SEPTEMBER 2003
The Securities and Exchange Commission held an open meeting on September 24, 2003 at which it approved final rules and proposed new rules relating to investment companies. A summary of the
Commission’s actions is set forth below.
information (“SAI”) solely to support their advertising. The purpose of the amendments is to give funds the ability to include more timely information in their advertisements under Rule 482, such as information about current economic conditions that normally would not be included in a fund’s prospectus.
AMENDMENTS TO INVESTMENT COMPANY
ADVERTISING RULES
The Commission adopted amendments to the advertising rules that apply to investment companies.
These amendments are designed to encourage mutual fund advertisements that convey balanced information to prospective investors, particularly with respect to past performance. The Commission originally proposed these amendments in May 2002.
The rule amendments were adopted substantially as proposed with the exception of three modifications relating to the delivery of the month-end performance data to investors as noted below.
Investment companies must comply with the new advertising rule amendments beginning on March 31,
2004. The rule amendments will be available on the
Commission’s website, http://www.sec.gov/rules/ final.shtml, within the next few days.
Rescission of Investment Company-Specific
Tombstone Ad Provisions . The amendments rescind, as duplicative, the provisions of Rule 134 under the
1933 Act that permit funds to include in “tombstone” advertisements a broad range of information. This
Rule provided funds an avenue to advertise information that did not meet the requirements of
Rule 482 because the “substance of” the information was not contained in the prospectus or SAI. Unlike information that is included in a “tombstone” advertisement under Rule 134, information in a Rule
482 advertisement would be subject to prospectus liability. The Commission staff noted that the regulatory intent of Rule 134 had been to permit an issuer to announce an offering, and nothing more.
Rescinding Rule 134 as it applied to investment companies would restore the Rule’s original purpose.
Summary of Rule Proposals as Adopted
“Substance of Which” Requirement . Rule 482 under the Securities Act of 1933 currently permits investment companies to advertise any information
“the substance of which” is included in the statutory prospectus. The new amendments to Rule 482 eliminate the “substance of which” requirement. The
Commission staff noted that Rule 482 has proven very burdensome over the years because it effectively required funds to add many pages to their prospectuses and statements of additional
Month-End Performance Information . Rule 482 currently permits a fund to advertise its performance returns for one-, five- and ten-year periods (or, if shorter, for the life of the fund) as long as such performance is current to the most recent calendar quarter . The rule amendments now require funds that advertise performance to make available, by a toll-free or collect telephone number, or through the fund’s website, total returns that are current to the last day of the previous calendar month .
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Modifications to the Month-End Performance
Proposal . The Commission staff made three modifications from the proposed amendments in response to comments it received. First, the current performance information must be made available to investors within within three seven calendar
Second, a fund may make the current performance information available on the fund’s website rather than by telephone. Finally, neither the telephone nor website disclosure is required if the current monthend performance information is provided in the advertisement itself.
Disclosure Enhancements . The rule amendments also impose new disclosure requirements for investment company advertisements:
„ In addition to disclosing that past performance does not guarantee future results, fund advertisements that contain performance information also must disclose that current performance may be lower or higher than the performance quoted;
„ Fund advertisements that contain performance information must include disclosure that directs investors to a fund’s investment objective, risks, fees and expenses in its prospectus; and
„ Fund advertisements must prominently disclose important information, such as the dates during which quoted performance occurred.
Anti-Fraud Provisions . Rule 482 under the 1933
Act and Rule 34b-1 under the Investment Company
Act of 1940 were amended to state that compliance with the Rules does not relieve a fund of the obligation to ensure that its advertisement is not false or misleading. This codifies a position taken by the
Commission in several enforcement actions in recent years.
Registration Forms business days, rather than
days as originally proposed.
. Conforming changes to implement the rule amendments have been made to investment company registration forms, including
Form N-1A for mutual funds and Forms N-3, N-4, and N-6 for variable insurance products.
In response to concerns regarding the differences between Commission advertising rules and those of the National Association of Securities Dealers, Inc.
(“NASD”), the Commission staff stated that they consulted with the NASD in drafting the advertising rule amendments. In addition, the NASD indicated it would revisit its own advertising rules in light of the
Commission’s rule amendments.
PROPOSED RULES EXPANDING INVESTMENTS
IN OTHER INVESTMENT COMPANIES
The Commission proposed three new rules under the
Investment Company Act of 1940 that expand a fund’s ability to invest in other investment companies that are affiliated or unaffiliated, registered or unregistered. Proposed Rules 12d1-1, 12d1-2 and
12d1-3 codify, for the most part, exemptive relief the
Commission previously has granted with respect to cash sweep and fund-of-funds arrangements. In addition, the Commission proposed related amendments to Forms N-1A, N-2, N-3, N-4 and N-6 that would require disclosure of certain expenses of the investment companies in which a fund invests.
The Commission staff noted that the proposed rules have the potential to affect how funds invest in exchange-traded funds and unregistered funds, as well as how unregistered funds invest in registered funds.
The proposed rules will be available on the
Commission’s website, http://www.sec.gov/rules/ proposed.shtml, within the next few days. The
Commission is soliciting comment on the proposed rules by December 3, 2003.
Summary of Rule Proposals
Cash Sweep Arrangements . Proposed Rule 12d1-1 would permit a registered fund to invest without limitation in another money market fund regardless of whether the money market fund is affiliated or registered with the Commission. As a result, a fund would not need to obtain exemptive relief from the
Commission to invest its cash in an affiliated money market fund. Nevertheless, it appears that a fund would be required to satisfy many of the conditions the Commission has required in granting exemptive relief for cash sweep arrangements. The proposed rule also would permit an unregistered fund to invest without limitation in a registered money market fund.
