December 17, 2004
Keith O`Connell, Esquire
Securities & Exchange Commission
Division of Investment Management
450 Fifth Street, N.W.
Washington, D.C. 20549
Re:T. Rowe Price Capital Appreciation Fund
T. Rowe Price Capital Appreciation Fund-Advisor Class
File Nos.: 033-05646/811-4519
Post-Effective Amendment No.: 21
T. Rowe Price Capital Opportunity Fund, Inc.
T. Rowe Price Capital Opportunity Fund-Advisor Class
T. Rowe Price Capital Opportunity Fund-R Class
File Nos.: 033-56015/811-07225
Post-Effective Amendment No.: 11
T. Rowe Price Real Estate Fund, Inc.
T. Rowe Price Real Estate Fund-Advisor Class
File Nos.: 333-36137/811-08371
Post-Effective Amendment No.: 10
T. Rowe Price Short-Term Bond Fund, Inc.
T. Rowe price Short-Term Bond Fund-Advisor Clas s
File Nos.: 002-87568/811-3894
Post-Effective Amendment No.: 32
Dear Mr. O`Connell:
Below are our responses to your December 9, 2004 oral comments (other than Prospectus Comments #3 and 8) on the Post-Effective Amendments listed above, which were filed on October 25, 2004. If at all possible, we would appreciate receiving your comments by close of business on December 21, 2004.
Prospectuses
Comment #1:
In the footnote to table 2, fees and expenses of the class, a fee waiver reimbursement can not be more than three years.
Response:
The fee waiver reimbursement periods for the funds will not exceed three years. The disclosure in the footnotes to the table will be changed as follows: "... no reimbursement will be made more than three years after any waiver or payment".
Comment #2:
The chart under the subheading, "Contingent Redemption Fee" should include Real Estate Fund-Advisor Class in the applicable prospectuses.
Response:
We have added the contingent redemption fee and holding period for the Real Estate Fund-Advisor Class to the Contingent Redemption Fee chart.
Comment #3:
In the last paragraph under the subheading, "Transactions not subject to redemption fees", you sate that some transactions are n ot motivated by short-term trading considerations and, therefore, may be exempt from the redemption fee policy subject to prior written approval by designated persons at T. Rowe Price. Please clarify. Timing would be defined as buying and selling on a particular date or during a period of time. The rule states that you have to describe with specificity any exceptions (exemptions), and if there are any arrangements including timing, you must disclose the persons allowed to do it and when.
Response:
To be supplied in a future response.
Comment #4:
The footnote to items 3, 4, 7, and 8 under the subheading, "Transactions not subject to redemption fees" states that subsequent exchanges of these shares into funds that assess redemption fees will be subject to the fee. Please clarify this statement.
Response:
This statement clarifies that shares purchased by payroll contributions or other transactions that are exempt from the fee will be subject to the fee if they are subsequently exchanged into a redemption fee fund. The following example outlines this point:
1/10/05: Participant has a payroll contribution into the T. Rowe Price International Stock Fund (ISF), a redemption fee fund;
2/10/05: Participant exchanges out of ISF into the T. Rowe Price High Yield Fund (HYF), a redemption fee fund, and is not charged a redemption fee on the ISF shares because these shares were purchased through payroll deduction;
3/10/05: Participant exchanges out of HYF and is charged a fee because the shares exchanged into HYF are subject to the fee since they were purchased by exchange (even though the shares were originally purchased by payroll contribution in ISF).
Comment #5:
The last sentence of the first paragraph under the subheading, "Excessive Trading and Market Timing" states that purchase transactions placed by such persons are subject to rejection or cancellation without notice. Explain what is meant by "cancellation without noti ce". If this the same as what is intended by item (4) in Rights Reserved by the Funds? If this cancellation occurs after the fact, describe the legal basis for doing this.
Response:
The funds reserve the right to cancel without notice a trade that violates the funds` excessive trading policy. The attached memo from fund counsel, Shearman & Sterling, provides the legal basis for our position.
