[Federal Register: November 30, 2007 (Volume 72, Number 230)]
[Proposed Rules]
[Page 67789-67824]
[DOCID:fr30no07-23]

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Part II

Securities and Exchange Commission

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17 CFR Parts 230, 232, 239, and 274

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

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230, 232, 239, and 274

[Release Nos. 33-8861; IC-28064; File No. S7-28-07]
RIN 3235-AJ44

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

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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

DATES: Comments should be submitted on or before February 28, 2008.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml.
);     Send an e-mail to<EMAIL_ADDRESS>Please include

File Number S7-28-07 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov
). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number S7-28-07. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/ proposed.shtml). Comments

are also available for public inspection and copying in the
Commission's Public Reference Room, 100 F Street, NE., Washington, DC
20549, on official business days between the hours of 10 am and 3 pm.
All comments received will be posted without change; we do not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Kieran G. Brown, Senior Counsel;
Sanjay Lamba, Senior Counsel; Tara R. Buckley, Branch Chief; or Brent
J. Fields, Assistant Director, Office of Disclosure Regulation,
Division of Investment Management, at<PHONE_NUMBER>, Securities and
Exchange Commission, 100 F Street, NE., Washington, DC 20549-5720.

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

I. Background
II. Discussion
    A. Proposed Amendments to Form N-1A
    B. New Delivery Option for Mutual Funds
    C. Technical and Conforming Amendments
    D. Compliance Date
III. General Request for Comments
IV. Special Request for Comments From Investors
V. Paperwork Reduction Act
VI. Cost/Benefit Analysis
VII. Consideration of Promotion of Efficiency, Competition, and
Capital Formation
VIII. Initial Regulatory Flexibility Analysis
IX. Consideration of Impact on the Economy
X. Statutory Authority
Text of Proposed Rule and Form Amendments
Appendix

I. Background

    Millions of individual Americans invest in shares of open-end
management investment companies (``mutual funds''),\12\ relying on
mutual funds for their retirement, their children's education, and
their other basic financial needs.\13\ These investors face a difficult
task in choosing among the more than 8,000 available mutual funds.\14\
Fund prospectuses, which have been criticized by investor advocates,
representatives of the fund industry, and others as long and
complicated, often prove difficult for investors to use efficiently in
comparing their many choices.\15\ Current Commission rules

require mutual fund prospectuses to contain key information about
investment objectives, risks, and expenses that, while important to
investors, can be difficult for investors to extract. Prospectuses are
often long, both because they contain a wealth of detailed information,
which our rules require, and because prospectuses for multiple funds
are often combined in a single document. Too frequently, the language
of prospectuses is complex and legalistic, and the presentation formats
make little use of graphic design techniques that would contribute to
readability.
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    \12\ An open-end management investment company is an investment
company, other than a unit investment trust or face-amount
certificate company, that offers for sale or has outstanding any
redeemable security of which it is the issuer. See Sections 4 and
5(a)(1) of the Investment Company Act [15 U.S.C. 80a-4 and 80a-
5(a)(1)].
    \13\ Investment Company Institute, 2007 Investment Company Fact
Book, at 57 (2007), available at: http://www.icifactbook.org/pdf/2007_factbook.pdf
 (96 million individuals own mutual funds).

    \14\ Id. at 10 (as of year-end 2006, there were 8,726 mutual
funds).
    \15\ See William D. Lutz, Ph.D., Professor of English, Rutgers
University, Transcript of U.S. Securities and Exchange Commission
Interactive Data Roundtable, at 69 (June 12, 2006), available at:
http://www.sec.gov/spotlight/xbrl/xbrlofficialtranscript0606.pdf

(``June 12 Roundtable Transcript'') (stating that current mutual
fund prospectus is ``unreadable''); Don Phillips, Managing Director,
Morningstar, Inc., id. at 26 (stating that current prospectus is
``bombarding investors with way more information than they can
handle and that they can intelligently assimilate''). A Webcast
archive of the June 12 Interactive Data Roundtable is available at:
http://www.connectlive.com/events/secxbrl/. See also Investment

Company Institute, Understanding Preferences for Mutual Fund
Information, at 8 (Aug. 2006), available at: http://ici.org/pdf/rpt_06_inv_prefs_summary.pdf
 (``ICI Investor Preferences

Study'') (noting that sixty percent of recent fund investors
describe mutual fund prospectuses as very or somewhat difficult to
understand, and two-thirds say prospectuses contain too much
information); Associated Press Online, Experts: Investors Face
Excess Information (May 25, 2005) (``There is broad agreement * * *
that prospectuses have too much information * * * to be useful.''
(quoting Mercer Bullard, President, Fund Democracy, Inc.)); Thomas
P. Lemke and Gerald T. Lins, The ``Gift'' of Disclosure: A Suggested
Approach for Managed Investments, The Investment Lawyer, at 19 (Jan.
2001) (stating that the fund prospectus ``typically contains more
information than the average investor needs'').
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    Numerous commentators have suggested that investment information
that is key to an investment decision should be provided in a
streamlined document with other more detailed information provided
elsewhere.\16\ Furthermore, recent investor surveys indicate that
investors prefer to receive information in concise, user-friendly
formats.\17\
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    \16\ See Charles A. Jaffe, Improving Disclosure of Funds Can Be
Done, The Fort Worth Star-Telegram (May 7, 2006) (``Bring back the
profile prospectus, and make its use mandatory. * * * A two page-
summary of [the] key points [in the profile]--at the front of the
prospectus--would give investors the bare minimum of what they
should know out of the paperwork.''); Experts: Investors Face Excess
Information, supra note 15 (stating ``a possible middle ground in
the disclosure debate is to rely more heavily on so-called profile
documents which provide a two-page synopsis of a fund'' (attributing
statement to Mercer Bullard, President, Fund Democracy, Inc.));
Mutual Funds: A Review of the Regulatory Landscape, Hearing Before
the Subcomm. on Capital Markets, Insurance and Government Sponsored
Enterprises of the Comm. on Financial Services, U.S. House of
Representatives, 109th Cong. (May 10, 2005), at 24 (``To my mind, a
new and enhanced mutual fund prospectus should have two core
components. It should be short, addressing only the most important
factors about which typical fund investors care in making investment
decisions, and it should be supplemented by additional information
available electronically, specifically through the Internet, unless
an investor chooses to receive additional information through other
means.'' (Testimony of Barry P. Barbash, then Partner, Shearman &
Sterling LLP)); Thomas P. Lemke and Gerald T. Lins, The ``Gift'' of
Disclosure: A Suggested Approach for Managed Investments, supra note
15, at 19 (information that is important to investors includes goals
and investment policies, risks, costs, performance, and the identity
and background of the manager).
    In addition, a mutual fund task force organized by the National
Association of Securities Dealers, Inc. (``NASD'') supported the use
of a ``profile plus'' document, on the Internet, that would include,
among other things, basic information about a fund's investment
strategies, risks, and total costs, with hyperlinks to additional
information in the prospectus. See NASD Mutual Fund Task Force,
Report of the Mutual Fund Task Force: Mutual Fund Distribution (Mar.
2005), available at: http://www.finra.org/web/groups/rules_regs/documents/rules_regs/p013690.pdf
.

    \17\ See ICI Investor Preferences Study, supra note 15, at 29
(``Nearly nine in 10 recent fund investors say they prefer a summary
of the information they want to know before buying fund shares,
either alone or along with a detailed document. * * * Just 13
percent prefer to receive only a detailed document.''); Barbara
Roper and Stephen Brobeck, Consumer Federation of America, Mutual
Fund Purchase Practices, at 13-14 (June 2006), available at: http://www.consumerfed.org/pdfs/mutual_fund_survey_report.pdf
 (survey

respondents more likely to consult a fund summary document rather
than a prospectus or other written materials).
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    Similar opinions were voiced at a roundtable held by the Commission
in June 2006, at which representatives from investor groups, the mutual
fund industry, analysts, and others discussed how the Commission could
change the mutual fund disclosure framework so that investors would be
provided with better information. Significant discussion at the
roundtable concerned the importance of providing mutual fund investors
with access to key fund data in a shorter, more easily understandable
format.\18\ The participants focused on the importance of providing
mutual fund investors with shorter disclosure documents, containing key
information, with more detailed disclosure documents available to
investors and others who choose to review additional information.\19\
There was consensus among the roundtable participants that the key
information that investors need to make an investment decision includes
information about a mutual fund's investment objectives and strategies,
risks, costs, and performance.\20\
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    \18\ See, e.g., Henry H. Hopkins, Vice President and Chief Legal
Counsel, T. Rowe Price Group, Inc., June 12 Roundtable Transcript,
supra note 15, at 31 (``[S]hareholders prefer receiving a concise
summary of fund information before buying.''); William D. Lutz,
Ph.D., Professor of English, Rutgers University, id. at 88 (stating
that ``investors [should] be able to find quickly and easily the
information they want'').
    \19\ See Don Phillips, Managing Director, Morningstar, Inc., id.
at 27 (stating that mutual fund investors need two different
documents, including a simplified print document and a tagged
electronic document); Paul Schott Stevens, President and Chief
Executive Officer, Investment Company Institute, id. at 72-73
(urging the Commission to consider permitting mutual funds to
``deliver a clear concise disclosure document * * * much like the
profile prospectus'' with a statement that additional disclosure is
available on the funds' website or upon request in paper); Elisse B.
Walter, Senior Executive Vice President, NASD, id. at 41 (noting
that the industry-recommended disclosure document, the ``profile
plus,'' would include hyperlinks to the statutory prospectus, which
would enable investors to ``choose for themselves the level of
detail they want'').
    \20\ See Barbara Roper, Director of Investor Protection,
Consumer Federation of America, June 12 Roundtable Transcript, supra
note 15, at 20 (noting that there is ``agreement to the point of
near unanimity about the basic factors that investors should
consider when selecting a mutual fund. These closely track the
content of the original fund profile with highest priority given to
investment objectives and strategies, risks, costs, and past
performance particularly as it relates to the volatility of past
returns.''). See also Paul G. Haaga, Jr., Executive Vice President,
Capital Research and Management Company, id. at 90 (stating that the
Commission should ``specify some minimum amounts of information'' to
provide investors with ``something along the lines of the [fund]
profile''); Henry H. Hopkins, Vice President and Chief Legal
Counsel, T. Rowe Price Group, Inc., id. at 31 (``The profile is an
excellent well organized disclosure document whose content
requirements were substantiated by SEC-sponsored focus groups and an
industry pilot program.''); William D. Lutz, Ph.D., Professor of
English, Rutgers University, id. at 88 (noting that the information
that mutual fund investors want has not changed substantially since
the adoption of the profile); Elisse B. Walter, Senior Executive
Vice President, NASD, id. at 40-41 (noting that NASD's ``profile
plus'' builds on the profile and includes key information about a
fund's objectives, risks, fees, and performance, as well as
information about dealer fees and conflicts of interest).
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    The roundtable participants also discussed the potential benefits
of increased Internet availability of fund disclosure documents, which
include, among other things, facilitating comparisons among funds and
replacing ``one-size-fits-all'' disclosure with disclosure that each
investor can tailor to his or her own needs.\21\ In recent years,
access to the Internet has greatly expanded, \22\ and significant
strides

have been made in the speed and quality of Internet connections.\23\
The Commission has already harnessed the power of these technological
advances to provide better access to information in a number of areas.
Recently, for example, we created a program that permits issuers, on a
voluntary basis, to submit to the Commission financial information and,
in the case of mutual funds, key prospectus information, in an
interactive data format that facilitates automated retrieval, analysis,
and comparison of the information.\24\ Earlier this year, we adopted
rules that provide all shareholders with the ability to choose whether
to receive proxy materials in paper or via the Internet.\25\ As
suggested by the participants at the roundtable, advances in technology
also offer a promising means to address the length and complexity of
mutual fund prospectuses by streamlining the key information that is
provided to investors, ensuring that access to the full wealth of
information about a fund is immediately and easily accessible, and
providing the means to present all information about a fund online in
an interactive format that facilitates comparisons of key information,
such as expenses, across different funds and different share classes of
the same fund.\26\ Technology has the potential to replace the current
one-size-fits-all mutual fund prospectus with an approach that allows
investors, their financial intermediaries, third party analysts, and
others to tailor the wealth of available information to their
particular needs and circumstances.
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    \21\ See Paul Schott Stevens, President and Chief Executive
Officer, Investment Company Institute, id. at 70-71 (stating that
the Internet can serve as ``far more than a stand-in for paper
documents * * * It can * * *put investors in control when it comes
to information about their investments.''); Don Phillips, Managing
Director, Morningstar, Inc., id. at 49 (discussing ``the ability to
use the Internet as a tool for comparative shopping''); Elisse B.
Walter, Senior Executive Vice President, NASD, id. at 41 (noting
that the Internet ``doesn't force disclosure into one size fits
all'').
    \22\ Recent surveys show that Internet use among adults is at an
all time high with approximately three quarters of Americans having
access to the Internet. See A Typology of Information and Technology
Users, Pew Internet & American Life Project, at 2 (May 2007),
available at: http://www.pewinternet.org/pdfs/PIP_ICT_Typology.pdf
; Internet Penetration and Impact, Pew Internet &

