[Federal Register: January 26, 2009 (Volume 74, Number 15)]
[Rules and Regulations]
[Page 4545-4593]
[DOCID:fr26ja09-5]

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Part III

Securities and Exchange Commission

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17 CFR Parts 230, 232, 239, et al.

Enhanced Disclosure and New Prospectus Delivery Option for Registered
Open-End Management Investment Companies; Final Rule

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230, 232, 239, and 274

[Release Nos. 33-8998; IC-28584; File No. S7-28-07]
RIN 3235-AJ44

Enhanced Disclosure and New Prospectus Delivery Option for
Registered Open-End Management Investment Companies

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission is adopting amendments
to the form used by mutual funds to register under the Investment
Company Act of 1940 and to offer their securities under the Securities
Act of 1933 in order to enhance the disclosures that are provided to
mutual fund investors. The amendments require key information to appear
in plain English in a standardized order at the front of the mutual
fund statutory prospectus. The Commission is also adopting rule
amendments that permit a person to satisfy its mutual fund prospectus
delivery obligations under section 5(b)(2) of the Securities Act by
sending or giving the key information directly to investors in the form
of a summary prospectus and providing the statutory prospectus on an
Internet Web site. Upon an investor's request, mutual funds are also
required to send the statutory prospectus to the investor. These
amendments are intended to improve mutual fund disclosure by providing
investors with key information in plain English in a clear and concise
format, while enhancing the means of delivering more detailed
information to investors. Finally, the Commission is adopting
additional amendments that are intended to result in the disclosure of
more useful information to investors who purchase shares of exchange-
traded funds on national securities exchanges.

DATES: Effective Date: March 31, 2009.
    Compliance Date: See Part III.D. of this release for information on
compliance dates.

FOR FURTHER INFORMATION CONTACT: Kieran G. Brown, Senior Counsel;
Sanjay Lamba, Senior Counsel; Devin F. Sullivan, Attorney; or Mark T.
Uyeda, Assistant Director, Office of Disclosure Regulation, at (202)
551-6784, or, with respect to exchange-traded funds, Adam B. Glazer,
Senior Counsel, Office of Regulatory Policy, at<PHONE_NUMBER>,
Division of Investment Management, Securities and Exchange Commission,
100 F Street, NE., Washington, DC 20549-5720.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission
(``Commission'') is adopting amendments to rules 159A,\1\ 482,\2\
485,\3\ 497,\4\ and 498 \5\ under the Securities Act of 1933
(``Securities Act'') and rules 304 \6\ and 401 \7\ of Regulation S-
T.\8\ The Commission is also adopting amendments to Form N-1A,\9\ the
form used by open-end management investment companies to register under
the Investment Company Act of 1940 (``Investment Company Act'') and to
offer securities under the Securities Act; Form N-4,\10\ the form used
by insurance company separate accounts organized as unit investment
trusts and offering variable annuity contracts to register under the
Investment Company Act and to offer securities under the Securities
Act; and Form N-14,\11\ the form used by registered management
investment companies and business development companies to register
under the Securities Act securities to be issued in business
combinations.
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    \1\ 17 CFR 230.159A.
    \2\ 17 CFR 230.482.
    \3\ 17 CFR 230.485.
    \4\ 17 CFR 230.497.
    \5\ 17 CFR 230.498.
    \6\ 17 CFR 232.304.
    \7\ 17 CFR 232.401.
    \8\ 17 CFR 232.10 et seq.
    \9\ 17 CFR 239.15A and 274.11A.
    \10\ 17 CFR 239.17b and 274.11c.
    \11\ 17 CFR 239.23.
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Table of Contents

I. Executive Summary
II. Background
III. Discussion
    A. Amendments to Form N-1A
    1. General Instructions to Form N-1A
    2. Exchange Ticker Symbols
    3. Information Required in Summary Section
    a. Elimination of Proposed Portfolio Holdings Requirement
    b. Order of Information
    c. Investment Objectives and Goals
    d. Fee Table
    e. Investments, Risks, and Performance
    f. Management
    g. Purchase and Sale of Fund Shares
    h. Tax Information
    i. Financial Intermediary Compensation
    4. Exchange-Traded Funds
    a. Purchasing and Redeeming Shares
    b. Total Return
    c. Premium/Discount Information
    5. Conforming and Technical Amendments to Form N-1A
    B. New Delivery Option for Mutual Funds
    1. Use of Summary Prospectus and Satisfaction of Statutory
Prospectus Delivery Requirements
    2. Content of Summary Prospectus
    a. General
    b. Cover Page or Beginning of Summary Prospectus
    c. Updating Requirements
    3. Provision of Statutory Prospectus, SAI, and Shareholder
Reports
    a. Documents Required To Be Provided on the Internet
    b. Formatting Requirements for Information Provided on the
Internet
    c. Technological Requirements for Online Information
    d. Ability To Retain Documents
    e. Safe Harbor for Temporary Noncompliance
    f. Requirement To Send Documents
    4. Incorporation by Reference
    a. Permissible Incorporation by Reference
    b. Effect of Incorporation by Reference
    5. Filing Requirements for the Summary Prospectus
    C. Technical and Conforming Amendments
    D. Compliance Date
IV. Paperwork Reduction Act
V. Cost/Benefit Analysis
VI. Consideration of Promotion of Efficiency, Competition, and
Capital Formation
VII. Final Regulatory Flexibility Analysis
VIII. Statutory Authority
Text of Final Rule and Form Amendments

I. Executive Summary

    Today, the Commission is adopting an improved mutual fund
disclosure framework that it originally proposed in November 2007.\12\
This improved disclosure framework is intended to provide investors
with information that is easier to use and more readily accessible,
while retaining the comprehensive quality of the information that is
available today. The foundation of the improved disclosure framework is
the provision to all investors of streamlined and user-friendly
information that is key to an investment decision.
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    \12\ Investment Company Act Release No. 28064 (Nov. 21, 2007)
[72 FR 67790 (Nov. 30, 2007)] (``Proposing Release'').
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    To implement the new disclosure framework, we are adopting
amendments to Form N-1A that will require every prospectus to include a
summary section at the front of the prospectus, consisting of key
information about the fund, including investment objectives and
strategies, risks, costs, and performance. We are also adopting a new
option for satisfying prospectus delivery obligations with respect to
mutual fund securities under the Securities Act. Under the option, key
information will be sent or given to investors in the form of a summary
prospectus (``Summary Prospectus''), and the statutory prospectus will
be provided on an Internet Web site.\13\ Funds that select this option
will also be

required to send the statutory prospectus to the investor upon request.
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    \13\ A ``statutory prospectus'' is a prospectus that meets the
requirements of Section 10(a) of the Securities Act [15 U.S.C.
77j(a)].
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    In addition, the Commission is adopting amendments to Form N-1A
relating to exchange-traded funds (``ETFs'') that we proposed in a
separate release in March 2008.\14\ These amendments are intended to
result in the disclosure of more useful information to investors who
purchase shares of exchange-traded funds on national securities
exchanges.
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    \14\ See Investment Company Act Release No. 28193 (Mar. 11,
2008) [73 FR 14618 (Mar. 18, 2008)] (``ETF Proposing Release'').
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II. Background

    Millions of individual Americans invest in shares of open-end
management investment companies (``mutual funds''),\15\ relying on
mutual funds for their retirement, their children's education, and
their other basic financial needs.\16\ These investors face a difficult
task in choosing among the more than 8,000 available mutual funds.\17\
Fund prospectuses, which have been criticized by investor advocates,
representatives of the fund industry, and others as being too long and
complicated, often prove difficult for investors to use efficiently in
comparing their many choices.\18\ Current Commission rules require
mutual fund prospectuses to contain key information about investment
objectives, risks, and expenses that, while important to investors, can
be difficult for investors to extract. Prospectuses are often long,
both because they contain a wealth of detailed information, which our
rules require, and because prospectuses for multiple funds are often
combined in a single document. Too frequently, the language of
prospectuses is complex and legalistic, and the presentation formats
make little use of graphic design techniques that would contribute to
readability.
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    \15\ An open-end management investment company is an investment
company, other than a unit investment trust or face-amount
certificate company, that offers for sale or has outstanding any
redeemable security of which it is the issuer. See Sections 4 and
5(a)(1) of the Investment Company Act [15 U.S.C. 80a-4 and 80a-
5(a)(1)].
    \16\ Investment Company Institute, 2008 Investment Company Fact
Book, at 70 (2008) (``2008 ICI Fact Book''), available at http://
www.ici.org/pdf/2008_factbook.pdf (88 million individual investors
own mutual funds).
    \17\ Id. at 16 (in 2007, there were 8,752 mutual funds).
    \18\ See, e.g., Don Phillips, Managing Director, Morningstar,
Inc., Transcript of U.S. Securities and Exchange Commission
Interactive Data Roundtable, at 26 (June 12, 2006), available at
http://www.sec.gov/spotlight/xbrl/xbrlofficialtranscript0606.pdf
(``June 12 Roundtable Transcript'') (stating that current prospectus
is ``bombarding investors with way more information than they can
handle and that they can intelligently assimilate''). A Webcast
archive of the June 12 Interactive Data Roundtable is available at
http://www.connectlive.com/events/secxbrl/. See also Investment
Company Institute, Understanding Preferences for Mutual Fund
Information, at 8 (Aug. 2006), available at http://ici.org/pdf/rpt_
06_inv_prefs_summary.pdf (``ICI Investor Preferences Study'')
(noting that sixty percent of recent fund investors describe mutual
fund prospectuses as very or somewhat difficult to understand, and
two-thirds say prospectuses contain too much information);
Associated Press Online, Experts: Investors Face Excess Information
(May 25, 2005) (``There is broad agreement * * * that prospectuses
have too much information * * * to be useful.'' (quoting Mercer
Bullard, President, Fund Democracy, Inc.)); Thomas P. Lemke and
Gerald T. Lins, The ``Gift'' of Disclosure: A Suggested Approach for
Managed Investments, The Investment Lawyer, at 19 (Jan. 2001)
(stating that the fund prospectus ``typically contains more
information than the average investor needs'').
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    Numerous commentators have suggested that investment information
that is key to an investment decision should be provided in a
streamlined document with other more detailed information provided
elsewhere.\19\ Furthermore, recent investor surveys indicate that
investors prefer to receive information in concise, user-friendly
formats.\20\
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    \19\ See, e.g., Charles A. Jaffe, Improving Disclosure of Funds
Can Be Done, The Fort Worth Star-Telegram (May 7, 2006) (``Bring
back the profile prospectus, and make its use mandatory * * *. A two
page-summary of [the] key points [in the profile]--at the front of
the prospectus--would give investors the bare minimum of what they
should know out of the paperwork.''); Experts: Investors Face Excess
Information, supra note 18 (stating ``a possible middle ground in
the disclosure debate is to rely more heavily on so-called profile
documents which provide a two-page synopsis of a fund'' (attributing
statement to Mercer Bullard, President, Fund Democracy, Inc.));
Mutual Funds: A Review of the Regulatory Landscape, Hearing Before
the Subcomm. on Capital Markets, Insurance and Government Sponsored
Enterprises of the Comm. on Financial Services, U.S. House of
Representatives, 109th Cong. (May 10, 2005), at 24 (``To my mind, a
new and enhanced mutual fund prospectus should have two core
components. It should be short, addressing only the most important
factors about which typical fund investors care in making investment
decisions, and it should be supplemented by additional information
available electronically, specifically through the Internet, unless
an investor chooses to receive additional information through other
means.'' (Testimony of Barry P. Barbash, then Partner, Shearman &
Sterling LLP)); Thomas P. Lemke and Gerald T. Lins, The ``Gift'' of
Disclosure: A Suggested Approach for Managed Investments, supra note
18, at 19 (information that is important to investors includes goals
and investment policies, risks, costs, performance, and the identity
and background of the manager).
    In addition, a mutual fund task force organized by the National
Association of Securities Dealers, Inc. (``NASD'') supported the use
of a ``profile plus'' document, on the Internet, that would include,
among other things, basic information about a fund's investment
strategies, risks, and total costs, with hyperlinks to additional
information in the prospectus. See NASD Mutual Fund Task Force,
Report of the Mutual Fund Task Force: Mutual Fund Distribution (Mar.
2005), available at http://www.finra.org/web/groups/rules_regs/
documents/rules_regs/p013690.pdf (``NASD Mutual Fund Task Force
Report''). The name of NASD has been changed to the Financial
Industry Regulatory Authority, Inc. (``FINRA'').
    \20\ See ICI Investor Preferences Study, supra note 18, at 29
(``Nearly nine in 10 recent fund investors say they prefer a summary
of the information they want to know before buying fund shares,
either alone or along with a detailed document * * *. Just 13
percent prefer to receive only a detailed document.''); Barbara
Roper and Stephen Brobeck, Consumer Federation of America, Mutual
Fund Purchase Practices, at 13-14 (June 2006), available at http://
www.consumerfed.org/pdfs/mutual_fund_survey_report.pdf (survey
respondents more likely to consult a fund summary document rather
than a prospectus or other written materials).
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    Similar opinions were voiced at a roundtable held by the Commission
in June 2006, at which representatives from investor groups, the mutual
fund industry, analysts, and others discussed how the Commission could
change the mutual fund disclosure framework so that investors would be
provided with better information. Significant discussion at the
roundtable concerned the importance of providing mutual fund investors
with access to key fund data in a shorter, more easily understandable
format.\21\ The participants focused on the importance of providing
mutual fund investors with shorter disclosure documents, containing key
information, with more detailed disclosure documents available to
investors and others who choose to review additional information.\22\
There was consensus among the roundtable participants that the key
information that investors need to make an investment decision includes
information about a mutual fund's investment objectives and strategies,
risks, costs, and performance.\23\
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    \21\ See, e.g., Henry H. Hopkins, Vice President and Chief Legal
Counsel, T. Rowe Price Group, Inc., June 12 Roundtable Transcript,
supra note 18, at 31 (``[S]hareholders prefer receiving a concise
summary of fund information before buying.'').
    \22\ See, e.g., Don Phillips, Managing Director, Morningstar,
Inc., id. at 27 (stating that mutual fund investors need two
different documents, including a simplified print document and a
tagged electronic document); Paul Schott Stevens, President and
Chief Executive Officer, Investment Company Institute, id. at 72-73
(urging the Commission to consider permitting mutual funds to
``deliver a clear, concise disclosure document * * * much like the
profile prospectus'' with a statement that additional disclosure is
available on the funds' Web site or upon request in paper).
    \23\ See, e.g., Barbara Roper, Director of Investor Protection,
Consumer Federation of America, id. at 20 (noting that there is
``agreement to the point of near unanimity about the basic factors
that investors should consider when selecting a mutual fund. These
closely track the content of the original fund profile with highest
priority given to investment objectives and strategies, risks,
costs, and past performance particularly as it relates to the
volatility of past returns.''). See also Paul G. Haaga, Jr.,
Executive Vice President, Capital Research and Management Company,
id. at 90 (stating that the Commission should ``specify some minimum
amounts of information'' to provide investors with ``something along
the lines of the [fund] profile''); Henry H. Hopkins, Vice President
and Chief Legal Counsel, T. Rowe Price Group, Inc., id. at 31 (``The
profile is an excellent, well organized disclosure document whose
content requirements were substantiated by SEC-sponsored focus
groups and an industry pilot program.'').