Affiliated Fund-of-Funds .
Proposed Rule 12d1-2 broadens the scope of the current statutory provision that permits fund-of-funds arrangements involving affiliated funds. Currently, the 1940 Act permits these arrangements when a fund invests only in funds of the same complex, government securities and
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short-term paper. The proposed rule would permit such a fund also to: (1) make limited investments in funds outside the same fund complex; (2) invest in securities not issued by a fund; and (3) invest in money market funds in reliance on proposed Rule
12d1-1.
Unaffiliated Fund-of-Funds .
Proposed Rule
12d1-3 expands the current limits of Section
12(d)(1), which permits funds to invest in other unaffiliated funds subject to certain conditions. One of these conditions is that the investing fund may not charge a front-end sales load greater than
1½ percent. It appears that the proposed rule would permit a fund to invest to a limited extent in other investment companies, provided that the aggregate sales loads and distribution fees of the acquiring and underlying funds are within the limits of NASD Rule
2830(d)(3), which regulates sales loads of fund-offunds.
Registration Forms . The Commission also proposed amendments to the registration forms used by funds.
The proposed amendments would require any fund that invests in another fund to include in its prospectus fee table an additional line disclosing the costs of investing in underlying funds. The amendments would include a formula for calculating this fee.
DIANE E. AMBLER
202.778.9886
dambler@kl.com
ALEXANDRA C. LAFRANKIE
202.778.9481
alafrankie@kl.com
PATRICIA A. MAXEY
202.778.9487
pmaxey@kl.com
FRANCINE J. ROSENBERGER
202.778.9187
francine.rosenberger@kl.com
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Kirkpatrick & Lockhart LLP maintains one of the leading investment management practices in the United States, with more than 60 lawyers devoting all or a substantial portion of their practice to this area and its related specialties. The American Lawyer Corporate Scorecard, published in April 2003, lists K&L as a primary legal counsel to the investment companies, board members or advisory firms for 15 of the 25 largest mutual fund complexes. No law firm was mentioned more frequently in the Scorecard.
We represent mutual funds, closed-end funds, insurance companies, broker-dealers, investment advisers, retirement plans, banks and trust companies, hedge funds, offshore funds and other financial institutions. We also regularly represent mutual fund distributors, independent directors of investment companies and service providers to the investment management industry. In addition, we frequently serve as outside counsel to industry associations on a variety of projects, including legislative and policy matters.
We work with clients in connection with the full range of investment company industry products and activities, including all types of open-end and closed-end investment companies, funds of hedge funds, variable insurance products, private and offshore investment funds and unit investment trusts. Our practice involves all aspects of the investment company business.
We invite you to contact one of the members of the practice, listed below, for additional assistance. You may also visit our website at www.kl.com for more information, or send general inquiries via email to investmentmanagement@kl.com.
BOSTON
Michael S. Caccese
Philip J. Fina
Mark P. Goshko
Thomas Hickey III
Nicholas S. Hodge
LOS ANGELES
William P. Wade
SAN FRANCISCO
Eilleen M. Clavere
Jonathan D. Joseph
David Mishel
Mark D. Perlow
Richard M. Phillips
617.261.3133
617.261.3156
617.261.3163
617.261.3208
617.261.3210
310.552.5071
NEW YORK
Beth R. Kramer
Richard D. Marshall
212.536.4024
bkramer@kl.com
212.536.3941
rmarshall@kl.com
Robert M. McLaughlin 212.536.3924
rmclaughlin@kl.com
Loren Schechter 212.536.4008
lschechter@kl.com
415.249.1047
415.249.1012
415.249.1015
415.249.1070
415.249.1010
mcaccese@kl.com
pfina@kl.com
mgoshko@kl.com
thickey@kl.com
nhodge@kl.com
wwade@kl.com
eclavere@kl.com
jjoseph@kl.com
dmishel@kl.com
mperlow@kl.com
rphillips@kl.com
WASHINGTON
Clifford J. Alexander 202.778.9068 calexander@kl.com
Diane E. Ambler 202.778.9886 dambler@kl.com
Catherine S. Bardsley 202.778.9289 cbardsley@kl.com
Arthur J. Brown 202.778.9046 abrown@kl.com
Arthur C. Delibert
Robert C. Hacker
202.778.9042 adelibert@kl.com
202.778.9016 rhacker@kl.com
Benjamin J. Haskin 202.778.9369 bhaskin@kl.com
Kathy Kresch Ingber 202.778.9015 kingber@kl.com
Rebecca H. Laird 202.778.9038 rlaird@kl.com
Thomas M. Leahey 202.778.9082 tleahey@kl.com
Cary J. Meer
R. Charles Miller
202.778.9107 cmeer@kl.com
202.778.9372 cmiller@kl.com
Dean E. Miller
R. Darrell Mounts
C. Dirk Peterson
Alan C. Porter
202.778.9371 dmiller@kl.com
202.778.9298 dmounts@kl.com
202.778.9324 dpeterson@kl.com
202.778.9186 aporter@kl.com
Theodore L. Press 202.778.9025 tpress@kl.com
Robert H. Rosenblum 202.778.9464 rrosenblum@kl.com
William A. Schmidt 202.778.9373 william.schmidt@kl.com
Lynn A. Schweinfurth 202.778.9876 lschweinfurth@kl.com
Donald W. Smith
Robert A. Wittie
Robert J. Zutz
202.778.9079 dsmith@kl.com
202.778.9066 rwittie@kl.com
202.778.9059 rzutz@kl.com
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www.kl.com
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© 2003 KIRKPATRICK & LOCKHART
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. ALL RIGHTS RESERVED.