[Federal Register Volume 60, Number 41 (Thursday, March 2, 1995)]
[Proposed Rules]
[Pages 11890-11896]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-4998]
Federal Register / Vol. 60, No. 41 / Thursday, March 2, 1995 /
Proposed Rules
[[Page 11890]]
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 239, 270, and 274
[Release Nos. 33-7144; IC-20917; File No. S7-8-95]
RIN 3235-AD18
Exemption for Certain Open-End Management Investment Companies To
Impose Deferred Sales Loads
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule and form amendments, and request for comment.
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SUMMARY: The Commission is proposing amendments to the rule under the
Investment Company Act of 1940 that permits certain registered open-end
management investment companies (``mutual funds'') to impose contingent
deferred sales loads. The proposed amendments would allow funds to
offer investors a wider variety of deferred sales loads, including
installment loads, and would eliminate certain requirements in the
rule. The Commission also is proposing amendments to the registration
form for mutual funds, and publishing for comment a staff guide to the
registration form. These amendments modify the requirements for
disclosing deferred sales loads in mutual fund prospectuses to reflect
the changes made in the proposed rule amendments.
DATES: Comments must be received on or before April 17, 1995.
ADDRESSES: Comments should be submitted in triplicate to Jonathan G.
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street,
NW., Mail Stop 6-9, Washington, DC 20549. All comment letters should
refer to File No. S7-8-95. All comments received will be available for
public inspection and copying in the Commission's Public Reference
Room, 450 Fifth Street NW., Washington, DC 20549.
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 NW., Mail Stop 10-
6, Washington, DC 20549.
SUPPLEMENTARY INFORMATION: The Commission is requesting public comment
on proposed amendments to rule 6c-10 (17 CFR 270.6c-10) under the
Investment Company Act of 1940 (15 U.S.C. 80a) (the ``Investment
Company Act'' or the ``Act''), and on proposed amendments to Form N-1A
(17 CFR 239.15A, 274.11A) under the Securities Act of 1933 (15 U.S.C.
77a-77aa) (the ``Securities Act'') and the Investment Company
Act.1
\1\Exemption for Certain Open-End Management Investment
Companies to Impose Contingent Deferred Sales Loads, Investment
Company Act Release No. 20916 (Feb. 23, 1995) [hereinafter Rule 6c-
10 Adopting Release].
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Executive Summary
The Commission is proposing amendments to rule 6c-10 (17 CFR
270.6c-10) under the Investment Company Act to allow mutual funds to
impose deferred sales loads other than contingent deferred sales loads
(``CDSLs''), and to remove certain requirements in the rule. Rule 6c-
10, which allows mutual funds to impose CDSLs, was adopted today in a
companion release.2 The proposed amendments would allow mutual
funds to assess sales charges such as those paid at redemption (``back-
end loads'') that differ from CDSLs, as well as loads paid after
purchase during the term of a shareholder's investment in a fund, for
example, in installments (``installment loads''). These new forms of
deferred sales load would be an alternative to the existing sales load
structures. Although mutual funds to date have not used installment
loads or back-end loads other than CDSLs, the Commission has permitted
back-end loads under the rules for certain variable insurance products,
and has issued installment load exemptive orders to separate accounts
and unit investment trusts.
\2\Supra note 1.
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Rule 6c-10 provisions for back-end loads other than CDSLs and
installment loads were part of proposed rule 6c-10 as originally
proposed in 1988.3 That proposal would have codified for deferred
sales loads generally the exemptions and the requirements in the CDSL
exemptive orders granted to date. Rule 6c-10 was adopted today to allow
CDSLs essentially as proposed. Some commenters on the original proposal
suggested that, because mutual fund sales charges are regulated by the
National Association of Securities Dealers, Inc. (the ``NASD''), it is
unnecessary for the Commission to impose specific requirements on
deferred loads, other than requirements governing prospectus
disclosure. The Commission is proposing amendments to rule 6c-10 to
follow such an approach for CDSLs and other deferred loads by removing
most of the requirements in rule 6c-10. Under the new approach, the
terms of any deferred sales load would be subject to specific
disclosure requirements and would be covered by the overall limits in
the NASD rule governing the amount of mutual fund sales charges (``NASD
Sales Charge Rule''). The Commission also is proposing revised
prospectus disclosure requirements that reflect the proposed changes to
rule 6c-10.
\3\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 1988 Proposing Release].
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I. Background
The Commission first proposed rule 6c-10 allowing mutual funds to
impose deferred sales loads on November 2, 1988.4 Under the 1988
proposal, mutual funds would have been able to assess deferred loads
under the terms and conditions contained in CDSL exemptive orders
granted to individual funds as of the date of the proposal. The
proposed rule would have permitted mutual funds to charge not only
CDSLs,5 but also loads paid at redemption whose amount remains the
same or changes in a manner different than a CDSL, as well as loads
paid in one or more installments during the term of a shareholder's
investment in a fund. In accordance with the CDSL exemptive orders, the
rule as proposed in 1988 would have specified load calculation
requirements; prohibited deferred loads on reinvested distributions;
and allowed scheduled load variations. Rule 6c-10 as adopted today to
allow CDSLs contains these requirements.
