[Federal Register Volume 68, Number 247 (Wednesday, December 24, 2003)]
[Proposed Rules]
[Pages 74732-74743]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-31545]



[[Page 74731]]

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Part III





Securities and Exchange Commission





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17 CFR Parts 239 and 274



Disclosure of Breakpoint Discounts by Mutual Funds; Proposed Rule

  Federal Register / Vol. 68, No. 247 / Wednesday, December 24, 2003 / 
Proposed Rules  

[[Page 74732]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 239 and 274

[Release Nos. 33-8347; 34-48939; IC-26298; File No. S7-28-03]
RIN 3235-AI95


Disclosure of Breakpoint Discounts by Mutual Funds

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission is proposing amendments 
to Form N-1A under the Securities Act of 1933 and the Investment 
Company Act of 1940 to require an open-end management investment 
company to provide enhanced disclosure regarding breakpoint discounts 
on front-end sales loads. Under the proposed amendments, an open-end 
management investment company would be required to describe in its 
prospectus any arrangements that result in breakpoints in sales loads 
and to provide a brief summary of shareholder eligibility requirements.

DATES: Comments must be received on or before February 13, 2004.

ADDRESSES: To help us process and review your comments more 
efficiently, comments should be sent by one method only. Comments 
should be submitted in triplicate to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609. Comments also may be submitted electronically at the 
following E-mail address: [email protected]. All comment letters 
should refer to File No. S7-28-03; this file number should be included 
in the subject line if electronic mail is used. All comments received 
will be posted on the Commission's Internet Web site (http://www.sec.gov) and made available for public inspection and copying in 
the Commission's Public Reference Room, 450 Fifth Street, NW., 
Washington, DC 20549.\1\
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    \1\ We do not edit personal identifying information, such as 
names or electronic mail addresses, from electronic submissions. You 
should submit only information that you wish to make available 
publicly.

FOR FURTHER INFORMATION CONTACT: Christian L. Broadbent, Senior 
Counsel, or Paul G. Cellupica, Assistant Director, Office of Disclosure 
Regulation, Division of Investment Management, (202) 942-0721, or with 
respect to questions about disclosure by financial intermediaries, 
Joseph P. Corcoran, Special Counsel, Office of Chief Counsel, Division 
of Market Regulation, at (202) 942-0073, at the Securities and Exchange 
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Commission, 450 Fifth Street, NW., Washington, DC 20549-0506.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission 
(``Commission'') is proposing for comment amendments to Form N-1A (17 
CFR 239.15A and 274.11A), the registration form used by open-end 
management investment companies to register under the Investment 
Company Act of 1940 (``Investment Company Act'') and to offer their 
securities under the Securities Act of 1933 (``Securities Act'').

Table of Contents

I. Introduction and Background
II. Discussion
    A. Disclosure of Arrangements that Result in Breakpoints in 
Sales Loads
    B. Disclosure of Methods Used to Value Accounts
    C. Disclosure Regarding Information and Records Necessary to 
Aggregate Holdings
    D. Disclosure of Availability of Sales Load and Breakpoint 
Information on Fund's Web site
    E. Presentation Requirements
    F. Compliance Date
III. General Request for Comments
IV. Paperwork Reduction Act
V. Cost/Benefit Analysis
VI. Consideration of Effects on Efficiency, Competition, and Capital 
Formation
VII. Initial Regulatory Flexibility Analysis
VIII. Consideration of Impact on the Economy
IX. Statutory Authority
Text of Proposed Form Amendments

I. Introduction and Background

    The shares of open-end management investment companies (``mutual 
funds'') are sold to investors in a variety of ways. Many shares are 
sold without a sales load, including shares sold directly by the fund 
and those sold through retirement plans. An estimated 37% of mutual 
fund shareholders purchase shares through a broker-dealer or another 
financial intermediary.\2\ Fund shares sold through a broker-dealer or 
other intermediary often are subject to a front-end sales load. A 
front-end sales load is a sales charge that applies at the time the 
fund shares are purchased to compensate the broker-dealer that sells 
the fund shares, and is based on a percentage of the purchase price.
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    \2\ Investment Company Institute, 2001 Profile of Mutual Fund 
Shareholders 13-14 (Fall 2001).
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    Mutual funds with a front-end sales load typically establish a 
schedule of sales load percentages that are used to calculate the sales 
load that an investor pays. Some mutual funds that charge front-end 
sales loads will charge lower sales loads for larger investments. For 
example, a fund might charge a 5% front-end sales load for investments 
up to $50,000, but charge a load of 4% for investments between $50,000 
and $100,000 and 3% for investments exceeding $100,000. The investment 
levels required to obtain a reduced sales load are commonly referred to 
as ``breakpoints.'' \3\ A broker-dealer who sells fund shares to retail 
customers must disclose breakpoint information to its customers and 
must have procedures reasonably designed to ascertain information 
necessary to determine the availability and appropriate level of 
breakpoints.\4\
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    \3\ Information for investors concerning mutual fund 
breakpoints--including how funds calculate breakpoints and the steps 
investors can take if they fail to receive the benefit of a 
breakpoint to which they were entitled--is available on the 
Commission's Web site at http://www.sec.gov/answers/breakpt.htm.
    \4\ NASD Special Notice to Members 02-85 (Dec. 23, 2002) 
(directing all member firms to immediately review the adequacy of 
their existing policies and procedures to ensure that investors are 
charged the correct sales load on mutual fund transactions); NASD 
Notice to Members 94-16 (Mar. 1994) (discussing the obligation of 
member firms to ensure that communications with customers are 
accurate and complete regarding mutual fund breakpoints). See NASD 
Conduct Rule 2110 (Standards of Commercial Honor and Principles of 
Trade) and NASD Conduct Rule IM-2830-1 (``Breakpoint'' Sales); In 
the Matter of Application of Harold R. Fenocchio for Review of 
Disciplinary Action Taken by the NASD, 46 SEC 279 (1976) (sustaining 
NASD's finding of violation of its Rules of Fair Practice where 
registered representatives failed to have customers execute a letter 
of intent or to inform them of their rights of accumulation in 
connection with mutual fund purchases).
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    Each mutual fund company establishes its own formula for how it 
will calculate whether an investor is entitled to receive a breakpoint. 
Funds typically offer investors two principal options that enable them 
to take advantage of breakpoints in sales loads for purchases made over 
time: a letter of intent and a right of accumulation. A letter of 
intent is a written statement by an investor to a fund in which the 
investor states that he or she intends to purchase a stated dollar 
amount of fund shares over a specified period (frequently, 13 months). 
As a result, the investor is charged the reduced sales charge that 
applies to the total amount of the investor's intended purchase on his 
or her first purchase and all subsequent purchases. If a shareholder 
fails to fulfill his or her obligation to purchase the intended total 
dollar amount of fund shares, the shareholder must reimburse the 
discount.
    A right of accumulation permits an investor to aggregate shares 
owned in related accounts in some or all funds in a fund family to 
reach a breakpoint discount. Funds typically allow

[[Page 74733]]

