[Federal Register Volume 60, Number 41 (Thursday, March 2, 1995)]
[Rules and Regulations]
[Pages 11887-11889]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-4996]



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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 270

[Release No. IC-20916; File No. S7-24-88]
RIN 3235-AD18


Exemption for Certain Open-End Management Investment Companies To 
Impose Contingent Deferred Sales Loads

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Commission is adopting a new rule under the Investment 
Company Act of 1940 to permit certain registered open-end management 
investment companies (``mutual funds'') to impose contingent deferred 
sales loads (``CDSLs''). A CDSL is a sales charge that is paid at 
redemption; its amount declines over several years until it reaches 
zero. The adoption of the rule is intended to allow mutual funds to 
offer investors the choice of an additional form of sales load without 
applying to the Commission for exemptive relief.

EFFECTIVE DATE: The new rule will become effective April 3, 1995.

FOR FURTHER INFORMATION CONTACT: Nadya B. Roytblat, Staff Attorney, 
(202) 942-0693, or Robert G. Bagnall, Assistant Chief, (202) 942-0686, 
Office of Regulatory Policy, Division of Investment Management, 
Securities and Exchange Commission, 450 Fifth Street, N.W., Mail Stop 
10-6, Washington, D.C. 20549.

    Requests for formal interpretive advice should be directed to the 
Office of Chief Counsel at (202) 942-0659, Division of Investment 
Management, Securities and Exchange Commission, 450 Fifth Street, N.W., 
Mail Stop 10-6, Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: The Commission is adopting rule 6c-10 [17 
CFR 270.6c-10] under the Investment Company Act of 1940 [15 U.S.C. 
Sec. 80a] (the ``Investment Company Act'' or the ``Act''). The 
Commission is not adopting the amendments that were proposed to Form N-
1A [17 CFR 239.15A, 274.11A]. In a companion release, the Commission is 
proposing amendments to rule 6c-10 that would permit mutual funds to 
impose deferred sales loads generally, including loads payable in 
installments (``installment loads''); the amendments also would modify 
most of the substantive requirements of rule 6c-10 as adopted 
here.1

    \1\Exemption for Certain Open-End Management Investment 
Companies to Impose Deferred Sales Loads, Investment Company Act 
Release No. 20917 (Feb. 23, 1995).
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    A condition in many CDSL exemptive orders granted to date requires 
applicants to comply with rule 6c-10 as originally proposed or as it 
may be reproposed, adopted, or amended. Rule 6c-10 as adopted here 
constitutes the rule as adopted within the meaning of that condition; 
the amendments that the Commission is proposing in the companion 
release do not constitute the rule as reproposed or amended within the 
meaning of that condition and may not be relied upon by those 
applicants.

I. Introduction and Background

    The Commission proposed rule 6c-10 in 1988 to allow mutual funds to 
impose deferred sales loads generally, including CDSLs, as well as 
other loads paid at redemption and sales loads payable in 
installments.2 The Commission received 33 comment letters.3 
Although the commenters generally supported the proposal to allow 
CDSLs, some commenters questioned the need for certain substantive 
requirements in the rule. Commenters had mixed reactions to the 
proposed provisions for installment loads.

    \2\Exemptions for Certain Registered Open-End Management 
Investment Companies To Impose Deferred Sales Loads, Investment 
Company Act Release No. 16619 (Nov. 2, 1988), 53 FR 45275 
[hereinafter Proposing Release].
    \3\The commenters included the American Bar Association 
Subcommittee on Investment Companies and Investment Advisers (the 
``ABA Subcommittee''); the American Council of Life Insurance; 
Deutsche Bank AG New York Branch (``Deutsche Bank'') (commenting 
outside the comment period); Fidelity Management and Research 
Company; Gaston & Snow; IDS Financial Services, Inc. (``IDS 
Financial''); IDS Mutual Fund Group; the Investment Company 
Institute (the ``ICI'') (commenting both within and outside the 
comment period); the Keystone Group, Inc.; the National Association 
of Securities Dealers, Inc.; NASL Financial Services, Inc. 
(commenting outside the comment period); NYLIFE Securities, Inc.; 
Simpson, Thacher & Bartlett (``Simpson Thacher'') (commenting 
outside the comment period); Templeton Funds Management, Inc.; and 
19 individual investors. The comment letters are available for 
public inspection and copying at the Commission's public reference 
room in File No. S7-24-88.
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    Since the proposal of rule 6c-10, the Commission (or the Division 
of Investment Management exercising delegated authority) has issued 
almost 200 exemptive orders permitting funds to impose CDSLs and 
continues to receive such applications. Also since the original 
proposal, the National Association of Securities Dealers, Inc. 
(``NASD'') has amended the provisions of its Rules of Fair Practice 
that govern mutual fund sales charges (``NASD Sales Charge Rule''). The 
amendments address certain deferred sales charges, including CDSLs, and 
distribution charges paid by funds in accordance with rule 12b-1 under 
the Investment Company Act.4

