The SEC has proposed amendments to Rule 482 under the Securities Act of 1933 (the “Securities Act”) and other related rules and forms to permit the use of information in investment company advertisements the “substance of which” is not included in the applicable fund’s statutory prospectus. The amendments are intended to

• provide funds with the ability to include more timely information in their advertisements (e.g., information about current economic conditions that normally would not be included in a fund’s prospectus);
• eliminate from funds’ prospectuses boilerplate disclosure that clutters the prospectuses and obscures other important information;
• and reinforce antifraud protections and encourage the provision of information to investors that is more balanced and informative, particularly in the area of investment performance.

Historically, the advertising restrictions of the Securities Act have caused special problems for many mutual funds, which offer and sell their shares to the public continuously. In order to address this issue, the SEC previously adopted Rule 482 under Section 10(b) of the Securities Act. Rule 482 permits mutual funds to advertise any information “the substance of which” is included in the fund’s statutory prospectus and provides a means for funds to advertise performance information according to standardized formulas. Recognizing the limitations of Rule 482, however, under the National Securities Markets Improvement Act of 1996 (“NSMIA”), Congress amended the Investment Company Act of 1940 (the “Investment Company Act”) to add new Section 24(g). Section 24(g) directs the SEC to adopt rules or regulations that permit mutual funds to use communications that include information the substance of which is not included in the statutory prospectus. The proposed amendments are intended to implement this provision of NSMIA.

Accordingly, the proposed amendments, if adopted, would:

• Amend Rule 482 to:
  
• eliminate the “substance of which” requirement (conforming amendments are proposed to Forms N-1A, N-3, N-4 and N-6);
• require funds that advertise performance information to make available total returns that are current through the most recent month end by providing a toll-free number to investors where total-return information is provided within three days after the most recent month end (and updated website performance information, if applicable, within the same time frame);
• require that fund advertisements include improved narrative information, including (1) a statement that past performance does not guarantee future results; (2) a statement that current performance may be lower or higher than the quoted performance figures and (3) the toll-free number and website information for obtaining current data (described above);
• require that fund advertisements note that information about charges and expenses is contained in the fund’s statutory prospectus; and
• require that fund advertisements present explanatory information more prominently by requiring that (1) narrative disclosures in print advertisements be at least as large and of a style different from, but at least as prominent as, that used in the major portion of the advertisement and (2) narrative disclosures regarding fund performance in both print and radio/television advertisements be presented in close proximity to the performance data.
  
  
• Rescind the applicability of Rule 134 under the Securities Act to mutual funds (and thereby excluding mutual funds from relying on Rule 134). Rule 134 specifies certain categories of information (other than performance) that a fund may advertise, and advertisements that comply with Rule 134 do not give rise to “prospectus” liability.
  
  
• Amend mutual fund advertising rules to add specific language to reemphasize that fund advertisements are subject to the anti-fraud provisions of the federal securities laws. The proposed amendments would add language to Rule 482 and Rule 34b-1 under the Investment Company Act to the effect that compliance with these rules does not alter the obligations of that funds, underwriters and dealers are subject to the anti-fraud provisions of the federal securities laws with respect to fund advertisements. The new language would cross-reference Rule 156 under the Securities Act, which provides guidance about the factors to be weighed in determining whether fund advertisements are misleading.
  
  
• Amend Rule 156 to provide further factors to be weighed in determining whether fund advertisements are misleading. Specifically, it is proposed that the language of Rule 156 be modified to state more explicitly that portrayals of past income, gain or growth of assets may be misleading if the portrayals omit explanations, qualifications, limitations or other statements necessary or appropriate to make these portrayals of past performance not misleading.
  
  
• Reorganize Rule 482 to make it easier to use, including reordering provisions and adding headings.
  
  
• Amend Forms N-1A, N-3, and N-4 to eliminate requirements for disclosure of the method of calculating performance, the length and the last day of the base period used and (in Form N-1A only) the income tax rate used.

The SEC is seeking comments on the proposed rules (including the application of Rule 482 to variable insurance contracts). Comments are due on or before July 31, 2002.