investors to aggregate fund shares owned by a person or group of 
persons related to the investor (e.g., family members). This option 
also gives a fund shareholder the ability to count earlier purchases of 
shares of funds in his or her accounts and in related accounts towards 
the reduction of the sales charge on a current purchase. A right of 
accumulation may often be combined with a letter of intent for further 
benefits.
    Typically, a mutual fund values accounts in order to determine 
whether aggregate holdings have reached a sales load breakpoint using 
one of three methods: net asset value, public offering price, and 
historical cost. Most mutual fund families use the net asset value of 
an investor's holdings to determine whether a breakpoint discount is 
available. Some fund families, however, permit an investor's holdings 
to be valued using the public offering price, which is determined by 
adding the maximum front-end sales load charged to the net asset value. 
In addition, some fund families permit holdings to be valued based on 
the greater of market value (net asset value or public offering price) 
and historical cost, which is what the investor actually paid for a 
mutual fund at the time of purchase.
    A mutual fund that offers breakpoint discounts must disclose its 
schedule of breakpoints in its prospectus.\5\ A fund must disclose its 
aggregation rules for determining breakpoints, such as letters of 
intent and rights of accumulation, in either its prospectus or 
statement of additional information (``SAI'').\6\
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    \5\ Item 8(a)(1) of Form N-1A. Rule 22d-1 under the Investment 
Company Act (17 CFR 270.22d-1) permits a mutual fund to sell shares 
at prices reflecting scheduled breakpoints if it meets certain 
requirements, such as furnishing to existing shareholders and 
prospective investors the information regarding breakpoints required 
by applicable registration statement form requirements.
    \6\ Items 8(a)(2) and 18(a) of Form N-1A. The SAI is part of a 
fund's registration statement and contains information about a fund 
in addition to that contained in the prospectus. The SAI is required 
to be delivered to investors upon request and is available on the 
Commission's Electronic Data Gathering, Analysis, and Retrieval 
System.
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    In late 2002, the staffs of the Commission and the NASD identified 
concerns regarding the extent to which mutual fund investors were 
receiving breakpoint discounts, which were first uncovered by NASD's 
routine examination program. As a result, the Commission and NASD 
launched a multifaceted action plan to address these concerns.\7\ 
First, broker-dealers were required to review the adequacy of their 
policies and procedures in this area, make necessary changes, and 
report information concerning their mutual fund businesses. Second, the 
Commission and NASD, along with the New York Stock Exchange (``NYSE''), 
initiated an examination sweep of 43 broker-dealers that sell front-end 
sales load mutual funds to evaluate whether samples of transactions 
received the sales load discounts offered by the fund. Third, NASD, the 
Securities Industry Association (``SIA''), and the Investment Company 
Institute (``ICI'') formed a task force to recommend ways in which the 
mutual fund and broker-dealer industries could prevent breakpoint 
problems in the future.
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    \7\ SEC and NASD Action Plan on Mutual Fund Sales Load Charges, 
Securities and Exchange Commission Press Release, Jan. 16, 2003, 
http://www.sec.gov/news/press/2003-7.htm.
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    The Commission, NASD, and NYSE conducted their examination sweep of 
broker-dealers between November 2002 and January 2003. The examination 
revealed that most firms, in some instances, did not provide investors 
with breakpoint discounts for which they appeared to have been 
eligible.\8\ Of the more than 9,000 transactions reviewed, examiners 
identified 5,515 transactions that appeared to be eligible for a 
reduced sales charge. Of these 5,515 transactions, examiners found 
1,757 transactions that did not receive a breakpoint discount or 
appeared to have incurred other unnecessary sales charges (representing 
20% of all the transactions reviewed, and 32% of the transactions that 
were eligible for a discount). For these 1,757 transactions, the 
average discount not provided was $364 per transaction. The most 
frequent causes for not providing a breakpoint discount involved 
problems with rights of accumulation, including not linking a 
customer's ownership of different funds in the same mutual fund family, 
not linking shares owned in a fund or fund family in all of a 
customer's accounts at the firm, and not linking shares owned in the 
same fund or fund family by persons related to the customer (e.g., 
spouse, children) in accounts at the firm.\9\
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    \8\ Securities and Exchange Commission et al., Joint SEC/NASD/
NYSE Report of Examinations of Broker-Dealers Regarding Discounts on 
Front-End Sales Charges on Mutual Funds 14-15 (Mar. 2003) 
(hereinafter Joint Report), available at http://www.sec.gov/spotlight/breakpoints.htm.
    \9\ Id. at 1-2, 14-17.
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    The NASD formed the Joint NASD/Industry Task Force on Breakpoints 
together with the SIA and ICI in February 2003, to recommend ways in 
which the mutual fund and brokerage industries can assure that 
investors are not overcharged when they purchase funds with front-end 
sales loads.\10\ The Task Force issued its report in July 2003.\11\ 
Consistent with the findings of the joint examination sweep of broker-
dealers, the Task Force reported that many of the significant 
challenges in applying breakpoints correctly were with respect to 
rights of accumulation. The Task Force explained that to deliver 
breakpoint discounts based on rights of accumulation, the parties 
involved with the transaction must be able to link the accounts 
containing shares eligible to be aggregated and to ascertain the value 
of the accounts in order to determine whether a shareholder has met 
sales load breakpoints. The Task Force identified particular challenges 
to delivering breakpoints based on investors' rights of accumulation. 
First, broker-dealers have experienced difficulty in accessing and 
understanding the terms upon which mutual funds allow investors to 
aggregate both their holdings and those of related parties to reach 
breakpoints. Second, broker-dealers and mutual funds must communicate 
to investors the terms concerning rights of accumulation, and broker-
dealers must obtain from investors necessary information regarding 
accounts eligible to be linked and, if applicable, historical 
costs.\12\
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    \10\ NASD Announces Joint NASD/Industry Breakpoint Task Force, 
NASD News Release, Feb. 18, 2003, http://www.nasdr.com/news/pr2003/release_03_006.html.
    \11\ Joint NASD/Industry Breakpoint Task Force Issues Report, 
NASD News Release, July 22, 2003, http://www.nasdr.com/news/pr2003/release_03_030.html.
    \12\ NASD et al., Report of the Joint NASD/Industry Task Force 
on Breakpoints 5 (July 2003) (hereinafter Task Force Report), 
available at http://www.nasdr.com/pdf-text/breakpoints_report.pdf.
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    To address the challenges in providing correct breakpoint discounts 
to investors, the Task Force provided 13 recommendations, including: 
That mutual fund companies take steps to make investors aware of the 
availability of breakpoint discounts; that broker-dealers adopt 
policies and practices to gather the appropriate information from 
investors so that they can take advantage of all available breakpoint 
discounts; that transfer agents and broker-dealers modify the systems 
used to execute mutual fund transactions; and that regulators and the 
mutual fund and securities industries continue to educate investors 
about breakpoint opportunities. Two of the recommendations called for 
Commission rules that would require a fund to disclose certain 
information regarding breakpoints in its prospectus

[[Page 74734]]

and on its Web site.\13\ First, the Task Force recommended that the 
Commission require a mutual fund to provide critical data regarding 
pricing methods, breakpoint schedules, and linkage rules in its 
prospectus and on its website, in a prominent and clear format.\14\ 
Second, the Task Force recommended that the Commission require a fund 
to disclose in its prospectus that an investor may need to provide his 
or her broker-dealer with the information and records necessary to take 
full advantage of breakpoint discounts. The information and records 
could be used to aggregate, for example, holdings in retirement 
accounts, holdings of related parties, and holdings in accounts at 
other broker-dealers. In addition, the Task Force recommended that, if 
funds permit investors to rely on historical costs, the Commission 
require the prospectus to advise the investor to keep records necessary 
to demonstrate historical costs.\15\
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    \13\ The Task Force also made a number of recommendations to the 
NASD, NYSE, and mutual fund and brokerage industries. Working groups 
have been formed to address the other Task Force recommendations. 
See, e.g., Breakpoints Training Outline, http://www.nasdr.com/breakpoints_training_outline.asp (last modified Nov. 19, 2003) 
(training outline developed by NASD and working group in response to 
recommendation that broker-dealers provide enhanced training 
regarding mutual fund breakpoint discounts); Breakpoints Checklist 
and Worksheet, http://www.nasdr.com/breakpoints_checklist.asp (last 
modified Nov. 3, 2003) (checklist and worksheet designed by NASD and 
working group to assist member firms in implementing recommendations 
that broker-dealers require registered representatives to complete 
standardized checklists or worksheets, which record relevant account 
data, when executing transactions that carry front-end sales loads).
    In addition, the NASD is heading an Omnibus Account Task Force 
consisting of members of the fund and brokerage industries, as well 
as other intermediaries, to study the issue of trading through 
omnibus accounts. Statement of William H. Donaldson, Chairman, U.S. 
Securities and Exchange Commission, Testimony Before the Senate 
Committee on Banking, Housing and Urban Affairs 14 (Nov. 18, 2003). 
Typically, a brokerage firm has one omnibus account with each of the 
mutual funds with which it does business and through which all of 
its brokerage customers purchase and redeem shares of those mutual 
funds. Consequently, these mutual funds do not have information on 
the identity of the underlying brokerage customer who is purchasing 
or redeeming the funds' shares. In the breakpoint context, omnibus 
accounts make it difficult for funds to track information about the 
underlying shareholder that might have entitled the shareholder to 
breakpoint discounts.
    \14\ Task Force Report, supra note 12, at 10.
    \15\ Id. at 13-14.
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    Today, the Commission is proposing rules that would implement these 
recommendations. Specifically, we are proposing to require a mutual 
fund to describe briefly in its prospectus any arrangements that result 
in breakpoints in sales loads, including a summary of shareholder 
eligibility requirements. In addition, we are proposing to require a 
mutual fund to describe in its prospectus the methods used to value 
accounts in order to determine whether a shareholder has met sales load 
breakpoints. We are also proposing to require a mutual fund to state in 
its prospectus, if applicable, that in order to obtain a breakpoint 
discount, it may be necessary for a shareholder to provide information 
and records, such as account statements, to a mutual fund or financial 
intermediary. Our proposals would also require a mutual fund to state 
in its prospectus whether it makes available on or through its website 
information regarding its sales loads and breakpoints. This enhanced 
disclosure is intended to assist investors in understanding the 
breakpoint opportunities available to them, and to alert investors as 
to the information that they may need to provide to funds and broker-
dealers to take full advantage of all available breakpoint discounts. 
It also should help broker-dealers to access information about 
available breakpoint discounts.

