Friday,
                                                                                            August 27, 2004




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52788              Federal Register / Vol. 69, No. 166 / Friday, August 27, 2004 / Rules and Regulations

      SECURITIES...
Federal Register / Vol. 69, No. 166 / Friday, August 27, 2004 / Rules and Regulations                                     ...
52790              Federal Register / Vol. 69, No. 166 / Friday, August 27, 2004 / Rules and Regulations

      fund, it m...
Federal Register / Vol. 69, No. 166 / Friday, August 27, 2004 / Rules and Regulations                                     ...
52792              Federal Register / Vol. 69, No. 166 / Friday, August 27, 2004 / Rules and Regulations

      requiring ...
Federal Register / Vol. 69, No. 166 / Friday, August 27, 2004 / Rules and Regulations                                     ...
52794                 Federal Register / Vol. 69, No. 166 / Friday, August 27, 2004 / Rules and Regulations

      address...
Final Rule: DISCLOSURE REGARDING PORTFOLIO MANAGERS OF ...
Final Rule: DISCLOSURE REGARDING PORTFOLIO MANAGERS OF ...
Final Rule: DISCLOSURE REGARDING PORTFOLIO MANAGERS OF ...
Final Rule: DISCLOSURE REGARDING PORTFOLIO MANAGERS OF ...
Final Rule: DISCLOSURE REGARDING PORTFOLIO MANAGERS OF ...
Final Rule: DISCLOSURE REGARDING PORTFOLIO MANAGERS OF ...
Final Rule: DISCLOSURE REGARDING PORTFOLIO MANAGERS OF ...
Final Rule: DISCLOSURE REGARDING PORTFOLIO MANAGERS OF ...
Final Rule: DISCLOSURE REGARDING PORTFOLIO MANAGERS OF ...
Final Rule: DISCLOSURE REGARDING PORTFOLIO MANAGERS OF ...
Final Rule: DISCLOSURE REGARDING PORTFOLIO MANAGERS OF ...
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Final Rule: DISCLOSURE REGARDING PORTFOLIO MANAGERS OF ...

  1. 1. Friday, August 27, 2004 Part III Securities and Exchange Commission 17 CFR Parts 239, 249, 270, and 274 Disclosure Regarding Portfolio Managers of Registered Management Investment Companies; Final Rule VerDate jul<14>2003 15:32 Aug 26, 2004 Jkt 203001 PO 00000 Frm 00001 Fmt 4717 Sfmt 4717 E:FRFM27AUR2.SGM 27AUR2
  2. 2. 52788 Federal Register / Vol. 69, No. 166 / Friday, August 27, 2004 / Rules and Regulations SECURITIES AND EXCHANGE Securities and Exchange Commission, D. Disclosure of Securities Ownership of COMMISSION 450 Fifth Street, NW., Washington, DC Portfolio Managers 20549–0609. E. Date of Disclosure 17 CFR Parts 239, 249, 270, and 274 All submissions should refer to File F. Removal of Exclusion for Index Funds G. Disclosure of Availability of Information [Release Nos. 33–8458; 34–50227; IC– Number S7–12–04. This file number H. Amendment of Form N–CSR 26533; File No. S7–12–04] should be included on the subject line I. Compliance Date if e-mail is used. To help us process and III. Paperwork Reduction Act RIN 3235–AJ16 review your comments more efficiently, IV. Cost/Benefit Analysis please use only one method. The V. Consideration of Burden on Competition; Disclosure Regarding Portfolio Commission will post all comments on Promotion of Efficiency, Competition, Managers of Registered Management the Commission’s Internet Web site and Capital Formation Investment Companies (http://www.sec.gov/rules/final.shtml). VI. Final Regulatory Flexibility Analysis VII. Statutory Authority AGENCY: Securities and Exchange Comments are also available for public Text of Rule and Form Amendments Commission. inspection and copying in the ACTION: Final rule; request for comments Commission’s Public Reference Room, I. Introduction on Paperwork Reduction Act burden 450 Fifth Street, NW., Washington, DC Registered management investment estimates. 20549. All comments received will be companies (‘‘funds’’) 7 typically are posted without change; we do not edit externally managed by an investment SUMMARY: The Securities and Exchange personal identifying information from adviser, to which they pay an advisory Commission is adopting amendments to submissions. You should submit only fee from fund assets. The investment its forms under the Securities Act of information that you wish to make adviser in turn employs and 1933, the Securities Exchange Act of available publicly. compensates the individuals who act as 1934, and the Investment Company Act FOR FURTHER INFORMATION CONTACT: portfolio managers for the fund. Our of 1940 to improve the disclosure Sanjay Lamba, Attorney, or Christopher rules require funds to disclose in their provided by registered management P. Kaiser, Branch Chief, Office of prospectuses certain information investment companies regarding their Disclosure Regulation, Division of concerning their portfolio managers. portfolio managers. The amendments Investment Management, (202) 942– Fund prospectuses are required to extend the existing requirement that a 0721, at the Securities and Exchange include the name, title, length of registered management investment Commission, 450 Fifth Street, NW., service, and business experience of the company provide basic information in Washington, DC 20549–0506. individuals who are primarily its prospectus regarding its portfolio SUPPLEMENTARY INFORMATION: The responsible for the day-to-day managers to include the members of Securities and Exchange Commission management of the fund.8 If a management teams. The amendments (‘‘Commission’’) is adopting committee, team, or other group is also require a registered management amendments to Form N–1A,1 Form N– jointly and primarily responsible for investment company to disclose 2,2 and Form N–3,3 registration forms management of the fund, the fund must additional information about its used by management investment provide disclosure to the effect that the portfolio managers, including other companies to register under the fund’s investments are managed by that accounts that they manage, Investment Company Act of 1940 group, but need not provide the names compensation structure, and ownership (‘‘Investment Company Act’’) and to of the members of the group.9 of securities in the investment company. offer their securities under the Recently, several areas of concern DATES: Effective Date: October 1, 2004. Securities Act of 1933 (‘‘Securities have been identified with respect to Compliance Date: See Section II.I. of Act’’); amendments to Form N–CSR 4 fund portfolio managers. In particular, this release for information on under the Investment Company Act and concerns have been raised regarding the compliance dates. the Securities Exchange Act of 1934 following: Comment Date: Comments regarding (‘‘Exchange Act’’), the form used by • The absence of disclosure about: the collection of information registered management investment » The individual members of requirements within the meaning of the companies to file certified shareholder portfolio management teams; Paperwork Reduction Act of 1995 of reports with the Commission; and an » The compensation of portfolio Forms N–1A and N–CSR should be amendment to Rule 30a–2 5 under the managers; and received by October 1, 2004. Investment Company Act.6 7 Management investment