    \4\17 CFR 270.12b-1.
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    The Commission has considered the comments on the proposal and the 
implications of the amendments to the NASD Sales Charge Rule and has 
concluded that it may be appropriate to modify the rule to eliminate 
most of the substantive requirements in the original proposal and rely 
upon the roles of disclosure and the overall limits in the NASD Sales 
Charge Rule. Instead of adopting rule 6c-10 with these changes, the 
Commission is proposing modifications to rule 6c-10 to obtain the 
benefit of public comment on this approach and on issues raised by 
deferred loads other than CDSLs.
    In light of the Commission's extensive experience under the CDSL 
exemptive [[Page 11888]] orders, the Commission does not believe that 
it is necessary to require funds seeking to impose CDSLs to continue to 
file exemptive applications with the Commission pending consideration 
of these proposed modifications. Therefore, the Commission is adopting 
rule 6c-10 to permit the imposition of CDSLs, but not other forms of 
deferred sales load.5

    \5\See supra note 1.
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II. Discussion

    The Commission is adopting rule 6c-10 substantially as originally 
proposed to permit mutual funds6 to impose CDSLs. The rule as 
adopted and as originally proposed requires CDSLs to be calculated 
based on the lesser of the net asset value at the time of purchase or 
at the time of redemption; specifies a particular order of load 
calculation in a partial redemption; prohibits CDSLs on reinvested 
dividends and capital gains distributions; and allows scheduled CDSL 
variations. The rule as adopted does depart from the proposal in 
certain respects in light of comments on the 1988 proposal and of the 
adoption of amendments to the NASD Sales Charge Rule.

    \6\Like the rule as proposed, rule 6c-10 as adopted applies only 
to open-end management investment companies other than registered 
separate accounts. In the Proposing Release, the Commission also 
requested comment on whether to propose amendments to rules 6c-8 [17 
CFR 270.6c-8] and 6e-3(T) [17 CFR 270.6e-3(T)] under the Act, and 
whether to issue revised proposed amendments to rule 6e-2 [17 CFR 
270.6e-2] under the Act, governing the use of deferred sales loads 
by registered insurance company separate accounts. The Commission 
received eight comment letters in response to that request, 
suggesting that the Commission not propose any amendments. The 
Commission is not taking any action with regard to these rules.
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A. The NASD Rule on Maximum Sales Charges

    Paragraph (a)(2) in the proposed rule provided that the maximum 
amount of a back-end load, or any combination of a back-end load and a 
front-end load, may not exceed the maximum allowed under the NASD Sales 
Charge Rule. At the time rule 6c-10 was proposed, the NASD Sales Charge 
Rule did not expressly apply to back-end loads. Since then, the NASD 
has amended its Sales Charge Rule to include expressly back-end loads, 
as well as asset-based distribution fees.7 Because a Commission 
rule no longer is necessary to bring CDSLs within the limits of the 
NASD Sales Charge Rule, the proposed paragraph has been deleted from 
rule 6c-10 as adopted to permit CDSLs.

    \7\The NASD Sales Charge Rule prohibits NASD members from 
offering or selling shares of an open-end management investment 
company registered under the Act if the sales charges described in 
the company's prospectus are excessive. Aggregate sales charges are 
deemed excessive under the Rule if they do not conform to the 
specific provisions set forth in the Rule. NASD, Rules of Fair 
Practice, Art. III, Secs. 26(d)(1) and (2). See also Letter from the 
NASD to Jonathan G. Katz, Secretary, SEC (March 14, 1989), File No. 
S7-24-88; Proposed Rule Change by NASD Relating to the Limitation of 
Asset-Based Sales Charges as Imposed by Investment Companies, 
Securities Exchange Act Release No. 29070 (Apr. 12, 1991), 56 FR 
16137; Order Approving Proposed Rule Change Relating to the 
Limitation of Asset-Based Sales Charges as Imposed by Investment 
Companies, Securities Exchange Act Release No. 30897 (July 7, 1992), 
57 FR 30985.
    Since back-end loads are used by mutual funds to finance the 
payment of brokerage commissions, and brokers selling mutual fund 
shares must be members of the NASD, virtually all funds that impose 
these loads would be distributed by NASD members and therefore would 
be subject to the Sales Charge Rule.
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B. ``No-Load'' Labeling