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    The roundtable participants also discussed the potential benefits
of increased Internet availability of fund disclosure documents, which
include, among other things, facilitating comparisons among funds and
replacing ``one-size-fits-all'' disclosure with disclosure that each
investor can tailor to his or her own needs.\24\ In recent years,
access to the Internet has greatly expanded,\25\ and significant
strides have been made in the speed and quality of Internet
connections.\26\ The Commission has already harnessed the power of
these technological advances to provide better access to information in
a number of areas. Recently, for example, we created a program that
permits issuers, on a voluntary basis, to submit to the Commission
financial information and, in the case of mutual funds, key prospectus
information, in an interactive data format that facilitates automated
retrieval, analysis, and comparison of the information.\27\ More
recently, we proposed rules that would require mutual funds to provide
the risk/return summary section of their prospectuses, and companies to
provide their financial statements, to the Commission in interactive
data format.\28\ In addition, we recently adopted rules that provide
all shareholders with the ability to choose whether to receive proxy
materials in paper or via the Internet.\29\
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    \24\ See, e.g., Paul Schott Stevens, President and Chief
Executive Officer, Investment Company Institute, id. at 70-71
(stating that the Internet can serve as ``far more than a stand-in
for paper documents * * *. It can * * * put investors in control
when it comes to information about their investments.''); Don
Phillips, Managing Director, Morningstar, Inc., id. at 49
(discussing ``the ability to use the Internet as a tool for
comparative shopping'').
    \25\ Recent surveys show that Internet use among adults is at an
all time high with approximately three quarters of Americans having
access to the Internet. See A Typology of Information and Technology
Users, Pew Internet & American Life Project, at 2 (May 2007),
available at http://www.pewinternet.org/pdfs/PIP_ICT_Typology.pdf;
Internet Penetration and Impact, Pew Internet & American Life
Project, at 3 (Apr. 2006), available at http://www.pewinternet.org/
pdfs/PIP_Internet_Impact.pdf. Further, while some have noted a
``digital divide'' for certain groups, see, e.g., Susannah Fox,
Digital Divisions, Pew Internet & American Life Project, at 1 (Oct.
5, 2005) (noting that certain groups lag behind in Internet usage,
including Americans age 65 and older, African-Americans, and those
with less education), others have noted that this divide may be
diminishing for those groups. See, e.g., Mutual Fund Shareholders'
Use of the Internet, 2006, Investment Company Institute, Research
Fundamentals, at 7 (Oct. 2006), available at http://www.ici.org/
stats/res/fm-v15n6.pdf (``Recent increases in Internet access among
older shareholders * * * have narrowed the generational gap
considerably. Today, shareholders age 65 or older are more than
twice as likely to have Internet access than in 2000.''); Michel
Marriott, Blacks Turn to Internet Highway, and Digital Divide Starts
to Close, The New York Times (Mar. 31, 2006), available at: http://
www.nytimes.com/2006/03/31/us/
31divide.html?ex=1301461200&en=6fd4e942aaaa04ad&ei=5088 (``African-
Americans are steadily gaining access to and ease with the Internet,
signaling a remarkable closing of the `digital divide' that many
experts had worried would be a crippling disadvantage in achieving
success.'').
    \26\ See John B. Horrigan, Home Broadband Adoption 2007, Pew
Internet & American Life Project, at 1 (June 2007), available at
http://www.pewinternet.org/pdfs/PIP_Broadband%202007.pdf (47% of
all adult Americans had a broadband connection at home as of early
2007).
    \27\ See Investment Company Act Release No. 27884 (July 11,
2007) [72 FR 39290 (July 17, 2007)] (adopting rule amendments to
enable mutual funds voluntarily to submit supplemental tagged
information contained in the risk/return summary section of their
prospectuses); Securities Act Release No. 8529 (Feb. 3, 2005) [70 FR
6556 (Feb. 8, 2005)] (adopting rule amendments to enable registrants
voluntarily to submit supplemental tagged financial information).
    \28\ Investment Company Act Release No. 28298 (June 10, 2008)
[73 FR 35442 (June 23, 2008)]; Securities Act Release No. 8924 (May
30, 2008) [73 FR 32794 (June 10, 2008)].
    \29\ Exchange Act Release No. 56135 (July 26, 2007) [72 FR 42222
(Aug. 1, 2007)].
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    As suggested by the participants at the June 2006 roundtable,
advances in technology also offer a promising means to address the
length and complexity of mutual fund prospectuses by streamlining the
key information that is provided to investors, ensuring that access to
the full wealth of information about a fund is immediately and easily
accessible, and providing the means to present all information about a
fund online in an interactive format that facilitates comparisons of
key information, such as expenses, across different funds and different
share classes of the same fund.\30\ Technology has the potential to
replace the current one-size-fits-all mutual fund prospectus with an
approach that allows investors, their financial intermediaries, third-
party analysts, and others to tailor the wealth of available
information to their particular needs and circumstances.
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    \30\ A mutual fund may issue more than one class of shares that
represent interests in the same portfolio of securities with each
class, among other things, having a different arrangement for
shareholder services or the distribution of securities, or both. See
rule 18f-3 under the Investment Company Act [17 CFR 270.18f-3].
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    In November 2007, the Commission proposed an improved mutual fund
disclosure framework that was intended to address the concerns that
have been raised about mutual fund prospectuses and to make use of
technological advances to enhance the provision of information to
mutual fund investors. The Commission received approximately 155
comment submissions.\31\ The commenters generally supported the
proposals, with some commenters suggesting specific changes to the
proposals. Commission staff also arranged for investor focus group
testing of the proposed Summary Prospectus.\32\ Today, the Commission
is adopting the proposed amendments with modifications to respond to
the focus group testing and to address commenters' recommendations.
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    \31\ In response to the ETF Proposing Release, the Commission
received seven comment submissions that addressed the proposed ETF
amendments to Form N-1A.
    \32\ The Commission engaged a consultant to conduct focus group
interviews and a telephone survey concerning investors' views and
opinions about various disclosure documents filed by companies,
including mutual funds. During this process, investors participating
in focus groups were asked questions about a hypothetical Summary
Prospectus. Investors participating in the telephone survey were
asked questions relating to several disclosure documents, including
mutual fund prospectuses. We have placed in the comment file
(available at http://www.sec.gov/comments/s7-28-07/s72807.shtml) for
the proposed rule the following documents from the investor testing
that relate to mutual fund prospectuses and the proposed Summary
Prospectus: (1) The consultant's report concerning focus group
testing of the hypothetical Summary Prospectus and related
disclosures (``Focus Group Report''); (2) transcripts of focus
groups relating to the hypothetical Summary Prospectus and related
disclosures (``Focus Group Transcripts''); (3) disclosure examples
used in these focus groups; and (4) an excerpt from the consultant's
report concerning the telephone survey of individual investors
(``Telephone Survey Report'').
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    We are adopting amendments to Form N-1A that will require every
prospectus to include a summary section at the front of the prospectus,
consisting of key information about the fund, including investment
objectives and strategies, risks, costs, and performance. This key
information is required to be presented in plain English in a
standardized order. Our intent is that this information will be
presented succinctly, in three or four pages, at the front of the
prospectus.
    We are also adopting a new option for satisfying prospectus
delivery obligations with respect to mutual fund securities under the
Securities Act. Under the option, key information will be sent or given
to investors in the form of a Summary Prospectus, and the statutory
prospectus will be provided on an Internet Web site. Upon an investor's
request, funds will also be required to send the statutory prospectus
to the investor. Our intent in providing this option is that funds take
full advantage of the Internet's search and retrieval capabilities in
order to enhance the provision of information to mutual fund investors.
    The disclosure framework that we are adopting has the potential to

revolutionize the provision of information to the millions of investors
who rely on mutual funds for their most basic financial needs. It is
intended to help investors who are overwhelmed by the choices among
thousands of available funds described in lengthy and legalistic
documents to access readily key information that is important to an
informed investment decision. At the same time, by harnessing the power
of technology to deliver information in better, more useable formats,
the disclosure framework can help those investors, their
intermediaries, third-party analysts, the financial press, and others
to locate and compare facts and data from the wealth of more detailed
disclosures that are available.

III. Discussion

A. Amendments to Form N-1A

    The Commission is adopting, with modifications to address
commenters' suggestions, amendments to Form N-1A that will require the
statutory prospectus of every mutual fund to include a summary section
at the front of the prospectus consisting of key information presented
in plain English in a standardized order.\33\ Commenters and investors
participating in focus groups arranged by Commission staff generally
supported the proposed summary presentation and agreed that it will
address investors' preferences for concise, user-friendly
information.\34\ The summary section will provide investors with key
information about the fund that investors can use to evaluate and
compare the fund. This summary will be located in a standardized,
easily accessible place and will be available to all investors,
regardless of whether the fund uses a Summary Prospectus and whether
the investor is reviewing the prospectus in a paper or electronic
format.
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    \33\ The Commission is also adopting amendments to Form N-1A
relating to exchange-traded funds. See discussion infra Part
III.A.4.
    \34\ See, e.g., Letter of AARP (Feb. 28, 2008) (``AARP
Letter''); Letter of Capital Research and Management Company (Feb.
28, 2008) (``Capital Research Letter''); Letter of Fund Democracy,
Consumer Federation of America, and Consumer Action (Feb. 28, 2008)
(``Fund Democracy et al. Letter''); Letter of Investment Company
Institute (Feb. 28, 2008) (``ICI Letter''); Letter of Mutual Fund
Directors Forum (Feb. 28, 2008) (``MFDF Letter''); Letter of
Morningstar, Inc. (Feb. 27, 2008) (``Morningstar Letter''); Focus
Group Report, supra note 32, at 5.
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    As in our proposal, the information required in the summary section
of the prospectus will be the same as that required in the new Summary
Prospectus, and it is key information that is important to an
investment decision. We believe, and commenters generally agreed,\35\
that the key information that is important to an investment decision is
the same, whether an investor is reviewing the summary section of a
statutory prospectus or a short-form disclosure document. For that
reason, we are requiring the same information in the summary section of
the statutory prospectus and in the Summary Prospectus. In each case,
our intent is that funds prepare a concise summary (on the order of
three or four pages) that will provide key information.
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    \35\ See, e.g., Letter of Bo Li (Feb. 28, 2008) (``Bo Li
Letter''); Letter of Data Communiqu[eacute], Inc. (Feb. 27, 2008)
(``Data Communiqu[eacute] Letter''); Letter of Firehouse
Communications LLC (Feb. 29, 2008) (``Firehouse Letter''); Letter of
L.A. Schnase (Feb. 26, 2008) (``Schnase Letter''). But see Letter of
Kathleen K. Clarke (Mar. 4, 2008) (``Clarke Letter'').
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    In addition, with the exception of some information that is common
to multiple funds, we are requiring, as proposed, that the summary
section be presented separately for each fund covered by a multiple
fund prospectus and that the information for multiple funds not be
integrated.\36\ This requirement is intended to assist investors in
finding important information regarding the particular fund in which
they are interested. Multiple fund prospectuses contribute
substantially to prospectus length and complexity, which act as
barriers to understanding. We have concluded that requiring a self-
contained summary section for each fund will significantly aid
investors' ability to use multiple fund prospectuses effectively.
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    \36\ General Instruction C.3.(c)(ii) of Form N-1A.
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    The Commission is committed to encouraging statutory prospectuses
that are simpler, clearer, and more useful to investors. The prospectus
summary section is intended to provide investors with streamlined
disclosure of key mutual fund information at the front of the statutory
prospectus, in a standardized order that facilitates comparisons across
funds. We are adopting the following amendments to Form N-1A in order
to implement the summary section.
1. General Instructions to Form N-1A
    We are adopting, substantially as proposed, amendments to the
General Instructions to Form N-1A to address the new summary section of
the statutory prospectus. These amendments address plain English and
organizational requirements.
Plain English
    We are amending, as proposed, the General Instructions to state
that the summary section of the prospectus must be provided in plain
English under rule 421(d) under the Securities Act.\37\ Rule 421(d)
requires an issuer to use plain English principles in the organization,
language, and design of the front and back cover pages, the summary,
and the risk factors sections of its prospectus.\38\ The amended
instruction will serve as a reminder that the new prospectus summary
section is subject to rule 421(d). The use of plain English principles
in the new summary section will further our goal of encouraging funds
to create useable summaries at the front of their prospectuses. The
prospectus, in its entirety, also will remain subject to the
requirement that the information be presented in a clear, concise, and
understandable manner.\39\
---------------------------------------------------------------------------

