SEC Company Response from PACIFIC SELECT FUND (CIK 0000813900) — Apr 17, 2020
PACIFIC SELECT FUND (CIK 0000813900)
Date: April 17, 2020 · CIK: 0000813900 · Accession: 0001104659-20-048260
AI Filing Summary & Sentiment
File numbers found in text: 811-05141
Referenced dates: July 26, 2019, September 9, 2019
Letter
VIA EDGAR Division of Investment Management 100 F Street, NE Washington, D.C. 20549 RE: Pacific Select Fund File Nos. 033-13954 and 811-05141
Dear Mr. Cowan:
This letter is being provided in response to comments received from the U.S. Securities and Exchange Commission (“SEC” or the “Commission”) staff (“Staff”) on March 11, 2020, concerning post-effective amendment No. 143 to the registration statement of Pacific Select Fund (“Registrant”) on Form N-1A (including the Prospectuses (“Prospectus”), Statement of Additional Information (“SAI”) and Part C), which was filed with the Commission on February 3, 2020 pursuant to Rule 485(a) under the Securities Act of 1933 on behalf of each series of Registrant (a “Fund”). Set forth in the numbered paragraphs below are the Staff’s comments followed by Registrant’s responses.
Prospectus Comments
General Comments (as applicable)
1. Comment: Principal Risks: Currently, principal risks appear in alphabetical order, separated into two risks categories. Please reorder the risks to prioritize those that are most likely to adversely affect the Fund’s net asset value, yield and total return. In addition, please delete the introductory paragraph to the “Principal Risks” section regarding the separation of “key principal risks” and “other principal risks” as it is the position of the Staff that separating risks by key risks and other principal risks is not permitted or required by Form N-1A for the summary.
Response: Registrant notes that there is no regulatory directive under either Item 4 or Item
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9 of Form N-1A stating that principal risks cannot be in alphabetical order or separated into categories, and Registrant believes its current approach is consistent with plain English principles and provides a clear and reliable roadmap of each Fund’s principal investment risks. The Staff previously provided comments for Registrant’s companion trust (see letter dated July 26, 2019) whereby the Staff requested the most significant risks to a Fund be listed first. In addition, U.S. SEC Division of Investment Management, Disclosure Review and Accounting Office, Accounting and Disclosure Information ADI 2019-08 – Improving Principal Risks Disclosure, dated September 9, 2019 (“ADI 2019-08”) states that the SEC staff recognizes that ordering risks is a subjective determination and that “the staff believes that funds are best positioned to make these judgments of relative importance, and we would not generally expect to comment on a fund’s ordering of risks by importance.” However, in light of the current comment, Registrant will amend the introductory paragraphs, remove the “two-tier” principal risk structure and accordingly the risk section will not be in alphabetical order.
2. Comment: Principal Risks – Debt Securities Risk: Please explain why the cross-referenced risks of Market and Regulatory Risk, Price Volatility Risk and Liquidity Risk were deleted.
Response: With respect to the cross-referenced Market and Regulatory Risk and Price Volatility Risk, they are now listed under the section regarding information on ancillary risks. These edits are the result of prior Staff comments to only list Fund-specific principal risks and to designate other risks as “ancillary risks” and move them to a separate section of the prospectus. In addition, the previous referenced ADI 2019-08 discusses that a fund should tailor its specific risk disclosures. The removal of the cross-referenced Liquidity Risk from the Debt Securities Risk was the result of an analysis by Registrant’s Liquidity Risk Management Program.
3. Comment: Principal Risks – Floating Rate Loan Risk: The Staff requests that this risk include an expanded discussion of covenant lite loan risk for any Fund that invests in such instruments.
Response: Registrant believes that its risk disclosure regarding covenant lite loans is adequate.
4. Comment: Principal Risks- Floating Rate Loan Risk: Please explain why disclosures regarding hierarchy and the potential lack of protections have been deleted. This disclosure is helpful to investors to understand why these concepts are a risk for the Funds.