\4\1988 Proposing Release, supra note 3.
\5\A CDSL is paid at redemption, but declines to zero if the
shares are held for a certain period of time. Mutual funds typically
impose a CDSL in combination with an asset-based distribution fee
charged in accordance with rule 12b-1 under the Act [17 CFR 270.12b-
1] (``rule 12b-1 fee''), in an arrangement commonly called a
``spread load.'' Under this arrangement, a fund's principal
underwriter initially pays the fund's sales and promotional
expenses, including commissions to persons who sell the fund's
shares. The underwriter then recovers these expenses through a
distribution fee paid to it by the fund out of the fund's assets.
Should a shareholder redeem his or her shares before the underwriter
has been fully reimbursed, the CDSL paid by the shareholder upon
redemption compensates the underwriter for the balance.
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The Commission received 33 comment letters on the 1988
proposal.6 [[Page 11891]] The commenters generally supported the
proposal.7 The commenters welcomed a rule allowing CDSLs as
eliminating the need to file exemptive applications, and many
maintained that installment loads could offer desirable flexibility to
funds as well as consumers.8 Individual investors in particular
supported installment loads as an option in paying a sales
charge.9 Some of these investors compared installment loads to
front-end loads and preferred the former as allowing them to defer the
payment of a sales charge; others compared installment loads to rule
12b-1 fees, and believed that installment loads as proposed in 1988
would be a more clear charge, as well as one that would be payable
within a more definite term. Other commenters have suggested that
installment loads would make it easier for smaller mutual fund
sponsors, as well as sponsors of mutual funds not affiliated with
brokerage firms, to obtain financing to pay broker commissions through
securitization of installment load cash flows; and they argued that
installment loads would thereby encourage competition in the fund
industry that ultimately would benefit investors.10
\6\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. (``Keystone''); the
National Association of Securities Dealers, Inc.; NASL Financial
Services, Inc. (commenting outside the comment period); NYLIFE
Securities, Inc. (``NYLIFE''); Simpson, Thacher & Bartlett
(``Simpson Thacher'') (commenting outside the comment period);
Templeton Funds Management, Inc. (``Templeton''); 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.
\7\The comments addressed CDSLs and installment loads, but did
not focus specifically on back-end loads other than CDSLs. While
some earlier industry commenters perceived practical difficulties
with using installment loads, more recent industry comments suggest
that any such difficulties either no longer exist or could be
resolved. Compare Letter from the ABA Subcommittee to Jonathan G.
Katz, Secretary, SEC (Jan. 11, 1989); Letter from IDS Financial to
Jonathan G. Katz, Secretary, SEC (Jan. 3, 1989); Letter from the ICI
to Jonathan G. Katz, Secretary, SEC (Jan. 9, 1989); Letter from
Keystone to Jonathan G. Katz, Secretary, SEC (Jan. 6, 1989)
(together, suggesting recordkeeping, transfer agent, accounting and
tax-related complexities associated with installment loads) to
Letter from Deutsche Bank, submitted on its behalf by Simpson
Thacher, to the Division of Investment Management, SEC 2 (Dec. 13,
1993) (stating that Deutsche Bank ``encountered a great deal of
interest'' in installment loads in the course of its ``discussions
with more than 15 well-recognized (both small and large) mutual fund
management companies'').
Two earlier commenters also interpreted a statement in the 1988
Proposing Release that the proposal of rule 6c-10 should be read
together with the Commission's proposed amendments to rule 12b-1, as
intending to mandate installment loads as a replacement for spread
loads. ABA Subcommittee comment letter, supra note 7, at 3; ICI
comment letter, supra note 7, at 2, 13-16. See also Payment of
Asset-Based Sales Loads by Registered Open-End Management Investment
Companies, Investment Company Act Release No. 16431 (June 13, 1988),
53 FR 23258. The 1988 proposal was not intended to express such a
view, nor is the Commission today expressing such a view.
\8\Letter from IDS Mutual to Jonathan G. Katz, Secretary, SEC
(Nov. 15, 1988); Letter from NYLIFE to Jonathan G. Katz, Secretary,
SEC (Dec. 30, 1988); Letter from Templeton to Jonathan G. Katz,
Secretary, SEC (Jan. 9, 1989); Deutsche Bank December 13, 1993
comment letter, supra note 7; Letter from the NASL to the Division
of Investment Management, SEC (Feb. 16, 1994).
\9\All but one of the 16 letters the Commission received from
individual investors on this subject favored the installment load
proposal.