    \37\ General Instruction B.4.(c) of Form N-1A; rule 421(d) [17
CFR 230.421(d)].
    Commenters generally supported the use of plain English in the
summary section. See, e.g., AARP Letter, supra note 34; Letter of
CFA Institute (Feb. 28, 2008) (``CFA Institute Letter''); Letter of
Committee on Federal Regulation of Securities of the American Bar
Association's Section of Business Law (Mar. 17, 2008) (``ABA
Letter''); Letter of Investment Company Institute and Securities
Industry and Financial Markets Association (Feb. 28, 2008) (``ICI
and SIFMA Letter'').
    \38\ Rule 421(d) lists the following plain English principles:
(1) Short sentences; (2) definite, concrete, everyday words; (3)
active voice; (4) tabular presentation or bullet lists for complex
material, wherever possible; (5) no legal jargon or highly technical
business terms; and (6) no multiple negatives.
    \39\ Pursuant to rule 421(b) [17 CFR 230.421(b)], the following
standards must be used when preparing prospectuses: (1) present
information in clear, concise sections, paragraphs, and sentences;
(2) use descriptive headings and subheadings; (3) avoid frequent
reliance on glossaries or defined terms as the primary means of
explaining information in the prospectus; and (4) avoid legal and
highly technical business terminology. We note that these standards
provide funds with flexibility, for example, in determining whether
or not to use headings in a question-and-answer format.
---------------------------------------------------------------------------

Organizational Requirements
    We are also adopting amendments to the organizational requirements
of the General Instructions, with one modification to address
commenters' suggestions. The amendments will require mutual funds to
disclose the summary information in numerical order at the front of the
prospectus and not to precede this information with any information
other than the cover page or table of contents.\40\ Commenters
generally supported standardizing the order and content of the summary
section, agreeing that a standardized summary section will enhance
investor understanding and the ability to compare funds.\41\
Information included

in the summary section need not be repeated elsewhere in the
prospectus. While a fund may continue to include information in the
prospectus that is not required, a fund may not include any such
additional information in the summary section of the prospectus.\42\
---------------------------------------------------------------------------

    \40\ General Instruction C.3.(a) to Form N-1A.
    \41\ See, e.g., Letter of Evergreen Investments (Feb. 28, 2008)
(``Evergreen Letter''); Letter of Financial Services Institute (Feb.
28, 2008) (``Financial Services Institute Letter'').
    \42\ General Instruction C.3.(b) of Form N-1A. See, e.g., CFA
Institute Letter, supra note 37; Letter of Great-West Retirement
Services (Feb. 28, 2008) (``Great-West Letter''); ICI Letter, supra
note 34; Letter of The Vanguard Group, Inc. (Feb. 28, 2008)
(``Vanguard Letter'') (supporting prohibition on including
information in the summary section that is not required).
---------------------------------------------------------------------------

    As noted above, we are, with one exception, requiring as proposed
that a multiple fund prospectus present the summary information for
each fund sequentially and not integrate the information for more than
one fund.\43\ That is, a multiple fund prospectus will be required to
present all of the summary information for a particular fund together,
followed by all of the summary information for each additional fund.
For example, a multiple fund prospectus will not be permitted to
present the investment objectives for several funds followed by the fee
tables for several funds. A multiple fund prospectus will also be
required to identify clearly the name of the particular fund at the
beginning of the summary information for that fund.
---------------------------------------------------------------------------

    \43\ General Instruction C.3.(c)(ii) of Form N-1A. See supra
note 36 and accompanying text.
---------------------------------------------------------------------------

    Many commenters agreed that multiple fund prospectuses should
present the summary information for each fund separately.\44\ Some
commenters stated that requiring a separate summary for each fund will
better achieve the Commission's goal of keeping summaries short, which
should help facilitate comparisons across funds.\45\ Commenters also
stated that multiple fund prospectuses often confuse investors and make
reviewing key information for a single fund more difficult.\46\
---------------------------------------------------------------------------

    \44\ See, e.g., CFA Institute Letter, supra note 37; Letter of
Coalition of Mutual Fund Investors (Feb. 13, 2008) (``CMFI
Letter''); Fund Democracy et al. Letter, supra note 34; Evergreen
Letter, supra note 41; MFDF Letter, supra note 34; Letter of the
National Association of Personal Financial Advisors (Feb. 28, 2008)
(``NAPFA Letter''); Letter of Oppenheimer Funds (Feb. 28, 2008)
(``Oppenheimer Letter'').
    \45\ See, e.g., Fund Democracy et al. Letter, supra note 34;
Data Communiqu[eacute] Letter, supra note 35. See also ICI Letter,
supra note 34 (stating that some of its members believe that
requiring a separate summary for each fund will better facilitate
the Commission's goals of keeping documents short and facilitating
comparisons across funds).
    \46\ See, e.g., Data Communiqu[eacute] Letter, supra note 35;
CMFI Letter, supra note 44; Oppenheimer Letter, supra note 44.
---------------------------------------------------------------------------

    A number of commenters, however, expressed reservations about the
Commission's proposal to prohibit multiple fund summary sections,
requesting that the Commission permit integrated summaries for multiple
funds in at least some circumstances.\47\ Some commenters suggested
that integrated summary information would allow investors to better
compare all funds within a fund family, or at least certain categories
of funds within a fund family.\48\ Categories of funds cited included
international funds, asset allocation funds, and U.S. Treasury
Funds.\49\ In addition, some commenters argued that prohibiting
multiple fund summaries would lead to unnecessary duplication of
information and longer statutory prospectuses.\50\
---------------------------------------------------------------------------

    \47\ See, e.g., Letter of AIM Investments (Feb. 27, 2008) (``AIM
Letter'') (favoring integrated summaries for target date, asset
allocation or lifestyle funds, and variable annuity funds); Capital
Research Letter, supra note 34 (favoring integrated summaries for
target date and variable annuity funds).
    \48\ See, e.g., AIM Letter, supra note 47; Letter of American
Century Investments (Feb. 28, 2008) (``American Century Letter'');
Clarke Letter, supra note 35; ICI Letter, supra note 34; Letter of
Putnam Investments (Feb. 28, 2008) (``Putnam Letter''); Letter of
Russell Investments (Feb. 28, 2008) (``Russell Letter'').
    \49\ See, e.g., Letter of T. Rowe Price Associates, Inc. (Feb.
28, 2008) (``T. Rowe Letter'') (favoring integrated summaries for
certain categories of funds and citing focus group research
conducted by T. Rowe Price concerning integrated versus single-fund
summaries).
    \50\ See, e.g., AIM Letter, supra note 47; American Century
Letter, supra note 48; Letter of Dechert LLP (Mar. 3, 2008)
(``Dechert Letter''); Putnam Letter, supra note 48; Russell Letter,
supra note 48. See also ICI Letter, supra note 34 (members split,
with some noting that an integrated summary may be more useful to
investors in certain circumstances, in particular for groups of
funds an investor may wish to compare, and others believing that a
separate document for each fund would better accomplish goals of
keeping the document short and facilitating comparisons across
funds).
---------------------------------------------------------------------------

    A number of investors in our focus groups expressed the view that
multiple fund presentations of mutual fund information could be helpful
in facilitating useful comparisons among funds.\51\ Some of these
investors stated that multiple fund presentations could be used as a
screening tool to determine which funds to research in more detail.\52\
Some investors in our focus groups, however, indicated that combining
too many funds within a single summary can result in confusing
complexity.\53\ The investors in our focus groups did not express a
consensus on a specific limit on the number of funds or page length
that would be appropriate in multiple fund presentations.
---------------------------------------------------------------------------

    \51\ See Focus Group Report, supra note 32, at 9.
    \52\ See Focus Group Transcripts, supra note 32, at 20.
    \53\ Id. at 19 (``I thought there were too many in the [multiple
fund prospectus]. It just really makes your head spin when you have
to read all that.''), 22, 46.
---------------------------------------------------------------------------

    While we believe that multiple fund presentations can, in limited
circumstances, be useful in helping investors to compare funds, we have
determined that prohibiting multiple fund summary sections is more
consistent with the goal of achieving concise, readable summaries for
investors. The requirement that summary information be separately
presented for each fund in a multiple fund prospectus is intended to
address the problem of lengthy and complex multiple fund prospectuses
in the least intrusive manner possible. Multiple fund prospectuses
contribute substantially to prospectus length and complexity, which act
as barriers to investor understanding. We have concluded that
permitting information for multiple funds to be integrated in the
summary section would undermine our goal of providing mutual fund
investors with concise and readable key information.
    We note, however, that our rules do not restrict in any way the use
of multiple fund presentations in advertising and sales materials,
whether those materials are provided along with the Summary Prospectus
or separately.\54\ Funds have complete flexibility to prepare and
present comparative information to investors regarding any grouping of
multiple funds that they believe is useful, and also to provide
automated tools on their Web sites permitting investors to choose which
funds to compare. As a result, we do not believe that the prohibition
on multiple fund summaries in the statutory prospectus will impair in
any significant manner funds' ability to provide useful, comparative
information to investors.
---------------------------------------------------------------------------

    \54\ See rule 482 under the Securities Act [17 CFR 230.482] and
rule 34b-1 under the Investment Company Act [17 CFR 270.34b-1]
(investment company advertising rules).
---------------------------------------------------------------------------

    We are adopting one exception to the requirement that multiple fund
prospectuses not integrate the summary information for more than one
fund in order to eliminate duplicative information and reduce
prospectus length. Two commenters recommended that the Commission
permit summary information that is identical for multiple funds to be
presented once, at the end of all the individual summaries within a
multiple fund statutory prospectus.\55\ We agree with these commenters
that permitting integration of information that is likely to be uniform
for multiple funds will further our goal of concise, user-friendly
summary sections. Therefore, a multiple fund prospectus

will be permitted to integrate the information required by any of new
Item 6 (purchase and sale of fund shares), Item 7 (tax information),
and Item 8 (financial intermediary compensation) if it is identical for
all funds covered in the prospectus.\56\ This information is often
uniform across multiple funds unlike, for example, information about
investment objectives, costs, performance, or portfolio managers. If
the information required by any of Items 6 through 8 is integrated, the
integrated information will be required to immediately follow the
separate individual fund summaries containing the other non-integrated
information. In addition, a statement containing the following
information will be required in each individual fund summary section in
the location where the information that is integrated, and presented
later, would have appeared.
---------------------------------------------------------------------------

    \55\ See Capital Research Letter, supra note 34; ICI Letter,
supra note 34.
    \56\ General Instruction C.3.(c)(iii) of Form N-1A. This
exception will not be available to Summary Prospectuses delivered
pursuant to new rule 498 because a Summary Prospectus may describe
only one fund. See discussion infra Part III.B.2.a.

