\225\ See id. at n.1 (requiring the fund to list each major
category of swaps by descriptive title); n.2 (requiring the fund to
list separately each swap where description, counterparty, or
maturity dates differ within each major category).
---------------------------------------------------------------------------

    While instruction 3 of proposed rule 12-13C provides specific
examples for the more common types of swap contracts (e.g., credit
default swaps, interest rate swaps, and total return swaps), we
recognize that other types of swaps exist (e.g., currency swaps,
commodity swaps, variance swaps, and subordinated risk swaps).\226\ For
example, a cross-currency swap has two notional amounts, one for the
currency to be received and one for the currency to be paid. For a
cross-currency swap, funds would report for purposes of Column A of
proposed rule 12-13C, a description of the interest rate to be received
and the notional amount that the calculation of interest to be received
is based upon. Column B of proposed rule 12-13C would include a
description of the interest rate to be paid and the notional amount
that the calculation of interest to be paid is based upon. Column E
would include both notional amounts and the currency in which each is
denominated, or the same information could be presented in two separate
columns.
---------------------------------------------------------------------------

    \226\ See proposed rule 12-13C, n.3 of Regulation S-X.
---------------------------------------------------------------------------

    As required in our proposed disclosures for open option contracts
\227\ and in proposed Form N-PORT,\228\ in the case of a swap with a
referenced asset that is an index whose components are publicly
available on a Web site as of the fund's balance sheet date, or if the
notional amount of the holding does not exceed one percent of the
fund's NAV as of the close of the period, we are proposing that the
fund provide information sufficient to identify the referenced asset,
such as a description.\229\ If the referenced asset is an index whose
components are not publicly available on a Web site as of the fund's
balance sheet date, or is based upon a custom basket of investments,
and the notional amount of the holding exceeds one percent of the
fund's NAV as of the close of the period, the fund would list
separately each of the investments comprising the referenced
assets.\230\ As with underlying investments for option contracts, we
believe that disclosure of the underlying referenced assets of a swap
would assist investors in better understanding and evaluating the full
risks of investments in swaps.
---------------------------------------------------------------------------

    \227\ See proposed rule 12-13, n.3 of Regulation S-X.
    \228\ See Item C.11.f.i of proposed Form N-PORT.
    \229\ See proposed rule 12-13C, n.3 of Regulation S-X.
    \230\ See id.
---------------------------------------------------------------------------

    For swaps which pay or receive financing payments, funds would
disclose variable financing rates in a manner similar to disclosure of
variable interest rates on securities in accordance with instruction 4
to proposed rule 12-12.\231\ Our proposal would also include other
instructions to this rule that are similar across all of our proposed
rules for derivatives contracts.\232\
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    \231\ See proposed rule 12-13C, n.3; and 12-12, n.4 of
Regulation S-X.
    \232\ Instruction 4 would clarify that the fund need not list
counterparty for exchange traded swaps. See proposed rule 12-13C,
n.4 of Regulation S-X. Instruction 5 would require the fund to
indicate each investment which cannot be sold because of
restrictions or conditions applicable to the investment. See
proposed rule 12-13C, n.5 of Regulation S-X. Instruction 6 would
require the fund to indicate each investment whose fair value was
determined using significant unobservable inputs. See proposed rule
12-13C, n.6 of Regulation S-X. Instruction 7 would require funds to
identify each illiquid investment. See proposed rule 12-13C, n.7 of
Regulation S-X. Instruction 8 would require that columns F (value),
G (upfront payments/receipts), and H (unrealized appreciation/
depreciation) be totaled and agree with the totals of their
respective amounts shown on the related balance sheet. See proposed
rule 12-13C, n.8 of Regulation S-X. Instruction 9 would extend
current rule 12-13's tax basis disclosure to disclosures of swap
contracts. See proposed rule 12-13C, n.9 of Regulation S-X.
---------------------------------------------------------------------------

e. Other Investments -- Rule 12-13D (Current Rule 12-13)
    We are also proposing to amend current rule 12-13 and, for
organization and consistency, renumber it as proposed rule 12-13D.
Proposed rule 12-13D is intended to continue, as is currently required
by rule 12-13, to be the schedule by which funds report investments not
otherwise required to be reported pursuant to Article 12.\233\ As
proposed, rule 12-13D would require reporting of: (1) Description; (2)
balance held at close of period-quantity; and (3) value of each item at
close of period.\234\ We expect that funds would report, among other
holdings, investments in physical holdings, such as real estate or
commodities, pursuant to proposed rule 12-13D. As discussed above, our
proposal would also modify current rule 12-13's requirement that funds
disclose ``each investment not readily marketable'' \235\ in favor of
disclosures concerning whether an investment is restricted and if an
investment's fair value was determined using significant unobservable
inputs.\236\ Our proposal would also include certain new instructions
to the schedule that are generally the same across all the schedules
for derivatives contracts.\237\
---------------------------------------------------------------------------

    \233\ See proposed rule 12-13D of Regulation S-X.
    \234\ Id.
    \235\ See rule 12-13, n.4 of Regulation S-X.
    \236\ See proposed rule 12-13D, n.6 of Regulation S-X (requiring
the fund to indicate each investment which cannot be sold because of
restrictions or conditions applicable to the investment); n.7
(requiring the fund to indicate each issue of securities whose fair
value was determined using significant unobservable inputs).
    \237\ Instruction 1 would require the fund to organize each
investment separately where any portion of the description differs.
See proposed rule 12-13D, n.1 of Regulation S-X. Instruction 2 would
require the fund to categorize the schedule by the type of
investment, and related industry, country, or geographic region, as
applicable. See proposed rule 12-13D, n.2 of Regulation S-X.
Instruction 3 would require that the description of the asset
include information sufficient for a user to understand the nature
and terms of the investment. See proposed rule 12-13D, n.3 of
Regulation S-X. Instruction 8 would require the fund to identify
each illiquid investment. See proposed rule 12-13D, n.8 of
Regulation S-X.

---------------------------------------------------------------------------

    We request comment on our proposed amendments to rules 12-13
through 12-13D of Regulation S-X:
     Many of our proposed portfolio holdings disclosure
requirements in Article 12 conform with similar requirements on
proposed Form N-PORT. Are our proposed amendments to Article 12
appropriate for fund financial statements? Is there information that is
currently proposed in Form N-PORT, but not in Article 12, that would
benefit investors? For example, to the extent that proposed Form N-PORT
instructs filers to report the country code that corresponds to the
country of investment or issuer based on the concentrations of the risk
and economic exposure of the investments, or, if different, the country
where the issuer is organized, should those same instructions be
integrated into Regulation S-X to standardize how funds report that
information in their financial statements and in Form N-PORT? \238\
---------------------------------------------------------------------------

    \238\ See supra note 104 and accompanying and following text
(discussing how funds would report country codes for portfolio
investments on Form N-PORT).
---------------------------------------------------------------------------

     Are there other categories of investments not specifically
covered in Article 12 that should be specifically addressed in a new
rule or directly addressed in rule 12-13D?
     To what extent are proposed rules 12-13 through 12-13D
consistent with industry practices? How are our proposed amendments
different? Are there other industry practices that we should include in
our proposal with respect to the disclosure of derivative investments?
     The schedules to rules 12-13 through 12-13D use the term
``description'' to require funds to disclose the information sufficient
for a user of financial information to identify the investment. Should
the instructions to any of those rules be enhanced or modified to
clarify what is meant by the term ``description?'' If so, how should
these be enhanced or modified?
     The schedules to rules 12-13 (Open option contracts
written), 12-13B (Open forward foreign currency contracts), 12-13C
(Open swap contracts), and 12-13D (Other investments) would require
disclosure of the counterparty to the transaction for non-exchange
traded instruments. Should we, as proposed, require disclosure of the
counterparty to certain transactions? Should the exchange or clearing
member be disclosed for exchange-traded derivatives? Are there any
additional counterparty or exchange risks that should be disclosed? If
so, why? Are there any confidentiality or other concerns with requiring
the disclosure of counterparties?
     We request comment on our proposed amendments to rule 12-
13 (Open option contracts written). Should we require different or
additional information about these contracts? Should any of the
proposed information requirements be excluded? Is it appropriate to
require disclosure of ``notional amount'' for option contracts? Is this
metric useful to investors? Should we require the disclosures of open
option contracts written to be grouped or subtotaled? For example,
should we require over-the-counter option contracts to be grouped by
counterparty?
     As proposed, rule 12-13 would require disclosure of each
option contract with an underlying investment that is an index or
basket of investments whose components are not publicly available on a
Web site and the notional amount of the holding exceeds one percent of
the NAV of the fund. Are there better alternatives to disclose the
underlying investments for an options contract if it consists of a
custom basket of securities? If so, what alternatives and why? To the
extent such indices are proprietary or subject to licensing agreements,
what would be the effect of this requirement? For example, would funds
incur costs for amending licensing agreements? Would index providers be
unwilling to amend existing licensing agreements? If so, how would this
impact funds that make such investments and the marketplace generally?
Are there other concerns about disclosing the components of proprietary
indices? Should we alter this requirement, and if so how? Is our
exceeding one percent of the NAV disclosure threshold appropriate?
Should there be a different disclosure threshold applied to an option
contract's underlying investments? If so, what threshold and why? For
example, should there be a disclosure threshold applied to individual
holdings (e.g., if the notional amount of a single underlying
investment in a custom basket is less than a certain percentage of a
fund's net assets)? Should we use a different percentage for the
disclosure threshold, such as exceeding five percent of the NAV?
Alternatively, would summary disclosure be adequate to inform
investors, similar to instruction 3 of rule 12-12C, which requires
disclosure of the 50 largest issues and any other issue the value of
which exceeded one percent of net asset value of the fund as of the
close of the period? If so, how should such a disclosure be handled? If
the reference asset is a modified version of an index whose components
are publicly available on a Web site as of the fund's balance sheet
date, for example a version that is customized to exclude certain
issuers that the fund is restricted from owning, would requiring a
narrative of those modifications be preferable to funds and investors
rather than requiring each holding of the modified index to be listed?
     We request comment on proposed rule 12-13A (Open futures
contracts). Should we require different or additional information about
these contracts? Should any of the proposed information requirements be
excluded? Our proposed rule would require disclosure of notional amount
and value on open futures contracts. Should we require disclosure of
notional amount for futures contracts? Should we require disclosure of
value for futures contracts? Should we require the disclosures of open
futures contracts to be grouped or subtotaled? If so, how? For example,
should we require open futures contracts to be organized by country of
issuance?
     We request comment on proposed rule 12-13B (Open forward
foreign currency contracts). Should we require different or additional
information about these contracts? Should any of the proposed
information requirements be excluded? Rule 12-13B, as proposed, is
limited to forward foreign currency contracts. Are there other types of
forwards that should be addressed in this section that would not
otherwise be presented as other derivative investments, such as swaps?
Should we require the disclosures of open forward foreign currency
contracts to be grouped or subtotaled? If so, how? For example, should
we require open forward foreign currency contracts to be organized by
currency or type of transaction (e.g., purchased or sold U.S. dollars)?
     We request comment on proposed rule 12-13C (Open swap
contracts). Should we require different or additional information about
these contracts? Should any of the proposed information requirements be
excluded? Instruction 1 to proposed rule 12-13C requires the schedule
to be organized by descriptive title (e.g., credit default swaps,
interest rate swaps). Should we require additional subgrouping of the
schedules beyond what is already required? For example, should we

