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Final Rule:
|
| Form | Hours Transferred |
| Form N-1A | 177,514 hours |
| Form N-2 | 1,014 hours |
| Form N-3 | 792 hours |
| Form N-4 | 36,630 hours |
| Form N-6 | 9,065 hours |
| Total hours transferred to new rule 482 category | 225,015 hours |
The information required to be filed with the Commission pursuant to the information collections contained in the registration forms permits the verification of compliance with securities law requirements and assures the public availability and dissemination of the information.
The purpose of Form N-1A is to meet the registration and disclosure requirements of the Securities Act and the Investment Company Act and to provide investors with information necessary to evaluate an investment in the fund. The respondents to this information collection are open-end funds registering with the Commission. Compliance with the disclosure requirements on Form N-1A is mandatory. Responses to the disclosure requirements are not confidential.
The previous hour burden for preparing an initial Form N-1A filing was 824 burden hours per portfolio, and the Commission attributed 23 of these burden hours per portfolio to compliance with rule 482, reducing the remaining burden hours per portfolio to 801.88 The previous annual hour burden for preparing post-effective amendments on Form N-1A was 122 hours per portfolio, and the Commission attributed 23 of these burden hours per portfolio to compliance with rule 482, reducing the remaining burden hours per portfolio to 99. The Commission estimated that, on an annual basis, 193 portfolios file initial registration statements on Form N-1A and 7,525 file post-effective amendments on Form N-1A. Thus, the burden hours attributable to rule 482 transferred from Form N-1A to the new rule 482 collection of information amounted to 177,514 ((23 hours × 193 portfolios) + (23 hours × 7,525 portfolios)). After shifting the rule 482 burden hours to a new collection of information, the total burden hours that remain allocated to Form N-1A for all purposes unassociated with rule 482 amount to 899,568 ((801 hours × 193 portfolios) + (99 hours × 7,525 portfolios)).
Except for the transfer of PRA burden from Form N-1A to the new collection of information for rule 482, the Commission estimates no effect on the remaining PRA burden for Form N-1A from the amendments. The change in PRA burden resulting from the amendments is accounted for under the new rule 482 collection of information.
The purpose of Form N-2 is to meet the registration and disclosure requirements of the Securities Act and the Investment Company Act and to enable funds to provide investors with information necessary to evaluate an investment in the fund. The respondents to this information collection are closed-end funds registering with the Commission. Compliance with the disclosure requirements of Form N-2 is mandatory. Responses to the disclosure requirements are not confidential.
The previous hour burden for preparing an initial registration statement on Form N-2 was 542.4 burden hours per filing, and the previous hour burden for preparing a post-effective amendment on Form N-2 was 107.4 hours per filing. The Commission attributed 5.7 of these burden hours per filing to compliance with rule 482, reducing the burden hours per filing to 536.7 and 101.7, respectively. The Commission estimated that, on an annual basis, 140 respondents file an initial registration statement on Form N-2 and 38 file post-effective amendments on Form N-2. Thus, the burden hours attributable to rule 482 transferred from Form N-2 to the new rule 482 collection of information amounted to 1,014 ((5.7 hours × 140 filings) + (5.7 hours × 38 filings)). After shifting the rule 482 burden hours to a new collection of information, the total burden hours that remain allocated to Form N-2 for all purposes unassociated with rule 482 amount to 79,003 ((536.7 hours × 140 filings) + (101.7 hours × 38 filings)).
Except for the transfer of PRA burden from Form N-2 to the new collection of information for rule 482, the Commission estimates no effect on the remaining Form N-2 PRA burden from the amendments. The change in PRA burden resulting from the amendments is accounted for under the new rule 482 collection of information.
The purpose of Form N-3 is to meet the registration and disclosure requirements of the Securities Act and the Investment Company Act and to enable funds to provide investors with information necessary to evaluate an investment in the fund. The respondents to this information collection are separate accounts, organized as management investment companies and offering variable annuities, registering with the Commission. Compliance with the disclosure requirements of Form N-3 is mandatory. Responses to the disclosure requirements are not confidential.
The previous annual hour burden for preparing an initial registration statement on Form N-3 was 910.5 hours per portfolio, and the Commission attributed 3.3 of these burden hours per portfolio to compliance with rule 482, reducing the remaining burden hours per portfolio to 907.2.89 The previous annual hour burden for preparing post-effective amendments on Form N-3 was 151.7 hours per portfolio, and the Commission attributed 3.3 of these burden hours per portfolio to rule 482, reducing the remaining burden hours per portfolio to 148.4. The Commission estimated that, on an annual basis, no initial registration statements are filed on Form N-3 and 60 post-effective amendments, including 240 portfolios, are filed on Form N-3. Thus, the burden hours attributable to rule 482 transferred from Form N-3 to the new rule 482 collection of information amounted to 792 (3.3 hours × 240 portfolios). After shifting the rule 482 burden hours to a new collection of information, the total burden hours that remain allocated to Form N-3 for all purposes unassociated with rule 482 amount to 35,616 (148.4 x 240 portfolios) hours.
Except for the transfer of PRA burden from Form N-3 to the new collection of information for rule 482, the Commission estimates no effect on the remaining PRA burden for Form N-3 resulting from the amendments. The change in PRA burden resulting from the amendments is accounted for under the new rule 482 PRA collection of information.
The purpose of Form N-4 is to meet the registration and disclosure requirements of the Securities Act and the Investment Company Act and to enable separate accounts issuing variable annuity contracts to provide investors with information necessary to evaluate an investment in a contract. The respondents to this information collection are separate accounts, organized as unit investment trusts and offering variable annuities, registering with the Commission. Compliance with the disclosure requirements of Form N-4 is mandatory. Responses to the disclosure requirements are not confidential.
The previous hour burden for preparing an initial Form N-4 filing was 298 burden hours per filing, and the Commission attributed 24.8 of these burden hours per filing to rule 482, reducing the remaining burden hours per filing to 273.2.90 The previous annual hour burden for preparing post-effective amendments on Form N-4 was 219.8 hours per filing, and the Commission attributed 24.8 of these burden hours per filing to rule 482, reducing the remaining burden hours per filing to 195. The Commission estimated that, on an annual basis, 157 respondents file initial registration statements on Form N-4 and 1320 respondents file post-effective amendments on Form N-4. Thus, the burden hours attributable to rule 482 transferred from Form N-4 to the new rule 482 collection of information amount to 36,630 ((24.8 hours × 157 filings) + (24.8 hours × 1320 filings)). After shifting the rule 482 burden hours to a new collection of information, the total hour burden that remains allocated to Form N-4 for all purposes unassociated with rule 482 amount to 300,292 ((273.2 hours × 157 filings) + (195 hours × 1320 filings)).
Except for the transfer of PRA burden from Form N-4 to the new collection of information for rule 482, the Commission estimates no effect on the remaining PRA burden for Form N-4 resulting from the amendments. The change in PRA burden resulting from the amendments is accounted for under the new rule 482 PRA collection of information.
The purpose of Form N-6 is to meet the registration and disclosure requirements of the Securities Act and the Investment Company Act and to enable separate accounts issuing variable life insurance policies to provide investors with information necessary to evaluate an investment in a policy. The respondents to this information collection are separate accounts, organized as unit investment trusts and offering variable life insurance policies, registering with the Commission. Compliance with the disclosure requirements of Form N-6 is mandatory. Responses to the disclosure requirements are not confidential.
The previous hour burden for preparing an initial registration statement on Form N-6 was 800 burden hours per filing and the hour burden for a post-effective amendment on Form N-6 was 100 hours per post-effective amendment filed as an annual update, and 10 hours per post-effective amendment filed for other purposes. The Commission attributed 35 of these burden hours per filing to compliance with rule 482 for both initial registration statements and post-effective amendments that are annual updates.91 The Commission estimated no burden hours associated with rule 482 for additional post-effective amendments that are not annual updates. The Commission estimated that, on an annual basis, 59 initial registration statements will be filed on Form N-6 and 500 post-effective amendments will be filed on Form N-6, 200 as annual updates and 300 as additional post-effective amendments.92 Thus, the burden hours attributable to rule 482 transferred from Form N-6 to the new rule 482 collection of information amounted to 9,065 ((35 hours × 59 filings) + (35 hours × 200 filings)). The total hour burden that remains allocated to Form N-6 for all purposes unassociated with rule 482 is 61,135 ((765 hours × 59 filings) + (65 hours × 200 filings) + (10 hours × 300 filings)) hours.
Except for the transfer of PRA burden from Form N-6 to the new collection of information for rule 482, the Commission estimates no effect on the remaining PRA burden for Form N-6 resulting from the amendments. The change in PRA burden resulting from the amendments is accounted for under the new rule 482 PRA collection of information.
The information required by the amendments to the advertising rules is primarily for the use and benefit of investors. The Commission is concerned that investors receive information in advertisements that is accurate, balanced, timely, not misleading, and otherwise appropriate and helpful in making investment decisions. The additional information that is required to be disclosed to investors pursuant to the collection of information provisions of the rules affected by the amendments, addresses these concerns regarding investor protection.
Rule 34b-1, as amended, contains collection of information requirements. The rule applies to supplemental sales literature, i.e., sales literature that is preceded or accompanied by the statutory prospectus, and requires the inclusion of standardized performance data in sales literature that includes performance data. Compliance with rule 34b-1 is mandatory for every registered investment company that issues supplemental sales literature. Responses to the disclosure requirements will not be kept confidential.
