?

     Mutual funds today are required to provide investors with
their annual returns for each of the past 10 years.  By looking
at these returns, investors can get an idea of how variable a
fund's returns have been.  This variability could be illustrated
with a bar graph like the following.
 
[To obtain a hard copy of the bar graph, please call 1-800-SEC-
0330 and request the mutual fund risk disclosure document]

--------------------- BEGINNING OF PAGE #25 -------------------

*         Would you find a bar graph like the above helpful in
          understanding the ups and downs in a mutual fund's
          annual returns?  Would it increase your understanding
          of a fund's risk if the fund also provided you a bar
          graph of the returns of a market index, such as the
          Standard & Poor's 500 stock index?

     The SEC is looking at the possibility of requiring mutual
funds to use numbers to tell investors about the risks of
investing.  Examples of the numbers that the SEC is considering
as required risk measures are:

*         Standard Deviation of Total Return.  This number
          measures how variable a fund's total returns have been,
          that is, how much they have gone up and down.  The
          larger the standard deviation, the more variable a
          fund's total returns have been.

*         Duration.  This number measures how sensitive a bond
          fund's value is to changes in interest rates.

If you have ideas about what risk measurement numbers the SEC
should ask mutual funds to give to investors, the SEC would like
to hear those ideas.

*         Should the SEC require funds to disclose standard
          deviation or duration or any other specific risk
          measures?  Why or why not?

SHOULD MUTUAL FUNDS RANK THEIR RISK LEVELS?  The SEC is
considering whether it would be useful and practical for mutual
funds to rank various aspects of risk.  For example, bond funds
could be required to tell investors whether their exposures to
interest rate changes, default risks, and currency fluctuations
are low, medium, or high.  This could be done in the form of a
chart like the following.

                           RISK SUMMARY
                                                                 
                           INTEREST      DEFAULT    CURRENCY     
   PORTFOLIO               RATE RISK      RISK        RISK       
                                                                 
   High-Yield Fund          Medium         High        Low       
                                                                 
   Global Bond Fund         Medium        Medium       High      
                                                                 
   Mortgage-Backed                                               
     Security Fund           High          Low         Low       
                                                                 

*         Would it be useful for funds to rank various aspects of
          risk?  Do you find the above chart helpful?  Do you
          understand the types of risk referred to in the chart
          and the significance of those risks?

HOW TO MAIL YOUR IDEAS AND SUGGESTIONS TO THE SEC:

*         Please send your completed form in an envelope directly
          to the SEC.  Mark your letter "File No. S7-10-95," and
          send it to Jonathan G. Katz, Secretary, Securities and
          Exchange Commission, 450 Fifth Street, N.W.,
          Washington, D.C.  20549.
 
-------------------- BEGINNING OF PAGE #26 -------------------

*         Remember to send your ideas and suggestions by July 7,
          1995.

DO YOU WANT FURTHER INFORMATION ABOUT WHAT THE SEC IS
CONSIDERING?

*         If you would like a copy of the complete SEC release
          that describes what the SEC is considering, write to
          Office of Consumer Affairs, Securities and Exchange
          Commission, Attn:  Michael Strupp, Mail Stop 2-6, 450
          Fifth Street, N.W., Washington, D.C.  20549.

THANK YOU FOR RESPONDING.

     Your Name  ________________________________________
     Street Address  ______________________________________
     City  ____________   State  ____________   Zip  ________