require over-the-counter swaps to be grouped by counterparty?
     Instruction 3 of proposed rule 12-13C contains examples of
information that could be included for credit default swaps, interest
rate swaps, and total return swaps. Is the example contained in
proposed rule 12-13C adequate? Is there any other information that
should be disclosed as part of the description for credit default
swaps, interest rate swaps, and total return swaps? Are there other
types of swaps that should be included as examples within proposed rule
12-13C? If so, what information should be included in the example?
     As proposed, rule 12-13C would require disclosure of each
investment with a referenced asset that is an index whose components
are not periodically publicly available on a Web site and the notional
amount of the holding exceeds one percent of the NAV of the fund. Are
there better alternatives to disclose the underlying assets of a swap
if it consists of a custom basket of securities? If so, what
alternative and why? To the extent such indices are proprietary or
subject to licensing agreements, what would be the effect of this
requirement? For example, would funds incur costs for amending
licensing agreements? Would index providers be unwilling to amend
existing licensing agreements? If so, how would this impact funds that
make such investments and the marketplace generally? Are there other
concerns about disclosing the components of proprietary indices? Should
we alter this requirement, and if so how? Is our exceeding one percent
of the NAV disclosure threshold appropriate? Should there be a
different disclosure threshold applied to a swap's referenced assets?
If so, what threshold and why? For example, should there be a
disclosure threshold applied to individual holdings (e.g., if the
notional amount of a single underlying investment in a custom basket is
less than a certain percentage of a fund's net assets)? Should we use a
different percentage for the disclosure threshold, such as exceeding
five percent of the NAV? Alternatively, would summary disclosure be
adequate to inform investors, similar to instruction 3 of rule 12-12C,
which requires disclosure of the 50 largest issues and any other issue
the value of which exceeded one percent of net asset value of the fund
as of the close of the period? If so, how should such a disclosure be
handled? Should we include this disclosure requirement for other
investments? For example, should we require funds to disclose the
referenced asset for futures contracts or forward foreign currency
contracts if their underlying investments are composed of an index or
custom basket of securities?
     We request comment on our proposed amendments in rule 12-
13D (Investments other than those presented in rules 12-12, 12-12A, 12-
12B, 12-13, 12-13A, 12-13B, and 12-13C). Should we require different or
additional information about these contracts? Should any of the
proposed information requirements be excluded?
     We request comment on our proposed requirements in rules
12-13 through 12-13D that the fund identify investments which cannot be
sold because of restrictions or conditions applicable to the
investment. Is this requirement appropriate? Why or why not? Would this
requirement assist investors and other interested parties with
understanding the marketability of an investment? Why or why not?
     We request comment on our proposed requirements in rules
12-13 through 12-13D that the fund identify investments whose fair
value was determined using significant unobservable inputs. Is this
requirement appropriate? Why or why not? Would this requirement assist
investors and other interested parties with understanding risks
associated with valuation?
     Should we propose a disclosure relating to ``investments
not readily marketable'' as is currently required by rule 12-13? Why or
why not?
     We request comment on our proposed requirements in rules
12-13 through 12-13D that the fund identify investments that are
considered to be illiquid. Is this requirement appropriate? Why or why
not? What are the costs and benefits associated with this requirement?
Will independent accountants be able to audit this disclosure?
     We request comment on our proposed disclosures based on
cost for Federal income tax purposes under proposed rule 12-12A and
rules 12-13 through 12-13D. Do these disclosures provide meaningful
information for investors in addition to tax basis disclosures required
under U.S. GAAP? What are the costs and benefits associated with
providing this disclosure? Should our proposed disclosures be reported
in a separate stand-alone disclosure or, as proposed, as a note to each
separate schedule? Should we eliminate the current disclosure
requirement to present tax-basis cost and unrealized appreciation and
depreciation in both semi-annual and annual shareholder reports? Why or
why not? As an alternative, should we make the tax-basis disclosure an
annual requirement?
3. Amendments to Rules 12-12 Through 12-12C
    While we are not proposing changes to the schedules for rules 12-
12, 12-12A, and 12-12C, we are proposing certain additional rule
instructions that would include new disclosures, as well as certain
clarifying changes, including renumbering several of the schedules.
    We are proposing several modifications to the instructions to rule
12-12, the rule concerning disclosure of investments in securities of
unaffiliated issuers. We are proposing to modify instruction 2 to rule
12-12 (and the corresponding instructions to proposed rules 12-12A, 12-
12B, 12-13D, and 12-14) which would require funds to categorize the
schedule by type of investment, the related industry, and the related
country, or geographic region.\239\ U.S. GAAP requires investment
companies that are nonregistered investment partnerships to categorize
investments in securities by type, country or geographic region, and
industry.\240\ In order to provide more transparency into the industry
and the country or geographic region of a fund's investments in
securities, we believe that the disclosures provided by funds should
provide investors with the same categorization as nonregistered
investment partnerships. We also believe that disclosure of both the
industry and the country or geographic region would be particularly
beneficial for investors in global and international funds, where
currently funds are only required to categorize their schedule by
industry, country, or geographic region, as it would provide additional
transparency into the investments owned by the fund.
---------------------------------------------------------------------------

    \239\ See proposed rule 12-12, n.2 of Regulation S-X; see also
proposed rules 12-12A, n.2; 12-12B, n.2; 12-13D, n.2; and 12-14, n.2
of Regulation S-X.
    \240\ See ASC 946-210-50-6, Financial Services--Investment
Companies (``ASC 946'').
---------------------------------------------------------------------------

    In order to provide more transparency to a fund's investments in
debt securities, we are proposing an instruction to rule 12-12
requiring the fund to indicate the interest rate or preferential
dividend rate and maturity rate for certain enumerated debt
instruments.\241\ When disclosing the interest rate for variable rate
securities, we are proposing that the fund describe the referenced rate
and spread.\242\ In proposing disclosures for variable rate securities,
we considered other alternatives, such as period-end interest rate
(e.g. the investment's interest rate in effect at the end of the
period).

However, we believe that disclosure of both the referenced rate and
spread allow investors to better understand the economics of the fund's
investments in variable rate debt securities, such as the effect of a
change in the reference rate on the security's income. This proposal is
intended to result in more consistency across funds in disclosures of
the interest rate for variable rate securities. For securities with
payments-in-kind, we are proposing that the fund provide the rate paid
in-kind in order to provide more transparency to investors when the
fund is generating income that is not paid in cash.\243\
---------------------------------------------------------------------------

    \241\ See proposed rule 12-12, n.4 of Regulation S-X.
    \242\ See id.
    \243\ Id.
---------------------------------------------------------------------------

    Our proposal would modify the current instruction to rule 12-12
\244\ that requires a fund to identify each issue of securities held in
connection with open put or call option contracts and loans for short
sales, by adding the requirement to also indicate where any portion of
the issue is on loan.\245\ We believe that this disclosure would
increase the transparency of the fund's securities lending activities.
We are also proposing to modify current instruction 3 of rule 12-12
concerning the organization of subtotals for each category of
investments, making the instructions consistent with those in proposed
rule 12-12B (current rule 12-12C), Summary schedule of investments in
securities of unaffiliated issuers.\246\
---------------------------------------------------------------------------

    \244\ See rule 12-12, n.7 of Regulation S-X.
    \245\ See proposed rule 12-12, n.11 of Regulation S-X; see also
proposed rule 12-12B, n.14 of Regulation S-X.
    \246\ See rule 12-12, n.3 of Regulations S-X; see also proposed
rule 12-12B, n.2 of Regulation S-X.
---------------------------------------------------------------------------

    As in our proposed derivatives disclosures,\247\ in order to
increase transparency into the observability of inputs used in
determining the value of individual investments, we are adding the
requirement for funds to disclose those investments whose fair value
was determined using significant unobservable inputs.\248\ Here, as in
our proposed derivatives disclosures, we would expect funds to identify
each investment categorized in Level 3 of the fair value hierarchy in
accordance with ASC Topic 820. We are also extending this requirement
to proposed rules 12-12A and 12-12B.\249\
---------------------------------------------------------------------------

    \247\ See proposed rules 12-13, n.7; 12-13A, n.5; 12-13B, n.3;
12-13C, n.6; and 12-13D, n.7 of Regulation S-X.
    \248\ See proposed rule 12-12, n.9 of Regulation S-X.
    \249\ See proposed rules 12-12A, n.6 and 12-12B, n.12 of
Regulation S-X.
---------------------------------------------------------------------------

    As in proposed rules 12-13 through 12-13D,\250\ proposed
instruction 10 to rule 12-12 would contain a requirement to identify
each issue of illiquid securities.\251\ Like other proposed rules, we
believe that this requirement would provide investors with greater
transparency and understanding of the liquidity of a fund's
investments.\252\
---------------------------------------------------------------------------

    \250\ See proposed rules 12-13, n.8; 12-13A, n.6; 12-13B, n.4;
12-13C, n.7; and 12-13D, n.8 of Regulation S-X.
    \251\ See proposed rule 12-12, n.10 of Regulation S-X.
    \252\ See supra note 206 and accompanying text.
---------------------------------------------------------------------------

    Likewise, we are proposing several modifications to rule 12-12A
regarding the presentation of securities sold short, in order to
conform the instructions to proposed rule 12-12.\253\
---------------------------------------------------------------------------

    \253\ Instruction 2 would require the fund to organize the
schedule in rule 12-12A in the same manner as is required by
instruction 2 of rule 12-12. See proposed rule 12-12A, n.2.
Instruction 3 would require the fund to identify the interest rate
or preferential dividend rate and maturity rate as required by
instruction 4 of proposed rule 12-12. See proposed rule 12-12A, n.3
of Regulation S-X. Instruction 4 would require the subtotals for
each category of investments be subdivided both by investment type
and business grouping or instrument type, and be shown together with
their percentage value compared to net assets, in the same manner as
is required by proposed instruction 5 of rule 12-12. See proposed
rule 12-12A, n.4 of Regulation S-X. Instruction 6 would require the
fund to identify each issue of securities whose fair value was
determined using significant unobservable inputs. See proposed rule
12-12A, n.6 of Regulation S-X. Instruction 7 would require the fund
to identify each issue of securities held in connection with open
put or call option contracts in the same manner as required by
proposed instruction 11 of rule 12-12. See proposed rule 12-12A, n.7
of Regulation S-X. Instruction 8 would extend rule 12-12's tax basis
disclosure to securities sold short. See proposed rule 12-12A, n.8
of Regulation S-X.
---------------------------------------------------------------------------

    Funds are permitted to include in their reports to shareholders a
summary portfolio schedule, in lieu of a complete portfolio schedule,
so long as it conforms with current rule 12-12C (Summary schedule of
investments in securities of unaffiliated issuers).\254\ In order to
maintain numbering consistency and organization throughout the
regulation, we are proposing to rename current rule 12-12C (Summary
schedule of investments in securities of unaffiliated issuers) as rule
12-12B. As in rule 12-12 and 12-12A, we are not proposing to modify the
schedule of proposed rule 12-12B (current rule 12-12C), but again added
similar changes to its instructions.\255\
---------------------------------------------------------------------------

    \254\ See rule 6-10(c)(2) of Regulation S-X [17 CFR 210.6-
10(c)(2)]; see also Quarterly Portfolio Holdings Adopting Release,
supra note 19.
    \255\ Instruction 2 would add ``type of investment'' to the
current subtotal requirements for the summary schedule. See proposed
rule 12-12B, n.2 of Regulation S-X. Instruction 3 would extend rule
12-12's proposed requirement that funds indicate the interest rate
or preferential dividend rate and maturity rate for certain
enumerated securities. See proposed rule 12-12B, n.3 of Regulation
S-X. Instruction 5 would require for options purchased all
information that would be required by rule 12-13 for written option
contracts. See proposed rule 12-12B, n.5 of Regulation S-X.
Instruction 12 would require the fund to indicate each issue of
securities whose fair value was determined using significant
unobservable inputs. See proposed rule 12-12B, n.12 of Regulation S-
X. Instruction 13 would require the fund to identify illiquid
securities. See proposed rule 12-12B, n.13 of Regulation S-X.
Instruction 14 would extend rule 12-12's requirement that the fund
indicate where any portion of the issue is on loan. See proposed
rule 12-12B, n.14 of Regulation S-X.
---------------------------------------------------------------------------

