[Federal Register Volume 61, Number 181 (Tuesday, September 17, 1996)]
[Rules and Regulations]
[Pages 49010-49011]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23439]



[[Page 49009]]


_______________________________________________________________________

Part II





Securities and Exchange Commission





_______________________________________________________________________



17 CFR Part 200, et al.



Registered and Certain Open-End Management Investment Companies; Final 
Rules



17 CFR Part 270



Multiple Class and Series Investment Companies; Rule Amendment; 
Proposed Rule

  Federal Register / Vol. 61, No. 181 / Tuesday, September 17, 1996 / 
Rules and Regulations  

[[Page 49010]]



SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200, 239 and 270
[Release No. IC-22201; File No. S7-2-96]
RIN 3235-AG59


Technical Amendments to Rule Relating to Payments for the 
Distribution of Shares by a Registered Open-End Management Investment 
Company

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Commission is adopting a technical amendment to the rule 
under the Investment Company Act of 1940 that governs the use of assets 
of registered open-end management investment companies (``funds'') to 
pay for the distribution of fund shares. The amendment provides that a 
plan to use fund assets to pay for the distribution of fund shares 
adopted prior to a fund's initial public offering does not have to be 
approved by shareholders. Because the fund's directors must approve the 
plan, and investors that buy their shares in the fund's public 
offering, in effect, ``vote with their dollars'' to accept the plan, 
shareholder approval of the plan prior to the fund's public offering is 
not necessary.

EFFECTIVE DATE: The rule amendments will become effective October 17, 
1996.

FOR FURTHER INFORMATION CONTACT: Marilyn K. Mann, Senior Counsel, or 
Kenneth J. Berman, Assistant Director, at (202) 942-0690, Office of 
Regulatory Policy, Division of Investment Management, 450 Fifth Street, 
NW., Mail Stop 10-2, Washington, DC 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, NW., Mail Stop 10-6, Washington, 
DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is adopting a technical 
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''). The 
Commission also is making technical corrections to rule 30-5 [17 CFR 
200.30-5] and Form N-14 [17 CFR 239.23].

I. Discussion

    The Commission is adopting a technical amendment to rule 12b-1 
under the Investment Company Act, which governs the use of fund assets 
to pay for the distribution of fund shares.1 The amendment 
provides that a plan to use fund assets to pay for the distribution of 
fund shares (a ``rule 12b-1 plan'') adopted prior to a fund's initial 
public offering does not have to be approved by the fund's 
shareholders. The Commission received four comments in response to the 
proposal, all supporting the amendment.2
---------------------------------------------------------------------------

    \1\ The Commission proposed this amendment on January 5, 1996. 
Distribution of Shares by Registered Open-End Management Investment 
Company, Investment Company Act Release No. 21660 (Jan. 5, 1996) [61 
FR 1313 (Jan. 19, 1996)] [hereinafter Proposing Release].
    \2\ The commenters were the Subcommittee on Investment Companies 
and Investment Advisers, Committee on Federal Regulation of 
Securities, Section of Business Law, American Bar Association; the 
Investment Company Institute; Bank One Corporation; and Capital 
Research and Management Company.
---------------------------------------------------------------------------

    Shareholder approval of a rule 12b-1 plan is unnecessary when the 
plan is adopted prior to a fund's initial public offering. Under these 
circumstances, the shareholders voting typically are comprised of 
persons involved in organizing the fund (i.e., the fund's investment 
adviser or its affiliates). Shareholder approval, therefore, is 
virtually automatic, mechanical, and offers no significant protection 
to the fund's shareholders. Rule 12b-1 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, prior to the plan's 
implementation.3 In addition, 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\ Rule 12b-1(b)(2) [17 CFR 270.12b-1(b)(2)]. The fund's board 
also must approve the continuation of the plan at least annually. 
Rule 12b-1(b)(3)(i) [17 CFR 270.12b-1(b)(3)(i)].
    \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]. In 
addition, rule 12b-1 requires fund shareholders to approve any 
changes in the rule 12b-1 plan that would materially increase the 
amount of the asset-based sales load and gives shareholders the 
right to terminate the plan at any time. Rule 12b-1(b)(3)(iii) and 
(4) [17 CFR 270.12b-1(b)(3)(iii) and (4)].
---------------------------------------------------------------------------

    The amended rule requires shareholder approval of a rule 12b-1 plan 
that is adopted after a fund's initial public offering. Shareholder 
approval also is required for a rule 12b-1 plan adopted prior to a 
public offering when fund shares have been sold to persons other than 
those involved in organizing the fund.5 Two commenters requested 
the Commission to clarify how the amended rule would apply to a newly 
created series or class of shares of an existing fund.6 The 
commenters suggested that a series or class that had not been publicly 
offered should be treated in the same manner as a fund that had not 
been publicly offered. The Commission agrees. If an existing fund that 
already offers its shares to the public adds a new series or class 
subject to a rule 12b-1 plan, approval of the plan by shareholders of 
the new series or class is not required prior to any public offering of 
the shares of that series or class. This interpretation is consistent 
with the approach that the Commission has taken with respect to series 
funds.7 In addition, rule 12b-1 specifically provides that a plan 
that covers more than one class of shares must be severable for each 
class, and that whenever action is required to be taken with respect to 
a class, that action must be taken separately for each class.8
---------------------------------------------------------------------------