Comment #6:
In the first bullet under the subheading, "Excessive Trading and Market Timing", you state: All persons purchasing shares held directly with a T. Rowe Price fund, or through a retirement plan for which T. Rowe Price serves as recordkeeper, who make more than one "round trip" (i.e., one purchase and one sale or one sale and one purchase) involving the same fund within any 90-day calendar period will violate the policy. Please explain to the staff what is meant by more than one round trip? An investor could argue that more than one round trip means two round trips and that "one purchase and one sale or one sale and one purchase" does not qualify as two round trips, but only one trip and a half. Clarify.
Response:
We will remove the term "round trip". The policy permits one purchase and one sale or one sale and one purchase. The sentence will read as follows:
"All persons purchasing shares held directly with a T. Rowe Price fund, or through a retirement plan for which T. Rowe Price serves as recordkeeper, who make more than one purchase and one sale or one sale and one purchase involving the same fund within any 90-day calendar period will violate the policy."
Comment #7:
The fifth paragraph under the subheading, "Excessive Trading and Market Timing" states that payroll contribution, withdrawals, and loan transactions of retirement plan participants are exempt from the policy. Supplementally explain to the staff why retirement plans are exempt.
Response:
Certain types of retirement plan purchases are exempt from the fee, such as purchases made by payroll contributions, loan repayments, etc. These transactions are exempt because they are not conducive to market timing. Payroll contributions are scheduled payments made by the participant`s employer (e.g., on the 15th and 30th) and, therefore,
cannot be used to time the market. Purchases by exchange in a retirement plan are subject to the fee and, therefore, if the participant subsequently exchanges these shares into a redemption fee fund, the shares will be subject to the fee (see explanation in response to Comment #4 above).
Comment #8:
The sixth paragraph under the subheading, "Excessive Trading and Market Timing" states some transactions are not motivated by short-term trading considerations and, therefore, may be exempt from the excessive trading policy subject to prior written approval by designated persons at T. Rowe Price. When there are exceptions, you must describe these with specificity.
Response:
To be supplied in a future response.
Comment #9:
The second sentence in the paragraph under the subheading, "Disclosure of Fund Portfolio Information" states that up to five percent of the fund`s holdings may be omitted from the portfolio list. Supplementally explain to the staff why this is okay.
Response:
The omission of 5% of a fund`s portfolio is based on footnote 1 to Rule 12-12 of Regulati on S-X which states:
"Each issue shall be listed separately: provided, however, that an amount not exceeding five percent of the total of Column C (value of each item at close of period) may be listed in one amount as "Miscellaneous securities," provided the securities so listed are not restricted, have been held for not more than one year prior to the date of the related balance sheet, and have not previously been reported by name to the shareholders of the person for which the schedule is filed or to any exchange, or set forth in any registration statement, or annual report or otherwise made available to the public."
Statement of Additional Information
Comment #1:
Who are the members of the steering committee that determines when disclosure of portfolio holdings will be made [Form N-1A Item 11(f)(1)(i)]?
Response:
Each steering committee is comprised of senior investment management personnel of
T. Rowe Price Associates, Inc. or T. Rowe Price International Inc., as applicable. The
committee as a whole determines the funds` policy on selective disclosure. We have added similar language to the SAI.
Comment #2:
Are portfolio holdings disclosed to ratings or rankings agencies [Form N-1A Item 11(f)(1)(i)]?
Response:
We have added references to rating and ranking organizations to the SAI.
Comment #3:
Confirm to the staff supplementally, are there any restrictions on use of portfolio information that have been provided to the press, shareholders, or potential shareholders [Form N-1A Item 11(f)(1)(ii)]?
Response:
Other than in connection with persons who receive portfolio holdings under a non-disclosure agreement, there are no restrictions on the use of portfolio holdings information disclosed to any person.
Comment #4:
Confirm to staff supplementally, are t here any policies with the respect to the receipt of compensation by the fund, the adviser, or any other party in connection with the providing information [Form N-1A Item 11(f)(1)(iv)]?
Response:
Yes. Our policy states that we will not accept compensation for providing portfolio holdings to a nyone.