    We request comment on our amendments to proposed rules 12-12
through 12-12B of Regulation S-X:
     Are our proposed amendments to rule 12-12 through 12-12B
appropriate? Are there other amendments to rules 12-12 through 12-12B
that should be made to improve disclosures regarding the investments
that would be reported under the rules? If so, what amendments and why?
     We request comment on proposed amendments to rule 12-12
(Investments in securities of unaffiliated issuers). For variable rate
securities, we propose to require disclosure of a description of the
reference rate and spread (e.g., USD LIBOR 3-month + 2%). Is this
requirement appropriate? Should we alternatively require disclosure of
the period end interest rate?
     We request comment on instruction 2 to proposed rule 12-12
(and the corresponding instructions to rules 12-12A, 12-12B, and 12-14)
which would require funds to categorize the schedule by type of
investment, the related industry, and the related country, or
geographic region. Should we include this instruction in our proposed
rules? What are the costs or benefits associated with such a
requirement?
     We request comment our proposed modifications in rules 12-
12 and 12-12B that would require a fund to indicate where any portion
of the issue is on loan. Should we include this requirement in our
proposed rules? Why or why not?
     We request comment on instruction 4 to proposed rule 12-
12. Should we require funds to disclose the interest rate or
preferential dividend rate and maturity rate for certain debt
instruments? Are there any types of securities that should (or should
not) be included in instruction 4's list of applicable debt
instruments?
     We request comment on our proposal to require a fund to
disclose each issue of illiquid securities. Should we include this
requirement in our proposed rules? Why or why not? Would the fund's
independent accountants be able to audit this disclosure?
     We request comment on our proposed requirements in rules
12-12, 12-12A, and 12-12B that the fund identify investments whose fair
value

was determined using significant unobservable inputs. Is this
requirement appropriate? Why or why not? Would this requirement assist
investors and other interested parties with understanding risks
associated with valuation?
     Are our amendments to proposed rules 12-12 through 12-12B
consistent with industry practices? If not, how are our amendments
different and what would be the costs and benefits associated with such
differences? Are there other industry practices that we should include
in our proposal?
4. Investments In and Advances to Affiliates
    We are proposing amendments to rule 12-14 (Investments in and
advances to affiliates).\256\ Rule 12-14 requires a fund to make
certain disclosures about its investments in and advances to any
``affiliates'' or companies in which the investment company owns 5% or
more of the outstanding voting securities.\257\ The rule currently
requires that a fund disclose the ``amount of equity in net profit and
loss for the period'' for each controlled company, but does not require
disclosure of realized or unrealized gains or losses. Based upon staff
experience, we believe that the presentation of realized gains or
losses and changes in unrealized appreciation or depreciation would
assist investors with better understanding the impact of each
affiliated investment on the fund's statement of operations. As a
result, we are proposing to modify column C of the schedule to rule 12-
14 to require ``net realized gain or loss for the period,'' \258\ and
column D to require ``net increase or decrease in unrealized
appreciation or depreciation for the period'' for each affiliated
investment.\259\
---------------------------------------------------------------------------

    \256\ See proposed rule 12-14 of Regulation S-X.
    \257\ See rule 12-14 of Regulation S-X.
    \258\ See proposed rule 12-14, column C of Regulation S-X.
Column C of current rule 12-14 requires disclosure of the ``amount
of equity in net profit and loss for the period,'' which is derived
from the controlled company's income statement and does not directly
translate to the impact to a fund's statement of operations. We are
proposing to replace this requirement with ``net realized gain or
loss for the period.''
    \259\ See id. at column D.
---------------------------------------------------------------------------

    Likewise, in instruction 6(e) and (f), we are proposing to require
disclosure of total realized gain or loss and total net increase or
decrease in unrealized appreciation or depreciation for affiliated
investments in order to correlate these totals to the statement of
operations.\260\ Disclosure of realized gains or losses and changes in
unrealized appreciation or depreciation, in addition to the current
requirement to disclose the amount of income, would allow investors to
understand the full impact of an affiliated investment on a fund's
statement of operations.
---------------------------------------------------------------------------

    \260\ See proposed rule 12-14, nn.6(e) and (f) of Regulation S-
X.
---------------------------------------------------------------------------

    Additionally, we are proposing a new instruction 7 in order to make
the categorization of investments in and advances to affiliates
consistent with the method of categorization used in proposed rules 12-
12, 12-12A, and 12-12B.\261\ We are also proposing several other
modifications to the instructions to rule 12-14 in order to, in part,
conform the rule to our proposed disclosure requirements in rules 12-12
and 12-13.\262\
---------------------------------------------------------------------------

    \261\ See id. at n.7; see also proposed rule 12-12, n.5, 12-12A.
n.4, 12-12B, n.2 of Regulation S-X.
    \262\ Instruction 1 would delete the instruction to segregate
subsidiaries consolidated in order to make the disclosures under
rule 12-14 consistent with the fund's balance sheet. See proposed
rule 12-14, at n.1 of Regulation S-X. Instruction 2 would require
the fund to organize the schedule to rule 12-14 in the same manner
as is required by instruction 2 of rule 12-12. See proposed rule 12-
14, at n.2 of Regulation S-X. Instruction 3 would require the fund
to identify the interest rate or preferential dividend rated and
maturity rate, as applicable. See proposed rule 12-14, at n.3 of
Regulation S-X. Instruction 4 would add column F to the columns to
be totaled and update the instruction to state that Column F should
agree with the correlative amount shown on the related balance
sheet. See proposed rule 12-14, at n.4 of Regulation S-X.
Instruction 5 would update the reference to instruction 8 of rule
12-12 and reference to rule 12-13 to reflect the changes in the
numbering of the instructions for those rules. See proposed rule 12-
14, at n.5 of Regulation S-X. Instruction 6(a) and (b) would update
references to column D to reference Column E in order to reflect our
proposed changes to rule 12-14's schedule. See proposed rule 12-14,
at nn.6(a) and (b) of Regulation S-X. Instruction 6(d), which
proposes to add clarifying language from instruction 7 of rule 12-
12, would provide the fund with more detail on the definition of
non-income producing securities. See proposed rule 12-14, at n.6(d)
of Regulation S-X. Instruction 8 would require the fund to identify
each issue of securities whose fair value was determined using
significant unobservable inputs. See proposed rule 12-14, at n.8 of
Regulation S-X. Instruction 9 would require the fund to identify
illiquid securities. See proposed rule 12-14, at n.9 of Regulation
S-X. Instruction 10 would require the fund to indicate each issue of
securities held in connection with open put or call option
contracts, loans for short sales, or where any portion of the issue
is on loan, as required by note 11 to rule 12-12. See proposed rule
12-14, at n.10 of Regulation S-X. Instruction 11 would extend rule
12-12's tax basis disclosure to investments in and advances to
affiliates. See proposed rule 12-14, at n.11 of Regulation S-X.
---------------------------------------------------------------------------

    We request comment on our proposed amendments to rule 12-14 of
Regulation S-X:
     Are our proposed amendments to rule 12-14 appropriate? Are
there other amendments to rule 12-14 that should be made to improve
disclosures regarding the investments that would be reported under the
rule? If so, what amendments and why?
     In proposed rule 12-14, we are no longer requiring
information about the fund's equity in the profit or loss of each
controlled portfolio company. Instead, we are proposing to require the
realized gain or loss and change in unrealized appreciation or
depreciation for all affiliated investments. Is this change
appropriate? Is it still important to understand the equity in the
profit or loss of each controlled company in addition to the controlled
portfolio company's effect on the fund's statement of operations? Would
the presentation of realized gains or losses and changes in unrealized
appreciation or depreciation assist investors with better understanding
the impact of each affiliated investment on the fund's statement of
operations? Why or why not? Are there other changes to the disclosure
of affiliated transactions that would better assist investors with
understanding the impact of affiliated investments on the fund's
statement of operations?
     In addition to those discussed above, what are the costs
and benefits associated with the proposed changes? Would the proposed
changes under rule 12-14 reduce any burdens on filers? If so, how?
     Are our amendments to proposed rule 12-14 consistent with
industry practices? If not, how are our amendments different? Are there
other industry practices that we should include in our proposal with
respect to the disclosure of affiliated investments?
5. Form and Content of Financial Statements
    Finally, we are proposing revisions to Article 6 of Regulation S-X,
which prescribes the form and content of financial statements filed for
funds. Many of the revisions we are proposing today are intended to
conform Article 6 with our proposed changes to Article 12 and update
other financial statement requirements.\263\ As part of these changes,
we are proposing to modify the title and description of Article 6 from
``Registered Investment Companies'' to ``Registered Investment
Companies and Business Development Companies'' to clarify that BDCs are
subject to Article 6 of Regulation S-X.\264\ This does not

change existing requirements for BDCs.\265\
---------------------------------------------------------------------------

    \263\ We are also proposing to amend the reference in rule 6-
03(c) to Sec.  210.3A-05, as that section of Regulation S-X was
rescinded in 2011. See Rescission of Outdated Rules and Forms, and
Amendments to Correct References, Securities Act Release No. 33-9273
(Nov. 4, 2011) [76 FR 71872 (Nov. 21, 2011)].
    \264\ See proposed rules 6-01; 6-03; 6-03(c)(1); 6-03(d); 6-
03(i); 6-04; and 6-07 of Regulation S-X.
     A BDC is a closed-end fund that is operated for the purpose of
making investments in small and developing businesses and
financially troubled businesses and that elects to be regulated as a
BDC. See section 2(a)(48) of the Investment Company Act (defining
BDCs). BDCs are not subject to periodic reporting requirements under
the Investment Company Act, although they must comply with periodic
reporting requirements under the Exchange Act.
    \265\ See Instruction 1.a to Item 6.c of Form N-2 (``A business
development company should comply with the provisions of Regulation
S-X generally applicable to registered management investment
companies. (See section 210.3-18 [17 CFR 210.3-18] and sections
210.6-01 through 210.6-10 of Regulation S-X [17 CFR 210.6-01 through
210.6-10]).'').
---------------------------------------------------------------------------

    In order to allow a more uniform presentation of investment
schedules in a fund's financial statements, we are proposing to rescind
subparagraph (a) of rule 6-10 under Regulation S-X, regarding which
schedules are to be filed.\266\ We believe that a fund and its
consolidated subsidiaries should present their consolidated investments
for each applicable schedule, without indicating which are owned
directly by the fund or which are owned by the consolidated
subsidiaries.
---------------------------------------------------------------------------

    \266\ See proposed rule 6-10 of Regulation S-X.
---------------------------------------------------------------------------

    Moreover, current rule 6-10(a) provides that if the information
required by any schedule (including the notes thereto) is shown in the
related financial statement or in a note thereto without making such
statement unclear or confusing, that procedure may be followed and the
schedule omitted.\267\ We believe that some funds may have interpreted
this guidance as allowing presentation of some Article 12 schedules
(e.g., rules 12-13 and 12-14) in the notes to the financial statements,
as opposed to immediately following the schedules required by rules 12-
12, 12-12A, and 12-12C, and are therefore proposing to eliminate rule
6-10(a). In light of the increased use of derivatives by funds, we
believe that all schedules required by rule 6-10 should be presented
together within a fund's financial statements, and not in the notes to
the financial statements. We recognize that our proposal would change
current practice for some funds but believe that, coupled with more
detailed disclosure rules for derivatives, this amendment would provide
more consistent disclosure and improve the usability of financial
statements for investors.\268\
---------------------------------------------------------------------------

    \267\ See rule 6-10 of Regulation S-X.
    \268\ Additionally, in order to conform proposed rule 6-10(b)
with the new requirements under Article 12, we added schedules
corresponding to our proposed new schedules of derivatives
investments.
---------------------------------------------------------------------------

    We are also proposing changes to rules 6-03 and 6-04 to
specifically reference the investments required to be reported on
separate schedules in amended Article 12.\269\ Additionally, we are
proposing to eliminate current rule 6-04.4, which requires disclosure
of ``Total investments'' on the balance sheet under ``Assets,''
recognizing that investments reported under proposed rules 12-13A
through 12-13D could potentially be presented under both assets and
liabilities on the balance sheet.\270\ For example, a fund may hold a
forward foreign currency contract with unrealized appreciation and a
different forward foreign currency contract with unrealized
depreciation. The fund presents on its balance sheet an asset balance
for the contract with unrealized appreciation and a liability balance
for the contract with unrealized depreciation. Totaling the amounts of
investments reported under assets could be misleading to investors in
this example, or in other examples where a fund holds derivatives in a
liability position (e.g., unrealized depreciation on an interest rate
swap contract). A ``Total investments'' amount in the Assets section of
the fund's balance sheet would include the fund's investments in
securities and derivatives that are in an appreciated position, but it
would not include the unrealized depreciation on the interest rate swap
contract, which would be classified under the Liabilities section of
the fund's balance sheet. Given the increasing use of derivatives by
funds, we believe eliminating current rule 6-04.4 would provide more
complete information to investors. We are also proposing a
corresponding change in rule 6-03(d) to remove the reference to ``total
investments reported under [rule 6-04.4].'' \271\
---------------------------------------------------------------------------

    \269\ See proposed rules 6-03(d), 6-04.3 and 6-04.9 of
Regulation S-X.
    \270\ See rule 6-04.4 of Regulation S-X [17 CFR 210.6-04.4].
    \271\ See proposed rule 6-03(d) of Regulation S-X.
---------------------------------------------------------------------------