companies typically ADDRESSES: Comments may be Table of Contents issue shares representing an undivided submitted by any of the following proportionate interest in a changing pool of I. Introduction methods: II. Discussion securities, and include open-end and closed-end companies. See T. Lemke, G. Lins, A. Smith III, Electronic Comments A. Identification of Portfolio Management Regulation of Investment Companies, Vol. I, ch. 4, Team Members § 4.04, at 4–5 (2002). An open-end company is a • Use the Commission’s Internet B. Disclosure Regarding Other Accounts management company that is offering for sale or has comment form (http://www.sec.gov/ Managed and Potential Conflicts of outstanding any redeemable securities of which it rules/final.shtml); or Interest is the issuer. A closed-end company is any • Send an e-mail to rule- C. Disclosure of Portfolio Manager management company other than an open-end comments@sec.gov. Please include File Compensation Structure company. See Section 5 of the Investment Company Act [15 U.S.C. 80a–5]. Open-end companies Number S7–12–04 on the subject line; generally offer and sell new shares to the public on 1 17 CFR 239.15A and 274.11A. or a continuous basis. Closed-end companies generally • Use the Federal eRulemaking Portal 2 17 CFR 239.14 and 274.11a–1. engage in traditional underwritten offerings of a 3 17 CFR 239.17a and 274.11b. (http://www.regulations.gov). Follow the fixed number of shares and, in most cases, do not 4 17 CFR 249.331 and 274.128. offer their shares to the public on a continuous instructions for submitting comments. 5 17 CFR 270.30a–2. basis. 8 Item 5(a)(2) of Form N–1A; Item 9.1.c of Form Paper Comments 6 The Commission proposed these amendments in March 2004. Investment Company Act Release No. N–2. • Send paper comments in triplicate 26383 (March 11, 2004) [69 FR 12752 (March 17, 9 Instruction 2 to Item 5(a)(2) of Form N–1A; to Jonathan G. Katz, Secretary, 2004)] (‘‘Proposing Release’’). Instruction 2 to Item 9.1.c. of Form N–2. VerDate jul<14>2003 15:32 Aug 26, 2004 Jkt 203001 PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 E:FRFM27AUR2.SGM 27AUR2
  3. 3. Federal Register / Vol. 69, No. 166 / Friday, August 27, 2004 / Rules and Regulations 52789 » Portfolio managers’ holdings in the portfolio managers in its reports on every such junior member of a funds that they manage; and Form N–CSR.12 management team, which would result • Potential conflicts of interest in lengthy disclosure that would have to between the interests of shareholders in II. Discussion be updated frequently, whenever the a fund that a portfolio manager oversees, A. Identification of Portfolio composition of the team changed. In and the interests of other clients and Management Team Members addition, some commenters argued that investment vehicles, such as hedge The Commission is adopting, with a requirement to identify all members of funds and pension funds, that a modifications to address commenters’ a portfolio management team could portfolio manager may also oversee.10 concerns, proposed amendments to inhibit an adviser’s ability to change the In order to address these concerns, composition of a team. Forms N–1A and N–2, the registration earlier this year the Commission We note that, under the amendments forms for mutual funds and closed-end proposed rules intended to provide we are adopting, disclosure is only funds, that will require those funds to greater transparency regarding portfolio required with respect to members of a identify in their prospectuses each managers, their incentives in managing management team who are jointly and member of a committee, team, or other a fund, and potential conflicts of primarily responsible for the day-to-day group of persons associated with the interest (‘‘Proposing Release’’). These management of the fund’s portfolio. To fund or its investment adviser that is proposals were designed to assist the extent that a fund is managed by a jointly and primarily responsible for the investors in evaluating fund committee, team, or other group that day-to-day management of the fund’s management and making investment includes additional members who are portfolio.13 The amendments we are decisions. not jointly and primarily responsible for adopting will require funds to state the The Commission received 34 day-to-day management, identification name, title, length of service, and comment letters relating to the of these individuals is not required. business experience of each member of proposals. The commenters generally Thus, if a fund has a management team a portfolio management team. supported the proposals, although some that includes analysts who make We are also adopting amendments to expressed concerns regarding portions securities recommendations with Form N–3, the registration form for of the disclosure or suggested changes. respect to the portfolio, but do not have insurance company managed separate Today, the Commission is adopting decision-making authority, these accounts that issue variable annuity these proposals, with modifications to individuals would not have to be contracts, to require disclosure address commenters’ concerns. The identified, unless they are jointly and regarding portfolio managers, including amendments that the Commission is primarily responsible for day-to-day members of portfolio management adopting will: management of the fund’s portfolio. An teams, similar to the disclosure that will • Require a fund to identify in its analyst could be jointly and primarily be required by Forms N–1A and N–2.14 prospectus each member of a responsible for day-to-day management Currently, Form N–3 does not require committee, team, or other group of if, for example, the individual who has persons that is jointly and primarily disclosure about portfolio managers. Commenters generally supported the decision-making authority over the responsible for the day-to-day fund’s portfolio routinely adopts the Commission’s proposal to require management of the fund’s portfolio (or, analyst’s recommendations. improved disclosure about members of in the case of a team with more than five We are, however, modifying our portfolio management teams. However, such members, the five members with proposal in response to the commenters’ several commenters expressed concern the most significant responsibility for concerns to provide that if more than that, while a requirement to identify the the day-to-day management of the five persons are jointly and primarily members of a portfolio management fund’s portfolio); responsible for the day-to-day • Require a fund to provide team may be appropriate for teams that consist of a relatively small number of management of a fund’s portfolio, the information in its Statement of members, the disclosure could become fund need only provide the required Additional Information (‘‘SAI’’) 11 lengthy and less meaningful in the case information for the five persons with the regarding other accounts managed by of larger teams. Some of these most significant responsibility.15 This any of