[Federal Register Volume 62, Number 192 (Friday, October 3, 1997)]
[Rules and Regulations]
[Pages 51762-51766]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-26145]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 270

[Release No. IC-22835; File No. S7-24-96]
RIN 3235-AG72


Rule Amendments Relating to Multiple Class and Series Investment 
Companies

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Commission is adopting amendments to the rule under the 
Investment Company Act of 1940 that permits open-end management 
investment companies (``funds'') to issue multiple classes of shares 
representing interests in the same portfolio. The amendments expand and 
clarify the methods by which a multiple class fund may allocate among 
its classes income, gains and losses, and expenses not allocated to a 
particular class, and clarify the shareholder voting provisions of the 
rule. The Commission also is adopting a technical amendment that 
clarifies the application to series funds of the rule under the 
Investment Company Act that governs the use of fund assets to pay for 
the distribution of fund shares.

EFFECTIVE DATE: November 10, 1997.

FOR FURTHER INFORMATION CONTACT: Thomas M. J. Kerwin, Senior Counsel, 
Office of Regulatory Policy, at (202) 942-0690, or, regarding 
accounting issues, John S. Capone, Assistant Chief Accountant, Office 
of the Chief Accountant, at (202) 942-0590, in the Division of 
Investment Management, Mail Stop 10-2, Securities and Exchange 
Commission, 450 Fifth Street, N.W., 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, 
Mail Stop 10-6, Securities and Exchange Commission, 450 Fifth Street, 
N.W., Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to 
rules 18f-3 [17 CFR 270.18f-3] and 12b-1 [17 CFR 270.12b-1] under the 
Investment Company Act of 1940 [15 U.S.C. 80a] (the ``Investment 
Company Act'').

Executive Summary

    The Commission is adopting amendments to rule 18f-3 under the 
Investment Company Act, the rule that permits a fund to issue multiple 
classes of shares representing interests in the same investment 
portfolio. The amendments expand the specified methods a multiple class 
fund may use to allocate among its classes income, gains and losses 
(including unrealized appreciation or depreciation), and expenses not 
allocated to a particular class. The amendments also permit a fund to 
use any other allocation method that the fund's board of directors 
determines is fair to the shareholders of each class. In addition, the 
amendments clarify the shareholder voting rights provision of the rule.
    The Commission also is adopting a technical amendment to rule 12b-1 
under the Investment Company Act, the rule that governs the use of fund 
assets to pay for the distribution of fund shares in accordance with a 
``rule 12b-1 plan.'' The amendment codifies existing interpretations of 
how various provisions of the rule apply to a ``series''

[[Page 51763]]

fund (i.e., a fund that offers investors an opportunity to invest in 
one or more portfolios, each of which has a specific investment 
objective).

