[Federal Register Volume 59, Number 42 (Thursday, March 3, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-4869]


[[Page Unknown]]

[Federal Register: March 3, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33673 ; File No. SR-NASD-93-42]

 

Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approved Proposed Rule Change Relating to Asset-
Based Sales Charge Disclosures by Money Market Mutual Funds

February 24, 1994.
    On December 3, 1993, the National Association of Securities 
Dealers, Inc. (``NASD'' or ``Association'') filed with the Securities 
and Exchange Commission (``SEC'' or ``Commission'') a proposed rule 
change\1\ pursuant to Section 19(b)(1) of the Securities Exchange Act 
of 1934 (``Act'')\2\ and Rule 19b-4 thereunder.\3\ The rule change 
amends Article III, Section 26 of the Rules of Fair Practice 
(``Rules'') to exempt certain money market mutual funds from the 
disclosure required by Section 26(d)(4) of the Rules. In particular, 
the rule change exempts funds with annual asset-based sales charges 
equal to or less than .25 of 1% (25 basis points) of average net assets 
from the requirement to disclose in its prospectus that long-term 
shareholders may pay more than the economic equivalent of the permitted 
maximum frontend sales charges.
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    \1\The NASD originally filed the proposed rule change on August 
3, 1993. On December 3, 1993, the NASD filed Amendment No. 1 in 
response to concerns raised by the Commission. Amendment No. 1 was 
reflected in the Commission's Notice of Filing. Securities Exchange 
Act Release No. 33352 (Dec. 16, 1993), 58 FR 67884 (Dec. 22, 1993). 
On February 9, 1994, the NASD submitted Amendment No. 2 which 
included a response to the comment letters received by the 
Commission and the results of the membership vote on the proposed 
rule change. The membership approved the rule change with 1,874 
approving, 242 disapproving and 9 not voting, of all valid ballots 
received.
    \2\15 U.S.C. 78s(b)(1) (1988).
    \3\17 CFR 240.19b-4 (1993).
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    Notice of the proposed rule change together with its terms of 
substance was provided by issuance of a Commission release and by 
publication in the Federal Register.\4\ Three comments were received in 
response to the Commission release. This order approves the proposed 
rule change.
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    \4\Securities Exchange Act Release No. 33352 (Dec. 16, 1993), 58 
FR 67884 (Dec. 22, 1993).
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I. Introduction

    On July 7, 1992, the Commission approved an NASD rule change 
concerning investment company sales charges.\5\ As currently drafted, 
section 26(d)(4) of these new rules require any investment company 
assessing asset-based sales charges to disclose in its prospectus that 
``long-term shareholders may pay more than the economic equivalent of 
the maximum front-end sales charges permitted by this section.''\6\
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    \5\See Securities Exchange Act Release No. 30897 (July 7, 1992), 
57 FR 30985 (July 13, 1992) (approving SR-NASD-90-69); NASD Manual, 
Rules of Fair Practice, Art. III, Sec. 26(d), (CCH)  2176.
    \6\NASD Manual, Rules of Fair Practice, Art. III, Sec. 26(d)(4), 
(CCH)  2176.
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    As the July 7, 1993 effective date for the NASD's new rule 
approached, the NASD received several applications for exemption from 
section 26(d)(4)'s disclosure requirement. The applicants sought the 
exemption based on their assessment that section 26(d)(4) requires the 
disclosure even if the statement may not be true for a particular 
mutual fund. According to the NASD, the applicants pointed out that in 
the case of a money market mutual fund, a high probability exists that 
the statement will be inaccurate because such funds generally have very 
low asset-based sales charges, and an investor would have to be a 
shareholder for an extremely long time before the disclosure would be 
accurate.