We estimated that approximately 37,000 responses are filed annually pursuant to rule 34b-1, and the burden per response is 2.9 hours. The amendments change rule 34b-1 to add language to clarify the Commission's present interpretation of its rules, namely, that compliance with rule 34b-1 does not relieve the fund, underwriter, or dealer of any obligations with respect to the sales literature under the antifraud provisions of the federal securities laws. This added language merely confirms the present state of the law and imposes no additional burden hours. In addition, the amendments to rule 34b-1 make the newly adopted changes in the narrative disclosure and presentation requirements under rule 482 applicable to supplemental sales literature, but these narrative disclosure and presentation requirements also will impose no additional burden for purposes of rule 34b-1.93
Rule 482, as amended, contains collection of information requirements in that it permits a fund to advertise information subject to certain disclosure requirements. Compliance with rule 482 is mandatory for every fund that issues rule 482 advertisements. Responses to the disclosure requirements will not be kept confidential.
The Commission currently estimates that 41,484 responses are filed annually by 5,025 funds pursuant to rule 482. The burden associated with rule 482 was previously included in the collections of information for the investment company registration statement forms, but at the time of the Proposing Release the Commission transferred this PRA burden to a new rule 482 collection of information. The Commission then adjusted this amount to account for the estimated savings of 6,890 burden hours associated with the proposed amendments to arrive at a total annual burden for rule 482 of 218,125.94
The Commission's per-investment-company burden estimates calculated at the time of the Proposing Release remain unchanged.95 However, the Commission is adjusting the total annual burden hours associated with rule 482 to reflect a decrease in the number of investment companies from 5,587 to the current number of 5,025. The Commission estimates an increase of 3,653 (0.727 hours per fund x 5,025 funds) annual burden hours will be required to comply with the amendments as adopted, as a result of one-time switchover cost of 10,959 burden hours amortized over a three-year period. The Commission also estimates a decrease of 9,849 annual burden hours (1.96 hours per fund x 5,025 funds) resulting from the amendments as adopted due to the simplification and clarification of rule 482, including the removal of the "substance of which" requirement. The net result would be an annual decrease of approximately 6,196 (3,653 hours increase - 9,849 hours decrease) hours.96 The current estimate of the total annual burden for rule 482, as amended, is 218,819.97
This Final Regulatory Flexibility Analysis ("Analysis") has been prepared in accordance with 5 U.S.C. 604, and relates to the Commission's rule and form amendments under the Securities Act and the Investment Company Act to provide investment companies with the ability to disclose more timely information in advertisements and to reinforce the antifraud protections that apply to investment company advertisements. The amendments implement a provision of NSMIA98 by eliminating the requirement in rule 482 under the Securities Act that investment company advertisements contain only information the "substance of which" is included in the statutory prospectus. The amendments also require enhanced disclosure in investment company advertisements and are designed to encourage advertisements that convey balanced information to prospective investors, particularly with respect to past performance. The Commission is also rescinding the provisions in rule 134 under the Securities Act that apply to investment companies.
The Commission prepared an Initial Regulatory Flexibility Analysis ("IRFA") in accordance with 5 U.S.C. 603. The Proposing Release included the IRFA and solicited comments on it. The Commission received one comment specifically addressing the IRFA.
The Commission amended the advertising regulations described above to achieve two separate objectives. First, the Commission is simplifying and clarifying the rules governing fund advertising. Specifically, the amendments remove the "substance of which" requirement of rule 482 and rescind the provisions of rule 134 that apply to investment companies, following Congress' directive in NSMIA to adopt rules or regulations allowing funds the use of a section 10(b) prospectus that may include information the substance of which is not included in the statutory prospectus.99 We are also adopting technical amendments to reorganize and clarify the language of rule 482. These simplifying and clarifying amendments will aid funds and others in understanding and complying with the advertising rules, making it easier and cheaper for funds to advertise.
Second, the Commission is enhancing the disclosure required in rule 482 advertising. Specifically, we are requiring rule 482 advertisements to: (i) highlight the availability of certain additional information, such as that regarding objectives, risks, charges, and expenses, as well as updated monthly performance figures; (ii) provide an amended legend; and (iii) present certain required disclosure with prominence equal to the major portion of the advertisement. We are adopting these amendments because of our concern about fund performance advertising that could create unrealistic investor expectations or even mislead potential investors. The enhanced disclosure requirements will help to ensure that investors find advertising clear, easy to use, and balanced, and that investors are made aware of important and timely information necessary to make informed investment decisions.
The Commission requested comment with respect to the IRFA prepared and published with the Proposing Release. Two commenters indicated that the cost of complying with the proposed requirement that updated information be made available through a toll-free or collect telephone number would be particularly burdensome for smaller fund complexes, stating that some smaller complexes do not already have automated voice response systems. The commenters cited costs of buying and maintaining an automated telephone system or dedicating employees to provide the required information. One of these commenters, the only commenter who specifically addressed the IRFA, also stated that the IRFA likely underestimated the costs that small fund complexes would incur from having to satisfy the requirement that updated monthly information be provided by a toll-free or collect telephone number.100 One commenter indicated that making updated monthly performance data available in the manner contemplated by the proposal would be affordable for all funds, regardless of size.
None of the commenters provided additional data or figures to quantify this cost.101 The commenters did not indicate either the number of small funds that would need to set up a telephone system (versus those that already have such a system in place that could be adapted to meet the proposed requirements) or how much small funds may have to pay to establish and maintain such systems.
For purposes of the Regulatory Flexibility Act, an investment company is a small entity if it, together with other investment companies in the same group of related investment companies, has net assets of $50 million or less as of the end of its most recent fiscal year.102 Approximately 237 out of 5025 investment companies meet this definition.103
The Commission estimates, based on the staff's discussions with members of the fund industry, that approximately two-thirds of small entity funds do not advertise and, thus, do not incur any burdens or costs associated with rule 482. For small entity funds that do advertise, the Commission estimates an internal hour burden of approximately 80 hours per small entity fund. This represents approximately 6,320 (80 hours × 79 small entities) hours, or $235,483 (6,320 hours × $37.26 wage rate) in internal costs, for all small entities. The Commission estimates that the external cost burden associated with rule 482 for small entities, as with other funds, is negligible. To the extent small entities currently advertise, the burden and costs may affect them to a greater extent because small entities are unable to take advantage of economies of scale available to larger fund complexes.104
The amendments will modify the disclosure requirements applicable to rule 482 advertisements. Advertisements will have to contain an amended legend, an explanation about where information about investment objectives, risks, and charges and expenses can be found, and, if performance figures are used, information about where updated performance information can be found, unless the advertisement includes total return quotations current to the most recent month ended seven business days prior to the date of use. In addition, the required disclosure will generally have to be given as much prominence in the advertisement as the major portion of the advertisement. The amendments will also rescind the requirements of rule 134 as they apply to funds, but we expect that this will not result in any appreciable change in the disclosure that funds make in their advertisements because present rule 134 advertisements will generally become rule 482 advertisements.
The Commission has considered the potential effect that the amendments will have on the preparation of advertisements. Without regard to the size of the entity, we estimate that the amendments will result in a net decrease of 1.23 hours, or $45.83 (1.23 hours × $37.26 wage rate), per investment company per year in internal costs and a net increase of $805.67 per investment company per year in external costs.105
The Commission estimates some one-time switchover costs and burdens that will be imposed on all funds, but which may have a relatively greater impact on smaller firms. These costs include the costs of altering existing advertisements, including those now covered by rule 134, to comply with the new provisions of rule 482; generating performance figures on a monthly basis; and making available the updated monthly performance data through a toll-free or collect telephone number or a website when required. The costs of making updated performance data available could include expenses for computer time, legal and accounting fees, information technology staff, and additional computer and telephone equipment. However, we believe, based on consultation with a number of fund complexes, that many funds that presently advertise already provide performance information on a basis at least as current as monthly through these means and, therefore, expect the marginal cost increases for most funds to be minimal.
The Commission anticipates that the amendments will also provide ongoing reductions in the compliance burden for all funds by clarifying the language of rule 482, eliminating the "substance of which" requirement, and simplifying fund advertising requirements through rescission of rule 134 for fund advertising. These changes will effect savings primarily by reducing the time and money funds now spend on legal review and amending their prospectuses and SAIs to comply with the "substance of which" requirement in current rule 482.
The Regulatory Flexibility Act directs us to consider significant alternatives that would accomplish our stated objective, while minimizing any significant adverse impact on small entities. In connection with the amendments, the Commission considered the following alternatives: (a) the establishment of differing compliance or reporting requirements or timetables that take into account the resources available to small entities; (b) the clarification, consolidation, or simplification of compliance and reporting requirements under the amendments for small entities; (c) the use of performance rather than design standards; and (d) an exemption from coverage of the amendments, or any part thereof, for small entities.
The Commission believes at the present time that special compliance or reporting requirements for small entities, or an exemption from coverage for small entities, would not be appropriate or consistent with investor protection. The disclosure amendments will provide shareholders and the public with more balanced information about a fund's performance. Different disclosure requirements for small entities, such as reducing the level of disclosure that small entities would have to provide shareholders in advertising, may create the risk that shareholders would not receive balanced information about a fund's performance or would receive confusing, false, or misleading information. In addition, applying different standards for advertising by small and large funds might impede investors' ability to adequately compare funds. We believe it is important for the enhanced advertising disclosure required by the amendments to be provided to investors by all funds, not just funds that are not considered small entities.
The Commission also notes that current advertising requirements, and its disclosure rules in general, do not distinguish between small entities and other funds. In addition, we believe that it would be inappropriate to impose a different timetable on small entities for complying with the requirements.106 Further clarification, consolidation, or simplification of the proposals for funds that are small entities may be inconsistent with investor protection. We do not consider using performance rather than design standards to be consistent with our statutory mandate of investor protection in the present context.
We note, however, that we have modified our proposal in several ways that will reduce burdens on funds, including small funds, and will address the concerns raised by the commenters referenced above. As adopted, the amendments will not require funds to provide updated month-end performance data by toll-free or collect telephone. Rather, funds will be permitted to choose whether to make the month-end information available by telephone or on the fund's website. In general, commenters indicated that making the information available over a fund website would be less burdensome than using a telephone system. In addition, we have modified the proposal to provide that if the advertisement includes total return quotations current to the most recent month ended seven business days prior to the date of use, the fund is not required to make such data available by telephone or on its website. We expect that both of these revisions to the proposed amendments will reduce the cost burden for all funds, including small entities.