The SEC has adopted new rules requiring private and public foreign issuers to file their registration statements and other documents electronically to improve U.S. investor access. Previously, foreign issuers were exempt from rules that require domestic firms to file their documents through the SEC's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.

The SEC has adopted new rules requiring private and public foreign issuers to file their registration statements and other documents electronically to improve U.S. investor access. Previously, foreign issuers were exempt from rules that require domestic firms to file their documents through the SEC's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.

With regard to EDGAR filings, Alan Beller, director of the SEC's Division of Corporation Finance, said that a lack of resources is standing in the way of a 24-hour filing system for both foreign and domestic issuers. Any technical problems that exist are surmountable, he said. Extra technical personnel would be needed to "mind the system," and more staff also would have to be available to answer the questions of EDGAR users as they arise, Beller said. Currently, the staff is working on making EDGAR available earlier--from about 3 a.m. onward--as a first step to accommodate the European community, Beller reported. However, having a facility in Europe would not give the SEC a cost advantage, staff from the Office of Information Technology (OIT) said in answer to a question from SEC Chairman Harvey Pitt. The OIT staff also said that EDGAR would need to have more redundancy to achieve a 24/7 opening.

The final rules amend Regulation S-T, governing electronic filing, to eliminate the foreign issuer exception from mandated EDGAR filings required under the Securities Act and the Securities Exchange Act of 1934 (the “Exchange Act”). Foreign issuers will have to file electronically registration statements under each act, and reports under the Exchange Act. Multijurisdictional Disclosure System forms filed by Canadian issuers are affected. They may still be bilingual in French and English.

Other electronic filings will include:

• statements of beneficial ownership on Schedules 13D and 13G and tender offer schedules pertaining to the securities of a foreign issuer;
• Form CB--the form used for cross-border rights offers, exchange offers, and business combinations that are exempt from the tender offer rules or 1933 Act registration--if the filer is a reporting company under the 1934 Act;
• Form 6-K reports, except under two exceptions, when paper filing would be permitted; and
• most Trust Indenture Act forms.

In addition, supranational entities such as the World Bank will be allowed but not required to file their reports electronically. First-time EDGAR filers will no longer have to supply the SEC with a paper copy of their electronic filing. Certain filings by foreign private companies that are not raising capital in the United States must continue to be submitted in paper only.

The SEC incorporated several provisions in its final rules that differed from the original proposal. For example, rather than eliminating the option of using an English summary instead of a full English translation of a foreign language exhibit or attachment to a filing, the final rules allow companies to use an English summary, with exceptions for specified, significant documents. Also, in addition to permitting paper filing of glossy annual reports, the final rules make an exception for any Form 6-K report that has not been distributed to the press or shareholders, and does not contain new, material information.

The new rules will become effective November 4, 2002, providing a six-month period in which foreign issuers can prepare to comply with them. BNA Securities Law Reporter Vo. 34 No. 19 (May 13, 2002).

This Summary, which draws from a wide range of sources, endeavors to condense important investment company regulatory news of the preceding week into one, easily digestible source. This Summary is not intended as legal advice. Readers should not act upon information contained in this Summary without professional legal counsel. This summary may be considered advertising under the rules of the Supreme Judicial Court of Massachusetts. If you have any questions or suggestions for next weeks summary, please contact Timothy Silva at +1 617 526 6502 or [email protected]

The SEC proposed a new rule and several rule amendments governing transactions between investment companies and their affiliated persons. The rules and amendments are intended to codify in a new rule and amendments to several current rules a number of orders that have been issued to funds permitting affiliated and joint transactions with two types of affiliates. The new rule and rule amendments would eliminate the need for funds to obtain individual exemptive orders, in the following circumstances that are not likely to raise the concerns that the Investment Company Act was intended to address.