Comment #5:
What are the procedures that the fund uses to ensure that the disclosure of portfolio holdings is in the best interests of fund shareholders, including the procedures to address conflict of interests of the fund shareholders, on the one hand, and the fund`s investment advise r, principal underwriter, or their affiliated person, on the other hand [Form N-1A Item 11(f)(1)(vi)]?
Response:
The steering committees determine what and when information is disclosed. The disclosure of information that could reasonably be viewed as harmful to the funds will not be disclosed . Under this policy, we do not believe there is a conflict of interest.
Comment #6:
Does the Board exercise oversight over the disclosure of portfolio securities other than just approving policies as described in the first SAI paragraph? If so, describe. [Form N-1A Item 11(f)(1)(vii)].
Response:
The Board has approved the policy and it will be administered by T. Rowe Price. We have added language concerning the role of the Board to the SAI.
Comment #7:
In the penultimate paragraph of the SAI disclosure, names of proxy voting services, third parties providing analytical systems and pricing services, and other persons who provide systems or software support in connection with fund operations must be provided if there is an ongoing arrangement to disclose portfolio holdings to these entities [Form N-1A Item 11(f)(2)].
Response:
We have added a table listing the names of proxy voting services, third parties providing analytical systems and pricing services, and other persons who provide systems or software support in connection with fund operations. The names of these persons and the services they provide are set forth in the "Disclosure of Fund Portfolio Information" section of the SAI under the subheading, "Fund Service Providers".
Comment #8:
Are there any procedures in place to monitor the use of portfolio holdings information provided pursuant to the ongoing arrangements described [Form N-1A Item 11(f)(1)(ii) via Rule 11(f)(2)]?
Response:
There is a non-disclosure agreement in effect for each service provider that restricts the use of portfolio holdings information by the service provider. We have added the following sentence to the end of the penultimate paragraph: "T. Rowe Price relies on these non-disclosure agreements in determining that such disclosures are not harmful to the funds."
Comment #9:
If the fund intends to take advantage of the exception in Instruction 3 to Form N-1A Item 11(f)(2), website disclosure, the information must remain on the website until the fund files its Form N-CSR or NQ for the period that includes the date as of which the website information is current. The SAI disclosure indicates that the top ten portfolio holdings information will be replaced each month. [Instruction 3b to Form N-1A Item 11(f)(2)].
Response:
We believe the cited exception applies to disclosure of the full portfolio (which corresponds to the NQ) and we are maintaining each calendar quarter portfolio listing for a period of one year. Top 10 holdings are supplemental information and a requirement to maintain this information for two or three additional months is unnecessary. Further, the staff`s position also raises the issue of whether a similar requirement would apply to disclosure of even a few fund holdings such as the top three sales and purchases or the five best and worst performers. Such disclosures are common in fund sales materials.
Very truly yours,
/s/Tawanda Cottman
Tawanda Cottman
In connection with responding to your comments, T. Rowe Price acknowledges that:
the fund is responsible for the adequacy and accuracy of the disclosure in the filings;
staff comments or changes to disclosure in response to staff comments in the filings reviewed by the staff do not foreclose the Commission from taking any action with respect to the filing; and
the fund may not assert staff comments as a defense in any proceedings initiated by the Commission or any person under the federal securities laws of the United States.
/s/Henry H. Hopkins
_______________________________
Henry H. Hopkins
Vice President,
T. Rowe Price Capital Appreciation Fund
T. Rowe Price Capital Opportunity Fund, Inc.
T. Rowe Price Real Estate Fund, Inc.
T. Rowe Price Short-Term Bond Fund, Inc.
Shearman & Sterling llp
December 9, 2004
Memorandum To:
| Forrest Foss, Esq.
