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John H. Lively
February 14, 2003 Jonathan G. Katz, Secretary
Subject: File No. S7-51-02 Dear Mr. Katz: This letter provides comments on the recently proposed rules (the "Proposed Rules") of the Securities and Exchange Commission ("SEC") regarding "Shareholder Reports and Quarterly Portfolio Disclosure of Registered Management Investment Companies." We at A I M Advisors Inc. ("AIM")1 appreciate this opportunity to comment on the Rules and hope that the comments provided in this letter will be useful to the SEC. AIM recognizes that in administering the rulemaking process, the SEC often encounters significant pressure from various interested parties attempting to influence that process. In rulemakings affecting the investment management industry, the parties attempting to influence the rulemaking process often include various service providers in that industry since these parties often are required to bear the costs and burdens associated with complying with any adopted rules. Where any SEC proposed rulemaking serves a legitimate and meaningful purpose, AIM believes that the investment management industry has generally accepted the SEC's rulemaking initiatives with the understanding that the requirements that would be imposed by the rule would benefit shareholders and/or the industry. Much unlike the SEC's recent rulemaking requiring funds to disclose their proxy procedures, policies and actual proxy voting, which, with respect to the disclosure of actual proxy voting, AIM believes serves no legitimate or meaningful purpose, AIM believes that the Proposed Rules may serve a legitimate and meaningful purpose to some interested investors. As a result, AIM generally supports the adoption of the Proposed Rules although we would like to make a few suggestions that could improve the quality of disclosure and ease compliance burdens. With this framework in mind, below are AIM's responses to the SEC's request for comments regarding the Proposed Rules 1. SEC Comment Request: Comment was requested on a proposal to permit funds to deliver a summary portfolio schedule in their reports to shareholders. AIM Response: AIM believes that the proposals to require funds to disclose their 50 largest holdings and each of a fund's holdings accounting for one percent (and greater) of net assets may be useful to a few funds in some fund complexes. Comment was specifically requested as to whether the rule should set a minimum number that a fund must hold in order to utilize the summary portfolio schedule and whether that number should be set at a level so as to ensure that the majority of funds continue to include their complete schedules of portfolio holdings. AIM feels that, as a practical matter, such a requirement would be unnecessary. Under the Proposed Rules, a fund will be required to file their complete portfolio schedules on Form N-CSR. As a result, we believe the only true benefit to a fund in providing a summary schedule is in a possible reduction of the number of pages that are contained in the reports to shareholders. AIM believes this option to provide a summary schedule will only be utilized by those funds with a number of holdings so large that the cost savings associated with producing a shorter report to shareholders outweigh the costs associated with producing two separate portfolio schedules (a complete schedule and a summary schedule). If the SEC's intent with respect to allowing funds to utilize a summary schedule is "to strike a balance that would result in maximum availability of information in a useful format and at a minimum cost," AIM believes the SEC should allow funds to file summary portfolio schedules on Form N-CSR (and Form N-Q - see below). AIM believes that funds should be permitted to provide their complete portfolio schedules to investors exclusively through posting this information on their websites, rather than requiring any particular form of hard-copy delivery to shareholders. We would also suggest that disclosure of the complete portfolio holdings schedule not be subject to the specific requirements of Regulation S-X, Sections 12-12 through 12-14; we believe such a requirement would be overly burdensome from an administrative and cost perspective and inconsistent with striking the balance described above. We would recommend providing a more simplified format in which the disclosure would provide details about the fund's holdings in a tabular format similar to that required in Sections 12-12 through 12-14, but which would not be required to provide the level of detail required by the notes to Sections 12-12 through 12-14. We do not believe that securities should be required to be disclosed in the summary schedule in order of descending value (i.e., largest holding to smallest). AIM feels strongly that there should be the flexibility to provide the summary schedule in a manner that the fund deems to be useful to investors - this approach would be consistent with the flexibility proposed to be provided to funds for the tabular and/or graphic presentation. We concur with the SEC's proposal to require full disclosure of investments in securities of other than unaffiliated issuers (e.g., investments in securities sold short, open written option contracts, investments other than securities, and investments in and advances to affiliates). We believe that providing full disclosure of these types of investments is important to investors because it allows them to appreciate how risks are being managed for a fund and any potential conflicts of interest that may be occurring in the management of the fund. 2. SEC Comment Request: Comment was requested on whether money market funds should be permitted to omit their portfolio schedules from reports to shareholders. AIM Response: For the reasons described in the proposing release, in particular with respect to the credit quality, maturity and portfolio diversification requirements of Rule 2a-7 under the 1940 Act, we concur with the SEC that it is appropriate to exempt money market funds from the requirement to omit their required portfolio schedules from reports to shareholders. As a result, we also believe it would be appropriate to exempt money market funds from any requirements to file portfolio schedules of unaffiliated issuers on Form N-Q as described in the Proposed Rules. 