-------------------- BEGINNING OF PAGE #1 ------------------- REMARKS OF COMMISSIONER STEVEN M.H. WALLMAN Before the Investment Company Institute's 1995 Investment Company Directors Conference & New Directors Workshop Stouffer Renaissance Mayflower Hotel Washington, D.C. September 22, 1995 The views expressed herein are those of Commissioner Wallman and do not necessarily represent those of the Commission, other Commissioners or the staff. Introduction I am pleased to be here today to give the closing remarks to the ICI's Investment Company Directors Conference. Although I will be speaking about a number of topics, I would also like to use this opportunity to engage, to the extent possible, in a dialogue with you. Before I begin, however, I am required to say that the views I am about to express are my own and do not necessarily represent those of the Commission or its staff. I would like to take this opportunity to speak about several important issues confronting the mutual fund industry. First, I would like to talk briefly about the duties of boards of directors, particularly in connection with valuing portfolio securities and monitoring advisory fees, and how we can assist your efforts as directors. Second, I would like to discuss asset allocation issues and a joint SEC-Department of Labor undertaking that will facilitate provision of information to defined contribution plan participants. Then, I will briefly discuss some ideas on how the fund industry might better disclose risk. Finally, I would like to tell you briefly about an important initiative the Commission will be taking during the next few weeks with regard to electronic delivery of information to investors. I. Role of Investment Company Directors You play an essential role in a remarkable industry in which investors have placed a tremendous amount of trust. At present, Americans have invested nearly $3 trillion in 5,600 investment companies -- an amount nearly half a trillion dollars more than is on deposit with banks. Mutual fund directors are largely responsible for the success and prosperity of investment companies. Directors play a central role in the management -- and regulation -- of the fund industry. Over the last 55 years, directors have commendably fulfilled their responsibilities and have earned the confidence of the SEC. As my colleague Chairman Arthur Levitt said before this conference last year, the relationship between the SEC and fund directors is a partnership in the public interest. This partnership has been a remarkable success. The mutual fund business has been remarkably free from significant problems or scandals. Thanks in no small part to the role of directors, the SEC has been able to accomplish its mission with very little cost to the public. Though Americans now have invested more -------------------- BEGINNING OF PAGE #2 ------------------- money in investment companies than they have deposited with banks, the regulatory burdens on these two industries are quite dissimilar. By some counts, there are over 14,000 banking regulators, while there are only about 500 SEC personnel working in the mutual fund area. In no insignificant part, it is largely due to YOUR efforts and the efforts of others in the fund industry -- including the ICI -- to work cooperatively with us to develop practical solutions to difficult problems faced by investors. I would particularly like to recognize the efforts of the ICI in this regard. Your input and comment on issues before the Commission has always been helpful and very constructive. II. Duties of Fund Directors Now, I would like to share with you a few observations on the role of directors. A. Valuation Recently, there has been considerable discussion about the valuation of illiquid securities. In particular, last year's problems with money market funds and adjustable rate notes have received a lot of attention in the press. The Commission and its staff are paying increasing attention to this area, and the staff has begun examinations of funds that have improperly valued portfolio securities. This is, I believe, one area in which directors should be on the lookout for problems.-[1]- Directors should examine their valuation procedures for illiquid securities to assure that they are prudent and that they are in fact being carried out properly. You should be particularly aware that longer term investments -- particularly those with interest reset provisions -- may have unexpected price fluctuations. Directors should ask questions such as, given various market assumptions, can a particular position be liquidated at a price approximating that on the investment company's books? Is there a third party performing the valuation? Is the third party affiliated with the adviser or portfolio manager? --------- FOOTNOTES --------- -[1]-Mutual funds generally must calculate the current net asset value of their shares every day to set the per share prices for purchases and redemptions. 17 C.F.R. 270.22c-1(b) (1994). Usually, fund assets are valued at their market value as determined with reference to market quotes. If market quotes for a particular asset is unavailable, the asset's fair value must be determined according to written procedures approved by the board of directors or by the board itself. 