\10\Deutsche Bank December 13, 1993 comment letter, supra note
7; NASL comment letter, supra note 8. Both commenters compared the
financing possibilities with installment loads to the financing of
receivables from rule 12b-1 fees. The commenters noted that the risk
of a fund board's terminating a rule 12b-1 plan, as well as the risk
of net asset value fluctuations inherent in an asset-based charge,
currently restrict the availability of credit to larger mutual fund
sponsors only; and that installment loads, which would not carry the
same risks, could broaden the financing possibilities. See also
Letter from the ICI to Barry Barbash, Director, Division of
Investment Management, SEC 5 (June 14, 1994) (noting that
facilitation of the financing of distribution costs is one of the
principal objectives cited by the proponents of installment loads).
One commenter's remarks suggested that, from the point of view
of those concerned with systemic risk, the assurance of a steady
stream of payments in an installment load structure would mean that
a fund sponsor would be taking on less risk when it borrows to
finance commission payments. Deutsche Bank December 13, 1993 comment
letter, supra note 7, at 4-5.
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II. Discussion of Proposed Amendments to Rule 6c-10
Like the 1988 proposal, the proposed amendments to rule 6c-10 would
allow mutual funds to impose back-end sales loads other than CDSLs as
well as installment loads, and would permit scheduled load variations.
In a change from the 1988 proposal and the rule as adopted, the
proposed amendments no longer would specify load calculation
requirements, nor prohibit deferred sales loads on reinvested dividends
and other distributions. Instead, the terms of any deferred sales load
would be required to be covered by the overall limits in the NASD Sales
Charge Rule,11 and would be subject to specific prospectus
disclosure requirements under the proposed amendments to the
Commission's mutual fund registration form.
\11\The NASD Sales Charge Rule prohibits NASD members from
offering or selling shares of an open-end management investment
company registered under the Investment Company 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).
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A. Scope of the Rule as Amended
Under the proposed amendments, paragraph (b)(3) of the rule would
define a deferred sales load as any amount properly chargeable to sales
or promotional expenses that is paid by a shareholder after purchase
but before or upon redemption.12 The definition would include
CDSLs, as well as other loads paid at redemption whose amount may
remain the same or change in a manner different than a CDSL. The
definition also would include loads paid after purchase during the term
of a shareholder's investment in a fund, such as in one or more
installments that could be accelerated upon an early redemption.
\12\Rule 6c-10 as amended would not be applicable to certain
charges that may be imposed by a mutual fund to discourage short-
term trading in its shares and that are paid directly to the fund.
See, e.g., 17 CFR 270.11a-3(a)(7) (defining a ``redemption fee'').
The Commission's staff has taken the position that such charges may
be imposed without the need for exemptive relief under the Act. See,
e.g., John P. Reilly & Associates (pub. avail. July 12, 1979).
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Rule 6c-10 as adopted and as originally proposed does not apply to
registered insurance company separate accounts. The exemption to impose
deferred sales loads under the proposed amendments also would not
extend to unit investment trusts. The Commission has issued installment
load exemptive orders to unit investment trusts (``UITs''),13 and
requests comment on the appropriateness of a rule allowing UITs to
assess deferred loads.14
\13\See Merrill Lynch, Pierce, Fenner & Smith, Inc., Investment
Company Act Release Nos. 13801 (Feb. 29, 1984), 49 FR 8512 (Notice
of Application to allow UITs to impose a deferred sales load payable
in installments) and 13848 (Mar. 27, 1984), 30 SEC Docket 192
(Order), and 15120 (May 29, 1986), 51 FR 20389 (Notice of
Application) and 15167 (June 24, 1986), 35 SEC Docket 1735 (Order).
See also PaineWebber, Inc., Investment Company Act Release Nos.
20755 (Dec. 6, 1994), 59 FR 64003 (Notice of Application to allow a
UIT to impose a deferred sales load payable in installments) and
20819 (Jan. 4, 1995) (Order).
\14\See Rule 6c-10 Adopting Release, supra note 1, at n.7
regarding deferred sales loads in the context of separate accounts.
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Unlike the 1988 proposal, which would have required installment
loads to be deducted directly from a shareholder's account, the
amendments would not require any particular method of collecting
installment loads. The loads, for example, could be paid out of
distributions, by automatic redemptions, or through separate billing of
an investor's account. Two commenters indicated that funds most likely
would deduct installment load payments from dividend
distributions.15 The Commission invites further comment on the
methods that could be used to pay installment loads. Whichever method
is used, however, it would have to be disclosed in the fund's
prospectus, as required by the proposed [[Page 11892]] amendments to
Form N-1A.16 Because different methods of collecting load payments
could carry different potential tax consequences for investors,17
funds also would be required to disclose those consequences briefly in
the prospectus.18
\15\ICI comment letter, supra note 7, at 8; Letter from Simpson
Thacher to the Division of Investment Management, SEC 2 (Dec. 13,
1993).
\16\See infra section III.B.