    For important information about [purchase and sale of fund
shares,] [tax information,] and [financial intermediary
compensation], please turn to [identify section heading and page
---------------------------------------------------------------------------
number of prospectus].

    As proposed, the instructions will permit a fund with multiple
share classes, each with its own cost structure, to present the summary
information separately for each class, to integrate the information for
multiple classes, or to use another presentation that is consistent
with disclosing the summary information in a standard order at the
beginning of the prospectus.\57\ Commenters generally supported, or did
not express a view with respect to, allowing multiple class summary
sections; and some commenters noted that such sections would assist
investors in choosing the class most appropriate for their
circumstances.\58\ We are not requiring the integration of information
for multiple classes of a fund, which two commenters argued was
important to facilitate cost comparisons.\59\ We are retaining
flexibility in this area because we believe that whether a multiple
class presentation is helpful or overwhelming depends on the particular
circumstances. We note, however, that our ongoing interactive data
initiative is intended, among other things, to facilitate cost
comparisons by investors across multiple classes of a single fund, as
well as across different funds.\60\
---------------------------------------------------------------------------

    \57\ General Instruction C.3.(c)(ii) of Form N-1A.
    \58\ See, e.g., Clarke Letter, supra note 35; Data
Communiqu[eacute] Letter, supra note 35; Great-West Letter, supra
note 42; Oppenheimer Letter, supra note 44.
    \59\ See, e.g., Fund Democracy et al. Letter, supra note 34;
Letter of Brock Hastie (Jan. 8, 2008) (``Hastie Letter'').
    \60\ See supra note 28 and accompanying text.
---------------------------------------------------------------------------

Page Limits
    As proposed, we are not imposing page limits on the summary
section. We emphasize, however, that it is our intent that funds
prepare a concise summary (on the order of three or four pages) that
will provide key information. Commenters differed regarding whether the
Commission should impose page limits on the summary.
    Several commenters supported page limits. One commenter expressed
concern that, in the absence of a page limit, the summary section would
tend to expand over time, which would undermine its usefulness.\61\
Another commenter noted that, absent page limits, lengths of summary
sections would vary widely, hindering investors' ability to compare
funds.\62\
---------------------------------------------------------------------------

    \61\ See Letter of Independent Directors Council (Feb. 15, 2008)
(``IDC Letter'').
    \62\ See Firehouse Letter, supra note 35. See also Letter of
Jeffrey C. Keil (Jan. 9, 2008) (``Keil Letter'') (suggesting that
summaries might garner more investor attention if limited to two or
three pages).
---------------------------------------------------------------------------

    While we share these commenters' concerns, especially with respect
to the possibility of summary sections getting longer over time, we
believe that these concerns are outweighed by the concerns of other
commenters that page limits could constrain appropriate disclosure and
lead funds to omit material information.\63\ We also agree with a
commenter who noted that the prohibition of multiple fund summary
sections should help to limit their length.\64\
---------------------------------------------------------------------------

    \63\ See, e.g., Letter of Janus Capital Group (Feb. 28, 2008)
(``Janus Letter''); CMFI Letter, supra note 44.
    \64\ See Data Communiqu[eacute] Letter, supra note 35.
---------------------------------------------------------------------------

Elimination of Separate Purchase and Redemption Document
    As proposed, we are eliminating the provisions of Form N-1A that
permit a fund to omit detailed information about purchase and
redemption procedures from the prospectus and to provide this
information in a separate document that is incorporated into and
delivered with the prospectus, as well as a similar provision in the
requirements for the statement of additional information (``SAI'').\65\
We have concluded that this option is unnecessary in light of the new
Summary Prospectus which could be used, at a fund's option, along with
any additional sales materials, including a document describing
purchase and redemption procedures.\66\ The elimination of these
provisions does not otherwise alter the information about purchase and
redemption procedures that must appear in the fund's prospectus and
SAI, and this information will continue to be required in those
documents.
---------------------------------------------------------------------------

    \65\ Instruction 6 to current Item 1(b) of Form N-1A; current
Item 6(g) of Form N-1A; Instruction to current Item 18(a) of Form N-
1A.
    \66\ See discussion infra Part III.B.1. Most commenters did not
address this proposed change. But see Clarke Letter, supra note 35
(supporting change); Schnase Letter, supra note 35 (opposing
change).
---------------------------------------------------------------------------

Variable Contract and Retirement Plan Funds
    Finally, we are modifying the proposal to permit funds that are
used as investment options for retirement plans and variable insurance
contracts to modify or omit certain information required in the new
summary section. This modification addresses commenters' concerns that
certain information is not relevant to those funds.\67\ Specifically,
we are amending the General Instructions to Form N-1A to permit funds
that are used as investment options for retirement plans and variable
insurance contracts to modify or omit the information required by new
summary section Item 6 (purchase and sale of fund shares).\68\ Existing
Form N-1A permits funds that are used as investment options for
retirement plans and variable insurance contracts to modify or omit
certain information regarding the purchase and sale of fund shares that
is not relevant in these contexts.\69\ The amendment we are making
extends the same treatment to the purchase and sale information in the
new summary section.
---------------------------------------------------------------------------

    \67\ See Letter of EQ Advisors Trust/AXA Premier VIP Trust (Feb.
28, 2008) (``EQ/AXA Letter''); Letter of Committee of Annuity
Insurers (Feb. 28, 2008) (``CAI Letter'').
    \68\ General Instruction C.3.(d)(i) of Form N-1A.
    \69\ General Instruction C.3.(d)(i) of existing Form N-1A. We
note that Item 7 of the summary section, which requires tax
information that may not be relevant in the context of retirement
plans and variable insurance contracts, expressly states that the
disclosures are only required to be made, as applicable.
---------------------------------------------------------------------------

2. Exchange Ticker Symbols
    We requested comment on whether we should require or permit a fund
to include its ticker symbol in the summary, or on the front or back
cover page of the statutory prospectus or SAI or elsewhere. Many
commenters suggested that the Commission should require or permit funds
to disclose their exchange ticker symbols.\70\ We agree

with these commenters that requiring exchange ticker symbols to be
included in fund disclosure documents would make it easier for
investors to find information about particular funds and share classes
of funds. Accordingly, we are requiring that a fund include its
exchange ticker symbol on the cover pages of the statutory prospectus
and SAI.\71\ Specifically, a fund will be required to disclose the
exchange ticker symbol of the fund's shares or, if the prospectus or
SAI relate to one or more classes of the fund's shares, adjacent to
each such class, the exchange ticker symbol of that class.
---------------------------------------------------------------------------

    \70\ See, e.g., CMFI Letter, supra note 44; Data
Communiqu[eacute] Letter, supra note 35; Firehouse Letter, supra
note 35; Hastie Letter, supra note 59; Letter of William E. Kent
(Dec. 26, 2007) (``Kent Letter''); NAPFA Letter, supra note 44;
Letter of Art Ticknor (Feb. 6, 2008) (``Ticknor Letter'').
    \71\ Item 1(a)(2) of Form N-1A; Item 14(a)(2) of Form N-1A.
Exchange ticker symbols will also be required on the cover page, or
at the beginning of, the Summary Prospectus. Rule 498(b)(1)(ii).
---------------------------------------------------------------------------

3. Information Required in Summary Section
    We are adopting the required content of the summary section
substantially as proposed, except that, having considered commenters'
concerns and the views of investors expressed in focus groups, we have
determined not to require disclosure of a fund's portfolio holdings.
The summary section of a mutual fund statutory prospectus will consist
of the following information: (1) Investment objectives; (2) costs; (3)
principal investment strategies, risks, and performance; (4) investment
advisers and portfolio managers; (5) brief purchase and sale and tax
information; and (6) financial intermediary compensation. These items
will appear in the same order that we proposed. We have modified the
requirements for some items to address comments and views expressed in
the focus groups.
a. Elimination of Proposed Portfolio Holdings Requirement
    The Commission has determined not to require the summary section to
include the list of the fund's 10 largest holdings which we
proposed.\72\ As proposed, the top 10 holdings list would have been
updated in the statutory prospectus on an annual basis and in the
Summary Prospectus on a quarterly basis.\73\
---------------------------------------------------------------------------

    \72\ Proposed Item 5 of Form N-1A.
    \73\ Section 10(a)(3) of the Securities Act [15 U.S.C.
77j(a)(3)] generally requires that when a prospectus is used more
than nine months after the effective date of the registration
statement, the information in the prospectus must be as of a date
not more than sixteen months prior to such use. The effect of this
provision is to require mutual funds to update their prospectuses
annually to reflect current cost, performance, and other financial
information. See proposed rule 498(b)(2)(iii) (proposed Summary
Prospectus quarterly updating requirement).
---------------------------------------------------------------------------

    Commenters were split regarding whether the top 10 portfolio
holdings should be required in the summary section. We are persuaded by
the commenters who pointed out the limited utility of the proposed top
10 holdings list.\74\ Commenters expressed the view that top 10
holdings information may mislead investors because the top 10 holdings
may not accurately represent a fund's overall holdings \75\ and because
the top 10 holdings information may become stale.\76\ Commenters also
pointed out that portfolio holdings information is already widely
available through other sources, such as shareholder reports and other
Commission filings,\77\ as well as fund Web sites and sales
materials.\78\
---------------------------------------------------------------------------

    \74\ See, e.g., AIM Letter, supra note 47; Letter of Cornell
Securities Law Clinic (Feb. 28, 2008) (``Cornell Law Clinic
Letter''); Evergreen Letter, supra note 41; Letter of Foreside
Compliance Services, LLC (Feb. 28, 2008) (``Foreside Letter'');
Oppenheimer Letter, supra note 44; Russell Letter, supra note 48.
    Other commenters supported including the top 10 portfolio
holdings in the summary section. See, e.g., CMFI Letter, supra note
44; Data Communiqu[eacute] Letter, supra note 35; Firehouse Letter,
supra note 35; Letter of Jill Gross (Feb. 28, 2008); Letter of
Richard K. Hopkins (Feb. 15, 2008) (``Hopkins Letter''); Letter of
Richard McCormick (Feb. 11, 2008) (``McCormick Letter''); Letter of
William Mahavier (Feb. 10, 2008) (``Mahavier Letter''); Letter of
Dan Meador (Feb. 12, 2008); NAPFA Letter, supra note 44; Letter of
Bruce R. Bent (Feb. 28, 2008) (``Bent Letter'').
    \75\ See, e.g., Dechert Letter, supra note 50 (top 10 holdings
information could mislead investors of a diversified fund where top
10 holdings represent a relatively small percentage of the fund's
holdings); ICI Letter, supra note 34 (noting that a fund's top 10
holdings may be misleading for funds in a master-feeder structure,
funds of funds, fixed income funds, index funds, money market funds,
exchange-traded funds, and new funds); Letter of New York City Bar
(Feb. 25, 2008) (``NYC Bar Letter'') (arguing that for certain types
of funds, such as money market funds, fixed income funds, and index
funds, top 10 holdings information may be misleading); Letter of
Leslie L. Ogg (Feb. 1, 2008) (``Ogg Letter'') (noting that top 10
holdings information can be misleading for multi-manager funds,
funds of funds, long-short funds, and funds using derivative
instruments).
    \76\ See, e.g., AIM Letter, supra note 47; CAI Letter, supra
note 67; Capital Research Letter, supra note 34; Clarke Letter,
supra note 35; Dechert Letter, supra note 50; ICI Letter, supra note
34; IDC Letter, supra note 61; Janus Letter, supra note 63; NYC Bar
Letter, supra note 75; Oppenheimer Letter, supra note 44; Russell
Letter, supra note 48.
    \77\ Form N-CSR [17 CFR 249.331; 17 CFR 274.128] (form used by
investment companies semi-annually to file certified shareholder
reports); Form N-Q [17 CFR 249.332; 17 CFR 274.130] (form used by
investment companies to file schedule of portfolio holdings for
first and third quarters).
    \78\ See, e.g., AIM Letter, supra note 47; EQ/AXA Letter, supra
note 67; Evergreen Letter, supra note 41; Russell Letter, supra note
48; T. Rowe Letter, supra note 49.
---------------------------------------------------------------------------

    We continue to believe that information concerning a fund's
portfolio holdings may provide investors with a greater understanding
of a fund's stated investment objectives and strategies and may assist
investors in making more informed asset allocation decisions. In light
of the limited utility of top 10 holdings information, however, and the
widespread availability of portfolio holdings information from other
sources, we have determined not to require this information in the
summary section. Some commenters and investors in our focus groups
suggested that we instead require disclosure about the current
allocation of a fund's portfolio by asset type, such as a pie chart
that would graphically display this information.\79\ We have determined
not to require this information because we have concluded that it is
subject to the same concerns about staleness as top 10 holdings
information and because of the widespread availability of portfolio
holdings information from other sources. Nonetheless, where a fund's
asset allocation strategy is a principal investment strategy of the
fund, the fund should clearly disclose this strategy,\80\ and we would
encourage the use of graphical representations as a potentially helpful
communications tool.
---------------------------------------------------------------------------