3. SEC Comment Request: Comment was requested on the appropriateness of the proposed tabular or graphic presentation of fund holdings. AIM Response: We believe that the proposals related to the tabular or graphic presentation of fund holdings would be useful to shareholders and should be required for all funds, except money market funds, regardless of the fund's size or whether the fund provides a summary portfolio schedule or it full portfolio schedule in its reports to shareholders. We believe this requirement would be of little, if any, value for shareholders of money market funds for the same reasons that we believe money market funds should be exempt from the requirement to provide portfolio schedules of unaffiliated issuers, as described above. We concur with the SEC's proposal to allow the fund to determine the categories that would be appropriate for its particular circumstances. 4. SEC Comment Request: Comment was requested on whether more frequent portfolio holdings disclosure should be required. AIM Response: AIM supports the concept of filing portfolio holdings on Form N-Q for the first and third quarters of a fund's fiscal year on a sixty-day delayed basis. However, for the same reasons described above, we believe it is appropriate and consistent with the SEC's purpose of striking a balance (also described above) to allow a summary schedule to be filed on the Form N-Q. Funds could then provide their complete portfolio holdings in the manner described above on their websites. We believe that portfolio holdings disclosure more frequently than quarterly is unnecessary and would be overly burdensome. We believe that the sixty-day delay is adequate to discourage the ability of third parties to "front-run," "free ride" and engage in other predatory trading practices. In our view, it is unnecessary to have the delay in filing the Form N-Q be identical to the delay in filing the Form 13F; this view is based on our belief that the concerns about predatory trading practices are less significant in the context of disclosure about aggregate holdings in equity securities managed by an institutional investment manager (Form 13F). We are also of the view that the SEC should not restrict the ability of institutional investment managers to be able to request confidential treatment of filings on Form 13F on the basis of a manager's ongoing investment strategy. We support the SEC's proposal to leave all requirements with respect to Form 13F filings as they currently exist. Finally, because of the additional administrative and cost burdens that would be incurred by fund complexes, we do not believe that the Form N-Q should be designated as a report filed under Section 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended ("1934 Act"), and, therefore, subject to the certification requirements of Section 302 of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"). We believe it would be appropriate to allow any authorized officer of a fund to sign the Form N-Q. In considering this position, we would ask that the SEC take into consideration the unique circumstances of fund complexes in complying with the SEC's rules related to Sarbanes-Oxley as compared to those imposed on operating companies. While it is difficult to estimate the costs associated with complying with the additional requirement to file Form N-Q, especially if the Form N-Q were designated a report filed under Section 13(a) and 15(d) of the 1934 Act, we believe that at a minimum it would cost $2,500 per year per fund simply to compile the portfolio schedule that would be contained in the filing. We expect that the additional costs to fully comply with the requirements would be significantly more. 5. SEC Comment Request: Comment was requested on a proposal to require mutual funds to include in reports to shareholders the dollar cost associated with a $10,000 investment AIM Response: AIM believes that the disclosure of actual costs paid over the period covered by the report may be useful to investors. We feel strongly that any benefits of providing an investor with individualized cost disclosure in account statements (or any other means) would be heavily outweighed by the significant administrative and economic burdens of complying with such a requirement. We believe that the provision of an example based on an initial $10,000 investment similar to that currently required in fund prospectuses would adequately allow investors to understand the cost associated with investing in a particular fund and it will allow investors to estimate their actual cost. We also believe the focus of this proposed disclosure should be on "actual cost" incurred during the reporting period covered by the report to shareholders. We do not think it is necessary to require this disclosure to be provided on a forward-looking perspective as would be required by Instruction 2(c)(ii) to Item 21 of Form N-1A - such a requirement would be duplicative of the requirements imposed in Form N-1A for fund prospectuses. 6. SEC Comment Request: Comment was requested on a proposal to require mutual funds to include "Management's Discussion of Fund Performance" (the "MDFP") in their annual reports to shareholders AIM Response: AIM believes that it is appropriate to require the MDFP in annual reports to shareholders. Currently, the ability to include the MDFP in the annual report to a fund's shareholders is an option that is permitted under the N-1A rules. As a practical matter and consistent with what we perceive to be common industry practice, we exercise that option and include the MDFP in the annual report. We do not have any recommendations to change any of the existing requirements of the MDFP. 7. SEC Comment Request: Comment was requested on the benefits to investors of quarterly portfolio disclosure, and in particular on whether, and to what extent, quarterly portfolio disclosure might deter forms of portfolio manipulation. Comment was requested on the nature and magnitude of any potential costs of front-running, free-riding and resulting from more frequent disclosure of portfolio holdings. Comment was requested on the nature and magnitude of any potential costs of free-riding and other predatory trading practices that may result from more frequent disclosure of portfolio holdings. AIM Response: AIM believes that some interested investors may benefit from quarterly portfolio holdings disclosure because it may allow investors to monitor whether a fund is following the investment strategies described in the fund's registration statement. AIM believes that the 60-day delay before the Form N-Q would be required to be filed with the SEC should minimize any potential costs associated with front-running, free-riding and other predatory trading practices. Thank you in advance for your consideration of the comments contained in this letter.
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