II. Description of the Rule Change

    The NASD agreed with the arguments of the applicants and concluded 
that requiring funds to include disclosure statements in the situations 
identified by the applicants does not serve any identifiable purpose 
and does not advance any recognizable regulatory interest. Accordingly, 
the NASD filed a proposed rule change to amend section 26(d)(4) to 
exempt certain money market mutual funds from the disclosure 
requirement.\7\ The exemption is limited to money market mutual funds 
with asset-based sales charges equal to or less than .25 of 1% of 
average net assets per annum.
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    \7\Securities Exchange Act Release No. 33352 (Dec. 16, 1993), 58 
FR 67884 (Dec. 22, 1993).
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III. Comment Letters

    As noted above, in response to the solicitation of comments, the 
Commission received three comment letters. The NASD responded to these 
comments in an amendment to the filing dated February 9, 1994\8\ and a 
letter dated February 14, 1994.\9\
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    \8\File No. SR-NASD-93-42, Amendment No. 2 (Feb. 9, 1994).
    \9\Letter from Suzanne E. Rothwell, Associate General Counsel, 
NASD, to Selwyn Notelovitz, Branch Chief, SEC (Feb. 14, 1994).
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    All three commenters supported the NASD's proposed exemption but 
suggested certain changes. Two commenters suggested that the exemption 
not be limited to money market mutual funds but also extend to any fund 
where the disclosure might be misleading or inaccurate.\10\ One of 
these commenters suggested that the NASD establish a test to determine 
whether the disclosure would be required,\11\ and the other recommended 
allowing the funds to assess the surrounding circumstances to determine 
whether disclosure would be necessary.\12\ The third commenter argued 
that the disclosure should be expanded to include a statement that 
``short term shareholders will pay sales charges less than the maximum 
permitted by (the rules).''\13\
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    \10\Letter from Frances M. Stadler, Associate Counsel, 
Investment Company Institute, to Jonathan G. Katz, Secretary, SEC 
(Jan. 13, 1994) (``ICI Comment Letter'') and letter from Robert L. 
Butler, President, Pioneer Funds Distributor, Inc. to Office of the 
Secretary, SEC (Jan. 10, 1994) (``Pioneer Comment Letter'').
    \11\Pioneer Comment Letter.
    \12\ICI Comment Letter.
    \13\Letter from Vern M. Clemenson, Saturna Capital, to Margaret 
H. McFarland, SEC (Jan. 10, 1994).
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    The NASD has determined not to incorporate the suggested changes 
and noted that it crafted the exemption for money market mutual funds 
because these funds typically charge low asset-based sales charges and 
have a relatively low return on investment. Thus, that an investor 
would pay the economic equivalent of the maximum permitted front-end 
sales charge is unlikely. In addition, in the NASD's assessment, the 
current tendency is for investors to use money market mutual funds for 
short-term purposes, for example, as checking accounts or temporary 
holding areas for investment funds and, therefore, these funds should 
be exempted from the section 26(d)(4) disclosure requirement.

IV. Discussion

    The Commission believes that the NASD's rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to the NASD and, therefore, has determined to 
approve the rule change. Specifically, the Commission believes that the 
rule change is consistent with Section 15A(b)(6) of the Act.\14\ This 
section requires, among other things, that the NASD's rules be designed 
to promote just and equitable principles of trade and to protect 
investors and the public interest.
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    \14\15 U.S.C. 78o-3(b)(6).
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    The NASD adopted section 26(d)(4) with the intent of providing 
adequate disclosure to readers of prospectuses of investment companies 
assessing asset-based sales charges. While the current rule only states 
that shareholders may pay more than the economic equivalent of the 
maximum front-end sales charges, by creating an exemption from this 
disclosure requirement for money market mutual funds, the rule provides 
more accurate disclosure to readers of these prospectuses. With respect 
to money market mutual funds, the disclosure is unnecessary, 
potentially misleading and serves no regulatory or investor protection 
interest.

V. Conclusion

    In conclusion, for the reasons stated above, the Commission finds 
that the proposed rule change is consistent with the requirements of 
the Act.
    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change SR-NASD-93-42 be, and hereby is, 
approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-4869 Filed 3-2-94; 8:45 am]
BILLING CODE 8010-01-M