15 U.S.C. 80a-2(a)(41)(B) (1988); 17 C.F.R. 270.2a-4(a)(1) (1994); Restricted Securities, Investment Company Act Release No. 5,847, [1937-1982 Accounting Series Releases Transfer Binder] Fed. Sec. L. Rep. (CCH) 72,135, at 62,283 (Oct. 21, 1969). If the valuation is improperly done, fund sponsors may be required to reimburse shareholders who suffer a material economic loss due to errors. Moreover, those parties involved with the improper valuation -- including directors -- might be in violation of the securities laws. Mispricing of securities may result in pricing violations, reporting violations, antifraud violations, and performance advertising violations. -------------------- BEGINNING OF PAGE #3 ------------------- The bottom line is that directors have a duty to inquire as to whether illiquid securities are valued appropriately. If you suspect problems, you might want to review your valuation procedures, or possibly even hire an independent consultant to examine the procedures. B. Advisory Fees Another issue that seems to be raised periodically is that of director's responsibilities vis-a-vis the amount of advisory fees. Directors are required by statute to evaluate and approve advisory contracts. As part of that duty, directors should consider the amount of the fee paid to the adviser. This summer, an article in Forbes magazine raised this issue again,-[2]- and I have personally received complaints from fund shareholders about this problem. One recurring question is why advisory fees seem to remain a flat percentage even though the amount of assets under management increases by orders of magnitude. I will not get into the reasons why that should or should not be the case, as the arguments on both sides of the debate are well known to you. The industry would do well if directors ask the right questions to ensure that the level of fees is in fact justified and WELL-EXPLAINED to the public. I know that I may sound somewhat preaching speaking about these matters, but Commissioners are supposed to say these things at conferences. I would like to reiterate before going on that, while there may be problems in the fund industry, these problems are very minor. Overall, as I previously noted, fund directors have done an outstanding job. C. What Can the SEC Do Better? Now, I would like to ask you what you think the Commission can do better. As you know, investment company directors are required by statute and regulation to deliberate upon many fundamental aspects of fund operations. Virtually no other industry places upon its directors such detailed responsibilities. I believe it is important that directors have flexibility so that they are able to do what they do best -- namely, OVERSEE fund operations and deliberate upon fundamental matters. Regulation should provide direction, but not such that directors are overwhelmed with detailed findings or are required to micromanage funds' day-to-day operations. Recognizing that directors work best when afforded some latitude, the Commission has recently taken steps to reduce unwarranted burdens it had previously imposed. During the last few years, the Commission amended six rules that required directors to make complex annual determinations with respect to routine operational activities.-[3]- The amendments generally --------- FOOTNOTES --------- -[2]-James W. Michaels, Watchdogs Who Rarely Bark, FORBES (May 22, 1995). -[3]-The rules required boards to make findings in connection with investments in issuers engaged in brokerage activities, certain principal transactions with affiliates during an underwriting, certain principal transactions with affiliates in (continued...) -------------------- BEGINNING OF PAGE #4 ------------------- reflect a common sense determination that operational matters that do not present a conflict between the interests of advisers and investors should be handled by the adviser, not boards of directors. Similarly, several months ago the Commission proposed revisions to its foreign custody rule-[4]- that will substantially relieve burdens currently placed on mutual fund directors with respect to foreign custodial determinations. Currently, directors are required to make technical findings concerning foreign custody arrangements. The proposed rule would permit boards to delegate responsibilities to others who are better situated to make foreign custody determinations. I am very interested in your thoughts on whether the Commission has done enough to alleviate unnecessary burdens. Should any other rules be revised? Are there any new issues in the industry that the Commission should be considering? III. Helping Plan Participants Make Informed Choices in Defined Contribution Plans Over the last 50 years, as you know, a new form of retirement plan has become widely available. In increasing numbers, employers are offering "defined contribution plans." Since 1988, the amount of assets in private-sector defined contribution plans have nearly doubled, and by some estimates currently amount to $1.2 trillion. If trends continue, defined contribution plans soon will be the most common type of ERISA plan. Plan participants have a real need to receive information concerning their investment choices and perhaps more importantly, they have a real need to understand how to ALLOCATE AMONG investment vehicles. Simply put, they need to be informed about how to obtain adequate benefits with which to retire. News reports of a recent survey released by Towers Perrin underscore this concern. This survey of 1,000 workers indicated generally that most individuals are not getting the information they need to maximize their investment returns, and that few know even the basics of investing. More specifically, while 75% of those participating in employer-sponsored plans said that they are "very comfortable" or "somewhat comfortable" making investment decisions, 39% do not know how their 401(k) or savings plan dollars are allocated among asset classes.