[Federal Register Volume 70, Number 42 (Friday, March 4, 2005)]
[Proposed Rules]
[Pages 10521-10557]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-4215]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 239, 240 and 274

[Release Nos. 33-8544; 34-51274; IC-26778; File No. S7-06-04]
RIN 3235-AJ11; 3235-AJ12; 3235-AJ13; 3235-AJ14


Point of Sale Disclosure Requirements and Confirmation 
Requirements for Transactions in Mutual Funds, College Savings Plans, 
and Certain Other Securities, and Amendments to the Registration Form 
for Mutual Funds

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule; reopening of comment period and supplemental 
request for comment.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
reopening the comment period on proposed rules, published in January 
2004, that would require broker-dealers to provide their customers with 
information regarding the costs and conflicts of interest that arise 
from the distribution of mutual fund shares, 529 college savings plan 
interests, and variable insurance products. The Commission also is 
supplementing its request for comments on the proposed rules to reflect 
issues raised by commenters, including feedback received from investors 
in in-depth interviews about revised forms for disclosing information 
at the point of sale. The Commission is publishing this supplemental 
request for comment and reopening the comment period to assure that the 
public has a full opportunity to address such issues in their comments.

DATES: Comments should be submitted on or before April 4, 2005.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number S7-06-04 on the subject line; or

[[Page 10522]]

     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, 
Washington, DC 20549-0609. All submissions should refer to File Number 
S7-06-04. This file number should be included on the subject line if e-
mail is used. To help us process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments also are available for public 
inspection and copying in the Commission's Public Reference Room, 450 
Fifth Street, NW, Washington, DC 20549. All comments received will be 
posted without change; we do not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make available publicly.

FOR FURTHER INFORMATION CONTACT: With respect to Securities Exchange 
Act Rules 10b-10, 15c2-2, and 15c2-3, contact Catherine McGuire, Chief 
Counsel, Paula R. Jenson, Deputy Chief Counsel, Joshua S. Kans, Branch 
Chief, David W. Blass, Branch Chief, or John J. Fahey, Attorney, at 
(202) 942-0073, Office of Chief Counsel, Division of Market Regulation, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-1001.
    With respect to Form N-1A, contact Deborah Skeens, Senior Counsel, 
at (202) 942-0721, Office of Disclosure Regulation, Division of 
Investment Management, Securities and Exchange Commission, 450 Fifth 
Street, NW, Washington, DC 20549-0506.

SUPPLEMENTARY INFORMATION:

I. Introduction

    On January 29, 2004, the Commission issued, and requested comment 
on, two proposed new rules, as well as rule amendments under the 
Securities Exchange Act of 1934 designed to enhance the information 
broker-dealers provide to their customers in connection with 
transactions in certain types of securities.\1\ Proposed rules 15c2-2 
and 15c2-3 would require broker-dealers to provide their customers with 
targeted information, at the point of sale and in transaction 
confirmations, regarding the costs and conflicts of interest that arise 
from the distribution of mutual fund shares, 529 college savings plan 
interests \2\, and variable insurance products (collectively, ``covered 
securities''). The Commission also proposed conforming amendments to 
rule 10b-10, its general confirmation rule, as well as amendments to 
that rule to provide investors with additional information about call 
features of debt securities and preferred stock. Finally, the 
Commission proposed amendments to Form N-1A, the registration form for 
mutual funds, to improve disclosure of sales loads and revenue sharing 
payments.\3\
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    \1\ See Securities Exchange Act Release No. 49148 (January 29, 
2004), 69 FR 6438 (February 10, 2004) (``Proposing Release'').
    \2\ College savings plans are often referred to as ``529 savings 
plans.''
    \3\ In the Proposing Release, and on the forms attached to the 
Proposing Release, we used the term ``revenue sharing'' to refer to 
payments to broker-dealers for promoting certain covered securities 
over others. However, investor feedback indicated that the term 
``revenue sharing'' is not easily understandable. While we continue 
to refer to the term ``revenue sharing payment'' in this release, we 
have removed references to ``revenue sharing'' from the forms 
attached to this release and instead refer to payments broker-
dealers receive for promoting certain covered securities over 
others. See infra part II.A.3.
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    We received over one thousand separate comments on the proposed 
rules and rule amendments, as well as over four thousand comments from 
individuals and entities using a variety of standard letter types.\4\ 
Because proposed rules 15c2-2 and 15c2-3 were intended to provide clear 
and useful disclosure to investors, we actively encouraged comments 
from individual investors and investor groups. We also met with 
numerous investor groups, and engaged a consultant to assist in 
investor testing of possible forms for confirmation and point of sale 
disclosures.
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    \4\ The full text of comments to the proposal, including the 
text of standard letter types, is publicly available at: http://www.sec.gov/rules/proposed/s70604.shtml.
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    The comments and other feedback we received suggest a number of 
areas where the proposed point of sale and confirmation disclosure 
requirements may need to be revised to more effectively communicate 
information to investors, while more efficiently balancing the benefits 
of disclosure against the costs of compliance. In addition, some 
feedback suggests that we should consider taking a more layered 
approach to disclosure by requiring broker-dealers to use the Internet 
as a disclosure medium to supplement point of sale and confirmation 
disclosure.
    Section II of this release discusses possible improvements to the 
proposed point of sale disclosure rule for transactions in covered 
securities. Section III discusses possible improvements to the proposed 
confirmation disclosure rule for transactions in covered securities. 
Section IV discusses the possible requirement for broker-dealers to 
disclose detailed information about revenue sharing payments and other 
broker compensation practices on the Internet. Section V discusses 
possible changes to the prospectus disclosure of revenue sharing. 
Section VI contains a general request for comments on this release and 
also renews our request for comments on the proposals in the Proposing 
Release.\5\
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    \5\ In the Proposing Release, we proposed rule language to 
require confirmation disclosure of comparative information about 
certain costs and conflicts. This release does not address those 
proposed requirements, given that the content of comparison 
information and the form of disclosure (e.g., at the point of sale 
versus in confirmations) in large part will depend upon any final 
point of sale and confirmation requirements. At a later date and in 
a separate release, we plan to request further comments about 
comparison range disclosure requirements.
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II. Point of Sale Proposal

    Proposed rule 15c2-3 was intended to improve investment 
decisionmaking by providing investors at the point of sale with 
information about costs and conflicts of interest associated with 
purchases of covered securities. Comments and investor feedback 
indicated, however, that while point of sale disclosure may be quite 
useful to investors, there are a number of areas that could be enhanced 
to make the proposed rule more effective. These include: (a) The 
content and format of the disclosure that would be required under the 
proposed rule, including the disclosure of ``management fees'' and 
``other expenses'' of the covered security; (b) the manner in which 
oral point of sale disclosures would be made; (c) the timing of 
delivery of point of sale disclosures; (d) exceptions to the 
requirement to deliver point of sale disclosures; and (e) special 
issues related to variable insurance products. We seek additional 
comment about these key areas, as detailed below.

A. Content and Format of Proposed Point of Sale Disclosure for Covered 
Securities

1. Brief Summary of Select Comments to the Proposing Release Relating 
to Point of Sale Disclosure
    We received substantial feedback on the point of sale forms that 
would be required under proposed rule 15c2-3. Some investors were 
confused by the use of industry jargon, such as ``sales loads'' and 
``revenue sharing,'' in the forms attached to the Proposing Release.