II. Discussion

    The Commission is proposing amendments to Form N-1A, the 
registration form for mutual funds, that would require enhanced 
disclosure regarding breakpoint discounts on front-end sales loads. 
These proposed disclosure requirements are intended to assist investors 
in receiving the benefit of any breakpoint discounts to which they are 
entitled. Nothing in the proposed amendments would eliminate, or 
diminish in any respect, a broker-dealer's obligations to its customers 
with respect to mutual fund breakpoints, including its obligations to 
disclose information about breakpoints.\16\
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    \16\ See supra note 4 and accompanying text; In re Russell C. 
Turek, Exchange Act Release No. 45459 (Feb. 20, 2002) (Commission 
sanctioned registered representative for, among other violations, 
failing to inform customers of the availability of breakpoint 
discounts); In re Mason, Moran & Co., Exchange Act Release No. 4832 
(Apr. 23, 1953) (registrant claimed it complied with disclosure 
requirements of the federal securities laws by furnishing the 
customer with a prospectus which included breakpoint information; 
Commission held that while the prospectus requirements were intended 
to provide the investor with more information than had theretofore 
been generally available in the ordinary securities transaction, 
these requirements were not intended to abrogate the greater 
disclosure duties traditionally imposed on brokers and dealers in a 
fiduciary position).
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A. Disclosure of Arrangements That Result in Breakpoints in Sales Loads

    We are proposing to revise Form N-1A to require a mutual fund to 
provide a brief description in its prospectus of arrangements that 
result in sales load breakpoints, including a summary of shareholder 
eligibility requirements. Currently, Item 8(a)(2) of Form N-1A requires 
disclosure of arrangements that result in breakpoints in, or 
elimination of, sales loads, including letters of intent and rights of 
accumulation. Item 8(a)(2) also requires that each class of individuals 
or transactions to which the arrangements apply be identified and that 
each different breakpoint be stated as a percentage of both the 
offering price and the amount invested. This information may be 
provided in either the prospectus or the SAI.
    The proposed amendments would require that a mutual fund include 
the description required by Item 8(a)(2) of arrangements that result in 
breakpoints in, or elimination of, sales loads in its prospectus and 
not the SAI. We believe that information regarding breakpoints, which 
can significantly affect the cost of a shareholder's investment, should 
be included in the prospectus that is delivered to all shareholders. 
This will provide greater prominence to breakpoint disclosure than 
inclusion in the SAI, which is delivered to investors upon request. Our 
proposals would direct that prospectus disclosure regarding breakpoints 
be brief, in order to avoid overwhelming investors with excessively 
detailed information. Proposed Item 8(a)(2) would not require the 
prospectus to include the information currently required in the SAI 
regarding breakpoints for affiliated persons of the fund and 
breakpoints in connection with a reorganization.\17\ This information 
would continue to be required in the SAI.
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    \17\ Proposed Instruction 3 to Item 8(a)(2) of Form N-1A. Item 
13(d) of Form N-1A requires that a mutual fund disclose any 
arrangements that result in breakpoints in, or elimination of, sales 
loads for directors and other affiliated persons of the fund. Item 
18(b) of Form N-1A requires that a mutual fund disclose any 
arrangements that result in breakpoints in, or elimination of, sales 
loads in connection with the terms of a merger, acquisition, or 
exchange offer made under a plan of reorganization.
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    We are proposing to amend Item 18(a) of Form N-1A to require that 
information regarding breakpoint arrangements that is not included in 
the prospectus be included in the SAI. We are also proposing to modify 
Item 18(a) to conform the enumeration of types of special purchase 
plans or methods in that Item to the enumeration in Item 8(a)(2) of 
types of arrangements that result in breakpoints, so that references to 
``dividend reinvestment plans,'' ``employee benefit plans,'' and 
``redemption reinvestment plans'' would be added to Item 18(a) and 
``services in connection with retirement

[[Page 74735]]

plans'' would be eliminated from Item 18(a). The proposals would also 
add ``waivers for particular classes of investors'' to the enumeration 
in both Items 8(a)(2) and 18(a). To assist investors and financial 
intermediaries in finding all information about breakpoints, the 
prospectus would be required to state, if applicable, that additional 
information concerning sales load breakpoints is available in the SAI.
    Our proposed amendments would add an instruction to require that 
the description of arrangements resulting in breakpoints include a 
brief summary of shareholder eligibility requirements. This summary 
would be required to include a description or list of the types of 
accounts (e.g., retirement accounts, accounts held at other financial 
intermediaries), account holders (e.g., immediate family members, 
family trust accounts, solely-controlled business accounts), and fund 
holdings (e.g., funds held within the same fund complex) that may be 
aggregated for purposes of determining eligibility for sales load 
breakpoints. We believe that requiring such a summary of the 
eligibility requirements for sales load breakpoints in the mutual fund 
prospectus would assist investors and financial intermediaries in 
better understanding the ways in which investors may take full 
advantage of breakpoint opportunities.
    We request comment generally on the proposed requirement to 
disclose in the prospectus arrangements that result in breakpoints in 
sales loads, including a summary of shareholder eligibility 
requirements, and specifically on the following issues:
    [sbull] Is the proposed requirement for a brief description in the 
prospectus of arrangements that result in breakpoints in, or 
elimination of, sales loads appropriate or necessary? Should this 
description include a brief summary of shareholder eligibility 
requirements with respect to sales load breakpoints? Is there any 
additional information that we should require? Would these proposed 
requirements benefit investors or other parties?
    [sbull] As discussed above, our proposals would require a mutual 
fund to provide a brief description of arrangements that result in 
breakpoints in its prospectus, and would require any additional details 
regarding these arrangements in the SAI. Is this proposed division of 
disclosure regarding breakpoints appropriate? Is there information that 
would be required in the prospectus under our proposals that is more 
appropriate for the SAI, or vice versa? Is the information regarding 
breakpoints for affiliated persons of the fund and breakpoints in 
connection with a reorganization more appropriately included in the SAI 
or in the prospectus? Should we permit a mutual fund to choose whether 
to include information regarding breakpoints in either its prospectus 
or SAI? Should we require that all information regarding breakpoints be 
included in the prospectus? Would the breakpoint information that we 
propose to require in the prospectus detract from other important 
information in the prospectus? How should we strike a balance between 
requiring enhanced disclosure and not overwhelming investors with 
information that they do not consider important?
    [sbull] Should the information we are proposing to require in the 
prospectus be required in another location, such as the confirmation, 
account statement, document provided by a financial intermediary prior 
to share purchases, or shareholder report?

B. Disclosure of Methods Used to Value Accounts

    We are also proposing to require a mutual fund to describe in its 
prospectus the methods used to value accounts in order to determine 
whether a shareholder has met sales load breakpoints, including the 
circumstances in which and the classes of individuals to whom each 
method applies.\18\ The methods required to be disclosed, if 
applicable, would include historical cost, net amount invested, and 
offering price.\19\ We believe that requiring a mutual fund to describe 
in its prospectus the methods that it uses to value accounts in 
determining breakpoint eligibility would assist investors and financial 
intermediaries in more effectively determining investors' eligibility.
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    \18\ Proposed Item 8(a)(3) of Form N-1A.
    \19\ See Section I, ``Introduction and Background,'' supra 
(discussing net asset value, public offering price, and historical 
cost methods of valuing accounts). We refer here to ``net amount 
invested'' rather than ``net asset value,'' and to ``offering 
price'' rather than ``public offering price,'' because these are the 
terms currently used in Form N-1A. See Instruction 3(a) and (b) to 
Item 8(a)(1) of Form N-1A.
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    We request comment generally on the proposed requirement to 
describe the methods used to value accounts and specifically on the 
following issues:
    [sbull] Is our proposed requirement that a mutual fund describe the 
methods used to value accounts in order to determine whether a 
shareholder has met sales load breakpoints appropriate? Would our 
proposals provide sufficient information to investors? Should we 
require any additional information about these methods?
    [sbull] Is the prospectus the most appropriate location for a 
description of the methods used to value accounts? Should we require or 
permit this disclosure to be included in the SAI, confirmation, account 
statements, shareholder reports, document provided by a financial 
intermediary prior to share purchase, or some other location?

C. Disclosure Regarding Information and Records Necessary to Aggregate 
Holdings

    The proposals would also require a mutual fund to state in its 
prospectus, if applicable, that, in order to obtain a breakpoint 
discount, it may be necessary at the time of purchase for a shareholder 
to inform the fund or his or her financial intermediary of the 
existence of other accounts in which there are holdings eligible to be 
aggregated to meet sales load breakpoints.\20\ In addition, a mutual 
fund would be required to describe any information or records, such as 
account statements, that may be necessary for a shareholder to provide 
to the fund or his or her financial intermediary in order to verify his 
or her eligibility for a breakpoint discount. The description would be 
required to include, if applicable:
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    \20\ Proposed Item 8(a)(4)(i) of Form N-1A.
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    [sbull] Information or records regarding shares of the fund or 
other funds held in all accounts (e.g., retirement accounts) of the 
shareholder at the financial intermediary; \21\
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    \21\ Proposed Item 8(a)(4)(i)(A) of Form N-1A.
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    [sbull] Information or records regarding shares of the fund or 
other funds held in any account of the shareholder at another financial 
intermediary; \22\ and
    [sbull] Information or records regarding shares of the fund or 
other funds held at any financial intermediary by related parties of 
the shareholder, such as members of the same family or household.\23\
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    \22\ Proposed Item 8(a)(4)(i)(B) of Form N-1A.
    \23\ Proposed Item 8(a)(4)(i)(C) of Form N-1A.

