[Federal Register Volume 69, Number 113 (Monday, June 14, 2004)]
[Rules and Regulations]
[Pages 33262-33270]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-13276]



[[Page 33261]]

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Part VI





Securities and Exchange Commission





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17 CFR Parts 239 and 274



Disclosure of Breakpoint Discounts by Mutual Funds; Final Rule

  Federal Register / Vol. 69, No. 113 / Monday, June 14, 2004 / Rules 
and Regulations  

[[Page 33262]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 239 and 274

[Release Nos. 33-8427; 34-49817; IC-26464; File No. S7-28-03]
RIN 3235-AI95


Disclosure of Breakpoint Discounts by Mutual Funds

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission is adopting 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 amendments, an open-end management 
investment company will 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: Effective Date: July 23, 2004.
    Compliance Date: All initial registration statements, and all post-
effective amendments that are either annual updates to effective 
registration statements or that add a new series, filed on Form N-1A on 
or after September 1, 2004, must include the disclosure required by the 
amendments. Section II.G. of this release contains more information on 
the compliance date.

FOR FURTHER INFORMATION CONTACT: Christian L. Broadbent, Senior 
Counsel, 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, (202) 
942-0073, at the Securities and Exchange Commission, 450 Fifth Street, 
NW., Washington, DC 20549-0506.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission 
(``Commission'') is adopting amendments to Form N-1A,\1\ 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'').\2\
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    \1\ 17 CFR 239.15A; 17 CFR 274.11A.
    \2\ The Commission proposed these amendments in December 2003. 
Investment Company Act Release No. 26298 (Dec. 17, 2003) [68 FR 
74732 (Dec. 24, 2003)] (``Proposing Release'').

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. Omnibus Accounts
    G. Compliance Date
III. Paperwork Reduction Act
IV. Cost/Benefit Analysis
V. Consideration of Effects on Efficiency, Competition, and Capital 
Formation
VI. Final Regulatory Flexibility Analysis
VII. Statutory Authority
Text of 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.\3\ Fund shares sold through a broker-dealer or 
other intermediary often are subject to a sales charge or ``front-end 
sales load'' that is based on a percentage of the purchase price. The 
broker-dealer that sells the fund shares is compensated out of the 
proceeds of the front-end sales load.
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    \3\ 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.''\4\
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    \4\ 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. In 
addition, the Commission has jointly developed educational material 
with NASD and industry groups that explains breakpoints and 
discusses ways in which an investor might earn these discounts. See 
Making the Most of Mutual Fund Breakpoints (April 2004), at http://www.nasd.com/Investor/Choices/breakpoints_brochure.htm.
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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 aggregate purchases 
made over time: a letter of intent and a right of accumulation.\5\ A 
mutual fund that offers breakpoint discounts must disclose its schedule 
of breakpoints in its prospectus.\6\ 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'').\7\ 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.\8\
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    \5\ See Section I, ``Introduction and Background,'' Proposing 
Release, supra note 2, 68 FR at 74732-33 (description of letters of 
intent and rights of accumulation, and of the methods used by funds 
to value accounts in order to determine whether aggregate holdings 
have reached a sales load breakpoint).
    \6\ Item 7(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.
    \7\ Items 7(a)(2) and 17(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.
    \8\ In re American Express Financial Advisors, Securities Act 
Release No. 8365 (Feb. 12, 2004) (finding violations of securities 
laws where a broker-dealer failed to disclose to customers that they 
were not receiving the benefit of applicable breakpoint discounts, 
and failed to charge these customers correct sales loads and to 
disclose in confirmations the remuneration received from the sales 
loads charged). See In re 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); 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). Cf. NASD Conduct Rule IM-2830-1 
(``Breakpoint'' Sales); NASD Conduct Rule 2110 (Standards of 
Commercial Honor and Principles of Trade).