The Commission is adopting amendments to rule 134 pursuant to authority set forth in sections 2(a)(10) and 19(a) of the Securities Act [15 U.S.C. 77b(a)(10) and 77s(a)]. The Commission is adopting amendments to rule 156 pursuant to authority set forth in section 19(a) of the Securities Act [15 U.S.C. 77s(a)] and sections 10(b) and 23(a) of the Exchange Act [15 U.S.C. 78j(b) and 78w(a)]. The Commission is adopting amendments to rule 482 pursuant to authority set forth in sections 5, 10(b), 19(a), and 28 of the Securities Act [15 U.S.C. 77e, 77j(b), 77s(a), and 77z-3] and sections 24(g) and 38(a) of the Investment Company Act [15 U.S.C. 80a-24(g) and 80a-37(a)]. The Commission is adopting amendments to rule 34b-1 pursuant to authority set forth in sections 34(b) and 38(a) of the Investment Company Act [15 U.S.C. 80a-33(b) and 80a-37(a)]. The Commission is adopting amendments to Form N-1A, Form N-3, Form N-4, and Form N-6 pursuant to authority set forth in sections 5, 6, 7, 10, and 19(a) of the Securities Act [15 U.S.C. 77e, 77f, 77g, 77j, and 77s(a)] and sections 8, 24(a), 30, and 38 of the Investment Company Act [15 U.S.C. 80a-8, 80a-24(a), 80a-29, and 80a-37].
List of Subjects
17 CFR Part 230
Advertising, Investment companies, Reporting and recordkeeping requirements, Securities.
17 CFR Part 239
Reporting and recordkeeping requirements, Securities.
17 CFR Parts 270 and 274
Investment companies, Reporting and recordkeeping requirements, Securities.
For the reasons set out in the preamble, the Commission amends Title 17, Chapter II, of the Code of Federal Regulations as follows.
PART 230 -- GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
1. The general authority citation for Part 230 is revised to read as follows:
Authority: 15 U.S.C. 77b, 77c, 77d, 77f, 77g, 77h, 77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78t, 78w, 78ll(d), 78mm, 79t, 80a-8, 80a-24, 80a-28, 80a-29, 80a-30, and 80a-37, unless otherwise noted.
* * * * *
2. Section 230.134 is amended by:
a. Removing the authority citation following § 230.134;
b. Removing paragraphs (a)(3)(iii) and (a)(13);
c. Redesignating paragraphs (a)(3)(iv) and (a)(14) as paragraphs (a)(3)(iii) and (a)(13), respectively;
d. In newly redesignated paragraph (a)(13)(ii), revising the reference "(a)(14)(i)" to read "(a)(13)(i)"; and
e. Revising paragraph (e) to read as follows:
§ 230.134 Communications not deemed a prospectus.
* * * * *
(e) This § 230.134 does not apply to a notice, circular, advertisement, letter, or other communication relating to an investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) or a business development company as defined in section 2(a)(48) of the Investment Company Act (15 U.S.C. 80a-2(a)(48)).
3. Section 230.156 is amended by:
a. Removing the authority citation following § 230.156; and
b. Revising paragraph (b)(2)(i) to read as follows:
§ 230.156 Investment company sales literature.
* * * * *
(b) * * *
(2) * * *
(i) Portrayals of past income, gain, or growth of assets convey an impression of the net investment results achieved by an actual or hypothetical investment which would not be justified under the circumstances, including portrayals that omit explanations, qualifications, limitations, or other statements necessary or appropriate to make the portrayals not misleading; and
* * * * *
4. Section 230.482 is revised to read as follows:
§ 230.482 Advertising by an investment company as satisfying requirements of section 10.
(a) Scope of rule. This section applies to an advertisement or other sales material (advertisement) with respect to securities of an investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) (1940 Act), or a business development company, that is selling or proposing to sell its securities pursuant to a registration statement that has been filed under the Act. This section does not apply to an advertisement that is excepted from the definition of prospectus by section 2(a)(10) of the Act (15 U.S.C. 77b(a)(10)), or a Profile under § 230.498. An advertisement that complies with this section, which may include information the substance of which is not included in the prospectus specified in section 10(a) of the Act (15 U.S.C 77j(a)), will be deemed to be a prospectus under section 10(b) of the Act (15 U.S.C. 77j(b)) for the purpose of section 5(b)(1) of the Act (15 U.S.C. 77e(b)(1)).
Note to paragraph (a): The fact that an advertisement complies with this section does not relieve the investment company, underwriter, or dealer of any obligations with respect to the advertisement under the antifraud provisions of the federal securities laws. For guidance about factors to be weighed in determining whether statements, representations, illustrations, and descriptions contained in investment company advertisements are misleading, see § 230.156. In addition, an advertisement that complies with this section is subject to the legibility requirements of § 230.420.
(b) Required disclosure. This paragraph describes information that is required to be included in an advertisement in order to comply with this section.
(1) Availability of additional information. An advertisement must include a statement that:
(i) Advises an investor to consider the investment objectives, risks, and charges and expenses of the investment company carefully before investing; explains that the prospectus contains this and other information about the investment company; identifies a source from which an investor may obtain a prospectus; and states that the prospectus should be read carefully before investing; or
(ii) If used with a Profile, advises an investor to consider the investment objectives, risks, and charges and expenses of the investment company carefully before investing; explains that the accompanying Profile contains this and other information about the investment company; describes the procedures for investing in the investment company; and indicates the availability of the investment company's prospectus.
(2) Advertisements used prior to effectiveness of registration statement. An advertisement that is used prior to effectiveness of the investment company's registration statement or the determination of the public offering price (in the case of a registration statement that becomes effective omitting information from the prospectus contained in the registration statement in reliance upon § 230.430A) must include the "Subject to Completion" legend required by § 230.481(b)(2).
(3) Advertisements including performance data. An advertisement that includes performance data of an open-end management investment company or a separate account registered under the 1940 Act as a unit investment trust offering variable annuity contracts (trust account) must include the following:
(i) A legend disclosing that the performance data quoted represents past performance; that past performance does not guarantee future results; that the investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost; and that current performance may be lower or higher than the performance data quoted. The legend should also identify either a toll-free (or collect) telephone number or a website where an investor may obtain performance data current to the most recent month-end unless the advertisement includes total return quotations current to the most recent month ended seven business days prior to the date of use. An advertisement for a money market fund may omit the disclosure about principal value fluctuation; and
Note to paragraph (b)(3)(i): The date of use refers to the date or dates when an advertisement is used by investors, not the date on which an advertisement is published or submitted for publication. The date of use refers to the entire period of use by investors and not simply the first date on which an advertisement is used.
(ii) If a sales load or any other nonrecurring fee is charged, the maximum amount of the load or fee, and if the sales load or fee is not reflected, a statement that the performance data does not reflect the deduction of the sales load or fee, and that, if reflected, the load or fee would reduce the performance quoted.
(4) Money market funds. An advertisement for an investment company that holds itself out to be a money market fund must include the following statement:
An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.
A money market fund that does not hold itself out as maintaining a stable net asset value may omit the second sentence of this statement.
(5) Presentation. In a print advertisement, the statements required by paragraphs (b)(1) through (b)(4) of this section must be presented in a type size at least as large as and of a style different from, but at least as prominent as, that used in the major portion of the advertisement, provided that when performance data is presented in a type size smaller than that of the major portion of the advertisement, the statements required by paragraph (b)(3) of this section may appear in a type size no smaller than that of the performance data. If an advertisement is delivered through an electronic medium, the legibility requirements for the statements required by paragraphs (b)(1) through (b)(4) of this section relating to type size and style may be satisfied by presenting the statements in any manner reasonably calculated to draw investor attention to them. In a radio or television advertisement, the statements required by paragraphs (b)(1) through (b)(4) of this section must be given emphasis equal to that used in the major portion of the advertisement. The statements required by paragraph (b)(3) of this section must be presented in close proximity to the performance data, and, in a print advertisement, must be presented in the body of the advertisement and not in a footnote.
(6) Commission legend. An advertisement that complies with this section need not contain the Commission legend required by § 230.481(b)(1).
(c) Use of applications. An advertisement that complies with this section may not contain or be accompanied by any application by which a prospective investor may invest in the investment company, except that:
(1) Variable annuity and variable life insurance contracts. A prospectus meeting the requirements of section 10(a) of the Act (15 U.S.C. 77j(a)) by which a unit investment trust offers variable annuity or variable life insurance contracts may contain a contract application although the prospectus includes, or is accompanied by, information about an investment company in which the unit investment trust invests that, pursuant to this section, is deemed a prospectus under section 10(b) of the Act (15 U.S.C. 77j(b)); and
(2) Profile. An advertisement that complies with this section may be used with a Profile that includes, or is accompanied by, an application to purchase shares of the investment company as permitted under § 230.498.
(d) Performance data for non-money market funds. In the case of an open-end management investment company or a trust account (other than a money market fund referred to in paragraph (e) of this section), any quotation of the company's performance contained in an advertisement shall be limited to quotations of:
(1) Current yield. A current yield that:
(i) Is based on the methods of computation prescribed in Form N-1A
(§§ 239.15A and 274.11A of this chapter), N-3 (§§ 239.17a and 274.11b of this chapter), or N-4 (§§ 239.17b and 274.11c of this chapter);
(ii) Is accompanied by quotations of total return as provided for in paragraph (d)(3) of this section;
(iii) Is set out in no greater prominence than the required quotations of total return; and
(iv) Adjacent to the quotation and with no less prominence than the quotation, identifies the length of and the date of the last day in the base period used in computing the quotation.