[[Page 10523]]

Some stated that the definitions and explanatory materials were not as 
useful as they would have liked. Others stated that the forms did not 
adequately differentiate one-time costs from ongoing costs.\6\ Also, 
many investors wanted point of sale disclosure to provide comprehensive 
information about all the costs of owning covered securities, not just 
distribution-related costs. They sought comprehensive information about 
ownership costs, in percentage terms and in dollar terms, to better 
inform them about the total costs associated with purchasing and owning 
these securities.\7\
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    \6\ AARP conducted its own investor testing, which further 
indicated that the proposed disclosure form was not effective in 
communicating information to many investors.
    \7\ While many investors recognized that dollar-based disclosure 
of future annual costs is hypothetical in nature, in that these 
costs would vary over time, they nonetheless concluded that such 
dollar-based disclosure would help them make better investment 
decisions. Consumer advocates also supported this change, stating 
that point of sale disclosure that failed to include information 
about fund management fees and other non-distribution costs could 
cause some investors to mistakenly believe that those additional 
costs of ownership are not present.
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    Some securities industry commenters urged the Commission to revisit 
the proposed requirement that point of sale disclosure be specific to 
the anticipated amount of the customer's transaction, stating that such 
quantified disclosure would be difficult and costly to provide. Some 
saw standardized point of sale disclosure as preferable to transaction-
specific disclosure and some viewed point of sale disclosure as overly 
time-consuming for broker-dealers to deliver, particularly over the 
telephone.
    Some commenters suggested specific changes to the wording and 
layout of the proposed point of sale forms, and provided alternative 
forms for us to consider.\8\ In addition, we received several comments 
about the proposed ``yes or no'' point of sale disclosure of whether a 
broker-dealer or its affiliates receive revenue sharing from a person 
within a fund complex. The disclosure requirement, including proposed 
definitions of ``revenue sharing'' and ``fund complex,'' in general 
would have required a broker-dealer to disclose whether it receives 
certain payments from affiliates of the issuer of the covered security, 
but not from the issuer itself. Disclosure about special compensation 
arrangements was intended to alert customers to those conflicts of 
interest and promote further inquiry.
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    \8\ See Letter from Mary L. Shapiro, Vice Chairman, NASD, and 
President, Regulatory Policy and Oversight, NASD, to Jonathan G. 
Katz, Secretary, Commission, dated May 4, 2004; Letter from Mary L. 
Shapiro, Vice Chairman, NASD, and President, Regulatory Policy and 
Oversight, NASD, to Jonathan G. Katz, Secretary, Commission, dated 
August 20, 2004; Letter from Mike Scafati, Senior Vice President, 
A.G. Edwards & Sons, Inc., dated April 12, 2004; Letter from William 
Lutz, Professor of English, Rutgers University, to Jonathan G. Katz, 
Secretary, Commission, dated April 12, 2004; Letter from Nancy M. 
Smith to Jonathan G. Katz, Secretary, Commission, dated April 12, 
2004; Letter from Nancy M. Smith to Jonathan G. Katz, Secretary, 
Commission, dated April 22, 2004; Letter from Amy B.R. Lancellotta, 
Acting General Counsel, Investment Company Institute, to Jonathan G. 
Katz, Secretary, Commission, dated April 12, 2004; Memorandum from 
the Division of Market Regulation regarding a meeting with 
representatives of the Investment Company Institute, dated October 
26, 2004; and Memorandum from the Division of Market Regulation 
regarding a meeting with representatives of the Securities Industry 
Association, dated October 26, 2004.
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    One commenter suggested that the disclosure requirement relating to 
revenue sharing should be more focused, stating that the proposal would 
encompass payments unrelated to the distribution of covered securities 
purchased by a customer.\9\ Commenters also expressed concern that the 
provisions of the proposed rules relating to revenue sharing would lead 
to inconsistent disclosure depending upon how payments are depicted by 
a fund complex, particularly in light of the proposed exclusion for 
payments by issuers.\10\ Some commenters also suggested that such 
payments merely constitute ``cost sharing'' by which fund families 
compensate broker-dealers for services that the fund families otherwise 
would incur.\11\
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    \9\ Some commenters also stated that the proposed disclosure 
requirement should not encompass payments that a broker-dealer 
receives for underwriting state bonds, or payments received by banks 
that are affiliated with broker-dealers, or certain payments that 
broker-dealers receive from affiliated fund complexes.
    \10\ That particularly may be an issue with regard to payments 
received by fund ``supermarkets'' operated by certain broker-
dealers.
    \11\ Regardless of the characterization, a broker-dealer's 
receipt of special payments from some fund complexes but not others 
gives the broker-dealer monetary incentives to promote the sale of 
securities of the fund complexes that make those payments. That is 
true even if the payments solely reimburse the broker-dealer for 
sales and servicing costs it incurs.
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2. Revised Point of Sale Disclosure Forms
    In response to the comments we received to the Proposing Release, 
we sought feedback from investors and have developed revised forms that 
we are considering adopting.\12\ Broker-dealers would be required to 
deliver these proposed new forms at the point of sale before a customer 
purchases a covered security. Consistent with investors' views that 
disclosure should be targeted and should exclude irrelevant 
information, broker-dealers would not use a ``one size fits all'' form 
to provide written point of sale disclosure to customers. Instead, 
while broker-dealers would have to disclose specific categories of 
information in a required format to the extent those categories are 
applicable, the written point of sale forms would omit categories of 
information that are not applicable to a particular purchase.\13\ This 
targeted approach would limit ``information overload''--which can 
undercut the effectiveness of highly detailed disclosure--and also 
would facilitate disclosure of special costs associated with particular 
securities.\14\ It therefore should lead to disclosure that is as 
standardized as possible, while targeted enough to be useful to a wide 
range of investors. We would hope that investors would request, and 
broker-dealers would provide, forms for different share classes where 
applicable and where consistent with suitability obligations, in order 
to help investors make informed investment decisions.
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    \12\ The Commission retained Siegel & Gale, LLC and Gelb 
Consulting Group, Inc. to help develop and test model disclosure 
forms that would effectively convey information to investors. See 
Siegel & Gale, LLC/Gelb Consulting Group, Inc., ``Results of In-
Depth Investor Interviews Regarding Proposed Mutual Fund Sales Fee 
and Conflict of Interest Disclosure Forms: Report to the Securities 
and Exchange Commission,'' (November 4, 2004) and ``Supplemental 
Report to the Securities and Exchange Commission'' (November 29, 
2004) (together, the ``Siegel & Gale/Gelb Consulting Report''). The 
report is available at http://www.sec.gov/rules/proposed/s70604/rep110404.pdf and the supplemental report is available at http://www.sec.gov/rules/proposed/s70604/sup-rep010705.pdf.
    \13\ Thus, for example, a customer contemplating buying class A 
mutual fund shares with an upfront sales fee would receive a form 
that would reflect that upfront fee in a standardized format, but a 
broker-dealer would not be required to include information about 
deferred sales fees, which are not applicable to class A shares.
    \14\ As discussed below, those special costs may include, among 
others, account opening fees imposed by the issuers of college 
savings plans, or purchase or redemption fees imposed by funds.
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    Consistent with those principles, the forms in Attachments 1-6 
reflect feedback we have received through investor outreach about how 
to improve the clarity and readability of the forms, as well as 
additional analysis about how to improve their cost-effectiveness.\15\ 
Attachments 1-3 show proposed new ``models'' of required point of sale 
disclosure forms filled in for a hypothetical mutual fund,\16\ with the