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[[Page 33263]]

    In late 2002, the staffs of the Commission and 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,\9\ 
including an examination sweep (with the New York Stock Exchange 
(``NYSE'')) of 43 broker-dealers that sell front-end sales load mutual 
funds,\10\ and the formation of the Joint NASD/Industry Task Force on 
Breakpoints (``Task Force'') to recommend ways in which the mutual fund 
and broker-dealer industries could prevent breakpoint problems in the 
future.\11\
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    \9\ 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.
    \10\ 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. 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.
    \11\ NASD Announces Joint NASD/Industry Breakpoint Task Force, 
NASD News Release, Feb. 18, 2003, http://www.nasdr.com/news/pr2003/release_03_006.html.
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    In addition, the Commission and NASD recently announced enforcement 
and disciplinary actions against 15 brokerage firms for failure to 
deliver mutual fund breakpoint discounts during 2001 and 2002.\12\ The 
firms agreed to compensate customers for the overcharges, pay fines 
that total over $21.5 million, and undertake other corrective 
measures.\13\
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    \12\ Fifteen Firms to Pay Over $21.5 Million in Penalties to 
Settle SEC and NASD Breakpoints Charges, Securities and Exchange 
Commission Press Release, Feb. 12, 2004, http://www.sec.gov/news/press/2004-17.htm. The Commission and NASD each brought cases 
against a group of 7 firms, and NASD separately brought actions 
against the other 8 firms. Id.
    \13\ Each of the 15 firms agreed to review all front-end load 
mutual fund trades in excess of $2,500 conducted between January 1, 
2001, and November 3, 2003; to provide written notification of the 
firm's problem delivering breakpoint discounts to each customer who 
purchased front-end load mutual funds from January 1, 1999, through 
November 3, 2003, and advise these customers that they may be 
entitled to a refund; to provide refunds where appropriate; and to 
pay a fine equal to the amount of the firm's projected overcharges. 
Id.
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    Today we are continuing to attack breakpoint discount problems by 
adopting form amendments that implement recommendations of the Task 
Force. The Task Force issued its report in July 2003 and, among other 
things, recommended that the Commission adopt rules requiring a fund to 
disclose certain information regarding breakpoints in its prospectus 
and on its Web site.\14\ In December 2003, we issued a release 
proposing form amendments intended to address these recommendations 
(``Proposing Release'').\15\ Specifically, we proposed 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 proposed 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 also proposed 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. Further, we proposed to require a mutual 
fund to state in its prospectus whether it makes available on or 
through its Web site information regarding its sales loads and 
breakpoints.
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    \14\ NASD et al., Report of the Joint NASD/Industry Task Force 
on Breakpoints 10, 13-14 (July 2003), available at http://www.nasdr.com/pdf-text/breakpoints_report.pdf. The Task Force also 
made a number of recommendations to the NASD, NYSE, and mutual fund 
and brokerage industries. NASD recently reported that the financial 
industry has taken the steps necessary to implement 7 of the Task 
Force's 13 recommendations and that substantial progress has been 
made toward implementing the remainder of the recommendations. NASD, 
Status Report: Implementation of Recommendations of Joint NASD/
Industry Breakpoint Task Force (Mar. 2004), available at http://www.nasdr.com/breakpoints_status.asp.
    \15\ See Proposing Release, supra note 2.
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    The Commission received 14 comment letters on the proposed 
amendments regarding breakpoint discounts from an investment adviser, 
professional and trade associations, investor advocacy and consumer 
groups, and individuals. These commenters generally supported the 
Commission's proposals to provide enhanced disclosure regarding 
breakpoint discounts on front-end sales loads. We are now adopting 
these proposed amendments, which are 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. The amendments also should help broker-dealers to 
access information about available breakpoint discounts.

