[Federal Register Volume 61, Number 13 (Friday, January 19, 1996)]
[Proposed Rules]
[Pages 1313-1314]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-504]



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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 270

[Release No. IC-21660; File No. S7-2-96]
RIN 3235-AG59


Distribution of Shares by Registered Open-End Management 
Investment Company

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule amendment.

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SUMMARY: The Commission is proposing a technical amendment to the rule 
under the Investment Company Act of 1940 relating to the distribution 
of shares by registered open-end management investment companies. Among 
other things, the rule requires the payment of an asset-based sales 
load to be made pursuant to a written plan that contains certain 
provisions and specifies the amount of the asset-based load. The 
proposed amendment would provide that a plan adopted prior to an 
investment company's initial public offering would not have to be 
approved by shareholders. Since the investment company's directors must 
approve the plan, and investors that buy their shares after the 
company's public offering, in effect, ``vote with their dollars'' to 
accept the plan, shareholder approval of the plan prior to the 
company's public offering is not necessary.

DATES: Comments must be received on or before February 22, 1996.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
N.W., Stop 6-9, Washington, D.C. 20549. All comment letters should 
refer to File No. S7-2-96. All comments received will be available for 
public inspection and copying in the Commission's Public Reference 
Room, 450 Fifth Street, N.W., Washington, D.C. 20549.

FOR FURTHER INFORMATION CONTACT: Holly Hill-Little, Staff Attorney, or 
Elizabeth R. Krentzman, Assistant Chief, (202) 942-0690, Office of 
Regulatory Policy, Division of Investment Management, 450 Fifth Street, 
N.W., Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: The Commission today is requesting public 
comment on a proposed amendment to rule 12b-1 [17 CFR 270.12b-1] under 
the Investment Company Act of 1940 [15 U.S.C. 80a] (the ``Investment 
Company Act'').

I. Discussion

    Rule 12b-1 governs the payment of asset-based sales loads by 
registered open-end management investment companies (individually, a 
``fund''). Among other things, rule 12b-1 requires a fund's payment of 
an asset-based sales load to be made pursuant to a written plan that 
contains certain provisions and specifies the amount of the load (a 
``rule 12b-1 plan'').1 The rule requires a rule 12b-1 plan to be 
approved by a majority of the fund's board of directors, including a 
majority of the independent directors, and a majority of the fund's 
outstanding shares prior to the plan's implementation.2

    \1\ 17 CFR 270.12b-1(b).
    \2\ 17 CFR 270.12b-1(b)(1) and (2). The fund's board also must 
approve the continuation of the plan at least annually. 17 CFR 
270.12b-1(b)(3)(i).
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    The shareholder approval requirement is unnecessary when a rule 
12b-1 plan is adopted prior to a fund's initial public offering. Under 
these circumstances, the shareholders voting typically will be 
comprised of persons involved in organizing the fund (i.e., the fund's 
investment adviser or its affiliates).3 Shareholder approval, 
therefore, is virtually automatic, mechanical, and offers no real 
protection to the fund's shareholders. Investors purchasing shares in a 
fund's initial public offering, in effect, ``vote with their dollars'' 
to accept the fund's rule 12b-1 plan since the terms of the plan, and 
its effects on fund expenses, are disclosed in the fund's 
prospectus.4

    \3\ In 1992, the Division of Investment Management discontinued 
the practice of requiring funds to submit their rule 12b-1 plans and 
certain other matters to a shareholder vote following the initial 
public offering of the fund's shares. See Investment Company 
Institute (pub. avail. Nov. 6, 1992).
    \4\ Items 2 and 7 of Form N-1A under the Securities Act of 1933 
and the Investment Company Act, 17 CFR 239.15A and 274.11A.
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    As noted above, the fund's directors must approve the rule 12b-1 
plan, including the asset-based load payable thereunder. In addition, 
fund shareholders must approve any changes in the rule 12b-1 plan that 
would materially increase the amount of the asset-based sales load and 
have the right to terminate the plan at any time. Taken together, these 
provisions provide shareholders with sufficient protection, without the 
need for a vote prior to the fund's public offering.
    The proposed amendment would provide that a rule 12b-1 plan adopted 
prior to a fund's initial public offering would not have to be approved 
by shareholders.5 If a fund adopts a rule 12b-1 plan following a 
public offering, the amended rule, like the current rule, would require 
the fund's shareholders to approve the plan.6 The Commission 
requests comment on the proposed amendment.