[[Page 10524]]

differences among the forms reflecting differences in share classes and 
other pricing attributes. Attachments 4-6 show proposed new ``models'' 
for the required point of sale disclosure forms filled in for a 
hypothetical 529 savings plan, again reflecting differences in pricing. 
Following is a summary of some of the key aspects of these forms:
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    \15\ This section discusses generally the proposed new point of 
sale disclosure forms for all covered securities. We recognize, 
however, that variable insurance products have special disclosure 
issues. We discuss additional forms more appropriate to those 
products in part II.E.
    \16\ The proposed new ``model'' forms in Attachments 1-3 and 4-6 
depict how the required forms would be filled in for hypothetical 
mutual funds or 529 savings plans, respectively.
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    a. Clarity of the forms. We believe that the forms in Attachments 
1-6 are clearer and easier to understand than the point of sale forms 
attached to the Proposing Release. Where possible, we have used plain 
English in the forms, rather than using industry jargon. In addition, 
broker-dealers would be required to deliver forms in the same format, 
including font size and layout, as that of Attachments 1-6.
    b. Identification of security subject to disclosure. Broker-dealers 
would be required to more clearly identify the security subject to 
disclosure in the forms. For example, in the case of mutual funds, this 
would include the disclosure of the fund's ticker symbol (if 
applicable). In the case of 529 savings plans, this would include 
disclosure of the specific age-based or other portfolio within the 
plan, if applicable, and the name of the state that sponsors the plan, 
if that name otherwise would not be identified. Disclosure of point of 
sale information for 529 savings plan interests also would include 
brief text reminding customers to consider the potential tax benefits 
of investing in the plan of their home state.
    c. Combined use of standardized and transaction-specific cost 
disclosure. Costs associated with investments in covered securities 
would be shown using standardized $1,000, $50,000 and $100,000 payment 
or investment amounts. In addition, if a customer requests at the point 
of sale, broker-dealers would be required to use ``fill in the blank'' 
boxes to disclose cost information reflecting the customer's 
anticipated payment amount.\17\
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    \17\ There are potential disclosure efficiencies associated with 
standardized disclosure, such as the use of preprinted forms. At the 
same time, however, our testing has shown that many investors want 
information at the point of sale that is specific to the anticipated 
amount of their purchase. The proposed new forms are intended to 
strike a balance between the use of standardized disclosure and the 
ability for interested investors to receive more personalized 
information.
    In developing these new proposed forms, we considered disclosing 
information based on a $10,000 hypothetical investment. However, our 
investor testing indicated that disclosure based on a $1,000 
hypothetical investment should permit customers to more easily 
estimate the costs for their actual purchase amount than disclosures 
based on a $10,000 hypothetical investment. Furthermore, disclosure 
of information based on hypothetical $50,000 and $100,000 
investments provide additional context and also illustrate the 
effect of breakpoint discounts on upfront sales loads (referred to 
on the forms and in this release as ``sales fees'' for mutual 
funds).
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    d. Presentation of sales fee disclosure. Based on the standardized 
payment amounts (for securities with an upfront sales fee)\18\ or 
investment amounts (for other securities), broker-dealers would be 
required to disclose on the forms sales fees in dollars and as a 
percentage of the amount invested.\19\ For securities with an upfront 
sales fee, the forms would contain an additional column for the net 
amount invested. Broker-dealers would be required to disclose the back 
end sales fee on the form as a ``maximum'', reflecting the highest back 
end fee a customer could expect to pay if the investment did not 
appreciate or depreciate.\20\ Broker-dealers would also be required to 
disclose on the forms a brief statement about the possible availability 
of breakpoint discounts, referred to on the forms as ``volume 
discounts.''
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    \18\ Whenever an upfront sales fee is charged, the amount of the 
investment is less than what the customer pays.
    \19\ The ``investment amount'' could be defined to equal the 
customer's total payment less the upfront sales fee.
    \20\ The amount of any back end sales fee depends on the time an 
investor sells the covered security and the net asset value of the 
covered security at that time, the actual amount of the fee would 
not be known at the point of sale.
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    e. Comprehensive annual cost disclosure. In the Proposing Release, 
we proposed to require broker-dealers to disclose only distribution-
related costs. However, in response to the comments and investor 
testing described above, we now propose to require broker-dealers to 
disclose on the proposed new forms comprehensive information about all 
the costs of owning the securities subject to disclosure, including 
investment company costs such as ``management fees'' and ``other 
expenses'' that are disclosed in the prospectus. The disclosure of 
those costs would be made in both dollar terms and as a percentage of 
investment value. Because our investor testing showed that disclosure 
of costs appears to be most effective when all the components of the 
costs are identified, broker-dealers would be required to show the 
breakdown of annual costs by category. In addition, they would be 
required to disclose any flat annual fees, such as the account fee 
illustrated on Attachment 1.
    f. Disclosures tailored to share class and pricing structure. 
Broker-dealers would be required to tailor point of sale disclosures to 
reflect particular share classes or other pricing structures that are 
applicable to a contemplated purchase. Accordingly, point of sale 
disclosure would be required for all share classes and pricing 
structures, not just the front-end, back-end, and ``level load'' 
structures set forth in the attachments (commonly referred to as A, B, 
and C share classes). Broker-dealers selling any other share classes or 
pricing structures would be required to provide the applicable 
disclosures from the attached forms.
    g. Disclosure of all share classes under consideration. A broker-
dealer would have to provide point of sale information with regard to 
all share classes that are under consideration at the point of sale, 
including share classes other than the typical A, B, and C share 
classes.
    h. Disclosure of revenue sharing arrangements. Broker-dealers would 
be required to disclose the existence of revenue sharing payments they 
receive for promoting covered securities as a conflict of interest. 
Consistent with the proposed Internet disclosure requirements discussed 
below, broker-dealers would also be required to disclose on the point 
of sale forms an Internet Web site and a toll-free telephone number 
customers can use to find more detailed information about disclosures 
of those payments, including the amounts of, and sources of, the 
payments.\21\
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    \21\ Broker-dealers would not be required to include the amounts 
of revenue sharing payments on the point of sale disclosure forms, 
or on transaction confirmations. This differs from the proposed 
rules described in the Proposing Release. Some investors expressed 
more interest in information about the existence of the conflict of 
interest created by the revenue sharing payments than the amounts 
paid under revenue sharing arrangements. While descriptive 
information about the conflicts posed by revenue sharing 
arrangements is necessary to inform customers about the conflicts of 
interest facing their agents, as discussed below in part IV, 
Internet-based disclosure may be a preferable means for giving 
investors detailed and more thorough information about revenue 
sharing payments their broker-dealer receives and the conflicts of 
interest those payments create.
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    i. Disclosure of special incentives to broker-dealer sales 
personnel. Broker-dealers would be required to disclose the fact, if 
true, that they pay their personnel proportionately more for selling 
the covered security than for others (i.e., whether they pay 
differential compensation) or for selling certain share classes over 
others.\22\ The

