In a recent release,1 the SEC adopted amendments to rules and forms for investment companies under the Investment Company Act of 1940 (the "Investment Company Act") that, among other things, approved a new quarterly reporting form (Form N-Q) and certain new disclosure requirements that are discussed below. Specifically, the amendments require registered investment companies to:

  • Electronically file complete portfolio holdings schedules as of the end of the first and third fiscal quarters with the SEC on new Form N-Q. New Form N-Q will be filed under the Investment Company Act and the Securities Exchange Act of 1934, and will be required to be certified by the fund's principal executive and financial officers. Among other things, the certification on Form N-Q will require a certifying officer to state, based on the officer's knowledge, that the schedules of investments included in the report fairly present in all material respects the investments of the registrant as of the end of the fiscal quarter for which the report is filed.2
  • Disclose in their reports to shareholders (e.g., annual and semi-annual reports) the amount of fund expenses borne by shareholders during the reporting period by showing:

1) the cost in dollars associated with an investment of $1,000, based on the fund's actual expenses and return for the period; and

2) the cost in dollars associated with an investment of $1,000, based on the fund's actual expenses for the period and an assumed return of 5 percent per year.

The sample expenses must be accompanied by narrative explanation prescribed by the SEC that includes an explanation of the types of costs charged by mutual funds and the assumptions used in the example.

  • Present in shareholder reports a tabular or graphic presentation of their portfolio holdings by identifiable categories. For example, the Adopting Release suggests that funds present their portfolios in tables, charts, or graphs depicting the fund's portfolio holdings by reasonably identifiable categories (e.g., industry sector, geographic region, credit quality, or maturity).

With respect to reports of portfolio holdings, the SEC also approved a new option for registered investment companies that permits (but does not require) a fund to include a summary portfolio schedule in shareholder reports in lieu of a complete portfolio schedule.3 Under the amendments, the summary portfolio schedule would include each of the fund's 50 largest holdings in unaffiliated issuers and each investment in unaffiliated issuers that exceeds one percent of the fund's net asset value. Funds that use a summary portfolio schedule are also required to categorize the summary holdings by (i) the type of investment (such as common stocks, preferred stocks, convertible securities, fixed income securities, government securities, options purchased, warrants, loan participations and assignments, commercial paper, bankers' acceptances, certificates of deposit, short-term securities, repurchase agreements, other investment companies, and so forth); and (ii) the related industry, country, or geographic region of the investment.4 If a fund uses a summary portfolio schedule, then the fund must file a complete portfolio schedule with the Commission on Form N-CSR semi-annually and provide that complete schedule to shareholders upon request, free of charge. In addition to the changes discussed above, the new amendments also require that an investment company include its Management's Discussion of Fund Performance ("MDFP") in its annual report to shareholders. Most funds already include the MDFP in their annual reports, but technically, the MDFP has always been required in the prospectus unless it was included in the annual report.

Effective Dates

Investment companies are required to comply with the amended rules in shareholder reports for periods ending on or after July 9, 2004. Therefore, semi-annual and annual reports for periods ending on or after July 9, 2004 will be required to comply with the new amendments. In addition, funds will be required to file quarterly reports on Form N-Q with respect to any fiscal quarter ending on or after July 9, 2004.

As always, if you have any questions regarding the foregoing or any other investment adviser or investment company matter, please do not hesitate to call us.


1 Securities and Exchange Commission ("SEC") Release No. IC-26372 (February 27, 2004) (the "Adopting Release").

2 As part of the certification requirements, a fund's management will also be required to evaluate, with the participation of its principal executive and financial officers, the effectiveness of the fund's disclosure controls and procedures within the 90-day period prior to the filing of a report on Form N-Q. This is similar to the evaluation currently conducted within the 90-day period prior to the filing of a report on Form N-CSR.

3 Under the amendments, money market funds are permitted to forego providing portfolio schedules in shareholder reports altogether, provided that they include a complete portfolio holding schedule in the fund’s semi-annual filing on Form N-CSR and provide a complete schedule to shareholders upon request, free of charge.

4 The SEC also adopted conforming amendments to clarify that these categories are required to be used in the complete portfolio schedule, in lieu of the current required categories.

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