Transactions with Portfolio Affiliates. Rules 17a-6 and 17d-1(d)(5) under the Investment Company Act permit a fund and its portfolio affiliates to engage in principal transactions and enter into joint arrangements that would otherwise be prohibited by the Investment Company Act. Under Rules 17a-6 and 17d-1(d)(5), a fund may enter into a principal transaction or a joint arrangement with a portfolio affiliate, or an affiliated person of a portfolio affiliate, as long as certain other affiliated persons of the fund (e.g., the fund’s adviser, persons controlling the fund, and persons under common control with the fund) (“Prohibited Participants”) are not parties to the transaction and do not have a financial interest in a party to the transaction.

• Second-tier affiliates. Currently, Rules 17a-6 and 17d-1 give broad exemptions that permit transactions and arrangements involving a fund and its own portfolio affiliates (first-tier affiliates), but do not extend to identical transactions or arrangements involving portfolio affiliates of funds under common control with the fund (second-tier affiliates). The amendments would expand Rules 17a-6 and 17d-1 to permit a fund to engage in principal transactions or enter into joint arrangements with its second-tier portfolio affiliates under the same conditions as with first-tier portfolio affiliates. This is largely a technical change necessitated because the current rules pre-dated the widespread organization of mutual funds into fund complexes.
  
  
• Financial interests. The rules currently do not explain what constitutes a “financial interest” in a party. Instead, the rules provide a list of interests that are deemed not to be “financial interests.” The amendments would provide that, in addition to the interests currently deemed not to be “financial interests” under the rules, any interest that the fund’s board of directors, including a majority of the independent directors, finds to be not material also is not a “financial interest.” The amendments also would make the rules consistent with one another with regard to the time period for which a Prohibited Participant’s financial interest will result in loss of the rules’ exemption.
  
  
• Percentage limits on investment in joint enterprise. The proposed amendments also would eliminate the percentage limit of Rule 17d-1(d)(5), which permits a fund, or a company that a fund controls to commit no more than five percent of its assets to a joint enterprise with a portfolio affiliate.
  
  
• Transactions with Subadviser Affiliates. Under Section 17 of the Investment Company Act, an adviser (including any subadviser) to a fund generally is prohibited from engaging in transactions with the fund (or any other fund in the fund complex) such as selling securities to the fund, which would be a form of self-dealing. The SEC has, however, issued a number of orders permitting subadvisers to enter into transactions and arrangements with other funds in the complex that other subadvisers advise (or with other subadvisers to a different discrete portion of the portfolio). The SEC has also granted related exemptive relief from restrictions on purchasing any security during an underwriting syndicate and purchasing securities of affiliated securities-related businesses. The proposed amendments are intended to codify these exemptive orders and further amend Rule 10f-3, as described below.
  
  
• Principal transactions with subadvisers (Section 17(a) and new Rule 17a-10). Section 17(a) of the Investment Company Act prohibits a subadviser that is a first- or second-tier affiliate of a fund from borrowing money or other property from, or selling or buying securities or other property to or from the fund, or any company that the fund controls. The SEC is proposing a new rule, Rule 17a-10, that would permit a subadviser of a fund to enter into transactions with (1) funds the subadviser does not advise but which are affiliated persons of a fund it does advise (e.g., other funds in the fund complex), and (2) funds the subadviser does advise, but with respect to portions of the subadvised fund for which the subadviser does not provide investment advice. The proposed exemption would be subject to conditions designed to limit its availability to circumstances in which the subadviser is unable to influence the management of the fund, or portion of the fund, that participates in the transaction (“participating fund” or “participating portion”). First, the rule would require that the subadvisory relationship be the sole reason why section 17(a) prohibits the transaction (e.g., that the subadviser not be an affiliated person of the participating fund’s investment advisers, officers, directors, promoters, or underwriters). Second, the rule would require the participating subadviser and any subadviser of the participating fund or portion to be prohibited by their advisory contracts from consulting with each other concerning securities transactions of the participating fund or portion.
  