    We are also proposing to amend rule 6-04 to refer individually to
our derivatives disclosures in proposed rules 12-13A through 12-
13C.\272\ As is currently the case, these proposed amendments are not
meant to require gross presentation where netting is allowed under U.S.
GAAP.\273\ For example, if a fund held a forward foreign currency
contract which had unrealized appreciation and another forward foreign
currency contract which had unrealized depreciation, the fact that
forward foreign currency contracts are mentioned in proposed rules 6-
04.3(b) and 6-04.9(d) is not meant to require both contracts to be
presented gross on the balance sheet if netting were allowed under U.S.
GAAP.
---------------------------------------------------------------------------

    \272\ See proposed rules 6-04.3; 6-04.6; and 6-04.9 of
Regulation S-X.
    \273\ See ASC 210, Balance Sheet (``ASC 210'') and ASC 815.
---------------------------------------------------------------------------

    Proposed rule 6-05.3 would also specifically require presentation
of items relating to investments other than securities in the notes to
financial statements.\274\ Current rule 6-05.3 only requires
presentation in the notes to financial statements of disclosure
required by rules 6-04.10 through 6-04.13, which include information
relating to securities sold short and open option contracts
written.\275\ Our proposal would also amend rule 6-05.3 to require fund
financial statements to reflect all unaffiliated investments other than
securities presented on separate schedules under Article 12.\276\
---------------------------------------------------------------------------

    \274\ See proposed rule 6-05.3 of Regulation S-X.
    \275\ See rule 6-05.3 of Regulation S-X [17 CFR 210.6-05.3].
    \276\ See proposed rule 6-05.3 of Regulation S-X.
---------------------------------------------------------------------------

    We are also proposing to add new disclosure requirements that are
designed to increase transparency to investors about certain
investments and activities. First, we are proposing to add new
subsection (m) to rule 6-03 that would require funds to make certain
disclosures in connection with a fund's securities lending activities
and cash collateral management.\277\ Specifically, we are proposing to
require disclosure of (1) the gross income from securities lending,
including income from cash collateral reinvestment; (2) the dollar
amount of all fees and/or compensation paid by the registrant for
securities lending activities and related services, including borrower
rebates and cash collateral management services; (3) the net income
from securities lending activities; (4) the terms governing the
compensation of the securities lending agent, including any revenue
sharing split, with the related percentage split between the registrant
and the securities lending agent, and/or any fee-for-service, and a
description of services included; (5) the details of any other fees
paid directly or indirectly, including any fees paid directly by the
registrant for cash collateral management and any management fee
deducted from a pooled investment vehicle in which cash collateral is
invested; and (6) the monthly average of the value of portfolio
securities on loan.\278\ We believe that these proposed disclosures
would allow investors to better understand the income generated from,
as well as the expenses associated with, securities lending activities.
Second, our proposal would also amend rule 6-07 to require funds to
make a separate disclosure for income from

non-cash dividends and payment-in-kind interest on the statement of
operations.\279\ Our proposed amendment to rule 6-07 is intended to
increase transparency for investors in order to allow them to better
understand when fund income is earned, but not received, in the form of
cash.
---------------------------------------------------------------------------

    \277\ See supra note 71 and accompanying text.
    \278\ See proposed rule 6-03(m) of Regulation S-X.
    \279\ See proposed rule 6-07.1 of Regulation S-X.
---------------------------------------------------------------------------

    We are proposing to amend rule 6-07.7(a) in order to conform
statement of operations disclosures of the net realized gains or losses
from investments to include our additional derivatives disclosures in
proposed rules 12-13A through 12-13C.\280\ Likewise, we are proposing
similar changes to proposed 6-07.7(c) (current rule 6-07.7(d)) in order
to conform statement of operations disclosures of the net increase or
decrease in the unrealized appreciation or depreciation of investments
to include our new derivatives disclosures.\281\ We recognize that
Regulation S-X, which organizes net realized gains and losses (and net
increases or decreases in the unrealized appreciation or depreciation)
by investment type, diverges from our approach in proposed Form N-PORT,
which organizes net realized gain or loss and net change in unrealized
appreciation or depreciation attributable to derivatives by each
instrument's primary underlying risk exposure.\282\ While we believe
that organizing these disclosures by exposure type, which are derived
from ASC Topic 815, are appropriate for Form N-PORT; we also believe
that it is more appropriate for statement of operations disclosures to
be organized by major types of investment transactions, as doing so
would be consistent with the types of investments requiring separate
schedules in Article 12 and allow investors to relate the disclosures
in the schedule of investments with the statement of operations.\283\
---------------------------------------------------------------------------

    \280\ See proposed rule 6-07.7(a) of Regulation S-X.
    \281\ See proposed rule 6-07.7(c) of Regulation S-X.
    \282\ See Item B.5.c of proposed Form N-PORT.
    \283\ See ASC 815.
---------------------------------------------------------------------------

    We are also proposing to eliminate Regulation S-X's requirement for
specific disclosure of written options activity under current rule 6-
07.7(c).\284\ This provision was adopted prior to FASB adopting
disclosures generally applicable to derivatives, including written
options, now required by ASC Topic 815.\285\ We are proposing that the
requirement for specific disclosures for written options activity be
removed because they are generally duplicative of the requirements of
ASC Topic 815, which include disclosure of the fair value amounts of
derivative instruments, gains and losses on derivative instruments, and
information that would enable users to understand the volume of
derivative activity.\286\
---------------------------------------------------------------------------

    \284\ See rule 6-07.7(c) of Regulation S-X [17 CFR 210.6-
07.7(c)].
    \285\ See ASC 815.
    \286\ Id. Rule 6-07.7(c) requires disclosure in a note to the
financial statements of the number and associated dollar amounts as
to option contracts written: (i) At the beginning of the period;
(ii) during the period; (iii) expired during the period; (iv) closed
during the period; (v) exercised during the period; (vi) balance at
end of the period. The balances at the beginning of the period and
end of the period are available in the prior period-end and current
period-end schedules of open option contracts written, respectively.
By eliminating the written options roll-forward, investors would no
longer have information regarding the number of contracts expired,
closed, or exercised during the period. However, disclosures
required by ASC 815 provide gains and losses on derivative
instruments, including written options, along with information that
would enable users to understand the volume of derivative activity
during the period.
---------------------------------------------------------------------------

    We are also proposing to eliminate the exception in Schedule II of
current rule 6-10 which does not require reporting under current rule
12-13 if the investments, at both the beginning and end of the period,
amount to one percent or less of the value of total investments.\287\
We believe that it is appropriate to propose eliminating this
exception, because a fund may have significant notional amount in its
portfolio that could be valued at one percent or less of the value of
total investments. Accordingly, removing this exception would provide
more transparency to investors regarding a fund's derivatives activity.
---------------------------------------------------------------------------

    \287\ See rule 6-10(c)(1) Schedule II of Regulation S-X; see
also proposed rule 6-10(b)(1) Schedule II of Regulation S-X.
---------------------------------------------------------------------------

    We request comment on our proposed changes to Article 6 of
Regulation S-X.
     Are our proposed amendments to Article 6 of Regulation S-X
appropriate? If not, which amendments are not appropriate and why? Are
there other amendments to Article 6 of Regulation S-X that we should
propose? If so, what amendments and why?
     Are there alternative methods of presentation of
derivatives that we should consider, rather than the proposed
requirement that all schedules be presented in the same location? If
so, what method and why is it preferable?
     As we discussed above, among others, our basis for
proposing to eliminate rule 6-10(a) was our belief that a fund and its
consolidated subsidiaries should present their consolidated investments
for each applicable schedule, without indicating which are owned
directly by the fund and which are owned by the consolidated
subsidiaries. Is this proposed change appropriate? Why or why not?
Should we require different or additional information about
consolidated investments?
     We request comment on our proposal to eliminate rule 6-
04.4, which requires disclosure of ``Total investments'' on the balance
sheet under ``Assets,'' and the corresponding reference to rule 6-04.4
in rule 6-03(d). Are these proposed changes appropriate? Why or why
not? Would eliminating current rule 6-04.4 provide more complete
information to investors?
     We request comment on our proposal to amend rule 6-05.3 to
specifically require presentation of items relating to investments
other than securities in the notes to the financial statements, as well
as require fund financial statements to reflect all unaffiliated
investments presented on separate schedules under Article 12. Are our
proposed changes appropriate? Why or why not?
     Would the disclosure required under proposed rule 6.03(m)
concerning income and expenses in connection with securities lending
activities provide meaningful information to investors or other
potential users? For example, would the disclosures regarding
compensation and other fee and expense information relating to the
securities lending agent and cash collateral manager be useful to fund
boards in evaluating their securities lending arrangements? Would these
disclosures be sufficient for this purpose, or would additional
information be necessary, for example, to put the fee and expense
information in context (e.g., the nature of the services provided by
the securities lending agent and cash collateral manager)? Should the
Commission instead require that these or other similar disclosures, be
provided elsewhere in the fund's financial statements (e.g., the
Statement of Operations), or provided as part of other disclosure
documents (e.g., the Statement of Additional Information) or reporting
forms (e.g., proposed Form N-CEN)? Why or why not?
     Is the proposed disclosure under rule 6-07.1 for non-cash
dividends and payment-in-kind interest on the statement of operations
meaningful to investors or other potential users of the fund's
financial statements? Should all non-cash interest be disclosed,
including amortization and accretion, or should just payment-in-kind
interest be disclosed?
     Do our proposed amendments to rules 6-07.7(a) and 6-
07.7(c) omit any classifications of gains or loss or changes in
unrealized appreciation or

depreciation that should be disclosed? If so, which categories and why?
     We request comment on our proposal to eliminate Regulation
S-X's requirements for specific disclosure of written options activity
under rule 6-07.7(c). Does the current requirement for specific
disclosure of written options activity under rule 6-07.7(c) provide a
user of financial statements with sufficient incremental benefit to
merit retaining this disclosure in addition to the disclosures required
by ASC Topic 815? Why or why not?
     Proposed rule 6-10(b) would no longer allow funds to omit
the schedule of investments other than securities if the investments,
other than securities, at both the beginning and end of the period
amount to one percent or less of the value of total investments. Is
this change appropriate? Are there any costs associated with this
change? If so, what are they?
     Are our amendments to Article 6 of Regulation S-X
generally consistent with industry practices, except where specifically
noted in the discussion above? If not, how are our amendments
different? Are there other industry practices that we should include in
our proposal with respect to the form and content of financial
statements?

D. Option for Web Site Transmission of Shareholder Reports

1. Overview
    The Commission is proposing new rule 30e-3 under the Investment
Company Act, which would, if adopted, permit, but not require, a fund
to satisfy requirements under the Act and rules thereunder to transmit
reports to shareholders if the fund makes the reports and certain other
materials accessible on its Web site. Reliance on the rule would be
subject to certain conditions, including conditions relating to (1) the
availability of the shareholder report and other required information,
(2) prior shareholder consent, (3) notice to shareholders of the
availability of shareholder reports, and (4) shareholder ability to
request paper copies of the shareholder report or other required
information.
    This new option is intended to modernize the manner in which
periodic information is transmitted to shareholders. We believe it
would improve the information's overall accessibility while reducing
burdens such as printing and mailing costs borne by funds, and
ultimately, by fund shareholders. As described below, today's proposal
draws on the Commission's experience with use of the Internet as a
medium to provide documents and other information to investors. The
proposal is supported by recent Commission investor testing efforts and
other empirical research concerning investors' preferences about report
transmission methods and use of the Internet for financial and other
purposes generally. At the same time, the Commission recognizes that
empirical research, discussed below, demonstrates that some investors
continue to prefer to receive paper reports. The proposal therefore
incorporates a set of protections intended to avoid investor confusion
and protect the ability of investors to choose their preferred means of
communication.
    Reliance on the rule would be optional. Funds that do not maintain
Web sites or that otherwise wish to transmit shareholder reports in
paper or pursuant to the Commission's existing electronic delivery
guidance would continue to be able to satisfy transmission requirements
by those transmission methods. Furthermore, under the rule as proposed,
a fund relying on the rule to satisfy shareholder report transmission
obligations with respect to certain shareholders would not be precluded
from transmitting shareholder reports to other shareholders pursuant to
the Commission's electronic delivery guidance. We expect that funds
would continue to rely on the Commission's guidance to electronically
transmit reports to shareholders who have elected to receive reports
electronically, and rely on the rule with respect to shareholders who
have not so elected (i.e., those who currently receive printed
shareholder reports by mail).
2. Discussion
    Funds are generally required to transmit reports to shareholders on
a semiannual basis.\288\ Historically, these reports have been printed
and mailed to shareholders. With advances in technology and, in
particular, the increasing use of the Internet as a medium through
which information, financial or otherwise, is made accessible, we have
previously issued guidance describing the circumstances under which
transmission of disclosure documents may be effected through electronic
means.\289\ Under that guidance, funds may transmit documents
electronically provided that a number of conditions related to
shareholder notice, access, and evidence of delivery are met.\290\
---------------------------------------------------------------------------