\17\One commenter on the 1988 proposal, for example, pointed out
that paying installments out of dividend distributions would mean
that a shareholder would incur dividend income, yet not actually
receive the portion of that income that was used to pay the
installment. ICI comment letter, supra note 7, at 2, 9. Payment
through automatic redemptions, on the other hand, would mean that a
shareholder might incur a capital gain or loss on each such
redemption; if additional shares then were purchased by the
shareholder within 30 days of the automatic redemption, any capital
loss might be disallowed under the ``wash sale'' rule contained in
the Internal Revenue Code. Id. at 9; IDS Financial comment letter,
supra note 7, at 1; NYLIFE comment letter, supra note 8, at 3.
According to another commenter, installment loads could present
potential difficulties for tax-privileged investors, such as
retirement plans subject to the Employee Retirement Income Security
Act of 1974, as amended (``ERISA''). Simpson Thacher comment letter,
supra note 15, at 1-8. Automatic redemptions to pay installment
loads, for example, might result in the mutual fund's being deemed a
fiduciary of the investor for purposes of ERISA, the redemption's
being deemed a prohibited transaction under ERISA, and the
investor's losing its tax-exempt status. Id. This commenter noted,
however, that a fund could seek to obtain a favorable ruling from
the Internal Revenue Service on these issues. Simpson Thacher
comment letter, supra note 15, at 5-6. A fund also could choose not
to offer installment loads to its tax-privileged investors.
\18\See infra section III.B (discussing staff Guide 30 to Form
N-1A).
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B. Deferred Load Calculation
Rule 6c-10 sets two requirements for calculating a deferred sales
load. Under the first requirement, a CDSL must be based on the lesser
of the net asset value (the ``NAV'') at the time of purchase or the NAV
at the time of redemption.19 The 1988 proposal would have required
the ``lesser of'' standard for all deferred loads paid at redemption,
but would have allowed deferred loads paid other than at redemption
(such as installment payments) to be based at a fund's option either on
the NAV at the time of purchase or on the lesser of the NAV at the time
of purchase or the NAV at the time the load was paid. The mandatory
``lesser of'' standard for loads paid at redemption was designed to
eliminate any impediment to redemption in a falling market that might
be created by the load. The second requirement prescribes the method
for load calculation in a partial redemption.20 This requirement
was intended to allow shareholders the maximum benefit from shares in
their deferred load accounts that carried no load.
\19\17 CFR 270.6c-10(a)(1).
\20\17 CFR 270.6c-10(a)(3). A fund must treat as if redeemed
first shares or amounts representing shares not subject to a load,
and treat other shares or amounts representing shares as if redeemed
in the order they were purchased. In a partial redemption, this
method would allow a shareholder, in effect, to delay the payment of
the deferred sales charge. In a full redemption, no particular order
of load calculation would have affected the amount of a deferred
sales charge due.
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Commenters on the 1988 proposal generally argued that neither
requirement is necessary as long as deferred loads are subject to the
limits of the NASD Sales Charge Rule and properly disclosed.21
None of the commenters addressed the concern about an impediment to
redemption associated with the ``lesser of'' requirement, nor any
benefits or drawbacks of the order of load calculation. Some commenters
suggested, however, that allowing, but not requiring, the ``lesser of''
method would make it easier for fund sponsors to obtain financing to
pay commissions to brokers by eliminating the risk of NAV
fluctuation.22 One commenter also argued that eliminating the
``lesser of'' requirement would eliminate the need to build a cushion
into the load structure to account for the risk of a lower NAV.23
This commenter suggested that the ``lesser of'' standard may cause fund
sponsors to set the load at a higher percentage amount than they
otherwise would in order to allow a margin for a possible decline in
the NAV.
\21\ABA Subcommittee comment letter, supra note 7, at 6; ICI
comment letter, supra note 7, at 2; IDS comment letter, supra note
7, at 2.
\22\Deutsche Bank December 13, 1993 comment letter, supra note
7, at 5; ICI June 14, 1994 comment letter, supra note 10, at 5.
\23\Deutsche Bank December 13, 1993 comment letter, supra note
7, at 5.
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The Commission is proposing to eliminate the two load calculation
requirements from rule 6c-10. Under the proposed amendments, paragraph
(a)(1) would allow a deferred load to be a specified percentage of the
NAV at the time of purchase, redemption, or the payment of an
installment, but would not otherwise limit load calculation.24
Paragraph (a)(2) would require the terms of a deferred load to be
subject to the NASD Sales Charge Rule.
\24\This provision also would allow funds to base a deferred
sales load on a combination of these standards, such as on the
lesser of, or the higher of, the NAV at the time of purchase or
redemption, provided the standard is disclosed and is consistent
with any applicable provisions in the NASD Sales Charge Rule. A
``higher of'' standard, for instance, currently is not allowed under
the NASD Sales Charge Rule for mutual funds without an asset-based
sales charge, because the Rule limits the sales loads for these
funds to a set percentage of the offering price. NASD, Rules of Fair
Practice, Art. III, Sec. 26(d)(1)(A).