    As initially proposed, rule 6c-10 would have prohibited any 
exempted person and its first and second tier affiliates (all as set 
forth in the proposed rule), from holding a mutual fund out to the 
public as being ``no-load'' or as having ``no sales charge'' if the 
fund imposed a deferred sales load. The amendments to the NASD Sales 
Charge Rule also expressly prohibited NASD members and their associated 
persons from describing a mutual fund as ``no load'' or as having ``no 
sales charge'' if the fund imposes a front-end load, a back-end load, 
or a 12b-1 and/or service fee that exceeds .25% of average net assets 
per year.8 Therefore, the rule as adopted to permit CDSLs omits 
the prohibition in proposed paragraph (b) as duplicative of the 
provision in the NASD Sales Charge Rule. The Commission also believes 
that it would be misleading and a violation of the federal securities 
laws for a fund that imposes a deferred sales load to be held out as a 
no-load fund.9

    \8\NASD, Rules of Fair Practice, Art. III, Sec. 26(d)(3).
    \9\See Proposing Release, supra note 2, at 45283 (referring, in 
turn, to an earlier Commission statement of its view).
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C. Interest, Carrying, and Finance Charges

    As proposed in 1988, rule 6c-10 would have prohibited a fund from 
imposing a deferred load if any amount were charged on the shareholders 
or the fund that was intended to be a payment of interest related to 
the load or a similar charge. Several commenters pointed out that a 
prohibition on interest charges would leave a fund's underwriter 
uncompensated for the cost of advancing the sales and promotional 
expenses later reimbursed through deferred loads.10 Commenters 
noted that the NASD Sales Charge Rule allows the inclusion of an 
interest component in the computation of the aggregate sales load 
limits.11

    \10\Letter from the ABA to Jonathan G. Katz, Secretary, SEC at 
7-8 (Jan. 31, 1989); Letter from Deutsche Bank, submitted on its 
behalf by Simpson Thacher, to the Division of Investment Management, 
SEC 8-9 (Nov. 5, 1993); Letter from the ICI to Barry Barbash, 
Director, Division of Investment Management, SEC 3-4 (June 14, 
1994); Letter from the ICI to Jonathan G. Katz, Secretary, SEC 7-8 
(Jan. 9, 1989); Letter from IDS Financial to Jonathan G. Katz, 
Secretary, SEC 1-2 (Jan. 3, 1989).
    \11\ICI June 14 comment letter, supra note 10, at 3-4; Deutsche 
Bank November 5, 1993 comment letter, supra note 10, at 9.
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    The proposed provision was not intended to prohibit any interest 
charges that might be reflected in the specified load amount. Rather, 
the provision was designed to prohibit any interest or similar charge 
that was separate from and in addition to the load amount. Because 
paragraph (a)(1) of the rule already requires all components of a 
deferred load to be included in one specified amount, rule 6c-10 as 
adopted does not include the interest charge prohibition.12

    \12\The initial proposal stated that in the view of the 
Commission's Division of Market Regulation, deferred sales loads 
likely would not involve an extension of credit from a fund's 
underwriter to the shareholders that would be prohibited under 
section 11(d)(1) of the Securities Exchange Act of 1934 (the 
``Exchange Act''). One commenter nevertheless raised a concern that 
section 11(d)(1) of the Exchange Act would prohibit deferred sales 
charges. Deutsche Bank November 5, 1993 comment letter, supra note 
10, at 9-10. The Commission believes that absent an explicit 
interest charge, a deferred sales load would not involve an 
extension of credit prohibited by section 11(d)(1) of the Exchange 
Act. The Commission notes that the NASD Sales Charge Rule limits the 
amount that NASD members can charge their customers for the purchase 
of mutual fund shares.
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D. Scheduled Variations

    Paragraph (a)(4) of the rule as adopted permits a fund to offer a 
scheduled variation in, or eliminate, a CDSL for a particular class of 
shareholders or transactions, provided that the scheduled variation 
meets the conditions in rule 22d-1 under the Act.13 Paragraph 
(a)(4) also permits a fund to offer an existing shareholder any new 
scheduled variation that would [[Page 11889]] waive or reduce the 
amount of a CDSL not yet paid.

    \13\17 CFR 270.22d-1. Under rule 22d-1, any scheduled variation 
must be applied uniformly to all offerees in the specified class; 
adequate information about the scheduled variation must be furnished 
to the existing and prospective shareholders; the fund's prospectus 
and statement of additional information must be revised to describe 
the new scheduled variation prior to making the variation available 
to investors; and existing shareholders must be advised of the new 
scheduled variation within one year of the date the variation is 
first made available to investors.
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E. Other Changes

    The text of the rule as adopted also departs from the originally 
proposed text in two other respects. First, because the adoption of the 
rule is limited to CDSLs, the adopted rule text omits provisions 
relating to installment loads or other forms of back-end loads.14 
Second, paragraph (a) of the rule as adopted omits an exemption from 
section 22(c) of the Investment Company Act [15 U.S.C. Sec. 80a-22(c)], 
because section 22(c) is solely a grant of rulemaking authority to the 
Commission and no exemption from that section is required.