I. Discussion

A. Rule 18f-3

    Rule 18f-3 under the Investment Company Act establishes a framework 
for a fund's issuance of multiple classes of shares representing 
interests in the same portfolio. A fund generally establishes a 
multiple class arrangement to offer investors a choice of methods for 
paying distribution costs or to allow the fund to use alternative 
distribution channels more efficiently. Rule 18f-3 addresses issues 
that may create conflicts among multiple classes, including how a fund 
must allocate to each class its share of income, gains and losses, and 
expenses that are not allocated to a particular class (``fundwide 
expenses'').1
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    \1\ In this release, ``gains and losses'' include both realized 
gains and losses and unrealized appreciation and depreciation. 
``Fundwide expenses'' may include expenses that are attributable to 
more than one class but fewer than all classes, such as the costs of 
adding new classes to an existing multiple class structure. See 
Exemption for Open-End Management Investment Companies Issuing 
Multiple Classes of Shares; Disclosure by Multiple Class and Master-
Feeder Funds; Class Voting on Distribution Plans, Investment Company 
Act Release No. 20915 at nn.26-27 and accompanying text (Feb. 23, 
1995) [60 FR 11876 (Mar. 2, 1995)] [hereinafter 1995 Release].
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    Rule 18f-3(c) permits a fund generally to allocate income, gains 
and losses, and fundwide expenses based on the ratio of class net 
assets to fund net assets (``relative net assets'').2 The 
rule also permits a fund that declares dividends daily (a ``daily 
dividend fund''), such as a money market fund, to select either of two 
alternative allocation methods.3 A daily dividend fund that 
maintains the same net asset value (``NAV'') per share in each class 
may allocate income, gains and losses, and fundwide expenses to each 
share without regard to class.4 A daily dividend fund that 
maintains the same NAV per share in each class may also make these 
allocations to each class based on relative net assets after 
subtracting the value of subscriptions for non-settled shares (i.e., 
shares for which payment in federal funds has not been received) (the 
``settled shares method'').5
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    \2\ Rule 18f-3(c)(1) [17 CFR 270.18f-3(c)(1)]; see amended rule 
18f-3(c)(1)(i) [17 CFR 270.18f-3(c)(1)(i)].
    \3\ Rule 18f-3(c)(2) [17 CFR 270.18f-3(c)(2)]; see amended rule 
18f-3(c)(2)(i) [17 CFR 270.18f-3(c)(2)(i)] (defining a daily 
dividend fund as ``any company that has a policy of declaring 
distributions of net investment income daily, including any money 
market fund that determines net asset value using the amortized cost 
method permitted by section 270.2a-7 [rule 2a-7]'').
    \4\ Rule 18f-3(c)(2)(i) [17 CFR 270.18f-3(c)(2)(i)]; see amended 
rule 18f-3(c)(1)(iv) [17 CFR 270.18f-3(c)(1)(iv)]. Use of this 
method in those circumstances is equivalent to allocation based on 
relative net assets. The rule also requires funds using this method 
to obtain the agreement of their service providers that, to the 
extent necessary to assure that all classes maintain the same NAV 
per share, providers will waive or reimburse class expenses. Rule 
18f-3(c)(2)(i). The amended rule clarifies that amounts waived or 
reimbursed by service providers under these agreements may not be 
carried forward or recouped later. Amended rule 18f-3(c)(1)(iv).
    \5\ Rule 18f-3(c)(2)(ii) [17 CFR 270.18f-3(c)(2)(ii)]; see 
amended rule 18f-3(c)(1)(iii), (c)(2)(iii) [17 CFR 270.18f-
3(c)(1)(iii), (c)(2)(iii)]. The settled shares method is consistent 
with the policy of many daily dividend funds to withhold dividends 
from non-settled shares. Payment of dividends on non-settled shares 
would dilute dividends paid on settled shares, since fund income is 
attributable only to settled shares. See Rule Amendments Relating to 
Multiple Class and Series Investment Companies, Investment Company 
Act Release No. 22203 at n.7 (Sept. 9, 1996) [61 FR 49022 (Sept. 17, 
1996)] [hereinafter Proposing Release] (investor's payment in 
federal funds may not be collected until three days after share 
purchase; at time of purchase fund may buy portfolio securities to 
be paid for in three days, but fund does not earn interest on 
securities until it makes payment; buying other portfolio securities 
that settle daily against federal funds is not feasible until 
investor's payment has been collected).
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    In September 1996 the Commission proposed amendments to rule 18f-3 