II. Discussion

    The Commission is adopting, with one technical change,\16\ 
amendments to Form N-1A, the registration form for mutual funds, that 
will require enhanced disclosure regarding breakpoint discounts on 
front-end sales loads. Nothing in the amendments will 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.\17\
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    \16\ The technical amendment to General Instruction C.3.(d)(i) 
to Form N-1A that the Commission is adopting is discussed in Section 
II.E. of this release.
    \17\ See supra note 8 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 revising 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 7(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.\18\ Item 
7(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.
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    \18\ The amendments to Form N-1A reflect the recent adoption of 
amendments to the form that renumber Items 7 (Shareholder 
Information), 8 (Distribution Arrangements), and 18 (Purchase, 
Redemption, and Pricing of Shares) as Items 6, 7, and 17, 
respectively. See Investment Company Act Release No. 26372 (Feb. 27, 
2004) [69 FR 11244 (Mar. 9, 2004)].
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    The amendments will require that a mutual fund include the 
description required by Item 7(a)(2) of arrangements

[[Page 33264]]

that result in breakpoints in, or elimination of, sales loads in its 
prospectus. Our amendments direct that prospectus disclosure regarding 
breakpoints be brief in order to avoid overwhelming investors with 
excessively detailed information. Item 7(a)(2) will 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.\19\ This information 
will continue to be required in the SAI.
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    \19\ Instruction 2 to Item 7(a)(2) of Form N-1A. Item 12(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 17(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 amending Item 17(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 modifying Item 17(a) to 
conform the enumeration of types of special purchase plans or methods 
in that Item to the enumeration in Item 7(a)(2) of types of 
arrangements that result in breakpoints. Specifically, we are adding 
references to ``dividend reinvestment plans,'' ``employee benefit 
plans,'' and ``redemption reinvestment plans'' to Item 17(a) and 
eliminating ``services in connection with retirement plans'' from Item 
17(a). The amendments also add ``waivers for particular classes of 
investors'' to the enumeration in both Items 7(a)(2) and 17(a). To 
assist investors and financial intermediaries in finding all 
information about breakpoints, the prospectus will be required to 
state, if applicable, that additional information concerning sales load 
breakpoints is available in the SAI.
    Our amendments add an instruction to require that the description 
of arrangements resulting in breakpoints include a brief summary of 
shareholder eligibility requirements. This summary will 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.
    Several commenters provided recommendations regarding the location 
of the breakpoint disclosure. For example, two commenters argued that 
the Commission should require a fund to provide the breakpoint 
disclosure at the front of its prospectus, such as in the fee table 
required by Item 3 of Form N-1A, so that the disclosure would be easier 
to locate. We believe, however, that the amendments strike an 
appropriate balance between providing enhanced disclosure regarding 
breakpoint discounts and not overwhelming investors with information. 
Although important information regarding breakpoint discounts should be 
included in the prospectus, including this information in the fee table 
could tend to detract from the presentation of more basic information 
about fund costs. In addition, some commenters recommended that 
breakpoint information be provided to investors at the point of sale or 
in confirmation statements. We note that we recently proposed rules 
that would require a broker-dealer to provide its customers with 
information regarding breakpoints at the point of sale and in 
transaction confirmations.\20\
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    \20\ Exchange Act Release No. 49148 (Jan. 29, 2004) [69 FR 6438, 
6479-83 (Feb. 10, 2004)] (proposing rules 15c2-2 and 15c2-3 under 
the Securities Exchange Act of 1934).
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B. Disclosure of Methods Used To Value Accounts

    The amendments also 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.\21\ The methods required to be disclosed, if 
applicable, will include historical cost, net amount invested, and 
offering price.\22\
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    \21\ Item 7(a)(3) of Form N-1A.
    \22\ See Proposing Release, supra note 2, 68 FR at 74733 
(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 7(a)(1) of Form N-1A.
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C. Disclosure Regarding Information and Records Necessary To Aggregate 
Holdings

    Our amendments will 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.\23\ In addition, a mutual 
fund will 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 will be 
required to include, if applicable:
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    \23\ Item 7(a)(4)(i) of Form N-1A.
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     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; \24\
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    \24\ Item 7(a)(4)(i)(A) of Form N-1A.
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     Information or records regarding shares of the fund or 
other funds held in any account of the shareholder at another financial 
intermediary;\25\ and
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    \25\ Item 7(a)(4)(i)(B) of Form N-1A.
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     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.\26\
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    \26\ Item 7(a)(4)(i)(C) of Form N-1A.
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    In addition, if a mutual fund permits breakpoints to the determined 
based on historical cost, it will 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.\27\
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    \27\ Item 7(a)(4)(ii) of Form N-1A.
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D. Disclosure of Availability of Sales Load and Breakpoint Information 
on Fund's Web Site