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The Commission requests comment on whether paragraph (a)(1) should
provide for a deferred load to be based on the offering price either
instead of, or in addition to, the NAV at the time of purchase. The fee
table appearing in mutual fund prospectuses calls for deferred loads to
be expressed, where applicable, as a percentage of the original
purchase price. This disclosure provides easier comparability with
front-end sales loads, which are expressed as a percentage of the
offering price.
The requirement in paragraph (a)(1) that the load be a ``specified
percentage'' stated in the prospectus would allow investors to know at
the time of purchase the maximum percentage amount of the load.25
Under the revised prospectus disclosure requirements, funds also would
have to disclose in the fee table, and explain elsewhere in the
prospectus, the manner in which the load is calculated.26 In
addition, funds would have to disclose the method by which they would
calculate a deferred load in a partial redemption. The requirement in
paragraph (a)(2) that the terms of a deferred load be covered by the
NASD Sales Charge Rule would subject all deferred sales loads to the
NASD's limits on maximum sales charges.27 Such an approach is
consistent with that currently taken with front-end sales charges
assessed on mutual fund shares. The Commission requests comment on the
proposed elimination of the load calculation restrictions and the
reliance on revised prospectus disclosure requirements and the NASD
Sales Charge Rule for deferred sales charges.
\25\The requirement that the load be a ``specified percentage''
does not mean that the amount must be fixed and may not decrease or
increase over time. Rather, it requires only that the percentage
amount of the load to be charged at a given time be disclosed in the
prospectus. Therefore, the phrase ``the same or a lower percentage''
in paragraph (a)(1) as adopted for CDSLs has been deleted from the
proposed text. Funds would be able to show in the prospectus fee
table the range of any deferred load that changes over time, as well
as a schedule of any installment load payments. See infra section
III.A.
\26\See infra sections III.A and B.
\27\The NASD Sales Charge Rule in its current form governs only
deferred loads paid at redemption. The Rule applies to, among other
things, ``deferred sales charges,'' which it defines, in relevant
part, as ``a sales charge that is deducted from the proceeds of the
redemption of shares by an investor.'' NASD, Rules of Fair Practice,
Art. III, Sec. 26(b)(8)(B). To the extent deferred loads would be
allowed to be paid other than upon redemption (e.g., installment
loads), they would fall outside the current definition and would not
be covered by the Rule. The proposed amendments to rule 6c-10
contemplate the NASD's amending its Sales Charge Rule to address
deferred loads paid other than upon redemption. The Commission's
staff has requested the NASD to review its Sales Charge Rule in
light of the proposed amendments. [[Page 11893]]
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C. Deferred Loads on Reinvested Distributions
Rule 6c-10 prohibits mutual funds from imposing CDSLs on shares
purchased through the reinvestment of dividends or other
distributions.28 Some commenters on the 1988 proposal argued that
this prohibition is unnecessary so long as a mutual fund appropriately
discloses the manner in which loads are assessed and so long as loads
charged by mutual funds generally are subject to the limits in the NASD
Sales Charge Rule.29 The Commission is proposing to delete this
prohibition from rule 6c-10. Under the revised prospectus disclosure
requirements, funds that impose deferred sales charges on reinvested
dividends and other distributions would have to disclose this fact in
their prospectuses.30 This approach would be consistent with the
Commission's approach to front-end loads on reinvested dividends. The
Commission requests comment on the appropriateness of the proposed
approach for deferred loads.
\28\17 CFR 270.6c-10(a)(2). The 1988 proposal also would have
prohibited funds from charging deferred loads on capital
appreciation. Because under the proposed amendments paragraph (a)(1)
would allow deferred loads to be based on the NAV at the time of
redemption and at the time an installment is paid, a load could be
charged on any capital appreciation to the extent the load is based
on the higher of the NAV at purchase or at the time of redemption or
load payment.
\29\ABA Subcommittee comment letter, supra note 7, at 8-9; ICI
comment letter, supra note 7, at 5.
\30\See infra section III.B.
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The NASD Sales Charge Rule currently covers front-end loads, but
not deferred loads, on reinvested dividends. The NASD Sales Charge Rule
also does not cover loads on reinvested capital gains distributions or
returns of capital.31 The proposed amendments to rule 6c-10
contemplate the NASD's amending its Sales Charge Rule to address these
issues.
\31\A return of capital generally occurs when a fund's
distribution exceeds the fund's aggregate amount of undistributed
net taxable income and net realized capital gains. See
Determination, Disclosure, and Financial Statement Presentation of
Income, Capital Gain, and Return of Capital Distributions by
Investment Companies, American Institute of Certified Public
Accountants, Statement of Position 93-2, 8 (Feb. 1, 1993).