    \14\E.g., paragraph (a)(1)(ii) and pertinent provisions of other 
paragraphs such as paragraph (c)(3) in the original proposal.
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F. Form N-1A

    The Commission is not adopting the amendments to Form N-1A that 
were proposed in 1988. Because the Commission is not adopting the 
provisions of rule 6c-10 for installment loads, no adjustments to the 
fee table are necessary now.

III. Cost/Benefit Analysis

    Rule 6c-10 as adopted does not impose any significant burdens on 
mutual funds. Rather, the rule should benefit the funds by making it 
possible to impose CDSLs without having to file exemptive applications 
with the Commission. The adoption of the rule would give investors an 
additional option for a means of paying sales charges.

IV. Summary of Regulatory Flexibility Analysis

    A summary of the Initial Regulatory Flexibility Analysis, which was 
prepared in accordance with 5 U.S.C. 603, was published in Investment 
Company Act Release No. 16619. No comments were received on this 
analysis. The Commission has prepared a Final Regulatory Flexibility 
Analysis in accordance with 5 U.S.C. 604. The Analysis explains that 
the new rule allows mutual funds to impose CDSLs without having to file 
exemptive applications with the Commission. A copy of the Final 
Regulatory Flexibility Analysis may be obtained by contacting Nadya B. 
Roytblat, Esq., Mail Stop 10-6, Securities and Exchange Commission, 450 
Fifth Street, N.W., Washington, D.C. 20549.

V. Statutory Authority

    The Commission is adopting rule 6c-10 under sections 6(c) and 38(a) 
of the Investment Company Act [15 U.S.C. 80a-6(c), and -37(a)].

List of Subjects in 17 CFR Part 270

    Investment Companies, Reporting and recordkeeping requirements, 
Securities.

Text of Adopted Rule

    For the reasons set out in the preamble, Title 17, Chapter II of 
the Code of Federal Regulations is amended as follows:

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

    1. The authority citation for Part 270 is amended by adding the 
following citation:

    Authority: 15 U.S.C. 80a-1 et seq., 80a-37, 80a-39 unless 
otherwise noted;
* * * * *
    Section 270.6c-10 is also issued under sec. 6(c) [15 U.S.C. 80a-
6(c)];
* * * * *
    2. Section 270.6c-10 is added to read as follows:


Sec. 270.6c-10  Exemption for certain open-end management investment 
companies to impose contingent deferred sales loads.

    (a) A company and any exempted person shall be exempt from the 
provisions of Sections 2(a)(32), 2(a)(35), and 22(d) of the Act [15 
U.S.C. 80a-2(a)(32), 80a-2(a)(35), and 80a-22(d), respectively] and 
Sec. 270.22c-1 to the extent necessary to permit a contingent deferred 
sales load to be imposed on shares issued by the company, Provided, 
that:
    (1) The amount of a contingent deferred sales load is calculated as 
being the lesser of the amount that represents a specified percentage 
of the net asset value of the shares at the time of purchase, or the 
amount that represents the same or a lower percentage of the net asset 
value of the shares at the time of redemption;
    (2) No contingent deferred sales load is imposed on shares, or 
amounts representing shares, that are purchased through the 
reinvestment of dividends or capital gains distributions;
    (3) The contingent deferred sales load is calculated as if shares 
or amounts representing shares not subject to a load are redeemed 
first, and other shares or amounts representing shares are then 
redeemed in the order purchased, Provided, however, that another order 
of redemption may be used if such order would result in the redeeming 
shareholder paying a lower contingent deferred sales load; and
    (4) The same contingent deferred sales load is imposed on all 
shareholders, except that scheduled variations in or elimination of a 
contingent deferred sales load may be offered to particular classes of 
shareholders or in connection with particular classes of transactions, 
Provided, that the conditions in Sec. 270.22d-1 are satisfied. Nothing 
in this paragraph (a) shall prevent a company from offering to existing 
shareholders a new scheduled variation that would waive or reduce the 
amount of a contingent deferred sales load that has not yet been paid.
    (b) For purposes of this section:
    (1) Company means a registered open-end management investment 
company, other than a registered separate account, and includes a 
separate series of such company;
    (2) Exempted person means any principal underwriter of, dealer in, 
and any other person authorized to consummate transactions in, 
securities issued by such company; and
    (3) Contingent deferred sales load means any amount properly 
chargeable to sales or promotional expenses that is paid by a 
shareholder, if at all, at the time of redemption, the amount of which 
would decrease to zero if the shares were held for a reasonable period 
of time specified by the company.

    Dated: February 23, 1995.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-4996 Filed 3-1-95; 8:45 am]
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