Response: The language referenced is contained within the Item 9 disclosure for this risk. Prior Staff comments requested a “layered disclosure” approach in that the principal investment strategies and accordingly the principal risks in the Item 4 summary section of the prospectus (“Summary Sections”) should be based on the information given in response to Item 9 disclosure and should be a summary of that information. The Staff referenced IM Guidance Update No. 2014-08 “Guidance Regarding Mutual Fund Enhanced Disclosure”
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dated June 2014 (the “Guidance”), which states that the responses in both Items 4 and 9 disclosure should not be substantially the same or identical, as the Summary Section is intended to summarize key information with more detailed information presented elsewhere. In response to the prior Staff comments, Registrant shortened and tailored the risk descriptions in the Summary Sections and expanded in detail in the Item 9 disclosure. In addition, ADI 2019-08 discusses that a fund should tailor its specific risk disclosures, as the intent of the summary prospectus to “provide investors a concise summary of key information” and that “Funds should present more detailed information about their principal risks elsewhere in the prospectus.” Registrant believes that its Floating Rate Loan Risk disclosure is adequate.
5. Comment: Principal Risks – Mortgage-Related and Other Asset-Backed Securities Risk; Derivatives Risk: Regarding the cross-reference to the Item 9 disclosure for additional information, it is the Staff’s view that it is not appropriate to mention risks and not describe them fully within the Item 4 disclosure. All of the sub-risks mentioned should be briefly discussed here. Investors are only getting the summary prospectuses, so the summary needs to provide a full summary of all risks, without cross-reference to the statutory.
Response: As noted above, Registrant shortened and tailored the risk descriptions in the Fund Summaries section of the Prospectus (Item 4) by identifying the risk of the specific derivative(s) used by the Fund and then explaining the risk in detail in the Item 9 disclosure. In addition, ADI 2019-08 discusses that a fund should tailor its specific risk disclosures, as the intent of the summary prospectus to “provide investors a concise summary of key information” and that “Funds should present more detailed information about their principal risks elsewhere in the prospectus.” Form N-1A notes that cross referencing with a prospectus is allowed and is useful when it assists investors in understanding the information presented – see General Instruction C.2.(a) of Form N-1A. Registrant believes that its current Mortgage-Related and Other Asset-Backed Securities Risk and Derivatives Risk disclosure is adequate.
6. Comment: Principal Risks – Liquidity Risk: Please explain why disclosures regarding meeting redemptions have been deleted or restore the language.
Response: Registrant will revert this edit.
7. Comment: Principal Risks – Sector Risk: With respect to Registrant’s prior responses that Sector Risk is included for each Fund that has 25% or more of its net assets invested in any one sector as of its most recent fiscal year end, as reflected in the annual shareholder report, in the Staff’s view this is not an appropriate response. If a Fund invests more than 25% in a particular sector, then that Fund is concentrated, and as a result the specific sector needs to be identified and risks applicable to such sector must be included. Please also confirm that for each such Fund, the fundamental policy of that Fund permits concentration.
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Response: The Funds that have a Sector Risk do not have a policy to concentrate in securities of issuers in a particular “industry or group of industries” by investing more than 25% of its assets in any particular industry or group of industries pursuant to Item 4(a) and Instruction 4 of Item 9(b) of Form N-1A. In the Schedule of Investments section of the shareholder report, Registrant breaks out the holdings of each Fund by broad market sectors. Each such sector may encompass many industries. For example, “Financials” is a broad market sector that contains such industries and groups of industries as Banks, Diversified Financial Services, Insurance, Thrifts & Mortgage, Consumer Finance, and Capital Markets. Sector therefore is much broader than an “industry” as used in a Fund’s concentration policy.
In response to prior Staff comments, Sector Risk is included in the Fund Summaries section of the Prospectus for each Fund that has 25% or more of its net assets invested in any one sector as of its most recent fiscal year end, as reflected in the annual shareholder report. Other than the Real Estate, Technology and Health Sciences Portfolios (the “Concentrated Funds”), these Funds do not have a principal investment strategy to focus their investments in any particular industry or group of industries for any given period of time. Although a Fund may have more than 25% of its assets invested in a particular sector at a discrete point in time, the exposure could fall below 25% shortly thereafter. As such, the exposure of these Funds to any particular sector is not intended to be fixed for an extended period of time. Registrant believes that because any prospectus disclosure added to identify a particular sector and related risk to which a Fund other than the Concentrated Funds has significant exposure as of its most recent fiscal year end, a discrete point in time, could become inapplicable shortly thereafter, the disclosure might be misleading or confusing to investors as it sets an expectation that a principal investment strategy of that Fund is to invest in the identified sector(s) above a 25% threshold. Accordingly, Registrant believes that its current Sector Risk disclosure is appropriate and respectfully declines to make the requested change
8. Comment: Rule 35d-1 – Derivatives: In response to prior Staff comment indicating that the valuation of derivatives counted towards a Fund’s 80% policy should be market value, Registrant noted that such Funds take into account the economic exposure created by those derivatives when calculating compliance with Rule 35d-1 or “Names Rule” of the Investment Company Act of 1940. The Staff notes that the Rule 35d-1 policy is based on net assets, and not an exposure test, so derivatives must be valued at market values if counted towards the 80% test. Please add disclosure to this effect.
