February 2, 1998
VIA ELECTRONIC TRANSMISSION AND FEDERAL EXPRESS
Mr. Jonathan Katz, Secretary
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-6009
RE: Delivery of Disclosure Documents to Households
File No. S7-27-97
Dear Mr. Katz:
Capital Research and Management Company ("CRMC") appreciates the opportunity to comment on the Commissions proposal regarding the delivery of disclosure documents to households ("household mailings"). [ Proposed Rule 154 under the Securities Act and amendments to Rules 14a-3 and 14c-3 under the Exchange Act and Rules 30d-1 and 30d-2 under the Investment Company Act. SEC Release Nos. 33-7475, 34-39321, IC-22884 (Nov. 13, 1997).] CRMC is the investment adviser to the twenty-eight mutual funds in The American Funds Group. With nearly ten million shareholder accounts currently in The American Funds Group we believe these new rules will have a great impact on the funds and ultimately shareholders. A review of our funds revealed that household mailings would yield mailing cost savings in the range of 5% to 21% depending on the fund, with aggregate fund savings of approximately $600,000 annually. [ This is a very conservative estimate that was determined using the street address on each account and another identifier that links accounts for sales load purposes. Consequently, many accounts that should qualify for household mailings under the rule ( e.g., accounts that share the same street address, but whose shareholders are not related) are not included.] This is a tremendous cost savings to the funds that would only magnify as the shareholder base grows. In addition, household mailings would alleviate a great deal of waste and would be responsive to the common shareholder complaint about receiving multiple prospectuses and shareholder reports. For these reasons CRMC supports the Commissions efforts in this area. We believe, however, that certain changes to the rules are necessary in order for household mailings to be feasible and benefit as many shareholders as possible. Our specific comments are discussed below.
I. Proposed Rule 154 - Household Mailing of Prospectuses
Under Proposed Rule 154, a prospectus would be deemed delivered "to all investors at a shared address if the person relying on the rule delivers the prospectus to a natural person who shares that address and the other investors consent to delivery of a single prospectus." [ Proposed Rule 154(a).]
A. Natural Person
Proposed Rule 154 provides that a single prospectus could be delivered to more than one investor if it is addressed to a natural person. The rule would not allow a prospectus to be addressed to a group of people (e.g., "The Smith Household") because of the concern that general addressing will reduce the likelihood that someone will open and read the prospectus (thinking that the prospectus is "junk mail").
First, the concern that the prospectus will be treated as "junk mail" can be easily remedied by putting a notice on the outside of the envelope such as "Prospectus Enclosed." This will alert shareholders that important material is enclosed and reduce the likelihood that the prospectus will be discarded as "junk mail." In addition, addressing the prospectus to a group of people actually increases the number of persons eligible to open the prospectus and correspondingly increases the likelihood that the prospectus will be read.
Second, it would be much more difficult to address the prospectus to a natural person because it would take a great deal more time to identify a single person. For example, at least two steps would be required -- a first sort to establish which accounts are eligible for household mailing and then a second sort to identify the natural person. It is much easier to address the prospectus to a group of people which would require only one sort to identify the "group." The prospectus could then be addressed to the group for instance, as "To the Shareholders of XYZ Fund." We do not believe shareholders should be required to identify the person a prospectus would be delivered to as that would also create a burden in having to wait for shareholders to communicate this information and would undoubtedly cause us to have to repeatedly solicit this information from shareholders.
Third, requiring that a prospectus be addressed to a natural person would also create additional problems should the person change addresses. It is not unlikely that a person would change his/her address and not notify the fund of the change. In such a case other investors may not receive the prospectus if the persons mail is automatically forwarded to the new address, or the prospectus may not be opened since it is addressed solely to one particular person. On the other hand, by addressing the prospectus to a group of people, even if one person changes his/her address, the prospectus will still be delivered to the other investors. [ The inability to deliver a prospectus to a shareholder who moved and failed to notify the fund of his/her new address should not impair a fundís ability to mail to a household.]
Therefore, because the concerns regarding general addressing can be easily remedied and addressing to a natural person is overly burdensome, we recommend that funds be permitted to address prospectuses to a group of people.
The proposed rule would allow a prospectus to be sent to an address other than the one shared by investors. We believe flexibility should be given to allow a fund to deliver a prospectus to such an alternative address, however we do not believe providing this option should be required. It would be operationally difficult to monitor and maintain one address for household mailings and another address for all other purposes, such as confirmation statements and dividend notices. There may be a small benefit gained from allowing alternative addressing, but large problems may be created if it is required. Therefore, we recommend that the option to deliver prospectuses to an address other than the shared address not be required.