to give daily dividend funds greater flexibility in using the settled 
shares method, to permit funds to use a new allocation method (the 
``simultaneous equations method''), and to clarify certain other 
aspects of the rule.6 The Commission received letters from 
two commenters in response to the proposal, both generally favoring the 
proposed amendments.7 The Commission is adopting the 
proposed amendments with certain revisions, as described below.
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    \6\ See Proposing Release, supra note .
    \7\ See Letter from Subcommittee on Investment Companies and 
Investment Advisers, Committee on Federal Regulation of Securities, 
Section of Business Law, American Bar Association (``ABA''), to 
Jonathan G. Katz, Secretary, SEC (Nov. 19, 1996) (hereinafter ``ABA 
Letter''); Letter from Gregory M. Smith, Director-Operations, 
Investment Company Institute (``ICI''), to Jonathan G. Katz, 
Secretary, SEC (Nov. 18, 1996) (hereinafter ``ICI Letter'').
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1. Expanded Allocation Methods
    a. Settled Shares Method. Some daily dividend funds use the settled 
shares method in reliance upon exemptive orders that predate the 
adoption of rule 18f-3.8 These funds have been unable to 
rely on rule 18f-3 because they do not maintain the same NAV per share 
in each class, a condition for use of the settled shares method under 
the rule. Because the settled shares method produces appropriate 
allocations even if NAV per share differs among classes, the Commission 
proposed to amend rule 18f-3 to permit a daily dividend fund to use the 
settled shares method without maintaining the same NAV per share in 
each class. Commenters supported the amendment, which the Commission is 
adopting as proposed.9
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    \8\ Such orders may require compliance with conditions, such as 
disclosure of differences among multiple classes, that do not apply 
to multiple class funds that rely on rule 18f-3 and related 
requirements of Form N-1A [17 CFR 239.15A, 274.11A].
    \9\ See amended rule 18f-3(c)(1)(iii).
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    The Commission is also amending rule 18f-3 to clarify that a daily 
dividend fund may simultaneously use the settled shares method to 
allocate income and fundwide expenses and use the relative net assets 
method to allocate gains and losses.10 This combination of 
methods is consistent with fund policies that commonly permit the 
participation of non-settled shares in any increase or decrease in NAV 
that results from appreciation or depreciation of portfolio securities, 
while excluding non-settled shares from participation in daily 
dividends.11
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    \10\ Amended rule 18f-3(c)(1)(iii). The staff of the Commission 
previously approved use of this combination of methods. See Letter 
from the Division of Investment Management to Investment Company 
Chief Financial Officers at 5 (Nov. 2, 1995).
    \11\ See ICI Letter, supra note 7, at 2 (daily dividend funds 
generally process purchase orders when received, before the 
collection of payment in federal funds, to enable the purchaser of 
non-settled shares to participate in changes in NAV per share from 
appreciation or depreciation of portfolio securities during 
collection period; most funds nevertheless pay dividends only on 
settled shares). Combining these methods may be essential if a fund 
maintains the same NAV per share for all classes, since allocating 
gains and losses (which affect NAV) based only on settled shares 
could cause a divergence in NAV among classes. See Proposing 
Release, supra note , at n.11 (use of settled shares method requires 
reduction of net assets of fund and each class by unpaid 
subscriptions; percentage reduction of each class's net assets would 
vary for each class because of differing amounts of non-settled 
shares; resulting different allocations of gains and losses to each 
class would affect NAV differently).
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    b. Simultaneous Equations Method. The Commission is adopting, as 
proposed, an amendment to rule 18f-3 to permit any fund to allocate 
income, gains and losses, and fundwide expenses based on an additional 
method, the ``simultaneous equations method.'' 12 Under this 
method, allocations are based on simultaneous equations designed to 
produce an annualized rate of return of each class that generally 
differs from that of the other classes only by the expense 
differentials among the classes.13 A fund