-[5]- Similarly, a recent Gallup survey of employees indicated that nearly two- thirds were unfamiliar or only vaguely familiar with basic financial concepts such as investment risk, compounding, and --------- FOOTNOTES --------- -[3]-(...continued) securities, certain joint enterprises with affiliates in connection with the distribution of a fund's shares, approval of domestic securities depositories, and the appropriate time of day for determining net asset value. -[4]-17 C.F.R. 270.17f-5. -[5]-New Survey Shows Working Americans Need More Knowledge to Prepare Effectively for Retirement, Business Wire, Inc., April 18, 1995. -------------------- BEGINNING OF PAGE #5 ------------------- asset allocation.-[6]- Another study undertaken by the Employee Benefit Research Institute found that nearly one in three workers whose employers offer a defined contribution plan was unaware of whether the employer offered a matching contribution to the plan.-[7]- This lack of knowledge has real consequences. A recent survey of profit sharing and 401(k) plans-[8]- suggests that employees invest about 30 percent of their retirement savings in GICs or money market funds, and in companies with less than 5,000 workers, employees invest roughly 40 percent of their retirement funds in GICs or money market funds. While such investments are generally fairly safe in the short term, they have historically had low rates of return and may not keep pace with inflation. By placing retirement savings in investments with low rates of return, many employees and their families may not have sufficient income to retire. The human costs lie not only with that employee and his or her family. To the extent an employee's investments do not provide a sufficient retirement income, he or she may seek supplemental income from public resources -- placing a burden on the public welfare, social security, and medical care systems. Given the apparent need for better investor education, I encourage plan sponsors to provide employee investment education programs with information on topics such as risk/reward trade- offs, the importance of saving while young, investment strategies appropriate for different age or family statuses, and the effect of inflation on future returns. Several reasons have been offered as to why plan sponsors and others do not provide employees with meaningful investment information. Some defined contribution plan sponsors and service providers have intimated that they fear, among other things, being deemed an "investment adviser" under the Investment Advisers Act of 1940 and becoming subject to the full panoply of investment adviser regulation. Similarly, to the extent employers and service providers give investment information or advice, they may be subject to liability as fiduciaries under the Employment Retirement Income Security Act of 1974. These two statutes, while very well intentioned, may have had this unintended consequence of discouraging the provision of investment education and advice to defined benefit plan participants. Others have stated, perhaps more cynically, that employers, advisers, and others have little or no incentive to provide meaningful investment information to begin with. To the extent our legal system discourages them from providing information, it would ensure that they won't provide such information at all. --------- FOOTNOTES --------- -[6]-Research Roundup: Trends and Issues in 401k Plans, 26 COMPENSATION AND BENEFITS REVIEW 62 (March 1994). -[7]-Employee Benefit Research Institute, Can We Save Enough to Retire? Participant Education in Defined Contribution Plans at 6 (April 1995). -[8]-The Profit Sharing Counsel of America, 38th Annual Survey of Profit Sharing and 401(k) Plans (1995). -------------------- BEGINNING OF PAGE #6 ------------------- This is not the right or necessary result. Several months ago, I expressed my interest in doing what I could to help change this situation. We have been coordinating our efforts with the Departments of Labor and the Treasury, who have been working hard on these issues for a long time. At the moment it is my hope that the SEC and the Department of Labor will be able to issue an important release in this area. My hope and expectation is that the release will allow employers and investment advisers to provide meaningful investment information and advice to tens of millions of Americans. If we can, the release will be a JOINT RELEASE -- one that will provide attorneys and laypersons with a single, uncontradictary source of information on protected activities. This release would set forth circumstances under which persons will not be deemed investment