|
From:
| Joel H. Goldberg
Jennifer E. Berman
|
|
|
I. Introduction and Background
T. Rowe Price Associates Inc. ("TRP") has implemented a number of procedures to protect shareholders in its registered open-end investment companies ("Funds") against excessive trading (including market timing) or fraudulent or other abusive practices. As part of these procedures, TRP has measures in place to pre-screen purchase orders in order to identify potential shareholders who might be planning to engage in such undesirable practices before the purchase is made. It is not alw ays possible, however, to identify a potentially troublesome purchase order before it is processed. For this reason, TRP adopted a policy for its Funds allowing them to cancel or rescind any purchase or exchange within five business days of the trade or if the written confirmation has not been received by the shareholder, whichever is sooner (the "Cancellation Policy"). In furtherance of this policy, most of the Fund prospectuses contain the following disclosure:
"The fund and its agents reserve the right toxc9 refuse any purchase order; to cancel or rescind any purchase or exchange (for example, if an account has been restricted due to excessive trading or fraud) upon notice to the shareholder within five business days of the trade or if the written confirmation has not been received by the shareholder, whichever is sooner; to freeze any account and suspend account services when notice has b een received of a dispute between the registered or beneficial account owners or there is reason to believe a fraudulent transaction may occur, to otherwise modify the conditions of purchase and any services at any time; or to act on instructions believed to be genuine."
You have asked us whether the Cancellation Policy described above is permissible under the Investment Company At of 1940 (the "Act"). For the reasons set out below, we believe that it is.
II. Applicable Law
Section 22(c) of the Act states, in part, that "The Commission may make rules and regulations applicable to registered investment companies and to principal underwriters of, and dealers in, the redeemable securities of any registered investment company, whether or not members of any securities association, to the same extent, covering the same subject matter, and for the accomplishment of the same ends as are prescribed in subsection (a) of this section in respect of the rules which may be made by a registered securities association governing its members."1
Rule 22c-1 under the Act states, in part, that: "No registered investment company issuing any redeemable security, no person designated in such issuer's prospectus as authorized to consummate transactions in any such security, and no principal underwriter of, or dealer in, any such security shall sell, redeem, or repurchase any such security except at a price based on the current net asset value of such security which is next computed after receipt of a tender of such security for redemption or of an order to purchase or sell such security."2
Section 22(e) of the Act states, in part, that "no registered investment company shall suspend the right of redemption, or postpone the date of payment or satisfaction upon redemption of any redeemable security in accordance with its terms for more than seven days after the tender of such security to the company or its agent designated for that purpose for redemption."3
III. Legal Analysis
Sections 22(c) and 22(e) and the rules thereunder address concerns that arise out of the purchase and sale of securities. While 22(e) requires that Funds honor all redemption requests (except in certain limited circumstances), nothing in the Act or the rules thereunder requires a Fund to accept all purchase requests. Nor is there anything in the Act or rules restricting a Fund from canceling or rescinding a purchase offer as described in the Cancellation Policy. Moreover, as explained below the purposes behind the Cancellation Policy are consistent with and further the purposes behind relevant provisions of the Act.
Rule 22c-1 was adopted for the purpose of eliminating or reducing, so far as reasonably practicable, any dilution of the net asset value of long-term shareholders.4 Another purpose of Rule 22c-1 is, "to eliminate or reduce so far as reasonably practicable other results, aside from dilution, which arise from the sale, redemption, or repurchase of
securities of registered investment companies and which are unfair to the holders of such outstanding securities."5 The ability to reject purchase orders is obviously an important tool to help a Fund defend against unfair trading practices which can lead to the dilution that Rule 22c-1 was designed to prevent. You have informed us, however, that in some circumstances persons who have improper intentions in purchasing shares of a Fund, such as an intent to market-time the Fund or to use it for money laundering might be difficult to detect. Such persons might switch names, create new accounts, or trade through intermediaries. In such cases, it might take a few days for TRP to identify a potentially troublesome purchase order. Canceling or rescinding such purchase orders allows TRP to prevent the dilution to other shareholders which might otherwise occur, thus furthering the purposes behind Section 22(c) and Rule 22c-1. The ability to protect the Fund by rejecting a purchase order would be illusory to the extent that a final decision whether to do so had to be made before TRP had the information necessary to make such a decision.
Recent events have focused particular attention on the harm to mutual fund shareholders that can result from excessive trading practices that a re otherwise abusive or fraudulent. In this connection, the Securities and Exchange Commission ("SEC") earlier this year adopted amendments to Form N-1A requiring open-end management investment companies to disclose in their prospectuses both the risks to shareholders of frequent purchases and redemptions of investment company shares, and the investment company`s policies and procedures with respect to such frequent purchases and redemptions.6 In t he absence of any explicit prohibition in the Act against rescinding or canceling purchase orders within a reasonable period of time, it would not be sensible to believe that such a prohibition is implied in the Act given that it would tend to frustrate much of the purpose underlying both Rule 22c-1 and the recent amendments to N-1A.