    \79\ See, e.g., Cornell Law Clinic Letter, supra note 74;
Oppenheimer Letter, supra note 44; Focus Group Report, supra note
32, at 6.
    \80\ Items 4(a) and 9 of Form N-1A (requiring disclosure of
principal investment strategies).
---------------------------------------------------------------------------

    In reaching our determination with respect to portfolio holdings
information, we carefully considered the views of investors expressed
in our focus groups. Many investors in the focus groups expressed
significant interest in portfolio holdings information.\81\ At the same
time, like the commenters, a number of the investors participating in
our focus groups pointed out that top 10 portfolio holdings information
changes frequently and can quickly become outdated, and some
participants acknowledged that the top 10 holdings information can
sometimes account for a relatively small portion of a fund's
holdings.\82\ We concluded that investors' interest in this information
is outweighed by its potential to mislead and confuse in the context of
the summary section of a prospectus. Because this information is widely
available through other sources, we are persuaded that investors'
interest in this information can be satisfied through these other
sources.
---------------------------------------------------------------------------

    \81\ Focus Group Report, supra note 32, at 7; Focus Group
Transcripts, supra note 32, at 12.
    \82\ Focus Group Report, supra note 32, at 7; Focus Group
Transcripts, supra note 32, at 13-14, 78.
---------------------------------------------------------------------------

b. Order of Information
    We are adopting the order of the information required in the
summary

section, as proposed. This includes moving the fee table forward from
its current location, which follows information about investment
strategies, risks, and past performance. We continue to believe that
the change to the location of the fee table will enhance the prominence
of this information, which is important to address continuing concerns
about investor understanding of mutual fund costs.\83\ Several
commenters agreed that relocation of the fee table will place fee
information in a more prominent location and encourage investors to
give greater attention to costs and cost comparisons.\84\ While several
commenters suggested alternative orders for the information in the
summary section, there was no consensus by commenters regarding any
alternative.\85\
---------------------------------------------------------------------------

    \83\ See Barbara Roper, Director of Investor Protection,
Consumer Federation of America, June 12 Roundtable Transcript, supra
note 18, at 21; James J. Choi, David Laibson, & Brigitte C. Madrian,
National Bureau of Economic Research, Why Does the Law of One Price
Fail? An Experiment on Index Mutual Funds, at 6 (May 2006),
available at http://www.nber.org/papers/w12261.pdf.; Focus Group
Transcripts, supra note 32, at 6 (``[The hypothetical summary
prospectus] shows the fee right up there, what they charge, so that
would appeal to me.'').
    \84\ See, e.g., Letter of Roy J. Biegel (Feb. 14, 2008)
(``Biegel Letter''); CFA Institute Letter, supra note 37; Foreside
Letter, supra note 74; Letter of Fund Democracy and Consumer
Federation of America (Apr. 17, 2008); NAPFA Letter, supra note 44;
Letter of Charles Sikorovsky (Feb. 29, 2008) (``Sikorovsky
Letter''). See also Focus Group Transcripts, supra note 32, at 10
(investors expressed view that fund costs are important); Letter of
Investment Company Institute (Mar. 14, 2008) (``ICI Survey'')
(finding that 95% of respondents believed that fees are important).
    \85\ See, e.g., Letter of Ward C. Bourn (Feb. 27, 2008); Capital
Research Letter, supra note 34; Evergreen Letter, supra note 41;
Financial Services Institute Letter, supra note 41; Vanguard Letter,
supra note 42.
---------------------------------------------------------------------------

    A number of commenters, largely from the fund industry, opposed
relocating the fee table. These commenters argued that moving the fee
table forward inappropriately overemphasizes costs over other more
important information and that the fee table should not come between
investment objectives and principal investment strategies and
risks.\86\ Some of these commenters argued that the fee table should
not be moved forward, because it is important for investors to first
and foremost understand a fund and its risks, and that a fund's
objectives, strategies, and risks provide necessary context for fees.
Some commenters also argued that moving the fee table forward is
unnecessary because the short length of the summary section will make
the fee table sufficiently prominent.
---------------------------------------------------------------------------

    \86\ See, e.g., AIM Letter, supra note 47; Evergreen Letter,
supra note 41; Letter of Fidelity Investments (Feb. 28, 2008)
(``Fidelity Letter''); ICI Letter, supra note 34; Oppenheimer
Letter, supra note 44; Russell Letter, supra note 48; T. Rowe
Letter, supra note 49.
---------------------------------------------------------------------------

    We are not persuaded by these commenters. We continue to believe,
along with a number of commenters, that placement of the fee table in a
more prominent location will encourage investors to give greater
attention to costs. The fee table and example are designed to help
investors understand the costs of investing in a fund and compare those
costs with the costs of other funds. Placing the fee table and example
at the front of the summary section reflects the importance of costs to
an investment decision.\87\ Moving the fee table forward also
eliminates the possibility that the fee table could be obscured by
other information.\88\
---------------------------------------------------------------------------

    \87\ For example, a 1% increase in annual fees reduces an
investor's return by approximately 18% over 20 years.
    \88\ See Sikorovsky Letter, supra note 84 (stating that if an
investment manager can in any way ``hide'' fees from an investor,
the document has failed to fulfill its function).
---------------------------------------------------------------------------

c. Investment Objectives and Goals
    We are adopting, as proposed, the requirement that the summary
section begin with disclosure of a fund's investment objectives or
goals, which commenters generally supported.\89\ As proposed, a fund
also will be permitted to identify its type or category (e.g., that it
is a money market fund or balanced fund).\90\
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    \89\ See, e.g., AARP Letter, supra note 34; Firehouse Letter,
supra note 35; ICI and SIFMA Letter, supra note 37; Letter of
Christine A. Nelson (Feb. 12, 2008); Schnase Letter, supra note 35.
See also ICI Survey, supra note 84 (providing survey results that
found investment objectives was one of the most important pieces of
information to investors).
    \90\ Item 2 of Form N-1A.
---------------------------------------------------------------------------

d. Fee Table
    We are adopting, with modifications to address commenters' concerns
and views expressed by investors in the focus groups, the fee table and
example. The fee table and example disclose the costs of investing and
immediately follow the fund's investment objectives.\91\
---------------------------------------------------------------------------

    \91\ Item 3 of Form N-1A.
---------------------------------------------------------------------------

Breakpoint Discounts
    We are requiring, substantially as proposed, that mutual funds that
offer discounts on front-end sales charges for volume purchases (so-
called ``breakpoint discounts'') include brief narrative disclosure
alerting investors to the availability of those discounts.\92\
Commenters generally supported the disclosure about breakpoint
discounts, although many commenters, as well as focus group investors,
provided suggestions for revising the narrative proposed.\93\ We are
modifying the proposal in two ways to address these comments.
---------------------------------------------------------------------------

    \92\ Item 3 of Form N-1A; Instruction 1(b) to Item 3 of Form N-
1A.
    \93\ See, e.g., AIM Letter, supra note 47; CFA Institute Letter,
supra note 37; Fund Democracy et al. Letter, supra note 34; Letter
of Manuela A. De Leon (Feb. 7, 2008); ICI Letter, supra note 34;
Keil Letter, supra note 62; NAPFA Letter, supra note 44; Oppenheimer
Letter, supra note 44; Russell Letter, supra note 48; Focus Group
Report, supra note 32, at 8.
---------------------------------------------------------------------------

    First, we are adding to the required narrative a description of
where investors can find additional information regarding breakpoint
discounts.\94\ Specifically, the narrative will be required to state
that further information is available from the investor's financial
professional, as well as identify the section heading and page number
of the fund's prospectus and SAI where more information can be found.
This information is intended to address the views of both commenters
and investors in the focus groups that it would be helpful for more
detailed information about breakpoint discounts to be readily available
to investors.\95\
---------------------------------------------------------------------------

    \94\ Item 3 of Form N-1A.
    \95\ See, e.g., CMFI Letter, supra note 44 (summary should
indicate where additional information about breakpoint discounts is
available); NAPFA Letter, supra note 44 (same); Focus Group
Transcripts, supra note 32, at 17 (participant observes that ``I'll
go to the long-form and look that up and then make my decision.'').
---------------------------------------------------------------------------

    Second, we are clarifying the instruction that the dollar level at
which investors may qualify for breakpoint discounts that is required
to be disclosed in the new item is the minimum level of investment
required to qualify for a discount as disclosed in the table required
by current Item 7(a)(1) of Form N-1A.\96\ This change makes clear that
the required dollar threshold to be disclosed is the same as disclosure
that is already required in Form N-1A. This change, together with the
added narrative about additional information, addresses commenters'
concerns that the breakpoints disclosure does not capture the
complexity and variety of policies regarding breakpoint discounts.\97\
---------------------------------------------------------------------------

    \96\ Instruction 1(b) to Item 3 of Form N-1A. Item 7 of Form N-
1A is being renumbered as Item 12 in this rulemaking.
    \97\ See, e.g., AIM Letter, supra note 47; ICI Letter, supra
note 34; Russell Letter, supra note 48; Letter of Securities
Industry and Financial Markets Association (Feb. 28, 2008) (``SIFMA
Letter'').
---------------------------------------------------------------------------

Parenthetical to ``Annual Fund Operating Expenses''
    We are adopting, substantially as proposed, revisions to the
heading ``Annual Fund Operating Expenses'' in the fee table.
Specifically, we are revising the parenthetical following the

heading to read ``expenses that you pay each year as a percentage of
the value of your investment'' in place of ``expenses that are deducted
from Fund assets.'' \98\ In recent years, we have taken significant
steps to address concerns that investors do not understand that they
pay costs every year when they invest in mutual funds, including
requiring disclosure of these costs in shareholder reports.\99\ Our
revision further addresses those concerns by making clear that the
expenses in question are paid by investors as a percentage of the value
of their investments in the fund.
---------------------------------------------------------------------------

    \98\ Item 3 of Form N-1A.
    \99\ Item 27(d)(1) of Form N-1A; Investment Company Act Release
No. 26372 (Feb. 27, 2004) [69 FR 11244 (Mar. 9, 2004)] (adopting
disclosure of costs in shareholder reports). See also General
Accounting Office Report on Mutual Fund Fees: Additional Disclosure
Could Encourage Price Competition, at 66-81 (June 2000), available
at http://www.gao.gov/archive/2000/gg00126.pdf (discussing lack of
investor awareness of the fees they pay and investor focus on mutual
fund sales charges rather than recurring fees).
---------------------------------------------------------------------------

    Many commenters supported the Commission's proposed revision.\100\
We have deleted the word ``ongoing'' from the beginning of the
parenthetical language to address commenters' concerns that this term
incorrectly suggests that fund operating expenses are the same each
year.\101\ We are not modifying the parenthetical to address the views
of some industry commenters that the statement incorrectly implies that
shareholders directly pay fund expenses, when in fact expenses are paid
out of fund assets.\102\ The purpose of the revision is to make clear
to investors that they, in fact, bear these expenses, and the proposed
language conveys this fact. Our conclusion is supported by commenters
representing investor groups.\103\
---------------------------------------------------------------------------

    \100\ See, e.g., CFA Institute Letter, supra note 37; Clarke
Letter, supra note 35; Fund Democracy et al. Letter, supra note 34.
    \101\ See, e.g., CFA Institute Letter, supra note 37; Clarke
Letter, supra note 35; Fund Democracy et al. Letter, supra note 34;
Evergreen Letter, supra note 41; Letter of Fenimore Asset Management
(Feb. 28, 2008); Fidelity Letter, supra note 86; MFDF Letter, supra
note 34; Oppenheimer Letter, supra note 44; T. Rowe Letter, supra
note 49.
    \102\ See, e.g., Evergreen Letter, supra note 41; ICI Letter,
supra note 34; Oppenheimer Letter, supra note 44; Putnam Letter,
supra note 48; Russell Letter, supra note 48; T. Rowe Letter, supra
note 49.
    \103\ See Fund Democracy et al. Letter, supra note 34.
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Portfolio Turnover Rate
    We are adopting, with two modifications, the requirement that
funds, other than money market funds, include brief disclosure
regarding portfolio turnover immediately following the fee table
example.\104\ A fund will be required to disclose its portfolio
turnover rate for the most recent fiscal year as a percentage of the
average value of its portfolio. This numerical disclosure will be
accompanied by a brief explanation of the effect of portfolio turnover
on transaction costs and fund performance. Some concerns have been
expressed in recent years regarding the degree to which investors
understand the effect of portfolio turnover, and the resulting
transaction costs, on fund expenses and performance.\105\ The
requirement to provide brief portfolio turnover disclosure in the
summary section of the prospectus is intended to address these
concerns, and the proposed disclosure received support from a
significant number of commenters.\106\ Because we believe that it is
important to address investors' lack of understanding of the effect of
portfolio turnover and transaction costs on fund expenses and
performance, we disagree with commenters opposing the disclosure of
portfolio turnover rate on the grounds that such information is too
complicated or unnecessary for the summary section.\107\
---------------------------------------------------------------------------