[[Page 51764]]

using this method would allocate each day's income, gains and losses, 
and fundwide expenses to each class, and simultaneously reallocate 
cumulative undistributed income and undistributed or unrealized capital 
items among the classes.14 Commenters agreed that the 
results derived from this method are consistent with the purpose of the 
rule's allocation provisions.
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    \12\ Amended rule 18f-3(c)(1)(ii), (c)(2)(iv) [17 CFR 270.18f-
3(c)(1)(ii), (c)(2)(iv)].
    \13\ Amended rule 18f-3(c)(2)(iv). For example, if fundwide 
expenses amounted to .75% of net assets for each class on average, 
and Class A were assessed a class expense ratio of .30% of net 
assets annually and Class B were assessed .80% for class expenses, 
use of the simultaneous equations method during a full year that 
produced gross returns of 10.75% should result in an annualized rate 
of return of approximately 9.70% for Class A and 9.20% for Class B.
    \14\ The equations should allocate the day's income, realized 
gains (or losses), unrealized appreciation (or depreciation), and 
fundwide expenses and reallocate each class's undistributed net 
investment income, undistributed realized gains (or losses), and 
unrealized appreciation (or depreciation).
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    The amended rule does not specify particular equations to be used 
in implementing this method.15 Appropriate equations may 
vary depending on the number of classes offered and other factors such 
as whether expense differentials among classes are fixed or variable. 
Commenters also confirmed the Commission's understanding that equations 
may be further refined as funds gain more experience in using this 
method 16
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    \15\ An example of equations for a fund having two classes of 
shares appeared in an appendix to the Proposing Release, and is 
attached to this release as Appendix A.
    \16\ See ICI Letter, supra note 7, at 2 (recommending that 
Commission not specify particular equations). Any equations selected 
generally should be applied on a consistent basis. See infra note 21 
and accompanying text.
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    c. Other Allocation Methods. The Commission is also amending rule 
18f-3 to permit a fund to use any appropriate allocation method not 
specified in the rule if the fund's directors, including a majority of 
directors who are not interested persons of the fund, determine that 
the method is fair to each class of shareholders.17 The 
amendment also would require directors to determine that under the new 
method, the annualized rate of return of each class will generally 
differ from that of the other classes only by the expense differentials 
among the classes.18 This amendment will provide funds with 
flexibility and avoid the possible need for further administrative 
relief to permit new allocation methods that may be developed. The 
Commission believes it is appropriate to require a specific board 
determination concerning the fairness of an alternative allocation 
method to assure that the selection of such a method is fair to each 
class.19 In making this determination, the fund board may 
reasonably rely on the opinions of experts such as accounting 
firms.20 A fund would be expected to apply on a consistent 
basis any allocation method selected under this or any other provision 
of the rule.21
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    \17\ Amended rule 18f-3(c)(1)(v) [17 CFR 270.18f-3(c)(1)(v)]; 
see section 2(a)(19) of the Investment Company Act [15 U.S.C. 80a-
2(a)(19)] (defining ``interested person'' of a fund).
    \18\ See supra note 13 and accompanying text.
    \19\ The allocation methods specified in the rule provide 
standards for determining whether a new allocation method is fair to 
shareholders.
    \20\ The amended rule should not impose significant additional 
burdens on fund boards, which remain free to permit only the use of 
one of the allocation methods specified in the rule.
    \21\ Amended rule 18f-3(c)(1) [17 CFR 270.18f-3(c)(1)]; see also 
1995 Release, supra note 1, at text accompanying nn. 24-25. Because 
the selected allocation method should be consistently applied from 
period to period, changes in the method are expected to be rare. See 
also rule 18f-3(d) [17 CFR 270.18f-3(d)] (before any material 
amendment of a plan governing a multiple class arrangement, the 
fund's directors must determine that the plan as proposed to be 
amended, including the expense allocation, is in the best interests 
of each class individually and the fund as a whole).
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2. Voting Rights
    Rule 18f-3 contains certain conditions that are applicable to 
arrangements involving a class of shares with one type of distribution 
charge (the ``purchase class'') that automatically convert into another 
class (the ``target class'') after a specified period of 
time.22 The rule requires a fund having such an arrangement 
to obtain the approval of the shareholders of the purchase class 
whenever the fund materially increases expenses for the target 
class.23 The amended rule, as proposed, clarifies that this 
provision applies only if the expense increase is submitted for a 
separate vote of target class shareholders.24
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    \22\ The purchase class typically pays an asset-based 
distribution fee and a contingent deferred sales charge. The 
conversion feature is intended to permit long-term shareholders to 
receive the benefit of a lower distribution fee (or no fee) charged 
to the target class. See Proposing Release, supra note 5, at n.16 
and accompanying text.
    \23\ In the alternative, the fund could establish a new target 
class for purchase class shareholders on the same terms that applied 
to the target class before the increase.
    \24\ Amended rule 18f-3(e)(2)(iii) [17 CFR 270.18f-
3(e)(2)(iii)]. An increase that implicates this provision would 
include, for example, a proposal to increase distribution fees 
materially for the target class under a rule 12b-1 plan or certain 
shareholder services plans.
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B. Rule 12b-1
    The Commission also is adopting as proposed a technical amendment 
to rule 12b-1 that clarifies the rule's application to separate series 
or portfolios of a fund.25 Rule 12b-1 permits the use of 
fund assets to finance the distribution of fund shares pursuant to a 
written plan that describes the distribution financing arrangement and 
contains certain conditions.26 Among other conditions, the 
rule 12b-1 plan must allow fund shareholders to vote on certain matters 
including approval, amendment, or termination of the plan.27 
Rule 12b-1 provides that a plan may cover more than one class of shares 
if the plan's provisions are severable for each class and if votes by 
shareholders and other required actions are taken separately for each 
class.28 The amendment codifies prior interpretations that a 
rule 12b-1 plan also may cover more than one series or portfolio under 
the same conditions applicable when a plan covers more than one 
class.29
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    \25\ Amended rule 12b-1(g) [17 CFR 270.12b-1(g)].
    \26\ Rule 12b-1(b) [17 CFR 270.12b-1(b)].
    \27\ See rule 12b-1(b)(1), (b)(3)(iii) to (iv)(A), (b)(4), (g) 
[17 CFR 270.12b-1(b)(1), (b)(3)(iii) to (iv)(A), (b)(4), (g)].
    \28\ Rule 12b-1(g).
    \29\ Amended rule 12b-1(g); see Distribution of Shares by 
Registered Open-End Management Investment Company, Investment 
Company Act Release No. 22201 at n.7 and accompanying text (Sept. 9, 
1996) [61 FR 49010 (Sept. 17, 1996)] (rule 12b-1 has been 
interpreted to treat each series of a fund as a separate fund; a 
series or class not publicly offered should be treated in same way 
as a fund not publicly offered). The amended rule also deletes 
current rule 12b-1(g)'s description of certain voting rights of 
purchase class shareholders under rule 18f-3, which is a matter 
addressed by rule 18f-3 itself. The amended rule substitutes a 
reference to amended rule 18f-3(e)(2)(iii). Amended rule 12b-1(g).
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II. Cost/Benefit Analysis and Effects On Competition, Efficiency, And 
Capital Formation