American Life Project, at 3 (Apr. 2006), available at: http://www.pewinternet.org/pdfs/PIP_Internet_Impact.pdf.
 Further, while

some have noted a ``digital divide'' for certain groups, see, e.g.,
Susannah Fox, Digital Divisions, Pew Internet & American Life
Project, at 1 (Oct. 5, 2005) (noting that certain groups lag behind
in Internet usage, including Americans age 65 and older, African-
Americans, and those with less education), others have noted that
this divide may be diminishing for those groups. See, e.g., Mutual
Fund Shareholders' Use of the Internet, 2006, Investment Company
Institute, Research Fundamentals, at 7 (Oct. 2006), available at:
http://www.ici.org/stats/res/1fm-v15n6.pdf (``Recent increases in

Internet access among older shareholders * * * have narrowed the
generational gap considerably. Today, shareholders age 65 or older
are more than twice as likely to have Internet access than in
2000.''); Michel Marriott, Blacks Turn to Internet Highway, And
Digital Divide Starts to Close, The New York Times (Mar. 31, 2006),
available at: http://www.nytimes.com/2006/03/31/us/31divide.html?ex=1301461200&en=6fd4e942aaaa04ad&ei=5088
 (``African-

Americans are steadily gaining access to and ease with the Internet,
signaling a remarkable closing of the `digital divide' that many
experts had worried would be a crippling disadvantage in achieving
success.'').
    \23\ See John B. Horrigan, Home Broadband Adoption 2007, Pew
Internet & American Life Project, at 1 (June 2007), available at:
http://www.pewinternet.org/pdfs/PIP_Broadband%202007.pdf (47% of

all adult Americans had a broadband connection at home as of early
2007).
    \24\ See Securities Act Release No. 8823 (July 11, 2007) [72 FR
39290 (July 17, 2007)] (adopting rule amendments to enable mutual
funds voluntarily to submit supplemental tagged information
contained in the risk/return summary section of their prospectuses);
Securities Act Release No. 8529 (Feb. 3, 2005) [70 FR 6556 (Feb. 8,
2005)] (adopting rule amendments to enable registrants voluntarily
to submit supplemental tagged financial information).
    \25\ Exchange Act Release No. 56135 (July 26, 2007) [72 FR 42222
(Aug. 1, 2007)].
    \26\ A mutual fund may issue more than one class of shares that
represent interests in the same portfolio of securities with each
class, among other things, having a different arrangement for
shareholder services or the distribution of securities, or both. See
rule 18f-3 under the Investment Company Act [17 CFR 270.18f-3].
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    We are proposing an improved mutual fund disclosure framework that
is intended to provide investors with information that is easier to use
and more readily accessible, while retaining the comprehensive quality
of the information that is available today. The foundation of the
proposal is the provision to all investors of streamlined and user-
friendly information that is key to an investment decision. More
detailed information would be provided both on the Internet and, upon
an investor's request, in paper or by e-mail.
    To implement this improved disclosure framework, we are proposing
amendments to Form N-1A that would require every prospectus to include
a summary section at the front of the prospectus, consisting of key
information about the fund, including investment objectives and
strategies, risks, costs, and performance. This key information has
been identified by the participants in the roundtable, by investor
research, and by a variety of commentators as information that is
important to most investors in selecting mutual funds.\27\ The key
information would be required to be presented in plain English in a
standardized order. Our intent is that this information would be
presented succinctly, in three or four pages at the front of the
prospectus.
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    \27\ See supra notes 16 and 20.
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    We are also proposing a new option for satisfying prospectus
delivery obligations with respect to mutual fund securities under the
Securities Act. Under the proposed option, key information would be
sent or given to investors in the form of a summary prospectus
(``Summary Prospectus''), and the statutory prospectus would be
provided on an Internet Web site.\28\ Upon an investor's request, funds
would also be required to send the statutory prospectus to the
investor. Our intent in proposing this option is that funds take full
advantage of the Internet's search and retrieval capabilities in order
to enhance the provision of information to mutual fund investors.
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    \28\ A ``statutory prospectus'' is a prospectus that meets the
requirements of Section 10(a) of the Securities Act [15 U.S.C.
77j(a)].
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    Today's proposals have the potential to revolutionize the provision
of information to the millions of mutual fund investors who rely on
mutual funds for their most basic financial needs. The proposals are
intended to help investors who are overwhelmed by the choices among
thousands of available funds described in lengthy and legalistic
documents to readily access key information that is important to an
informed investment decision. At the same time, by harnessing the power
of technology to deliver information in better, more usable formats,
the proposals can help those investors, their intermediaries, third
party analysts, the financial press, and others to locate and compare
facts and data from the wealth of more detailed disclosures that are
available.

II. Discussion

A. Proposed Amendments to Form N-1A

    We are proposing amendments to Form N-1A that would require the
statutory prospectus of every mutual fund to include a summary section
at the front of the prospectus consisting of key information presented
in plain English in a standardized order. This presentation is intended
to address investors' preferences for concise, user-friendly
information. The proposed summary section in a fund's prospectus would
provide investors with key information about the fund that investors
could use to evaluate and compare the fund. This summary would be
located in a standardized, easily accessible place and would be
available to all investors, regardless of whether the fund uses a
Summary Prospectus and regardless of whether the investor is reviewing
the prospectus in a paper or electronic format.
    Our proposal builds upon the risk/return summary that is currently
required at the front of every mutual fund prospectus.\29\ The risk/
return summary presents a mutual fund's investment objectives and
strategies, risks, and costs, in a standardized order at the front of
the prospectus. The risk/return summary has, to a significant extent,
functioned effectively to convey this information to investors. As a
result, the current risk/return summary serves as the centerpiece of
the proposed prospectus summary section.
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    \29\ Items 2 and 3 of Form N-1A. See Investment Company Act
Release No. 23064 (Mar. 13, 1998) [63 FR 13916, 13919-25 (Mar. 23,
1998)] (adopting risk/return summary requirement).
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    We are, however, proposing to modify the front portion of the
prospectus in two significant ways in order to make it more useful to
investors. First, we are proposing to require that brief additional
information be included in

the summary section of the prospectus so that this section will
function as a more comprehensive presentation. The information required
in the summary section of the prospectus would be the same as that
required in the new Summary Prospectus, and it is key information that
is important to an investment decision. This approach differs from that
used in the current risk/return summary. When the Commission adopted
the risk/return summary, it simultaneously permitted funds to offer
their shares pursuant to a ``profile'' that summarizes key information
about the fund.\30\ While the risk/return summary items were included
in the profile, the profile also included additional information. We
believe that the key information that is important to an investment
decision is the same, whether an investor is reviewing the summary
section of a statutory prospectus or a short-form disclosure document;
and, for that reason, we are proposing to require the same information
in the summary section of the statutory prospectus and in the Summary
Prospectus. In each case, our intent is for funds to prepare a concise
summary (on the order of three or four pages) that will provide
comprehensive key information.
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    \30\ Investment Company Act Release No. 23065 (Mar. 13, 1998)
[63 FR 13968 (Mar. 23, 1998)]. Our proposed amendments would
eliminate the profile.
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    Second, we are proposing to require that the summary information be
presented separately for each fund covered by a multiple fund
prospectus and that the information for multiple funds not be
integrated.\31\ This requirement is intended to assist investors in
finding important information regarding the particular fund in which
they are interested. Currently, in presenting the risk/return summary
information, multiple fund prospectuses may present all of the
investment objectives, investment strategies, and risks for multiple
funds, followed by the performance information for those funds, and,
finally, the fee tables for those funds.\32\ Unfortunately, in
practice, this flexibility has too frequently resulted in lengthy
presentations that are not summary in nature and from which an investor
would have considerable difficulty extracting the information about the
particular fund in which he or she is interested. In practice, multiple
fund prospectuses have integrated information for as many as 40 funds,
and we are concerned that it would be extremely difficult, if not
impossible, to achieve our goal of short summaries on the order of
three or four pages if those summaries were permitted to contain
information about multiple funds.
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    \31\ Proposed General Instruction C.3.(c)(ii) of Form N-1A.
    \32\ General Instruction C.3.(c) of Form N-1A.
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    The proposed requirement that summary information be separately
presented for each fund in a multiple fund prospectus is intended to
address the problem of lengthy, complex multiple fund prospectuses in
the least intrusive manner possible. Multiple fund prospectuses
contribute substantially to prospectus length and complexity, which act
as barriers to investor understanding. Rather than eliminate altogether
the ability to use multiple fund prospectuses, which could have more
significant cost and other implications than our proposal, we concluded
that it was preferable to propose to require a self-contained summary
section for each fund.
    The Commission is committed to encouraging statutory prospectuses
that are simpler, clearer, and more useful to investors. The proposed
prospectus summary section is intended to provide investors with
streamlined disclosure of key mutual fund information at the front of
the statutory prospectus, in a standardized order that facilitates
comparisons across funds. We are proposing the following amendments to
Form N-1A in order to implement the summary section.
1. General Instructions to Form N-1A
    We are proposing amendments to the General Instructions to Form N-
1A to address the proposed new summary section of the statutory
prospectus. These proposed amendments address plain English and
organizational requirements.
    We propose to amend the General Instructions to state that the
summary section of the prospectus must be provided in plain English
under rule 421(d) under the Securities Act.\33\ Rule 421(d) requires an
issuer to use plain English principles in the organization, language,
and design of the front and back cover pages, the summary, and the risk
factors sections of its prospectus.\34\ The amended instruction would
serve as a reminder that the new prospectus summary section is subject
to rule 421(d). The use of plain English principles in the new summary
section will further our goal of encouraging funds to create usable
summaries at the front of their prospectuses. The prospectus, in its
entirety, also would remain subject to the requirement that the
information be presented in a clear, concise, and understandable
manner.\35\
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    \33\ Proposed General Instruction B.4.(c) of Form N-1A; 17 CFR
230.421(d).
    \34\ Rule 421(d) requires the use of the following plain English
principles: (1) Short sentences; (2) definite, concrete, everyday
words; (3) active voice; (4) tabular presentation or bullet lists
for complex material, wherever possible; (5) no legal jargon or
highly technical business terms; and (6) no multiple negatives.
    \35\ Pursuant to rule 421(b), the following standards must be
used when preparing prospectuses: (1) Present information in clear,
concise sections, paragraphs, and sentences; (2) use descriptive
headings and subheadings; (3) avoid frequent reliance on glossaries
or defined terms as the primary means of explaining information in
the prospectus; and (4) avoid legal and highly technical business
terminology. 17 CFR 230.421(b).
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    We are also proposing amendments to the organizational requirements
of the General Instructions. The proposals would require mutual funds
to disclose the summary information in numerical order at the front of
the prospectus and not to precede this information with any information
other than the cover page or table of contents.\36\ Information
included in the summary section need not be repeated elsewhere in the
prospectus. While a fund may continue to include information in the
prospectus that is not required, a fund may not include any such
additional information in the summary section of the prospectus.\37\
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    \36\ Proposed General Instruction C.3.(a) to Form N-1A.
    \37\ Proposed General Instruction C.3.(b) of Form N-1A.
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    As noted above, we are also proposing that a multiple fund
prospectus be required to present all of the summary information for
each fund sequentially and not integrate the information for more than
one fund.\38\ That is, a multiple fund prospectus would be required to
present all of the summary information for a particular fund together,
followed by all of the summary information for each additional fund.
For example, a multiple fund prospectus would not be permitted to
present the investment objectives for several funds followed by the fee
tables for several funds. A multiple fund prospectus would be required
to clearly identify the name of the particular fund at the beginning of
the summary information for the fund.
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    \38\ Proposed General Instruction C.3.(c)(ii) of Form N-1A; see
supra note and accompanying text.
---------------------------------------------------------------------------