    \104\ Instruction 5 to Item 3 of Form N-1A.
    \105\ See Investment Company Act Release No. 26313 (Dec. 18,
2003) [68 FR 74820 (Dec. 24, 2003)] (request for comment regarding
ways to improve disclosure of transaction costs); Report of the
Mutual Fund Task Force on Soft Dollars and Portfolio Transaction
Costs (Nov. 11, 2004), available at http://www.finra.org/web/groups/
rules_regs/documents/rules_regs/p012356.pdf.
    \106\ See, e.g., Biegel Letter, supra note 84; CFA Institute
Letter, supra note 37; CMFI Letter, supra note 44; Fund Democracy et
al. Letter, supra note 34; IDC Letter, supra note 61; Mahavier
Letter, supra note 74; NAPFA Letter, supra note 44; Schnase Letter,
supra note 35; Vanguard Letter, supra note 42. See also ICI Letter,
supra note 34 (stating that it does not oppose the disclosure).
    \107\ See, e.g., American Century Letter, supra note 48; Capital
Research Letter, supra note 34; Clarke Letter, supra note 35;
Evergreen Letter, supra note 41; Foreside Letter, supra note 74;
McCormick Letter, supra note 74; Oppenheimer Letter, supra note 44;
Russell Letter, supra note 48.
---------------------------------------------------------------------------

    We are modifying the proposed required explanation of the effect of
portfolio turnover to require that the explanation also address the
adverse tax consequences that may result from a higher portfolio
turnover rate when fund shares are held in a taxable account. We agree
with commenters who suggested that adverse tax consequences, as well as
higher transaction costs, should be expressly addressed by the
explanation.\108\ We are also making a technical revision to the final
sentence of the proposed required explanation.\109\
---------------------------------------------------------------------------

    \108\ See Fund Democracy et al. Letter, supra note 34; Letter
from Representative Donald A. Manzullo (Feb. 26, 2008) (``Manzullo
Letter'').
    \109\ Item 3 of Form N-1A. We are deleting the reference to
portfolio turnover rate as a percentage of the average value of the
fund's ``whole'' portfolio in the explanation to reflect the fact
that the rate is calculated without reference to securities whose
maturities at the time of acquisition are one year or less. See
Instruction 4(d)(ii) to current Item 8(a) of Form N-1A (describing
how to calculate portfolio turnover rate; current Item 8 is being
renumbered as Item 13).
---------------------------------------------------------------------------

    We have determined not to adopt two significant suggestions that
were made by commenters: First, that we require the impact of
transaction costs to be reflected in a fund's expense ratio in the fee
table and, second, that we require disclosure of portfolio turnover
rates over a period greater than one year. While we believe that both
of these suggestions have considerable merit, we have concluded that it
is not feasible to implement either at the present time as discussed
further below.
    Several commenters expressed the view that the Commission should
require that transaction costs be reflected in a fund's expense ratio
in the fee table and that this disclosure would be more meaningful to
investors than the rate of portfolio turnover.\110\ The comments on
this rulemaking, however, do not provide an adequate basis for
prescribing a specific and accurate methodology for reflecting
transaction costs in a fund's expense ratio.\111\ We do agree with the
commenters that portfolio turnover rate is an imperfect measure of
portfolio transaction costs. While a higher portfolio turnover rate
tends to result in higher transaction costs and a lower portfolio
turnover rate tends to result in lower transaction costs, there is not
necessarily a direct correlation between portfolio turnover rate and
portfolio transaction costs. Nonetheless, in the absence of a basis for
prescribing a better measure, we believe that portfolio turnover rate,
though imperfect, is an appropriate indicator of transaction costs for
purposes of the summary section.
---------------------------------------------------------------------------

    \110\ See, e.g., Fund Democracy et al. Letter, supra note 34;
Letter from Representative George Miller, Senator Edward M. Kennedy,
Representative Robert E. Andrews, Senator Tom Harkin, and Senator
Herb Kohl (Mar. 13, 2008) (``Miller Letter'').
    \111\ In addition, in 2003 the Commission issued a concept
release that sought public comment on a number of issues related to
the disclosure of mutual fund transaction costs. See Investment
Company Act Release No. 26313, supra note 105, 68 FR at 74820. While
most commenters who responded to the concept release felt that there
should be greater transparency of mutual fund transaction costs,
there was a wide range of opinions on what should be disclosed.
---------------------------------------------------------------------------

    A number of commenters argued that disclosing a portfolio turnover
rate over a one-year period would not yield a representative portfolio
turnover rate because portfolio turnover rates vary significantly over
time depending on a variety of factors, including the need to meet
redemption requests, unexpected cash inflows due to sharp swings in

markets, or the occurrence of a significant event not likely to repeat
in future years, such as a fund merger or a new portfolio manager
restructuring the fund's holdings.\112\ These commenters suggested that
the Commission address this concern by, for example, requiring funds to
disclose year-by-year turnover rates for a longer period (e.g., 5-10
years) or an average turnover rate over a longer period of time (e.g.,
five years).\113\ We believe that requiring year-by-year turnover rates
for multiple years in the summary section would not further our goal of
providing concise, user-friendly disclosure, particularly in light of
the fact that there is not necessarily a direct correlation between
portfolio turnover and transaction costs. We note that portfolio
turnover rates for each of the past five years are already required
elsewhere in the prospectus.\114\ We do not believe that there is a
sufficient basis in the comments to require disclosure of an average
turnover rate over a longer period of time (e.g., five years). Doing so
would require us to address a number of questions that have not been
subject to adequate comment in this rulemaking, including devising a
calculation methodology and addressing questions of comparability
across funds that have been in existence for different periods of time.
---------------------------------------------------------------------------

    \112\ See, e.g., CMFI Letter, supra note 44; Firehouse Letter,
supra note 35; IDC Letter, supra note 61.
    \113\ See, e.g., CMFI Letter, supra note 44; Mahavier Letter,
supra note 74.
    \114\ Item 13(a) of Form N-1A.
---------------------------------------------------------------------------

Expense Reimbursement and Fee Waiver Arrangements
    Finally, we are adopting, with modifications to address commenters'
recommendations, the proposed amendments to the requirement that a fund
disclose in its fee table gross operating expenses that do not reflect
the effect of expense reimbursement or fee waiver arrangements, which
result in reduced expenses being paid by the fund.\115\ The adopted
amendments will permit a fund to place two additional captions directly
below the ``Total Annual Fund Operating Expenses'' caption in cases
where there are expense reimbursement or fee waiver arrangements that
will reduce any fund operating expenses for no less than one year from
the effective date of the fund's registration statement.\116\ We have
eliminated the proposed requirement that the reimbursement or waiver
arrangement has reduced operating expenses in the past, as suggested by
two commenters, because this is irrelevant to the impact that the
arrangements will have in the future.\117\ The purpose of the permitted
line items is to show investors how the arrangements will affect
expenses in the future and not how they have affected expenses in the
past.\118\
---------------------------------------------------------------------------

    \115\ Instruction 3(d)(i) and 6(a) to Item 3 of Form N-1A. In an
expense reimbursement arrangement, the adviser reimburses the fund
for expenses incurred. Under a fee waiver arrangement, the adviser
agrees to waive a portion of its fees in order to limit fund
expenses.
    \116\ Instruction 3(e) to Item 3 of Form N-1A. A fund may not
include the additional captions if the expense reimbursement or fee
waiver arrangement may be terminated without agreement of the fund's
board of directors (e.g., unilaterally by the fund's investment
adviser) during the one-year period. If a fee waiver or expense
reimbursement arrangement, in fact, terminates less than a year
after the effective date of a fund's registration statement, the
fund generally would be required to supplement or ``sticker'' its
prospectus to reflect the termination. The ``sticker'' would be
filed with the Commission in accordance with rule 497 under the
Securities Act.
    \117\ Instruction 3(e) to Item 3. We are also making a similar
change in the instructions to the fee table example. Instruction
4(a) to Item 3. See, e.g., Dechert Letter, supra note 50; Evergreen
Letter, supra note 41.
    \118\ Because expense reimbursement and fee waiver arrangements
of new funds will be disclosed in the same manner as existing funds
as a result of the elimination of the proposed requirement described
in the text, we are eliminating current Instruction 5(b) (renumbered
as Instruction 6(b) in the Proposing Release) to Item 3 of Form N-
1A, which pertains to new funds, rather than adopting the proposed
revision to the Instruction.
---------------------------------------------------------------------------

    One caption will show the amount of the expense reimbursement or
fee waiver, and a second caption will show the fund's net expenses
after subtracting the fee reimbursement or expense waiver from the
total fund operating expenses. Funds that disclose these arrangements
will also be required to disclose the period for which the expense
reimbursement or fee waiver arrangement is expected to continue,
including the expected termination date, and briefly describe who can
terminate the arrangement and under what circumstances. We are adding
an express requirement that the expected termination date of the
arrangement be disclosed in order to address a commenter's concern that
investors should be informed in cases where the commitment on a fee
waiver becomes shorter than one year.\119\
---------------------------------------------------------------------------

    \119\ See, e.g., Fund Democracy et al. Letter, supra note 34.
---------------------------------------------------------------------------

    In computing the fee table example, a fund will be permitted to
reflect any expense reimbursement or fee waiver arrangements that will
reduce any operating expenses for no less than one year from the
effective date of the fund's registration statement.\120\ This
adjustment may be reflected only in the periods for which the expense
reimbursement or fee waiver arrangement is expected to continue. For
example, if such an arrangement were expected to continue for one year,
then, in the computation of 10-year expenses in the fee table example,
the arrangement could only be reflected in the first of the 10
years.\121\
---------------------------------------------------------------------------

    \120\ Instruction 4(a) to Item 3 of Form N-1A. We have modified
this instruction from the proposal to eliminate the requirement that
the arrangement has reduced fund operating expenses during the most
recently completed calendar year. This modification is consistent
with the modification that is described at notes 117 and 118 and the
accompanying text.
    We are also adopting, as proposed, a technical amendment to the
instructions to the expense example to eliminate language permitting
funds to reflect the impact of the amortization of initial
organization expenses in the expense example numbers. Id. This
language is unnecessary because initial organization expenses must
be expensed as incurred and may no longer be capitalized. See
American Institute of Certified Public Accountants, Statement of
Position 98-5, Reporting on the Costs of Start-Up Activities (Apr.
3, 1998).
    \121\ A fund may not reflect the arrangement in any period
during which the arrangement may be terminated without agreement of
the fund's board of directors (e.g., unilaterally by the fund's
investment adviser).
---------------------------------------------------------------------------

    Commenters made several suggestions with respect to cost disclosure
that we have determined not to implement at this time. First, a number
of commenters suggested that the fee table in the summary section
should simply disclose the total fees and expenses and should omit
certain line item breakdowns of expenses that are currently required in
the statutory prospectus.\122\ Commenters argued that a more
abbreviated presentation, such as a fund's total expense ratio, is
preferable because they argued that the current breakdown of fees is
not crucial information to an investor's investment decision.\123\ We
believe that this idea deserves further consideration, and we will
consider it for possible future rulemaking.
---------------------------------------------------------------------------

    \122\ See, e.g., Capital Research Letter, supra note 34;
Evergreen Letter, supra note 41; Fund Democracy et al. Letter, supra
note 34.
    \123\ See Fund Democracy et al. Letter, supra note 34.
---------------------------------------------------------------------------

    Second, some commenters suggested that we consider alternative
terms to describe sales loads or rule 12b-1 fees \124\ because the
terms are not easily understood by most investors.\125\ We have
concluded that it is more appropriate to consider these changes in the
context of a full reconsideration of

sales charges and rule 12b-1 rather than in the current
rulemaking.\126\
---------------------------------------------------------------------------

    \124\ ``Rule 12b-1 fees'' or ``12b-1 fees'' are fees paid out of
fund assets pursuant to a distribution plan adopted under rule 12b-1
under the Investment Company Act [17 CFR 270.12b-1].
    \125\ See, e.g., Miller Letter, supra note 110; CFA Institute
Letter, supra note 37; Manzullo Letter, supra note 108; Letter of
Investor Rights Clinic at Pace University School of Law (Feb. 28,
2008) (``Pace Letter'').
    \126\ The Commission last year hosted a roundtable that brought
together representatives from mutual funds, financial services
companies, and investor advocacy groups to discuss issues relating
to rule 12b-1. See Commission Roundtable on Rule 12b-1 (Jun. 19,
2007) available at http://www.sec.gov/spotlight/rule12b-1.htm.
Following the roundtable, we sought public comment on these topics
and have received almost 1,500 comment letters.
---------------------------------------------------------------------------