    The amendments 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 is required regarding the fund's sales loads and 
breakpoints in the prospectus and SAI pursuant to Items 7(a) and 17(a), 
including whether the Web site includes hyperlinks that facilitate 
access to the information.\28\ A mutual fund that does not make the 
sales load and breakpoint information available in this manner will 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).
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    \28\ Item 7(a)(5) of Form N-1A.
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    The amendments will require that the disclosure about Web site 
availability of

[[Page 33265]]

sales load and breakpoint information indicate whether the information 
is in a clear and prominent format, including whether the Web site 
includes hyperlinks that facilitate access to the information. We 
believe that it is important for Web site disclosure regarding sales 
loads and breakpoint discounts to be clear and prominent in order to 
help investors and financial intermediaries find this information 
easily. Hyperlinks that facilitate access to the information may 
contribute to a clear and prominent presentation. Thus, Web sites 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 Web site 
containing the information.\29\
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    \29\ See Securities Act Release No. 8128 (Sept. 5, 2002) [67 FR 
58480, 58493 (Sept. 16, 2002)] (requiring companies to include 
disclosure in their annual reports on Form 10-K about availability 
on company Web sites of reports on Forms 10-K, 10-Q, and 8-K). We 
direct funds to this release for guidance concerning satisfaction of 
this requirement through hyperlinking to a third-party Web site.
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     Three commenters argued that breakpoint information should be 
included on a fund's Web site. For example, one commenter recommended 
that the Commission require an explanation of breakpoint eligibility 
requirements on the Web sites of funds that maintain them because the 
Web sites may be useful in conveying these requirements to investors. 
Another commenter, by contrast, argued that we should revise our 
proposed amendments so that a fund disclosing the availability of 
breakpoint information on its Web site would not be required to discuss 
the format of this information, and so that a fund which does not make 
breakpoint information available on its Web site would not be required 
to disclose that fact and explain the reasons why it does not do so.
    We believe, however, that our proposed approach, which we are 
adopting, more appropriately reflects our intention to encourage mutual 
funds to provide accessible Web site disclosure regarding the 
availability of breakpoint discounts.\30\ The increased availability of 
information through the Internet has helped to promote transparency, 
liquidity, and efficiency by making information available to investors 
quickly and in a cost-effective manner.
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    \30\ Cf. id.
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E. Presentation Requirements