Importantly, the legality of the TRP Cancellation Policy has been previously addressed by the SEC staff. On May 1, 1998 the SEC staff responded to a complaint from a shareholder whose purchase had been rescinded when he placed a large purchase order on one day, then sought to redeem the shares the next day. In its response (a copy of which is attached), the SEC staff stated its belief that the Fund had acted within the scope of its stated policy and the Act when it rescinded the shareholder`s purchase of Fund shares.
IV. Conclusion
For the reasons set out above, we believe that a Fund and its agents may reserve the right to cancel or rescind any purchase or exchange offer upon notice to the shareholder within five business days of the trade or if the written confirmation has not been received by the shareholder, whichever i s sooner. Please contact either of us if we can be of any further assistance.
1 See Section 22(c). Section 22(a) deals with rules relating to minimum and maximum prices for purchases and sales of securities from an investment company.
2 See Rule 23c-3 under the Act. The rule does goes on to state further provisions which are beyond the scope of this memorandum.
3 See Section 22(e) of the Act. The section does allow for certain exceptions which are beyond the scope of this memorandum.
4 See Investment Company Release No. 34-8340 (June 25, 1968).
5 Id.
6 See Investment Company Release No. 33-8408 (April 19, 2004).
United States
Securities and Exchange Commission
Washington, DC 20549
DIVISION OF
INVESTMENT MANAGEMENT
May 1, 1998
Mr. Carl V. Schuman
280 Rector Place, Apartment 7N
New York, New York 10280
Dr. Mr. Schuman:
This will respond to your letter addressed to the Securities and Exchange Commission`s Consumer Affairs Specialist, Philadelphia District Offi ce.1 That Office referred your letter to the Commission`s Division of Investment Management, the Division primarily responsible for the regulation and oversight of investment companies and investment advisers.
You state that on October 28, 1997, you purchased shares in the T. Rowe Price New Asia Fund (the "Fund"), and on October 29, 1997, you sold these shares. You state that your net profits, after commissions, from these trades was $34,564.68.
Your letter continues to explain that after you had phoned in the sale of the Fund securities, you were informed by your broker that the Fund had decided to reject your previous day`s purchase. As a result, your broker informed you that both your purchase and sale orders were being canceled. You have requested our assistance in restoring your trades because you believe that the Fund`s actions were "extreme, unfair, and ultimately in violation of the spirit of its own policy."
The Investment Company Act of 1940 requires a mutual fund, such as the Fund, to honor redemption requests, except in certain very limited circumstances. See Section 22(e) of the Investment Company Act. The Investment Company Act does not, however, require a fund to accept all purchase requests. Although a fund may adopt policies requiring it to accept some or all investors, based on the information that you have provided us, we are unable to conclude that the Fund has done this. To the contrary, the language of the prospectus that you have provided us unambiguously states, in relevant part, that the "fund and its agents reserve the right to. . . refuse any purchase order."
The prospectus also states that the fund and its agents reserve the right to "cancel or rescind any purchase or exchange (for example, if an account has been restricted due to excessive trading or fraud)." The language in the parenthesis is an example. Therefore, that language does not, in our view, require the Fund to restrict an account before it may cancel or rescind a purchase for excessive trading or fraud.
On the basis of the material you have provided us, we believe that the Fund acted within the scope of its stated policy and the Investment Company Act. If the Fund made other representations to you, you may want to consult with a lawyer. We are not, however, able to advise you in this regard. Thank you for writing to us.
Sincerely,
/s/Edward J. Rubenstein
Edward J. Rubenstein
Senior Special Counsel
Office of Chief Counsel
cc:Forrest R. Foss, T. Rowe Price
Merri Jo Gillette, Philadelphia District Office
1 I also note that we spoke over the telephone about this matter on January 16, 1998.