    Finally, some commenters suggested that the fee table require some
form of comparison of the fund's fees to a relevant benchmark based on
the fees of similar funds.\127\ The Commission shares the commenters'
view that the ability to compare fees across mutual funds is extremely
important to investors. To facilitate this comparison, we have designed
the summary section to provide investors with key information in a
standardized order. We also note that the Commission's ongoing
interactive data initiative is intended to provide investors and other
users with the tools necessary to facilitate comparisons of fee
information. The Commission recently proposed rules that would, if
adopted, require mutual funds to file the information in their fee
tables in an interactive data format that would facilitate automated
analysis of the information and comparison to other funds.\128\ The
interactive data format would allow users of fee table information to
download cost and performance information directly into spreadsheets
and analyze it using commercial off-the-shelf software.
---------------------------------------------------------------------------

    \127\ See, e.g., AARP Letter, supra note 34; Fund Democracy et
al. Letter, supra note 34; Letter of Gary M. Keenan (Feb. 14, 2008).
    \128\ See Investment Company Act Release No. 28298, supra note
28, 73 FR at 35442.
---------------------------------------------------------------------------

e. Investments, Risks, and Performance
    Following the fee table and example, we are requiring,
substantially as proposed, that a fund disclose its principal
investment strategies and risks.\129\ This includes the current bar
chart and table illustrating the variability of returns and showing the
fund's past performance.
---------------------------------------------------------------------------

    \129\ Item 4 of Form N-1A. To conform to other changes we are
adopting to Form N-1A, the Instructions to Item 4 contain technical
revisions that (1) amend cross-references to other Items in Form N-
1A; and (2) eliminate language related to the presentation of
performance information for more than one fund, given the
requirement that information for each fund be presented separately.
Instructions 2(e) and 3 to Item 4(b)(2) of Form N-1A.
---------------------------------------------------------------------------

    We are modifying the narrative that is required to accompany the
bar chart and performance table in one respect to address the views
expressed by both focus group investors and commenters. A fund that
makes updated performance information available on a Web site or at a
toll-free (or collect) telephone number will be required to include a
statement explaining this and providing the Web site address and/or
telephone number.\130\ A number of investors in focus groups expressed
the view that the availability of updated performance information,
particularly at a Web site, would be helpful.\131\ In addition, many
industry commenters noted that funds routinely make updated performance
information available to investors either by Internet Web site or by
telephone and suggested that the summary section direct investors to
this information.\132\ Particularly in light of our determination not
to require quarterly updating of the Summary Prospectus, which is
discussed below,\133\ we believe that it will be helpful to investors
for the summary section to indicate where updated performance
information may be found.
---------------------------------------------------------------------------

    \130\ Item 4(b)(2)(i) of Form N-1A.
    \131\ See Focus Group Report, supra note 32, at 11; see, e.g.,
Focus Group Transcripts, supra note 32, at 49, 78.
    \132\ See, e.g., AIM Letter, supra note 47; American Century
Letter, supra note 48; Capital Research Letter, supra note 34;
Fidelity Letter, supra note 86; ICI Letter, supra note 34; Janus
Letter, supra note 63; Oppenheimer Letter, supra note 44; Putnam
Letter, supra note 48; Russell Letter, supra note 48; T. Rowe
Letter, supra note 49.
    \133\ See discussion infra Part III.B.2.c.
---------------------------------------------------------------------------

    We are not modifying the required bar chart and performance table
to add additional comparative information as suggested by several
commenters.\134\ Currently, funds are required to include an
appropriate broad-based securities market index in the performance
table.\135\ We have determined not to require additional comparative
performance information at this time because we are concerned that it
would tend to undermine our goal of a concise, user-friendly summary of
key information by contributing to the length and complexity of the
summary section. Further, as with cost information,\136\ we believe
that it is preferable for investors and other users of the prospectus
to be given the flexibility to make a variety of performance benchmark
comparisons. Our ongoing interactive data initiative is intended to
provide the tools necessary to facilitate dynamic comparisons of this
type, and we note that the information in the bar chart and performance
table is covered by our recently proposed rules that would, if adopted,
require mutual funds to file information in an interactive data
format.\137\
---------------------------------------------------------------------------

    \134\ See, e.g., Letter of Scott Hastings (Feb. 11, 2008)
(suggesting comparative disclosure of the portfolio manager's stated
benchmark); Morningstar Letter, supra note 34 (same).
    \135\ Current Item 2(c)(2)(iii) of Form N-1A; Instruction 5 to
current Item 22(b)(7) of Form N-1A. A fund is also permitted to
include information for one or more other indexes. Instruction 6 to
current Item 22(b)(7) of Form N-1A. If an additional index is
included, a fund is required to disclose information about the
additional index in the narrative explanation accompanying the bar
chart and table (e.g., by stating that the information shows how the
fund's performance compares with the returns of an index of funds
with similar investment objectives).
    \136\ See supra note 127 and accompanying text.
    \137\ See Investment Company Act Release No. 28298, supra note
28, 73 FR at 35442.
---------------------------------------------------------------------------

f. Management
    We are adopting, as proposed, the requirement that the summary
section include the name of each investment adviser and sub-adviser of
the fund, followed by the name, title, and length of service of the
fund's portfolio managers.\138\ A fund will not be required to identify
a sub-adviser whose sole responsibility is limited to day-to-day
management of cash instruments unless the fund is a money market fund
or other fund with a principal investment strategy of regularly holding
cash instruments.\139\ Also, a fund having three or more sub-advisers,
each of which manages a portion of the fund's portfolio, will not be
required to identify each sub-adviser, except that the fund will be
required to identify any sub-adviser that is (or is reasonably expected
to be) responsible for the management of a significant portion of the
fund's net assets. For this purpose, a significant portion of a fund's
net assets generally will be deemed to be 30% or more of the fund's net
assets.\140\ The portfolio managers required to be listed will be the
same ones with respect to which information is currently required in
the prospectus.\141\
---------------------------------------------------------------------------

    \138\ Item 5 of Form N-1A. Additional disclosures regarding
investment advisers and portfolio managers that are currently
required in the prospectus will continue to be required, but not in
the summary section. Item 10(a) of Form N-1A.
    \139\ Instruction 1 to Item 5(a) of Form N-1A. A fund will
continue to be required to provide the name, address, and experience
of all sub-advisers elsewhere in the prospectus. Item 10(a)(1)(i) of
Form N-1A.
    \140\ Instruction 2 to Item 5(a) of Form N-1A.
    \141\ Item 10(a)(2) of Form N-1A.
---------------------------------------------------------------------------

    Several commenters opposed requiring funds to disclose portfolio
managers.\142\ Two of these commenters argued that the identity and
length of service of portfolio managers do not rise to the level of
importance necessary to warrant inclusion in the summary.\143\ However,
the Commission continues to believe, along with other

commenters,\144\ that investors in a fund should be provided basic
information about the individuals who significantly affect the fund's
investment operations.
---------------------------------------------------------------------------

    \142\ See, e.g., Capital Research Letter, supra note 34; ICI
Letter, supra note 34; Vanguard Letter, supra note 42.
    \143\ See ICI Letter, supra note 34; Russell Letter, supra note
48.
    \144\ See, e.g., AARP Letter, supra note 34; Evergreen Letter,
supra note 41; Financial Services Institute Letter, supra note 41.
See also Focus Group Transcripts, supra note 32, at 11; id. at 30-31
(importance of fund managers); ICI Survey, supra note 84, at 8 (61%
of respondents believed that the name of the portfolio manager was
very important or somewhat important).
---------------------------------------------------------------------------

    Some commenters noted that funds are often managed by teams and
that disclosing the individuals making up such teams would make the
summary section too long and would not add substantive disclosure.\145\
We note that, as is currently the case, disclosure will be required
only with respect to the members of a management team who are jointly
and primarily responsible for the day-to-day management of the fund's
portfolio.\146\ We agree with other commenters that investors have the
same interest in the identity of the individuals who are primarily
responsible for management, regardless of whether a fund is managed by
an individual portfolio manager or a team.\147\
---------------------------------------------------------------------------

    \145\ See, e.g., Capital Research Letter, supra note 34; Clarke
Letter, supra note 35; Ogg Letter, supra note 75.
    \146\ Instruction 2 to Item 5(b) of Form N-1A. In addition, if
more than five persons are jointly and primarily responsible for the
day-to-day management of a fund's portfolio, the fund need only
provide the required information for the five persons with the most
significant responsibility.
    \147\ See Evergreen Letter, supra note 41; Keil Letter, supra
note 62.
---------------------------------------------------------------------------

g. Purchase and Sale of Fund Shares
    We are adopting, with modifications to address exchange-traded
funds,\148\ the proposed requirement that the summary section disclose
the fund's minimum initial or subsequent investment requirements and
the fact that the fund's shares are redeemable, and identify the
procedures for redeeming shares (e.g., on any business day by written
request, telephone, or wire transfer).\149\ Commenters generally did
not express a view with respect to this requirement.\150\
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    \148\ See discussion infra Part III.A.4. We are also making a
technical amendment to current Item 6(b) of Form N-1A (which is
being renumbered as Item 11(b)) to remove the requirement to
disclose a fund's minimum initial or subsequent investment
requirements because we have added this requirement to Item 6(a) of
the summary section.
    \149\ Item 6 of Form N-1A. We are modifying the proposal to
permit funds that are used as investment options for retirement
plans and variable insurance contracts to modify or omit this
information. See supra note 68 and accompanying text.
    \150\ Three commenters supported the proposal. See Letter of
Alison W. Beirlein (Feb. 26, 2008); Foreside Letter, supra note 74;
Schnase Letter, supra note 35. Three commenters opposed the
proposal. See Bent Letter, supra note 74; Clarke Letter, supra note
35; Letter of MFS Investment Management (Feb. 28, 2008) (``MFS
Letter'').
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h. Tax Information
    We are adopting, as proposed, the requirements for tax information
in the summary section. A fund will be required to state, as
applicable, that it intends to make distributions that may be taxed as
ordinary income or capital gains or that the fund intends to distribute
tax-exempt income. A fund that holds itself out as investing in
securities generating tax-exempt income will be required to provide, as
applicable, a general statement to the effect that a portion of the
fund's distributions may be subject to federal income tax.\151\
Commenters generally expressed no views on these requirements.\152\
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    \151\ Item 7 of Form N-1A.
    \152\ One commenter opposed mandating the tax information. See
Clarke Letter, supra note 35.
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i. Financial Intermediary Compensation
    The Commission is adopting the proposed requirement that the
summary section of the prospectus conclude with disclosure regarding
financial intermediary compensation. Commenters generally supported
this requirement,\153\ and we are modifying the requirement in two ways
to address views expressed during investor focus groups and the
concerns of commenters. Specifically, we are requiring the following
statement, which could be modified provided that the modified statement
contains comparable information: \154\

    \153\ See, e.g., Data Communiqu[eacute] Letter, supra note 35;
Firehouse Letter, supra note 35; Fund Democracy et al. Letter, supra
note 34; ICI Letter, supra note 34; Keil Letter, supra note 62;
NAPFA Letter, supra note 44; Schnase Letter, supra note 35; SIFMA
Letter, supra note 97; Letter of USAA Investment Management Company
(Feb. 28, 2008) (``USAA Letter''); Vanguard Letter, supra note 42;
Letter of Wachovia Securities, LLC (Aug. 29, 2008). But see Letter
of Capital Research and Management Company (Aug. 29, 2008) (opposing
the financial intermediary disclosure requirement).
    \154\ Item 8 of Form N-1A.
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Payments to Broker-Dealers and Other Financial Intermediaries

    If you purchase the Fund through a broker-dealer or other
financial intermediary (such as a bank), the Fund and its related
companies may pay the intermediary for the sale of Fund shares and
related services. These payments may create a conflict of interest
by influencing the broker-dealer or other intermediary and your
salesperson to recommend the Fund over another investment. Ask your
salesperson or visit your financial intermediary's Web site for more
information.