advisers under the Advisers Act, will clarify the circumstances under which investment advice is provided under ERISA, and will state when ERISA's 404(c) defense is available. The release should set forth broad, specific factual examples -- essentially, safe harbors -- under which employers, service providers, or others could provide meaningful investment information without concerns about unintended liability. Other areas may also be covered, if possible, that may affect more difficult issues such as transactions that raise conflicts of interest called prohibited transactions. In all, I believe that if we are able to provide a good release that encourages better investor education, we will significantly benefit Americans planning for retirement. This is particularly important given the doubts that many Americans have with respect to the future of Social Security and Medicare. IV. Risk Assessment and Asset Allocation Now I would like to turn to a related topic, how funds should assess risk and convey risk information to investors. I believe that investors generally may benefit from better information about risk and the relationship between risk and return over the life of an investment. Take the example of retirement planning, which we have just discussed. Many -- including several former SEC Commissioners - - have expressed concern that investors may not be appropriately investing for retirement. They maintain, in particular, that investors with longer-term investment horizons should consider allocating a greater portion of their investments to funds that may have greater short-term volatility, but greater long-term expected returns. Citing the recent influx of retirement funds into stocks, some have remarked that this problem appears to be dissipating - - that the problem of investor misapprehension of increased volatility is over. I do not believe that necessarily is true. During the last 15 years, stocks have undergone a remarkable appreciation. In such an extended bull market, one could reasonably anticipate that investors might increasingly invest in equity. To the extent investors misunderstand the risk-return relationship, if the market takes a downward turn, investors whose expectations are shaken might begin to shy away, over the long-term, from the equity markets. -------------------- BEGINNING OF PAGE #7 ------------------- I believe that the SEC and the fund industry should take appropriate actions to better educate investors about the relationship between risk and return. To the extent we do, we will better serve investors, create greater confidence in the fund industry, and contribute to more efficient capital markets. The bottom line is that better risk disclosure is not only in the interests of investors -- who would be significantly benefitted by better disclosure in this area -- but it clearly ALSO IS IN THE INTERESTS OF THE INDUSTRY. Better risk and return disclosure is in the industry's interests not only for these reasons I just talked about, but also because many who are not now invested in mutual funds would be more likely to enter the market or make larger investments if they better understood the risks. Many potential investors have a "casino mentality" about the market. They believe that there is MORE risk in the market than there actually is. To the extent that risk disclosure alleviates their concerns, that could have good implications for both them and the industry. A. How to Disclose Risk I think most would agree that mutual funds generally do a good job at disclosing past return information. Funds disclose that information and investors demand it even though past returns are, by many accounts, completely uncorrelated with future returns. Similarly, most people might generally agree that funds also do a fair job disclosing information about the fees and costs associated with purchasing a fund. Most people, however, probably would not agree that funds do a very good job about disclosing risks. Presently, risk disclosure is generic and lacking in detail. For instance, in the descriptions of portfolio securities in a fund's prospectus one might fund a statement that the securities are "subject to interest rate risk" -- without any further disclosures defining the magnitude of exposure. We do not now adequately disclose risks even though some measurements of risk, like standard deviation, have high temporal correlations. In fact, past risk information can be quite robust in terms of its ability to help forecast future risk -- particularly in the case of beta or standard deviation. HOW can we identify risks and better disclose risk and return information? First, we have to identify what we mean by "risk." To different investors, "risk" may mean different things. To one investor, "risk" might mean the risk of loss of principal. For instance, an investor with limited funds who is sending a son or daughter to college in a year may be most concerned with not losing money at all. That investor might prefer money market or short-term government bond funds. To another investor, "risk" might mean the risk of loss of purchasing power. Take the example of an investor saving for retirement. That investor might be less concerned with short term volatility, and more concerned that inflation could erode the value