    The amendments will require that the disclosure in Item 7(a)(2) 
regarding arrangements resulting in breakpoints in, or elimination of, 
sales loads, and all other sales load disclosure required by Item 7(a), 
be adjacent to the table of sales loads and breakpoints required by 
Item 7(a)(1).\31\ This will include the description of sales loads 
required by Item 7(a)(1), as well as the information about breakpoints, 
including valuation methods, shareholder information and records, and 
Web site availability that will be required by Items 7(a) (3), (4), and 
(5). The amendments also will require that a mutual fund present the 
information required by Item 7(a) in a clear, concise, and 
understandable manner, and include tables, schedules, and charts as 
expressly required by Item 7(a)(1) or where doing so would facilitate 
understanding.\32\
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    \31\ Instruction to Item 7(a) of Form N-1A.
    \32\ Id. Cf. rule 421 under the Securities Act of 1933 [17 CFR 
230.421] (plain English requirements for prospectuses).
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     General Instruction C.3.(a) to Form N-1A currently requires the 
information required by Item 7 to be in one place in the prospectus. 
This includes the information about sales loads and breakpoints 
required by Item 7(a)(1), information about 12b-1 fees required by Item 
7(b), and information about multiple class and master-feeder funds 
required by Item 7(c). It does not include the information on 
breakpoints currently required by Item 7(a)(2) because this information 
may be included in the SAI or in a separate purchase and redemption 
document pursuant to Item 6(g). Item 6(g) of Form N-1A currently 
permits a mutual fund to omit from the prospectus information about 
purchase and redemption procedures required by Items 6(b)-(d)\33\ and 
7(a)(2), other than information that is also required by Item 6(e),\34\ 
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.
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    \33\ Items 6(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.
    \34\ Newly-adopted Item 6(e) requires disclosure regarding 
frequent purchases and redemptions of fund shares. This information 
may not be omitted from the prospectus in reliance on Item 6(g). 
Investment Company Act Release No. 26418 (Apr. 16, 2004) [69 FR 
22300 (Apr. 23, 2004)].
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    Under our amendments, Item 6(g) will continue to permit the 
breakpoint information required by Item 7(a)(2) to be included in a 
separate purchase and redemption document.\35\ In addition, we are 
amending Item 6(g) to permit the information about breakpoints required 
by new Items 7(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 
amending 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 7(a) 
(2), (3), (4), and (5) is included in the separate document. This 
instruction will also clarify that if the information required by 
paragraphs 7(a) (2)-(5) is disclosed in a separate purchase and 
redemption document, the table of sales loads and breakpoints required 
by Item 7(a)(1) must be included in the separate purchase and 
redemption document, as well as the prospectus, in order to comply with 
the requirement that all disclosure required by Item 7(a) be adjacent 
to the table of sales loads and breakpoints.
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    \35\ We are, however, eliminating, as duplicative, the reference 
to this alternative in Item 7(a)(2).
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    General Instruction C.3.(d)(i) to Form N-1A currently permits a 
fund to modify or omit, if inapplicable, the information required by 
Items 6(b)-(d) and 7(a)(2) for funds used as investment options for 
certain defined contribution plans, tax-deferred arrangements, and 
variable insurance contracts. The Commission is adopting a technical 
amendment to General Instruction C.3.(d)(i) to extend the instruction 
to the information required by new Items 7(a) (3), (4), and (5).

F. Omnibus Accounts

    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 could entitle the shareholder to breakpoint 
discounts.
    Although omnibus accounts were not addressed in the proposed 
amendments, several commenters provided

[[Page 33266]]

suggestions regarding these accounts. One commenter urged the 
Commission to end the practice of using omnibus accounts, and in the 
meantime to require broker-dealers who rely on omnibus accounts and 
other methods of settling transactions without providing identifying 
information to show that their methods are as accurate in providing 
breakpoints as methods that do provide this information. Another 
commenter argued that the Commission should require financial 
intermediaries to disclose shareholder identity and transaction 
information to mutual funds.
    We note that the Commission addressed omnibus account issues in our 
proposed rules regarding mandatory redemption fees.\36\ Specifically, 
we proposed to require that, on at least a weekly basis, a financial 
intermediary provide to a fund the Taxpayer Identification Number and 
the amount and dates of all purchases, redemptions, or exchanges for 
each shareholder within an omnibus account. If the Commission adopts 
this proposed requirement, the information provided under this 
requirement may in some cases be helpful to funds that would be able to 
use it to determine whether shareholders received appropriate 
breakpoint discounts on purchases of fund shares sold with a front-end 
sales load.\37\
---------------------------------------------------------------------------

    \36\ Investment Company Act Release No. 26375A (Mar. 5, 2004) 
[69 FR 11762 (Mar. 11, 2004)]. An Omnibus Account Task Force 
convened by the NASD to study the issue of trading through omnibus 
accounts recommended this proposed approach in a report to the 
Commission. See NASD, Report of the Omnibus Account Task Force 7 
(Jan. 30, 2004).
    \37\ Investment Company Act Release No. 26375A, supra note 36, 
69 FR at 11767.
---------------------------------------------------------------------------

G. Compliance Date

    The effective date for these amendments will be July 23, 2004. We 
are requiring all initial registration statements, and all post-
effective amendments that are either annual updates to effective 
registration statements or that add a new series, filed on Form N-1A on 
or after September 1, 2004, to include the disclosure required by the 
amendments. We believe that this will provide funds with sufficient 
time to draft new disclosure to reflect the amendments.