(2) Tax-equivalent yield. A tax-equivalent yield that:
(i) Is based on the methods of computation prescribed in Form N-1A (§§ 239.15A and 274.11A of this chapter), N-3 (§§ 239.17a and 274.11b of this chapter), or N-4 (§§ 239.17b and 274.11c of this chapter);
(ii) Is accompanied by quotations of yield as provided for in paragraph (d)(1) of this section and total return as provided for in paragraph (d)(3) of this section;
(iii) Is set out in no greater prominence than the required quotations of yield and total return;
(iv) Relates to the same base period as the required quotation of yield; and
(v) Adjacent to the quotation and with no less prominence than the quotation, identifies the length of and the date of the last day in the base period used in computing the quotation.
(3) Average annual total return. Average annual total return for one, five, and ten year periods, except that if the company's registration statement under the Act (15 U.S.C. 77a et seq.) has been in effect for less than one, five, or ten years, the time period during which the registration statement was in effect is substituted for the period(s) otherwise prescribed. The quotations must:
(i) Be based on the methods of computation prescribed in Form N-1A (§§ 239.15A and 274.11A of this chapter), N-3 (§§ 239.17a and 274.11b of this chapter), or N-4 (§§ 239.17b and 274.11c of this chapter);
(ii) Be current to the most recent calendar quarter ended prior to the submission of the advertisement for publication;
(iii) Be set out with equal prominence; and
(iv) Adjacent to the quotation and with no less prominence than the quotation, identify the length of and the last day of the one, five, and ten year periods.
(4) After-tax return. For an open-end management investment company, average annual total return (after taxes on distributions) and average annual total return (after taxes on distributions and redemption) for one, five, and ten year periods, except that if the company's registration statement under the Act (15 U.S.C. 77a et seq.) has been in effect for less than one, five, or ten years, the time period during which the registration statement was in effect is substituted for the period(s) otherwise prescribed. The quotations must:
(i) Be based on the methods of computation prescribed in Form N-1A (§§ 239.15A and 274.11A of this chapter);
(ii) Be current to the most recent calendar quarter ended prior to the submission of the advertisement for publication;
(iii) Be accompanied by quotations of total return as provided for in paragraph (d)(3) of this section;
(iv) Include both average annual total return (after taxes on distributions) and average annual total return (after taxes on distributions and redemption);
(v) Be set out with equal prominence and be set out in no greater prominence than the required quotations of total return; and
(vi) Adjacent to the quotations and with no less prominence than the quotations, identify the length of and the last day of the one, five, and ten year periods.
(5) Other performance measures. Any other historical measure of company performance (not subject to any prescribed method of computation) if such measurement:
(i) Reflects all elements of return;
(ii) Is accompanied by quotations of total return as provided for in paragraph (d)(3) of this section;
(iii) In the case of any measure of performance adjusted to reflect the effect of taxes, is accompanied by quotations of total return as provided for in paragraph (d)(4) of this section;
(iv) Is set out in no greater prominence than the required quotations of total return; and
(v) Adjacent to the measurement and with no less prominence than the measurement, identifies the length of and the last day of the period for which performance is measured.
(e) Performance data for money market funds. In the case of a money market fund:
(1) Yield. Any quotation of the money market fund's yield in an advertisement shall be based on the methods of computation prescribed in Form N-1A (§§ 239.15A and 274.11A of this chapter), N-3 (§§ 239.17a and 274.11b of this chapter), or N-4 (§§ 239.17b and 274.11c of this chapter) and may include:
(i) A quotation of current yield that, adjacent to the quotation and with no less prominence than the quotation, identifies the length of and the date of the last day in the base period used in computing that quotation;
(ii) A quotation of effective yield if it appears in the same advertisement as a quotation of current yield and each quotation relates to an identical base period and is presented with equal prominence; or
(iii) A quotation or quotations of tax-equivalent yield or tax-equivalent effective yield if it appears in the same advertisement as a quotation of current yield and each quotation relates to the same base period as the quotation of current yield, is presented with equal prominence, and states the income tax rate used in the calculation.
(2) Total return. Accompany any quotation of the money market fund's total return in an advertisement with a quotation of the money market fund's current yield under paragraph (e)(1)(i) of this section. Place the quotations of total return and current yield next to each other, in the same size print, and if there is a material difference between the quoted total return and the quoted current yield, include a statement that the yield quotation more closely reflects the current earnings of the money market fund than the total return quotation.
(f) Advertisements that make tax representations. An advertisement for an open-end management investment company (other than a company that is permitted under § 270.35d-1(a)(4) of this chapter to use a name suggesting that the company's distributions are exempt from federal income tax or from both federal and state income tax) that represents or implies that the company is managed to limit or control the effect of taxes on company performance must accompany any quotation of the company's performance permitted by paragraph (d) of this section with quotations of total return as provided for in paragraph (d)(4) of this section.
(g) Timeliness of performance data. All performance data contained in any advertisement must be as of the most recent practicable date considering the type of investment company and the media through which the data will be conveyed, except that any advertisement containing total return quotations will be considered to have complied with this paragraph provided that:
(1) (i) The total return quotations are current to the most recent calendar quarter ended prior to the submission of the advertisement for publication; and
(ii) Total return quotations current to the most recent month ended seven business days prior to the date of use are provided at the toll-free (or collect) telephone number or website identified pursuant to paragraph (b)(3)(i) of this section; or
(2) The total return quotations are current to the most recent month ended seven business days prior to the date of use of the advertisement.
Note to paragraph (g): The date of use refers to the date or dates when an advertisement is used by investors, not the date on which an advertisement is published or submitted for publication. The date of use refers to the entire period of use by investors and not simply the first date on which an advertisement is used.
(h) Filing. An advertisement that complies with this section need not be filed as part of the registration statement filed under the Act.
Note to paragraph (h): These advertisements, unless filed with NASD Regulation, Inc., are required to be filed in accordance with the requirements of
§ 230.497.
PART 239 -- FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
5. The authority citation for part 239 continues to read in part as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77sss, 78c, 78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 79l, 79m, 79n, 79q, 79t, 80a-8, 80a-24, 80a-26, 80a-29, 80a-30, and 80a-37, unless otherwise noted.
* * * * *
PART 270 - RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940
6. The authority citation for part 270 continues to read in part as follows:
Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, and 80a-39, unless otherwise noted.
* * * * *
7. Section 270.34b-1 is amended by:
a. Adding a note following the introductory text of § 270.34b-1;
b. Revising paragraph (a);
c. Revising paragraph (b)(1)(i);
d. Revising the reference "(d)(1)(i) of § 230.482" in paragraph (b)(1)(ii)(A) to read "(e)(1)(i) of § 230.482";
e. Revising the reference "§ 230.482(d)(1)(iii)" in paragraph (b)(1)(ii)(B) to read "§ 230.482(e)(1)(iii)";
f. Revising the reference "(d)(1)(i) of § 230.482" in the first sentence of paragraph (b)(1)(ii)(C) to read "(e)(1)(i) of § 230.482";
g. Revising the reference "(e)(3) of § 230.482" in paragraph (b)(1)(iii)(A) to read "(d)(3) of § 230.482";
h. Revising the reference "(e)(4) of § 230.482" in paragraph (b)(1)(iii)(B) to read "(d)(4) of § 230.482";
i. Revising the reference "(e)(4) of § 230.482" in paragraph (b)(1)(iii)(C) to read "(d)(4) of § 230.482";
j. Revising the reference "(e)(1) of § 230.482" in paragraph (b)(1)(iii)(D) to read "(d)(1) of § 230.482";
k. Revising the references "(e)(2)" and "(e)(1) of § 230.482" in paragraph (b)(1)(iii)(E) to read "(d)(2)" and "(d)(1) of § 230.482", respectively;
l. Revising the reference "paragraph (f) of § 230.482" in paragraph (b)(2) to read "paragraph (g) of § 230.482"; and
m. Revising the reference "(e)(3)(ii), (e)(4)(ii)" in paragraph (b)(3) to read "(d)(3)(ii), (d)(4)(ii)".
The addition and revisions read as follows:
§ 270.34b-1 Sales literature deemed to be misleading.
* * * * *
Note to introductory text of §270.34b-1: The fact that the sales literature includes the information specified in paragraphs (a) and (b) of this section does not relieve the investment company, underwriter, or dealer of any obligations with respect to the sales literature under the antifraud provisions of the federal securities laws. For guidance about factors to be weighed in determining whether statements, representations, illustrations, and descriptions contained in investment company sales literature are misleading, see § 230.156 of this chapter.
(a) Sales literature for a money market fund shall contain the information required by paragraph (b)(4) of § 230.482 of this chapter, presented in the manner required by paragraph (b)(5) of § 230.482 of this chapter.
(b)(1) * * *
(i) In any sales literature that contains performance data for an investment company, include the disclosure required by paragraph (b)(3) of § 230.482 of this chapter, presented in the manner required by paragraph (b)(5) of § 230.482 of this chapter.
* * * * *
PART 239 -- FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
PART 274 -- FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940
8. The authority citation for Part 274 continues to read in part as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m, 78n, 78o(d), 80a-8, 80a-24, 80a-26, and 80a-29, unless otherwise noted.
Note: The text of Forms N-1A, N-3, N-4, and N-6 does not, and these amendments will not, appear in the Code of Federal Regulations.
9. Item 21 of Form N-1A (referenced in §§ 239.15A and 274.11A) is amended by:
a. Revising the introductory text of paragraphs (a) and (b); and
b. Removing paragraphs (a)(5) and (b)(7), to read as follows:
Form N-1A
* * * * *
Item 21. Calculation of Performance Data
(a) Money Market Funds. Yield quotation(s) for a Money Market Fund included in the prospectus should be calculated according to paragraphs (a)(1) - (4).
* * * * *
(b) Other Funds. Performance information included in the prospectus should be calculated according to paragraphs (b)(1) - (6).