In addition, if a mutual fund permits breakpoints to be determined 
based on historical cost, it would be required to state in its 
prospectus that a shareholder should retain any records necessary to 
substantiate historical costs because the fund, its transfer agent, and 
financial intermediaries may not maintain this information.\24\
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    \24\ Proposed Item 8(a)(4)(ii) of Form N-1A.
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    We believe that prospectus disclosure regarding the information or 
records that may be necessary for a shareholder to provide would 
facilitate the correct application of breakpoint discounts in 
transactions in which shares are

[[Page 74736]]

aggregated to meet sales load breakpoints. As the Task Force report 
noted, in order to deliver breakpoint discounts where investor 
eligibility is based on rights of accumulation, financial 
intermediaries must obtain the necessary information from investors 
regarding accounts that may be linked (and, if applicable, historical 
costs).\25\ In addition, our proposed disclosure may heighten 
investors' awareness of the importance of maintaining records when 
breakpoints are determined using the historical cost method. The Task 
Force reported that broker-dealers would not generally have historical 
cost information for customer positions transferred into their firm or 
for positions held at another firm that a customer may be able to link 
in order to receive a breakpoint discount.\26\ In addition, the fund 
and its transfer agent may not have historical cost information for 
shareholders, for example, in the many cases where a financial 
intermediary places an omnibus order to purchase and sell fund shares 
on behalf of all its customers without identifying individual customer 
transactions.
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    \25\ Task Force Report, supra note 12, at 5.
    \26\ Id. at 5 n.7.
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    We request comment generally on the proposed disclosure requirement 
regarding information or records that may be necessary for a 
shareholder to provide and specifically on the following issues:
    [sbull] Should we require a mutual fund to state in its prospectus 
that it may be necessary for a shareholder to inform the fund or a 
financial intermediary of the existence of accounts that are eligible 
to be aggregated to meet sales load breakpoints? Should we require a 
mutual fund to describe the information and records that it may be 
necessary for a shareholder to provide in order to verify his or her 
eligibility for breakpoint discounts? Is there any additional 
information that we should require in this description?
    [sbull] Do the proposed disclosure requirements reflect the 
appropriate allocation of responsibility among the mutual fund, the 
financial intermediary, and the shareholder for ensuring that the 
shareholder obtains a breakpoint discount to which he or she is 
entitled? Will the proposed disclosures be adequate to enable 
shareholders to obtain the breakpoint discounts for which they are 
eligible, or would this proposed approach place too great a burden on 
shareholders?
    [sbull] Is the prospectus the most appropriate location for the 
proposed disclosure regarding the need for a shareholder to inform the 
fund or his or her financial intermediary of the existence of other 
accounts in which there are holdings eligible to be aggregated, and the 
information and records necessary to aggregate holdings? Should we 
require or permit any, or all, of this disclosure to be included in the 
SAI? Should this disclosure be required in shareholder reports, 
confirmations, account statements, or a document delivered by a 
financial intermediary prior to a purchase of mutual fund shares? 
Should shareholders be notified periodically, e.g., in shareholder 
reports or account statements, that it is their responsibility to 
monitor whether they have qualified for breakpoint discounts?

D. Disclosure of Availability of Sales Load and Breakpoint Information 
on Fund's Web Site

    We are proposing to require that a mutual fund state in its 
prospectus whether it makes available free of charge, on or through its 
Web site at a specified Internet address, and in a clear and prominent 
format, the information that would be required regarding the fund's 
sales loads and breakpoints in the prospectus and SAI pursuant to Items 
8(a) and 18(a), including whether the Web site includes hyperlinks that 
facilitate access to the information.\27\ A mutual fund that does not 
make the sales load and breakpoint information available in this manner 
would be required to disclose the reasons why it does not do so 
(including, where applicable, that the fund does not have an Internet 
Web site).
---------------------------------------------------------------------------

    \27\ Proposed Item 8(a)(5) of Form N-1A.
---------------------------------------------------------------------------

    This proposal is intended to encourage mutual funds to provide 
accessible Web site disclosure regarding the availability of breakpoint 
discounts to complement the prospectus disclosure regarding breakpoints 
that we are proposing. Modernizing the disclosure system under the 
Federal securities laws involves recognizing the importance of the 
Internet in fostering prompt and more widespread dissemination of 
information.\28\ We believe that mutual fund disclosure should be more 
readily available to investors in a variety of locations to facilitate 
investor access to that information. We also believe that it is 
important for funds to make investors aware of the different sources 
that provide access to information about a fund. In addition, we 
believe that encouraging website disclosure of information regarding 
breakpoint discounts may assist broker-dealers and other financial 
intermediaries to more easily access and understand the terms upon 
which mutual funds allow investors to aggregate their holdings and the 
holdings of related parties.
---------------------------------------------------------------------------

    \28\ See Securities Act Release No. 8128 (Sept. 5, 2002) (67 FR 
58480 (Sept. 16, 2002)) (adopting requirement for an operating 
company to disclose in its annual report on Form 10-K whether it 
makes available free of charge on or through its Web site its annual 
reports on Form 10-K, quarterly reports on Form 10-Q, current 
reports on Form 8-K, and amendments).
---------------------------------------------------------------------------

    Our proposal would require that the disclosure about website 
availability of sales load and breakpoint information indicate whether 
the information is in a clear and prominent format, including whether 
the website includes hyperlinks that facilitate access to the 
information. We believe that it is important for website disclosure 
regarding sales loads and breakpoint discounts to be clear and 
prominent, in order to help investors and financial intermediaries to 
find this information easily. Hyperlinks that facilitate access to the 
information may contribute to a clear and prominent presentation. Thus, 
websites could provide sales load and breakpoint information in a clear 
and prominent format by, for example, using clear and prominent 
hyperlinks that provide direct linkage to the relevant portions of the 
fund's prospectus and SAI or the specific pages on a third-party 
website containing the information.\29\
---------------------------------------------------------------------------

    \29\ See Securities Act Release No. 8128 (Sept. 5, 2002) (67 FR 
58480, 58493 (Sept. 16, 2002)). We direct funds to this release for 
guidance concerning satisfaction of this requirement through 
hyperlinking to a third-party Web site.
---------------------------------------------------------------------------

    We request comment on the proposed requirement to disclose whether 
sales load and breakpoint information is available on or through a 
fund's website and specifically on the following issues:
    [sbull] Is the proposed requirement for a mutual fund to state in 
its prospectus whether the required information regarding its sales 
loads and breakpoints is available on or through its Web site necessary 
or appropriate? Should a mutual fund that does not maintain a Web site 
be required to state that it does not make this information available 
because it does not have a Web site? What other disclosures in this 
area, if any, should funds be required to make?
    [sbull] Is the prospectus the appropriate location for a mutual 
fund to provide the proposed disclosure regarding Web site 
availability? Would this disclosure be more appropriately located in 
the SAI, Form N-CSR, shareholder reports, account statements, 
confirmations, a document provided by a financial intermediary prior to 
share purchase, or another location?
    [sbull] Should we require mutual funds with Web sites to include 
sales load and

[[Page 74737]]

breakpoint disclosure information on their Web sites?
    [sbull] Are there other measures that we should consider in order 
to encourage mutual funds to provide disclosure regarding sales loads 
and breakpoints on their Web sites in a prominent and readily 
accessible manner?
    [sbull] Are there other mechanisms besides prospectus and Web site 
disclosure to better inform investors about breakpoints to which they 
may be entitled (e.g., requiring a financial intermediary to provide a 
document prior to share purchase that describes breakpoint discounts, 
or requiring this information to be included in shareholder reports, 
account statements, or confirmations)?

E. Presentation Requirements

    Our proposals would require that the disclosure in Item 8(a)(2) 
regarding arrangements resulting in breakpoints in, or elimination of, 
sales loads, and all other sales load disclosure required by Item 8(a), 
be adjacent to the table of sales loads and breakpoints required by 
Item 8(a)(1).\30\ This would include the description of sales loads 
required by Item 8(a)(1), as well as the information about breakpoints, 
including valuation methods, shareholder information and records, and 
Web site availability that would be required by proposed Items 8(a)(3), 
(4), and (5). The proposals also would require that a mutual fund 
present the information required by Item 8(a) in a clear, concise, and 
understandable manner, and include tables, schedules, and charts as 
expressly required by Item 8(a)(1) or where doing so would facilitate 
understanding.\31\ These requirements are intended to encourage mutual 
funds to present information regarding sales loads and breakpoints in 
an integrated manner that will be easily understood by investors, which 
would address the Task Force recommendation that critical data 
regarding pricing methods, breakpoint schedules, and linkage rules be 
presented in a prominent and clear format.
---------------------------------------------------------------------------

    \30\ Proposed Instruction to Item 8(a) of Form N-1A.
    \31\ Id. Cf. rule 421 under the Securities Act of 1933 (17 CFR 
230.421) (plain English requirements for prospectuses).
---------------------------------------------------------------------------

