Ropes & Gray

July 31, 2002

Jonathan G. Katz
Securities and Exchange Commission
450 5th Street NW
Washington, DC 20549

Re: Proposed Amendments to Investment Company Advertising Rules
(File No. S7-17-02)

Dear Sir:

I am writing to oppose certain aspects of the Commission's proposed amendments relating to mutual fund advertising. Specifically, I suggest that the Commission reconsider its proposed repeal of Rule 134 and instead amend that Rule to permit mutual fund advertisements and sales literature to include standardized performance information.

Rule 134 currently does not permit inclusion of performance information. Given investors' keen interest in receiving performance information, the Commission some years ago adopted Rule 482 to permit the inclusion of standardized performance information in an "omitting prospectus." This created a certain awkwardness due to the "substance of" requirement. The Commission now proposes to fix that problem in a way that requires all mutual fund advertising and sales literature to be published under Rule 482.

The consequences of this approach is to subject to all mutual fund advertising and sales literature to the prospectus liability standards of Section 12 (a) (2) of the 1933 Act. The Commission's proposal fails to establish an adequate basis for this monumental shift of liability exposure.

Under Section 12 (a) (2), the sellers of securities, which in most instances would likely be the funds themselves, are subjected to liability. It is even possible that claims could be asserted against fund directors as alleged "controlling persons" under Section 15 (although existing legal principles would not, in my view, support such a conclusion). In the mutual fund context, however, responsibility for preparation and use of advertising and sales literature almost always rests with the fund's sponsor or principal underwriter. This is where the primary legal responsibility and liability should remain.

Making the fund itself liable for advertising and sales literature in effect transfers the liability to fund shareholders. While this result may make sense in the context of an industrial issuer, where the issuer's shareholders arguably benefited from a sale of a security at an inflated price as a result of inadequate disclosure, the logic breaks down in the mutual fund context where all purchases and sales occur at net asset value.

Rule 134, as currently formulated, already recognizes that sales of securities by mutual funds require special regulatory treatment. This is justified, in my view, by the fact that investors in mutual funds are not purchasing a passive stake in a business enterprise but in reality are purchasing a package of investment services: advice, custody and accounting. While Congress in its wisdom has decided to subject sales of mutual fund shares to the registration requirements the 1933 Act, it is also fitting that the Commission recognize the unique nature of these securities sales in formulating its regulations.

Allowing the continued use of Rule 134 for fund advertising and sales literature, and amending the Rule to permit inclusion of standardized performance disclosure, would do no violence to the current regulatory scheme and would ensure that those responsible for preparation and use of such materials remain primarily liable for their actions under the law.

The foregoing reflects my individual views and not the views of this firm or its clients.

Very truly yours,

John W. Gerstmayr