    \5\ The Division of Investment Management has recommended 
eliminating the requirement for a vote on rule 12b-1 plans by 
initial fund shareholders. Division of Investment Management, SEC, 
Protecting Investors: A Half Century of Investment Company 
Regulation 277-78 (1992). Commenters, including the Investment 
Company Institute, also have recommended eliminating this 
requirement. Memorandum of the Investment Company Institute, 
Proposals To Improve Investment Company Regulation 27 (July 19, 
1995).
    \6\ The proposed amendment would continue to require shareholder 
approval of a plan that is adopted after the sale of the fund's 
securities to persons who are not affiliates of the fund or its 
sponsor. Thus, for example, a plan would have to be approved by 
shareholders if adopted following the distribution of securities to 
persons other than fund insiders who provide the fund's ``seed 
capital'' required by section 14 of the Investment Company Act [15 
U.S.C. 80a-14], without regard to whether the offering was 
registered under the Securities Act of 1933 [15 U.S.C. 77a].
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II. Cost/Benefit Analysis

    The proposed amendment would provide that a rule 12b-1 plan adopted 
prior to a fund's initial public offering would not have to be approved 
by shareholders. Shareholder approval is unnecessary since the fund's 
board of directors must approve the rule 12b-1 plan, and investors 
participating in the fund's initial public offering effectively ``vote 
with their dollars'' to accept the plan. The proposed amendment, if 
adopted, would no longer require funds to undergo the perfunctory 
exercise of obtaining approval from persons who have supplied the fund 
with its initial capital prior to the fund's public offering.

III. Summary of Initial Regulatory Flexibility Analysis

    Pursuant to section 605(b) of the Regulatory Flexibility Act 
[U.S.C. 605(b)], the Chairman of the Commission has certified that the 
proposed amendment would not, if adopted, have a significant economic 
impact on a substantial number of small entities. The amendment would 
enable funds, including small entities, to forgo the minimal time and 
expense associated with obtaining shareholder approval of rule 12b-1 
plans from persons who have supplied the fund with its initial capital 
prior to the fund's initial public offering. The Chairman's 

[[Page 1314]]
certification is attached to this release as Appendix A.

IV. Statutory Authority

    The Commission is proposing to amend rule 12b-1 pursuant to the 
authority set forth in sections 6(c), 12(b) and 38(a) of the Investment 
Company Act [15 U.S.C. 6(c), 12(b), 37(a)].

Text of Proposed Rule Amendments

List of Subjects in 17 CFR Part 270

    Investment companies, Reporting and recordkeeping requirements, 
Securities.
    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;
* * * * *
    2. Section 270.12b-1 is amended by revising paragraph (b)(1) to 
read as follows:


Sec. 270.12b-1  Distribution of shares by registered open-end 
management investment company.

* * * * *
    (b) * * *
    (1) Such plan has been approved by a vote of at least a majority of 
the outstanding voting securities of such company, if adopted after any 
public offering of the company's voting securities or the sale of such 
securities to persons who are not affiliated persons of the company or 
affiliated persons of such persons;
* * * * *
    By the Commission.

    Dated: January 5, 1996.
Margaret H. McFarland,
Deputy Secretary.
    Note: Appendix A to the Preamble will not appear in the Code of 
Federal Regulations.

Appendix A

Regulatory Flexibility Act Certification

    I, Arthur Levitt, Chairman of the Securities and Exchange 
Commission, hereby certify, pursuant to 5 U.S.C. 605(b), that the 
proposed amendment to rule 12b-1 [17 CFR 270.12b-1] under the 
Investment Company Act of 1940 [15 U.S.C. 80a-1 et seq.], which 
would provide that a plan for the payment of an asset-based sales 
load adopted prior to an investment company's initial public 
offering would not have to be approved by shareholders, would not, 
if adopted, have a significant economic impact on a substantial 
number of small entities. The proposed amendment would enable 
investment companies, including small entities, to forgo the minimal 
time and expense associated with obtaining shareholder approval of 
these plans from persons who have supplied the companies with their 
initial capital. Accordingly, the proposed amendment would not have 
a significant economic impact on a substantial number of small 
entities.

    Dated: December 28, 1995.
Arthur Levitt,
Chairman.
[FR Doc. 96-504 Filed 1-18-96; 8:45 am]
BILLING CODE 8010-01-P