of amounts he or she has invested. -------------------- BEGINNING OF PAGE #8 ------------------- To most academics and market professionals, "risk" is some form of volatility. In addition, there are other risks. Some of these are market risk, credit risk, interest rate risk, systemic risk, currency risk, political risk, and legal risk. Funds also have discrete or intangible risks, such as risks associated with a change in personnel, risks attendant to unanticipated redemptions, and risks associated with changes in investment objectives -- to name but a few. Last March, the Commission issued a release asking for views on how to improve descriptions of risk provided to investors by mutual funds. The Commission made special efforts to obtain comment not only from funds, financial institutions and industry groups -- but also from INDIVIDUAL INVESTORS themselves. The concept release included a brief questionnaire designed to elicit ideas from investors about what they find useful or wanting in fund disclosure. To-date, we have received about 4,000 responses from individuals and a significant number of thoughtful comments from fund groups, financial institutions, rating organizations, and industry groups. The comments provided by the ICI were particularly helpful. Right now, the staff of the Division of Investment Management is reading every comment submitted with a view toward our possible risk disclosure initiatives. While it is premature to draw any conclusions at this time, I think it is fair to say that investors appear to want better, more concise summaries of the risks of investment in funds, and they appear to want summaries of risks in a graphic, tabular, or numerical format. While I have not yet concluded what the Commission's appropriate response should be, I do believe that many investors do not have a very good understanding of the risks of investment in funds with different investment objectives and do not fully appreciate the relationship between risk and return. We need to do a better job informing investors that investments with less risk typically offer lower returns, and investments with higher returns frequently have more risk. Some advocate graphic disclosure of risk information in the form of bar graphs indicating a fund's total annual returns over a ten-year period. Advocates contend that these bar graphs implicitly convey risk information -- that investors can see from the graphs that returns fluctuate over time and may be expected to do so in the future. Others say that the bar graphs essentially convey only total return information. They maintain that there is little or no evidence that total return information predicts future returns. Returns, they argue, proceed in a random walk. If true, the bar graph may actually foster false expectations with respect to future returns and performance. I suspect that both points of view are correct in some respects, but that the answer lies somewhere between. The bar graphs do clearly convey SOME information about a fund's past risk or volatility. Ten-year bar graphs, however, seem not to illustrate risk perfectly. Under certain circumstances, the bar graphs could actually confuse investors. Our Office of Economic Analysis prepared two illustrations of circumstances under which a ten- -------------------- BEGINNING OF PAGE #9 ------------------- year bar graph may be illusory with respect to an investment's risk. I have had these reproduced and would now like to show them to you. Exhibit 1 shows two very different return patterns. Most investors would be unable to identify which of the two has the higher historical volatility. I suspect that many investors would conclude that the bottom fund is more volatile than the top. In fact, the opposite is true. Exhibit 2 demonstrates an illusion created by the same or similar bar graphs with different scales. While both the top and bottom funds may appear at first glance to have identical volatility, the volatility of the top fund is actually only half that of the fund shown on the bottom. This is so because the scale of returns of the bottom fund is twice that of the top. As these graphs illustrate, it is almost impossible to compare among funds. Can you imagine a couple sitting at a kitchen table with a dozen or so such graphs trying to determine how to distinguish among them in a truly useful way? Consequently, while I believe bar graphs might represent an improvement to current disclosure, I don't know if they represent the best answer to the question on how funds should exhibit risk. The industry and the Commission must, I believe, take initiatives to disclose risk better. I would like to discuss briefly three general methods that could be pursued. 1. Statistical Risk Measures First, many are asking the Commission to require that all funds disclose risk through a specific risk measure or yardstick. There is some controversy with respect to this approach, and I am somewhat reluctant to mandate specific disclosures. Different statistics -- for example, beta, semi-variance, Treynor's Ratio, or Sharpe's Ratio -- measure risk quite differently. Of all these, perhaps none is more widely utilized than standard deviation (which, in fact, is commonly used to determine many of the other measures). 