* * * * *
10. General Instruction F of Form N-3 (referenced in §§ 239.17a and 274.11b) is amended by:
a. Removing General Instruction F.2; and
b. Redesignating General Instruction F.1 as General Instruction F.
11. Item 4 of Form N-3 (referenced in §§ 239.17a and 274.11b) is amended by:
a. Removing Item 4(c); and
b. Redesignating Item 4(d) as Item 4(c).
12. Item 25 of Form N-3 (referenced in §§ 239.17a and 274.11b) is amended by:
a. Removing Instruction 5 to paragraph (a); and
b. Revising paragraphs (a) and (b), and Instruction 6 to paragraph (b)(i), to read as follows:
Form N-3
* * * * *
Item 25. Calculation of Performance Data
(a) Money Market Accounts. Yield quotation(s) included in the prospectus for an account or sub-account that holds itself out as a "money market" account or sub-account should be calculated according to paragraphs (a)(i) - (ii).
(i) Yield Quotation. Based on the 7 days ended on the date of the most recent balance sheet of the Registrant included in the registration statement, calculate the yield by determining the net change, exclusive of capital changes and income other than investment income, in the value of a hypothetical pre-existing account having a balance of one accumulation unit of the account or sub-account at the beginning of the period, subtracting a hypothetical charge reflecting deductions from contractowner accounts, and dividing the difference by the value of the account at the beginning of the base period to obtain the base period return, and then multiplying the base period return by (365/7) with the resulting yield figure carried to at least the nearest hundredth of one percent.
(ii) Effective Yield Quotation. Based on the 7 days ended on the date of the most recent balance sheet of the Registrant included in the registration statement, calculate the effective yield, carried to at least the nearest hundredth of one percent, by determining the net change, exclusive of capital changes and income other than investment income, in the value of a hypothetical pre-existing account having a balance of one accumulation unit of the account or sub-account at the beginning of the period, subtracting a hypothetical charge reflecting deductions from contractowner accounts, and dividing the difference by the value of the account at the beginning of the base period to obtain the base period return, and then compounding the base period return by adding 1, raising the sum to a power equal to 365 divided by 7, and subtracting 1 from the result, according to the following formula:
EFFECTIVE YIELD = [(BASE PERIOD RETURN +1)365/7]-1.
Instructions:
* * * * *
(b) Other Accounts. Performance information included in the prospectus should be calculated according to paragraphs (b)(i) - (iii).
(i) Average Annual Total Return Quotation. For the 1-, 5-, and 10-year periods ended on the date of the most recent balance sheet of the Registrant included in the registration statement, calculate the average annual total return by finding the average annual compounded rates of return over the 1-, 5-, and 10-year periods that would equate the initial amount invested to the ending redeemable value, according to the following formula:
P(1+T)n = ERV
Where:
P= a hypothetical initial payment of $1,000
T= average annual total return
n= number of years
ERV= ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion).
Instructions:
* * * * *
6. Total return information in the prospectus need only be current to the end of the Registrant's most recent fiscal year.
(ii) Yield Quotation. Based on a 30-day (or one month) period ended on the date of the most recent balance sheet of the Registrant included in the registration statement, calculate yield by dividing the net investment income per accumulation unit earned during the period by the maximum offering price per unit on the last day of the period, according to the following formula:
| YIELD = 2[( |  | +1)6-1] |
Where:
a= dividends and interest earned during the period.
b= expenses accrued for the period (net of reimbursements).
c= the average daily number of accumulation units outstanding during the period.
d= the maximum offering price per accumulation unit on the last day of the period.
Instructions:
* * * * *
(iii) Non-Standardized Performance Quotation. A Registrant may calculate performance using any other historical measure of performance (not subject to any prescribed method of computation) if the measurement reflects all elements of return.
* * * * *
13. Item 28 of Form N-3 (referenced in §§ 239.17a and 274.11b) is amended by:
a. Adding the word "and" after the semicolon at the end of Item 28(b)(15);
b. Removing Item 28(b)(16);
c. Redesignating Item 28(b)(17) as Item 28(b)(16); and
d. Revising Instruction 1 to Item 28 to read as follows:
Form N-3
* * * * *
Item 28.
* * * * *
(b) * * *
(15) copies of any agreements or understandings made in consideration for providing the initial capital between or among the Registrant, the Insurance Company, underwriter, adviser, or initial contractowners and written assurances from the Insurance Company or initial contractowners that the purchases were made for investment purposes without any present intention of redeeming; and
(16) copies of any codes of ethics adopted under Rule 17j-1 under the 1940 Act [17 CFR 270.17j-1] and currently applicable to the Registrant (i.e., the codes of the Registrant and its investment advisers and principal underwriters). If there are no codes of ethics applicable to the Registrant, state the reason (e.g., the Registrant is a Money Market Fund).
Instructions:
1. Subject to the Rules regarding incorporation by reference and Instruction 2 below, the foregoing exhibits shall be filed as part of the Registration Statement. Exhibits numbered 5, 12, 13, and 14 above need be filed only as part of a 1933 Act Registration Statement. Exhibits shall be lettered or numbered for convenient reference. Exhibits incorporated by reference may bear the designation given in a previous filing. Where exhibits are incorporated by reference, the reference shall be made in the list of exhibits.
* * * * *
14. General Instruction F of Form N-4 (referenced in §§ 239.17b and 274.11c) is amended by:
a. Removing General Instruction F.2; and
b. Redesignating General Instruction F.1 as General Instruction F.
15. Item 4 of Form N-4 (referenced in §§ 239.17b and 274.11c) is amended by:
a. Removing Item 4(b); and
b. Redesignating Item 4(c) as Item 4(b).
16. Item 21 of Form N-4 (referenced in §§ 239.17b and 274.11c) is amended by:
a. Removing Instruction 5 to paragraph (a); and
b. Revising paragraphs (a) and (b), and Instruction 6 to paragraph (b)(i), to read as follows:
Form N-4
* * * * *
Item 21. Calculation of Performance Data
(a) Money Market Funded Sub-Accounts. Yield quotation(s) included in the prospectus for an account or sub-account that holds itself out as a "money market" account or sub-account should be calculated according to paragraphs (a)(i) - (ii).
(i) Yield Quotation. Based on the 7 days ended on the date of the most recent balance sheet of the Registrant included in the registration statement, calculate the yield by determining the net change, exclusive of capital changes and income other than investment income, in the value of a hypothetical pre-existing account having a balance of one accumulation unit of the account or sub-account at the beginning of the period, subtracting a hypothetical charge reflecting deductions from contractowner accounts, and dividing the difference by the value of the account at the beginning of the base period to obtain the base period return, and then multiplying the base period return by (365/7) with the resulting yield figure carried to at least the nearest hundredth of one percent.
(ii) Effective Yield Quotation. Based on the 7 days ended on the date of the most recent balance sheet of the Registrant included in the registration statement, calculate the effective yield, carried to at least the nearest hundredth of one percent, by determining the net change, exclusive of capital changes and income other than investment income, in the value of a hypothetical pre-existing account having a balance of one accumulation unit of the account or sub-account at the beginning of the period, subtracting a hypothetical charge reflecting deductions from contractowner accounts, and dividing the difference by the value of the account at the beginning of the base period to obtain the base period return, and then compounding the base period return by adding 1, raising the sum to a power equal to 365 divided by 7, and subtracting 1 from the result, according to the following formula:
EFFECTIVE YIELD = [(BASE PERIOD RETURN +1)365/7]-1.
Instructions:
* * * * *
(b) Other Sub-Accounts. Performance information included in the prospectus should be calculated according to paragraphs (b)(i) - (iii).
(i) Average Annual Total Return Quotation. For the 1-, 5-, and 10-year periods ended on the date of the most recent balance sheet of the Registrant included in the registration statement, calculate the average annual total return by finding the average annual compounded rates of return over the 1-, 5-, and 10-year periods that would equate the initial amount invested to the ending redeemable value, according to the following formula:
P(1+T)n = ERV
Where:
P= a hypothetical initial payment of $1,000
T= average annual total return
n= number of years
ERV= ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10- year periods (or fractional portion).
Instructions:
* * * * *
6. Total return information in the prospectus need only be current to the end of the Registrant's most recent fiscal year.
(ii) Yield Quotation. Based on a 30-day (or one month) period ended on the date of the most recent balance sheet of the Registrant included in the registration statement, calculate yield by dividing the net investment income per accumulation unit earned during the period by the maximum offering price per unit on the last day of the period, according to the following formula:
| YIELD = 2[( | | +1)6-1] |
Where:
a= net investment income earned during the period by the portfolio company attributable to shares owned by the sub-account.
b= expenses accrued for the period (net of reimbursements).
c= the average daily number of accumulation units outstanding during the period.
d= the maximum offering price per accumulation unit on the last day of the period.
Instructions:
* * * * *
(iii) Non-Standardized Performance Quotation. A Registrant may calculate performance using any other historical measure of performance (not subject to any prescribed method of computation) if the measurement reflects all elements of return.
* * * * *
19. Item 24 of Form N-4 (referenced in §§ 239.17b and 274.11c) is amended by:
a. Adding the word "and" after the semicolon at the end of Item 24(b)(11);
b. Removing Item 24(b)(13); and
c. Revising Instruction 1 to Item 24.
The revisions read as follows:
Form N-4
* * * * *
Item 24
* * * * *
(b) * * *
(11) all financial statements omitted from Item 23; and
(12) copies of any agreements or understandings made in consideration for providing the initial capital between or among the Registrant, the depositor, underwriter, or initial contractowners and written assurances from the depositor or initial contractowners that the purchases were made for investment purposes without any present intention of redeeming.
Instructions:
1. Subject to the Rules regarding incorporation by reference and Instruction 2 below, the foregoing exhibits shall be filed as part of the Registration Statement. Exhibits numbered 3, 9, 10, and 11 above need to be filed only as part of a 1933 Act Registration Statement. Exhibits shall be lettered or numbered for convenient reference. Exhibits incorporated by reference may bear the designation given in a previous filing. Where exhibits are incorporated by reference, the reference shall be made in the list of exhibits.