    As is the case with the current risk/return summary, the proposed
instructions would permit a fund with multiple share classes, each with
its own cost structure, to present the summary information separately
for each class, to integrate the information for multiple classes, or
to use another presentation that is consistent with disclosing the
summary information in a standard order at the beginning of the

prospectus.\39\ Generally, this flexibility has resulted in effective
presentations of class-specific cost and performance information that
facilitate comparisons among classes.
---------------------------------------------------------------------------

    \39\ Proposed General Instruction C.3.(c)(ii) of Form N-1A.
---------------------------------------------------------------------------

    Finally, we are proposing to eliminate the provisions of Form N-1A
that permit a fund to omit detailed information about purchase and
redemption procedures from the prospectus and to provide this
information in a separate document that is incorporated into and
delivered with the prospectus.\40\ This option appears to be
unnecessary in light of the proposed new Summary Prospectus which could
be used, at a fund's option, along with any additional sales materials,
including a document describing purchase and redemption procedures.\41\
In addition, the option to provide a separate purchase and redemption
document has been used infrequently since its adoption. We are also
proposing to eliminate a similar provision in the requirements for the
statement of additional information (``SAI'').\42\ The proposed
elimination of these provisions does not otherwise alter the
information about purchase and redemption procedures that must appear
in the fund's prospectus and SAI, and this information would continue
to be required in those documents.
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    \40\ Instruction 6 to Item 1(b) of Form N-1A; Item 6(g) of Form
N-1A; Investment Company Act Release No. 23064, supra note , 63 FR
at 13932-33.
    \41\ See infra notes 87 through 90 and accompanying text.
    \42\ Instruction to Item 18(a) of Form N-1A; proposed Item 24(a)
of Form N-1A (redesignating current Item 18(a) and eliminating
Instruction).
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    We request comment on the proposed amendments to the General
Instructions, and in particular on the following issues:
     Are the proposed revisions to the General Instructions
appropriate? Will they be helpful in encouraging prospectus summary
sections that address investors' preferences for concise, user-friendly
information?
     Should we amend the General Instructions to Form N-1A in
other respects? For example, should we impose any formatting
requirements on the summary section of the prospectus, such as
limitations on page length (e.g., three or four pages) or required font
sizes or layouts? Would any such formatting requirements further the
goal of making the summary section a user-friendly presentation of
information?
     Is it appropriate to prohibit a fund from including
information in the summary section that is not required?
     Are the proposed requirements for the order of information
appropriate? Will they contribute to more readable prospectuses and
summary information that is easy to evaluate and compare?
     Is it helpful for the prospectus to have a separate
summary section?
     Are the requirements with respect to multiple fund and
multiple class prospectuses appropriate? Should we prohibit multiple
fund or multiple class prospectuses altogether? Should we provide
greater or lesser flexibility in the presentation of multiple fund or
multiple class prospectuses? If we permit greater flexibility, how can
we do so consistent with the goal of achieving concise, readable
summaries? For example, if we permit integrated multiple fund summary
presentations for some or all funds, should we also impose a maximum
page limit on a summary section that integrates the information for
multiple funds?
     Should we eliminate or otherwise modify the optional
separate purchase and redemption document? What, if any, purpose will
this option serve if we adopt the new Summary Prospectus?
     Are there alternatives we should consider that would
achieve our goal of providing enhanced disclosures to investors in a
more cost effective manner?
2. Information Required in Summary Section
    The summary section of a mutual fund statutory prospectus would
consist of the following information: (1) Investment objectives; (2)
costs; (3) principal investment strategies, risks, and performance; (4)
top ten portfolio holdings; (5) investment advisers and portfolio
managers; (6) brief purchase and sale and tax information; and (7)
financial intermediary compensation. This information is largely drawn
from the current risk/return summary and fund profile.
Investment Objectives and Goals
    Like the current risk/return summary, the proposed summary section
would begin with disclosure of a fund's investment objectives or goals.
A fund also would be permitted to identify its type or category (e.g.,
that it is a money market fund or balanced fund).\43\
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    \43\ Proposed Item 2 of Form N-1A; Item 2(a) of Form N-1A; rule
498(c)(2)(i). See Investment Company Act Release No. 23064, supra
note 29, 63 FR 13919-20 (adopting investment objectives or goals
disclosure requirement in Item 2(a) of Form N-1A).
---------------------------------------------------------------------------

Fee Table
    The fee table and example, which are drawn from the current risk/
return summary and which disclose the costs of investing, would
immediately follow the fund's investment objectives.\44\ In order to
address continuing concerns about investor understanding of mutual fund
costs,\45\ we are proposing several modifications to the current fee
table that are intended to provide greater prominence to the cost
disclosures and make the table more understandable.
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    \44\ Proposed Item 3 of Form N-1A; Item 3 of Form N-1A; rule
498(c)(2)(iv).
    \45\ See Barbara Roper, Director of Investor Protection,
Consumer Federation of America, June 12 Roundtable Transcript, supra
note 15, at 21; James J. Choi, David Laibson, & Brigitte C. Madrian,
National Bureau of Economic Research, Why Does the Law of One Price
Fail? An Experiment on Index Mutual Funds, at 6 (May 2006),
available at: http://www.nber.org/papers/w12261.pdf.

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

    We are proposing to move the fee table forward from its current
location, which follows information about investment strategies, risks,
and past performance. Contrary to our intent in including the fee table
in the risk/return summary, this information has sometimes appeared
fairly deep within the prospectus, particularly in multiple fund
prospectuses covering a large number of funds. The proposed change to
the location of the fee table, together with the proposed requirement
that the summary section for each fund be provided separately, should
serve to enhance the prominence of the cost information. The fee table
and example are designed to help investors understand the costs of
investing in a fund and to compare those costs with the costs of other
funds. Placing the fee table and example at the front of the summary
information reflects the importance of costs to an investment
decision.\46\
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    \46\ For example, a 1% increase in annual fees reduces an
investor's return by approximately 18% over 20 years.
---------------------------------------------------------------------------

    We are proposing several additional amendments to the fee table
that are intended to improve the disclosure that investors receive
regarding fees and expenses of the fund. First, we are proposing that
mutual funds that offer discounts on front-end sales charges for volume
purchases (so-called ``breakpoint discounts'') include brief narrative
disclosure alerting investors to the availability of those
discounts.\47\ Several years ago, the Commission and NASD staffs
identified concerns regarding the extent to which mutual fund investors
were receiving breakpoint discounts to which they were entitled. The
Commission adopted enhanced prospectus disclosure requirements
regarding breakpoint

discounts at that time.\48\ We believe that investor awareness of the
availability of these discounts may be heightened further by requiring
brief narrative disclosure about the availability of these discounts at
the beginning of the fee table.
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    \47\ Proposed Item 3 of Form N-1A; proposed Instruction 1(b) to
proposed Item 3 of Form N-1A.
    \48\ See Investment Company Act Release No. 26464 (June 7, 2004)
[69 FR 33262 (June 14, 2004)].
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    Second, we are proposing to revise the heading ``Annual Fund
Operating Expenses'' in the fee table. Specifically, we propose to
revise the parenthetical following the heading to read ``ongoing
expenses that you pay each year as a percentage of the value of your
investment'' in place of ``expenses that are deducted from Fund
assets.'' In recent years, we have taken significant steps to address
concerns that investors do not understand that they pay ongoing costs
every year when they invest in mutual funds, including requiring
disclosure of ongoing costs in shareholder reports.\49\ Our proposed
revision further addresses those concerns by making clear that the
expenses in question are paid by investors as a percentage of the value
of their investments in the fund.
---------------------------------------------------------------------------

    \49\ Item 22(d)(1) of Form N-1A; Investment Company Act Release
No. 26372 (Feb. 27, 2004) [69 FR 11244 (Mar. 9, 2004)] (adopting
disclosure of ongoing costs in shareholder reports). See also
General Accounting Office report on Mutual Fund Fees: Additional
Disclosure Could Encourage Price Competition, at 66-81 (June 2000),
available at: http://www.gao.gov/archive/2000/gg00126.pdf

(discussing lack of investor awareness of the fees they pay and
investor focus on mutual fund sales charges rather than ongoing
fees).
---------------------------------------------------------------------------

    Third, for funds other than money market funds, the proposal would
require the addition of brief disclosure regarding portfolio turnover
immediately following the fee table example.\50\ A fund would be
required to disclose its portfolio turnover rate for the most recent
fiscal year, as a percentage of the average value of its portfolio.
This numerical disclosure would be accompanied by a brief explanation
of the effect of portfolio turnover on transaction costs and fund
performance. The prospectus currently is required to include the
portfolio turnover rate in the financial highlights table as well as
narrative information about portfolio turnover,\51\ and the effect of
transaction costs is reflected in fund performance. Nonetheless, some
concerns have been expressed in recent years regarding the degree to
which investors understand the effect of portfolio turnover, and the
resulting transaction costs, on fund expenses and performance.\52\ Our
proposal to require brief portfolio turnover disclosure in the summary
section of the prospectus is intended to address these concerns.
---------------------------------------------------------------------------

    \50\ Proposed Instruction 5 to proposed Item 3 of Form N-1A.
    \51\ Instruction 7 to Item 4(b)(1) of Form N-1A; Item 8(a) of
Form N-1A; Item 11(e) of Form N-1A. The portfolio turnover rate that
would be required to be disclosed in the summary section would be
calculated in the same manner that is currently required in Form N-
1A.
    \52\ See Investment Company Act Release No. 26313 (Dec. 18,
2003) [68 FR 74820 (Dec. 24, 2003)] (request for comment regarding
ways to improve disclosure of transaction costs); Report of the
Mutual Fund Task Force on Soft Dollars and Portfolio Transaction
Costs (Nov. 11, 2004), available at: http://www.finra.org/web/groups/rules_regs/documents/rules_regs/p012356.pdf
.