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forms would inform investors of where to find out more detailed 
disclosures of broker compensation and the special incentives paid to 
sales personnel for selling certain funds over others.\23\
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    \22\ As proposed, point of sale disclosure of differential 
compensation practices would not cover situations in which an 
associated person has a financial incentive to sell securities that 
pay a relatively high dealer concession or commission to the broker-
dealer, even though that could translate into a relatively high 
payment to the associated person. That type of compensation 
incentive was not proposed to be captured at the point of sale due 
to the need to keep point of sale disclosure simple and the risk 
that such disclosure either would invariably lead to a ``yes'' 
answer or else would be too unwieldy at the point of sale. See 
Proposing Release n. 105.
    \23\ As with disclosure of revenue sharing payments, investors 
in general expressed more interest in information about costs they 
would pay than in information about how broker-dealers were 
compensated. Accordingly, the forms would not require disclosure of 
the standard dealer concession that broker-dealers receive to sell 
the covered security. As discussed below in part IV, Internet-based 
disclosure may be a preferable means for giving customers quantified 
information about how their brokers are being compensated.
    Because we prohibited the use of brokerage to promote 
distribution in September 2004, point of sale disclosure of 
information about portfolio brokerage commissions no longer would be 
necessary. See Investment Company Act Release No. 26591 (Sept. 2, 
2004), 69 FR 54728 (Sept. 9, 2004). The NASD has adopted a 
corresponding amendment to its rules governing broker-dealers, and 
NASD rules for several years have prohibited member broker-dealers 
from favoring or disfavoring any fund based on expected brokerage 
commissions. See Securities Exchange Act Release No. 50883 (Dec. 20, 
2004), 69 FR 77286 (Dec. 27, 2004).
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    j. Reference to the fund prospectus as the primary source of 
information about the fund. Broker-dealers would be required to include 
a statement that customers should consider all costs, goals and risks 
before purchasing a covered security, direct customers to the 
security's prospectus or official statement for more information, and 
inform customers that the broker-dealer can provide those documents, 
including the disclosure regarding special incentives.
    k. Permissive omission of categories where no information is 
applicable. Broker-dealers would be able to omit any categories of 
information that are not applicable. For example, if the disclosure on 
the forms about a conflicts of interest is ``NO,'' broker-dealers 
could, but are not required to, omit that disclosure.
3. Request for Additional Comments
    Would the proposed new point of sale disclosure forms outlined 
above and attached improve decisionmaking by providing investors with 
the right information about covered securities prior to purchasing 
those securities? Commenters are invited to discuss the effectiveness 
of the proposed point of sale disclosure forms in Attachments 1-6 and 
to suggest alternatives and modifications. Commenters specifically are 
invited to discuss:
    Q. Clarity of the forms. Do the proposed new forms in Attachments 
1-6 strike an appropriate balance between the use of plain English and 
the need for specific disclosure of information about the costs and 
conflicts associated with purchases of covered securities? Is the 
terminology used in the forms easily understandable? If not, how should 
it be modified? For example, should the disclosure of annual fees on 
the forms include the term ``12b-1 fee'' to refer to annual 
distribution and service fees paid to broker-dealers for selling a 
covered security? Should the disclosure of conflicts of interest on the 
forms include the term ``revenue sharing,'' so that investors may 
connect the information on the forms with information they receive 
through other disclosure documents or the media? Would the use of the 
terms ``12b-1 fee'' and ``revenue sharing'' be confusing? If so, what 
other terms are appropriate substitutes? Also, are there other terms 
that should be included on the forms?
     Is it appropriate for the Commission to mandate the format 
of the forms, including font size and layout? If the format of the 
forms is not mandated, is it likely, either intentionally or 
unintentionally, that broker-dealers would obscure the information 
being disclosed?
     Should the forms contain a ``date line'' where the broker-
dealer would be required to fill in the date when the point of sale 
disclosures were communicated to the investor? Would such a requirement 
aid in assuring compliance with the rule? For point of sale information 
delivered orally, should broker-dealers be required to notify the 
customer that the information is current as of the date of disclosure?
     Should the forms contain a ``signature line'' which 
customers would be required to sign to evidence receipt of the point of 
sale disclosures? Would such a requirement aid in assuring compliance 
with the rule? Could it cause broker-dealers to make point of sale 
disclosures later in the selling process in order to avoid having 
customers sign multiple disclosure forms? How would such a ``signature 
line'' requirement be implemented for oral point of sale disclosures?
    Q. Identification of security subject to disclosure. Do the 
attached proposed forms appropriately set forth the covered security's 
issuer and class or pricing structure, ticker symbol (if applicable), 
and other portfolio or fund designations as necessary to identify the 
security and differentiate it from the issuer's other securities?
     In a transaction involving a 529 savings plan interest or 
variable insurance product, point of sale disclosure would be required 
to encompass costs related to a number of underlying securities (such 
as 12b-1 fees imposed at the level of the underlying security), and 
conflicts related to underlying securities (such as revenue sharing 
paid for distribution of those securities). Should broker-dealers be 
required to inform investors that the information being disclosed 
reflects costs and conflicts arising from securities underlying the 
covered security that is being directly purchased, as well as the costs 
and conflicts directly applicable to the covered security? Should 
broker-dealers also be required to disclose the identity of the 
securities underlying the covered security that is being directly 
purchased? Are there certain circumstances where such disclosure should 
be required, such as when that information is not otherwise available?
     For interests in a 529 savings plan, should broker-dealers 
be required to identify a specific age-based portfolio or other 
portfolio within the plan, to the extent a specific portfolio has been 
identified at the point of sale? Alternatively, if the underlying 
portfolio has not been identified at the point of sale, should the 
broker-dealer be able to provide a disclosure document setting forth 
maximum costs (i.e., maximum sales fee and maximum annual ownership 
costs) associated with all portfolios underlying the plan? To what 
extent do investors purchase interests in 529 plans without already 
having identified the underlying portfolio for the investment? If the 
state sponsoring a plan is not otherwise identified, should the broker 
also be required to disclose the name of the state in order to help 
customers determine whether they may be entitled to state tax 
deductions or other benefits for investing in that state's plan?
     Some states offer state tax benefits for investments in 
the 529 savings plans they sponsor. If residents of those states invest 
in a different state's 529 savings plan, they generally would not be 
eligible to receive the state tax benefits. Attachments 4-6 include a 
brief text reminding customers to consider the potential tax benefits 
of investing in a plan sponsored by their home state. Is this 
disclosure appropriate? Should it be modified, narrowed, or expanded?
    Q. Combined use of standardized and transaction-specific cost 
disclosure. The proposed new forms would combine disclosure of 
standardized information with disclosure of transaction-specific 
information upon customer request, or in accordance with a broker-
dealer's standard practice. Does this approach appropriately balance 
the cost savings of standardized disclosure with the effectiveness of 
transaction-specific

