July 31, 2002

Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549
Attn: Jonathan G. Katz, Secretary

Re: File S7-17-02

Ladies and Gentlemen:

We submit this letter in response to a request for comment by the Securities and Exchange Commission (the "Commission") on proposed rule and form amendments under the Securities Act of 1933 (the "Securities Act") and the Investment Company Act of 1940 concerning investment company advertising rules and related matters (the "Proposal").1 The Proposal would allow registered investment companies ("RICs") and business development companies to disclose more timely information in advertisements and reinforce the antifraud protection that applies to investment company advertisements. The Proposal would implement a provision of the National Securities Markets Improvement Act of 1996 by permitting the use of a prospectus that includes information the substance of which is not included in the RIC's statutory prospectus.

These comments have been prepared by members of the Subcommittee on Investment Companies and Investment Advisers, Section of Business Law of the American Bar Association (the "Subcommittee"). A draft of this letter was circulated for comment among members of the Subcommittee and the Chairs and Vice-Chairs of the other subcommittees and task forces of the Committee on Federal Regulation of Securities (the "Committee"), the officers of the Committee, the members of the Committee's Advisory Committee and the officers of the Section. This letter generally represents the views of those who have reviewed it but does not necessarily represent the official position of the American Bar Association, the Section or the Committee. References to the Subcommittee include other members of the Committee who have commented on the Subcommittee's draft.

General comments

As a threshold matter, the Subcommittee strongly supports the Proposal and believes that the Commission should be commended for its efforts to simplify the advertising rules applicable to RICs.

We view the Proposal as an important first step in what we hope will be the further streamlining and simplification of investment company advertising regulation. For example, we believe that future rulemaking proposals could simplify and combine redundant provisions of Rule 156 under the Securities Act of 1933 and Rule 34b-1 under the Investment Company Act of 1940. In addition, we suggest that the Commission encourage the National Association of Securities Dealers, Inc. to amend its Conduct Rules governing the filing and content of investment company advertising 2 to better harmonize with the Commission's advertising rules. For example, terms, such as "advertisement," "sales literature" and "correspondence," do not necessarily have the same ascribed meanings under each set of rules. The Subcommittee believes that addressing these broader issues would generally ease confusion, aid compliance and enhance the protection of shareholders.

Comment on the Proposed Note to Rule 482 and Rule 34b-1:

With regard to the Proposal specifically, we believe that any suggested changes that are technical or operational in nature, may be better addressed by industry participants. Accordingly, we have limited our comments to a single area that we believe will be most helpful to the Commission, that is, the proposed note to Rule 482 and Rule 34b-1 regarding the applicability of the antifraud provisions of the securities laws.

The Proposal would add an explanatory note to Rule 482 and 34b-1 indicating that compliance with each Rule "[d]oes not relieve the investment company, underwriter or dealer of the obligation to ensure that the sales literature is not false or misleading." While the Subcommittee agrees that it is appropriate to remind RICs, underwriters and dealers of their respective obligations concerning investment company sales material, the Subcommittee believes that the proposed explanatory note, as worded, could potentially expand that responsibility, which does not seem to be the Commission's intent.

RICs, underwriters and dealers have important responsibilities under the federal securities laws but they are not guarantors, as the use of the word "ensure" might imply. Indeed, RICs, underwriters and dealers have a reasonable care defense under Section 12 of the Securities Act. In addition, the proposed note could imply that RICs, underwriters and dealers are responsible for sales material that they did not prepare or use. The Subcommittee recommends that the Commission seek an alternative method to clarify its intent, short of codification of what may become a new standard of care. An alternative method, for example, could include Commission providing guidance in the adopting release.

The Subcommittee respectfully requests that the Commission revise its Proposal in accordance with the comments described above. We are prepared to meet and discuss these matters with the Commission and the staff and to respond to any questions.

Respectfully submitted,

Stanley Keller
Chair, Committee on Federal Regulation
Of Securities

Diane E. Ambler
Chair, Subcommittee on Investment
Companies and Investment Advisers

Jay G. Baris
Vice-Chair, Subcommittee on Investment
Companies and Investment Advisers

Drafting Committee:

Marco E. Adelfio
Jay G. Baris
Andrew J. Donohue
Barry Pershkow

cc: The Honorable Chairman Harvey L. Pitt
Commissioner Isaac C. Hunt, Jr.
Commissioner Cynthia A. Glassman
Paul F. Roye, Director, Division of Investment Management

1 Release No. IC-255575 (May 17, 2002) (the "Proposing Release").
2 See NASD Conduct Rules, Section 2210.