    In the proposing release, the Commission provided a Cost-Benefit 
Analysis on the amendments and requested comments. No comments were 
received on the analysis. The Commission is sensitive to the costs and 
benefits imposed by its rules. The amendments to rule 18f-3 provide 
greater flexibility to multiple class funds in allocating to each class 
its proportionate share of income, gains and losses, and fundwide 
expenses. The amended rule gives every fund a selection of one or more 
new specified methods without limiting the use of previously authorized 
methods. The amended rule also authorizes the use of an unspecified 
method selected by the fund subject to appropriate safeguards. A fund's 
selection of any method permitted by the amendments should not 
substantially increase the fund's costs in making allocations. The 
amended rule also reduces costs by allowing more funds to rely on the 
rule instead of obtaining and complying with exemptive orders, and by 
eliminating

[[Page 51765]]

unnecessary requirements to solicit votes of purchase class 
shareholders. The amendment to rule 12b-1 does not impose a burden 
because it codifies an existing interpretation of the rule.
    Section 2(c) of the Investment Company Act provides that whenever 
the Commission is engaged in rulemaking and is required to consider or 
determine whether an action is necessary or appropriate in the public 
interest, the Commission must consider, in addition to the protection 
of investors, whether the action will promote efficiency, competition, 
and capital formation.30 The Commission has considered the 
amendments to rule 18f-3 and rule 12b-1 in light of these standards. 
The Commission believes the amendments to rule 18f-3 are consistent 
with the public interest and may promote efficiency and competition 
because they broaden the scope and flexibility of an exemptive rule, 
may reduce costs and other burdens for funds, and may thereby encourage 
more funds to offer multiple classes of shares. The Commission believes 
that the amendments will have no adverse effect on capital formation. 
The amendment to rule 12b-1, as a codification of an existing 
interpretation of the rule, will not have significant effects on 
efficiency, competition, or capital formation.
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    \30\ 15 U.S.C. 80a-2(c).
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III. Summary of Final Regulatory Flexibility Analysis