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

    Finally, we are proposing to amend the requirement that a fund
disclose in its fee table gross operating expenses that do not reflect
the effect of expense reimbursement or fee waiver arrangements, which
result in reduced expenses being paid by the fund.\53\ While gross
operating expenses may provide investors with a more accurate
understanding of the potential long-term costs of an investment in the
fund, they may also overstate the actual, current expenses. In
addition, gross operating expenses may overstate long-term expenses
because any expense increase due to the termination of an expense
reimbursement or fee waiver arrangement may be offset by reduced
expenses that accompany economies of scale resulting from asset growth.
---------------------------------------------------------------------------

    \53\ Instructions 3(d)(i) and 5(a) to Item 3 of Form N-1A. In an
expense reimbursement arrangement, the adviser reimburses the fund
for expenses incurred. Under a fee waiver arrangement, the adviser
agrees to waive a portion of its fees in order to limit fund
expenses.
---------------------------------------------------------------------------

    To address these issues, we are proposing to permit a fund to place
two additional captions directly below the ``Total Annual Fund
Operating Expenses'' caption in cases where there were expense
reimbursement or fee waiver arrangements that reduced fund operating
expenses and that will continue to reduce them for no less than one
year from the effective date of the fund's registration statement.\54\
One caption would show the amount of the expense reimbursement or fee
waiver, and a second caption would show the fund's net expenses after
subtracting the fee reimbursement or expense waiver from the total fund
operating expenses. Funds that disclose these arrangements would also
be required to disclose the period for which the expense reimbursement
or fee waiver arrangement is expected to continue, and briefly describe
who can terminate the arrangement and under what circumstances.
Further, in computing the fee table example, a fund would be permitted
to reflect any expense reimbursement or fee waiver arrangements that
reduced any fund operating expenses during the most recently completed
calendar year and that will continue to reduce them for no less than
one year from the effective date of the fund's registration
statement.\55\ This adjustment could be reflected only in the periods
for which the expense reimbursement or fee waiver arrangement is
expected to continue. For example, if such an arrangement were expected
to continue for one year, then, in the computation of 10-year expenses
in the fee table example, the arrangement could only be reflected in
the first of the 10 years.
---------------------------------------------------------------------------

    \54\ Proposed Instructions 3(e) and 6(b) to proposed Item 3 of
Form N-1A.
    \55\ Proposed Instruction 4(a) to proposed Item 3 of Form N-1A.
We also propose a technical amendment to the instructions to the
expense example to eliminate language permitting funds to reflect
the impact of the amortization of initial organization expenses in
the expense example numbers. Id. This language is unnecessary
because initial organization expenses must be expensed as incurred
and may no longer be capitalized. See American Institute of
Certified Public Accountants, Statement of Position 98-5, Reporting
on the Costs of Start-Up Activities (Apr. 3, 1998).
---------------------------------------------------------------------------

Investments, Risks, and Performance
    Following the fee table and example, we are proposing that a fund
disclose its principal investment strategies and risks,\56\ in the same
manner required in the current risk/return summary.\57\ This would
include the current risk/return bar chart and table illustrating the
variability of returns and showing the fund's past performance.
---------------------------------------------------------------------------

    \56\ Proposed Item 4 of Form N-1A. To conform to other changes
we are proposing to Form N-1A, the Instructions to proposed Item 4
contain technical revisions that (1) amend cross-references to other
Items in Form N-1A; and (2) eliminate language related to the
presentation of performance information for more than one fund,
given the proposed requirement that information for each fund be
presented separately. Proposed Instructions 2(e) and 3 to proposed
Item 4(b)(2) of Form N-1A.
    \57\ Items 2(b) and (c) of Form N-1A.
---------------------------------------------------------------------------

Portfolio Holdings

    The proposed summary section would next need to include a list of
the 10 largest issues contained in the fund's portfolio, in descending
order, together with the percentage of net assets represented by
each.\58\ Information concerning portfolio holdings may provide
investors with a greater understanding of a fund's stated investment
objectives and strategies and may assist investors in making more
informed asset allocation decisions. It was suggested at our roundtable
that it may be appropriate to include this information, which currently
is not contained in the prospectus, in a short summary of key fund
information.\59\ In

addition, many funds and third party analysts include top 10 portfolio
holdings in fund summaries distributed to investors and prominently on
their Web sites, suggesting significant investor interest in this
information. While complete portfolio holdings information currently is
available in Commission filings on Form N-CSR and Form N-Q on a
quarterly basis,\60\ we believe that the top 10 holdings may be
important information in the summary section of the prospectus, which
is intended to bring together, in a single, readily accessible place,
key information that is important to an investment decision.
---------------------------------------------------------------------------

    \58\ Proposed Item 5 of Form N-1A.
    \59\ See Henry H. Hopkins, Vice President and Chief Legal
Counsel, T. Rowe Price Group, Inc., June 12 Roundtable Transcript,
supra note 15, at 32 (suggesting that the current profile be amended
to include the top 10 portfolio holdings).
    \60\ Form N-CSR [17 CFR 249.331; 17 CFR 274.128]; Form N-Q [17
CFR 249.332; 17 CFR 274.130].
---------------------------------------------------------------------------

    Mutual funds would be required to provide their top 10 portfolio
holdings as of the end of the most recent calendar quarter.\61\ In
determining their top 10 holdings, funds would be required to aggregate
and treat as a single issue (1) all fully collateralized repurchase
agreements; and (2) all securities of any one issuer (other than fully
collateralized repurchase agreements).\62\ The U.S. Treasury and each
agency, instrumentality, or corporation, including each government-
sponsored entity, that issues U.S. government securities would be
treated as a separate issuer.\63\
---------------------------------------------------------------------------

    \61\ Proposed Instruction 1 to proposed Item 5 of Form N-1A.
    \62\ This proposed aggregration provision is the same as that
currently applicable for purposes of determining whether the value
of an issue exceeds one percent of net asset value in the summary
portfolio schedule that may be included in a fund's report to
shareholders. Schedule VI of Regulation S-X [17 CFR 210.12-12C]
(Summary of Schedule of Investments in Securities of Unaffiliated
Issuers).
    \63\ Proposed Instruction 2 to proposed Item 5 of Form N-1A.
---------------------------------------------------------------------------

    We are proposing an exclusion to the requirement to list the top 10
holdings that is similar to an exclusion in the current requirements
for quarterly disclosure of a fund's complete portfolio holdings.\64\
Funds rely on this exclusion to guard against the premature release of
certain positions that could lead to front-running and other predatory
trading practices.\65\ Currently, a fund's complete portfolio schedule
filed with the Commission on Form N-CSR or Form N-Q may list an amount
not exceeding five percent of the total value of the portfolio holdings
in one amount as ``Miscellaneous securities,'' provided that securities
so listed are not restricted, have been held for not more than one year
prior to the date of the related balance sheet, and have not previously
been reported by name to the shareholders, or set forth in any
registration statement, application, or annual report or otherwise made
available to the public.
---------------------------------------------------------------------------

    \64\ Note 1 to Schedule I of Regulation S-X [17 CFR 210.12-12]
(Schedule of Investments in Securities of Unaffiliated Issuers);
Note 5 to Schedule VI of Regulation S-X [17 CFR 210.12-12C] (Summary
of Schedule of Investments in Securities of Unaffiliated Issuers).
    \65\ Investment Company Act Release No. 26372, supra note 49, 69
FR at 11250.
---------------------------------------------------------------------------

    Under the proposal, in listing the top 10 holdings, any securities
that would be required to be listed separately or included in a group
of securities that is listed in the aggregate as a single issue could
be listed in one amount as ``Miscellaneous securities,'' provided that
the securities so listed are eligible to be categorized by the fund as
``Miscellaneous securities'' in a complete portfolio schedule dated as
of the end of the most recent calendar quarter. However, if any
security that is included in ``Miscellaneous securities'' would
otherwise be required to be included in a group of securities that is
listed in the aggregate as a single issue in the top 10 portfolio
holdings, the remaining securities of that group must nonetheless be
listed in the top 10 portfolio holdings, even if the remaining
securities alone would not otherwise be required to be listed in this
manner (e.g., because the combined value of the security listed in
``Miscellaneous securities'' and the remaining securities of the same
issuer is sufficient to cause them to be among the 10 largest issues,
but the value of the remaining securities alone is not sufficient to
cause the remaining securities to be among the 10 largest issues). A
brief footnote explaining the term ``Miscellaneous securities'' would
be required.\66\
---------------------------------------------------------------------------

    \66\ Proposed Instruction 3 to proposed Item 5 of Form N-1A.
---------------------------------------------------------------------------

Management
    The next item in the proposed prospectus summary section would be
the name of each investment adviser and sub-adviser of the fund,
followed by the name, title, and length of service of the fund's
portfolio managers.\67\ These items are similar to disclosures
currently required in a fund profile, as well as in the fund's
prospectus.\68\
---------------------------------------------------------------------------

    \67\ Proposed Item 6 of Form N-1A.
    \68\ Item 5 of Form N-1A; rule 498(c)(2)(v). Additional
disclosures regarding investment advisers and portfolio managers
that are currently required in the prospectus would continue to be
required, but not in the summary section. Proposed Item 11(a) of
Form N-1A.
---------------------------------------------------------------------------

    As in the current profile, a fund would not be required to identify
a sub-adviser whose sole responsibility is limited to day-to-day
management of the fund's cash instruments unless the fund is a money
market fund or other fund with a principal investment strategy of
regularly holding cash instruments.\69\ Also as in the current profile,
a fund having three or more sub-advisers, each of which manages a
portion of the fund's portfolio, would not be required to identify each
sub-adviser, except that the fund would be required to identify any
sub-adviser that is (or is reasonably expected to be) responsible for
the management of a significant portion of the fund's net assets.\70\
We believe that, as in the current profile, a significant portion of
the fund's net assets for this purpose generally should be deemed to be
30% or more of the fund's net assets.\71\ The portfolio managers
required to be listed would be the same ones with respect to which
information is currently required in the prospectus.\72\
---------------------------------------------------------------------------

    \69\ Proposed Instruction 1 to proposed Item 6(a) of Form N-1A;
rule 498(c)(2)(v)(B)(1). A fund would continue to be required to
provide the name, address, and experience of all sub-advisers
elsewhere in the prospectus. Proposed Item 11(a)(1)(i) of Form N-1A.
    \70\ Proposed Instruction 2 to proposed Item 6(a) of Form N-1A;
rule 498(c)(2)(v)(B)(2).
    \71\ This proposed exception would be consistent with the
requirements of the current profile. Rule 498(c)(2)(v)(B)(2).
    \72\ Item 5(a)(2) of Form N-1A.
---------------------------------------------------------------------------

Purchase and Sale of Fund Shares
    The proposed summary section would next disclose the fund's minimum
initial or subsequent investment requirements and the fact that the
fund's shares are redeemable, and would identify the procedures for
redeeming shares (e.g., on any business day by written request,
telephone, or wire transfer).\73\ This disclosure would be the same as
that required in the current rule 498 profile except that we are not
proposing to include certain fee disclosures that are also covered by
the fee table, including a fund's sales loads, breakpoints, and charges
upon redemption.\74\
---------------------------------------------------------------------------

    \73\ Proposed Item 7 of Form N-1A.
    \74\ See rules 498(c)(2)(vi) and (vii) (profile purchase and
sale disclosures).
---------------------------------------------------------------------------

Tax Information
    Our proposals would require a mutual fund to state, as applicable,
that it intends to make distributions that may be taxed as ordinary
income or capital gains or that the fund intends to distribute tax-
exempt income. A fund that holds itself out as investing in securities
generating tax-exempt income would be required to provide, as
applicable, a general statement to the effect that a portion of the
fund's

distributions may be subject to federal income tax.\75\ This proposed
disclosure is a streamlined version of the tax disclosure required in
the current rule 498 profile.\76\
---------------------------------------------------------------------------

    \75\ Proposed Item 8 of Form N-1A.
    \76\ See rule 498(c)(2)(viii). The current rule 498 profile also
requires (1) a description of how frequently the fund intends to
make distributions and what options for reinvestment of
distributions are available to investors; (2) a statement that
distributions may be taxable at different rates depending on the
length of time that the fund holds its assets; and (3) that if a
fund expects that its distributions primarily will consist of
ordinary income or capital gains, disclosure to that effect be
provided. This disclosure would continue to be required in the
statutory prospectus. Proposed Items 12(d) and (f)(1)(i)
(redesignating current Items 6(d) and (f)(1)(i)).
---------------------------------------------------------------------------

Financial Intermediary Compensation
    The proposed summary section of the prospectus would conclude with
the following statement, which could be modified provided that the
modified statement contains comparable information.\77\
---------------------------------------------------------------------------

    \77\ Proposed Item 9 of Form N-1A.