* * * * *
20. General Instruction B.2.(b) of Form N-6 (referenced in §§ 239.17c and 274.11d) is amended by revising the reference "Items 27 (c), (k), (l), (n), and (o)" to read "Items 26 (c), (k), (l), (n), and (o)".
21. Item 25 of Form N-6 (referenced in §§ 239.17c and 274.11d) is removed.
22. Form N-6 (referenced in §§ 239.17c and 274.11d) is further amended by:
a. Redesignating Items 26 through 34 as Items 25 though 33;
b. Revising the reference "Item 26" in paragraph (j) of newly redesignated Item 25 to read "Item 25"; and
c. Revising the reference "Item 26" in paragraphs (l) and (m) of newly redesignated Item 26 to read "Item 25".
By the Commission.
Margaret H. McFarland
Deputy Secretary
Dated: September 29, 2003
1 "Statutory prospectus" refers to the full prospectus required by section 10(a) of the Securities Act. 15 U.S.C. 77j(a).
2 An open-end management investment company is an investment company, other than a unit investment trust or face-amount certificate company, that offers for sale or has outstanding any redeemable security of which it is the issuer. Sections 4 and 5(a)(1) of the Investment Company Act [15 U.S.C. 80a-4 and 80a-5(a)(1)]. Mutual funds typically offer and sell their shares continuously to provide an ongoing flow of capital into their portfolios and to enable them to meet redemption requests from their shareholders.
A unit investment trust ("UIT") is "an investment company which (A) is organized under a trust indenture, contract of custodianship or agency, or similar instrument, (B) does not have a board of directors, and (C) issues only redeemable securities, each of which represents an undivided interest in a unit of specified securities, but does not include a voting trust." Section 4(2) of the Investment Company Act [15 U.S.C. 80a-4(2)]. UITs typically have active secondary markets in which the trusts' sponsors are continuously purchasing and selling the trusts' units.
A face-amount certificate is a security that obligates the issuer to pay a stated (or determinable) amount on a fixed (or determinable) date or series of dates more than twenty-four months after the date of issuance. Section 2(a)(15) of the Investment Company Act [15 U.S.C. 80a-2(a)(15)]. A face-amount certificate company is an investment company that engages or proposes to engage in the business of issuing certain face-amount certificates. Section 4(1) of the Investment Company Act [15 U.S.C. 80a-4(1)].
3 17 CFR 230.482.
4 15 U.S.C. 77j(b).
5 Current 17 CFR 230.482(a)(2).
6 National Securities Markets Improvement Act of 1996, Pub. L. No. 104-290, 110 Stat. 3416, 3428, Section 204.
7 Investment Company Act Release No. 25575 (May 17, 2002) [67 FR 36712 (May 24, 2002)] ("Proposing Release").
8 See Proposing Release, supra note 7, 67 FR at 36713 nn. 8 and 9 and accompanying text (discussion regarding funds' advertising during 1999 and 2000 focused on extraordinary performance).
9 See Kimberly Weisul, Mutual Fund Ads: Reader Beware, Business Week, September 15, 2003, at 44; Suzanne McCoy, Performance Ads Return in Q2 as Spending Drops (August 12, 2003) http://www.ignites.com; Gregg Wolper, Buy this Fund--It's Had a Great Week!, Morningstar Online, July 15, 2003, available at http://news.morningstar.com/doc/document/print/1,3651,93809,00.html.
10 The comment letters and a summary of the comments are available for public inspection and copying in the Commission's Public Reference Room, 450 5th Street, NW, Washington, DC 20549-0102. Public comments submitted electronically and the comment summary are also available on the Commission's Internet website (http://www.sec.gov).
11 The "substance of which" requirement is presently contained in current rule 482(a)(2) [17 CFR 230.482(a)(2)]. We are also revising the language in the note to current paragraph (a)(3) of rule 482, which states that "[t]he fact that the statements included in the advertisement are included in the section 10(a) prospectus does not relieve the issuer, underwriter, or dealer of the obligation to ensure that the advertisement is not false or misleading." [17 CFR 230.482(a)(3)]. The removal of the "substance of which" requirement makes the reference to the section 10(a) prospectus unnecessary. The revised language of this note is incorporated into the note to newly adopted paragraph (a) of rule 482 [17 CFR 230.482(a)]. See Section II.B., "Applicability of Antifraud Provisions to Fund Advertising," infra.
12 15 U.S.C. 80a-24(g). See also S. Rep. No. 293, 104th Cong., 2d Sess. 8 (1996) (stating that the "bill improves fund advertising by giving the Commission express authority to create a new investment company `advertising prospectus'").
13 See Investment Company Act Release No. 9811 (June 8, 1977) [42 FR 30379, 30380 (June 14, 1977)] ("1977 Advertising Proposing Release") (proposing rule 434d, subsequently renumbered as rule 482).
14 15 U.S.C. 77j(b).
15 Section 24(b) of the Investment Company Act [15 U.S.C. 80a-24(b)] requires the filing with the Commission of "any advertisement, pamphlet, circular, form letter, or other sales literature" for any registered investment company other than a closed-end fund. Rule 24b-3 under the Investment Company Act [17 CFR 270.24b-3] relieves funds of the obligation to file advertisements and other sales materials with the Commission if those materials are filed with NASDR.
Members of the National Association of Securities Dealers, Inc. ("NASD") also must comply with rule 2210 of the NASD Conduct Rules when sponsoring fund advertisements. Rule 2210 outlines general standards for what may constitute misleading fund advertising and specific requirements for advertising communications. Rules 2210(d)(1) and (2) of the NASD Conduct Rules.
16 See discussion in Section II.B., "Applicability of Antifraud Provisions to Fund Advertising," and Section II.C., "Enhanced Disclosure Under Rule 482," infra.
17 Section 28 of the Securities Act [15 U.S.C. 77z-3]. Business development companies are a category of closed-end investment companies that are not required to register under the Investment Company Act. See section 2(a)(48) of the Investment Company Act [15 U.S.C. 80a-2(a)(48)] (defining "business development company").
18 17 CFR 230.134. Rule 134, in contrast to rule 482, is a content-based rule that specifies certain categories of information that a fund may advertise. Currently, funds may advertise a broad range of information under rule 134, other than performance information. See Proposing Release, supra note 7, 67 FR at 36714.
19 See 17 CFR 230.134(e) (registered investment companies and business development companies excluded from rule 134).
20 Because a rule 482 advertisement is a prospectus under section 10(b) of the Securities Act, a rule 482 advertisement is subject to section 12(a)(2) of the Securities Act [15 U.S.C. 77l(a)(2)], which imposes liability for materially false or misleading statements in a prospectus or oral communication, subject to a reasonable care defense. An action under section 12(a)(2) does not require proof of scienter (i.e., an intent to defraud investors), e.g., Wigand v. Flo-Tek, Inc., 609 F.2d 1028, 1034 (2d Cir. 1979), or investor reliance on a misleading statement or omission, e.g., MidAmerica Fed. S. & L. Assoc. v. Shearson/American Express, Inc., 886 F.2d 1249, 1256 (10th Cir. 1989); Sanders v. John Nuveen & Co., 619 F.2d 1222, 1225 (7th Cir. 1980), cert. denied, 450 U.S. 1005 (1981). In contrast, antifraud claims by investors under section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. 78j(b)] require proof of scienter and investor reliance. Under either type of claim, however, the plaintiff must establish that the misrepresentation or omission is material. Rule 134 advertisements are subject to the antifraud provisions under the federal securities laws but do not create liability under section 12(a)(2) of the Securities Act because rule 134 advertisements are not considered "prospectuses." Rule 134 was adopted under section 2(a)(10)(b) of the Securities Act [15 U.S.C. 77b(a)(10)(b)], which excepts certain communications from the definition of "prospectus."
21 1977 Advertising Proposing Release, supra note 13, 42 FR at 30380.
22 Investment Company Act Release No. 16245 (Feb. 2, 1988) [53 FR 3868, 3878 n. 51 (Feb. 10, 1988)]. See also Investment Company Act Release No. 24832 (Jan. 18, 2001) [66 FR 9002, 9008 (Feb. 5, 2001)] (compliance with rule 482 is not a safe harbor from antifraud liability); Investment Company Act Release No. 15315 (Sept. 17, 1986) [51 FR 34384, 34391 (Sept. 26, 1986)] (in proposing amendments to rule 482 to require the inclusion of a legend on advertisements, Commission stated that it was "not suggesting that the legend information contains all the material information necessary to prevent an ad from being misleading . . . [and] that whoever sponsors the ad, be it the fund, the underwriter, or the dealer, bears the primary responsibility for assuring that the ad is not false or misleading"); 1977 Advertising Proposing Release, supra note 13, 42 FR at 30380 (advertisements made pursuant to rule 434d (subsequently renumbered as rule 482) would be subject to the antifraud provisions of the securities laws); In the Matter of The Dreyfus Corporation and Michael L. Schonberg, Investment Advisers Act Release No. 1870 (May 10, 2000) (advertisements that comply with rule 482 are subject to the general antifraud provisions of the securities laws).
23 17 CFR 230.156.
24 Note to current rule 482(a)(3) [17 CFR 230.482(a)(3)] ("The fact that the statements included in the advertisement are included in the section 10(a) prospectus does not relieve the issuer, underwriter, or dealer of the obligation to ensure that the advertisement is not false or misleading.")
25 Section 5(b)(1) of the Securities Act [15 U.S.C. 77e(b)(1)] makes it unlawful to use interstate commerce to transmit any prospectus relating to a security with respect to which a registration statement has been filed unless the prospectus meets the requirements of section 10 of the Securities Act. Section 10(b) of the Securities Act [15 U.S.C. 77j(b)] permits the Commission to adopt rules that provide for a prospectus that "omits in part" or "summarizes" information contained in the statutory prospectus. Rule 482 was adopted under the authority of section 10(b) of the Securities Act.