2. Disclosure of Risk Ranking by NRSROs A second general approach would be for the Commission to require that mutual funds obtain and disclose risk rankings provided by nationally recognized statistical rating organizations. This is an interesting approach to explore. As I understand it, NRSROs generally evaluate risk with reference to a number of underlying variables -- some objective and some subjective. In formulating rankings, NRSROs examine, among other things, statistical measures of historical fund performance, the performance of the investment adviser, the composition of the portfolio, volatility of redemption patters, stated policies and objectives, and management controls. Many argue, however, that there are limitations to this approach. These limitations are similar to those of mandating single risk disclosures: The press and investors, not understanding fully what the rankings mean, may give them undue importance in their investment decision; investors might not have an adequate understanding of what the ratings really indicate without lengthy additional disclosure -- which investors most likely would not read. -------------------- BEGINNING OF PAGE #10 ------------------- Finally, some have called into question the reliability of these ratings. Recently, rating organizations did not indicate that money market funds were about to have difficulties during 1994, and they did not help anticipate the problems that occurred with respect to Orange County debt until those problems were made public. 3. Required Quantified and Graphical Presentation with Flexibility Left to Industry Participants A third approach that the Commission could take would be to require funds to provide a concise presentation of risk in a quantifiable or graphical form, but provide funds with some flexibility with respect to the type of information provided and the form of presentation. If investors generally want better, more concise risk information presented in easy-to-understand numerical or graphical presentations, then maybe the Commission should generally require just that, but leave the particulars to be resolved by market participants. This method has the advantage of providing investors with better risk information, yet providing the industry with the flexibility to develop its own -- perhaps better -- solutions to the risk disclosure question. To the extent that we can harness the power of market participants to provide the correct answer to this problem, maybe we should. For example, if a particular way to disclose risk is superior to any other, then investors presumably would to some extent demand that information in the funds' prospectuses. All other things being equal, to the extent one fund or fund group discloses useful information in its prospectus but another does not, investors should be expected to prefer the fund that provides the more useful information. Perhaps if the Commission nudges funds in the direction of more concise, focused risk disclosure, the market will decide on the appropriate risk assessment methodology. In any event, at this stage, this approach seems very interesting and one to which we should give more thought. B. Standard Deviation Before leaving this topic, I would like to take a few moments to discuss standard deviation. Standard deviation has an advantage over many other statistical risk measures in that it allows comparisons to be drawn between classes of funds -- gold funds can be contrasted with stock funds, bond funds with money market funds, municipal bond funds with emerging market funds. Studies have shown that the standard deviation of mutual fund returns over past periods are strongly correlated with those of later periods. No such claim can be made with respect to return information. This is an important point. We know that past variability appears to be significantly related to future variability. Past returns, however, do NOT appear correlated with future returns. YET WE REQUIRE DISCLOSURE OF RETURNS. If we believe that past return information is material and should be disclosed, wouldn't it follow that variability should also? Let me briefly touch upon some of the arguments raised against statistical risk measures such as standard deviation. * Standard deviation is inherently confusing to the average investor. If the SEC adopts it as an official risk measure, -------------------- BEGINNING OF PAGE #11 ------------------- the financial press will unduly focus on it, and a flood of investment into funds with lower standard deviations will ensue. As a consequence, investors would have placed funds in investments with lower rates of return than they need to accomplish their investment objectives, such as retirement. I do not believe that these results necessarily follow. In fact, many investors do not underestimate, but OVERESTIMATE the risks associated with certain investments. If investors were provided with an estimation of expected variability of returns, it might result in MORE money being invested in some of the more variable classes of funds. Also, I suspect that investors may be more sophisticated than some might presume. Most investors take many different criteria into account when deciding whether to invest in -- or divest from -- a fund including the fund's sales loads, anticipated returns, the investment adviser, the