    \288\ See section 30(e) of the Investment Company Act [15 U.S.C.
80a-29(e)]; rule 30e-1 (reports to stockholders of management
companies); rule 30e-2 (reports to shareholders of unit investment
trusts substantially all the assets of which consist of securities
issued by a management company).
    \289\ See generally Use of Electronic Media for Delivery
Purposes, Investment Company Act Release No. 21399 (Oct. 6, 1995)
[60 FR 53458 (Oct. 13, 1995)] (``1995 Release'') (providing
Commission views on the use of electronic media to deliver
information to investors, with a focus on electronic delivery of
prospectuses, annual reports to security holders and proxy
solicitation materials under the federal securities laws); Use of
Electronic Media by Broker-Dealers, Transfer Agents, and Investment
Advisers for Delivery of Information, Investment Company Act Release
No. 21945 (May 9, 1996) [61 FR 24644 (May 15, 1996)] (``1996
Release'') (providing Commission views on electronic delivery of
required information by broker-dealers, transfer agents and
investment advisers); Use of Electronic Media, Investment Company
Act Release No. 24426 (Apr. 28, 2000) [65 FR 25843 (May 4, 2000)]
(``2000 Release'') (providing updated interpretive guidance on the
use of electronic media to deliver documents on matters such as
telephonic and global consent; issuer liability for Web site
content; and legal principles that should be considered in
conducting online offerings).
    More recently, the Division of Investment Management published
guidance stating the staff's position that electronic delivery of a
notice pursuant to rule 19a-1 under the Investment Company Act,
consistent with the Commission's electronic delivery guidance, would
satisfy the purposes and policies underlying the rule. See Division
of Investment Management, Securities and Exchange Commission,
Shareholder Notices of the Sources of Fund Distributions--Electronic
Delivery, IM Guidance Update No. 2013-11 (Nov. 2013), available at
http://www.sec.gov/divisions/investment/guidance/im-guidance-2013-11.pdf (``2013-11 IM Guidance Update'').
    \290\ See id.
---------------------------------------------------------------------------

    Recent investor testing and Internet usage trends have highlighted
that preferences about electronic delivery of information have evolved,
and that many investors would prefer enhanced availability of fund
information on the Internet. For example, investor testing sponsored by
the Commission and conducted in 2011 \291\ suggested that an

investor looking for a fund's annual report is most likely to seek it
out on the fund's Web site, rather than request it by mail or phone or
by retrieving it from the Commission's EDGAR system.\292\ Many
investors indicated that they would prefer that fund information be
made available in both electronic and print versions, with a plurality
of respondents preferring electronic transmission by email with the
option to easily request a print copy of a particular report, though a
significant minority indicated that they would still prefer to receive
a print copy through the mail.\293\
---------------------------------------------------------------------------

    \291\ In 2011, the Commission engaged a consultant to conduct
investor testing regarding shareholder reports. We have placed the
consultant's report concerning that testing (``Investor Testing of
Mutual Fund Shareholder Reports'') in the comment file for the
proposed rule (available at www.sec.gov/comments/s7-08-15/s70815.shtml). Separately, Commission staff prepared a study of
investor financial literacy pursuant to section 917 of the Dodd-
Frank Act. Materials relating to this study, including the staff's
report, are available at http://www.investor.gov/publications-research-studies/sec-research.
    Also, in 2007, 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. We have placed the consultant's
report concerning the focus group testing and related transcripts in
the comment file for the proposed rule (available at www.sec.gov/comments/s7-08-15/s70815.shtml). The consultant's report concerning
the telephone survey (``Telephone Survey Report'') is available at
http://www.sec.gov/pdf/disclosuredocs.pdf. Respondents to the
telephone survey who had received a mutual fund shareholder report,
for example, were asked about their preferences for a mode of
delivery of the information contained in a shareholder report, and
``an Internet Web site'' received the highest ratings (with 49%
rating it 7 or above on a 10 point scale), compared with 42% of
respondents who rated ``a paper copy'' 7 or above. See Telephone
Survey Report at 96.
    \292\ See Investor Testing of Mutual Fund Shareholder Reports,
supra note 291, at 72. When asked ``If you wanted to see a mutual
fund annual report, how would you access/obtain the report? Please
check all that apply.,'' 59.5% of respondents selected ``look on the
mutual fund company's Web site,'' compared with 33.3% who selected
``ask my financial advisor,'' 24.5% who selected ``request by
mail,'' 21.0% who selected ``do a web search (Google, etc.),'' 18.8%
who selected ``request by phone,'' 12.3% who selected ``check with
my employer's HR or employee benefits representative,'' 11.3% who
selected ``look on the SEC's Web site or on EDGAR,'' and 2.3% who
selected ``other.'' Id.
    \293\ See id. at 185. When asked ``How would you prefer to
receive information about your mutual fund investments?,'' 25.8% of
respondents selected ``online through a link provided in an email,
with the option to request a print version,'' compared with 19.5% of
respondents who selected ``in print through the mail, with a web
address provided for an online version,'' 18.5% who selected
``online through a link provided in an email,'' 16.5% who selected
``a print summary of the key information through the mail, with a
web address provided for a complete online version,'' 13.8% who
selected ``in print through the mail,'' and 6.0% who selected ``I
don't have a preference.'' Id.
---------------------------------------------------------------------------

    In the time since this investor testing was conducted, access to
and use of the Internet has continued to increase significantly,
including among demographic groups that have previously been less apt
to use the Internet. For example, a study conducted by the Pew Research
Center's Internet & American Life Project in 2013 found that only 15%
of American adults ages 18 and older do not use the Internet or email--
falling from 26% in 2011, when our investor testing was conducted, and
from 39% a decade before in 2001.\294\ These researchers also found
that for the first time in 2012, more than half of adults over the age
of 64 used the Internet, a figure that climbed to 59% in 2013.\295\
---------------------------------------------------------------------------

    \294\ See Pew Research Center, Who's Not Online and Why, at 2
(Sept. 25, 2013), available at http://pewinternet.org/Reports/2013/Non-internet-users.aspx.
    \295\ See Pew Research Center, Older Adults and Technology Use,
at 1 (Apr. 3, 2014), available at http://www.pewinternet.org/2014/04/03/older-adults-and-technology-use/.
---------------------------------------------------------------------------

    These trends have also extended to use of the Internet for
financial purposes. For example, a recent survey by the Investment
Company Institute found that in 2014, 94% of U.S. households owning
mutual funds had Internet access (up from 68% in 2000), with widespread
use among various age groups, education levels and income levels.\296\
The year before, the Investment Company Institute found that 82% of
U.S. households owning mutual funds used the Internet for financial
purposes.\297\
---------------------------------------------------------------------------

    \296\ See 2015 ICI Fact Book, at 129, supra note 4. For example,
the study found the following with respect to Internet access in
mutual fund owning households: (1) Head of household age 65 or
older, 86% have access, (2) education level of high school diploma
or less, 84% have access, and (3) household income of less than
$50,000, 84% have access.
    \297\ See 2014 Investment Company Fact Book, Investment Company
Institute, at 115-17, available at http://www.ici.org/pdf/2014_factbook.pdf.
---------------------------------------------------------------------------

    Given the evolving preferences and trends in Internet usage, in
particular with regard to the delivery of financial information, we
believe that it is appropriate to propose a rule that would permit the
Web site transmission of fund shareholder reports, while maintaining
the ability of shareholders who prefer to receive reports in paper to
receive reports in that form. Funds and their shareholders would
benefit from the reductions in related printing and mailing costs.
Also, the rule, as proposed, would consolidate current and historical
portfolio holdings information in one location (i.e., a particular Web
site, as opposed to having some information on one Web site and other
information on EDGAR), whereas currently, funds are not required to
transmit or otherwise make accessible to investors holdings information
as to the first and third fiscal quarters.\298\
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    \298\ Currently, funds report their complete portfolio holdings
as of the first and third fiscal quarters on Form N-Q, which is
accessible only through EDGAR. There is no separate requirement for
funds to transmit or otherwise make this information available to
shareholders.
---------------------------------------------------------------------------

    Although we believe the proposed rule would benefit many investors,
we recognize that there are concerns associated with how some investors
may be affected. For example, as discussed above, investor testing
suggests that a significant minority of investors prefer to receive
paper reports and that some demographic groups of investors may be less
likely to use the Internet. Some of these investors might not fully
understand the actions they would need to take under the proposed rule
to continue to receive their reports in paper. We believe that it is
critical that these investors continue to receive disclosure in a means
that is convenient and accessible for them. In addition, there is a
risk that even some investors that prefer to use the Internet might be
less likely to review reports electronically than they would in paper.
We also believe it is critical that the proposed rule communicate the
importance of the information that would be made available on the Web
site.
    Accordingly, as discussed below, the proposed rule would include
certain safeguards for investors who wish to continue to receive
shareholder reports in paper, by requiring prior consent of investors,
and continuing to make shareholder reports and other required
information available in paper upon request. The proposed rule would
also include requirements intended to emphasize the importance of the
information available on the Web site. These protections are intended
to maintain the ability of investors who prefer to receive reports in
paper to continue to do so without confusion, as well as to provide to
investors clear and prominent printed notifications each time a new
shareholder report is made available online. We request comment below
on the potential concerns articulated above, as well as the steps we
are proposing to address them while capturing the potential benefits
for investors and funds of electronic communication.
3. Rule 30e-3
    As proposed, new rule 30e-3 would provide that a fund's annual or
semiannual report to shareholders would be considered transmitted to a
shareholder of record if certain conditions set forth in the rule are
satisfied as to (a) availability of the report and other materials, (b)
shareholder consent, (c) notice to shareholders, and (d) delivery of
materials upon request of the shareholder.\299\ As discussed below,
these conditions are generally consistent with similar conditions in
other rules adopted by the Commission, including its rules regarding
the use of a summary prospectus, internet delivery of proxy materials,
and ``householding'' of certain disclosure documents.
---------------------------------------------------------------------------

    \299\ Proposed rule 30e-3(a).
---------------------------------------------------------------------------

a. Availability of Report and Other Materials
    Under the rule as proposed, the fund's report to shareholders under
rule 30e-1 or 30e-2 would be required to be publicly accessible, free
of charge, at a

specified Web site address.\300\ The report would need to be accessible
beginning no later than the date of the transmission in reliance on
this option, and ending no earlier than the date when the fund next
``transmits'' a report required by rule 30e-1 or 30e-2.\301\ This
requirement is intended to provide shareholders with the opportunity
for ongoing access from the date of intended transmission until the
date that the fund transmits its next shareholder report.\302\
---------------------------------------------------------------------------

    \300\ Proposed rule 30e-3(b)(1).
    \301\ Id.
    \302\ See 1995 Release, supra note 289 (noting that to satisfy
access requirements under the Commission's electronic delivery
guidance, ``as is the case with a paper document, a recipient should
have the opportunity to retain the information or have ongoing
access equivalent to personal retention).
---------------------------------------------------------------------------

    In addition to the most current shareholder report, the rule as
proposed would require that the fund post on its Web site (1) any
previous shareholder report transmitted to shareholders of record
within the last 244 days,\303\ and (2) in the case of a fund that is
not a money market fund or an SBIC, the fund's complete portfolio
holdings as of the close of its most recent first and third fiscal
quarters, if any, after the date on which its registration statement
became effective.\304\ In addition, a fund that is not a money market
fund or an SBIC would be required to make its portfolio holdings as of
the end of the next fiscal quarter accessible in the same manner within
60 days after the close of that period.\305\ We are proposing
exceptions to the posting requirement of first and third fiscal quarter
portfolio holdings schedules for money market funds and SBICs because
money market funds are currently required to post certain portfolio
holdings and other information on their Web sites pursuant to rule 2a-
7,\306\ and because SBICs are neither currently required to file
reports on Form N-Q,\307\ nor would SBICs be required to file reports
on proposed Form N-PORT.\308\
---------------------------------------------------------------------------