III. Paperwork Reduction Act

    Certain provisions of the amendments contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 [44 U.S.C. 3501, et seq.]. 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 Office of Management 
and Budget (``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 published notice 
soliciting comments on the collection of information requirements in 
the Proposing Release and submitted the proposed collection of 
information to OMB for review in accordance with 44 U.S.C. 3507(d) and 
5 CFR 1320.11. We received no comments on the proposed collection of 
information requirements.
    We are adopting 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 requiring 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 requiring 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 amendments 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 amendments will 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 financial 
intermediaries to take full advantage of all available breakpoint 
discounts.
    Form N-1A, including the 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 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. We continue to estimate that the amendments will increase 
the hour burden per portfolio per filing of an initial registration 
statement on Form N-1A by 2 hours and will 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 continue to estimate that 30% 
of mutual fund portfolios will be affected by the amendments.\38\ The 
additional incremental hour burden resulting from the amendments will 
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%). The estimated total annual hour burden for all funds 
for preparation and filing of initial registration statements and post-
effective amendments to Form N-1A is 1,142,296 hours.\39\
---------------------------------------------------------------------------

    \38\ 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.
    \39\ This number represents 2,252 hours added to the current 
total annual hour burden for the preparation and filing of Form N-
1A, which is 1,140,044 hours. This total annual hour burden differs 
from the estimate of 1,107,078 hours contained in the Proposing 
Release due to the following additional hour burdens for Form N-1A 
that relate to amendments proposed subsequent to the Proposing 
Release: 30,998 hours resulting from proposed amendments relating to 
portfolio manager disclosure; and 1,968 hours resulting from the 
proposed rules relating to disclosure of sales loads and revenue 
sharing in connection with the proposals for new mutual fund 
confirmation and point of sale disclosure. Investment Company Act 
Release No. 26383 (Mar. 11, 2004) [69 FR 12752, 12759 (Mar. 17, 
2004)]; Exchange Act Release No. 49148 (Jan. 29, 2004) [69 FR 6438, 
6474 (Feb. 10, 2004)]. The estimate is based on the following 
calculation: 1,107,078 hours + 30,998 hours + 1,968 hours = 
1,140,044 hours.
---------------------------------------------------------------------------

IV. Cost/Benefit Analysis

    The Commission is sensitive to the costs and benefits imposed by 
its rules. The amendments that the Commission is adopting require 
mutual funds to provide enhanced disclosure regarding breakpoint 
discounts on front-end sales loads. Specifically, the amendments:

     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;
     Require a mutual fund to describe in its prospectus the 
methods used to

[[Page 33267]]

value accounts in order to determine whether a shareholder has met 
sales load breakpoints;
     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;
     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
     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 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.\40\ The average discount not provided was 
$364 per transaction.\41\ We anticipate that our amendments may result 
in a decrease in the number of transactions in which investors do not 
receive breakpoint discounts to which they are entitled.
---------------------------------------------------------------------------

    \40\ Joint Report, supra note 10, at 14-15.
    \41\ Id. at 16.
---------------------------------------------------------------------------

    Specifically, we believe that the amendments relating to disclosure 
of arrangements that result in breakpoints in sales loads will 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 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 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 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 disclosure may heighten investors' 
awareness of the importance of maintaining records when breakpoints are 
determined using the historical cost method.
    The 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 prospectus disclosure regarding breakpoints. In 
addition, the amendments relating to the presentation of disclosure 
regarding breakpoints should 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.