its portfolio managers, including commenters noted that some portfolio will permit funds with large numbers of a description of material conflicts of management teams consist of both persons that are jointly and primarily interest that may arise in connection portfolio managers, who have authority responsible for portfolio management to with simultaneously managing the fund to make management decisions, and provide information about the key and the other accounts; • Require a fund to disclose in its SAI analysts and other junior members, who decision-makers rather than lengthy the structure of, and the method used to have no decision-making authority. disclosure about numerous individuals determine, the compensation of each These commenters argued that the that would obscure other important portfolio manager; proposed disclosure requirement could information in the prospectus. • Require a fund to disclose in its SAI be interpreted to require disclosure of The determination of the members of each portfolio manager’s ownership of a portfolio management team who are securities in the fund; and 12 A fund is currently required to provide jointly and primarily responsible for the • Require a closed-end fund to portfolio manager disclosure regardless of whether day-to-day management of a fund’s the portfolio manager is employed by the portfolio will depend on the facts and provide disclosure regarding its investment adviser or a subadviser. This would continue under the requirements we are adopting. circumstances of the particular fund. 10 See Proposing Release, supra note 6, 69 FR at See Section 2(a)(20)(B) of the Investment Company For example, in the case of a fund with 12752–12753, nn. 8–13 and accompanying text Act [15 U.S.C. 80a–2(a)(20)(B)] (‘‘investment a large management team, where a (discussing concerns about portfolio managers). adviser’’ includes any person who provides single ‘‘lead member’’ is responsible for 11 The SAI is part of a fund’s registration investment advice to an investment company under a contract with an investment adviser to the implementing and monitoring the statement and contains information about a fund in addition to that contained in the prospectus. The company). overall portfolio management of the 13 Item 5(a)(2) and Instruction 2 to Item 5(a)(2) of SAI is required to be delivered to investors upon request and is available on the Commission’s Form N–1A; Item 9.1.c and Instruction to Item 9.1.c 15 Instruction 2 to Item 5(a)(2) of Form N–1A; Electronic Data Gathering, Analysis, and Retrieval of Form N–2. Instruction to Item 9.1.c of Form N–2; Instruction System. 14 Item 6(e) of Form N–3. 2 to Item 6(e) of Form N–3. VerDate jul<14>2003 15:32 Aug 26, 2004 Jkt 203001 PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 E:FRFM27AUR2.SGM 27AUR2
  4. 4. 52790 Federal Register / Vol. 69, No. 166 / Friday, August 27, 2004 / Rules and Regulations fund, it may be appropriate to identify management team, including members identifies more than five persons as this single ‘‘lead member’’ as the who may not be identified in the portfolio managers in its prospectus, it portfolio manager. Some funds with prospectus as portfolio managers. It will need only provide the required large management teams are ‘‘research- also assist investors in funds with large disclosure regarding other accounts driven’’ funds that may have portfolio management teams, such as research- managed, compensation, and securities management teams with as many as 50 driven funds, in understanding how the ownership for the five persons with the members, each of whom is allocated a responsibilities of an identified portfolio most significant responsibility for the specified portion of the portfolio over manager may differ from those of a day-to-day management of the fund’s which he or she has independent manager who manages a fund on his or portfolio. responsibility for research, stock her own or with a small team of other As adopted, the amendments require selection, and portfolio construction. A managers. For example, if a portfolio a fund to disclose the number of other research-driven fund may have a management team for a balanced fund accounts managed by a portfolio coordinator with responsibility for has one team member who is manager, and the total assets in the allocating the portfolio among the responsible only for the overall accounts, within each of the following various managers and analysts, allocation of the fund’s assets among categories: Registered investment implementing trades on behalf of equities, bonds, and money market companies; other pooled investment analysts on the team, reviewing the instruments, and other team members vehicles; and other accounts.22 For each overall composition of the portfolio to who are responsible only for selection of such category, a fund is also required to ensure its compliance with its stated securities within a particular segment of disclose the number of accounts and the investment objectives and strategies, the fund, the fund’s disclosure should total assets in the accounts with respect and monitoring cash flows. In such a describe these limitations in describing to which the advisory fee is based on case, it may be appropriate for a fund to each member’s role. account performance.23 We had identify the coordinator as its portfolio proposed an additional category of B. Disclosure Regarding Other Accounts ‘‘other investment companies.’’ A manager. If a research-driven fund does Managed and Potential Conflicts of commenter suggested, however, that not have such a portfolio coordinator or similar position, it may be appropriate Interest breaking out ‘‘other investment to provide the required information for We are adopting, with several companies’’ as a separate category the five persons with the most modifications to address commenters’ would not be helpful in enabling significant responsibility for the day-to- concerns, amendments that require a investors to assess a portfolio manager’s day management of the fund’s portfolio, fund to provide disclosure in its SAI potential conflicts of interest. We agree for example, the managers with the regarding other accounts for which the and are eliminating ‘‘other investment largest percentages of assets under fund’s portfolio manager is primarily companies’’ as a separate category. management. responsible for the day-to-day portfolio Accounts that would have been The amendments also require a fund management.18 If a committee, team, or included in this category will now be to provide a brief description of each other group that includes the portfolio included in ‘‘other pooled investment member’s role on the management team manager is jointly and primarily vehicles.’’ (e.g., lead member).16 We are modifying responsible for the day-to-day The amendments, as adopted, also the proposal to clarify that a fund’s management of an account, the fund is require a fund to describe any material description of a member’s role on a required to include that account in conflicts of interest that may arise in committee, team, or group must include responding to the disclosure connection with the portfolio manager’s a description of any limitations on the requirement.19 Commenters generally management of the fund’s investments, person’s role and the relationship supported this disclosure requirement, on the one hand, and the investments of between the person’s role and the roles which is designed to enable investors to the other accounts, on the other.24 This of other persons who have assess the conflicts of interest to which description would include, for example, responsibility for the day-to-day a portfolio manager may be subject as a material conflicts between the management of the fund’s portfolio.17 result of managing the fund and other investment strategy of the fund and the This responds to commenters’ portfolios, such as other registered investment strategy of the other suggestions that we require additional investment companies and hedge accounts managed by the portfolio disclosure regarding the structure of funds.20 manager and material conflicts in each management team. The amended This disclosure requirement, as well allocation of investment opportunities requirement is intended to provide as the disclosure requirements between the fund and such other investors with a clearer understanding discussed below regarding accounts. We have limited the conflicts of what an identified portfolio manager compensation structure and ownership disclosure requirement to material does and does not do in the course of of fund securities,21 applies to any conflicts of interest in order to address day-to-day management of the fund, and portfolio manager who is required to be commenters’ concerns that the proposed the ways in which the responsibilities of identified in the prospectus. If a fund requirement would encourage funds to any identified portfolio manager relate provide an overinclusive, boilerplate list to those of other members of a portfolio 18 Item 15(a) of Form N–1A; Item 21.1 of Form N– of potential conflicts. A conflict would 2; Item 22(a) of Form N–3. be material if there is a substantial 16 Instruction 2 to Item 5(a)(2) of Form N–1A; 19 Instruction 2 to Item 15(a) of Form N–1A; likelihood that disclosure of the conflict Instruction to Item 9.1.c of Form N–2; Instruction Instruction 2 to Item 21.1 of Form N–2; Instruction would be viewed by a reasonable 2 to Item 6(e) of Form N–3. The amendments also 2 to Item 22(a) of Form N–3. delete current Instructions 3 and 4 to Item 5(a)(2) 20 The disclosure requirement applies to accounts investor as significantly altering the of Form N–1A, which provided additional guidance managed in a personal capacity as well as accounts ‘‘total mix’’ of information available as to the disclosure obligations of funds for which managed in a professional capacity. Conflicts of day-to-day management responsibilities are shared interest may also arise in connection with the 22 Item 15(a)(2) of Form N–1A; Item 21.1.b of between a portfolio management team and an manager’s management of such accounts. Form N–2; Item 22(a)(ii) of Form N–3. individual. 21 See Section II.C. ‘‘Disclosure of Portfolio 23 Item 15(a)(3) of Form N–1A; Item 21.1.c of 17 Instruction 2 to Item 5(a)(2) of Form N–1A; Manager Compensation Structure’’ and Section II.D. Form N–2; Item 22(a)(iii) of Form N–3. Instruction 2 to Item 9.1.c of Form N–2; Instruction ‘‘Disclosure of Securities Ownership of Portfolio 24 Item 15(a)(4) of Form N–1A; Item 21.1.d of 2 to Item 6(e) of Form N–3. Managers,’’ infra. Form N–2; Item 22(a)(iv) of Form N–3. VerDate jul<14>2003 15:32 Aug 26, 2004 Jkt 203001 PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 E:FRFM27AUR2.SGM 27AUR2
  5. 5. Federal Register / Vol. 69, No. 166 / Friday, August 27, 2004 / Rules and Regulations 52791 about the fund.25 In our view, this prohibition could reduce investors’ non-cash.32 We are modifying the would include, for example, a conflict access to talented portfolio managers proposal to permit funds to omit that a reasonable investor would and could have a particularly disruptive disclosure regarding group life, health, consider likely to affect the manager’s effect on smaller investment hospitalization, medical reimbursement, professional judgment with respect to management firms that may not have relocation, and pension and retirement management of the fund. the resources to maintain separate staffs plans and arrangements, provided that We are not adopting our proposal to for different types of accounts. We they do not discriminate in scope, require a fund to include a description believe that the disclosure of other terms, or operation in favor of the of the policies and procedures used by accounts managed and material portfolio manager or a group of the fund or its investment adviser to conflicts of interest, together with the employees that includes the portfolio address conflicts of interest.26 We agree requirement in the compliance rules for manager and are available generally to with several commenters who argued policies and procedures to address all salaried employees.33 We agree with that requiring disclosure of these conflicts, is a preferable approach to several commenters who suggested that, policies and procedures would result in addressing conflicts of interest arising while a portfolio manager may often lengthy disclosure that most investors from side-by-side management of receive certain benefits of this type as would not find useful. We note that our multiple accounts. part of his or her overall compensation, recently adopted compliance rules requiring disclosure about these benefits C. Disclosure of Portfolio Manager require investment advisers to would be of little or no value to Compensation Structure implement policies and procedures that investors in assessing whether the address conflicts arising from We are adopting, with modifications manager’s interests are aligned with management of multiple funds and to address commenters’ concerns, a those of investors. accounts, such as the allocation of requirement that a fund provide For each type of compensation (e.g., investment opportunities and the disclosure in its SAI regarding the salary, bonus, deferred compensation, allocation of aggregated trades.27 The structure of, and the method used to retirement plans and arrangements), a requirement to adopt policies and determine, the compensation of its fund is required to describe with procedures to address conflicts, coupled portfolio managers.29 Commenters specificity the criteria on which that with the disclosure of other accounts supported this proposal and agreed that type of compensation is based, for managed and the material conflicts of it may help investors to better example, whether compensation is interest that may arise, should understand a portfolio manager’s fixed, whether (and, if so, how) sufficiently address potential conflicts incentives in managing a fund and shed compensation is based on the fund’s of interest without burdening investors light on possible conflicts of interest