    \303\ Proposed rule 30e-3(b)(1)(ii). Thus, for example, a fund
with a December 31 fiscal year end wishing to rely on rule 30e-3 to
transmit its annual report to shareholders would also be required to
ensure that its semiannual report as of June 30 is similarly
accessible. Only those annual and semiannual reports that are
required under rule 30e-1 or rule 30e-2 are required to be
accessible in order to rely on rule 30e-3. Thus, for example, if a
fund is transmitting a report for its first operational semiannual
period, the fund could rely on rule 30e-3 to transmit that report,
despite not having made a previous report publicly accessible
provided that it meets the other required conditions.
    \304\ See proposed rule 30e-3(b)(1)(iii).
    \305\ See proposed rule 30e-3(b)(2). For example, a fund with a
December 31 fiscal year end wishing to rely on rule 30e-3 to
transmit its annual report to shareholders would also be required to
ensure that its complete portfolio holdings for the first quarter of
the next year is similarly available.
    \306\ See rule 2a-7(h)(10). In 2014, we adopted certain
amendments to the Web site disclosure requirements for money market
funds under rule 2a-7. The compliance date for these amendments is
April 14, 2016. See Money Market Fund Reform 2014 Release, supra
note 13, at sections III.E.9 and III.N.4.
    \307\ See rule 30b1-5.
    \308\ See proposed rule 30b1-9.
---------------------------------------------------------------------------

    These materials would also be required to be publicly accessible in
the same manner and for the same time period as the current shareholder
report.\309\ We are proposing this requirement so that shareholders
have access to a complete year of portfolio holdings information in one
location (i.e., the Web site on which the report transmitted under the
proposed rule is made accessible), rather than have to separately
access portfolio holdings information for the first and third quarters
by accessing the fund's reports on Form N-PORT for those periods.
---------------------------------------------------------------------------

    \309\ Proposed rules 30e-3(b)(1) and (b)(2).
---------------------------------------------------------------------------

    To conform the form and content of the portfolio holdings schedules
for the first and third quarters to those schedules presented in the
fund's shareholder reports for the second and fourth quarters, the
proposed rule would require the schedules for the first and third
quarters to be presented in accordance with the schedules set forth in
Sec. Sec.  210.12-12--12-14 of Regulation S-X [17 CFR 210.12-12--12-
14], which need not be audited.\310\ As discussed above, we have also
proposed to require that these materials be filed as exhibits to Form
N-PORT, regardless of whether the fund intends to rely on the rule to
satisfy its shareholder report transmission obligations.\311\
---------------------------------------------------------------------------

    \310\ Id.
    \311\ See supra Part II.A.2.j.
---------------------------------------------------------------------------

    These Web site portfolio disclosure requirements would be generally
consistent with funds' current disclosure obligations under Regulation
S-X for reports filed on Forms N-Q and N-CSR.\312\ Accordingly, we
anticipate that most funds would have established procedures in place
to report and validate such disclosures, and that funds would be
familiar with these disclosure requirements. These Web site portfolio
disclosure requirements are also intended to provide disclosures that
would be easily understood and familiar to investors, because these
disclosures would contain similar information and would be presented in
a similar manner as those currently included in shareholder reports.
---------------------------------------------------------------------------

    \312\ See generally supra note 27.
---------------------------------------------------------------------------

    Proposed rule 30e-3 would require compliance with certain
conditions designed to ensure the accessibility of shareholder reports
and other required materials.\313\ First, the Web site address on which
the shareholder reports and other required portfolio information are
made accessible could not be the Commission's Web site address for
electronic filing.\314\ Second, the materials required to be posted on
the Web site would have to be presented in a format that is convenient
for both reading online and printing on paper, and persons accessing
the materials would have to be able to permanently retain (free of
charge) an electronic copy of the materials in this format.\315\ These
conditions are designed to ensure that shareholder reports and other
information posted on a fund's Web site pursuant to the proposed rule
are user-friendly and allow shareholders the same ease of reference and
retention abilities they would have with paper copies of the
information.
---------------------------------------------------------------------------

    \313\ These requirements are largely similar to the
accessibility requirements of rule 498 under the Securities Act,
which allows funds to use a summary prospectus, and rule 14a-16
under the Securities Exchange Act, which requires issuers and other
soliciting persons to furnish proxy materials by posting these
materials on a public Web site and notifying shareholders of the
availability of these materials and how to access them.
    \314\ See proposed rule 30e-3(b)(3). Currently, the Commission's
electronic filing system for fund documents is EDGAR.
    \315\ See proposed rules 30e-3(b)(4) and (5).
---------------------------------------------------------------------------

    Third, the rule as proposed would include a safe harbor provision
that would allow a fund to continue relying on the rule even if it did
not meet the posting requirements of the rule for a temporary period of
time.\316\ In order to rely on this safe harbor, a fund would be
required to have reasonable procedures in place to ensure that the
required materials are posted on its Web site in the manner required by
the rule and take prompt action to correct noncompliance with these
posting requirements.\317\ We are proposing this safe harbor because we
recognize that there may be times when, due to events beyond a fund's
control, such as system outages or other technological issues, natural
disasters, acts of terrorism, pandemic illnesses, or other
circumstances, a fund is temporarily not

in compliance with the Internet posting requirements of the rule.\318\
---------------------------------------------------------------------------

    \316\ See proposed rule 30e-3(b)(6). The rule provides that the
conditions in paragraphs (b)(1) through (b)(5) of the rule (i.e.,
the posting requirements) shall be deemed to be met, notwithstanding
the fact that the materials required by paragraph (b)(1) of the rule
are not available for a period of time in the manner required by the
posting requirements, so long as certain conditions are met. See id.
    \317\ See proposed rules 30e-3(b)(6)(i) and (ii). The rule would
require prompt action ``as soon as practicable following the earlier
of the time at which it knows or reasonably should have known'' that
the required documents are not available in the manner prescribed by
the posting requirements of the rule.
    \318\ Compare rule 498(e)(4) of the Securities Act (providing a
similar safe harbor under the summary prospectus rule for the same
reasons).
---------------------------------------------------------------------------

b. Shareholder Consent
    While we believe that many investors would prefer electronic
transmission of shareholder reports based on investor testing and
Internet usage trends, we also acknowledge that there likely will be
investors that may continue to prefer receiving shareholder reports in
paper.\319\ To maintain the ability of those shareholders to receive
paper copies of their shareholder reports, the rule as proposed would
require that a fund obtain shareholder consent prior to relying on the
rule to satisfy transmission obligations with respect to a particular
shareholder.\320\ Specifically, rule 30e-3 as proposed would permit
electronic transmission of shareholder report to a particular
shareholder only if the shareholder has either previously consented to
this method of transmission,\321\ or has been determined to have
provided implied consent under certain conditions specified in the
rule.\322\ Under the proposed rule, each series of a registrant
offering multiple series would need to obtain separate consent as to a
shareholder, regardless of whether consent was obtained from that
shareholder by other series offered by that registrant.\323\
---------------------------------------------------------------------------

    \319\ See supra notes 291-296 and accompanying text.
    \320\ These conditions are substantially similar to certain of
the conditions relating to the Commission's rules on
``householding'' prospectuses, shareholder reports, and proxy
statements and information statements to investors who share an
address. See, e.g., rule 154 under the Securities Act [17 CFR
230.154] (permitting householding of prospectuses); rules 30e-1 and
30e-2 under the Investment Company Act (permitting householding of
fund shareholder reports); rules 14a-3 and 14c-3 under the Exchange
Act (permitting householding of proxy statements and information
statements). See generally Delivery of Disclosure Documents to
Households, Investment Company Act Release No. 24123 (Nov. 4, 1999)
[64 FR 62540 (Nov. 16, 1999)] (adopting householding rules with
respect to prospectuses and shareholder reports); Delivery of Proxy
Statements and Information Statements to Households, Investment
Company Release No. 24715 (Oct. 27, 2000) [65 FR 65736 (Nov. 2,
2000) (adopting householding rules with respect to proxy statements
and information statements). For purposes of the householding rules,
consent may be written or implied.
    \321\ While the householding rules require that consent be ``in
writing,'' we are not proposing a similar ``in writing'' requirement
as, consistent with the Commission's guidance on electronic
delivery, consent may be provided in a number of ways, including in
writing, electronically, or telephonically. See 1995 Release, supra
note 289 (noting that one method for satisfying evidence of delivery
is to obtain informed consent from an investor to receive
information through a particular medium); 1996 Release, supra note
289 (stating that informed consent should be made by written or
electronic means); 2000 Release, supra note 289 (stating
Commission's view that an issuer or market intermediary may obtain
an informed consent telephonically, as long as a record of that
consent is retained).
    \322\ Proposed rule 30e-3(c).
    \323\ See id.
---------------------------------------------------------------------------

    To obtain implied consent as to a shareholder, the fund would be
required to transmit to the shareholder a separate written statement
(``Initial Statement''), at least 60 days before it begins to rely on
the rule, notifying the shareholder of the fund's intent to make future
shareholder reports available on the fund's Web site until the
shareholder revokes consent.\324\ As proposed, the Initial Statement
must be written using plain English principles so that it will be
easily understood by most investors \325\ and:
---------------------------------------------------------------------------

    \324\ See proposed rule 30e-3(c)(1). For purposes of the rule,
``Initial Statement'' would be defined as the notice described in
paragraph (c)(1) of the rule. See proposed rule 30e-3(h)(2).
    \325\ See proposed rules 30e-3(c)(1) and (e). See also A Plain
English Handbook, Securities and Exchange Commission, available at
https://www.sec.gov/pdf/handbook.pdf.
---------------------------------------------------------------------------

     State that future shareholder reports will be accessible,
free of charge, at a Web site; \326\
---------------------------------------------------------------------------

    \326\ Proposed rule 30e-3(c)(1)(i).
---------------------------------------------------------------------------

     explain that the fund will no longer mail printed copies
of shareholder reports to the shareholder unless the shareholder
notifies the fund that he or she wishes to receive printed reports in
the future; \327\
---------------------------------------------------------------------------

    \327\ Proposed rule 30e-3(c)(1)(ii).
---------------------------------------------------------------------------

     include a toll-free telephone number and be accompanied by
a reply form that is pre-addressed with postage-paid and that includes
the information that the fund would need to identify the shareholder,
and explain that the shareholder can use either of those two methods at
any time to notify the fund that he or she wishes to receive printed
reports in the future; \328\
---------------------------------------------------------------------------

    \328\ Proposed rule 30e-3(c)(1)(iii).
---------------------------------------------------------------------------

     state that the fund will mail printed copies of future
shareholder reports within 30 days after the fund receives notice of
the shareholder's preference; \329\ and
---------------------------------------------------------------------------

    \329\ Proposed rule 30e-3(c)(1)(iv).
---------------------------------------------------------------------------

     contain a prominent legend in bold-face type that states:
``How to Continue Receiving Printed Copies of Shareholder Reports.''
\330\
---------------------------------------------------------------------------

    \330\ Proposed rule 30e-3(c)(1)(v). This legend would be
required to appear on the envelope on which the Initial Statement is
delivered, or alternatively, if the Initial Statement is delivered
separately from other communications to investors, the legend may
appear either on the Initial Statement or on the envelope in which
the Initial Statement is delivered.
---------------------------------------------------------------------------

    The Initial Statement is designed to permit funds to infer that a
shareholder has consented to electronic transmission of future
shareholder reports by alerting the shareholder to the fact that the
shareholder will no longer receive printed copies in the future unless
the shareholder notifies the fund that he or she wishes to receive
print copies of such reports in the future. Because of the importance
of this information, in addition to the required prominent legend on
the envelope in which the Initial Statement is delivered or on the
Initial Statement itself, the proposed rule would require certain
conditions intended to ensure that the Initial Statement is not
obscured by other materials. Specifically, the proposed rule would
require that the Initial Statement could not be incorporated into or
combined with another document,\331\ nor could it be sent along with
other shareholder communications (with the exception of the fund's
current summary prospectus, statutory prospectus, statement of
additional information, or Notice of Internet Availability of Proxy
Materials under rule 14a-16 under the Exchange Act).\332\
---------------------------------------------------------------------------