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D. ``No-Load'' Labeling
As proposed in 1988, 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 load. After rule 6c-10 was proposed, the NASD amended its
Sales Charge Rule expressly to prohibit 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.32 In light of this amendment to the
NASD Sales Charge Rule, the Commission concluded that it was
unnecessary to retain a separate no-load labeling prohibition for CDSLs
in rule 6c-10 as adopted. The prohibition similarly is unnecessary for
back-end loads other than CDSLs. Although the NASD Sales Charge Rule
currently does not address installment loads, the Commission
anticipates that the NASD would amend its Sales Charge Rule if the
proposed rule 6c-10 amendments are adopted, and believes that it is
unnecessary to amend rule 6c-10 to prohibit no-load labeling in the
case of installment loads. 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 to the public as a
no-load fund.33
\32\NASD, Rules of Fair Practice, Art. III, Sec. 26(d)(3).
\33\See 1988 Proposing Release, supra note 3, at 45283
(referring, in turn, to an earlier Commission statement of its
view).
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E. Exchanges Involving Deferred Loads
The Commission is not proposing any amendments to rule 11a-3 under
the Investment Company Act governing exchanges of shares, that relate
to deferred sales loads.34 Back-end and installment loads would
fall under the current definition of ``deferred sales load'' in rule
11a-3,35 and therefore would be covered by the requirements in
that rule on the imposition of deferred sales charges in connection
with an exchange. The Commission invites comment on whether it should
amend the definition of deferred sales load in rule 11a-3 to correspond
expressly with the deferred load definition in the proposed amendments
to rule 6c-10. The Commission also invites comment on whether rule 11a-
3 needs to include any additional provisions for deferred loads.
\34\17 CFR 270.11a-3. The 1988 proposal did not address rule
11a-3.
\35\Rule 11a-3 defines a ``deferred sales load'' as ``any amount
properly chargeable to sales or promotional activities that is or
may be deducted upon redemption of all or a portion of a
securityholder's interest in an open-end investment company.'' 17
CFR 270.11a-3(a)(3). Deferred loads paid other than upon redemption
would fall within this definition because they could be accelerated
upon redemption.
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III. Discussion of Revised Disclosure Requirements
The Commission is proposing new disclosure requirements for
deferred sales loads in light of the proposed changes to rule 6c-10
discussed above. These requirements would reflect the rule's scope
under the proposed amendments, which would permit loads paid at
redemption or in installments. They also respond to the proposed
elimination of the limitations in the 1988 proposal that would have
required a back-end load to be based on the lower of the NAV at the
time of purchase or redemption, and permitted installment loads to be
based on the NAV at the time of purchase or on the lower of the NAV at
the time of purchase price and the NAV at the time an installment was
paid.
A. Fee Table Disclosure
The fee table requirements in Item 2 of Form N-1A currently require
disclosure of deferred sales loads, but do not contemplate installment
loads the amount of which is based on a price other than the purchase
price or redemption proceeds. The Commission is proposing amendments to
the fee table requirements to require disclosure concerning all forms
of deferred sales loads, including installment loads.
The parenthetical explanation following the caption ``Deferred
Sales Load'' in the fee table currently provides for deferred loads to
be expressed only as a percentage of the original purchase price or the
redemption proceeds. The proposed amendment would replace most of the
current wording inside the parentheses with a blank, indicating that a
registrant should provide appropriate disclosure describing the basis
on which the load is computed. This change reflects the greater variety
of load formulations that rule 6c-10 would permit under the proposed
amendments: in contrast to the limitations in the rule as adopted and
as initially proposed, the proposed amendments would permit deferred
loads to be a percentage of the NAV at the time of purchase,
redemption, or the payment of an installment, or the higher or lower of
those amounts.
The proposed revisions to Instruction 5 to the fee table are
intended to clarify how the fee table should address all deferred loads
and to respond to the greater range of practices that would be
permitted under the proposed amendments. The addition of the word
``total'' would make clear that the response to the ``Deferred Sales
Load'' caption for an installment load should be the sum of the
installments (e.g., 6%, [[Page 11894]] rather than 1% a year for six
years). Like the 1988 proposal, the proposed amendments would permit a
fund to include within the larger fee table a tabular presentation of
the schedule of installment payments.36
\36\As currently required by Instruction 1 to the fee table, a
fund also would have to provide a reference following the fee table
to the discussion of any scheduled variations and other information
about installment loads elsewhere in the prospectus.
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B. General Prospectus Disclosure
The Commission is proposing to require more detailed prospectus
disclosure concerning the way in which a specific fund's deferred sales
load is imposed and computed. Proposed new Item 7(g) would cover many
operational details that have been mandatory for all funds under rule
6c-10 as adopted and as originally proposed but would be subject to
greater flexibility under the proposed amendments. These details
include the price on which the load is based, whether deferred sales
loads may be imposed on shares acquired through reinvestments of
distributions, and the way in which the load is calculated.37 If a
fund charges deferred loads on shares from reinvestment of dividends or
other distributions, Item 7(g) would require a statement to that
effect, but it would not require this disclosure if the fund did not
charge such a load. In addition, as a general matter, to the extent
that a fund's sales charges do not differ from those of other funds,
the disclosure in response to proposed new Item 7(g) should be
relatively brief, but to the extent that the fund's charges differ,
more detail may be required.38
\37\As noted above, paragraphs (a)(1), (a)(5) and (a)(6) of rule
6c-10 as originally proposed required a load paid at redemption to
be based on the lower of the NAV at the time of purchase or
redemption; specified the order in which shares should be treated as
being redeemed for purposes of load calculation; and prohibited the
imposition of deferred loads on reinvested dividends and capital
gains distributions.