    General Instruction C.3.(a) to Form N-1A currently requires the 
information required by Item 8 to be in one place in the prospectus. 
This includes the information about sales loads and breakpoints 
required by Item 8(a)(1), information about 12b-1 fees required by Item 
8(b), and information about multiple class and master-feeder funds 
required by Item 8(c). It does not include the information on 
breakpoints required by Item 8(a)(2) because this information may be 
included in the SAI or in a separate purchase and redemption document 
pursuant to Item 7(f). Item 7(f) of Form N-1A permits a mutual fund to 
omit from the prospectus information about purchase and redemption 
procedures required by Items 7(b)-(d)\32\ and 8(a)(2) and provide it in 
a separate disclosure document if the fund delivers the document with 
the prospectus, incorporates the document into the prospectus by 
reference and files the document with the prospectus, and provides 
disclosure explaining that the information disclosed in the document is 
part of, and incorporated into, the prospectus.
---------------------------------------------------------------------------

    \32\ Items 7(b)-(d) require a description of the procedures for 
purchasing and redeeming the fund's shares, as well as the fund's 
policy with respect to dividends and distributions.
---------------------------------------------------------------------------

    Under our proposals, Item 7(f) would continue to permit the 
information required by Item 8(a)(2) to be included in a separate 
purchase and redemption document.\33\ In addition, we are proposing to 
amend Item 7(f) to permit the information about breakpoints required by 
proposed Items 8(a)(3), (4), and (5) (i.e., valuation methods, 
shareholder information and records, and Web site availability) to be 
included in the separate purchase and redemption document. We are also 
proposing to amend General Instruction C.3.(a) to Form N-1A to make it 
clear that this information may be disclosed in a separate purchase and 
redemption document, provided that all the information required by 
paragraphs 8(a)(2), (3), (4), and (5) is included in the separate 
document. This instruction will also clarify that if the information 
required by paragraphs 8(a)(2)-(5) is disclosed in a separate purchase 
and redemption document, the table of sales loads and breakpoints 
required by Item 8(a)(1) must be included in the separate purchase and 
redemption document, as well as the prospectus, in order to comply with 
the proposed requirement that all disclosure required by Item 8(a) be 
adjacent to the table of sales loads and breakpoints.
---------------------------------------------------------------------------

    \33\ We are, however, proposing to eliminate, as duplicative, 
the reference to this procedure in Item 8(a)(2).
---------------------------------------------------------------------------

    We request comment generally on the proposed requirements for 
presentation of information about sales loads and breakpoints and 
specifically on the following:
    [sbull] Will our proposal to require that the disclosure regarding 
sales loads and breakpoints required by Item 8(a)(1) and (a)(2) be 
presented in a clear, concise, and understandable manner, and include 
tables, schedules, and charts where expressly required by Item 8(a)(1) 
or where doing so would facilitate understanding result in disclosure 
that is easily understood by investors? Are there additional 
requirements that we should adopt regarding the presentation of this 
information?
    [sbull] Should we require that the sales load and breakpoint 
information required by Item 8 be adjacent to the table of sales loads 
and breakpoints required by Item 8(a)(1)? Are there other ways to 
ensure that all information related to breakpoints is provided in an 
integrated manner that will facilitate investor understanding? Should 
we adopt a ``close proximity'' or other standard instead of an 
``adjacent'' standard?
    [sbull] For a mutual fund that includes information about 
breakpoints in a separate purchase and redemption document, would the 
requirement that the table of sales load and breakpoint information 
required by Item 8(a)(1) appear in both the prospectus and the separate 
document result in unnecessary duplication? If so, how should we 
address this duplication, which arises from the existing requirement 
that the table be included in the prospectus along with other 
information currently required by Item 8 and the proposed requirement 
that all information about breakpoints be adjacent to the table? If we 
do not require the information about breakpoints required by proposed 
Items 8(a)(2)-(5) to be adjacent to the table, how should we address 
the Task Force recommendation that we require a mutual fund to provide 
critical data regarding pricing methods, breakpoint schedules, and 
linkage rules in a prominent and clear format? Should we require all 
information required by Item 8 to be in the prospectus? Should we 
permit all information required by Item 8 to be in the separate 
purchase and redemption document?
    [sbull] Should we continue to permit the separate purchase and 
redemption document? Does this document facilitate investor 
understanding of the information it contains? We note that, in a recent 
release, we proposed to amend Item 7 to require new disclosure 
regarding frequent purchases and redemptions to be included in the 
prospectus and not a separate purchase and redemption document.\34\ To 
what extent do funds currently use the separate purchase and redemption 
document? If we should continue to permit this document, what 
information

[[Page 74738]]

should it be permitted to include? Are there other means for 
effectively communicating purchase and redemption information to 
investors?
---------------------------------------------------------------------------

    \34\ Investment Company Act Release No. 26287 (Dec. 11, 2003).
---------------------------------------------------------------------------

F. Compliance Date

    If we adopt the proposed disclosure requirements, we expect to 
require all new registration statements, and all post-effective 
amendments that are either annual updates to effective registration 
statements or that add a new series, filed on or after the effective 
date of the amendments to comply with the proposed amendments. The 
Commission requests comment on this proposed compliance date.

III. General Request for Comments

    The Commission requests comment on the amendments proposed in this 
release, whether any further changes to our forms are necessary or 
appropriate to implement the objectives of our proposed amendments, and 
on other matters that might have an effect on the proposals contained 
in this release.

IV. Paperwork Reduction Act

    Certain provisions of the proposed amendments contain ``collection 
of information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (44 U.S.C. 3501, et seq.), and the Commission is 
submitting the proposed collection of information to the Office of 
Management and Budget (``OMB'') for review in accordance with 44 U.S.C. 
3507(d) and 5 CFR 1320.11. The title for the collection of information 
is: ``Form N-1A under the Investment Company Act of 1940 and Securities 
Act of 1933, Registration Statement of Open-End Management Investment 
Companies.'' An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid OMB control number.
    Form N-1A (OMB Control No. 3235-0307) was adopted pursuant to 
section 8(a) of the Investment Company Act (15 U.S.C. 80a-8) and 
section 5 of the Securities Act (15 U.S.C. 77e). We are proposing 
amendments to Form N-1A to require a mutual fund to describe briefly in 
its prospectus any arrangements that result in breakpoints in sales 
loads, including a summary of shareholder eligibility requirements. In 
addition, we are proposing to require a mutual fund to describe in its 
prospectus the methods used to value accounts in order to determine 
whether a shareholder has met sales load breakpoints. We are also 
proposing to require a mutual fund to state in its prospectus, if 
applicable, that in order to obtain a breakpoint discount, it may be 
necessary for a shareholder to provide information and records, such as 
account statements, to a mutual fund or financial intermediary. Our 
proposals would also require a mutual fund to state in its prospectus 
whether it makes available on or through its Web site, and in a clear 
and prominent format, information regarding its sales loads and 
breakpoints. In addition, our proposals would require a mutual fund to 
provide prospectus disclosure regarding sales loads and breakpoints 
adjacent to the table of sales loads and breakpoints, and to present 
the information in a clear, concise, and understandable manner. This 
enhanced disclosure is intended to assist investors in understanding 
the breakpoint opportunities available to them, and to alert investors 
to the information that they may need to provide to funds and broker-
dealers to take full advantage of all available breakpoint discounts.
    Form N-1A, including the proposed amendments, contains collection 
of information requirements. The likely respondents to this information 
collection are open-end funds registering with the Commission. 
Compliance with the disclosure requirements of Form N-1A is mandatory. 
Responses to the disclosure requirements are not confidential.
    The current hour burden for preparing an initial Form N-1A filing 
is 809 hours per portfolio. The current annual hour burden for 
preparing post-effective amendments of Form N-1A is 101 hours per 
portfolio. The Commission estimates that, on an annual basis, 
registrants file initial registration statements on Form N-1A covering 
483 portfolios, and file post-effective amendments on Form N-1A 
covering 6,542 portfolios. Additional burdens of 6,524 hours for the 
preparation and filing of initial registration statements and 49,065 
hours for the filing of post-effective amendments are expected to 
result from the Commission's recent proposed rules relating to ``fund 
of funds'' arrangements, and the recent proposed rule relating to 
frequent purchases and redemptions of fund shares and selective 
disclosure of portfolio holdings.\35\ Thus, the Commission estimates 
that the current total annual hour burden for the preparation and 
filing of Form N-1A is 1,107,078 hours.\36\
---------------------------------------------------------------------------

    \35\ See Investment Company Act Release No. 26198 (Oct. 2, 2003) 
(68 FR 58226 (Oct. 8, 2003)); Investment Company Act Release No. 
26287 (Dec. 11, 2003).
    \36\ This estimate is based on the following calculation: (809 
hours x 483 portfolios) + (101 hours x 6,542 portfolios) = 1,051,489 
hours. An additional annual hour burden of 24,591 hours (1,694 hours 
for initial registration statements and 22,897 hours for post-
effective amendments) resulting from the proposed rules described in 
the fund of funds proposing release, and an additional annual hour 
burden of 30,998 hours (4,830 hours for initial registration 
statements and 26,168 hours for post-effective amendments) resulting 
from the proposed rule relating to market timing and selective 
disclosure, yield a total annual hour burden of 1,107,078 hours.
---------------------------------------------------------------------------