    The Initial Regulatory Flexibility Analysis (``IRFA''), which was 
prepared in accordance with 5 U.S.C. 603, was published in Investment 
Company Act Release No. 22203. No comments were received on the IRFA. 
The Commission has prepared a Final Regulatory Flexibility Analysis 
(``FRFA'') in accordance with 5 U.S.C. 604. The FRFA indicates that the 
amendments to rule 18f-3 enable multiple class funds, including small 
entities, to rely on the rule instead of exemptive orders and to 
benefit from more flexible compliance requirements by expanding 
specified allocation methods and permitting the use of an unspecified 
method if directors determine that it is fair. In addition, the FRFA 
states that the amendments clarify compliance requirements by 
eliminating unnecessary voting provisions consistent with the 
Commission's original intent. The FRFA explains that the amendment to 
rule 12b-1 codifies existing interpretations treating multiple series 
of a series fund like multiple classes of a portfolio.
    The FRFA notes that in response to comments from the public, the 
Commission modified the amendments to permit the selection of 
unspecified methods. The FRFA also discusses the amendments' effect on 
small entities that are registered open-end management investment 
companies. For purposes of the amendments, small entities are those 
having net assets of $50 million or less as of the end of their most 
recent fiscal year. The Commission estimates that there are 500 small 
entities out of 3000 active open-end management investment companies, 
and that 43 of those 500 offer multiple classes of shares. The FRFA 
states that the rules do not impose any new reporting, recordkeeping, 
or other compliance requirements.
    The FRFA also discusses the Commission's efforts to minimize 
significant economic impact on small entities, noting that the 
amendments' effect is generally positive for all affected funds 
including small entities. The FRFA notes that the Commission considered 
several alternatives that might minimize any effect on small entities, 
including (a) the establishment of differing compliance or reporting 
requirements or timetables that take into account the resources 
available to small entities; (b) the clarification, consolidation, or 
simplification of compliance and reporting requirements under the rules 
for small entities; (c) the use of performance rather than design 
standards; and (d) an exemption from coverage of the rules or any part 
of the rules for small entities. The FRFA states that the amendments 
generally increase flexibility, simplify or clarify existing compliance 
requirements, and introduce performance standards by permitting the use 
of an unspecified allocation method determined to be fair. In light of 
these considerations, the FRFA states that it would be inconsistent 
with the purposes of the Act to exempt small entities from the 
amendments or to specify different requirements for small entities. 
Different compliance or reporting requirements for small entities are 
not necessary because the rules do not establish any new reporting, 
recordkeeping, or compliance requirements. The Commission has 
determined that it is not feasible to further clarify, consolidate, or 
simplify the rules for small entities consistently with the protection 
of investors.
    Cost-benefit information in the ``Cost/Benefit Analysis'' section 
of this Release is reflected in the Analysis. A copy of the Final 
Regulatory Flexibility Analysis may be obtained by contacting Thomas M. 
J. Kerwin, Mail Stop 10-2, Securities and Exchange Commission, 450 
Fifth Street, N.W., Washington, D.C. 20549.

IV. 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. 80a-12(b), -37(a)], and is amending rule 18f-3 under sections 
6(c), 18(i), and 38(a) of the Investment Company Act [15 U.S.C. 80a-
6(c), -18(i), -37(a)].

List of Subjects in 17 CFR Part 270

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

Text Of Rule Amendments

    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 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 (g) to read 
as follows:


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

* * * * *
    (g) If a plan covers more than one series or class of shares, the 
provisions of the plan must be severable for each series or class, and 
whenever this section provides for any action to be taken with respect 
to a plan, that action must be taken separately for each series or 
class affected by the matter. Nothing in this paragraph (g) shall 
affect the rights of any purchase class under Sec. 270.18f-
3(e)(2)(iii).
    3. Section 270.18f-3 is amended by revising paragraphs (c) and 
(e)(2)(iii) to read as follows:


Sec. 270.18f-3  Multiple class companies.