\38\The General Instructions to Form N-1A emphasize the
importance of brevity in describing practices ``that do not differ
materially from those of other investment companies.'' General
Instruction G (Preparation of the Registration Statement or
Amendment), Part A, Instruction 1.
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The proposed provision also would require an explanation of the
ways in which a shareholder may be required to pay an installment load,
such as through the withholding of dividend payments, involuntary
redemptions, or separate billing of an investor's account. The
Commission also is publishing for comment a revision to staff Guide 30
of the Guidelines for Form N-1A to require funds to describe briefly in
the prospectus any tax consequences for investors related to an
installment load.39
\39\See, e.g., supra note 17 (describing potential tax
complications suggested by commenters on the original proposal).
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C. Performance Data
The Commission is proposing to amend Instruction 1 to Item 22(b)(i)
of Form N-1A to require deferred sales loads to be included in
calculations of advertised total return data. The amendment would
require the calculation to be based on the deduction of the maximum
amount of a deferred sales load at the times, in the amounts, and under
the terms disclosed in the prospectus.
The Commission is not proposing to amend Item 22(b)(ii) of Form N-
1A to require installment loads to be included in advertised yield
calculations. Paragraph (a)(6) of rule 482 under the Securities
Act40 requires advertisements containing yield data to disclose
the maximum amount of any sales load; if the sales load is not
reflected in performance figures, the advertisement also must disclose
that the figures do not reflect the load and that, if reflected, the
load would reduce the quoted performance. Because installment loads
would not be reflected in yield figures, rule 482(a)(6) would apply to
advertisements containing yield figures of funds with installment
loads.41
\40\17 CFR 230.482.
\41\A fund's yield advertisement would disclose the amount of an
installment load, and the period of time during which a shareholder
is subject to the installment load.
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The treatment of installment loads in advertised yield calculations
would be different from the current treatment of rule 12b-1 fees, which
are included in the numerator in the yield formula in Item 22(b)(ii) of
Form N-1A as expenses, and thereby reflected in the yield data.
Therefore, for example, a fund with a rule 12b-1 fee of 1% would show a
lower yield than a fund with comparable performance and an installment
load of 1% per year for six years. The Commission requests comment on
whether it should require a thirty-day percentage amount of an
installment load similarly to be included as an expense in the
numerator in the yield formula in Item 22(b)(ii), or, alternatively,
require that the installment load be added to the net asset value to
reach an assumed ``offering price'' in the denominator in the yield
formula. The first alternative would allow greater comparability to
rule 12b-1 fees, but would understate the yield for those shareholders
that have completed paying the installment load. The second alternative
would treat installment loads as if they were front-end loads.
D. Dealer Compensation
The amount of commissions paid to persons selling funds' shares
currently is not required to be disclosed in prospectuses, except in
the case of front-end sales loads. Item 7(b)(iv) of Form N-1A requires
funds to show in a tabular format in the prospectus the sales load
reallowed to dealers as a percentage of the public offering price. This
requirement currently is deemed to apply only to front-end sales loads.
The Commission requests comment on whether it should amend Item
7(b)(iv) to require mutual funds that impose deferred sales loads to
provide disclosure about the commissions received by dealers selling
the funds' shares comparable to that now provided by funds with front-
end loads. Alternately, the Commission requests comment on whether
proposed new Item 7(g) should be modified to require such disclosure.
IV. Cost/Benefit Analysis
The proposed amendments to rule 6c-10 and Form N-1A would not
impose any significant burdens on mutual funds. Rather, the amendments
should benefit funds by providing them with alternatives in financing
their sales and promotional expenses. The amendments also would enable
investors to defer the payment of a sales charge on the purchase of
mutual fund shares until redemption or over one or more installment
payments during the term of their investment.
V. Summary Of the Regulatory Flexibility Analysis
The Commission has prepared an Initial Regulatory Flexibility
Analysis. The Analysis explains that the proposed amendments to rule
6c-10 would allow mutual funds to impose deferred sales loads other
than CDSLs and would remove certain restrictions in the rule. The
Analysis further explains that the proposed amendments to Form N-1A
would set prospectus disclosure requirements for deferred loads that
reflect the proposed changes to rule 6c-10, but that are similar to the
disclosure currently provided by funds and that would not impose any
additional burdens. A copy of the 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.
[[Page 11895]]
VI. Statutory Authority
The Commission is proposing amendments to 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)]. The authority citations for the proposed amendments to Form N-
1A precede the text of the amendments.
List of Subjects in 17 CFR Parts 239, 270, and 274
Investment companies, Reporting and recordkeeping requirements,
Securities.