    \331\ See proposed rule 30e-3(c)(2).
    \332\ See proposed rule 30e-3(c)(3). For purposes of the
proposed rule, (1) ``summary prospectus'' would mean the summary
prospectus described in paragraph (b) of rule 498, (2) ``statutory
prospectus'' would mean a prospectus that satisfies the requirements
of section 10(a) of the Securities Act, and (3) ``statement of
additional information'' means the statement of additional
information required by Part B of the registration form applicable
to the fund. See proposed rule 30e-3(h).
---------------------------------------------------------------------------

    If the fund does not receive the reply form or other notification
indicating that a particular shareholder wishes to continue to receive
paper reports by mail within 60 days after the fund sends the Initial
Statement, then the fund may begin to transmit shareholder reports to
that shareholder electronically, provided that it meets the other
conditions of the rule.\333\
---------------------------------------------------------------------------

    \333\ Proposed rule 30e-3(c)(4).
---------------------------------------------------------------------------

c. Notice
    Proposed rule 30e-3 would require funds relying on the rule with
respect to a shareholder who has consented to electronic transmission
pursuant to the conditions of paragraph (c)(1) of the rule to send a
notice (``Notice'') within 60 days of the close of the fiscal period to
which the report relates.\334\ The proposed requirements for a Notice
largely mirror the notice requirements under the Commission's rules
mandating the posting of proxy materials online.\335\
---------------------------------------------------------------------------

    \334\ See proposed rule 30e-3(d). For purposes of the rule,
``Notice'' would be defined as the notice described in paragraph (d)
of the rule. See proposed rule 30e-3(h)(3).
    \335\ See rule 14a-16 under the Exchange Act [17 CFR 240.14a-
16].
---------------------------------------------------------------------------

    As proposed, the Notice, like the Initial Statement, would be
required to

be written using plain English principles so that it will be easily
understood by most investors.\336\ and:
---------------------------------------------------------------------------

    \336\ See proposed rules 30e-3(d)(1) and (e).
---------------------------------------------------------------------------

     Contain a prominent legend in bold-face type stating that
an important report to shareholders is available online and in print by
request; \337\
---------------------------------------------------------------------------

    \337\ Proposed rule 30e-3(d)(1)(i). The rule as proposed would
also require that the legend include the specific fund name to which
the Notice relates, or the fund complex name.
---------------------------------------------------------------------------

     state that each shareholder report contains important
information about the fund, including its portfolio holdings, and is
available on the Internet or, upon request, by mail, and encouraging
shareholders to access and review the report; \338\
---------------------------------------------------------------------------

    \338\ Proposed rule 30e-3(d)(1)(ii).
---------------------------------------------------------------------------

     include a Web site address that leads directly to each
report the fund is transmitting to the recipient shareholder in
reliance on rule 30e-3; \339\
---------------------------------------------------------------------------

    \339\ Proposed rule 30e-3(d)(1)(iii). A fund could send a joint
Notice with other funds held by the same shareholder in a fund
complex; however, the Notice would have to include a link to each of
those funds' shareholder reports. A fund may also send a separate
Notice if it so wishes.
---------------------------------------------------------------------------

     include the Web site address where the shareholder report
and other required portfolio information is posted; \340\
---------------------------------------------------------------------------

    \340\ Proposed rule 30e-3(d)(1)(iv). The Web site address would
have to be specific enough to lead investors directly to the
documents that are required to be posted online under the rule. The
Web site address could be a central site with prominent links to
each document, but could not be a home page or section of the Web
site other than where the documents are posted. See id.
---------------------------------------------------------------------------

     provide instructions on how a shareholder may request, at
no charge, a paper copy of the shareholder report or other materials
required to be made accessible online, and an indication that the
shareholder will not receive a paper copy of the report unless
requested; \341\ and
---------------------------------------------------------------------------

    \341\ Proposed rule 30e-3(d)(1)(v).
---------------------------------------------------------------------------

     include a toll-free telephone number and must be
accompanied by a reply form that is pre-addressed with postage-paid and
that includes the information that the fund would need to identify the
shareholder, and explain that the shareholder can use either of those
two methods at any time to notify the fund that he or she wishes to
receive printed reports in the future.\342\
---------------------------------------------------------------------------

    \342\ Proposed rule 30e-3(d)(1)(vi).
---------------------------------------------------------------------------

    The proposed Notice is designed to alert shareholders to the
availability of a shareholder report online and to provide shareholders
with information on how to obtain a paper copy of the report if they
should want one. We believe it is important to limit the information in
the Notice and the other materials sent along with the Notice in order
to ensure that shareholders are made aware of the availability of a
shareholder report and so that the availability of the report does not
become obscured. Therefore, the rule as proposed would limit the
information contained in the Notice to the information required by the
rule.\343\ The Notice also could not be incorporated into or combined
with another document,\344\ nor could it be sent along with other
shareholder communications (with the exception of the fund's current
summary prospectus, prospectus, statement of additional information, or
Notice of Internet Availability of Proxy Materials under rule 14a-16
under the Exchange Act).\345\
---------------------------------------------------------------------------

    \343\ See proposed rule 30e-3(d)(3).
    \344\ See proposed rule 30e-3(d)(2).
    \345\ See proposed rule 30e-3(d)(4).
---------------------------------------------------------------------------

    Similar to the Commission's rules on householding prospectuses,
shareholder reports, and proxy statements and information
statements,\346\ proposed rule 30e-3 also would allow funds to send one
Notice to shareholders who share an address so long as the fund
addresses the Notice to the shareholders individually or as a
group.\347\ In addition, the proposed rule would require funds to file
a form of the Notice with the Commission not later than 10 days after
the Notice is sent to shareholders.\348\ This filing would occur on a
new EDGAR submission type which would be created by the Commission. We
believe the Notice filing requirement would assist us in overseeing
compliance with the rule.
---------------------------------------------------------------------------

    \346\ See, e.g., rule 154 under the Securities Act (permitting
householding of prospectuses); rules 30e-1 and 30e-2 under the
Investment Company Act (permitting householding of fund shareholder
reports); rules 14a-3 and 14c-3 under the Exchange Act (permitting
householding of proxy statements and information statements).
    \347\ See proposed rule 30e-3(d)(5).
    \348\ See proposed rule 30e-3(d)(6).
---------------------------------------------------------------------------

d. Delivery Upon Request
    Proposed rule 30e-3 would also require, as a condition to reliance
on the rule to transmit shareholder reports electronically, that the
fund (or a financial intermediary through which shares of the fund may
be purchased or sold) must send, at no cost to the requestor and by
U.S. first class mail or other reasonably prompt means, a paper copy of
any of the materials discussed above--viz., the fund's most recent
annual and semiannual reports, and the fund's portfolio holdings as of
its most recent first and third fiscal quarters--to any person
requesting such a copy within three business days after receiving a
request for a paper copy.\349\ This requirement is intended to allow
for investors to receive shareholder reports and portfolio information
in print format, if they so prefer, even if they have consented to
electronic transmission without revoking the consent.\350\
---------------------------------------------------------------------------

    \349\ Proposed rule 30e-3(f).
    \350\ See, e.g., 1995 Release, supra note 289 (stating the
Commission's belief that ``as a matter of policy, where a person has
a right to receive a document under the federal securities laws and
chooses to receive it electronically, that person should be provided
with a paper version of the document if any consent to receive
documents electronically were revoked or the person specifically
requests a paper copy (regardless of whether any previously provided
consent was revoked.'').
---------------------------------------------------------------------------

e. Prospectuses and Statements of Additional Information Transmitted
Under Rule 30e-1(d)
    Rule 30e-1(d) under the Investment Company Act permits an open-end
management investment company to transmit a copy of its prospectus or
statement of additional information in place of its shareholder report,
if it includes all of the information that would otherwise be required
to be contained in the shareholder report.\351\ We recognize that the
nature and purpose of the fund prospectus is different from that of
fund shareholder reports. Accordingly, at this time, we are not
proposing to permit a similar regime for fund prospectus delivery
obligations under the Securities Act. As a result, we do not believe
that it would be appropriate to permit the transmission of statutory
prospectuses in the manner provided under the proposed rule. Therefore,
the proposed rule would not be available to a fund seeking to transmit
a copy of its currently effective statutory prospectus or statement of
additional, or both, as permitted by paragraph (d) of rule 30e-1.\352\

---------------------------------------------------------------------------

    \351\ See rule 30e-1(d).
    \352\ Proposed rule 30e-3(g).
---------------------------------------------------------------------------

4. Use of Summary Schedule of Investments
    Under the current rules, in lieu of providing a complete schedule
of portfolio investments as part of the financial statements included
in its shareholder report, a fund may provide a summary schedule of
portfolio investments (``Summary Schedule'').\353\ Pursuant to Rule 12-
12C of Regulation S-X, the Summary Schedule generally must list
separately the 50 largest issues and any other issue the value of which

exceeded one percent of the net asset value of the fund at the close of
the period.\354\
---------------------------------------------------------------------------

    \353\ See, e.g., Instruction 1 to Item 27(b)(1) of Form N-1A
(permitting the inclusion of Schedule VI--Summary schedule of
investments in securities of unaffiliated issuers under Rule 12-12C
of Regulation S-X in lieu of Schedule 1 -- Investments of securities
of unaffiliated issuers under Rule 12-12 of Regulation S-X.
    \354\ See rule 12-12C, n.3 Regulation S-X [17 CFR 210.12-12C].
---------------------------------------------------------------------------

    We believe that use of the summary schedule may be
unnecessary,\355\ and in particular, may be potentially confusing or
cumbersome to investors seeking to access the fund's complete portfolio
holdings.\356\ For these reasons, we are proposing amendments to our
registration forms that would restrict funds relying on proposed rule
30e-3 from providing a Summary Schedule in their shareholder reports in
lieu of a complete schedule.\357\
---------------------------------------------------------------------------

    \355\ For example, a fund using the summary schedule for
considerations relating to printing and mailing costs would likely
have fewer such concerns if the report is posted on its Web site in
reliance on the proposed rule.
    \356\ For example, a shareholder consenting to electronic
transmission that wishes to view the complete portfolio holdings
would, pursuant to the rule as proposed, first receive a notice of
the availability of the report, then take the step to access the
report on the fund's Web site, only to have to take a subsequent
step to request or otherwise access the full schedule.
    \357\ See proposed amendments to Item 27(b) of Form N-1A; Item
24, Instruction 7 of Form N-2; and Item 28(a), Instruction 7(i) of
Form N-3.
---------------------------------------------------------------------------