Response: While the SEC stated in adopting Rule 35d-1 that the Rule “would permit an investment company to include a synthetic instrument in the 80% basket if it has economic characteristics similar to securities included in that basket,” the SEC did not define how economic exposure created by synthetic instruments (such as derivatives) should be measured for these purposes. Accordingly, Registrant has determined that it would be appropriate to use the gross market value or notional value of derivatives for purposes of calculating compliance with the Fund’s 80% test.
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In addition, Registrant notes that Form N-1A does not require disclosure of the value that a Fund will use to measure synthetic exposure for purposes of a Fund’s 80% test, and it is not generally industry practice to do so.
Registrant notes that the Commission recently published a release requesting comments on Rule 35d-1, including this specific topic on methodologies for valuing derivates for a fund’s 80% test. See SEC Release No. IC-33809, File No. S7-04-20, Request for Comments on Fund Names, dated March 2, 2020 (the “Names Test Release”). In the Names Test Release, the Commission notes that funds generally use market value for valuing derivatives, but that many funds have asserted that a derivative’s notional value would be more appropriate for purposes of complying with the 80% test. Registrant believes that its current disclosure is adequate and looks forward to future rulemaking for regulatory guidance on this topic.
9. Comment: Principal Risks – Geographic Focus Risk: The Staff reiterates its prior comment that a Fund that includes a Geographic Focus Risk should be specific as to the geographic region(s) that present this risk.
Response: The Funds that include Geographic Focus Risk do not have a principal investment strategy to focus their investments in any particular geographic region(s) for any given period of time. Registrant believes that any prospectus disclosure added to identify a particular geographic region(s) and related risk(s) specific to that geographic region(s) as of a discrete point in time could become inapplicable shortly thereafter, the disclosure might be misleading or confusing to investors as it sets an expectation that a principal investment strategy of that Fund is to invest in the identified geographic region(s). Registrant observes that the Geographic Focus Risk paragraph states that “[i]f the Fund invests a significant portion of its assets in a single country, limited number of countries, or particular geographic region, then the risk increases that economic, political, social, or other conditions in those countries or that region will have a significant impact on the Fund’s performance,” and that “[a]s a result, the Fund’s performance may be more volatile than the performance of more geographically diversified funds.” In addition, for all international Funds, the top five risk exposures by country and their approximate percentage of the Fund’s net assets as of the most recent fiscal year end is disclosed in the Prospectus within the Form N-1A Item 9 disclosure. Each such Fund’s holdings are also identified by country of risk exposure in the schedule of investments in its annual and semi-annual shareholder reports. Accordingly, Registrant respectfully declines to make the requested change.
If a Fund expects to have more than 25% of its assets tied to one specific country of risk on an on-going and continuous basis, Registrant will consider the inclusion of a country-specific principal risk
10. Comment: Principal Risks – Industry Concentration: As applicable to Registrant’s passively managed funds that seek to track the return of a specific index (“Index Funds”), please disclose whether any of the applicable indices are concentrated in any industry or group of industries and if so, specify and add appropriate risk disclosure.
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Response: Registrant has reviewed the benchmark indices that each Index Fund seeks to track, and confirms that none of these indices were concentrated in any industry or group of industries as of the fiscal year ended December 31, 2019.
11. Comment: Principal Risks – Non-Diversified Risk: As applicable to the Index Funds, please revise this risk to include the following additional language: “and representing more than 10 percent of the outstanding voting securities of such issuer(s).”
