SEC's Roye Addresses ICI's Securities Law Procedures Conference

Washington, DC, December 21, 1998 - Paul Roye, the newly appointed Director of the Securities and Exchange Commission's Division of Investment Management, spoke at the 1998 ICI Securities Law Procedures Conference held in Washington, D.C. on December 7th and 8th. Roye's remarks focused on the SEC's goals for 1999 with respect to the fund industry, which, among other things, include:

implementing new Form N-1A and the profile;
reviewing shareholder reports and advertising;
reviewing mutual; and
monitoring tech, with particular emphasis on Y2K issues.

Implementation of New Form N-1A and the Profile
Roye announced that one of the more important challenges facing the industry and the Commission is implementing the new Form N-1A and the fund profile. He emphasized the importance of completing a thorough overhaul of fund prospectuses using the new Form N-1A in a user-friendly, plain English format. He reported that, thus far, of the registration statements, post-effective amendments, and profiles filed with the Division that comply with the new rules, those that do the best job focus on effectively communicating to the individual investor the information needed in making an investment decision. But he also cautioned against falling prey to various, fairly common pitfalls, noting for example, that while some funds provide disclosure about principal investment strategies and risks that is too generic, other funds provide more detailed disclosure, but put it in the risk/return summary, thus undercutting its usefulness. Roye encouraged the industry to take the initiative and draft their prospectuses in the spirit of the new Form N-1A, adding that the staff will be flexible in its review if the goal that investors receive clear, concise, understandable disclosure is not compromised.

Other Disclosure Initiatives
Roye reported that the Commission also expects to focus its attention on other disclosure initiatives, including shareholder reports and advertising. In its review of shareholder reports, the Commission will pay particular attention to the schedule of portfolio investments, which in Roye's view, is instrumental in helping investors understand how their funds have been managed. Specifically, the Commission will attempt to improve the quality of the portfolio schedule information and will consider the possibility of (1) adding summary information about the portfolio, in order to help investors understand the wealth of data in the schedule, and (2) reducing the quantity of detail in the schedule, without reducing the valuable information that is available to shareholders.

Roye also mentioned that the Commission will evaluate the information that shareholders receive about the tax effects of portfolio activity. He noted that for those shareholders whose fund holdings are taxable-in contrast to 401(k) plans and other tax-deferred vehicles-the Commission will question the adequacy of portfolio turnover disclosure to determine whether it sufficiently conveys the tax effects of a fund investment.

Turning next to advertising, Roye reported that the Division expects to recommend rules to the Commission to remove the "substance of which" requirement and make the "advertising prospectus" a reality. He noted that the Commission will work with the NASD to prevent possible abuses resulting from the increased flexibility. Roye also reported that performance advertising will receive special attention, adding that Division disclosure review and inspection staffs will continue to scrutinize advertising for signs of misuse of performance information that might mislead investors.

Mutual Fund Fees and Expenses
Roye stated that the issue of mutual fund fees and expenses will receive increased attention in the coming months. He reported that the Division has undertaken a review of trends in the overall levels of fund fees, the manner in which fees are assessed, and whether economies of scale are passed on to shareholders, noting that the Division expects to complete its review early in 1999.

Given the importance of this issue to investors, Roye urged the audience to initiate steps now, rather than waiting for the results of the staff's and any other studies on the issue. Among other things, he recommended: (1) providing investors the information they need about fees and expenses, including for example, using the recently improved fee table and providing balanced sales presentations; (2) educating investors about the effect that costs have on returns, to facilitate their understanding of the nature and costs of such investments; and (3) ensuring that fund directors are fully informed in fulfilling their role in providing adequate oversight of fund fees and expenses. Roye noted that the completeness and quality of information provided directors regarding fees is an area he expects will be of continuing interest to the Division and the inspection staff in the coming months. He also stated that fund directors should be vigilant in protecting the interests of fund shareholders and in fulfilling their statutory role on a fully informed basis. Furthermore, he noted the Commission's concern over recent challenges to the role of independent directors, adding that "directors must be free to exercise their statutory and fiduciary responsibilities without being hamstrung by management." He said that the Commission will continue to examine this issue. Roye also mentioned that the Commission plans to follow up on the issues raised by the recent soft dollar report, noting that the report and its recommendations are a step in the direction of addressing the issues raised by the use and allocation of fund brokerage.

Technology Issues
Lastly, Roye addressed the subject of technology. Focusing his comments primarily on the Year 2000 issue, Roye discussed the Commission's multi-pronged approach in confronting Y2K readiness in the fund industry, referring, among other things, to the Commission's (1) guidance given to advisers and mutual funds regarding Y2K disclosure obligations, (2) establishment of a task force to monitor disclosure compliance, (3) nationwide examinations conducted by the Division's Office of Compliance Inspections and Examinations ("OCIE") to obtain information on the Y2K problem, and (4) announced moratorium on the implementation of Commission rules that would require major reprogramming of computer systems by mutual funds, their advisers, and other securities industry participants to better focus industry resources on remedying the Y2K problem. Roye also reminded registered advisers of their responsibility under new Rule 204-5 under the Investment Advisers Act of 1940, to file Y2K reports with the Commission.

Turning to other technology issues, Roye noted that the Commission supports technological advances in the fund industry. He stated that the Commission's role will be as facilitator of industry innovations that do not diminish investor protections, citing as an example, the Commission's recent interpretive release regarding the use of Internet websites to disseminate offering and solicitation materials for offshore sales of securities and investment services. Finally, Roye noted that the Commission will continue to take steps to prevent Internet fraud and prosecute it when found. The Commission also will be mindful of privacy and security issues associated with Internet use, particularly when the Internet is used to transmit personal information or effect business transactions.