B. Costs

    The amendments 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 new disclosures will 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 is required by the amendments in their registration 
statements (although they have not been 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 adopting 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 requiring 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 requiring 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 amendments 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 new disclosure requirements will add 2,252 hours to 
the total annual burden of completing Form N-1A.\42\ We estimate that 
this additional burden will equal total internal costs of $188,650 
annually, or approximately $89 per fund portfolio.\43\
---------------------------------------------------------------------------

    \42\ 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.
    \43\ These figures are based on a Commission estimate that 
approximately 781 registered investment companies, with 2,108 
portfolios, will file initial registration statements or post-
effective amendments annually that will be subject to the disclosure 
requirements, and an estimated hourly wage rate of $83.77. The 
estimate of the number of investment companies is based on data 
derived from the Commission's EDGAR filing system. The estimated 
wage rate is a blended rate, based on published hourly wage rates 
for assistant/associate general counsels ($82.05) and programmers 
($42.05) in New York City, and the estimate that staff in these 
categories will divide time equally on compliance with the 
disclosure requirements, yielding a weighted wage rate of $62.05 
(($82.05x.50)+(42.05x.50))=$62.05). See Securities Industry 
Association, Report on Management & Professional Earnings in the 
Securities Industry 2003 (Sept. 2003). 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 $83.77 ($62.05x1.35)=$83.77). This 
estimate differs from the estimate in the Proposing Release, which 
was based on published compensation for compliance attorneys outside 
New York City ($37.60) and programmers ($29.44) contained in the 
Securities Industry Association's Report on Management & 
Professional Earnings in the Securities Industry 2002 (Sept. 2002).
---------------------------------------------------------------------------

    We expect that the external costs of providing the new prospectus

[[Page 33268]]

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 disclosure will not add significant length to the prospectus.

V. 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. In the Proposing Release, we requested comment on whether 
the proposed amendments would promote efficiency, competition, and 
capital formation. We received no comments on this section of the 
proposals.
    The 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 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 amendments 
on capital formation are unclear.
    Although, as noted above, we believe that the amendments will 
benefit investors, the magnitude of the effect of the amendments on 
efficiency, competition, and capital formation, and the extent to which 
they would be offset by the costs of the amendments, are difficult to 
quantify. We note that, with respect to the amendments, in many cases 
mutual funds currently provide disclosure in their registration 
statements regarding breakpoint discounts on front-end sales loads.

VI. Final Regulatory Flexibility Analysis

    This Final Regulatory Flexibility Analysis has been prepared in 
accordance with 5 U.S.C. 604, and relates to the Commission's 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. An Initial Regulatory Flexibility 
Analysis (``IRFA''), which was prepared in accordance with 5 U.S.C. 
603, was published in the Proposing Release.

A. Reasons for, and Objectives of, the Amendments

    Sections I and II of this release describe the reasons for and 
objectives of the amendments. As discussed in detail above, the 
amendments adopted by the Commission include disclosure reforms 
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.

B. Significant Issues Raised by Public Comment

    In the IRFA for the proposed amendments, we requested comment on 
any aspect of the IRFA, including the number of small entities that 
would be affected by the proposed amendments, the likely impact of the 
proposals on small entities, and the nature of any impact, and we asked 
commenters to provide any empirical data supporting the extent of the 
impact. We received one comment letter specifically on the IRFA, in 
which the commenter argued that the Commission should ensure that small 
mutual funds, and small investment management companies, are not 
negatively impacted by the proposed rules beyond that permitted by the 
Regulatory Flexibility Act [5 U.S.C. 601 et seq.].

C. Small Entities Subject to the Rule

    The amendments adopted by the Commission will affect registered 
investment companies that are small entities. For purposes of the 
Regulatory Flexibility Act, an investment company is a small entity if 
it, together with other investment companies in the same group of 
related investment companies, has net assets of $50 million or less as 
of the end of its most recent fiscal year.\44\ Approximately 145 
investment companies registered on Form N-1A meet this definition.\45\
---------------------------------------------------------------------------

    \44\ 17 CFR 270.0-10.
    \45\ This estimate is based on analysis by the Division of 
Investment Management staff of information from databases compiled 
by third-party information providers, including Morningstar, Inc., 
and Lipper.
---------------------------------------------------------------------------