This disclosure will be new to fund prospectuses and is intended to
identify the existence of compensation arrangements with selling
broker-dealers or other financial intermediaries, alert investors to
the potential conflicts of interest arising from these arrangements,
and direct investors to their salesperson or the financial
intermediary's Web site for further information. It is intended to
address, in part, concerns that mutual fund investors lack adequate
information about certain distribution-related costs that create
conflicts for broker-dealers and their associated persons.\155\
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    \155\ The Commission has recognized these concerns in a separate
initiative in which the Commission proposed to require, among other
things, disclosure of mutual fund distribution-related costs and
conflicts of interest by selling broker-dealers and other financial
intermediaries at the point of sale. Securities Act Release No. 8544
(Feb. 28, 2005) [70 FR 10521 (Mar. 4, 2005)]; Securities Act Release
No. 8358 (Jan. 29, 2004) [69 FR 6438 (Feb. 10, 2004)]. One commenter
to that proposal recommended use of a short-form ``profile plus''
disclosure document that would include, among other things, basic
information about such potential conflicts of interest. See Letter
of NASD (Mar. 31, 2005) available at http://www.sec.gov/rules/
proposed/s70604/nasd033005.pdf. We intend to consider additional
steps to enhance investor access to information prior to making an
investment decision. See infra notes 200 and 201 and accompanying
text.
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    We have added a provision permitting a fund to omit the financial
intermediary disclosure if neither the fund nor any of its related
companies pay financial intermediaries for the sale of fund shares or
related services.\156\ This addresses the concerns of a number of
commenters who expressed the view that the Commission should not
require the narrative disclosure from funds to which the disclosure
does not apply.\157\ According to one commenter, such funds include,
for example, no-load funds and funds sold directly to investors.\158\
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    \156\ Item 8 of Form N-1A.
    \157\ See, e.g., CAI Letter, supra note 67; ICI Letter, supra
note 34; Oppenheimer Letter, supra note 44; T. Rowe Letter, supra
note 49; USAA Letter, supra note 153; Vanguard Letter, supra note
42. We note that Item 8 permits a fund to modify the narrative
statement provided that the modified statement contains comparable
information. For example, a fund that is offered as an underlying
investment option for a variable annuity contract could modify the
narrative statement to reflect payments made to the sponsoring
insurance company for distribution and other services.
    \158\ See ICI Letter, supra note 34. We note, however, that no-
load funds and directly-sold funds will be required to include the
narrative disclosure in certain circumstances. For example, the
disclosure will be required if a no-load fund pays servicing fees to
a fund supermarket.
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    We have also modified the proposed statement to clarify that
payments to a broker-dealer or other financial intermediary may create
a conflict of interest by influencing the broker-dealer or other
intermediary to recommend a

fund over another investment. This modification, made in response to
investor comments from our focus groups, is intended to increase
awareness of potential conflicts of interest.\159\ We are, therefore,
revising the narrative to expressly notify investors that a conflict of
interest may exist with respect to the broker-dealer's recommendation.
---------------------------------------------------------------------------

    \159\ See Focus Group Report, supra note 32, at 8 (stating that
participants felt that new investors may not be aware of the
potential conflict of interest); Focus Group Transcripts, supra note
32, at 16, 41.
---------------------------------------------------------------------------

    We have determined not to add a requirement that the disclosure
include standardized language enumerating the types of compensation
that may be provided to financial intermediaries, as suggested by one
commenter.\160\ Rather, we are adopting a statement that will alert
investors generally to the payment of compensation and the potential
conflicts arising from that payment. An investor could then obtain
further detail from his or her salesperson or the intermediary's Web
site. As discussed further below, we intend to consider additional
steps in the future that would further enhance investors' access to
information about broker and intermediary compensation and conflicts of
interest.
---------------------------------------------------------------------------

    \160\ 160 See NAPFA Letter, supra note 44 (requesting
standardized language describing possible forms of compensation,
such as surrender fees, payment for shelf space, commissions paid
for fund transactions, principal mark-ups and mark-downs, fees
derived from bid-ask spreads, and payments for marketing support
and/or education of registered representatives).
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4. Exchange-Traded Funds
    In March of this year, the Commission proposed several amendments
to Form N-1A to accommodate the use of the form by ETFs.\161\ Most ETFs
are organized and registered as open-end funds. Unlike traditional
mutual funds, however, they sell and redeem individual shares (``ETF
shares'') only in large aggregations called ``creation units'' to
certain financial institutions. ETFs register offerings and sales of
ETF shares under the Securities Act and list their shares for trading
under the Securities Exchange Act of 1934 (``Exchange Act'').\162\ As
with any listed security, investors trade ETF shares at market prices.
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    \161\ See ETF Proposing Release, supra note 14, 73 FR at 14618.
    \162\ For a description of how ETFs operate, see id. at 14620-
21. ETFs currently operate pursuant to exemptive orders granted by
the Commission. The final amendments define an ETF as a fund or
class of a fund, the shares of which are traded on a national
securities exchange, and that has formed and operates pursuant to an
exemptive order granted by the Commission or in reliance on an
exemptive rule adopted by the Commission. General Instruction A of
Form N-1A. The final ETF definition in Form N-1A eliminates from the
proposed definition the cross-reference to proposed rule 6c-11,
which, if adopted, would codify many of the exemptive orders granted
to ETFs. See ETF Proposing Release, supra note 14, 73 FR at 14621-
30. We have made this technical change to the ETF definition because
the Commission has not adopted proposed rule 6c-11.
---------------------------------------------------------------------------

    The proposed amendments for ETF prospectuses were designed to meet
the needs of investors (including retail investors) who purchase ETF
shares in secondary market transactions rather than financial
institutions that purchase creation units directly from the ETF. The
proposed amendments for ETF prospectuses also addressed the need to
modify the summary section of ETF prospectuses to include the amended
ETF disclosures. Today, we are adopting the proposed amendments for ETF
prospectuses with changes to respond to issues raised by commenters on
the summary prospectus proposing release and the ETF proposing
release.\163\
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    \163\ The amendments we proposed in the ETF Proposing Release
incorporated most of the comments from Barclays Global Fund Advisors
(``BGFA'') in response to the Proposing Release. See Letter of BGFA
(Feb. 28, 2008) (``BGFA Letter''). BGFA also requested guidance on
how disclosure requirements in future exemptive orders will be
integrated into the summary section of the prospectus. We are unable
to provide guidance in this release because we do not know what
additional disclosure requirements, if any, would be required for
ETFs that form and operate pursuant to future exemptive orders.
Additional disclosure requirements, if any, will be included in
those exemptive orders.
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a. Purchasing and Redeeming Shares
    We are amending Form N-1A to eliminate the requirement that ETF
prospectuses disclose information on how to buy and redeem shares
directly from the ETF because it is not relevant to investors who are
secondary market purchasers of ETF shares.\164\ We proposed to require
ETF prospectuses to state the number of shares contained in a creation
unit (i.e., the aggregate number of shares an ETF will issue or that is
necessary to redeem from the ETF), that individual shares can only be
bought and sold on the secondary market through a broker-dealer, and
that shareholders may pay more than net asset value (``NAV'') when they
buy ETF shares and receive less than NAV when they sell shares because
shares are bought and sold at current market prices.\165\ We also
proposed to amend the fee table disclosure in Form N-1A to exclude fees
and expenses for purchases or redemptions of creation units and instead
to modify the narrative explanation preceding the example in the fee
table to state that investors in ETF shares may pay brokerage
commissions that are not reflected in the example.\166\ Commenters who
addressed the proposed amendments generally supported this
approach.\167\ We are adopting the amendments largely as proposed, with
minor changes to conform to the final amendments to the summary
section.\168\ ETFs still will be required to include disclosure on how
creation units are offered to the public in the SAI.\169\
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    \164\ Item 6(c)(ii) of Form N-1A.
    \165\ See proposed Item 6(h)(3) and (4) of current Form N-1A;
proposed Instruction 3 to Item 6(h) of current Form N-1A.
    \166\ Proposed Instruction 1(e)(i) to current Item 3 of Form N-
1A. One commenter to the ETF Proposing Release requested that we
require ETFs to include spread costs in the fee table. See Letter of
BGFA (May 16, 2008) (File No. S7-07-08) (``BGFA Letter on ETF
Proposing Release''). This information is required to be disclosed
pursuant to rule 11Ac1-5(b) of the Exchange Act [17 CFR 240.11Ac1-
5(b)] and is publicly available to investors and the market, which
considers the effect of spreads. We did not follow the commenter's
suggestion because we believe that disclosure regarding additional
spreads in an ETF prospectus, particularly in the summary section,
would not be meaningful to most investors and may be confusing.
    \167\ See, e.g., BGFA Letter on ETF Proposing Release, supra
note 166, Letter of Investment Company Institute (May 19, 2008)
(File No. S7-07-08) (``ICI Letter on ETF Proposing Release'').
    \168\ Item 6(c)(i) of Form N-1A; Instruction 1(e)(i) to Item 3
of Form N-1A. Item 6(c)(i)(B) requires disclosure that ETF shares
may trade at a price greater than NAV (premium) or less than NAV
(discount). The final amendments, like the proposed amendments, also
will require each ETF to identify the exchange ticker symbol(s) and
principal U.S. market(s) on which the shares are traded. Item
1(a)(2) of Form N-1A; rule 498(b)(1)(ii) 17 CFR 230.498(b)(1)(ii).
We also are adopting a conforming amendment to the expense example
in ETF annual and semi-annual reports. Instruction 1(e)(i) to Item
27(d) of Form N-1A.
    \169\ Item 23(a) of Form N-1A. Consistent with our proposal, we
are not amending this disclosure to include information on creation
unit redemption, which Item 11 requires and which we are eliminating
for ETFs. See Item 11(g) of Form N-1A.
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    Consistent with our proposal, the alternative disclosures in Items
3 and 6 of Form N-1A will not be available to ETFs with creation units
of less than 25,000 shares.\170\ Although only certain financial
institutions purchase and redeem creation units directly from an ETF,
individual or retail investors may be more likely to transact in
creation units through one of these financial institutions if the
creation unit size is less than 25,000 shares.\171\ Because there is
greater potential for retail

investors to transact (indirectly) in creation units as they decrease
in size, we are requiring any ETF that sells and redeems its shares in
creation units of 25,000 or less to include in its prospectus
information on how to purchase and redeem creation units and the costs
associated with those transactions.\172\
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    \170\ Instruction (1)(e)(ii) to Item 3 of Form N-1A; Item
6(c)(ii) of Form N-1A. We also are adopting a conforming amendment
to the expense example in ETF annual and semi-annual reports.
Instruction 1(e)(ii) to Item 27(d) of Form N-1A.
    \171\ ETFs directly sell and redeem creation units only to
investors (``authorized participants''), usually brokerage houses,
with which the ETF has a contractual agreement. See, e.g.,
Investment Company Act Release No. 27963 (Aug. 31, 2007) [72 FR
51475 (Sept. 7, 2007)]. The authorized participant may act as a
principal in the transaction or as agent for another, typically an
institutional investor.
    \172\ We have not, as one commenter to the ETF Proposing Release
suggested, used a dollar value of a creation unit as the threshold
for disclosure. See ICI Letter on ETF Proposing Release, supra note
167. We do not want to establish a threshold that may change (and as
a consequence require amended disclosure) as a result of
fluctuations in portfolio value rather than direct action by the
ETF. We also disagree with one commenter who opined that the
proposed threshold would create a de facto minimum of 25,000 shares
for creation units and suggested that the threshold for exemptions
from disclosure be set at 1,000 shares. See Letter of James J. Angel
(May 16, 2008) (File No. S7-07-08). Other commenters, including ETF
sponsors, explained they supported the proposed exemption from
disclosure on the purchase and redemption of creation units because
the information would confuse retail investors rather than because
the disclosures were particularly costly or burdensome. See BGFA
Letter on ETF Proposing Release, supra note 166; ICI Letter on ETF
Proposing Release, supra note 167; Letter of Xshares Advisors LLC
(May 20, 2008) (File No. S7-07-08) (``Xshares Letter''). Thus, it
seems unlikely that an exemption from these disclosures would
outweigh the other factors an ETF considers in determining the
appropriate size of a creation unit, and we have not reduced the
threshold for the exemption. See ICI Letter on ETF Proposing
Release, supra note 167 (``[T]he appropriate size of a creation unit
may vary depending on a number of factors, such as the type and
availability of component securities, the expected uses of the
product, and the likely Authorized Participants.'').
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b. Total Return
    At the suggestion of commenters, we are not adopting our proposal
that ETFs include disclosure of market price returns in addition to
returns based on NAV.\173\ Like any other fund that files Form N-1A, an
ETF must disclose returns based on NAV.\174\ All commenters who
addressed this proposal opposed it.\175\ They disagreed that these
returns would be more relevant to an investor's experience in the ETF
than returns based on NAV because market price (which we proposed to
define as closing price) is not tied to an investor's particular
purchase price.\176\ One commenter suggested that while NAV also does
not represent any single investor's experience, it provides a better
metric of performance than market price.\177\ After consideration of
these comments, we agree with these commenters that market price
returns would not more closely represent the experience of any
particular investor and may confuse investors, particularly when
disclosed next to NAV returns.\178\ We therefore are not requiring ETFs
to disclose market price returns in Form N-1A.\179\
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    \173\ See ETF Proposing Release, supra note 14, 73 FR at 14623
n. 163 and preceding, accompanying, and following text.
    \174\ See Item 13(a) of Form N-1A.
    \175\ See ICI Letter on ETF Proposing Release, supra note 167;
BGFA Letter on ETF Proposing Release, supra note 166; Xshares
Letter, supra note 171.
    \176\ See ICI Letter on ETF Proposing Release, supra note 167;
Xshares Letter, supra note 172.
    \177\ ICI Letter on ETF Proposing Release, supra note 167
(``[NAV] provides a consistent metric calculated as of the same time