    ``Payments to Broker-Dealers and Other Financial Intermediaries
    If you purchase the Fund through a broker-dealer or other
financial intermediary (such as a bank), the Fund and its related
companies may pay the intermediary for the sale of Fund shares and
related services. These payments may influence the broker-dealer or
other intermediary and your salesperson to recommend the Fund over
another investment. Ask your salesperson or visit your financial
intermediary's Web site for more information.''

This disclosure would be new to fund prospectuses and would identify
the existence of compensation arrangements with selling broker-dealers
or other financial intermediaries, alert investors to the potential
conflicts of interest arising from these arrangements, and direct
investors to their salesperson or the financial intermediary's Web site
for further information. It is intended to address, in part, concerns
that mutual fund investors lack adequate information about certain
distribution-related costs that create conflicts for broker-dealers and
their associated persons.\78\
---------------------------------------------------------------------------

    \78\ The Commission has recognized these concerns in a separate
initiative in which the Commission proposed to require, among other
things, disclosure of mutual fund distribution-related costs and
conflicts of interest by selling broker-dealers and other financial
intermediaries at the point of sale. Securities Act Release No. 8544
(Feb. 28, 2005) [70 FR 10521 (Mar. 4, 2005)]; Securities Act Release
No. 8358 (Jan. 29, 2004) [69 FR 6438 (Feb. 10, 2004)]. One commenter
to that proposal recommended use of a short-form disclosure document
that would include, among other things, basic information about such
potential conflicts of interest. Comment Letter of NASD, dated March
31, 2005, available at: http://www.sec.gov/rules/proposed/s70604/nasd033005.pdf
 (supporting the use of a ``profile plus'' document on

the Internet). See also supra note 16.
---------------------------------------------------------------------------

    We request comment generally on the information proposed to be
included in the summary section of the statutory prospectus, and in
particular on the following issues:
     Does the proposed summary section encourage prospectuses
that are simpler, clearer, and more useful to investors? Would the
proposed summary section help investors to better compare funds?
     Should each of the proposed items be included in the
summary section? Should any additional disclosure items currently
required in Form N-1A be included in the summary section? Should we
consider disclosure items that are not currently in Form N-1A? If so,
what types of additional disclosures should we consider including in
the summary section?
     How would the required narrative explanations of various
items contribute to readability and length of the summary section?
Should each of these explanations be required, permitted, or prohibited
in the summary section? Should any of these explanations be required to
appear in the prospectus, but outside the summary section?
     Is the proposed order of the information appropriate, or
should it be modified? If so, how should it be modified?
     Should we also require a fund to disclose whether its
objective may be changed without shareholder approval in the summary
section?
     Are our proposed revisions to the fee table and example
appropriate? Are there any other revisions to the fee table or example
that we should consider?
     Is the proposed disclosure at the beginning of the fee
table regarding discounts on front-end sales charges for volume
purchases (i.e., breakpoint discounts) appropriate?
     Should we consider any other revisions to headings in the
fee table to make them more understandable to investors? For example,
should the terms ``load'' or ``12b-1'' be eliminated? Do investors
generally understand these terms, or are there clearer terms that we
should require?
     How, if at all, should expense reimbursement and fee
waiver arrangements be reflected in the fee table and expense example
and accompanying disclosures?
     Should funds be required to disclose the detailed fee
table information in the summary section or would it be more useful to
investors to require disclosure of total shareholder fees and total
annual fund operating expenses in the summary section and require
disclosure of the detailed fee table outside the summary section? Are
there any details regarding fund fees or expenses that should be
included only outside the summary section? For example, the fee table
currently permits ``Other Expenses'' to be subdivided into no more than
three subcaptions that identify the largest expense or expenses
comprising ``Other Expenses.'' \79\ Should we permit this detail in the
summary section of the prospectus, or should we require that funds
providing this level of detail include it outside the summary section?
---------------------------------------------------------------------------

    \79\ Instruction 3(c)(iii) to Item 3 of Form N-1A.
---------------------------------------------------------------------------

     Are there any revisions to the fee table example that
would make it more useful for investors? For example, should the fee
table example separately break out one-time charges, such as sales
loads, and recurring expenses, such as management and 12b-1 fees?
Should the required narrative explanation of the purpose of the fee
table example be modified or eliminated?
     Should the proposed disclosure regarding a fund's
portfolio turnover rate be included in the summary section? Should the
proposed portfolio turnover narrative disclosure be modified or should
funds be required to disclose their portfolio turnover in the summary
section without any narrative explanation? Should any additional
information regarding a fund's portfolio turnover rate be required to
be disclosed as part of the summary section, for example, information
about a fund that engages in active and frequent trading of portfolio
securities and the tax consequences to shareholders and effects on fund
performance of increased portfolio turnover? \80\ Should funds be
required to provide an explanation of the effect of portfolio turnover
on transaction costs and fund performance? Should new funds (e.g.,
funds with less than six months or one year of operations) be required
to include information about portfolio turnover in the summary section
given their limited period of operations? Is the portfolio turnover
rate meaningful enough for a new fund that it should be required in the
summary section?
---------------------------------------------------------------------------

    \80\ Cf. Instruction 7 to Item 4 of Form N-1A.
---------------------------------------------------------------------------

     Should we consider any revisions to the bar chart or table
disclosing a fund's returns? For example, should we modify or eliminate
the required explanation that this information illustrates the
variability of a fund's returns?
     Are there additional performance measures, such as past
performance adjusted for the impact of inflation, that

should be required in the summary section?
     Should we require disclosure regarding portfolio holdings
in the summary section? If so, what information should be required,
e.g., top five holdings, top 10, top 25? If we require portfolio
holdings disclosure, should any funds be exempt from the requirement,
e.g., money market funds or exchange-traded funds? Should new funds be
exempt from this requirement? Are there circumstances where this
disclosure might not be useful to investors or where additional
information regarding a fund's investment exposures would be necessary
to make the portfolio holdings information useful, for example, where
the top 10 holdings represent a relatively small percentage of the
fund's total holdings? Should we require funds to disclose additional
information such as the percentage of a fund's net assets represented
by the combined top 10 holdings? Should we require a fund to disclose
its holdings that represent a specified percentage of the fund's
holdings?
     Would the proposed exception to the requirement to list
the top 10 holdings that would permit a fund to list an amount not
exceeding five percent of the total value of the portfolio holdings in
one amount as ``Miscellaneous securities'' adequately guard against the
premature release of certain positions that could lead to front-running
and other predatory trading practices? If not, what other protections
would be necessary? Is the ``Miscellaneous securities'' exception
necessary and appropriate?
     Should we require funds to present tables, charts, or
graphs that depict portfolio holdings by reasonably identifiable
categories (e.g., industry sector, geographic region, credit quality,
maturity, etc.) either instead of, or in addition to, top 10 portfolio
holdings? \81\
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    \81\ Cf. Item 22(d)(2) of Form N-1A; Investment Company Act
Release No. 26372, supra note 49, 69 FR at 11251-52 (requiring
similar disclosures in shareholder reports).
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     Should, as proposed, a fund having three or more sub-
advisers be required to identify only those sub-advisers that are (or
are reasonably expected to be) responsible for the management of a
significant portion of the fund's net assets? Are there situations
where this would result in the disclosure of no sub-advisers and, if
so, would this be appropriate? Should we, as proposed, provide that a
``significant portion'' of a fund's net assets generally would be
deemed to be 30% or more of a fund's net assets? Should a higher or
lower percentage or some other measure or standard be used?
     Should any or all of the information that we propose to
require in the summary section regarding the purchase and sale of fund
shares be permitted rather than required? Should any of this
information be prohibited from being included in the summary section?
     Should any additional information regarding the purchase
and sale of fund shares be required to be disclosed in the summary
section? For example, should information regarding policies and
procedures with respect to frequent purchases and redemptions of fund
shares be disclosed in the summary, or is it appropriate to maintain
the location of this information elsewhere in the prospectus?
     Is there any additional tax information that should be
included in the summary section?
     Should we require disclosure regarding the compensation of
broker-dealers, banks, and other financial intermediaries in the
summary section? Should we permit this disclosure to be omitted or
modified in any context? For example, should a fund be permitted to
omit this disclosure if the fund is marketed directly to investors or
where a transaction is initiated by an investor and not on the basis of
a financial intermediary's recommendation? Should funds be permitted to
modify this disclosure to reflect the fact that some transactions may
be initiated by an investor and not on the basis of a financial
intermediary's recommendation?
     In addition or as an alternative to directing customers to
ask salespersons or visit a financial intermediary's Web site for more
information about intermediary compensation, should the summary
prospectus direct customers to other sources of information? Do all
financial intermediaries that distribute mutual funds have Internet Web
sites? Is information typically available on the Web sites of financial
intermediaries? Should the Commission require that such information be
made available on intermediaries' Web sites?
     Should we require or permit a fund to include its ticker
symbol in the summary section? Alternatively, should we require or
permit a fund to include its ticker symbol on the front or back cover
page of the statutory prospectus or SAI or elsewhere in those
documents?
3. Conforming and Technical Amendments to Form N-1A
    The proposed amendments to Form N-1A would require adding new items
to the form and revising and renumbering certain existing items. We are
proposing conforming amendments to Form N-1A in order to update the
table of contents and the various references to Form N-1A items
contained within the form. We are also proposing technical amendments
to Form N-1A to update the Commission's telephone number and
address.\82\
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    \82\ Proposed Item 1(b)(3) of Form N-1A.
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B. New Delivery Option for Mutual Funds