pre-or after-tax performance over a with extensive, technical disclosure. We that could arise when a portfolio certain period, and whether (and, if so, emphasize that fund boards of directors manager manages other accounts. how) compensation is based on the The amendments require a value of assets held in the fund’s and investment advisers are responsible description of the structure of, and the portfolio.34 This description is required for addressing conflicts of interest that method used to determine, the to clearly disclose any differences may arise from a portfolio manager’s compensation received by a fund’s between the method used to determine management of multiple accounts, and portfolio manager from the fund, its the portfolio manager’s compensation the disclosure we are requiring does not investment adviser, or any other source with respect to the fund and other diminish this responsibility.28 with respect to management of the fund accounts, e.g., if the portfolio manager Finally, we requested comment in the and any other account included by the receives part of an advisory fee that is Proposing Release on whether to fund in response to the disclosure based on performance with respect to prohibit portfolio managers of funds requirement described above regarding some accounts but not the fund, this from managing certain types of other accounts managed by the portfolio must be disclosed.35 accounts, such as hedge funds. We have We have modified the proposal in manager.30 This disclosure requirement determined not to do so, because we order to elicit better disclosure of the applies to any portfolio manager who is agree with several commenters that a basis on which a portfolio manager is required to be identified in the 25 See TSC Industries, Inc. v. Northway, Inc., 426 prospectus. The amendments do not compensated. We have made these U.S. 438, 449 (1976). require disclosure of the value of changes based on commenters’ 26 Proposed Item 15(a)(4) of Form N–1A; compensation received by a portfolio suggestions that a fund should be proposed Item 21.1.d of Form N–2; proposed Item manager.31 required to disclose the specific metrics 22(a)(iv) of Form N–3. For purposes of the disclosure used to measure performance. We 27 See Investment Company Act Release No. requirement, compensation includes, believe that where compensation is 26299 (Dec. 17, 2003) [68 FR 74714, 74716 (Dec. 24, 2003)] (adopting rule 206(4)–7 under the without limitation, salary, bonus, based on criteria such as performance, Investment Advisers Act of 1940 and rule 38a–1 deferred compensation, and pension under the Investment Company Act). 32 Instruction 2 to Item 15(b) of Form N–1A; and retirement plans and arrangements, 28 See Investment Company Act Release No. Instruction 2 to Item 21.2 of Form N–2; Instruction whether the compensation is cash or 2 to Item 22(b) of Form N–3. 26323 (Jan. 15, 2004) [69 FR 3472, 3472–3473 (Jan. 33 Cf. Item 402(a)(7)(ii) of Regulation S–K [17 CFR 23, 2004)] (discussing responsibility of independent 29 Item 15(b) of Form N–1A; Item 21.2 of Form N– directors to bring ‘‘ ‘a high degree of rigor and 229.402(a)(7)(ii)] (permitting operating companies, skeptical objectivity to the evaluation of [fund] 2; Item 22(b) of Form N–3. in disclosing information about executive officers, 30 See Section II.B, ‘‘Disclosure Regarding Other to omit information regarding group life, health, management and its plans and proposals,’ particularly when evaluating conflicts of interest’’); Accounts Managed and Potential Conflicts of hospitalization, medical reimbursement, or Mutual Fund Directors Forum, Report Of The Interest,’’ supra (describing required disclosure relocation plans that do not discriminate in scope, Mutual Fund Directors Forum: Best Practices And regarding other accounts for which the fund’s terms, or operation in favor of executive officers or Practical Guidance For Mutual Fund Directors 35– portfolio manager is primarily responsible); directors of the registrant and that are available 36 (July 2004) (recommending that a fund’s board Instruction 3 to Item 15(b) of Form N–1A; generally to all salaried employees). establish a process for identifying and reviewing Instruction 3 to Item 21.2 of Form N–2; Instruction 34 Item 15(b) of Form N–1A; Item 21.2 of Form N– conflicts of interest, including potential conflicts of 3 to Item 22(b) of Form N–3. 2; Item 22(b) of Form N–3. interest that may arise between the fund and its 31 Instruction 2 to Item 15(b) of Form N–1A; 35 Instruction 3 to Item 15(b) of Form N–1A; adviser or affiliates due to other business activities Instruction 2 to Item 21.2 of Form N–2; Instruction Instruction 3 to Item 21.2 of Form N–2; Instruction of the adviser or affiliates). 2 to Item 22(b) of Form N–3. 3 to Item 22(b) of Form N–3. VerDate jul<14>2003 15:32 Aug 26, 2004 Jkt 203001 PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 E:FRFM27AUR2.SGM 27AUR2
  6. 6. 52792 Federal Register / Vol. 69, No. 166 / Friday, August 27, 2004 / Rules and Regulations requiring more detailed disclosure about fund itself.37 As a result, we are also rule 13d–3 under the Exchange Act, the criteria may provide greater insight eliminating the proposed requirements which focuses on a person’s voting and into a manager’s incentives to manage a to include the name of the investment investment power, or rule 16a–1(a)(2) fund’s portfolio in a certain way. First, company or account in which the under the Exchange Act, which focuses we are requiring that the criteria on manager owns shares and the title of the on a person’s economic interests in a which each type of compensation is class of securities owned, as well as the security.41 We had proposed to require based be described with specificity. mandatory tabular format. Our proposed disclosure of record ownership, and a Second, we are clarifying that a fund amendments would have required a broader definition of beneficial must not only describe whether fund to disclose a portfolio manager’s ownership, in order to help investors compensation is based on criteria such ownership not only of the securities of assess potential conflicts of interest. as fund pre- or after-tax performance the fund, but also of the securities of However, in light of our current over a certain time period, and the value other accounts managed by the fund’s objective of providing information about of assets held in the fund’s portfolio, but investment adviser or the portfolio the alignment of managers’ and also how compensation is based on manager.38 This disclosure requirement shareholders’ economic interests, we these criteria. For example, if was intended, in part, to assist fund believe that disclosure of record compensation is based solely or in part investors in assessing potential conflicts holdings should not be required and on performance, a fund is required to between their interests and the interests that the focus of ‘‘beneficial ownership’’ identify any benchmark used to measure of other clients or investment vehicles should be on whether a