1.

Diversity in practice has arisen in implementing these requirements, with some concluding that the presentation of capital under existing Regulation S-X requirements complies with the Audit Guide until such time as Regulation S-X is amended. In general, we believe a registered fund should disclose disclosure of material book/tax differences in components of both capital and distributions, including some quantitative information about those differences.

The extent of quantitative disclosure of material book/tax differences is flexible. At present, Regulation S-X only requires, for example, the presentation of aggregate tax cost, but not the sources of differences from book cost. Similarly, current disclosures of ROC SOP reclassifications typically present only the aggregate amounts of reclassifications by capital component, not amounts by individual cause. In many cases, it may be sufficient merely to provide the aggregate tax-basis amounts of undistributed ordinary income and long-term gains, as the aggregate book/tax differences will be obvious from the differences between these amounts and S-X-based "undistributed net investment income" and "accumulated realized gains". Further detail may be helpful in a number of circumstances, such as:

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Disclosure of aggregate book/tax differences caused by the reclassification of short-term and foreign currency gains to ordinary income, compared to differences caused by unreversed timing differences;

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Disclosure of gross book/tax differences when major differences offset each other;

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Disclosure that several differences each had a relatively equal impact on aggregate book/tax differences when no one difference can be qualitatively stated to have been the principal cause.

However, we recognize the diversity of opinion on the issue, to a large degree resulting from the conflicting Regulation S-X requirements. We also recognize that the Regulation S-X requirements alone provide a degree of detailed disclosure which is useful to investors. As a result, while we believe quantitative disclosure should be included,qualitative disclosure (i.e., narrative, without numbers) of material book/tax differences is acceptable under GAAP as a minimum level of disclosure. We believe it would be inappropriate to entirely exclude disclosure of material book/tax differences when they exist, as readers could reasonably interpret the absence of disclosure to signify an absence of book/tax differences.

If no material book/tax differences exist, we believe that it is acceptable to merely include a statement to that effect in the footnotes to the financial statements, in addition to the tax-basis disclosures previously mandated by Regulation S-X and existing GAAP.

2.

For funds that support variable annuity/insurance contracts, we recognize that periodic distributions are irrelevant to the ultimate investor and, as such, information on tax components of capital is of limited use. As noted, we believe that GAAP requires such presentation in all investment company financial statements, and do not believe that any class of investment companies may automatically omit it. However, we also believe that qualitative materiality considerations may be approximately weighted more heavily for funds supporting variable insurance products, consistent with the qualitative considerations of SEC Staff Accounting Bulletin No. 99: Materiality (SAB 99).

3.

The characterization of distributions in excess of current year net investment income or realized gains as an "excess" distribution under ROC SOP is no longer required for SEC-registered funds. Further, funds may collapse "in excess" distributions into their related source (i.e., net investment income or realized gains) for prior years.

4.

The Audit Guide continues the required reclassification within the investment company's capital accounts of permanent book/tax differences, generally to paid-in capital. Thus, the only difference between ROC SOP and the Audit Guide is that there is no specific requirement to reclassify originating timing differences. Some have read these reclassifications to be required at the close of each fiscal year, while others believe that they may only be recorded when distributions related to the fiscal year are made. While we can accept the latter position, we believe all book/tax adjustments should be recorded at the close of the fiscal year in order to maintain consistency within the components of capital for financial reporting and tax purposes and avoid complex book/tax reconciliations involving prior-year differences.

5.

Different book and tax year-ends. If a fund’s tax year-end differs from its book year-end, it may present tax-based components of capital as of its most recently completed tax year-end. The fund may, but is not required to, disclose significant changes in capital (i.e., income, gains and distributions) occurring between the tax and book year-ends. If the difference between the two year-ends is substantial, it may be more advisable to identify these changes.

6.

Master-feeder funds. While the effects of timing differences originating at the master will appear in feeder financial statements through their proportionate effect on the feeders’ taxable income (and thus the feeders’ tax-basis components of capital), their reversal could impact the feeders in different proportions based on future allocations. We do not believe that the reversal of these differences should be allocated to the feeders for reporting purposes. Instead, the master financial statements should disclose the cause of material unreversed timing differences (most are likely to appear in the difference between the master’s book and tax-basis cost of investments) and note in a general manner that their effect on the feeders will depend on the proportions of the master held by each feeder at the time of their reversal.

7.

Tax equalization. Some funds recognize "deemed distributions" through equalization for tax purposes. We do not believe that equalization should be reported as a distribution in the footnote disclosure of tax-based distributions. Rather, it should be considered a permanent book/tax difference, with the amount of equalization reclassified as an increase to paid-in capital.

8.

The reporting of components of capital does not apply, either to registered or unregistered funds that are taxed not as investment companies but as partnerships. In these cases, of course, "distributions" and "undistributed income (or gains)" have no meaning, since each investor is taxed on an allocated share of tax items, regardless of when (or even if) any distributions are made.

9.

Semi-annual financial statements. We do not believe that tax-basis components of capital need to be updated for presentation in semi-annual financial statements. We believe that either the prior year-end disclosure may be repeated (similar to current presentation of capital loss carryforwards), or quantitative disclosure may be omitted entirely. (Under Regulation S-X, disclosure of the tax cost of investments at the semi-annual date continues to be required, however).

ROC SOP did not require full designation of the tax character of distributions in interim financial statements, but required disclosure that a return of capital distribution is likely to occur if management has determined such to be the case. We believe that such disclosure continues to be appropriate, and the SEC staff informally expressed this view in 2004 as well. While the relationship between this disclosure and the notices required to accompany distributions under Section 19 of the 1940 Act is unclear, we believe that, at a minimum, any fund that concludes such disclosure is required in semi-annual financial statements should carefully review with us and legal counsel the need for including parallel disclosure with all subsequent distributions under Section 19. Further, we believe clients should include such disclosure with distributions as soon as they first believe a return of capital is likely, and not rely on the semi-annual report to provide shareholders with their first notice of a potential redesignation. An enforcement action settled by the SEC in 2006 included the observation that a return of capital for Section 19 purposes should be computed based on the fund's undistributed income and gains at the time of the distribution, and should not necessarily consider estimated income and gains for the remainder of the fiscal year.

1.

the period-end tax cost of investments (as already required by Regulation S-X), and

2.

disclosure of the tax-based components of capital at period-end required under ASC 946-20-50-11 with a brief explanation of other significant book/tax differences.