1. Use of Summary Prospectus and Satisfaction of Statutory Prospectus
Delivery Requirements
    The Commission is proposing to replace rule 498, the current
voluntary profile rule, with a new rule that would permit the
obligation under the Securities Act to deliver a statutory prospectus
with respect to mutual fund securities to be satisfied by sending or
giving a Summary Prospectus and providing the statutory prospectus
online. In addition, the new rule would require a fund to send the
statutory prospectus in paper or by e-mail upon request. The Summary
Prospectus would be required to contain the key information that is
included in the new summary section of the statutory prospectus in the
same order that would be required in the statutory prospectus. As
discussed above, the proposal is intended to take advantage of
technological developments and the expanded use of the Internet in
order to provide investors with information that is easier to use and
more readily accessible, while retaining the comprehensive quality of
the information that is available to investors today. The proposal
provides for a layered approach to disclosure in which key information
is sent or given to the investor and more detailed information is
provided online and, upon request, is sent in paper or by e-mail.
    The proposed new rule would provide that any obligation under
Section 5(b)(2) of the Securities Act \83\ to have a statutory
prospectus precede or accompany the carrying or delivery of a mutual
fund security in an offering registered on Form N-1A is satisfied if
(1) a Summary Prospectus is sent or given no later than the time of the
carrying or delivery of the fund security; \84\ and, if any other
materials accompany the Summary Prospectus,

the Summary Prospectus is given greater prominence than those materials
and is not bound together with any of those materials; \85\ (2) the
Summary Prospectus that is sent or given satisfies the rule's
requirements at the time of the carrying or delivery of the fund
security; and (3) the conditions set forth in the rule, which require a
fund to provide the statutory prospectus and other information on the
Internet in the manner specified in the rule, are satisfied.\86\
Section 5(b)(2) of the Securities Act makes it unlawful to deliver a
security for purposes of sale or for delivery after sale ``unless
accompanied or preceded'' by a statutory prospectus. Under the rule,
delivery of the statutory prospectus for purposes of Section 5(b)(2)
would be accomplished by sending or giving a Summary Prospectus and by
providing the statutory prospectus and other required information
online. Failure to comply with the rule's requirements for sending or
giving a Summary Prospectus and providing the statutory prospectus and
other information online would mean that the rule could not be relied
on to meet the Section 5(b)(2) prospectus delivery obligation. Absent
satisfaction of the Section 5(b)(2) obligation by other means, a
Section 5(b)(2) violation would result. The rule would also require a
fund to send the statutory prospectus upon request. This requirement
would not be a condition to reliance on the rule, and failure to send
the requested statutory prospectus would result in a violation of the
rule (as opposed to a violation of Section 5(b)(2)).
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    \83\ 15 U.S.C. 77e(b)(2).
    \84\ A fund could rely upon existing Commission guidance, which
typically requires affirmative consent from individual investors, to
send or give a Summary Prospectus by electronic means. See
Securities Act Release No. 7233 (Oct. 6, 1995) [60 FR 53458 (Oct.
13, 1995)]; Securities Act Release No. 7856 (Apr. 28, 2000) [65 FR
25843 (May 4, 2000)].
    \85\ Cf. 17 CFR 240.17a-5(c)(5)(ii) (requiring a financial
disclosure document to be ``given prominence in the materials
delivered to customers of the broker or dealer'').
    \86\ Proposed rule 498(c).
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    The proposed rule also would provide that a communication relating
to an offering registered on Form N-1A that is sent or given after the
effective date of a mutual fund's registration statement (other than a
prospectus permitted or required under Section 10 of the Securities
Act) shall not be deemed a prospectus under Section 2(a)(10) of the
Securities Act if (1) it is proved that prior to or at the same time
with the communication a Summary Prospectus was sent or given to the
person to whom the communication was made; and, if any other materials
accompany the Summary Prospectus, the Summary Prospectus is given
greater prominence than those materials and is not bound together with
any of those materials; (2) the Summary Prospectus that was sent or
given satisfies the rule's requirements at the time of the
communication; and (3) the conditions set forth in the rule, which
require a fund to provide the statutory prospectus and other
information on the Internet in the manner specified in the rule, are
satisfied.\87\ This provision is similar to Section 2(a)(10)(a) of the
Securities Act, which provides that a communication sent or given after
the effective date of the registration statement (other than a
prospectus permitted under subsection (b) of Section 10) shall not be
deemed a prospectus if it is proved that prior to or at the same time
with the communication a written prospectus meeting the requirements
for a statutory prospectus at the time of the communication was sent or
given to the person to whom the communication was made.\88\ Pursuant to
this provision, communications that would otherwise be considered
``prospectuses'' subject to the liability provisions of Section
12(a)(2) of the Securities Act are not deemed prospectuses and are not
subject to Section 12(a)(2) if they are preceded or accompanied by the
statutory prospectus.\89\ Similarly, under our proposal, communications
that are preceded or accompanied by a Summary Prospectus would not be
deemed to be prospectuses and would not be subject to Section 12(a)(2)
if all the conditions of the proposed rule are met. These
communications would remain subject to the general antifraud provisions
of the federal securities laws.\90\
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    \87\ Proposed rule 498(d). This provision would be limited to a
mutual fund Summary Prospectus that satisfies the terms of the
proposed rule and would not apply in the case of any issuer other
than a mutual fund.
    \88\ 15 U.S.C. 77b(a)(10)(a).
    \89\ 15 U.S.C. 77l(a)(2). Section 12(a)(2) of the Securities Act
imposes liability for materially false or misleading statements in a
prospectus or oral communication, subject to a reasonable care
defense.
    \90\ See, e.g., Section 17(a) of the Securities Act [15 U.S.C.
77q(a)]; Section 10(b) of the Securities Exchange Act of 1934
(``Exchange Act'') [15 U.S.C. 78j(b)]; Section 34(b) of the
Investment Company Act [15 U.S.C. 80a-33(b)].
---------------------------------------------------------------------------

    The current proposal is intended to create a disclosure regime that
is tailored to the unique needs of mutual fund investors in a manner
that provides ready access to the information that investors need,
want, and choose to review in connection with a mutual fund purchase
decision. In crafting this proposal, the Commission has drawn upon
recent initiatives that have harnessed technology in order to provide
investors with better access to information.\91\ The current proposal
provides for a layered approach to disclosure in which key information
is sent or given to the investor and more detailed information is
provided online and, upon request, is sent in paper or by e-mail. This
is intended to provide investors with better ability to choose the
amount and type of information to review, as well as the format in
which to review it (online or paper). In addition, the provision of a
Summary Prospectus containing key information about the fund, coupled
with online provision of more detailed information, should aid
investors in comparing funds. The requirement that the Summary
Prospectus be given greater prominence than, and not be bound together
with, accompanying materials is intended to prevent the Summary
Prospectus from being obscured by accompanying sales materials and
highlight for investors the concise, balanced presentation of the
Summary Prospectus. In short, we believe that the proposal has the
potential to result in funds providing investors with more usable
information than they receive today in a format that investors are more
likely to use and understand. Under the proposal, an investor could
choose to receive the statutory prospectus in the same paper format
that would be provided today.
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    \91\ Exchange Act Release No. 56135, supra note 25, 72 FR 42222
(shareholder choice regarding proxy materials); Exchange Act Release
No. 55146 (Jan. 22, 2007) [72 FR 4148 (Jan. 29, 2007)] (Internet
availability of proxy materials); Securities Act Release No. 8591
(July 19, 2005) [70 FR 44722 (Aug. 3, 2005)] (securities offering
reform).
---------------------------------------------------------------------------

    We request comment generally on the proposed prospectus delivery
option for mutual funds and specifically on the following issues:
     Should we permit mutual funds to meet their prospectus
delivery obligations in the manner provided in the proposed rule? Does
this approach adequately protect investors and provide them with
material information about the fund? Does the proposed approach
adequately protect investors who have no Internet access or limited
Internet access or who prefer not to receive information about mutual
fund investments over the Internet? Should we make any other changes
with respect to prospectus delivery obligations?
     Are there other approaches that would provide mutual fund
investors with key information in a user-friendly format?
     Should we permit mutual funds to meet their prospectus
delivery obligations by filing with the Commission and/or by posting
online without giving or sending a Summary Prospectus?
     Should mutual fund investors have the ability to opt out
of the rule

permanently and thereafter receive a paper copy of any statutory
prospectus? How could this be implemented in practice? For example, how
would a mutual fund that had no prior relationship with an investor be
apprised of the investor's decision to opt out? Could such an opt-out
provision be implemented on a fund or fund complex basis?
     Should we require that the Summary Prospectus be given
greater prominence than other materials that accompany the Summary
Prospectus and that the Summary Prospectus not be bound together with
any of those materials? Are any clarifications of these requirements
needed? Are the requirements workable in all situations? Should we
permit a Summary Prospectus to be included within a newspaper or
magazine? Should we impose additional requirements to encourage the
prominence and separateness of a Summary Prospectus, when provided in
paper, at an Internet Web site, or by e-mail, such as requiring that
the Summary Prospectus be at the top of a list of documents provided
electronically or on top of a group of documents provided in paper?
2. Content of Summary Prospectus
    The proposed rule sets forth the content requirements that a
Summary Prospectus must satisfy.\92\ Similar to a current profile, a
Summary Prospectus meeting the requirements of the rule would be deemed
to be a prospectus that is authorized under Section 10(b) of the
Securities Act and Section 24(g) of the Investment Company Act for the
purposes of Section 5(b)(1) of the Securities Act.\93\ A Summary
Prospectus meeting these content requirements could be used to offer
securities of the fund pursuant to Section 5(b)(1) even if the other
conditions of the rule were not satisfied. The failure to satisfy these
other conditions would, however, preclude the use of the Summary
Prospectus for the other purposes described in proposed rule 498,
including for purposes of satisfying, in part, a fund's obligation
under Section 5(b)(2) to deliver a statutory prospectus. In these
circumstances, the Section 5(b)(2) obligation to deliver a fund's
statutory prospectus would have to be met by means other than the
proposed rule or a Section 5(b)(2) violation would result.
---------------------------------------------------------------------------

    \92\ Proposed rule 498(b). Proposed rule 498(a) would define
terms used in the rule. The Appendix to this release contains a
hypothetical Summary Prospectus, which is provided solely for
illustrative purposes.
    \93\ Proposed rule 498(b); rule 498(a)(2) [17 CFR
230.498(a)(2)]. Section 10(b) of the Securities Act authorizes the
Commission to adopt rules permitting the use of a prospectus for the
purposes of Section 5(b)(1) that summarizes information contained in
the statutory prospectus. Section 24(g) of the Investment Company
Act authorizes the Commission to permit the use of a prospectus
under Section 10(b) of the Securities Act to include information the
substance of which is not included in the statutory prospectus. 15
U.S.C. 77j(b); 15 U.S.C. 77e(b)(1); 15 U.S.C. 80a-24(g).
---------------------------------------------------------------------------

General
    The proposal generally would require the Summary Prospectus to
include the same information as the summary section of the statutory
prospectus in the same order as would be required in the statutory
prospectus.\94\ This key information about investment objectives,
costs, and risks would form the body of the Summary Prospectus.
---------------------------------------------------------------------------

    \94\ Proposed rule 498(b)(2)(i).
---------------------------------------------------------------------------

    The Summary Prospectus would not be permitted to omit any of the
required information or to include additional information except as
described below. A document that omits information required in a
Summary Prospectus or includes additional information not permitted by
the rule would not be a Summary Prospectus under the proposed rule and
could not be used under the proposed rule for any purpose, including
meeting the obligation to deliver a fund's statutory prospectus.\95\
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    \95\ A Summary Prospectus that omits certain information
required by the proposed rule or includes additional information not
permitted by the proposed rule could be deemed to be a prospectus
under Section 10(b) of the Securities Act for purposes of Section
5(b)(1) of the Securities Act pursuant to rule 482 under the
Securities Act [17 CFR 230.482] if the conditions of that rule are
met.
---------------------------------------------------------------------------

    In addition, a Summary Prospectus would be permitted to describe
only one fund, but could describe multiple classes of a single
fund.\96\ These restrictions are similar to restrictions with respect
to the proposed summary section of the statutory prospectus.\97\ Like
those restrictions, they are intended to result in a presentation of
key fund information that is concise and easy to read.
---------------------------------------------------------------------------

    \96\ Proposed rule 498(b)(4).
    \97\ See supra introductory text to Section II.A. and Section
II.A.1.
---------------------------------------------------------------------------

Cover Page or Beginning of Summary Prospectus
    The proposed Summary Prospectus would be required to include the
following information on the cover page or at the beginning of the
Summary Prospectus:
     The fund's name and the share classes to which the Summary
Prospectus relates;
     A statement identifying the document as a ``Summary
Prospectus''; and
     The approximate date of the Summary Prospectus's first
use.

In addition, the cover page or beginning of the Summary Prospectus
would be required to include the following legend:

    ``Before you invest, you may want to review the Fund's
prospectus, which contains more information about the Fund and its
risks. You can find the Fund's prospectus and other information
about the Fund online at [------------]. You can also get this
information at no cost by calling [------------] or by sending an e-
mail request to [------------].'' \98\
---------------------------------------------------------------------------

    \98\ Proposed rule 498(b)(1).