* * * * *
    (c) (1) Income, realized gains and losses, unrealized appreciation 
and depreciation, and Fundwide Expenses shall be allocated based on one 
of the following methods (which method shall be applied on a consistent 
basis):
    (i) To each class based on the net assets of that class in relation 
to the net assets of the company (``relative net assets'');
    (ii) To each class based on the Simultaneous Equations Method;
    (iii) To each class based on the Settled Shares Method, provided 
that the

[[Page 51766]]

company is a Daily Dividend Fund (such a company may allocate income 
and Fundwide Expenses based on the Settled Shares Method and realized 
gains and losses and unrealized appreciation and depreciation based on 
relative net assets);
    (iv) To each share without regard to class, provided that the 
company is a Daily Dividend Fund that maintains the same net asset 
value per share in each class; that the company has received 
undertakings from its adviser, underwriter, or any other provider of 
services to the company, agreeing to waive or reimburse the company for 
payments to such service provider by one or more classes, as allocated 
under paragraph (a)(1) of this section, to the extent necessary to 
assure that all classes of the company maintain the same net asset 
value per share; and that payments waived or reimbursed under such an 
undertaking may not be carried forward or recouped at a future date; or
    (v) To each class based on any other appropriate method, provided 
that a majority of the directors of the company, and a majority of the 
directors who are not interested persons of the company, determine that 
the method is fair to the shareholders of each class and that the 
annualized rate of return of each class will generally differ from that 
of the other classes only by the expense differentials among the 
classes.
    (2) For purposes of this section:
    (i) Daily Dividend Fund means any company that has a policy of 
declaring distributions of net investment income daily, including any 
money market fund that determines net asset value using the amortized 
cost method permitted by Sec. 270.2a-7;
    (ii) Fundwide Expenses means expenses of the company not allocated 
to a particular class under paragraph (a)(1) of this section;
    (iii) The Settled Shares Method means allocating to each class 
based on relative net assets, excluding the value of subscriptions 
receivable; and
    (iv) The Simultaneous Equations Method means the simultaneous 
allocation to each class of each day's income, realized gains and 
losses, unrealized appreciation and depreciation, and Fundwide Expenses 
and reallocation to each class of undistributed net investment income, 
undistributed realized gains or losses, and unrealized appreciation or 
depreciation, based on the operating results of the company, changes in 
ownership interests of each class, and expense differentials between 
the classes, so that the annualized rate of return of each class 
generally differs from that of the other classes only by the expense 
differentials among the classes.
* * * * *
    (e) * * *
    (2) * * *
    (iii) If the shareholders of the target class approve any increase 
in expenses allocated to the target class under paragraphs (a)(1)(i) 
and (a)(1)(ii) of this section, and the purchase class shareholders do 
not approve the increase, the company will establish a new target class 
for the purchase class on the same terms as applied to the target class 
before that increase.
* * * * *
    Dated: September 26, 1997.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.

    Note: Appendix A to the preamble will not appear in the Code of 
Federal Regulations.

Appendix A--Simultaneous Equations Method

    The equations set forth below are examples of a set of 
simultaneous equations that could be used as an allocation method in 
a multiple class fund with two classes at the end of day t. The 
inception date of class B shares is assumed to be on or after the 
inception date of class A shares.

Equation 1: At + Bt = Gt + 
Ct
Equation 2: At/Sat-Bt/
Sbt = dx(NAV0)

where:
At: the total net assets to be allocated to class A at 
the end of day t
Bt: the total net assets to be allocated to class B at 
the end of day t
Gt: the cumulative undistributed net change in assets 
from operations for the fund at the end of day t
Ct: the cumulative capital for the fund at the end of day 
t
Sat: the number of shares in class A at the end of day t
Sbt: the number of shares in class B at the end of day t
d: the time adjustment factor, calculated as the number of days 
since the inception of class B or the ex-dividend date of the last 
income distribution, whichever is more recent, divided by 365
x: the differential in expense ratios between the two classes
NAV0: the NAV per share for class A and class B on day 0, 
where day 0 is either the day class B commences trading or the ex-
dividend date of the last income distribution, whichever is more 
recent.

[FR Doc. 97-26145 Filed 10-2-97; 8:45 am]
BILLING CODE 8010-01-P