    \5\ This provision addresses funds that adopt a rule 12b-1 plan 
following the sale of shares to persons other than affiliates of the 
fund or its promoter without engaging in a public offering. The 
proposed amendment referred only to affiliates of the fund and their 
affiliated persons. See Proposing Release, supra note 1, at n.6. 
Consistent with the intent of the amendment and a commenter's 
recommendation, the adopted amendment also refers to the fund's 
promoter and its affiliated persons. See Section 2(a)(30) of the 
Investment Company Act [15 U.S.C. 80a-2(a)(30)] (defining promoter 
as a person who, alone or acting in concert, initiates or directs 
the organization of a fund).
    \6\ Funds often organize themselves as series funds and offer 
investors an opportunity to invest in one or more ``portfolios'' 
each of which has a specific investment objective. The fund will 
offer a series of shares that represents an interest in the 
portfolio in which the investor desires to participate. A fund, or a 
portfolio of a fund, also may offer different classes of shares that 
have different distribution and shareholder service arrangements. 
See rule 18f-3 under the Investment Company Act [17 CFR 270.18f-3].
    \7\ See Exemption for Open-End Management Investment Companies 
Issuing Multiple Classes of Shares; Disclosure by Multiple Class and 
Master-Feeder Funds, Investment Company Act Release No. 19955 (Dec. 
15, 1993) [58 FR 68074 (Dec. 23, 1993)] at n.53 (rule 12b-1 has been 
interpreted to treat each series of a fund as a separate fund). See 
also rule 18f-2 under the Investment Company Act [17 CFR 270.18f-2] 
(requiring the shareholders of the series affected by the matter to 
vote on that matter); Item 22 of Schedule 14A under the Securities 
Exchange Act of 1934 [17 CFR 240.14a-101] (defining a fund for 
purposes of the Commission's proxy rules as a registrant or a 
separate series of a registrant).
    \8\ Rule 12b-1(g) [17 CFR 270.12b-1(g)].
---------------------------------------------------------------------------

II. Technical Corrections

    The Commission is making a technical correction to paragraph 
(a)(8)(ii)(B) of rule 30-5, Delegation of Authority to Director of 
Division of Investment Management.9 That paragraph currently 
contains a reference to paragraphs (a)(9)(i) (A) and (C) of rule 30-5. 
There are no such paragraphs in the rule. The reference instead should 
be to paragraphs (a)(8)(i) (A) and (C) of

[[Page 49011]]

rule 30-5. The Commission also is making a technical correction to Item 
16(10) of Form N-14.10 The last clause of Item 16(10) currently 
includes the phrase ``a meeting of the minutes.'' That phrase should be 
``the minutes of the meeting.''
---------------------------------------------------------------------------

    \9\ 17 CFR 200.30-5(a)(8)(ii)(B).
    \10\ 17 CFR 239.23.
---------------------------------------------------------------------------

III. Cost/Benefit Analysis

    The amendment provides that a rule 12b-1 plan adopted prior to a 
fund's initial public offering does not have to be approved by 
shareholders. Shareholder approval in these circumstances 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. 
Under the amended rule, funds are no longer required to undergo the 
perfunctory exercise of obtaining approval from persons who have 
supplied the fund with its initial capital prior to the fund's initial 
public offering.

IV. Regulatory Flexibility Act Certification

    Pursuant to section 605(b) of the Regulatory Flexibility Act [5 
U.S.C. 605(b)], the Chairman of the Commission certified, at the time 
that the proposed technical amendment to rule 12b-1 was published for 
public comment, that the amendment would not, if adopted, have a 
significant economic impact on a substantial number of small entities. 
No comments were received regarding the certification. The amendment 
enables 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.

V. Statutory Authority

    The Commission is amending rule 12b-1 pursuant to the authority set 
forth in sections 12(b) and 38(a) of the Investment Company Act [15 
U.S.C. 12(b), 37(a)]. The Commission is making technical corrections to 
rule 30-5 pursuant to section 4A of the Securities Exchange Act of 1934 
[15 U.S.C. 78d-1] (``Exchange Act''), and Form N-14 pursuant to 
sections 6, 7, 8, 10 and 19(a) of the Securities Act of 1933 [15 U.S.C. 
77f, 77h, 77j and 77s(a)] and sections 14(a), 14(c) and 23(a) of the 
Exchange Act [15 U.S.C. 78n(a), 78n(c) and 78w].

List of Subjects in 17 CFR Parts 200, 239 and 270

    Authority delegations (Government agencies), Investment companies, 
Reporting and recordkeeping requirements, Securities.

Text of Rule and Form Amendments

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

PART 200--ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION 
REQUESTS

    1. The authority citation for part 200, subpart A continues to read 
in part as follows:

    Authority: 15 U.S.C. 77s, 78d-1, 78d-2, 78w, 78ll(d), 79t, 
77sss, 80a-37, 80b-11, unless otherwise noted.
* * * * *
    2. Section 200.30-5 is amended in paragraph (a)(8)(ii)(B) by 
removing the cite ``(a)(9)(i) (A) and (C)'' and adding ``(a)(8)(i) (A) 
and (C)''.

PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

    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. Form N-14 [referenced in 17 CFR 239.23] is amended in the last 
clause of Item 16(10) by removing the phrase ``a meeting of the 
minutes'' and adding in its place ``the minutes of the meeting''.

    Note: Form N-14 does not, and the amendment to Form N-14 will 
not, appear in the Code of Federal Regulations.

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

    5. 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;
* * * * *
    6. 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, 
affiliated persons of such persons, promoters of the company, or 
affiliated persons of such promoters;
* * * * *
    By the Commission.

    Dated: September 9, 1996.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-23439 Filed 9-16-96; 8:45 am]
BILLING CODE 8010-01-P