26 See Proposing Release, supra note 7, at Section I.B., "Performance Advertising Practices," 67 FR at 36715-16.
27 17 CFR 230.156(b)(2)(i); Cf. 17 CFR 230.156(b)(1)(ii) ("A statement could be misleading because of . . . [t]he absence of explanations, qualifications, limitations or other statements necessary or appropriate to make such statement not misleading . . . ").
28 See Proposing Release, supra note 7, 67 FR at 36715-16 (discussing concerns about lack of disclosure relating to unusual circumstances contributing to fund performance, currentness of performance information, and selective use of performance figures).
29 Current 17 CFR 230.482(g).
30 17 CFR 230.482(g)(1)(ii) and (g)(2).
31 A fund supermarket is a program offered by a broker-dealer or other financial institution through which its customers may purchase and redeem shares of a variety of funds from different fund complexes.
32 17 CFR 230.482(g).
33 17 CFR 230.482(g)(1)(ii); 17 CFR 230.482(b)(3)(i).
34 See Proposing Release, supra note 7, 67 FR at 36719.
35 17 CFR 230.482(b)(1)(i), (b)(3)(i), and (b)(3)(ii).
36 17 CFR 230.482(g)(2).
37 17 CFR 230.482(b)(3)(i).
38 Note to rule 482(b)(3)(i) [17 CFR 230.482(b)(3)(i)]; note to rule 482(g) [17 CFR 230.482(g)].
39 See supra note 9.
40 17 CFR 230.482(b)(3)(i).
41 See "Availability of Month-End Performance Information," supra.
42 17 CFR 230.482(b)(1)(i). Similar disclosure will also be required in an advertisement used with a profile pursuant to rule 498 under the Securities Act [17 CFR 230.498]. 17 CFR 230.482(b)(1)(ii).
Rule 482 currently does not require a fund to highlight the importance of information regarding the fund's investment objectives, risks, and charges and expenses. The rule does, however, require an advertisement to identify a source from which an investor may obtain a prospectus containing more complete information about the fund, which should be read carefully before investing. Current 17 CFR 230.482(a)(3)(i). The rule also requires that a fund that advertises performance data include some information about sales loads and other non-recurring fees. Current 17 CFR 230.482(a)(6).
43 See Securities and Exchange Commission, Mutual Fund Investing: Look at More Than a Fund's Past Performance (last modified Jan. 24, 2000) http://www.sec.gov/investor/pubs/mfperform.htm (cautioning investors to look beyond performance when evaluating funds and to consider the costs relating to a fund investment). See also NASD Notice to Members No. 98-107 (1998) (reminding members of their obligation to ensure that discussions concerning fees and expenses in fund advertising are fair, balanced, and not misleading).
44 Form N-4, Item 3 [17 CFR 239.17b; 17 CFR 274.11c]; Form N-6, Item 3 [17 CFR 239.17c; 17 CFR 274.11d].
45 17 CFR 230.482(b)(5). The presentation requirements for rule 482 are the same as those currently required under rule 134. 17 CFR 230.134(a)(iii). The presentation requirements would replace the current rule 482 requirement that certain required disclosures be "conspicuous." Current 17 CFR 230.482(a)(3).
46 17 CFR 230.482(b)(1) and (3). The narrative disclosure covered by the prominence requirement will also include, if applicable, the "subject to completion" legend that will be required by rule 482(b)(2) and, if the advertisement is used with a profile under rule 498 under the Securities Act [17 CFR 230.498], disclosure advising investors to consider the fund's investment objectives, risks, and charges and expenses carefully before investing, explaining that the profile contains this and other information about the fund, describing the procedures for investing in the fund, and indicating the availability of the prospectus. 17 CFR 230.482(b)(1)(ii) and (b)(2). In addition, the prominence requirement will extend to disclosures specific to money market funds. 17 CFR 230.482(b)(4).
47 17 CFR 230.482(b)(5).
48 Id.
49 17 CFR 230.420(b). Rule 420 applies to rule 482 advertisements. Note to rule 482(a) [17 CFR 230.482(a)]. See Securities Act Release No. 7289 (May 9, 1996) [61 FR 24652, 24652 (May 15, 1996)] (amending Commission rules to provide that issuer, when delivering electronic version of document, may comply with requirements prescribing physical appearance of paper document by (i) presenting the information in a format readily communicated to investors; and (ii) where legends are required to be printed in red ink or bold-face type, or in a different font size, presenting legends in any manner reasonably calculated to draw attention to them).
50 17 CFR 230.482(b)(5).
51 Id. The disclosure subject to the proximity requirement would include all of the disclosures required by paragraphs (b)(3)(i) and (ii) of rule 482. 17 CFR 230.482(b)(3)(i) and (ii). Paragraph (b)(3)(i) of rule 482 requires disclosure that the performance data quoted represents past performance; that past performance does not guarantee future results; in the case of a non-money market fund, that the investment return and principal value of an investment will fluctuate; that current performance may be lower or higher than the performance data quoted; and a toll-free telephone number or website where an investor may obtain month-end performance data. Paragraph (b)(3)(ii) of rule 482 requires that, if a sales load or any other nonrecurring fee is charged, the advertisement must disclose the maximum amount of the load or fee. In addition, if the sales load or fee is not reflected, the advertisement must also disclose that the performance data does not reflect its deduction, and that, if reflected, the load or fee would reduce the performance quoted. Cf. Proposing Release, supra note 7, 67 FR at 36721 n. 82 (omitting to state explicitly that disclosures of paragraph (b)(3)(ii) of rule 482 are covered by proximity requirement).
52 Current 17 CFR 230.482(d)(1)(i), (e)(1)(iv), (e)(2)(v), (e)(3)(iv), (e)(4)(vi), and (e)(5)(v).
53 17 CFR 230.482(d)(1)(iv), (d)(2)(v), (d)(3)(iv), (d)(4)(vi), (d)(5)(v), and (e)(1)(i).
54 See Section II.B., "Applicability of Antifraud Provisions to Fund Advertising," supra (discussing Commission's concerns with inadequate disclosure in fund performance advertising of unusual circumstances contributing to performance).
55 This clarification is limited to advertisements consisting of multi-page paper documents. Applicability of the presentation requirements to websites consisting of multiple web pages is discussed infra.
56 17 CFR 270.34b-1(a) and (b)(1)(i).
57 See Item 21 of Form N-1A [17 CFR 239.15A; 17 CFR 274.11A]; Items 4 and 25 of Form N-3 [17 CFR 239.17a; 17 CFR 274.11b]; Items 4 and 21 of Form N-4 [17 CFR 239.17b; 17 CFR 274.11c]. The amendments delete Item 25 of Form N-6 [17 CFR 239.17c; 17 CFR 274.11d].
Form N-1A is the registration form for open-end management investment companies. Form N-3 is the registration form for separate accounts organized as management investment companies that offer variable annuity contracts. Form N-4 is the registration form for separate accounts organized as unit investment trusts that offer variable annuity contracts. Form N-6 is the registration form for separate accounts that are registered as unit investment trusts and that offer variable life insurance policies.
58 See General Instruction F and Item 28 of Form N-3 and General Instruction F and Item 24 of Form N-4.
59 Current 17 CFR 230.482(a)(5); newly adopted 17 CFR 230.482(c).
60 Current 17 CFR 230.482(a)(5)(i); newly adopted 17 CFR 230.482(c)(1).
61 See Item 5(c) of Form N-4 and Item 4(c) of Form N-6 (requiring brief description of each underlying mutual fund offered through the contract). See also Investment Company Act Release No. 14575 (June 14, 1985) [50 FR 26145, 26155 n. 48 and accompanying text (June 25, 1985)] (describing treatment of underlying mutual funds in contract prospectus as omitting prospectuses).
62 See Investment Company Act Release No. 15315 (Sept. 17, 1986) [51 FR 34384, 34391 n. 60 (Sept. 26, 1986)].
63 Proposing Release, supra note 7, 67 FR at 36723.
64 17 CFR 230.482(c)(1).
65 See Proposing Release, supra note 7, at Section IV, "Cost/Benefit Analysis," 67 FR at 36723-26.
66 17 CFR 230.482(b)(3)(i).
67 Id.
68 17 CFR 230.482(b)(1)(i). This disclosure would also be required in an advertisement used with a profile pursuant to rule 498 under the Securities Act. 17 CFR 482(b)(1)(ii).
69 17 CFR 230.482(b)(5).
70 Id.
71 17 CFR 230.482(d)(1)(iv), (d)(2)(v), (d)(3)(iv), (d)(4)(vi), (d)(5)(v), and (e)(1)(i).
72 See Investment Company Institute, 2001 Mutual Fund Fact Book at 63.
73 The trade-off between lower advertising burdens and increased advertising activity is complex and further complicated by business cycles and marketing strategy among other factors. We believe, however, that investors and funds will enjoy benefits in any event-either resources will be saved in reducing the costs and burdens of advertising or they will be spent to increase the amount and timeliness of information provided to investors in advertising.
74 The benefits of potential direct investor suits in both remedying fraudulent advertising by funds and deterring such advertising in the future are difficult to quantify, but may be significant. The benefits will be reduced to the extent that the potential liability increases litigation and insurance costs for funds. However, because suits based on misleading advertising are relatively rare, we continue to estimate that the associated costs will be minimal.
75 The estimate of the number of investment companies is based on data derived from the Commission's EDGAR filing system. The estimate of the decrease in burden hours is based on information gathered from the fund industry by the Commission staff and from the staff's experience with the various advertising regulations.