[[Page 10526]]

disclosure? Should the Commission require that the brokers disclose 
transaction-specific information in all situations, and not just upon 
request? Alternatively, are there certain situations or products for 
which transaction-specific information should always be required?
    Q. Presentation of sales fee disclosure. Would the disclosure of 
upfront sales fees in the forms in Attachments 1-6--with separate 
columns for payment amount, fee in dollars, investment and fee as a 
percentage of net investment--effectively communicate information about 
the amount of those fees and their immediate impact on investment? If 
not, how should the forms be modified? Would it be appropriate to 
exclude the impact of letters of intent, rights of accumulation, 
purchases by related parties, or other customer-specific discounts, in 
light of the additional costs and complexity that could be associated 
with their inclusion?
     For disclosure of upfront sales fees, should the 
``investment amount'' equal the customer's payment less the amount of 
the sales fee? Should other fees, such as broker-imposed commissions or 
purchase fees, be deducted to determine the ``investment amount''?
     Would the proposed disclosure of deferred sales fees in 
the forms--with separate columns for investment amount, maximum fee in 
dollars and fee as a percentage of investment amount--effectively 
communicate information about the potential amount of those fees? Would 
focusing on maximum amounts of those fees, rather than providing year-
by-year breakdowns, effectively convey information about those fees' 
potential impact?
    Q. Comprehensive annual cost disclosure. Would the proposed method 
of disclosing comprehensive annual costs in the forms in Attachments 1-
6--with separate columns for investment amount and fees in dollars and 
fee as a percentage of investment amount--effectively communicate 
illustrative information about the potential amount of, and likely 
variations in, those costs? Would the proposed new point of sale 
disclosure forms adequately put investors on notice that the disclosed 
amount of the annual costs are illustrative, and that actual amounts 
are likely to vary? Should the forms include a statement that such 
annual costs would not be directly taken out of the investor's 
accounts--and would not be subject to separate disclosure as they are 
incurred--but rather would continuously be paid out of the assets of 
the funds the investor has purchased (including underlying funds in 
two-tiered 529 savings plan interests and variable insurance products)?
     Should point of sale disclosure include all the costs to 
the investor associated with owning covered securities (including 
mutual fund management and other costs), and not only distribution 
costs? If not, what costs should be included? Commenters are also 
invited to discuss whether investors perceive the economic impact of 
costs differently based on whether costs are charged directly or 
indirectly (i.e., fees that are deducted from fund assets).
     Should we require each category of annual fee to be 
separately quantified in percentage terms, as set forth in the proposed 
new forms? Should we require the aggregate of those annual ownership 
fees also to be quantified in dollar terms (based on the potential 
quantification standards discussed above)? Are there better ways to 
inform investors about the scope of those costs in dollar terms and to 
help investors understand the economic consequences of annual fees on 
an investment?
     Should point of sale disclosure set forth information 
about account fees that issuers may charge to typical investors in the 
covered security (other than fees that apply only in limited 
circumstances, such as returned check fees)? Should such account fees 
be expressed as a fixed dollar amount and/or as a percentage of assets 
(whichever is applicable)? If fees are applied only on accounts that 
are valued below a specified amount, should this threshold amount be 
disclosed? Commenters are also invited to discuss how disclosure of 
such fees could be expected to influence customers' decisions to 
purchase covered securities. Commenters also are invited to identify 
other fees that should be disclosed at point of sale, and discuss how 
disclosure could be done effectively.
     We also invite comment on the costs associated with 
providing dollar quantification of comprehensive fees, including the 
extent to which disclosure of transaction-specific information upon a 
customer's request would increase compliance costs.
     We note that the approach discussed here would require 
broker-dealers to make certain disclosures based on estimates, such as 
estimates of future first year ownership costs calculated with a total 
annual fee percentage that is derived from expense ratios reported in 
the current prospectus. The dollar estimates of those future first year 
costs also would be based on the assumption that the net asset value of 
an investment would not change during the first year following the 
investment. Broker-dealers would be required by rule to deliver those 
estimates, even though future outcomes may well differ from the 
estimates. Should the Commission address concerns about exposure to 
unfair private actions, for example, by requiring additional 
disclosures or providing a safe harbor? We would not expect private 
rights of action to result from non-fraudulent disclosures under the 
rule even if, for example, a broker-dealer erred by negligently 
transposing numbers between information in the prospectus and 
information reported at the point of sale.
    Q. In addition to disclosing cost information category-by-category 
(e.g., sales fees and annual ownership costs), should point of sale 
disclosure also depict ownership costs on an aggregate basis? 
Alternatively, should aggregate information be disclosed in lieu of 
category-by-category disclosure? Mutual fund prospectuses are required 
to estimate the total expenses associated with a $10,000 investment 
over one, three, five and ten year time horizons, based on an assumed 
five percent return and other assumptions. Those estimates help 
investors quantify the combined impact of disparate ownership costs 
such as sales fees and ongoing ownership costs. Those estimates also 
facilitate comparisons among share classes and funds. Would point of 
sale disclosure of information that similarly quantifies the aggregate 
impact of multiple cost categories provide a useful supplement to, or 
replacement for, category-by-category disclosure of ownership costs? If 
so, should disclosures of aggregate information reflect a range of 
investment amounts (such as $1,000, $50,000 and $100,000), consistent 
with other cost disclosures on the written point of sale form? On the 
other hand, would disclosure of aggregate cost information as a 
supplement to category-by-category information potentially confuse some 
investors by leading them to believe that those aggregate costs would 
be incurred in addition to other disclosed costs, rather than being an 
alternative way of expressing those costs? Would disclosure of 
aggregate information as a supplement to category-by-category 
information threaten to pose ``information overload'' that would reduce 
some investors'' use of point of sale disclosure? Would aggregate 
information be suitable as a replacement for disclosure of category-by-
category information? Alternatively, would aggregate information be 
inadequate as a replacement for category-by-category information? For 
example, would

[[Page 10527]]

aggregate information fail to explicitly inform investors about the 
types and timing of ownership costs that they would incur if they 
purchase a covered security? Further, would aggregate information be 
inadequate because its accuracy depends on the accuracy of underlying 
assumptions? Commenters are invited to suggest models by which 
aggregate cost information could be disclosed clearly on written point 
of sale forms as a supplement to, or a replacement for, category-by-
category information.\24\
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    \24\ Disclosure of aggregate cost information also may 
facilitate the disclosure and use of comparative information at the 
point of sale. That is because it may be easier for many investors 
to weigh a single aggregate cost amount against the benchmark posed 
by the aggregate cost average and range for alternative funds, than 
it would be to separately weigh the comparative context of upfront 
sales fees, deferred sales fees and annual ownership costs. As 
discussed above, we expect to address possible requirements for 
disclosure of comparative information in a later release.
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    Q. Disclosures tailored to share class and pricing structure. 
Should the Commission adopt separate forms for all share classes and 
pricing structures?\25\ In the alternative, should the Commission adopt 
an additional form that would permit disclosure of all potential costs 
for all share classes and pricing structures of mutual fund and 529 
savings plan investments, including purchase and redemption fees that 
are paid into fund assets?\26\ How could disclosure of the costs of 
owning classes of covered securities that are not illustrated by one of 
the forms attached as Attachments 1-6 (or funds with different pricing 
structures than those illustrated) be efficiently implemented?
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    \25\ Other pricing structures would include purchase and 
redemption fees some funds charge and which are paid into fund 
assets rather than for distribution.
    \26\ For example, in the Proposing Release the Commission set 
forth a generic point of sale form that was not specific to any 
particular share class or pricing structure.
---------------------------------------------------------------------------