Response: Registrant
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CORRESP 1 filename1.htm MARK KARPE Assistant Vice President, Counsel Office: (949) 219-3224 Fax: (949) 219-3706 E-mail: Mark.Karpe@PacificLife.com April 17, 2020 VIA EDGAR Mark Cowan, Esq. Senior Counsel U.S. Securities and Exchange Commission Division of Investment Management 100 F Street, NE Washington, D.C. 20549 RE: Pacific Select Fund File Nos. 033-13954 and 811-05141 Dear Mr. Cowan: This letter is being provided in response to comments received from the U.S. Securities and Exchange Commission (“SEC” or the “Commission”) staff (“Staff”) on March 11, 2020, concerning post-effective amendment No. 143 to the registration statement of Pacific Select Fund (“Registrant”) on Form N-1A (including the Prospectuses (“Prospectus”), Statement of Additional Information (“SAI”) and Part C), which was filed with the Commission on February 3, 2020 pursuant to Rule 485(a) under the Securities Act of 1933 on behalf of each series of Registrant (a “Fund”). Set forth in the numbered paragraphs below are the Staff’s comments followed by Registrant’s responses. Prospectus Comments General Comments (as applicable) 1. Comment: Principal Risks: Currently, principal risks appear in alphabetical order, separated into two risks categories. Please reorder the risks to prioritize those that are most likely to adversely affect the Fund’s net asset value, yield and total return. In addition, please delete the introductory paragraph to the “Principal Risks” section regarding the separation of “key principal risks” and “other principal risks” as it is the position of the Staff that separating risks by key risks and other principal risks is not permitted or required by Form N-1A for the summary. Response: Registrant notes that there is no regulatory directive under either Item 4 or Item Page 1 of 12 Pacific Select Fund – Response Letter April 17, 2020 9 of Form N-1A stating that principal risks cannot be in alphabetical order or separated into categories, and Registrant believes its current approach is consistent with plain English principles and provides a clear and reliable roadmap of each Fund’s principal investment risks. The Staff previously provided comments for Registrant’s companion trust (see letter dated July 26, 2019) whereby the Staff requested the most significant risks to a Fund be listed first. In addition, U.S. SEC Division of Investment Management, Disclosure Review and Accounting Office, Accounting and Disclosure Information ADI 2019-08 – Improving Principal Risks Disclosure, dated September 9, 2019 (“ADI 2019-08”) states that the SEC staff recognizes that ordering risks is a subjective determination and that “the staff believes that funds are best positioned to make these judgments of relative importance, and we would not generally expect to comment on a fund’s ordering of risks by importance.” However, in light of the current comment, Registrant will amend the introductory paragraphs, remove the “two-tier” principal risk structure and accordingly the risk section will not be in alphabetical order. 2. Comment: Principal Risks – Debt Securities Risk: Please explain why the cross-referenced risks of Market and Regulatory Risk, Price Volatility Risk and Liquidity Risk were deleted. Response: With respect to the cross-referenced Market and Regulatory Risk and Price Volatility Risk, they are now listed under the section regarding information on ancillary risks. These edits are the result of prior Staff comments to only list Fund-specific principal risks and to designate other risks as “ancillary risks” and move them to a separate section of the prospectus. In addition, the previous referenced ADI 2019-08 discusses that a fund should tailor its specific risk disclosures. The removal of the cross-referenced Liquidity Risk from the Debt Securities Risk was the result of an analysis by Registrant’s Liquidity Risk Management Program. 3. Comment: Principal Risks – Floating Rate Loan Risk: The Staff requests that this risk include an expanded discussion of covenant lite loan risk for any Fund that invests in such instruments. Response: Registrant believes that its risk disclosure regarding covenant lite loans is adequate. 4. Comment: Principal Risks- Floating Rate Loan Risk: Please explain why disclosures regarding hierarchy and the potential lack of protections have been deleted. This disclosure is helpful to investors to understand why these concepts are a risk for the Funds. Response: The language referenced is contained within the Item 9 disclosure for this risk. Prior Staff comments requested a “layered disclosure” approach in that the principal investment strategies and accordingly the principal risks in the Item 4 summary section of the prospectus (“Summary Sections”) should be based on the information given in response to Item 9 disclosure and should be a summary of that information. The Staff referenced IM Guidance Update No. 2014-08 “Guidance Regarding Mutual Fund Enhanced Disclosure” Page 2 of 12 Pacific Select Fund – Response Letter April 17, 2020 dated June 2014 (the “Guidance”), which states that the responses in both Items 4 and 9 disclosure should not be substantially the same or identical, as the Summary Section is intended to summarize key information with more detailed information presented elsewhere. In response to the prior Staff comments, Registrant shortened and tailored the risk descriptions in the Summary Sections and expanded in detail in the Item 9 disclosure. In addition, ADI 2019-08 discusses that a fund should tailor its specific risk disclosures, as the intent of the summary prospectus to “provide investors a concise summary of key information” and that “Funds should present more detailed information about their principal risks elsewhere in the prospectus.” Registrant believes that its Floating Rate Loan Risk disclosure is adequate. 