76 These figures are based on a Commission estimate of 5025 investment companies and an estimated hourly wage rate of $37.26. The estimated wage rate figure is based on published hourly wage rates for in-house attorneys ($33.66), paralegals ($19.93), and compliance examiners ($23.16) and the estimate, based on the Commission staff's discussions with certain fund complexes, that attorneys would account for 50% of hours spent on advertising regulation and that paralegals and compliance examiners would account for the remaining 50% in equal ratio, yielding a weighted wage rate of $27.60 (($33.66 x .50) + ($19.93 x .25) + (23.16 x .25) = $27.60). Securities Industry Association, Report on Office Salaries in the Securities Industry 2000 (Sept. 2002); Securities Industry Association, Report on Management & Professional Earnings in the Securities Industry 2000 (Sept. 2002). This weighted wage rate was then adjusted upward by 35% for overhead, reflecting the costs of supervision, space, and administrative support, to obtain the total per hour internal cost of $37.26 ($27.60 x 1.35 = $37.26).
The benefits estimated in this analysis differ from those provided in the Proposing Release because of intervening changes in the number of investment companies and the wage rates. Although the Commission modified the proposed amendments, these modifications did not affect our estimates of the benefits associated with the amendments. Some commenters indicated that the cost of making updated month-end information available by toll-free or collect telephone number, as the proposal would have required, would be significant. Nonetheless, the modification to the proposed requirement to permit funds to make month-end performance data available through a toll-free or collect telephone number or website did not affect our estimates of costs or benefits. The staff indicated in the Proposing Release that it expected the costs of making updated month-end information available by toll-free or collect telephone number would be negligible, because many, if not most, funds already provide month-end or more current performance information through those means. See Proposing Release, supra note 7, 67 FR at 36726.
77 On the other hand, one commenter did not object to the telephone-only requirement, indicating that making updated monthly performance data available in the manner contemplated by the proposal would be affordable for all funds, regardless of size.
78 One commenter estimated that the cost of installing an automated voice response telephone system for an insurance company to provide performance information about funds underlying variable contracts would be $500,000. Another commenter cited that $500,000 estimate and added that the estimate is for hardware and software requirements only and does not include personnel expenses and further stated that expenses for companies that do not presently have automated telephone systems would likely be several times higher. It appears that the commenter that calculated the $500,000 estimate intended that this figure represent the cost the commenter itself would incur and not a projection that every insurance company or every fund would incur a $500,000 expense. Another commenter, a fund supermarket, estimated the cost of updating its website to provide toll-free numbers for the many funds offered would amount to $70,000.
79 See Section II.B., "Applicability of Antifraud Provisions to Fund Advertising," supra.
80 See supra note 74.
81 These figures are based on averages derived from information gathered from several members of the fund industry by the Commission staff and from the staff's experience with the various advertising rules. Internal costs include, for example, the cost of reviewing all fund advertisements for compliance with the revised rules. External costs include, for example, the costs of typesetting and printing for new fund advertisements.
The costs estimated in this analysis differ from those provided in the Proposing Release because of intervening changes in the number of investment companies and the wage rates. Although the Commission modified the proposed amendments, these modifications did not affect our estimate of the costs associated with the amendments. See supra note 76.
82 See discussion in notes 75 and 76, supra, regarding number of investment companies, wage rates, and previous estimates of costs and benefits.
83 15 U.S.C. 77b(b), 78c(f), and 80a-2(c).
84 Although the amendments do not amend Form N-2, that form is included in this Paperwork Reduction Act ("PRA") summary because the PRA burden for rule 482 has previously been included in the various investment company registration statement forms affected by rule 482, including Form N-2. As discussed below, the Commission has transferred the PRA burden associated with rule 482 from all of these registration statement forms to a new rule 482 category.
85 The amendments modify rule 482, which is part of Regulation C under the Securities Act of 1933. Regulation C describes the disclosure that must appear in registration statements under the Securities Act and Investment Company Act. The PRA burden associated with rule 482 was previously included in the various investment company registration statement forms, not in Regulation C. However, because the amendments eliminate the rationale for allocating the PRA burden for rule 482 to the registration forms, the Commission has transferred the burden associated with rule 482 to a new category. The total PRA burden for each of the registration forms is different from that included in the PRA submissions that preceded this analysis because of the transfer of burden associated with rule 482, as well as the intervening changes in the number of filings. However, the newly adopted amendments to the forms do not have any effect on the burden hours for the forms.
86 Although this release also amends rule 156, there are no burden hours assigned to that rule by OMB and it has no OMB control number.
87 The Commission is adopting amendments to rules 134, 156, and 482 under the Securities Act, rule 34b-1 under the Investment Company Act, and Forms N-1A, N-3, N-4, and N-6 under the Investment Company Act and Securities Act.
88 The estimate of the burden hours attributable to compliance with rule 482 for filings on Forms N-1A, and Form N-2 were based on information supplied to the Commission staff by members of the fund industry and the staff's experience with these registration forms.
89 Estimates of the burden hours attributable to rule 482 for Forms N-3, N-4, and N-6 were derived by estimating the total burden hours for compliance with rule 482 for all variable insurance separate accounts, based on the staff's discussions with a member of the variable insurance products industry that issues both variable annuities and variable life insurance policies. We then converted this estimated number of burden hours associated with rule 482 into a percentage of the total burden hours associated with Forms N-3, N-4, and N-6 collectively. We allocated the rule 482 burden to each form by multiplying the total burden of each form by this percentage. However, we excluded burden hours attributable to initial filings on Form N-3 because we anticipated no such filings.
90 See discussion in note 89, supra.
91 See discussion in note 89, supra.
92 Based on its analysis of data from the EDGAR filing system from 2000-2001, the Commission estimated that there are approximately 200 variable life insurance policies, with respect to which at least one post-effective amendment must be filed per year. In addition, the Commission estimated, also based on EDGAR filing data, that 300 additional post-effective amendments are filed for these variable life insurance policies each year, generally to make non-material changes to their registration statements.
93 The secondary effect on the burden attributable to rule 34b-1 due to the amendments to rule 482 is estimated to be negligible. Both before and after the amendments, rule 34b-1 requires any performance data included in supplemental sales literature to be accompanied by performance data computed using the standardized formulas for advertising performance under rule 482. We estimate that the changes in types of disclosure and presentation that would be required by the amendments to rule 482 would not affect the amount of review necessary for funds to ensure compliance with rule 34b-1. Therefore, all changes in burden associated with the amendments are accounted for under the category associated with the principal rule generating the burden, i.e., the new rule 482 collection of information.
94 The Commission calculated this adjustment at the proposing stage by estimating a burden hour annual increase per investment company of 0.727 hours and a burden hour annual decrease per investment company of 1.96, and then multiplying these figures by the then current number of investment companies (5,587) to arrive at an estimated net decrease of approximately 6,890 total annual burden hours (0.727 x 5,587 - 1.96 x 5,587 = -6,889). The Commission then subtracted this estimated annual net decrease from the rule 482 burden hours that had been transferred from the registration forms, yielding the total annual rule 482 burden of 218,125 (225,015 hours transferred - 6,890 decrease = 218,125), which was used in the Proposing Release.
95 The estimates of changes in the burden hours per investment company attributable to rule 482 are based on a survey of information conducted by the Commission staff of members of the mutual fund and variable insurance products industry at the time of the Proposing Release. The Commission estimates no change in these per-investment-company burden rates due to changes to the amendments between the proposing stage and this adoption.
96 This estimated net decrease of 6,196 hours compares to an estimated net decrease of 6,890 in the Proposing Release. The difference of 694 hours is a result of the change in the number of investment companies since the time of the Proposing Release.
97 218,125 total hours (Proposing Release estimate) + 694 hours (lower net decrease) as explained in note 96, supra.
98 National Securities Markets Improvement Act of 1996, Pub. L. No. 104-290, 110 Stat. 3416, 3428, Section 204.
99 Id.
100 The commenter stated that the only costs that the IRFA discussed for small entities were those of actual production and review of advertising. However, the IRFA also refers to other one-time switchover costs that would result from the rule and recognizes that these costs may have a relatively greater effect on small entities. The IRFA states that among these costs are those of making available updated monthly performance data by a toll-free telephone number. Proposing Release, supra note 7, 67 FR at 36731.
101 One commenter estimated the cost of implementing an automatic voice response system for fund performance at $500,000. Another commenter cited this estimate and stated that it is for hardware and software requirements only and does not include personnel expenses. The commenter also stated that expenses for companies that do not presently have automated telephone systems would likely be several times higher than the estimate provided. Neither of these commenters specifically addressed the issue of costs incurred by small entities. Both were focusing on the costs of a system that insurance companies would use to provide information about funds underlying their variable insurance products.
102 17 CFR 270.0-10.
103 This estimate is based on figures compiled by the Commission staff regarding investment companies registered on Form N-1A, N-2, N-3, N-4, and N-6. In determining whether an insurance company separate account is a small entity for purposes of the Regulatory Flexibility Act, the assets of insurance company separate accounts are aggregated with the assets of their sponsoring insurance companies. 17 CFR 270.0-10(b). Currently, no insurance company separate account filing on Form N-3, Form N-4, or Form N-6 qualifies as a small entity.
104 We note, however, that to the extent that the amendments reduce the regulatory burden of advertising, small entities may be encouraged to increase their advertising activity.
105 These figures are based on the Commission staff's discussions with several fund complexes. With regard to internal costs, they represent the net of the amortized one-time switchover cost of .727 hours per fund per year and the decrease in burden associated with rule 482, for purposes of the Paperwork Reduction Act, of 1.96 hours per fund per year. With regard to external costs, the $805.67 figure represents one-time switchover costs amortized over three years.
The estimate provided here differs from that provided in the Initial Regulatory Flexibility Analysis in the Proposing Release because of a change in the number of small entities and the wage rate used. See supra note 76. Although the Commission modified the proposed amendments, these modifications did not affect our estimate of the burden on small entities.
106 The Commission has expanded the proposed compliance period from 90 days from the effective date to the end of the second full calendar quarter after adoption. This revision should lessen any burden for small entities, as well as other funds.
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