manager’s performance and state the length of the in which the manager has an interest. economic interests are tied to the period over which performance is We were persuaded by commenters who securities, rather than his or her ability measured. argued that expanding the disclosure to exert voting power or to dispose of requirement to include securities the securities. This definition is also D. Disclosure of Securities Ownership of ownership in other accounts would consistent with the requirements for Portfolio Managers result in overly detailed, complex disclosure of fund securities ownership We are adopting a requirement that a disclosure that would not help investors by fund directors.42 fund disclose in its SAI the securities assess the extent to which a portfolio Our proposal also would have ownership in the fund of each portfolio manager’s interests are aligned with required disclosure of securities owned manager who is required to be identified theirs. In addition, commenters noted by a portfolio manager’s immediate in the fund’s prospectus.36 This that the objective of providing investors family members, and would have disclosure is intended to help investors with information about conflicts of defined ‘‘immediate family member’’ for assess the extent to which the portfolio interest is more effectively addressed by this purpose as a person’s spouse; child manager’s interests are aligned with the amendments we are adopting that residing in the person’s household theirs. require disclosure of conflicts and the (including step and adoptive children); Commenters generally supported the and any dependent of the person, as compensation structure of portfolio goal of this proposal. Several defined in section 152 of the Internal managers. The commenters also argued commenters argued, however, that Revenue Code.43 We are deleting the that the disclosure would be time- while the level of a portfolio manager’s reference to immediate family members consuming and burdensome to prepare, securities ownership may be an and the proposed definition as particularly in the case of funds with indicator of the manager’s confidence in unnecessary. Under the definition of one or more subadvisers. the fund’s investment strategy where the beneficial ownership in rule 16a–1(a)(2) The disclosure requirement we are manager owns shares in the fund, it under the Exchange Act that we are adopting applies to fund securities does not necessarily follow that a adopting, a person is presumed to be a beneficially owned by a portfolio manager who owns few or no securities beneficial owner of securities that are manager.39 For purposes of the has any less confidence or is any less held by the person’s immediate family requirement to disclose a portfolio concerned about the fund’s members sharing the same household.44 manager’s beneficial ownership of fund We are adopting, as proposed, a performance. We continue to believe, securities, ‘‘beneficial ownership’’ will requirement that funds disclose however, that a portfolio manager’s be determined in accordance with rule portfolio managers’ ownership of ownership in a fund provides a direct 16a–1(a)(2) under the Exchange Act.40 securities in the fund using the indication of his or her alignment with Our proposal would have required the interests of shareholders in that disclosure of securities owned either 41 Proposed Item 15(c) and Instruction 2 to Item fund. While a manager could have beneficially or of record, and would 15(c) of Form N–1A; proposed Item 21.3 and reasons for not holding shares of a have deemed a person to be a Instruction 2 to Item 21.3 of Form N–2; proposed specific fund that are unrelated to the Item 22(c) and Instruction 2 to Item 22(c) of Form ‘‘beneficial owner’’ of a security if he or manager’s lack of confidence in the N–3; 17 CFR 240.13d–3; 17 CFR 240.16a–1(a)(2). she is a ‘‘beneficial owner’’ under either fund, e.g., that its investment objectives 42 Item 12(b)(4) of Form N–1A; Item 18.7 of Form do not match the manager’s, we note N–2; Item 20(f) of Form N–3. 37 A mutual fund that issues two or more series 43 See proposed Item 15(c) and Instruction 4 of that a fund is free to include an of preferred or special stock each of which is Form N–1A; proposed Item 21.3 and Instruction 4 explanation of these reasons in its preferred over all other series in respect of assets of Form N–2; proposed Item 22(c) and Instruction disclosure. specifically allocated to that series is required to 4 of Form N–3. disclose a portfolio manager’s securities ownership We have modified our proposed in each series in the statement of additional 44 See Rule 16a–1(a)(2)(ii)(A) under the Exchange disclosure requirement with respect to Act [17 CFR 240.16a–1(a)(2)(ii)(A)] (indirect information for that series. pecuniary interest in securities includes securities securities ownership significantly, to 38 Proposed Item 15(c) of Form N–1A; proposed held by any member of a person’s immediate family address concerns raised by commenters. Item 21.3 of Form N–2; proposed Item 22(c) of Form sharing the same household). ‘‘Immediate family’’ In particular, we have limited the N–3. is defined for purposes of rule 16a–1 as any child, 39 Item 15(c) of Form N–1A; Item 21.3 of Form N– requirement to a portfolio manager’s stepchild, grandchild, parent, stepparent, 2; Item 22(c) of Form N–3. grandparent, spouse, sibling, mother-in-law, father- ownership of equity securities in the 40 Instruction 2 to Item 15(c) of Form N–1A; in-law, son-in-law, daughter-in-law, brother-in-law, Instruction 2 to Item 21.3 of Form N–2; Instruction or sister-in-law, and includes adoptive 36 Item 15(c) of Form N–1A; Item 21.3 of Form N– 2 to Item 22(c) of Form N–3; 17 CFR 240.16a– relationships. Rule 16a–1(e) under the Exchange 2; Item 22(c) of Form N–3. 1(a)(2). Act [17 CFR 240.16a–1(e)]. VerDate jul<14>2003 15:32 Aug 26, 2004 Jkt 203001 PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 E:FRFM27AUR2.SGM 27AUR2
  7. 7. Federal Register / Vol. 69, No. 166 / Friday, August 27, 2004 / Rules and Regulations 52793 following dollar ranges: None, $1– However, in the case of an initial particular, limiting the disclosure of a $10,000, $10,001–$50,000, $50,001– registration statement or an update to a portfolio manager’s securities $100,000, $100,001–$500,000, fund’s registration statement that ownership to ownership of securities in $500,001–$1,000,000, or over discloses a new portfolio manager, the fund itself, will significantly reduce $1,000,000.45 Commenters’ views on information with respect to any newly the burden to funds of preparing this this proposed approach varied. Several identified portfolio manager is required disclosure. commenters argued that the maximum to be provided as of the most recent practicable date.49 The date as of which F. Removal of Exclusion for Index dollar range of securities owned should the information is provided must be Funds be lowered from ‘‘over $1,000,000’’ to ‘‘over $100,000,’’ which would be disclosed. In effect, this means that a We are removing the current