  
• Transactions with subadvisers as brokers (Section 17(e) and Rule 17e-1). Section 17(e)(2) of the Act generally limits the remuneration that a first- or second-tier affiliate of a fund may receive for effecting purchases and sales of securities on a securities exchange on behalf of the fund, or a company the fund controls, to the “usual and customary broker’s commission.” Rule 17e-1 describes the circumstances in which remuneration received by an affiliated person of a fund qualifies as the “usual and customary broker’s commission.” The rule, among other things, requires that the fund’s board of directors review transactions to determine that they comply with procedures adopted by the board to ensure that the remuneration received by the affiliated person does not exceed the usual and customary broker’s commission (“review requirement”). In addition, the fund must maintain a record of the transactions (“recordkeeping requirement”). The review and recordkeeping requirements of rule 17e-1 were designed to permit fund directors and the SEC’s examinations staff to monitor the reasonableness and fairness of remuneration received by affiliated persons of the fund. The proposed amendments would relieve funds and subadvisers from the review and recordkeeping requirements of Rule 17e-1 when the relationship between the subadviser and fund is sufficiently remote to make it unlikely that the subadviser could directly or indirectly cause the fund to pay an unreasonable or unfair commission. The relief would be available in certain circumstances, and subject to certain conditions, identical to those in which a subadviser could engage in a principal transaction with an affiliated fund under proposed rule 17a-10.
  
  
• Purchases During Primary Offering Underwritten by Subadvisers (Section 10(f) and Rule 10f-3). Section 10(f) of the Investment Company Act prohibits a fund from purchasing any security during an underwriting or selling syndicate if the fund has certain affiliated relationships with a principal underwriter for the security. When a fund has multiple subadvisers, section 10(f) can limit significantly the fund’s ability to purchase securities in a primary offering. A fund is subject to the prohibition in section 10(f) if any of its subadvisers participate in the underwriting or selling syndicate (or are affiliated persons of participants), whether or not the subadviser that recommends the purchase is participating. Moreover, in order for a fund to rely on the exemption in Rule 10f-3, the aggregate purchases by all of the funds advised by each of the fund’s subadvisers (as well as all of the funds advised by the fund’s principal adviser) must comply with the rule’s percentage limit. The proposed amendments to Rule 10f-3 would deem each of the series of a series company and the “managed portions” of a fund portfolio (“series” or “portions”) to be separate registered investment companies for purposes of section 10(f) and Rule 10f-3. The amendments would exempt a purchase of securities by an investment company from the prohibition in section 10(f), if the purchase would not be prohibited if each series or portion were separately registered. The proposed amendments are designed to exempt funds from the prohibition in section 10(f) when that prohibition is triggered by the participation in an underwriting or selling syndicate of a person who is not in a position to influence the fund’s investment decisions.

In addition, further amendments are proposed to Rule 10f-3 that would revise the way funds are required to aggregate purchases to determine compliance with the percentage limits of Rule 10f‑3. Currently, a fund is required to aggregate all of its purchases with those of any other fund advised by its investment adviser, but the fund need not aggregate purchases made by, for example, a hedge fund advised by the participating subadviser. Therefore, the proposed amendments to Rule 10f-3 would require the aggregation of purchases by funds that are advised, and accounts that are controlled, by an investment adviser that is a participant in the underwriting or selling syndicate.

• Ownership of securities issued by subadvisers (Section 12(d)(3) and Rule 12d3-1). Section 12(d)(3) of the Investment Company Act generally prohibits funds, and companies controlled by funds, from purchasing securities issued by a registered investment adviser, broker, dealer, or underwriter (“securities-related businesses”). Rule 12d3-1 permits a fund to invest up to five percent of its assets in securities of an issuer deriving more than fifteen percent of its gross revenues from securities-related businesses, but a fund may not rely on Rule 12d3-1 to acquire securities of its own investment adviser or any affiliated person of its own investment adviser. Thus, a fund may not acquire securities issued by any of its subadvisers, or their affiliated persons. The proposed amendments would, however, permit a fund to acquire securities issued by one of its subadvisers (or an affiliated person of one of its subadvisers) subject to the same conditions as the other proposed rules discuss above. The rule would be available only to a subadviser that provides investment advice with respect to a discrete portion of the fund’s portfolio, and that is not an affiliated person of the adviser causing the fund to purchase the securities.

Comments on the proposed rule and amendments are due on or before July 19, 2002. SEC Release No. IC-25557; File No. S7-13-02.