In addition, the legend could include a statement to the effect that
the Summary Prospectus is intended for use in connection with a defined
contribution plan that meets the requirements for qualification under
Section 401(k) of the Internal Revenue Code, a tax-deferred arrangement
under Section 403(b) or 457 of the Internal Revenue Code, or a variable
contract as defined in Section 817(d) of the Internal Revenue Code and
is not intended for use by other investors.\99\
---------------------------------------------------------------------------

    \99\ Proposed rule 498(b)(1)(iv)(B).
---------------------------------------------------------------------------

    The legend would be required to provide an Internet address, toll
free (or collect) telephone number, and e-mail address that investors
can use to obtain the statutory prospectus and other information.\100\
The legend would also be permitted to indicate that the statutory
prospectus and other information are available from a financial
intermediary (such as a broker-dealer or bank) through which shares of
the fund may be purchased or sold. The Internet address at which the
statutory prospectus and other information are available would not be
permitted to be the address of the Commission's Electronic Data
Gathering, Analysis, and Retrieval System (``EDGAR'').\101\ The address
would be required to be specific enough to lead investors directly to
the statutory prospectus and other required information, rather than to
the home page or other section of the Web site on which the materials
are posted.\102\ The Web site could be a central site with prominent
links to each required document.\103\
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    \100\ Proposed rule 498(b)(1)(iv)(A).
    \101\ Cf. rule 14a-16(b)(3) under the Exchange Act [17 CFR
240.14a-16(b)(3)] (similar requirement in rules relating to Internet
availability of proxy materials).
    \102\ For a description of the information required to be
available at the Web site and a discussion of the manner in which
such information must be available, see infra Section II.B.3.
    \103\ Cf. Exchange Act Release No. 55146, supra note 91, 72 FR
at 4153-54 n. 79 (use of central site with prominent links in
electronic delivery of proxy materials).

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Updating Requirements
    The proposed Summary Prospectus rule, similar to the current
voluntary profile rule, would require that average annual total returns
and yield be provided as of the end of the most recent calendar quarter
prior to the Summary Prospectus's first use.\104\ This information
would be required to be updated as of the end of each succeeding
calendar quarter not later than one month after the completion of the
quarter.\105\
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    \104\ Proposed rule 498(b)(2)(ii).
    \105\ Cf. rule 498(c)(2)(iii) (current voluntary profile rule
requiring quarterly updating of return information as soon as
practicable after the completion of each calendar quarter). The date
of the performance information would be required to be included
along with the performance information. The proposed rule would not
require a fund to explain in the Summary Prospectus the reasons for
any change in the securities market index used for comparison
purposes in the performance presentation. Cf. Instruction 2(c) to
proposed Item 4(b)(2) of Form N-1A (requiring this explanation in
proposed summary section of prospectus). Proposed rule
498(b)(2)(ii).
---------------------------------------------------------------------------

    The proposed Summary Prospectus rule also would require the top 10
portfolio holdings information to be provided as of the end of the most
recent calendar quarter prior to the Summary Prospectus's first use or
the immediately prior calendar quarter if the most recent calendar
quarter ended less than one month prior to the Summary Prospectus's
first use.\106\ This is intended to ensure that there is a lag of at
least one month between the end of a calendar quarter and disclosure of
the top 10 holdings as of the end of that quarter. The portfolio
holdings information would be required to be updated on the same
schedule as the performance information, at the end of each succeeding
calendar quarter not later than one month after the completion of the
quarter. The one-month lag is intended to eliminate any potential harm
to fund shareholders from predatory trading practices, such as trading
ahead of funds or ``front-running,'' that could result from more
immediate disclosure of fund portfolio holdings. In order to minimize
the number of times that a fund would be required to update its Summary
Prospectus, the proposed rule would also permit a one-month lag in the
required quarterly update of performance information, so that both
items could be updated on the same schedule.
---------------------------------------------------------------------------

    \106\ Proposed rule 498(b)(2)(iii).
---------------------------------------------------------------------------

    The Commission is proposing to require quarterly updating of
performance and portfolio holdings information in the Summary
Prospectus because we believe that providing updated information in a
concise, summary document may contribute significantly to the
usefulness of the document to investors and their financial
intermediaries. A fund could reflect the updated performance and
portfolio holdings information in the Summary Prospectus by affixing a
label or sticker, or by other reasonable means, and would not be
required to reprint the Summary Prospectus each quarter.\107\ This is
intended to minimize the costs of quarterly updating while still
resulting in an up-to-date and concise, unified presentation of key
information. A fund would not be required to update the performance and
portfolio holdings information in its statutory prospectus on a
quarterly basis. The proposed rule would provide that the failure to
include in a statutory prospectus or registration statement the
quarterly updated performance and portfolio holdings information
required to be included in a Summary Prospectus would not, solely by
virtue of inclusion of the information in a Summary Prospectus, be
considered an omission of material information required to be included
in the statutory prospectus or registration statement.\108\
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    \107\ Proposed Instruction to proposed rule 498(b)(2)(ii) and
(iii).
    \108\ Proposed rule 498(e)(2). Cf. rule 408(b) under the
Securities Act [17 CFR 230.408(b)].
---------------------------------------------------------------------------

    Notwithstanding the quarterly updating requirements, the proposed
rule would provide that, for purposes of satisfying a fund's prospectus
delivery obligations, a Summary Prospectus that satisfies the
requirements of the rule at the time it is sent or given shall be
deemed to continue to satisfy those requirements until the earlier of
the date on which (1) the information in the Summary Prospectus is
required to be updated for any purpose other than the required
quarterly updates to the portfolio holdings and performance
information; or (2) the fund is required to file an annual updating
amendment to its registration statement for the purpose of updating its
statutory prospectus to satisfy the requirements of Section 10(a)(3) of
the Securities Act.\109\ Thus, if a fund's Summary Prospectus had
previously been provided to an investor, persons could continue to rely
on the rule with respect to their prospectus delivery obligations to
that investor without providing a new Summary Prospectus that merely
reflects the quarterly updates to top 10 holdings and performance
information. The previously provided Summary Prospectus would continue
to be deemed current for purposes of the proposed rule until the fund
is required to update the Summary Prospectus for some other purpose or
is required to file an annual updating amendment to its registration
statement. This would be true in the case of existing investors as well
as new investors. Today, some funds choose to send an updated statutory
prospectus to all of their existing shareholders once each year in
order to meet their prospectus delivery obligations with respect to
those shareholders who purchase additional shares of the fund during
the coming year. Under the proposed rule, a fund could instead send an
updated Summary Prospectus to its shareholders once each year, so long
as the only changes to the Summary Prospectus during the year are the
required quarterly updates to holdings and performance information and
so long as the other conditions of the rule are satisfied.
---------------------------------------------------------------------------

    \109\ Proposed rule 498(e)(1). Section 10(a)(3) of the
Securities Act [15 U.S.C. 77j(a)(3)] generally requires that when a
prospectus is used more than nine months after the effective date of
the registration statement, the information in the prospectus must
be as of a date not more than sixteen months prior to such use. The
effect of this provision is to require mutual funds to update their
prospectuses annually to reflect current cost, performance, and
other financial information.
---------------------------------------------------------------------------

    We request comment generally on the proposed content and updating
requirements of the Summary Prospectus and specifically on the
following issues:
     Should the Summary Prospectus be required to include the
same information as the summary section of the statutory prospectus in
the same order as required in the statutory prospectus? Should any of
the information that we propose to require in the Summary Prospectus
not be required? Should any additional information, such as additional
information from the statutory prospectus, SAI, or annual or semi-
annual report, be required to be included in the Summary Prospectus?
     Should we, as proposed, prohibit the Summary Prospectus
from including information that is not explicitly permitted? What
effect would this prohibition have on the length, usability, and
completeness of a Summary Prospectus? If we include this prohibition,
should we make any exceptions to the prohibition?
     Should we restrict the number of funds or share classes
that may be included in a Summary Prospectus? Would including multiple
funds in a Summary Prospectus make it too long and confusing, and would
it decrease the likelihood that investors would use the Summary
Prospectus? Or would including multiple funds in a Summary Prospectus
contribute to investors'

ability to compare those funds? Are there groups of funds that should
be permitted to be included in a single Summary Prospectus even if we
generally prohibit multiple fund Summary Prospectuses? Instead of, or
in addition to, restricting the number of funds in a Summary
Prospectus, should we impose page limits on Summary Prospectuses (e.g.,
three or four pages)? If so, what should the page limits be? How would
we address situations in which a fund may conclude that it cannot
provide the information required in the Summary Prospectus within a
prescribed page limit?
     Is the information that we propose to require on the cover
page or at the beginning of the Summary Prospectus appropriate? Should
we include any additional information or eliminate any of the
information that we have proposed to include?
     Is the proposed legend sufficient to notify investors of
the availability and significance of the statutory prospectus and other
information about the fund and how to obtain this information? Should
the legend include greater detail about the information that is
available? Will the legend adequately inform investors of the various
means for obtaining additional information about a fund? Are the
proposed requirements for the Web site address where additional
information is available adequate to ensure that the Web site and the
additional information will be easy to locate?
     Should we require or permit a fund to include its ticker
symbol in the Summary Prospectus? If so, where should such information
be included (e.g., at the beginning or on the cover page)?
     Will a one-month lag in reporting top 10 portfolio
holdings sufficiently protect against potential dangers to
shareholders, such as the dangers of front-running? Would a shorter or
longer delay be more appropriate?
     Should we require the performance and portfolio holdings
information in the Summary Prospectus to be updated quarterly? How
would the inclusion of performance and portfolio holdings information
that is not updated quarterly affect the usefulness of a Summary
Prospectus to investors? How would the inclusion of performance and
portfolio holdings information that is not updated quarterly affect
investors' perceptions of the Summary Prospectus and investors'
interest in reviewing the information in the Summary Prospectus?
     Would semi-annual updating of performance and portfolio
holdings information in the Summary Prospectus be more appropriate or
should we require annual updating only?
     Would any concerns relating to investor confusion,
liability, or other matters arise from requiring quarterly updating of
performance and portfolio holdings information in the Summary
Prospectus but not in the statutory prospectus? Have any such concerns
resulted in practice for funds that currently use the voluntary
profile, where performance information is required to be updated on a
quarterly basis, but such information is not required to be updated
quarterly in the statutory prospectus?
     If we require quarterly or semi-annual updating of
performance and portfolio holdings information in the Summary
Prospectus, should we also require this information to be updated
quarterly or semi-annually in the statutory prospectus?
     What, if any, burdens would be associated with the
requirement for quarterly updating of performance and portfolio
holdings information? Would any burdens be reduced due to the
availability of ``on demand'' printing technologies in which copies of
documents are printed only as needed? How would any such burdens differ
from those associated with quarterly updates to sales materials that
include performance information, which funds routinely undertake today?
If we require quarterly updating, how can we minimize any associated
burdens?
     Should the rule require funds to provide quarterly updated
performance and portfolio holdings information on an Internet Web site
and/or on a toll-free telephone line instead of updating the Summary
Prospectus quarterly? If so, should the Summary Prospectus be required
to disclose the availability of the updated information? Would the
addition of a legend to this effect, and the elimination of the updated
information, affect the usefulness and perceived usefulness of the
Summary Prospectus to investors, as well as their willingness to read
and use the Summary Prospectus?
     Would it be appropriate for the proposed rule to deem a
previously provided Summary Prospectus to be current notwithstanding
subsequent quarterly updates to performance and portfolio holdings
information? If we require quarterly updating, should we include any
additional safe harbors or provide for a cure provision in cases where
a Summary Prospectus that lacks a required quarterly update has been
inadvertently distributed?
3. Provision of Statutory Prospectus, SAI, and Shareholder Reports
    In addition to sending or giving a Summary Prospectus, a person
that decides to rely on the proposed rule to meet its statutory
prospectus delivery obligations with respect to a mutual fund's
securities would be required to provide the statutory prospectus itself
on the Internet, together with other information, in the manner
specified by the rule.\110\ In order to maximize both the accessibility
and usability of the information, the statutory prospectus would be
required to be provided in two ways, by posting on an Internet website
and by sending the information directly to any investor requesting a
copy. Sending the information directly to any investor would not,
however, be a condition of reliance on the rule.
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    \110\ Proposed rule 498(c)(3), (d)(3), and (f).
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    Under the proposal, the statutory prospectus and other information
would be required to be provided through the Internet as follows. The
fund's current Summary Prospectus, statutory prospectus, SAI, and most
recent annual and semi-annual reports to shareholders would be required
to be accessible, free of charge, at the Web site address specified on
the cover page or at the beginning of the Summary Prospectus.\111\
These documents would be required to be accessible on or before the
time that the Summary Prospectus is sent or given and current versions
of the documents would be required to remain on the Web site through
the date that is at least 90 days after (i) in the case of reliance on
the proposed rule to satisfy the obligation to have a statutory
prospectus precede or accompany the carrying or delivery of a mutual
fund security, the date that the mutual fund security is carried or
delivered, and (ii) in the case of reliance on the proposed rule to
deem a communication with respect to a mutual fund security not to be a
prospectus under Section 2(a)(10) of the Securities Act, the date that
the communication is sent or given.\112\ This requirement is designed
to ensure continuous access to the information from the time the
Summary Prospectus is sent or given until at least 90 days after the
date of delivery of a security or communication in reliance on the
proposed rule.
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    \111\ The cost to access the Internet itself (e.g., monthly
subscription to an Internet service provider) and related costs,
such as the cost of printer ink, would not be considered costs for
purposes of determining whether information is accessible, free of
charge.
    \112\ Proposed rule 498(f)(1).
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    We are proposing to require that the information on the Internet be
presented in a format that:

     Is convenient for both reading online and printing on
paper; \113\
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    \113\ Proposed rule 498(f)(2)(i). See also 17 CFR 240.14a-16(c)
(requiring materials to be presented in a format convenient for both
reading online and printing in paper when delivering proxy materials
electronically).
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     permits persons accessing the statutory prospectus or SAI
to move directly back and forth between the table of contents in that
document and each section of that document referenced in the table of
contents; \114\ and
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    \114\ Proposed rule 498(f)(2)(ii).
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     permits persons accessing the Summary Prospectus to move
directly back and forth between each section of the Summary Prospectus
and (A) any section of the statutory prospectus and SAI that provides
additional detail concerning that section of the Summary Prospectus; or
(B) tables of contents in the statutory prospectus and SAI that
prominently display the sections within those documents that provide
additional detail concerning information contained in the Summary
Prospectus.\115\
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    \115\ Proposed rule 498(f)(2)(iii).

The first requirement is designed to ensure that the information
provided over the Internet will be user-friendly, both online and when
printed. This imposes on the online information a standard of usability
that is comparable to the readability of a paper document. The latter
two requirements are intended to result in online information that is
in a better and more usable format than the same information when
provided in paper. The first of those two requirements would allow an
investor or other user to move directly between the table of contents
in the prospectus or SAI and the related sections of that document, by
a single mouse click and without the need to flip through multiple
pages of a paper document. The second requirement would allow an
investor to move back and forth between related sections of the Summary
Prospectus, statutory prospectus, and SAI, either directly through a
single mouse click or indirectly by means of a table of contents in the
prospectus or SAI, in which case two mouse clicks would be required.
    In addition, persons accessing the Web site must be able to
permanently retain, through downloading or otherwise, free of charge,
an electronic version of the Summary Prospectus, statutory prospectus,
SAI, and shareholder reports in a format that meets the first two
requirements enumerated in the preceding paragraph.\116\ That is, the
format must be convenient for both reading online and printing on
paper, and persons accessing the downloaded version of the statutory
prospectus or SAI must be able to move directly back and forth between
the table of contents in that document and each section of that
document referenced in the table of contents. An electronic version
that is retained by an investor would not be required to incorporate
links between the Summary Prospectus, statutory prospectus, and SAI
because we anticipate that there may be technical difficulties
associated with keeping these links current.
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    \116\ Proposed rule 498(f)(3).
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    Compliance with all of the conditions in the proposed rule
regarding Internet posting would be required in order to meet
prospectus delivery obligations under Section 5(b)(2) of the Securities
Act. Failure to comply with any of the conditions would be a violation
of Section 5(b)(2) unless the fund's statutory prospectus is delivered
by means other than reliance on the rule. The Commission recognizes,
however, that there may be times when, due to system outages or other
technological issues, a fund is temporarily not in compliance with the
Internet posting requirements of the rule, despite the fund's best
efforts. For that reason, the proposed rule includes a safe harbor
provision stating that the conditions regarding Internet availability
of a fund's Summary Prospectus, statutory prospectus, SAI, and
shareholder reports would be deemed to be met, notwithstanding the fact
that those materials are not available for a time in the manner
required, provided that the fund has reasonable procedures in place to
ensure that those materials are available in the required manner. In
addition, a fund would be required to take prompt action to ensure that
those materials become available in the manner required, as soon as
practicable following the earlier of the time at which the fund knows
or reasonably should have known that the documents are not available in
the manner required.\117\
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    \117\ Proposed rule 498(f)(4). This safe harbor would not be
available to a fund that repeatedly fails to comply with the
proposed rule's Internet posting requirements or that is not in
compliance with the requirements over a prolonged period.
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    The Commission believes that every investor in a fund taking
advantage of the proposed prospectus delivery regime should be
permitted to choose whether to review a fund's information on the
Internet or whether to receive that information directly, either in
paper or through an e-mail. For that reason, the proposed rule would
require that a fund (or financial intermediary through which shares of
the fund may be purchased or sold) send, at no cost to the requestor
and by U.S. first class mail or other reasonably prompt means, a paper
copy of the fund's statutory prospectus, SAI, and most recent annual
and semi-annual shareholder report to any person requesting such a copy
within three business days after receiving a request for a paper copy.
Similarly, a fund (or financial intermediary through which shares of
the fund may be purchased or sold) would also be required to send, at
no cost to the requestor and by e-mail, an electronic copy of the
fund's statutory prospectus, SAI, and most recent annual and semi-
annual shareholder report to any person requesting such a copy within
three business days after receiving a request for an electronic
copy.\118\ This requirement, which is intended to ensure that an
investor has prompt access to the required information in the form that
he or she prefers, is based on a similar, existing requirement with
respect to requests for the SAI and shareholder reports.\119\
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    \118\ Proposed rule 498(g).
    \119\ See Instruction 3 to Item 1 of Form N-1A (requiring the
SAI and shareholder reports to be sent within three business days of
receipt of a request).
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    The requirement that a fund send a paper or electronic copy of the
statutory prospectus, SAI, and most recent annual and semi-annual
shareholder reports, as applicable, to a person requesting such a copy
would not be a condition to reliance on the rule to satisfy a fund's
delivery obligations under Section 5(b)(2) of the Securities Act or the
provision that a communication shall not be deemed a prospectus under
Section 2(a)(10) of the Securities Act. A person that complied with all
other aspects of the proposed rule would not violate Section 5(b)(2) of
the Securities Act if the fund failed to send the required paper or
electronic copy of the statutory prospectus, SAI, or most recent
shareholder reports. This failure would, however, constitute a
violation of the Commission's rules.
    We request comment generally on the proposal to require that
persons relying on the proposed rule provide the fund's statutory
prospectus and other information on the Internet and upon request and
specifically on the following issues:
     Should we permit the fund's current statutory prospectus
and other information to be provided in the manner specified in the
proposed rule? For what period of time should persons relying on the
rule be required to retain this information on an Internet Web site?
     Should we require that the information on the Internet Web
site be

in a format that is convenient for both reading online and printing on
paper?
     Are the proposed requirements regarding the ability to
move back and forth within the statutory prospectus and the SAI from
the table of contents to relevant sections, and between the Summary
Prospectus, statutory prospectus, and SAI appropriate and useful? Would
it be difficult or expensive for funds to comply with these
requirements? Will these requirements help investors to navigate
effectively within and between these documents and contribute to a more
useful presentation of information than is possible through paper
documents?
     Are there steps that the Commission should take to enhance
the accessibility to the general public of fund Summary Prospectuses,
statutory prospectuses, and other information that would be provided on
an Internet Web site pursuant to the proposed rule? How can we enhance
the availability of this information to investors, intermediaries,
analysts, and others who are researching funds?
     What steps can the Commission take to enhance
electronically provided documents? Should we require funds to tag any
of the information in the Summary Prospectus or statutory prospectus
using the eXtensible Business Reporting Language (``XBRL'') taxonomy
that was recently developed by the Investment Company Institute and is
being used in the Commission's voluntary data tagging program? \120\
Should the Commission make the submission of tagged risk/return summary
information using the XBRL taxonomy mandatory in order for funds to
rely upon the proposed rule amendments? If so, should funds be required
to tag all of the risk/return summary information or should only
certain information be required to be tagged, such as fees and
expenses, past performance, and other numerical information? Are there
any features, such as the ability to search documents for words and
phrases, that we should require in documents that are provided
electronically?
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    \120\ Recently, the Commission adopted rule amendments to enable
mutual funds to submit information from the risk/return summary
section of their prospectuses using interactive data under the
Commission's voluntary interactive data program. See Securities Act
Release No. 8823, supra note 24.
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     Should we require that persons accessing the Web site at
which the required documents are posted must be able to permanently
retain, through downloading or otherwise, free of charge, an electronic
version of such documents? Should we require that documents downloaded
from the Internet Web site must retain links that enable a user to move
readily within a single document, as proposed? Would this proposed
requirement present any technological difficulties? Should we also
require that downloaded documents retain links that enable a user to
move readily between related passages of multiple documents? Would it
be technologically feasible to meet such a requirement? What would the
costs be of complying with requirements that downloaded documents
retain links, either within a single document or between related
passages of multiple documents?
     Does the proposed rule appropriately address the
possibility of inadvertent technological problems that may arise from
time to time when information is provided electronically? Should funds
having technological issues be required to disclose on the Web site
that the information was not available for a time in the manner
required and explain the reasons for the failure to comply? If so, how
long should such information be required to be retained on the Web
site? Should funds that are not able to comply for a prolonged period,
perhaps a week or more, due to technological issues, or that are not
able to comply repeatedly over a long period due to such reasons, be
required to notify the Commission and/or investors?
     Are the requirements for sending the statutory prospectus,
SAI, and annual and semi-annual shareholder reports in paper and
electronically appropriate? Should funds be required to send a paper or
electronic copy of the fund's statutory prospectus, SAI, and most
recent annual and semi-annual shareholder report to any person
requesting such a copy within three business days after receiving a
request for a copy? Would a longer or shorter period be appropriate?
Will these requirements, together with the requirements for providing
information on the Internet, as well as the proposed Summary
Prospectus, enhance investors' ability to access, understand, and use
the information that they receive?
     Should the requirements to send the statutory prospectus,
SAI, and shareholder reports be a condition to reliance on the rule?
Should failure to comply with these requirements result in a violation
of Section 5(b)(2) of the Securities Act? Alternatively, should the
failure to comply with these requirements be a violation of Commission
rules that does not result in an inability to rely on the rule or a
violation of Section 5(b)(2)?
     Should we require funds or other persons that use the
proposed prospectus delivery regime to retain any additional records