consistent with the requirement for fund fund is required to disclose changes to provision in Form N–1A that excludes directors.46 These commenters this information with respect to a a fund that has as its investment expressed concern that the proposed previously identified portfolio manager objective replication of the performance dollar ranges would require portfolio once a year, as part of its post-effective of an index from the requirement to managers to provide too much amendment that is an annual update to identify and provide disclosure information about their net worth and its registration statement.50 A fund is regarding its portfolio managers.51 We would unduly infringe on their privacy not required to update its SAI during are removing this exclusion in order to interests. Another commenter, by the year for each change in any of the shed light on the alignment of index contrast, argued that any maximum required information regarding a fund portfolio managers with investors’ dollar range chosen should accurately previously identified portfolio manager, interests and on their potential conflicts reflect the likely value of shares owned such as changes in the fund securities of interest. Commenters were split on by a representative cross section of that a portfolio manager owns. the proposed removal of the index fund managers in the mutual fund industry. Several commenters suggested that we exclusion. A commenter who objected This commenter suggested that if a should require the information to the proposal argued that there are lower maximum range of $100,000 were regarding other accounts managed by a few, if any, conflicts between the used, an overwhelming majority of portfolio manager, compensation interests of shareholders of an index managers would likely exceed that structure, and ownership of fund fund and those of a portfolio manager threshold. Finally, other commenters securities as of the most recent calendar who is also managing an actively- suggested that we require disclosure of year-end, rather than the fund’s most managed fund, because the index fund the precise number of shares of the fund recent fiscal year-end. These structure imposes strict constraints on owned by a portfolio manager. commenters noted that a fund complex the portfolio manager’s actions. Another We continue to believe, on balance, frequently has multiple funds managed by the same portfolio manager, and commenter, however, agreed with the that requiring disclosure of securities Commission that conflicts of interest, owned using a maximum dollar range of argued that requiring information as of the most recent fiscal year-end would such as conflicts in determining trading ‘‘over $1,000,000’’ is appropriate. execution priorities, may arise when a complicate the administrative burden of Disclosure of the dollar range of portfolio manager for an index fund also compiling the required disclosure for a securities owned by a portfolio manager, manages an actively-managed fund. We portfolio manager who manages several rather than precise dollar holdings, is are removing the current index fund funds with different fiscal year-ends. intended to provide shareholders with exclusion because we continue to Another commenter, however, significant information to use in believe that concerns about the supported requiring the information as evaluating whether a manager’s interests alignment of portfolio managers and of the most recent fiscal year-end, are aligned with their own, while their conflicts of interest are important arguing that this approach would strike protecting managers’ legitimate privacy to investors in index funds. a reasonable balance between timeliness interests.47 The maximum range of and practicality. We are adopting the ‘‘over $1,000,000’’ is intended to reflect G. Disclosure of Availability of requirement as proposed, because we Information a level of investment that would be believe that requiring the disclosure to significant. At the same time, we are not be provided as of calendar year-end In order to assist investors in finding persuaded that requiring disclosure of would, in many instances, result in the additional information about the precise dollar holdings of securities investors receiving excessively stale portfolio managers that is required in owned is necessary. information. For example, if a fund the SAI, we are adopting amendments E. Date of Disclosure updated its prospectus on December 1 that require a fund to state in its and provided information about its prospectus that the SAI provides this The required information regarding portfolio managers as of the most recent information.52 This disclosure is other accounts managed by a portfolio calendar year-end, investors would required to appear adjacent to the manager, compensation structure, and receive information that is already 11 disclosure identifying the portfolio ownership of fund securities must be months old at the time of the update. managers. provided as of the end of the fund’s We note that other modifications we are most recently completed fiscal year.48 We are also adopting the proposed making to the amendments, in requirement that the back cover page of 45 Item 15(c) of Form N–1A; Item 21.3 of Form N– a mutual fund’s prospectus state 21.2, and 21.3 of Form N–2; Instruction 1 to each 2; Item 22(c) of Form N–3. of Items 22(a), (b), and (c) of Form N–3. whether the fund makes available its 46 Item 12(b)(4) of Form N–1A; Item 18.7 of Form 49 This includes an update to a mutual fund’s SAI and annual and semi-annual N–2; Item 20(f) of Form N–3. registration statement that adds a new series to the reports, free of charge, on or through its 47 Cf. Investment Company Act Release No. 24816 fund. Web site at a specified Internet (Jan. 2, 2001) [66 FR 3734, 3741 (Jan. 16, 2001)] 50 In the case of a change in portfolio manager, (explaining reasons for requiring disclosure of a however, a fund is required to update its director’s holdings of securities using dollar ranges registration statement to disclose the change and 51 Instruction 1 to Item 5(a)(2) of current Form N– rather than an exact dollar amount). provide information about the new manager as 1A. 48 Instruction 1 to each of Items 15(a), (b), and (c) necessary to comply with its obligations under the 52 Item 5(a)(2) of Form N–1A; Item 9.1.c of Form of Form N–1A; Instruction 1 to each of Items 21.1, Securities Act. N–2; Item 6(e) of Form N–3. VerDate jul<14>2003 15:32 Aug 26, 2004 Jkt 203001 PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 E:FRFM27AUR2.SGM 27AUR2