5. Comment: Principal Risks – Mortgage-Related and Other Asset-Backed Securities Risk; Derivatives Risk: Regarding the cross-reference to the Item 9 disclosure for additional information, it is the Staff’s view that it is not appropriate to mention risks and not describe them fully within the Item 4 disclosure. All of the sub-risks mentioned should be briefly discussed here. Investors are only getting the summary prospectuses, so the summary needs to provide a full summary of all risks, without cross-reference to the statutory. Response: As noted above, Registrant shortened and tailored the risk descriptions in the Fund Summaries section of the Prospectus (Item 4) by identifying the risk of the specific derivative(s) used by the Fund and then explaining the risk in detail in the Item 9 disclosure. In addition, ADI 2019-08 discusses that a fund should tailor its specific risk disclosures, as the intent of the summary prospectus to “provide investors a concise summary of key information” and that “Funds should present more detailed information about their principal risks elsewhere in the prospectus.” Form N-1A notes that cross referencing with a prospectus is allowed and is useful when it assists investors in understanding the information presented – see General Instruction C.2.(a) of Form N-1A. Registrant believes that its current Mortgage-Related and Other Asset-Backed Securities Risk and Derivatives Risk disclosure is adequate. 6. Comment: Principal Risks – Liquidity Risk: Please explain why disclosures regarding meeting redemptions have been deleted or restore the language. Response: Registrant will revert this edit. 7. Comment: Principal Risks – Sector Risk: With respect to Registrant’s prior responses that Sector Risk is included for each Fund that has 25% or more of its net assets invested in any one sector as of its most recent fiscal year end, as reflected in the annual shareholder report, in the Staff’s view this is not an appropriate response. If a Fund invests more than 25% in a particular sector, then that Fund is concentrated, and as a result the specific sector needs to be identified and risks applicable to such sector must be included. Please also confirm that for each such Fund, the fundamental policy of that Fund permits concentration. Page 3 of 12 Pacific Select Fund – Response Letter April 17, 2020 Response: The Funds that have a Sector Risk do not have a policy to concentrate in securities of issuers in a particular “industry or group of industries” by investing more than 25% of its assets in any particular industry or group of industries pursuant to Item 4(a) and Instruction 4 of Item 9(b) of Form N-1A. In the Schedule of Investments section of the shareholder report, Registrant breaks out the holdings of each Fund by broad market sectors. Each such sector may encompass many industries. For example, “Financials” is a broad market sector that contains such industries and groups of industries as Banks, Diversified Financial Services, Insurance, Thrifts & Mortgage, Consumer Finance, and Capital Markets. Sector therefore is much broader than an “industry” as used in a Fund’s concentration policy. In response to prior Staff comments, Sector Risk is included in the Fund Summaries section of the Prospectus for each Fund that has 25% or more of its net assets invested in any one sector as of its most recent fiscal year end, as reflected in the annual shareholder report. Other than the Real Estate, Technology and Health Sciences Portfolios (the “Concentrated Funds”), these Funds do not have a principal investment strategy to focus their investments in any particular industry or group of industries for any given period of time. Although a Fund may have more than 25% of its assets invested in a particular sector at a discrete point in time, the exposure could fall below 25% shortly thereafter. As such, the exposure of these Funds to any particular sector is not intended to be fixed for an extended period of time. Registrant believes that because any prospectus disclosure added to identify a particular sector and related risk to which a Fund other than the Concentrated Funds has significant exposure as of its most recent fiscal year end, a discrete point in time, could become inapplicable shortly thereafter, the disclosure might be misleading or confusing to investors as it sets an expectation that a principal investment strategy of that Fund is to invest in the identified sector(s) above a 25% threshold. Accordingly, Registrant believes that its