    We estimate that the proposed amendments would increase the hour 
burden per portfolio per filing of an initial registration statement on 
Form N-1A by 2 hours and would increase the hour burden per portfolio 
per filing of a post-effective amendment to a registration statement on 
Form N-1A by 1 hour. We also estimate that 30% of mutual fund 
portfolios would be affected by the proposed amendments.\37\ The 
additional incremental hour burden resulting from the proposed 
amendments would be 2,252 hours (2 hours for initial registration 
statements x 483 portfolios x 30%) + (1 hour per post-effective 
amendment x 6,542 portfolios x 30%). Thus, if the proposed amendments 
to Form N-1A are adopted, the total annual hour burden for all funds 
for preparation and filing of initial registration statements and post-
effective amendments to Form N-1A would be 1,109,330 hours (2,252 hours 
+ 1,107,078 hours).
---------------------------------------------------------------------------

    \37\ This estimate is based on information regarding the number 
of mutual fund portfolios with one or more classes of shares that 
have front-end sales loads, derived by the staff from Commission 
filings and third-party information sources.
---------------------------------------------------------------------------

Request for Comments
    We request your comments on the accuracy of our estimates. Pursuant 
to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments to: (i) 
Evaluate whether the proposed collection of information is necessary 
for the proper performance of the functions of the agency, including 
whether the information will have practical utility; (ii) evaluate the 
accuracy of the Commission's estimate of burden of the proposed 
collection of information; (iii) determine whether there are ways to 
enhance the quality, utility, and clarity of the information to be 
collected; and (iv) evaluate whether there are ways to minimize the 
burden of the collection of information on those who are to respond, 
including through the use of automated collection techniques or other 
forms of information technology.
    Persons submitting comments on the collection of information 
requirements should direct the comments to the Office of Management and 
Budget, Attention: Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Room 10102, 
New Executive

[[Page 74739]]

Office Building, Washington, DC 20503, and should send a copy to 
Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 
5th Street, NW., Washington, DC 20549-0609, with reference to File No. 
S7-28-03. OMB is required to make a decision concerning the collection 
of information between 30 and 60 days after publication of this 
release. Consequently, a comment to OMB is best assured of having its 
full effect if OMB receives it within 30 days after publication of this 
Release.

V. Cost/Benefit Analysis

    The Commission is sensitive to the costs and benefits imposed by 
its rules. Our proposals would require mutual funds to provide enhanced 
disclosure regarding breakpoint discounts on front-end sales loads. 
Specifically, the proposals would:
    [sbull] Require a mutual fund to describe briefly in its prospectus 
any arrangements that result in breakpoints in sales loads, including a 
summary of shareholder eligibility requirements;
    [sbull] Require a mutual fund to describe in its prospectus the 
methods used to value accounts in order to determine whether a 
shareholder has met sales load breakpoints;
    [sbull] Require a mutual fund to state in its prospectus, if 
applicable, that in order to obtain a breakpoint discount, it may be 
necessary for a shareholder to provide information and records, such as 
account statements, to a mutual fund or financial intermediary;
    [sbull] Require a mutual fund to state in its prospectus whether it 
makes available on or through its Web site, and in a clear and 
prominent format, information regarding its sales loads and 
breakpoints; and
    [sbull] Require a mutual fund to provide prospectus disclosure 
regarding sales loads and breakpoints adjacent to the table of sales 
loads and breakpoints, and to present the information in a clear, 
concise, and understandable manner.

A. Benefits

    The proposed form amendments are expected to benefit mutual fund 
investors by providing them with enhanced disclosure about breakpoint 
discounts on front-end sales loads. This enhanced disclosure is 
intended to assist investors in understanding the breakpoint 
opportunities available to them, and to alert investors to the 
information that they may need to provide to funds and financial 
intermediaries to take full advantage of all available breakpoint 
discounts. An examination sweep by the Commission, the NASD, and the 
NYSE between November 2002 and January 2003 found that in 32% of the 
transactions reviewed that appeared to be eligible for a reduced sales 
charge, investors did not receive a breakpoint discount or appeared to 
have incurred other unnecessary sales charges.\38\ The average discount 
not provided was $364 per transaction.\39\ We anticipate that our 
proposals, if adopted, may result in a decrease in the number of 
transactions in which investors do not receive breakpoint discounts to 
which they are entitled.
---------------------------------------------------------------------------

    \38\ Joint Report, supra note 8, at 14-15.
    \39\ Id. at 16.
---------------------------------------------------------------------------

    Specifically, we believe that the proposed amendments relating to 
disclosure of arrangements that result in breakpoints in sales loads 
would benefit investors by requiring that information regarding 
breakpoints, which can significantly affect the cost of a shareholder's 
investment, be included in the prospectus that is delivered to all 
shareholders. In addition, the proposed requirement that this 
prospectus disclosure include a summary of the eligibility requirements 
for sales load breakpoints may assist investors in better understanding 
the ways in which they may take full advantage of breakpoint 
opportunities.
    The proposed amendments relating to disclosure of methods used to 
value accounts in determining breakpoint eligibility also may benefit 
investors by assisting them and their financial intermediaries in more 
effectively determining investors' eligibility. Also, the proposed 
disclosure relating to information and records necessary to aggregate 
holdings may benefit investors because prospectus disclosure regarding 
the information or records that it may be necessary for a shareholder 
to provide may facilitate the correct application of breakpoint 
discounts in transactions in which shares are aggregated to meet sales 
load breakpoints. In addition, the proposed disclosure may heighten 
investors' awareness of the importance of maintaining records when 
breakpoints are determined using the historical cost method.
    The proposed amendments relating to disclosure regarding the 
availability of sales load and breakpoint information on a mutual 
fund's Web site may benefit investors by encouraging mutual funds to 
provide accessible Web site disclosure regarding the availability of 
breakpoint discounts to complement the proposed prospectus disclosure 
regarding breakpoints. In addition, the proposed amendments relating to 
the presentation of disclosure regarding breakpoints may benefit 
investors by encouraging mutual funds to present information regarding 
sales loads and breakpoints in an integrated manner that will be easily 
understood by investors.
    We seek comment on the benefits of the proposed amendments (and any 
alternatives suggested by commenters) as well as any data quantifying 
those benefits.

B. Costs

    The proposals would impose new requirements on mutual funds that 
have front-end sales loads to provide several new prospectus 
disclosures regarding breakpoint discounts on these front-end sales 
loads. We estimate that complying with the proposed new disclosures 
would entail a relatively small financial burden. The information 
regarding breakpoint discounts should be available to management and 
the board of directors of a fund, and mutual funds already disclose 
much of the breakpoint disclosure that would be required by the 
proposed amendments in their registration statements (although they are 
not required to include this information in their prospectuses). 
Therefore, we expect that the cost of compiling and reporting this 
information should be limited.
    Specifically, we are proposing amendments to Form N-1A to require a 
mutual fund to describe briefly in its prospectus any arrangements that 
result in breakpoints in sales loads, including a summary of 
shareholder eligibility requirements. In addition, we are proposing to 
require a mutual fund to describe in its prospectus the methods used to 
value accounts in order to determine whether a shareholder has met 
sales load breakpoints. We are also proposing to require a mutual fund 
to state in its prospectus, if applicable, that in order to obtain a 
breakpoint discount, it may be necessary for a shareholder to provide 
information and records, such as account statements, to a mutual fund 
or financial intermediary. Our proposals would also require a mutual 
fund to state in its prospectus whether it makes available on or 
through its Web site, and in a clear and prominent format, information 
regarding its sales loads and breakpoints.
    The costs of adding these new prospectus disclosures may include 
both internal costs (for attorneys and other non-legal staff of a fund, 
such as computer programmers, to prepare and review the required 
disclosure) and external costs (for printing and typesetting of the 
disclosure). For purposes of the Paperwork Reduction Act, we have 
estimated that the proposed new disclosure requirements would add 2,252 
hours to the total

[[Page 74740]]

annual burden of completing Form N-1A.\40\ We estimate that this 
additional burden would equal total internal costs of $101,903 
annually, or approximately $48 per fund portfolio.\41\
---------------------------------------------------------------------------

    \40\ This estimate is based on the following calculation: (2 
hours per initial registration statement x 483 portfolios x 30% of 
portfolios) + (1 hour per post-effective amendment x 6,542 
portfolios x 30% of portfolios) = 2,252 hours.
    \41\ These figures are based on a Commission estimate that 
approximately 781 registered investment companies, with 2,108 
portfolios, would file initial registration statements or post-
effective amendments annually that would be subject to the proposed 
disclosure requirements, and an estimated hourly wage rate of 
$45.25. The estimate of the number of investment companies is based 
on data derived from the Commission's EDGAR filing system. The 
estimated wage figure is based on published compensation for 
compliance attorneys outside New York City ($37.60) and programmers 
($29.44), and the estimate that attorneys and programmers would 
divide time equally on compliance with the proposed disclosure 
requirements, yielding a weighted wage rate of $33.52 (($37.60 x 
.50) + (29.44 x .50)) = $33.52). See Securities Industry 
Association, Report on Management & Professional Earnings in the 
Securities Industry 2002 (Sept. 2002). This weighted wage rate was 
then adjusted upward by 35% for overhead, reflecting the costs of 
supervision, space, and administrative support, to obtain the total 
per hour internal cost of $45.25 (33.52 x 1.35) = $45.25.
---------------------------------------------------------------------------

    We expect the external costs of providing the new prospectus 
disclosure will be limited, because the amendments relating to 
disclosure of arrangements that result in breakpoints in sales loads 
require the description of the arrangements to be brief. We expect that 
the proposed disclosure would not add significant length to the 
prospectus. We request comment on the nature and magnitude of our 
estimates of the costs of the additional disclosure that would be 
required if our proposals were adopted.