  8. 8. 52794 Federal Register / Vol. 69, No. 166 / Friday, August 27, 2004 / Rules and Regulations address.53 If a mutual fund does not The disclosure in Form N–CSR with the Investment Company Act of 1940 make its SAI and shareholder reports respect to the name, title, length of and Securities Act of 1933, Registration available in this manner, the fund is service, and business experience of a Statement of Open-End Management required to disclose the reasons why it portfolio manager is required to be Investment Companies’’; (2) ‘‘Form N–2 does not do so (including, where current as of the date of filing of the under the Investment Company Act of applicable, that the fund does not have report, and the disclosure regarding 1940 and Securities Act of 1933, an Internet Web site). We are also other accounts managed, compensation Registration Statement of Closed-End adopting amendments to Forms N–2 structure, and fund securities ownership Management Investment Companies’’; and N–3 that require similar disclosure generally is required to be current as of (3) ‘‘Form N–3—Registration Statement on the front cover page of the the end of the fund’s most recently of Separate Accounts Organized as prospectus for closed-end funds and completed fiscal year.60 In the case of a Management Investment Companies’’; insurance company managed separate newly identified portfolio manager in an and (4) ‘‘Form N–CSR—Certified accounts that issue variable annuity annual or semi-annual report, however, Shareholder Report of Registered contracts.54 In addition, the this disclosure is required to be current Management Investment Companies.’’ amendments to Forms N–2 and N–3 as of the most recent practicable date.61 An agency may not conduct or sponsor, require that the front cover page of the This will result in basic information and a person is not required to respond prospectus include a statement about a closed-end fund’s portfolio to, a collection of information unless it explaining how to obtain the fund’s manager in Form N–CSR that is current displays a currently valid OMB control shareholder reports and a toll-free (or on the date of filing, and will make the number. collect) telephone number for investors date with respect to which other Form N–1A (OMB Control No. 3235– to call to request the fund’s SAI, annual disclosure about a portfolio manager is 0307), Form N–2 (OMB Control No. and semi-annual reports, and other provided consistent with the 3235–0026), and Form N–3 (OMB information, and to make shareholder requirements for the SAI in Forms N– Control No. 3235–0316) were adopted inquiries. They also change from 1A, N–2, and N–3. pursuant to Section 8(a) of the optional to mandatory disclosure of the Investment Company Act [15 U.S.C. I. Compliance Date 80a–8(a)] and Section 5 of the Securities Commission’s Internet Web site address. These requirements are similar to The effective date of the amendments Act [15 U.S.C. 77e]. Form N–CSR (OMB existing requirements of Form N–1A.55 is October 1, 2004. All initial Control No. 3235–0570) was adopted registration statements on Forms N–1A, pursuant to Section 30 of the Investment H. Amendment of Form N–CSR N–2, and N–3, and all post-effective Company Act [15 U.S.C. 80a–29] and amendments that are annual updates to Sections 13 and 15(d) of the Exchange Because closed-end funds do not offer effective registration statements on these Act [15 U.S.C. 78m and 78o(d)]. their shares continuously, and are forms, filed on or after February 28, We published notice soliciting therefore generally not required to 2005, must include the disclosure comments on the collection of maintain an updated SAI to meet their required by the amendments. Moreover, information requirements in the obligations under the Securities Act of all post-effective amendments that add Proposing Release and submitted these 1933,56 we are adopting, as proposed, a new series, filed on or after February proposed collections of information to the requirement that closed-end funds 28, 2005, must comply with the the Office of Management and Budget provide disclosure regarding their amendments with respect to the new (‘‘OMB’’) for review in accordance with portfolio managers in their annual series. Every annual report by a closed- 44 U.S.C. 3507(d) and 5 CFR 1320.11.62 reports on Form N–CSR.57 This will end fund on Form N–CSR filed for a OMB has approved the collection of include the basic information (name, fiscal year ending on or after December information for the amendments to title, length of service, and business 31, 2005, and every semi-annual report Forms N–2 and N–3. We are experience), as well as the disclosure by a closed-end fund on Form N–CSR resubmitting the collections of that we are requiring regarding other filed after the first such annual report, information for the amendments to accounts managed by a portfolio must include the disclosure required by Forms N–1A and N–CSR. We received manager, compensation structure, and the amendments. Based on the no comments on any of the proposed ownership of fund securities.58 A comments and the changes we have collection of information requirements. closed-end fund is required to disclose made to the proposed requirements, we However, as discussed below, we are any change in its portfolio managers, believe that this will provide adequate requesting comment again with regard and to provide all of the required time for funds to compile and review to the collection of information portfolio manager disclosure for any the information that must be disclosed. requirements related to Forms N–1A newly identified portfolio manager, in and N–CSR. its semi-annual reports on Form N– III. Paperwork Reduction Act The amendments to Forms N–1A, N– CSR.59 As explained in the Proposing 2, and N–3 adopted in this release Release, certain provisions of the require funds to provide improved 53 Item 1(b)(1) of Form N–1A. amendments contain ‘‘collection of disclosure regarding their portfolio 54 Item 1.1.d of Form N–2; Item 1(a)(vi) of Form information’’ requirements within the managers in fund prospectuses and N–3. meaning of the Paperwork Reduction 55 See Items 1(b)(1) and 1(b)(3) of Form N–1A. SAIs. The amendments also amend 56 Pursuant to rule 8b–16(b) under the Investment Act of 1995 [44 U.S.C. 3501, et seq.]. Form N–CSR to require similar Company Act [17 CFR 270.8b–16(b)], closed-end The titles for the collections of disclosure for closed-end funds in funds are not required to file amendments to their information are: (1) ‘‘Form N–1A under reports on Form N–CSR. The paperwork registration statements (including their SAIs) in burden estimates for the amendments, order to comply with their Investment Company 60 Instruction 1 to Item 8(a)(1), Instruction 1 to Act registration obligations, provided that they described below, represent the Item 8(a)(2), Instruction 1 to Item 8(a)(3), and include specified information in their annual Instruction 1 to Item 8(a)(4) of Form N–CSR. estimated total burden annualized over reports to shareholders. 61 Instruction 1 to Item 8(a)(1), Instruction 1 to a three-year period. We expect that 57 Item 8 of Form N–CSR. Item 8(a)(2), Instruction 1 to Item 8(a)(3), 58 Item 8(a) of Form N–CSR. Instruction 1 to Item 8(a)(4), and Item 8(b) of Form 62 See Proposing Release, supra note 6, 69 FR at 59 Item 8(b) of Form N–CSR. N–CSR. 12759–60. VerDate jul<14>2003 15:32 Aug 26, 2004 Jkt 203001 PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 E:FRFM27AUR2.SGM 27AUR2

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