current Sector Risk disclosure is appropriate and respectfully declines to make the requested change 8. Comment: Rule 35d-1 – Derivatives: In response to prior Staff comment indicating that the valuation of derivatives counted towards a Fund’s 80% policy should be market value, Registrant noted that such Funds take into account the economic exposure created by those derivatives when calculating compliance with Rule 35d-1 or “Names Rule” of the Investment Company Act of 1940. The Staff notes that the Rule 35d-1 policy is based on net assets, and not an exposure test, so derivatives must be valued at market values if counted towards the 80% test. Please add disclosure to this effect. Response: While the SEC stated in adopting Rule 35d-1 that the Rule “would permit an investment company to include a synthetic instrument in the 80% basket if it has economic characteristics similar to securities included in that basket,” the SEC did not define how economic exposure created by synthetic instruments (such as derivatives) should be measured for these purposes. Accordingly, Registrant has determined that it would be appropriate to use the gross market value or notional value of derivatives for purposes of calculating compliance with the Fund’s 80% test. Page 4 of 12 Pacific Select Fund – Response Letter April 17, 2020 In addition, Registrant notes that Form N-1A does not require disclosure of the value that a Fund will use to measure synthetic exposure for purposes of a Fund’s 80% test, and it is not generally industry practice to do so. Registrant notes that the Commission recently published a release requesting comments on Rule 35d-1, including this specific topic on methodologies for valuing derivates for a fund’s 80% test. See SEC Release No. IC-33809, File No. S7-04-20, Request for Comments on Fund Names, dated March 2, 2020 (the “Names Test Release”). In the Names Test Release, the Commission notes that funds generally use market value for valuing derivatives, but that many funds have asserted that a derivative’s notional value would be more appropriate for purposes of complying with the 80% test. Registrant believes that its current disclosure is adequate and looks forward to future rulemaking for regulatory guidance on this topic. 9. Comment: Principal Risks – Geographic Focus Risk: The Staff reiterates its prior comment that a Fund that includes a Geographic Focus Risk should be specific as to the geographic region(s) that present this risk. Response: The Funds that include Geographic Focus Risk do not have a principal investment strategy to focus their investments in any particular geographic region(s) for any given period of time. Registrant believes that any prospectus disclosure added to identify a particular geographic region(s) and related risk(s) specific to that geographic region(s) as of a discrete point in time could become inapplicable shortly thereafter, the disclosure might be misleading or confusing to investors as it sets an expectation that a principal investment strategy of that Fund is to invest in the identified geographic region(s). Registrant observes that the Geographic Focus Risk paragraph states that “[i]f the Fund invests a significant portion of its assets in a single country, limited number of countries, or particular geographic region, then the risk increases that economic, political, social, or other conditions in those countries or that region will have a significant impact on the Fund’s performance,” and that “[a]s a result, the Fund’s performance may be more volatile than the performance of more geographically diversified funds.” In addition, for all international Funds, the top five risk exposures by country and their approximate percentage of the Fund’s net assets as of the most recent fiscal year end is disclosed in the Prospectus within the Form N-1A Item 9 disclosure. Each such Fund’s holdings are also identified by country of risk exposure in the schedule of investments in its annual and semi-annual shareholder reports. Accordingly, Registrant respectfully declines to make the requested change. If a Fund expects to have more than 25% of its assets tied to one specific country of risk on an on-going and continuous basis, Registrant will consider the inclusion of a country-specific principal risk 10. Comment: Principal Risks – Industry Concentration: As applicable to Registrant’s passively managed funds that seek to track the return of a specific index (“Index Funds”), please disclose whether any of the applicable indices are concentrated in any industry or group of industries and if so, specify and add appropriate risk disclosure. Page 5 of 12 Pacific Select Fund – Response Letter April 17, 2020 Response: Registrant has reviewed the benchmark indices that each Index Fund seeks to track, and confirms that none of these indices were concentrated in any industry or group of industries as of the fiscal year ended December 31, 2019. 11. Comment: Principal Risks – Non-Diversified Risk: As applicable to the Index Funds, please revise this risk to include the following additional language: “and representing more than 10 percent of the outstanding voting securities of such issuer(s).” Response: Registrant