5. Related Disclosure Amendments
    We are also proposing some related amendments to certain of our
rules and forms. First, we are proposing to amend rule 498 under the
Securities Act, which concerns the use of a summary prospectus,\358\ to
require funds relying on proposed rule 30e-3 to include as part of the
legend on the cover page of the fund's summary prospectus the Web site
address required to be included in the Notice.\359\ As proposed, the
Web site address that leads to shareholder report information could be
the same as the Web site address that leads to prospectus information,
provided that the other conditions of each rule are met, but funds
would also be permitted to use different Web site addresses for each
type of material and provide both addresses in the legend.\360\ This
requirement is intended to provide investors an additional reminder of
the availability of shareholder report and related portfolio holdings
information on the fund's Web site.
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    \358\ See rule 498 under the Securities Act [17 CFR 230.498].
    \359\ See rule 498(b)(1)(v)(A) under the Securities Act.
    \360\ See id.
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    Second, we are proposing to amend rule 498 under the Securities Act
and rule 14a-16 under the Exchange Act to include an Initial Statement
or Notice that would be required by proposed rule 30e-3 among the
materials that are permitted to accompany and have equal or greater
prominence than the summary prospectus prepared in reliance on rule 498
and a notice of Internet availability of proxy materials.\361\ These
amendments are intended to permit a fund's Initial Statement and Notice
to be sent with its summary prospectus or notice of Internet
availability of proxy materials if the fund wishes to send them in that
manner.\362\
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    \361\ See proposed rules 498(f)(2) under the Securities Act and
14a-16(f)(2)(iii) under the Exchange Act.
    \362\ See proposed rule 30e-3(d)(4).
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6. Requests for Comment
    We request comments on our proposal that would permit electronic
transmission of shareholder reports.
     To what extent are funds currently relying on the
Commission's guidance on the use of electronic media to deliver or
transmit disclosure documents and other information to shareholders? To
what extent have shareholders elected to receive disclosure documents
and other information in general, and shareholder reports in
particular, through electronic means? In the case of shareholders who
have elected electronic delivery of disclosure documents in general,
and delivery of shareholder reports in particular, to what extent are
those shareholders accessing those materials online? Please provide
supportive data to the extent available.
     If proposed rule 30e-3 is adopted, to what extent would
funds (i) choose to rely on the rule, and (ii) continue to rely on
guidance concerning electronic transmission that we have already
issued?
     Would availability of the rule change in any way current
industry practices on transmitting shareholder reports electronically?
For example, we expect that funds would continue to rely on the
Commission's guidance to electronically transmit reports to
shareholders who have elected to receive reports electronically, and
rely on the rule with respect to shareholders who have not so elected.
For administrative or other purposes, would funds discontinue their
reliance on the Commission's guidance and instead rely on the rule to
transmit reports electronically with respect to their entire
shareholder base? If so, why? What impact, if any, would the proposed
rule have on the transmission of reports to shareholders of UITs
required to transmit reports pursuant to rule 30e-2 under the
Investment Company Act? What impact, if any, would the proposed rule
have on the transmission of reports to shareholders holding fund shares
through financial intermediaries or other omnibus type arrangements?
Should we permit funds that rely on rule 30e-3 to continue to rely on
prior electronic transmission guidance for certain of their
shareholders? Why or why not?
     If rule 30e-3 is adopted as proposed, in the case of funds
relying on the rule to transmit reports electronically to one or more
shareholders, would funds nonetheless seek shareholder consent to
transmit reports to those shareholders pursuant to the Commission's
electronic guidance in lieu of the rule? Why or why not?
     Should we, as we have proposed, allow funds to transmit
reports to shareholders electronically by making them accessible on a
Web site? Would investors prefer that these materials be transmitted in
this manner? What would be the effect of proposed rule 30e-3 on the
ability of investors to access shareholder reports? Would the
shareholder report information be more useful or less useful if
transmitted in the manner proposed? Would investors be more aware or
less aware of the availability of the information if transmitted in
reliance on the proposed rule?
     Would any positive or negative effect of the proposed rule
on investors be disproportionately greater for certain investors than
for others? If so, which investors would be disproportionately
affected, to what extent, and how would such effects manifest? What, if
any, additional measures could help mitigate any such disproportionate
effects? Please provide supportive data to the extent available.
     Rule 30e-3 as proposed contains a number of conditions to
be satisfied for reliance on the rule. Are the proposed conditions
appropriate? Are there conditions that should be added or are any of
the proposed conditions inappropriate? If so, state the conditions and
the reasons why.
     The rule as proposed would require that the materials
required to be accessible online be publicly accessible, free of
charge, at the Web site specified in the Notice, and does not expressly
require that the Web site be the fund's Web site. Should the rule
require that the materials be accessible at the fund's Web site? Why or
why not?
     What materials should be required to be accessible in
order for a fund to rely on the rule? For example, we have proposed
that a fund relying on the rule would be required to make accessible
the shareholder report, the shareholder report for the prior period,
and in the case of a fund that is a management

company other than a money market fund or an SBIC, the complete
portfolio holdings for the most recent first and third fiscal quarters.
Is it appropriate to require funds to post holdings information
covering a full year? Should we require information be posted covering
a longer period or a shorter period? If so, why? Should money market
funds and SBICs relying on the rule be required to post complete
portfolio holdings for the first and third quarters? Why or why not?
     The rule as proposed would require that the materials made
accessible on the Web site be presented in a format or formats that are
convenient for both reading online and printing on paper. Is the
proposed format requirement appropriate? Are there liability or other
concerns that would arise in connection with meeting a fund's
obligation to transmit shareholder reports under Section 30(e) and the
rules thereunder? Should we instead require that the materials be
presented in a format or formats that are human-readable and capable of
being printed on paper in human-readable format? Why or why not?
     How soon should each of the materials be required to be
accessible, and how long should each be required to remain accessible?
     The proposed rule would contain a safe harbor for
instances in which the materials required to be made accessible are not
available for a temporary period of time. Is the safe harbor as
proposed appropriate, or should it be modified? For example, should the
rule be more proscriptive as to the period of time in which action must
be taken to resolve any issues?
     Should we require the Web site on which the proposed
rule's required materials are made accessible to incorporate safeguards
to protect the anonymity of its visitors? For example, should we
require similar conditions to those provided in rule 14a-16 under the
Exchange Act relating to Internet availability of proxy materials? Why
or why not? If so, what specific requirements should we consider?
     Should the proposed rule require that a shareholder
consent to electronic transmission of shareholder reports before a fund
begins to rely on the rule? Should we permit funds to obtain implied
consent, as proposed, or should we require funds to receive express
consent? Are there certain circumstances in which funds should not be
permitted to obtain implied consent? For example, if an investor upon
opening a new account does not opt-in to electronic delivery of
documents, should the fund be permitted nonetheless to seek to rely on
the proposed rule as to that shareholder? Why or why not?
     Under the proposed rule, each series of a registrant
offering multiple series would need to obtain separate consent as to a
shareholder, regardless of whether consent was obtained from that
shareholder by other series offered by that registrant. If a fund has
obtained implied consent from a shareholder as to a particular series,
and subsequently the shareholder invests in one or more other series
offered by the fund, should the fund be required to obtain consent as
to those other series, or should the fund be permitted to infer consent
as to all series offered by the fund? Why or why not? Should the fund
be permitted to infer consent as to only other series offered by the
registered investment company, or should the fund be permitted to infer
consent as to other funds within the fund complex? What, if any, are
the special considerations relating to investors who invest through
intermediaries?
     Under the proposed rule, to obtain implied consent as to a
shareholder, the fund would be required to transmit to the shareholder
an Initial Statement, at least 60 days before it begins to rely on the
rule. Are the proposed disclosures for the Initial Statement
appropriate? Should a fund be required to provide to a shareholder
other disclosures before inferring consent to electronic transmission?
     Should the rule require funds to provide multiple written
statements (i.e., in addition to the Initial Statement) prior to
inferring consent to electronic transmission? If so, how many
additional statements and how long after the Initial Statement should
they be provided? What period of time after a fund transmits the
Initial Statement should we permit the fund to infer consent? Is 60
days an appropriate time? Why or why not?
     What methods should shareholders be permitted to use to
deny or revoke consent to electronic transmission?
     Should we permit the Initial Statement to be incorporated
into, or combined with, one or more other documents? If so, which
documents should we permit the Initial Statement to be incorporated
into or combined with?
     The rule as proposed would require that the Initial
Statement must be sent separately from other types of communications
and may not accompany any other document or materials except the fund's
current summary prospectus, statutory prospectus, statement of
additional information, or Notice of Internet Availability of Proxy
Materials. Is this requirement appropriate? Should we permit the
Initial Statement to accompany one or more other documents? If so,
which documents?
     Should we, as we have proposed for the Notice, permit the
Initial Statement to be sent in a ``householded'' manner?
     Should we require that the Initial Statement not contain
any additional information other than that specified in the rule? Why
or why not? Absent any requirement specified by rule, what other
information would funds generally include in the Initial Statement? For
example, would funds provide information on how shareholders could
elect to receive the shareholder report and other documents and
information electronically by satisfying the conditions contained in
the Commission's guidance on use of electronic media relating to
notice, access, and evidence of delivery?
     Should the rule permit funds to obtain implied consent
from shareholders who have previously revoked consent? If so, should
the rule prescribe a minimum period of time after consent was revoked
before re-attempting to obtain implied consent from a shareholder? What
period should that be and why?
     Should each fund be required to send a shareholder a
Notice each time it transmits a shareholder report electronically under
the proposed rule? Why or why not?
     We anticipate that the Notice would be sent in paper and
mailed to shareholders. Should we permit the Notice to be sent by email
if the shareholder has provided an email address? Why or why not? For
example, are there any concerns that under such an approach, while a
shareholder may have provided an email address (e.g., as part of
opening an account), the shareholder may nonetheless neither prefer nor
expect to receive documents or other information through that medium?
To what extent are funds and intermediaries, pursuant to regulatory
requirements or otherwise, maintaining up-to-date email addresses for
investors? Would an investor be more likely to view a Notice delivered
by one method versus another (i.e., print versus electronically)? Would
an investor be more likely to access the related shareholder report and
other required materials when notified by one method or the other?
     Are the proposed disclosures for the Notice appropriate?
Should we require that the disclosure in the Notice concerning a
shareholder's ability to indicate a preference for paper transmission
in the future be preceded

by an additional bold-face legend or otherwise made more prominent?
     Should we permit the Notice to be incorporated into, or
combined with, one or more other documents? If so, which documents
should we permit the Notice to be incorporated into or combined with?
     The rule as proposed would require that the Notice must be
sent separately from other types of communications and may not
accompany any other document or materials except the fund's current
summary prospectus, statutory prospectus, statement of additional
information, or Notice of Internet Availability of Proxy Materials. Is
this requirement appropriate? Should we permit the Notice to accompany
one or more other documents? If so, which documents? For example, in
the case of a Notice sent to a shareholder for the first time, should
we permit or require the Notice to be accompanied with materials
explaining the new transmission regime? Why or why not?
     Should we, as proposed, permit funds to either send
separate Notices for each fund or send combined Notices for more than
one fund held by a particular shareholder, or should the rule require
one or the other of those approaches?
     Should we require that the Notice not contain any
additional information other than that specified in the rule? Why or
why not? Absent any restriction by rule, what other information would
funds generally include in the Notice? For example, would funds provide
information on how shareholders could elect to receive the shareholder
report and other documents and information electronically by satisfying
the conditions contained in the Commission's guidance on use of
electronic media relating to notice, access, and evidence of delivery?
     In the case of management companies that are not SBICs,
should we require such funds to send a notice each time the fund makes
accessible its complete portfolio holdings for the first or third
fiscal quarters? Why or why not?
     Should we, as proposed, permit the Notice to be sent in a
``householded'' manner?
     We are proposing that funds would file a form of the
Notice with the Commission not later than 10 days after it is sent to
shareholders. Is 10 days sufficient to meet this proposed filing
requirement, or should some other filing period be required? If so,
what time period and why?
     We anticipate that the form of Notice would be filed with
the Commission on EDGAR pursuant to a separate EDGAR submission type.
Should we instead require that the form of Notice be filed as an
exhibit to a report filed with the Commission? For example, should we
require that the form of Notice be filed as part of the fund's report
on Form N-CSR or Form N-CEN? Why or why not?
     Should we require, as proposed, that funds send a paper
copy of a shareholder report upon request? If so, how soon should a
fund be required to send the report after receiving a request?
     Should we restrict funds relying on the proposed rule from
using the summary schedule of investments? Why or why not? Are there
considerations relating to the use of the summary schedule of
investments other than those relating to printing and mailing costs
that would make the summary schedule an important option for funds to
provide portfolio holdings disclosures? Should we restrict funds from
using the summary schedule only in reports transmitted pursuant to the
rule, and permit funds to use the summary schedule in printed reports
that are mailed to shareholders? Would funds prefer this additional
flexibility? Why or why not?
     Are the proposed amendments to rule 498 and the
registration forms regarding Web site availability of documents
appropriate? Should we also, for example, specifically require funds
relying on the rule to disclose on the cover page or elsewhere in the
summary prospectus or statutory prospectus its reliance on the rule and
what specific documents are made available on the Web site?
     To what extent would the proposed rule reduce burdens such
as printing and mailing costs borne by funds? Would these burden
reductions ultimately accrue to fund shareholders in the form of lower
total fund operating expenses? For example, would these reductions
ultimately accrue to shareholders in funds with arrangements that
permit or limit payments to service providers or intermediaries such as
broker-dealers in connection with the printing and mailing of
shareholder reports? Please provide supportive data to the extent
available.
     In addition to allowing funds to electronically transmit
reports to shareholders, should we also consider options for permitting
similar delivery of summary or statutory prospectuses? Why or why not?

E. Form N-CEN and Rescission of Form N-SAR

1. Overview
    We are proposing to amend the framework by which registered
investment companies report census-type information to the Commission
by rescinding Form N-SAR and replacing it with a new form--Form N-
CEN.\363\ Form N-SAR was adopted by the Commission in 1985 and requires
that funds report a wide variety of census information to the
Commission, including information relating to a fund's organization,