     Do the proposed new forms appropriately require disclosure 
of information about fees customers must pay upon purchase or 
redemption that are retained in fund assets (as distinct from sales 
loads and commissions that are paid to broker-dealers)? Should the 
required disclosure of redemption fees reflect the duration of such 
redemption fees? Should this type of disclosure be required to be 
quantitative or narrative, depending on the fee being disclosed? For 
example, should redemption fees imposed on short-term holdings (such as 
holdings of 180 days or less) be disclosed in narrative terms, with 
other redemption fees disclosed the same way that back-end sales loads 
would be disclosed (consistent with the quantification standards 
discussed above)? Should it include other information about other costs 
of owning covered securities not otherwise required to be disclosed in 
our proposed rules and forms, such as the one-time application fees 
that some states charge upon initial investments in their 529 savings 
plan interests? Is the placement of the disclosure of the application 
fee on the B and C class disclosures for 529 plans appropriate?
    Q. Disclosure of all share classes under consideration. Would it be 
appropriate to require a broker-dealer to provide point of sale 
information with regard to all share classes that are under 
consideration at the point of sale?
    Q. Disclosure of revenue sharing payments. Do the point of sale 
disclosure forms in Attachments 1-6 provide sufficient information 
about revenue sharing arrangements, including where to find more detail 
about those arrangements, to inform customer's investment decisions? In 
light of concerns expressed by commenters, including investors, that 
complex disclosures potentially could distract investors from other 
important information, is it appropriate to omit the sources and 
amounts of revenue sharing payments received by the broker-dealer from 
point of sale disclosures and require them instead to be disclosed on 
the Internet and made available to customers upon request through a 
toll-free number? On the other hand, investors may find this 
information useful at the point of sale. Should we require the 
disclosure of the source and amount of revenue sharing payments at the 
point of sale? Commenters are invited to discuss how revenue sharing 
information can be disclosed simply and efficiently.
     Should the requirement to disclose the existence of 
revenue sharing payments focus on payments, either to a broker-dealer 
or its affiliate, that are directly or indirectly funded by some or all 
of the following: an investment adviser; a principal underwriter; and 
an administrator or transfer agent of the issuer of the covered 
security (and of issuers of underlying securities with regard to two-
tiered products)? \27\ Should the disclosure requirement extend to 
payments from issuers and/or from other parties not specifically 
identified above? \28\ Would such a requirement be adequate to prevent 
evasion of the proposed disclosure obligation? The revenue sharing 
disclosure obligation set forth in the Proposing Release focused on 
payments received from persons ``within the fund complex.'' Under this 
targeted approach to disclosure of revenue sharing payments, would it 
be appropriate to eliminate the definition of ``fund complex''?
---------------------------------------------------------------------------

    \27\ Such an approach would be an alternative to the proposed 
requirement that the broker-dealer identify payments received from 
persons within a ``fund complex'', including affiliates of the fund 
but not the fund issuer.
    \28\ While a commenter has suggested that the revenue sharing 
disclosure requirement be limited to payments ``in connection with'' 
the sale or distribution of covered securities, such an approach may 
inject too great an element of subjectivity into the disclosure 
requirement, by permitting a broker-dealer to characterize a 
particular payment as not distribution-related, and claim no need to 
disclose it. It may be more effective to implement an approach that 
requires disclosure of the types of payments that can be expected to 
compensate broker-dealers for distribution, and that does not reach 
to other payments.
---------------------------------------------------------------------------

     Should the proposed definition of ``revenue sharing'' be 
replaced by a definition of ``promotional payment'' to more accurately 
reflect the nature of such payments? If the required disclosure were to 
be targeted, as discussed above, to payments received from investment 
advisers, principal underwriters, administrators or transfer agents, 
should the definition of either ``revenue sharing'' generally encompass 
payments from an investment adviser, principal underwriter, 
administrator or transfer agent to a broker-dealer or associated 
person? Should payments that constitute dealer concessions be excluded 
from the definition because dealer concessions do not raise the same 
conflicts as special compensation arrangements, which warrant special 
disclosure? \29\ Should payments funded by asset-based distribution 
fees (such as rule 12b-1 fees) be excluded because they would be 
included elsewhere in the point of sale disclosure? Should payments 
that represent compensation for providing services as a principal 
underwriter of a covered security be included or do those payments not 
pose the same conflicts of interest? \30\
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    \29\ As defined in the Proposing Release, the dealer concession 
consists of fees earned by the broker-dealer at the time of sale 
from the issuer or its agent, the distributor or another broker-
dealer.
    \30\ The point of sale rules propose an exception for 
underwriters. Even if a targeted underwriter exclusion were adopted, 
however, such a carve-out might be inappropriate at times, such as 
when an underwriter is broker of record on an ``orphan'' account 
originated by another broker-dealer.
---------------------------------------------------------------------------

    Should payments to an issuing insurance company from funds 
underlying variable insurance products be included? What conflicts do 
these payments pose? Would other inclusions or exclusions be 
appropriate?
     If the revenue sharing disclosure were targeted, as 
discussed above, should the required disclosure exclude payments made 
``solely in connection''

[[Page 10528]]

with securities issued by a person that is not a ``related issuer'' of 
the issuer of the covered security? If so, would a definition of 
``related issuer'' appropriately encompass the issuer of the covered 
security (and underlying securities in the case of two-tiered 
products), and the issuers of other covered securities that hold 
themselves out as related companies for purposes of investment or 
investor services, as well as other affiliated issuers? \31\ Would 
there be better ways of excluding payments that are intended to promote 
the sale of a covered security other than the security that the 
customer is considering purchasing?
---------------------------------------------------------------------------

    \31\ Such a definition would be consistent with other securities 
laws provisions that identify investment company affiliates in part 
depending on whether two companies hold themselves out as related 
companies. See, e.g., Exchange Act rule 15a-6 (defining term 
``family of investment companies'' in part based on whether 
registered investment companies that share the same investment 
adviser or principal underwriter ``hold themselves out to investors 
as related companies for purposes of investment and investor 
services''); Investment Company Act rule 11a-3 (defining term 
``group of investment companies'' in part based on whether 
registered open-end investment companies hold themselves out to 
investors as related companies for purposes of investment and 
investor services).
---------------------------------------------------------------------------

     If the required revenue sharing disclosures were targeted 
in such a way, should the disclosure requirement further exclude 
payments received by an associated person if the broker-dealer making 
the disclosure reasonably determined that the associated person 
received those payments solely in connection with the distribution of 
covered securities by a different broker-dealer or by a bank? \32\ Are 
there other ways of excluding payments to affiliates that would not 
pose conflicts of interest for the broker-dealer and would pose fewer 
compliance challenges? Would such an exclusion for payments received by 
affiliates that are linked solely to a second broker-dealer's 
distribution activities be justified in part by the expectation that 
the second broker-dealer would be required to provide point of sale 
disclosures to put its own customers on notice of those payments? 
Should such an exclusion apply if payments received by an affiliate are 
not solely linked to the distribution activities of a second broker-
dealer or a bank?
---------------------------------------------------------------------------

    \32\ Securities activities by banks are subject to a different 
regulatory regime, so long as the banks meet applicable exceptions 
and exemptions from the definitions of ``broker'' and ``dealer'' set 
forth in Sections 3(a)(4)(B) and 3(a)(5)(B) of the Exchange Act and 
the rules thereunder. See also Securities Exchange Act Release No. 
50618 (Nov. 1, 2004) (order extending temporary exemption of banks, 
savings associations, and savings banks from the definition of 
``broker'' under Section 3(a)(4) of the Exchange Act).
---------------------------------------------------------------------------