C. Request for Comments

    We request comments on all aspects of this cost-benefit analysis, 
including identification of any additional costs or benefits of, or 
suggested alternatives to, the proposed amendments. Commenters are 
requested to provide empirical data and other factual support for their 
views to the extent possible.

VI. Consideration of Effects on Efficiency, Competition, and Capital 
Formation

    Section 2(c) of the Investment Company Act (15 U.S.C. 80a-2(c)) and 
section 2(b) of the Securities Act (15 U.S.C. 77(b)) require the 
Commission, when engaging in rulemaking that requires it to consider or 
determine whether an action is necessary or appropriate in the public 
interest, to consider, in addition to the protection of investors, 
whether the action will promote efficiency, competition, and capital 
formation.
    The proposed amendments are intended to provide greater 
transparency for mutual fund shareholders regarding breakpoint 
discounts on front-end sales loads. These changes may improve 
efficiency. The enhanced disclosure requirements are intended to assist 
investors in understanding the breakpoint opportunities available to 
them, and to alert investors to the information that they may need to 
provide to funds and financial intermediaries to take full advantage of 
all available breakpoint discounts, which could promote more efficient 
allocation of investments among mutual funds. The proposed amendments 
may also improve competition, as enhanced disclosure regarding the ways 
in which investors can aggregate holdings to meet sales load 
breakpoints may prompt investors to seek out mutual funds that offer 
the most favorable breakpoint schedules and aggregation rules for their 
particular circumstances, and may prompt funds to compete for the 
business of these better informed investors. Finally, the effects of 
the proposed amendments on capital formation are unclear.
    Although, as noted above, we believe that the proposed amendments 
would benefit investors, the magnitude of the effect of the proposed 
amendments on efficiency, competition, and capital formation, and the 
extent to which they would be offset by the costs of the proposals, are 
difficult to quantify. We note that, with respect to our proposals, in 
many cases mutual funds currently provide disclosure in their 
registration statements regarding breakpoint discounts on front-end 
sales loads.
    We request comment on whether the proposed amendments, if adopted, 
would promote efficiency, competition, and capital formation. 
Commenters are requested to provide empirical data and other factual 
support for their views if possible.

VII. Initial Regulatory Flexibility Analysis

    This Initial Regulatory Flexibility Analysis has been prepared in 
accordance with 5 U.S.C. 603, and relates to the Commission's proposed 
form amendments under the Securities Act and the Investment Company Act 
to require mutual funds to provide enhanced disclosure about breakpoint 
discounts on front-end sales loads. Specifically, the proposals would:
    [sbull] Require a mutual fund to describe briefly in its prospectus 
any arrangements that result in breakpoints in sales loads, including a 
summary of shareholder eligibility requirements;
    [sbull] Require a mutual fund to describe in its prospectus the 
methods used to value accounts in order to determine whether a 
shareholder has met sales load breakpoints;
    [sbull] Require a mutual fund to state in its prospectus, if 
applicable, that in order to obtain a breakpoint discount, it may be 
necessary for a shareholder to provide information and records, such as 
account statements, to a mutual fund or financial intermediary;
    [sbull] Require a mutual fund to state in its prospectus whether it 
makes available on or through its Web site, and in a clear and 
prominent format, information regarding its sales loads and 
breakpoints; and
    [sbull] Require a mutual fund to provide prospectus disclosure 
regarding sales loads and breakpoints adjacent to the table of sales 
loads and breakpoints, and to present the information in a clear, 
concise, and understandable manner.

A. Reasons for, and Objectives of, Proposed Amendments

    The Commission is proposing rules to address the concerns that have 
been identified regarding the extent to which mutual fund investors 
receive breakpoint discounts. An examination sweep by the Commission, 
the NASD, and the NYSE between November 2002 and January 2003 found 
that in 32% of the transactions reviewed that appeared to be eligible 
for a reduced sales charge, investors did not receive a breakpoint 
discount or appeared to have incurred other unnecessary sales 
charges.\42\ The enhanced disclosure that would be required by the 
Commission's proposed rules is intended to assist investors in 
understanding the breakpoint opportunities available to them, and to 
alert investors to the information that they may need to provide to 
funds and broker-dealers to take full advantage of all available 
breakpoint discounts.
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    \42\ Joint Report, supra note 8, at 14-15.
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B. Legal Basis

    The Commission is proposing amendments to Form N-1A pursuant to 
authority set forth in sections 5, 6, 7, 10, and 19(a) of the 
Securities Act (15 U.S.C. 77e, 77f, 77g, 77j, and 77s(a)), and sections 
8, 24(a), 30, and 38 of the Investment Company Act (15 U.S.C. 80a-8, 
80a-24(a), 80a-29, and 80a-37).

C. Small Entities Subject to the Rule

    For purposes of the Regulatory Flexibility Act, an investment 
company is a small entity if it, together with other investment 
companies in the same

[[Page 74741]]

group of related investment companies, has net assets of $50 million or 
less as of the end of its most recent fiscal year.\43\ Approximately 
145 investment companies registered on Form N-1A meet this 
definition.\44\
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    \43\ 17 CFR 270.0-10.
    \44\ This estiamte is based on analysis by the Division of 
Investment Management staff of information from databases compiled 
by third-part information providers, including Morningstar, Inc., 
and Lipper.
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D. Reporting, Recordkeeping, and Other Compliance Requirements

    The proposed amendments would require mutual funds that have front-
end sales loads to provide several new prospectus disclosures regarding 
breakpoint discounts on these sales loads, as described above.
    The Commission estimates some one-time formatting and ongoing costs 
and burdens that would be imposed on all mutual funds, including funds 
that are small entities. We note, however, that in many cases funds 
currently provide disclosure in their registration statements regarding 
breakpoint discounts. For purposes of the Paperwork Reduction Act, we 
have estimated that the proposed new disclosure requirements would 
increase the hour burden per portfolio per filing of an initial 
registration statement on Form N-1A by 2 hours and would increase the 
hour burden per portfolio per filing of a post-effective amendment to a 
registration statement by 1 hour. We estimate that this additional 
burden would increase total internal costs of filing an initial 
registration statement by $91 per affected mutual fund portfolio 
annually, and would increase total internal costs of filing a post-
effective amendment by $45 per affected mutual fund portfolio 
annually.\45\
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    \45\ These figures are based on an estimated hourly wage rate of 
$45.25. See supra note 41.
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    We expect the external costs of providing the new prospectus 
disclosure will be limited, because some funds currently provide some 
of this information in their registration statements, and we do not 
expect that the disclosure will add significant length to the 
prospectus. The Commission solicits comment on the effect the proposed 
amendments would have on small entities.

E. Duplicative, Overlapping or Conflicting Federal Rules

    There are no rules that duplicate, overlap, or conflict with the 
proposed amendments.

F. Significant Alternatives

    The Regulatory Flexibility Act directs us to consider significant 
alternatives that would accomplish our stated objective, while 
minimizing any significant adverse impact on small issuers. In 
connection with the proposed amendments, the Commission considered the 
following alternatives: (i) The establishment of differing compliance 
or reporting requirements or timetables that take into account the 
resources available to small entities; (ii) the clarification, 
consolidation, or simplification of compliance and reporting 
requirements under the proposed amendments for small entities; (iii) 
the use of performance rather than design standards; and (iv) an 
exemption from coverage of the proposed amendments, or any part 
thereof, for small entities.
    The Commission believes at the present time that special compliance 
or reporting requirements for small entities, or an exemption from 
coverage for small entities, would not be appropriate or consistent 
with investor protection. The proposed disclosure amendments would 
provide shareholders with greater transparency of breakpoint discounts 
on front-end sales loads. Different disclosure requirements for mutual 
funds that are small entities may create the risk that the shareholders 
in these funds would not be as able as investors in larger funds to 
assess the terms upon which breakpoint discounts in sales loads are 
offered. We believe it is important for the disclosure that would be 
required by the proposed amendments to be provided to shareholders by 
all mutual funds, not just funds that are not considered small 
entities.
    We have endeavored through the proposed amendments to minimize the 
regulatory burden on all funds, including small entities, while meeting 
our regulatory objectives. Small entities should benefit from the 
Commission's reasoned approach to the proposed amendments to the same 
degree as other investment companies. Further clarification, 
consolidation, or simplification of the proposals for funds that are 
small entities would be inconsistent with the Commission's concern for 
investor protection. Finally, we do not consider using performance 
rather than design standards to be consistent with our statutory 
mandate of investor protection in the present context.