D. Reporting, Recordkeeping, and Other Compliance Requirements

    We are adopting 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 requiring 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 requiring 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 amendments 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 amendments will 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.
    The Commission estimates some one-time formatting and ongoing costs 
and burdens that will 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 new disclosure requirements will increase the 
hour burden per portfolio per filing of an initial registration 
statement on Form N-1A by 2 hours and will 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 will 
increase total internal costs of filing an initial registration 
statement by approximately $168 per affected mutual fund portfolio 
annually, and will increase total internal costs of filing a post-
effective amendment by

[[Page 33269]]

approximately $84 per affected mutual fund portfolio annually.\46\
---------------------------------------------------------------------------

    \46\ These figures are based on an estimated hourly wage rate of 
$83.77. See supra note 43.
---------------------------------------------------------------------------

    We expect that 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.

E. Agency Action To Minimize Effect on Small Entities

    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 disclosure amendments will provide 
shareholders with greater transparency of breakpoint discounts on 
front-end sales loads. Different disclosure requirements for 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 will be required by the 
amendments to be provided to shareholders by all mutual funds, not just 
funds that are not considered small entities.
    We have endeavored through these 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 amendments to the same degree as 
other investment companies. Further clarification, consolidation, or 
simplification of the amendments 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. Based on our past 
experience, we believe that the disclosure required by the amendments 
will be more useful to investors if there are enumerated informational 
requirements.

VII. Statutory Authority

    The Commission is adopting 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].

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 Form Amendments

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

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

0
1. The general authority citation for part 239 is revised to read 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

0
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.
* * * * *

0
3. Form N-1A (referenced in Sec. Sec.  239.15A and 274.11A) is amended 
by:
0
a. Removing the final sentence of General Instruction C.3.(a) and 
adding two new sentences;
0
b. Revising the reference ``7(a)(2)'' to read ``7(a)(2)-(5)'' in 
General Instruction C.3.(d)(i);
0
c. Revising the introductory text of Item 6(g);
0
d. Revising Item 7(a)(2);
0
e. Adding Instructions to Items 7(a)(1) and (2);
0
f. Adding Items 7(a)(3), (4), and (5);
0
g. Adding an Instruction to Item 7(a); and
0
h. Revising Item 17(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 7 (Distribution 
Arrangements) in one place in the prospectus, except that the 
information required by paragraphs 7(a)(2), (3), (4), and (5) may be 
disclosed in a separate purchase and redemption document pursuant to 
Item 6(g), provided that all the information required by paragraphs 
7(a)(2), (3), (4), and (5) is included in the separate document. If the 
information required by paragraphs 7(a)(2), (3), (4), and (5) is 
disclosed in a separate purchase and redemption document, the table 
required by paragraph 7(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 7(a), which states that all information 
required by paragraph 7(a) must be adjacent to the table required by 
paragraph 7(a)(1).
* * * * *

Item 6. Shareholder Information

* * * * *
    (g) Separate Disclosure Document. A Fund may omit from the 
prospectus information about purchase and redemption procedures 
required by Items 6(b)-(d) and 7(a)(2)-(5), other than information that 
is also required by Item 6(e), and provide it in a separate document if 
the Fund:
* * * * *

Item 7. Distribution Arrangements

    (a) * * *
    (2) Unless disclosed in response to paragraph (a)(1), briefly 
describe any

[[Page 33270]]

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 7, of arrangements that result in breakpoints in, or elimination 
of, sales loads must 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 7 need 
not contain any information required by Items 12(d) and 17(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 Web site at a specified Internet address, and in a 
clear and prominent format, the information required by paragraphs 
(a)(1) through (a)(4) and Item 17(a), including whether the Web site 
includes hyperlinks that facilitate access to the information. If the 
Fund does not make the information required by paragraphs (a)(1) 
through (a)(4) and Item 17(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 Web site).
    Instruction. All information required by paragraph (a) of this Item 
7 must be adjacent to the table required by paragraph (a)(1) of this 
Item 7; 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 7 or where doing so would 
facilitate understanding.
* * * * *

Item 17. 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: June 7, 2004.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-13276 Filed 6-10-04; 8:45 am]
BILLING CODE 8010-01-P