     If payments received by an affiliate of a broker-dealer 
would not have to be disclosed if they are ``solely connected'' with 
the distribution activities of another broker-dealer or a bank, what 
facts and circumstances should a broker-dealer have to consider to 
determine whether revenue sharing received by an affiliate are in fact 
``solely connected'' with the distribution activities of another 
broker-dealer or a bank? \33\ In the case of payments that do not 
represent transaction-based or asset-based payment streams, such as 
payments that are designated as compensation for seminar sponsorship, 
should the broker-dealer be permitted to avoid having to disclose 
payments received by an affiliated broker-dealer if the payments that 
it receives and the payments that the affiliated broker-dealer receives 
are reasonably proportional to the relative size of the two broker-
dealers' distribution activities? \34\
---------------------------------------------------------------------------

    \33\ For example, would it be reasonable to conclude that 
payments received by an associated person (including a second 
broker-dealer or a bank) are solely in connection with the 
distribution activities of a second broker-dealer or a bank--and 
hence to fall within such an exclusion--if the payments are 
comprised of transaction-based streams that are linked solely to 
transactions effected by that other broker-dealer or bank, or if the 
payments are comprised of asset-based streams that are linked solely 
to assets held by customers of that other broker-dealer or bank?
    \34\ For instance, if the disclosing broker-dealer and the 
affiliated broker-dealer each have sold roughly the same amount of 
covered securities on behalf of the fund complex in the past year, 
and the two broker-dealers each received roughly the same amount of 
such miscellaneous payments, then would it be reasonable for the 
disclosing broker-dealer to conclude that the miscellaneous payments 
received by the affiliated broker-dealer were solely in connection 
with the affiliated broker-dealer's distribution activities? If, in 
contrast, the affiliated broker-dealer received materially more of 
those miscellaneous revenue sharing payments then the disclosing 
broker-dealer, while relative sales still were roughly the same, 
then would the disclosing broker-dealer reasonably have to inform 
the customer about those payments?
---------------------------------------------------------------------------

     Would such a comprehensive alternative to revenue sharing 
disclosure, including the possible elimination of the definition of 
``fund complex,'' adequately exclude payments that a broker-dealer 
receives in connection with underwriting municipal bonds?
     Is the description in the attached forms of the conflict 
that arises as a result of revenue sharing arrangements readily 
understandable? If not, how should it be modified? Should the term 
``revenue sharing'' be explicitly stated in the description of the 
conflict or would this term be confusing?
    Q. Disclosure of special incentives to broker-dealer sales 
personnel. Broker-dealers would be required to disclose on the proposed 
new forms, if true, that sales personnel are paid more for selling the 
covered security over other securities. Is this disclosure appropriate? 
Is it useful to investors? Is the language used to describe this 
conflict of interest appropriate? Should point of sale disclosure of 
differential compensation practices cover situations in which 
securities pay a relatively high dealer concession or commission to the 
broker-dealer, rather than only the situation where a broker-dealer 
provides an extra financial incentive to its sales personnel for 
selling a covered security?
     In light of concerns expressed by commenters that overly 
complex disclosures could distract investors from other important 
information, is it appropriate and helpful to omit quantified 
information about dealer concessions from point of sale disclosures and 
require it instead to be disclosed on the Internet, as discussed below?
     In addition, the attached forms for class B and class C 
shares would require disclosure of the fact, if true, that sales 
personnel are paid more for selling those classes of securities than 
class A shares. Is this disclosure appropriate? Is it helpful to 
investors? Should it appear on the forms for other classes of shares?
     Do the references pointing investors to the broker-
dealer's Web site for more information about ``special incentives'' 
adequately inform investors of where they can find more details about 
revenue sharing payments? Should other terms be used, such as ``extra 
incentives'' or ``conflicts of interest''?
    Q. References to the fund prospectus as the primary source of 
information about the fund. Would the approach for disclosure of other 
information on the forms in Attachments 1-6 (apart from ownership costs 
and conflicts of interest), such as the fact that investors should take 
other factors into account when making investment decisions, strike a 
reasonable balance between disclosure that is easy to understand and 
disclosure that is appropriately comprehensive?
    Q. Permissive omission of categories where no information is 
applicable. Would it be appropriate to permit broker-dealers to omit 
categories of information that are not applicable, or should disclosure 
of such categories be required to promote comparability? Should 
conflict of interest information be presented in all situations to 
provide investors with full conflict information about all funds they 
are considering? Should some sections be required to be omitted if 
inapplicable, such as sections on upfront fees for forms for variable

[[Page 10529]]

annuities that do not charge them? Would disclosure of some 
inapplicable information (for example, the fact, if true, that a 
broker-dealer is not paid extra for promoting one fund over others) 
serve to educate investors, or enhance their understanding of the 
remaining disclosure?
     In addition, would it be appropriate to permit broker-
dealers to omit all point of sale information, thereby eliminating all 
point of sale disclosures, in circumstances where there are no 
distribution-related expenses or conflicts of interest required to be 
disclosed at the point of sale? Would such an approach create a 
competitive advantage for funds that take advantage of such an 
exception? Would any such advantage be appropriate?

B. Oral Disclosure of Point of Sale Information

    Commenters expressed a variety of views about the proposed 
requirement for point of sale information to be disclosed orally when 
the point of sale occurs through means of oral communication other than 
at an in-person meeting (such as through a telephone conversation). 
Some consumer advocates questioned whether oral disclosure ever would 
be appropriate in light of difficulties associated with monitoring 
compliance and the need to give investors the opportunity to consider 
the point of sale information when making investment decisions. Some 
securities industry commenters suggested replacing oral disclosure with 
Internet-based alternatives or after-the-fact disclosure. Others stated 
that a verbatim reading of the point of sale form would not be 
practical and that disclosure of summary information should be 
sufficient. Commenters also stated that customers should be able to opt 
out of disclosure in certain circumstances, such as when orders are 
placed through automated telephone systems.
    As the comments indicate, oral point of sale disclosure poses 
special challenges given the difficulty that could be associated with 
hearing complex information without simultaneously seeing it. However, 
we are concerned that Web site disclosure or after-the-fact disclosure 
could be ineffective at providing investors with key information about 
costs and conflicts contemporaneous with investment decisions as point 
of sale disclosure. Moreover, we are concerned that requiring broker-
dealers to provide all point of sale disclosures in writing prior to 
accepting an order might preclude investors from purchasing mutual 
funds and related securities over the telephone without undue 
delay.\35\
---------------------------------------------------------------------------

    \35\ As discussed more fully below, we are considering ways to 
combine written and oral point of sale disclosure. We would expect 
any written disclosure supplementing oral point of sale disclosure 
to be provided contemporaneously.
---------------------------------------------------------------------------

    In light of these concerns, we believe that one possible way to 
make oral point of sale disclosure more effective could be to require 
broker-dealers to provide oral point of sale information that is 
either: (A) Quantified to reflect the anticipated amount of the 
purchase; or (b) quantified to reflect a standardized purchase amount--
$1,000, $50,000 or $100,000--that would be appropriate based on the 
customer's anticipated payment and the fee schedule of the covered 
security (or $1,000 if that amount is not readily estimable), 
supplemented by transaction-specific quantification upon the investor's 
request.\36\
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    \36\ Under the latter type of arrangement, the broker-dealer 
would not be able to ``round up'' the standardized disclosure amount 
to reduce the apparent percentage sales fee communicated through 
oral disclosure. For example, if the anticipated amount of the 
payment is $85,000, standardized information with regard to a 
$50,000 model payment may be more appropriate for disclosure of 
upfront sales fees than standardized information with regard to a 
$100,000 model payment, if the $50,000 model more accurately depicts 
the percentage sales fee associated with the customer's anticipated 
payment.
---------------------------------------------------------------------------