G. Solicitation of Comments

    The Commission encourages the submission of written comments with 
respect to any aspect of this analysis. Comment is specifically 
requested on the number of small entities that would be affected by the 
proposed amendments and the likely impact of the proposals on small 
entities. Commenters are asked to describe the nature of any impact and 
provide empirical data supporting the extent of the impact. These 
comments will be considered in the preparation of the Final Regulatory 
Flexibility Analysis, if the proposed amendments are adopted, and will 
be placed in the same public file as comments on the proposed 
amendments themselves. Comments should be submitted in triplicate to 
Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 
Fifth Street, NW., Washington, DC 20549-0609. Comments also may be 
submitted electronically at the following E-mail address: [email protected]. All comment letters should refer to File No. S7-28-
03; this file number should be included on the subject line if E-mail 
is used. All comments received will be posted on the Commission's 
Internet Web site (http://www.sec.gov) and made available for public 
inspection and copying in the Commission's Public Reference Room, 450 
Fifth Street, NW., Washington, DC 20549-0102.\46\
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    \46\ We do not edit personal identifying information, such as 
names or electronic mail addresses, from electronic submissions. You 
should submit only information that you wish to make available 
publicly.
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VIII. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996,\47\ a rule is ``major'' if it results or is likely to 
result in:
---------------------------------------------------------------------------

    \47\ Pub. L. 104-21, Title II, 110 Stat. 857 (1996).
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    [sbull] An annual effect on the economy of $100 million or more;
    [sbull] A major increase in costs or prices for consumers or 
individual industries; or
    [sbull] Significant adverse effects on competition, investment, or 
innovation.

The Commission requests comment on the potential impact of the proposed 
amendments on the U.S. economy on an annual basis. Commenters are 
requested to provide empirical data to support their views.

IX. Statutory Authority

    The Commission is proposing amendments to Form N-1A pursuant to 
authority set forth in sections 5, 6, 7, 10, and 19(a) of the 
Securities Act (15 U.S.C. 77e, 77f, 77g, 77j, and 77s(a)) and sections 
8, 24(a), 30, and 38 of the Investment Company Act (15 U.S.C. 80a-8, 
80a-24(a), 80a-29, and 80a-37).

[[Page 74742]]

List of Subjects

17 CFR Part 239

    Reporting and recordkeeping requirements, Securities.

17 CFR Part 274

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

Text of Proposed Form Amendments

    For the reasons set out in the preamble, the Commission proposes to 
amend title 17, chapter II of the Code of Federal Regulations as 
follows:

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

    1. The authority citation for part 239 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77sss, 78c, 
78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 
79l, 79m, 79n, 79q, 79t, 80a-8, 80a-24, 80a-26, 80a-29, 80a-30, and 
80a-37, unless otherwise noted.
* * * * *

PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

    2. The authority citation for part 274 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m, 
78n, 78o(d), 80a-8, 80a-24, 80a-26, and 80a-29, unless otherwise 
noted.
* * * * *
    3. Form N-1A (referenced in Sec. Sec.  239.15A and 274.11A) is 
amended by:
    a. Replacing the final sentence of General Instruction C.3.(a) with 
two new sentences;
    b. Revising the introductory language to Item 7(f);
    c. Revising Item 8(a)(2);
    d. Adding new Instructions to Items 8(a)(1) and (2);
    e. Adding new Items 8(a)(3), (4), and (5);
    f. Adding a new Instruction to Item 8(a); and
    g. Revising Item 18(a).
    These additions and revisions read as follows:

    Note: The text of Form N-1A does not, and these amendments will 
not, appear in the Code of Federal Regulations.

Form N-1A

* * * * *
General Instructions
* * * * *
C. Preparation of the Registration Statement
* * * * *
    3. Additional Matters:
    (a) * * * Disclose the information required by Item 8 (Distribution 
Arrangements) in one place in the prospectus, except that the 
information required by paragraphs 8(a)(2), (3), (4), and (5) may be 
disclosed in a separate purchase and redemption document pursuant to 
Item 7(f), provided that all the information required by paragraphs 
8(a)(2), (3), (4), and (5) is included in the separate document. If the 
information required by paragraphs 8(a)(2), (3), (4), and (5) is 
disclosed in a separate purchase and redemption document, the table 
required by paragraph 8(a)(1) must be included in the separate purchase 
and redemption document, as well as the prospectus, in order to comply 
with the Instruction to Item 8(a), which states that all information 
required by paragraph 8(a) must be adjacent to the table required by 
paragraph 8(a)(1).
* * * * *
Item 7. Shareholder Information
* * * * *
    (f) Separate Disclosure Document. A Fund may omit from the 
prospectus information about purchase and redemption procedures 
required by Items 7(b)-(d) and 8(a)(2)-(5) and provide it in a separate 
document if the Fund:
* * * * *
Item 8. Distribution Arrangements
    (a) * * *
    (2) Unless disclosed in response to paragraph (a)(1), briefly 
describe any arrangements that result in breakpoints in, or elimination 
of, sales loads (e.g., letters of intent, accumulation plans, dividend 
reinvestment plans, withdrawal plans, exchange privileges, employee 
benefit plans, redemption reinvestment plans, and waivers for 
particular classes of investors). Identify each class of individuals or 
transactions to which the arrangements apply and state each different 
breakpoint as a percentage of both the offering price and the net 
amount invested. If applicable, state that additional information 
concerning sales load breakpoints is available in the Fund's SAI.
    Instructions.
    1. The description, pursuant to paragraph (a)(1) or (a)(2) of this 
Item 8, of arrangements that result in breakpoints in, or elimination 
of, sales loads should include a brief summary of shareholder 
eligibility requirements, including a description or list of the types 
of accounts (e.g., retirement accounts, accounts held at other 
financial intermediaries), account holders (e.g., immediate family 
members, family trust accounts, solely-controlled business accounts), 
and fund holdings (e.g., funds held within the same fund complex) that 
may be aggregated for purposes of determining eligibility for sales 
load breakpoints.
    2. The description pursuant to paragraph (a)(2) of this Item 8 need 
not contain any information required by Items 13(d) and 18(b).
    (3) Describe, if applicable, the methods used to value accounts in 
order to determine whether a shareholder has met sales load 
breakpoints, including the circumstances in which and the classes of 
individuals to whom each method applies. Methods that should be 
described, if applicable, include historical cost, net amount invested, 
and offering price.
    (4)(i) State, if applicable, that, in order to obtain a breakpoint 
discount, it may be necessary at the time of purchase for a shareholder 
to inform the Fund or his or her financial intermediary of the 
existence of other accounts in which there are holdings eligible to be 
aggregated to meet sales load breakpoints. Describe any information or 
records, such as account statements, that it may be necessary for a 
shareholder to provide to the Fund or his or her financial intermediary 
in order to verify his or her eligibility for a breakpoint discount. 
This description must include, if applicable:
    (A) Information or records regarding shares of the Fund or other 
funds held in all accounts (e.g., retirement accounts) of the 
shareholder at the financial intermediary;
    (B) Information or records regarding shares of the Fund or other 
funds held in any account of the shareholder at another financial 
intermediary; and
    (C) Information or records regarding shares of the Fund or other 
funds held at any financial intermediary by related parties of the 
shareholder, such as members of the same family or household.
    (ii) If the Fund permits eligibility for breakpoints to be 
determined based on historical cost, state that a shareholder should 
retain any records necessary to substantiate historical costs because 
the Fund, its transfer agent, and financial intermediaries may not 
maintain this information.
    (5) State whether the Fund makes available free of charge, on or 
through the Fund's website at a specified Internet address, and in a 
clear and prominent format, the information required by paragraphs 
(a)(1) through (a)(4) and Item 18(a), including whether the website 
includes hyperlinks that facilitate access to the information. If the 
Fund does not make the information

[[Page 74743]]

required by paragraphs (a)(1) through (a)(4) and Item 18(a) available 
in this manner, disclose the reasons why it does not do so (including, 
where applicable, that the Fund does not have an Internet website).
    Instruction. All information required by paragraph (a) of this Item 
8 must be adjacent to the table required by paragraph (a)(1) of this 
Item 8; must be presented in a clear, concise, and understandable 
manner; and must include tables, schedules, and charts as expressly 
required by paragraph (a)(1) of this Item 8 or where doing so would 
facilitate understanding.
* * * * *
Item 18. Purchase, Redemption, and Pricing of Shares
    (a) Purchase of Shares. To the extent that the prospectus does not 
do so, describe how the Fund's shares are offered to the public. 
Include any special purchase plans or methods not described in the 
prospectus or elsewhere in the SAI, including letters of intent, 
accumulation plans, dividend reinvestment plans, withdrawal plans, 
exchange privileges, employee benefit plans, redemption reinvestment 
plans, and waivers for particular classes of shareholders.
* * * * *

    By the Commission.

    Dated: December 17, 2003.

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-31545 Filed 12-23-03; 8:45 am]
BILLING CODE 8010-01-P