fund complex, the investment objective, and the composition of the portfolio. If we provide investors with an additional tool that enables them to evaluate risk on a more thoughtful basis, I'm not sure that necessarily would lead to a bad result. Finally, if we described standard deviation as a measure of "VOLATILITY" rather than "RISK," I believe many of these problems would be alleviated. In conjunction with this, it would be important to describe the tradeoff between risk and return -- if investors want greater returns, they will have to take on greater risks; if investors want less risk, they will have to be satisfied with lower returns. * Standard deviation is too difficult for investors to comprehend. While it is a difficult concept for the layman, I suspect that many investors are quite capable of appreciating the fact that standard deviation is a measure of a funds' historical variability and provides an idea of what variability should be expected in the future. Even assuming that investors do not perfectly understand what standard deviation measures, it would still provide information that would facilitate ranking and comparison among funds. As a recent article in the New York Times noted, investors would not necessarily have to perfectly comprehend standard deviation to find it useful -- the fact that Americans don't have a comprehensive understanding of what a calorie is doesn't stop them from counting calories.-[9]- * A low standard deviation might mislead investors into believing that one investment is a good investment when in fact that is not the case. For instance, a fund may have a standard deviation of zero, but have had a steady history of losses of 5 percent each year. Again, however, if we call standard deviation a measure of "volatility" instead of "risk," this problem dissipates. In any event, this appears not to be an argument against disclosure of volatility, but an argument that we need to do a better job of educating investors about what to look for when investing and how to evaluate risk and return. --------- FOOTNOTES --------- -[9]-Edward Wyatt, The People Speak: Fund Risk is Unclear, N.Y. Times at C5, Aug. 20, 1995. -------------------- BEGINNING OF PAGE #12 ------------------- I want to make it clear that I have not made up my mind on this issue. We have a long way to go before the Commission will consider whether rule amendments are appropriate, and I firmly believe it is in everyone's interest that we further deliberate upon these issues. Both investors and the industry stand to benefit from better risk disclosure. I look forward to working with you toward an appropriate solution. V. Electronic Delivery of Information Finally, I would like to conclude by telling you about another important policy initiative that has been very important to me. I believe that everyone -- you, fund complexes, operating companies, and investors alike -- should be very pleased with the results. In a couple weeks, the Commission will issue an interpretive release that would permit the use of electronic media wherever paper is now used. The release is designed to be flexible, not rigid, and set forth principles that will be relevant to electronic communication well into the 21st Century. The underlying premise will be that electronic media is as acceptable as paper to the extent it fulfills the same function as paper. The release will eliminate many of the conditions to the use of electronic media previously imposed in a letter issued by the staff to Brown & Wood, and would make available to issuers and investors a greater choice of electronic media -- including CD ROM technology, audio tape, video tape, fax-modem technology, on-line services, and Internet resources such as the World Wide Web. The release also will allow many more types of investor communications (such as annual reports and proxies) to be made electronically. Through this release, the Commission will be acknowledging that we are in the midst of a technological revolution. One day, paper delivery may well become the investor communication vehicle of last resort -- as opposed to first resort. In the not too distant future, investors will be able to obtain a myriad of investment information -- prospectuses, annual reports, periodic reports -- through their computer. Even today, many public companies, broker-dealers, and fund groups have established World Wide Web sites and are examining the possibility of distributing prospectuses and periodic reports through those sites. Perhaps more importantly, electronic delivery of information is not just an alternative medium for communicating, it allows for a different way of communicating. With electronic delivery, it is far easier to engage in high level analytic, real time comparisons, full text searches, industry reviews, trend spotting, etc. It also will provide the visually-impaired access to fundamental investor information mandated by the government. Simply put, electronic delivery is better than paper. And it is something we should be encouraging, not discouraging. IV. Conclusion I realize that I have commented on a number of subjects in a short period of time and I thank you for your attention. I would be happy to take questions on any of these matters as well as any other issues of concern to you. # # #