Text of Proposed Rule and Form Amendments
For the reasons set out in the preamble, Title 17, Chapter II of
the Code of Federal Regulations is proposed to be amended as follows:
PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940
1. The authority citation for Part 270 continues to read, in part,
as follows:
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 revised to read as follows:
Sec. 270.6c-10 Exemption for certain open-end management investment
companies to impose 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 deferred sales load
to be imposed on shares issued by the company, Provided, that:
(1) Any deferred sales load is a specified percentage of the net
asset value at the time of purchase, redemption, or the payment of an
installment;
(2) The terms of the deferred sales load are covered by the
provisions of Article III, Section 26 of the Rules of Fair Practice of
the National Association of Securities Dealers, Inc.; and
(3) The same deferred sales load is imposed on all shareholders,
except that scheduled variations in or elimination of a deferred sales
load may be offered to a particular class of shareholders or
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 deferred sales load not yet 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 the company;
(2) Exempted person means any principal underwriter of, dealer in,
and any other person authorized to consummate transactions in,
securities issued by a company;
(3) Deferred sales load means any amount properly chargeable to
sales or promotional expenses that is paid by a shareholder after
purchase but before or upon redemption.
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940
3. The authority citation for Part 239 continues to read, in part,
as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77sss, 78c, 78l,
78m, 78n, 78o(d), 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 79l, 79m,
79n, 79q, 79t, 80a-8, 80a-29, 80a-30 and 80a-37, unless otherwise
noted.
* * * * *
4. The authority citation for Part 274 continues to read as
follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m,
78n, 78o(d), 80a-8, 80a-24, and 80a-29, unless otherwise noted.
5. Item 2 of Part A of Form N-1A [referenced in Secs. 239.15A and
274.11A] is amended by revising the parenthetical after ``Deferred
Sales Load'' in paragraph (a)(i), and Instruction 5, to read as
follows:
Note: Form N-1A does not, and the amendment will not, appear in
the Code of Federal Regulations.
Form N-1A
* * * * *
Part A. Information Required in a Prospectus
* * * * *
Item 2. Synopsis
(a)(i) * * *
* * * * *
Shareholder Transaction Expenses
* * * * *
Deferred Sales Load (as a percentage of ________); %
* * * * *
Instructions:
* * * * *
Shareholder Transaction Expenses
5. ``Deferred Sales Load'' includes the maximum total deferred
sales load payable upon redemption, in installments, or both,
expressed as a percentage of the amount or amounts stated in
response to Item 7(g), and may include a tabular presentation,
within the larger table, of the range over time of any deferred
sales load (such as a contingent deferred sales load) that may
change over time, or a schedule of any installment load payments.
* * * * *
6. Item 7 of Part A of Form N-1A [referenced in Secs. 239.15A and
274.11A] is amended by removing the word ``and'' at the end of
paragraph (e), removing the period at the end of paragraph (f) and
adding ``; and'' in its place, and adding paragraph (g) to read as
follows:
Form N-1A
* * * * *
Part A. Information Required in a Prospectus
* * * * *
Item 7. Purchase of Securities Being Offered
* * * * *
(g) a concise explanation of the way in which any deferred sales
load is imposed and computed, including: (i) an explanation of the
basis on which the specified percentage is calculated (e.g., the
original purchase price, the price at redemption, or the net asset
value at the time an installment is paid); (ii) if the method of
determining the amount of load results in a load being applied to
shares or amounts representing shares acquired through the
reinvestment of dividends or other distributions, a statement to
that effect; (iii) a description of the way in which the load is
calculated (e.g., in the case of a partial redemption, whether or
not the 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); and (iv) if applicable, an explanation of the way(s) in
which a shareholder may be required to pay an installment load
(e.g., through the withholding of dividend payments, involuntary
redemptions, separate billing of an investor's account).
7. Item 22 of Part B of Form N-1A [referenced in Secs. 239.15A and
274.11A] is amended by adding at the end of Instruction 1 to paragraph
(b)(i) a sentence that reads as follows:
Form N-1A
* * * * *
Part B. Information Required in a Statement of Additional
Information
* * * * *
Item 22. Calculation of Performance Data
* * * * *
(b) Other Registrants
(i) Total Return * * *
Instructions:
1. * * * If shareholders are charged a deferred sales load,
assume the maximum deferred sales load is deducted at the times,
[[Page 11896]] in the amounts, and under the terms disclosed in the
prospectus.
* * * * *
8. Guide 30 to Form N-1A [referenced in Secs. 239.15A and 274.11A]
is amended by adding a paragraph before the last paragraph to read as
follows:
Guidelines for Form N-1A
* * * * *
Guide 30. Tax Consequences
* * * * *
If the registrant imposes a sales load payable in installments
on the securities being offered, the registrant must describe
briefly in response to Item 6 any related tax consequences for
investors.
* * * * *
Dated: February 23, 1995.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-4998 Filed 3-1-95; 8:45 am]
BILLING CODE 8010-01-P