C. Notice and Consent
1. Delivery without consent - existing accounts
Proposed Rule 154 would allow household mailings to accounts in existence before the effective date of the rule if notice of the intent to rely on the rule is given to shareholders 60 days before initial reliance. In general, we believe that a notice requirement, as opposed to affirmative written consent, is appropriate for existing accounts and a great deal more practicable. We also believe that 60 days notice is an appropriate time period. However, requiring that investors have the same last name or be members of the same family and that the prospectus can be delivered only to a street address reasonably believed to be a residence would severely limit the number of shareholders that could benefit from the rule and would be operationally impracticable to implement.
a. Same last name or members of the same family
We believe the limitation that household mailings with existing accounts be available only for investors with the same last name or who are reasonably believed to be part of the same family should be eliminated. Many people that are members of the same family do not share the same last name. For example, many women today do not take their husbands name and it is not uncommon for children to have different last names from their parents. Due to the cost and time involved in investigating those persons with the same address but different last names, it is likely that a large number of families will be left out. It is also likely that a large percentage of investors that share the same address, but for other non-relevant reasons are not married or related will be excluded. Therefore, because of the cost-prohibitive and exclusionary nature of this condition we believe that it should be eliminated. Moreover, we believe such a condition frustrates, rather than furthers the Commissions goal of reducing fund mailing costs in this regard.
In order take full advantage of the rule we propose that eligible accounts be identified using the street address and eleven digit zip code on the accounts. This would allow people sharing the same address, but who are not related to benefit from household mailings. In addition, by not addressing the envelope to a specific individual, any person in the household could legally open the envelope.
b. Delivery to a street address
The condition that a prospectus may be delivered only to a street address believed to be a residence should also be eliminated. We believe it would be difficult to accurately determine whether an address is a residence or a place of business even with the help of the eleven digit zip code. It would probably require some manual examination of addresses making this requirement overly burdensome. Moreover, this condition would prohibit existing accounts with a post office box as the address from being eligible for household mailings.
Existing accounts should not be treated any differently from new accounts which under the proposed rule could have a prospectus delivered to any address, even, as proposed an address that is not the address of record. We do not believe that making a distinction between the type of address a prospectus is delivered to alleviates the possible concern that investors are more likely to see the prospectus if it is sent to a residence as opposed to a business address. If the accounts identified for household mailings share the same address each investor is also receiving other important documents, such as account statements at that address. Therefore, the likelihood is that each investor will have just as much access to the prospectus as they do to other material sent to them. This condition creates a burden on the funds in trying to identify which addresses are residences and also has the affect of eliminating a number of accounts in which household mailings would be appropriate. Consequently, this condition should be eliminated.
2. Delivery with consent - new accounts
For new accounts that are established after the effective date of this rule, Proposed Rule 154 would require a person relying on the rule to obtain written consent from each investor before commencing with household mailings. The Proposing Release suggests that this can be accomplished through an account application. [ See Proposing Release at 12-13.] This option would work well for those funds that market directly to the public and thus, establish most of their accounts using an application. However, there are many fund complexes, including our own, that distribute their funds through broker-dealers and as a result, the bulk of fund accounts are not established using an application. In fact, fewer than 20% of all new American Fund accounts are established using an account application. Consequently, in order capture the majority of new accounts we would need to send out and receive back a separate consent form from each investor. Not only would this be overly burdensome and costly to the funds, it has been our experience that shareholder responsiveness to solicitations for information or consent is extremely low. [ For example, we recently offered fund shareholders the option to establish a service that would allow them to have redemption proceeds wired directly to their bank account, rather than receive a redemption check. In order to have the service added to their accounts shareholders merely needed to return an acknowledgment form to the transfer agent. Despite the fact that this is clearly a useful and beneficial service we estimate that we received only about 15% of all forms back.]
As an alternative, we propose that new shareholders be treated the same as existing shareholders. Accordingly, rather than requiring affirmative written consent from each new shareholder, notice would be given to the new investor at the time their account is established that their account may be subject to household mailings and that they have the option to receive a separate prospectus if they wish. This notice could accompany the confirmation statement or could be included on the account statements or in a new investor package. We believe this approach would still ensure that investors are aware of the household mailing and provides shareholders with ample notice of their ability to opt out of this service if they wish.
3. Limited or general consent
The Proposing Release also contemplates that investors may give either limited or general consent to household mailings. General consent would allow investors to consent to household mailings for all funds in the fund family, including funds they do not currently invest in or that may be created in the future. We believe investors ability to give general consent to all household mailings is appropriate and will alleviate the burden of monitoring and re-communicating with shareholders about this issue in the future. In the same respect, we strongly believe that investors should not be given the option to provide limited consent. Limited consent would allow investors to consent to have household mailing for some funds, but not others. It would be incredibly difficult to monitor and implement systematically on an individual basis which funds shareholders have designated to receive household mailings and which they have not. Therefore, we propose that investors only be given the option of having all of their accounts subject to household mailing or none at all.
II. Shareholder Reports
We support the Commissions intention to also allow household mailing of shareholder reports. CRMC currently does household mailings of semi-annual reports pursuant to no-action relief previously granted by the SEC staff. [ See Oppenheimer Management Corp. (June 20, 1994); Scudder Group of Funds (June 19, 1990).] Like household mailings of prospectuses, however, we believe the same changes discussed above should be applied to household mailings of shareholder reports. This would allow for mailings that combine prospectuses and annual reports, further reducing fund mailing costs.
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CRMC appreciates the opportunity to comment on Proposed Rule 154 and the related amendments to the other rules. Please feel free to contact the undersigned at (213) 486-9652 if you have any questions.
Kristine M. Nishiyama