    A second possibility could be to clarify that oral disclosure would 
not require a verbatim reading of the written disclosure form. Instead, 
in addition to the quantitative information discussed above, broker-
dealers would be required to provide summary qualitative information 
about whether they receive revenue sharing payments or engage in 
differential compensation practices, as well as to disclose other 
information useful to investors (some of which are suggested in the 
questions below). This could include requiring disclosure that they are 
required to provide transaction-specific quantified information upon 
the customer's request (if such transaction-specific information has 
not been provided as a matter of course). Under such an approach, 
broker-dealers would be able to omit categories of costs that are not 
applicable to a contemplated purchase.
    A third possibility could be to permit a broker-dealer using an 
automated telephone system to receive customer purchase orders to 
program the system to convey the required point of sale information 
about sales fees and then allow customers to elect not to listen to 
information, other than about sales fees, that otherwise would have to 
be disclosed in a written disclosure document. Such an exception could 
accommodate the preference of some investors not to hear point of sale 
information, while helping to ensure that investors at a minimum are 
provided with information about sales fees. This alternative would not 
appear appropriate when a customer communicates with a natural person 
associated with a broker-dealer as part of the process of placing an 
order because, in these circumstances, the natural person would be well 
positioned to provide disclosure and respond to investor questions.\37\
---------------------------------------------------------------------------

    \37\ Such an alternative would not permit a broker-dealer to 
require a customer to ``opt into'' point of sale disclosure, but 
simply would allow a customer to affirmatively ``opt out'' of such 
disclosure.
---------------------------------------------------------------------------

    Request for comment. The Commission generally seeks comment on oral 
point of sale disclosure. To make oral point of sale disclosure more 
effective, should the Commission adopt one of the alternatives outlined 
above, or some combination of the alternatives? Would any of the 
alternatives be more effective than others? Would some combination of 
the alternatives be effective? Should the Commission require the 
broker-dealer to provide an investor a written copy of the disclosure 
form following each oral conversation? Should that disclosure be 
limited to an oral conversation that results in the customer placing an 
order? Are there other alternatives not discussed above that would make 
oral point of sale disclosure more effective? Commenters specifically 
are invited to address:
    Q. Would the proposed revised quantification standards for oral 
disclosure better permit investors to obtain sufficient information 
about the costs of owning covered securities than our original 
proposal? Would this approach provide investors with a reasonable 
amount of specificity without ``information overload''? If not, what 
other approaches should the Commission consider? Are disclosures based 
on standardized $1,000, $50,000 or $100,000 amounts appropriate? Would 
different or additional standardized amounts be appropriate (e.g. 
$10,000)? Should we adopt additional requirements to inform customers 
that the costs they may incur may be different than those disclosed at 
the point of sale due to the effects of rounding? \38\
---------------------------------------------------------------------------

    \38\ See Proposing Release, n. 155 (discussing the impact of 
rounding).
---------------------------------------------------------------------------

    Q. When point of sale disclosure is made orally, would it be 
practical to require broker-dealers to disclose that they are required 
to provide transaction-specific quantified information upon the 
customer's request (if such transaction-specific information has not 
been

[[Page 10530]]

provided as a matter of course)? Would it lead to practical and 
effective disclosure if we were to require broker-dealers to disclose 
that investors should consider all costs, goals and risks associated 
with potential investments before making purchases, and that related 
information is available in the applicable prospectus or official 
statement which the broker-dealer can provide to the customer? Would it 
lead to practical and effective disclosure if we were to require a 
broker-dealer to inform customers that they can inquire about special 
incentives that the broker-dealer may receive to sell the covered 
security? If not, how should we require that a broker-dealer provide an 
investor with adequate disclosure about these special incentives?
    Q. If a customer is contemplating buying a security with an upfront 
sales fee, would it be appropriate and useful for the customer to 
receive disclosure that he or she may qualify for fee discounts if the 
customer or members of the customer's family holds other shares from 
the fund family, or if the investor agrees to make additional 
purchases? Should broker-dealers have to disclose additional types of 
qualitative information? If so, what sort of information? For any such 
category of information, should the rules permit the broker-dealer to 
omit any disclosure conditioned on the broker-dealer's providing the 
customer with additional information in writing at a later time? Should 
there be any other conditions a broker-dealer would have to meet before 
being able to do so?
    Q. Would it be useful to investors to require broker-dealers to 
disclose that investors should consider all costs, goals and risks 
associated with potential investments before making purchases, and that 
related information is available in the applicable prospectus or 
official statement which the broker-dealer can provide to the customer? 
Would it be useful to investors to require a broker-dealer to inform 
customers that they can inquire about special incentives that the 
broker-dealer may receive to sell the covered security? If not, how 
should we require that a broker-dealer provide an investor with 
sufficient disclosure about these special incentives?
    Q. Would it be useful to investors if the Commission were to 
clarify that when providing oral disclosure a broker-dealer must 
provide summary qualitative information about whether a broker-dealer 
receives revenue sharing payments or engages in differential 
compensation practices? What other information would be useful to 
investors to receive if broker-dealers were permitted to summarize 
qualitative information? Are there compliance procedures that would 
help ensure that permitting broker-dealers to summarize qualitative 
information would not lead to situations where brokers obscure the 
information being disclosed?
    Q. Would it be appropriate to allow investors using automated 
telephone order systems to ``opt out'' of receiving certain oral point 
of sale disclosures? If so, what categories of information should be 
mandated and what categories subject to the opt-out right? If investors 
could opt out, would they still receive sufficiently helpful 
information to make an investment decision? Could an exception 
permitting customers to ``opt out'' of oral point of sale disclosure 
for orders taken via automated telephone systems be subject to 
manipulation intended to deter delivery of point of sale disclosure? 
What limitations could minimize or eliminate this potential? Should we 
require broker-dealers to send written point of sale disclosures to 
customers who opt out of oral point of sale disclosures for orders 
taken via automated telephone systems?
    Q. Would it be helpful to investors who receive oral point of sale 
disclosure to receive both the quantitative information discussed 
above, as well as summary qualitative information about whether their 
broker-dealer receives revenue sharing payments or engages in 
differential compensation practices? Is there a minimum amount and/or 
type of information that should be mandated for oral point of sale 
disclosure? What should be the required key items to help investors 
make informed investment decisions?
    Q. Would it be appropriate to permit broker-dealers to make 
Internet-based disclosures or e-mail disclosures to those customers who 
consent to electronic delivery? Should Internet-based or e-mail 
disclosures be made in the same format as that of the proposed point of 
sale disclosure forms? On what basis should the Commission permit a 
broker-dealer to do this? What limitations or procedures should apply 
to help ensure that customers actually receive written disclosures at 
the point of sale?

C. Timing of Point of Sale Disclosure

    The proposed definition of ``point of sale'' would have determined 
the timing of disclosure through a two-tiered approach. In general, the 
proposed rule would have required disclosure ``immediately prior'' to 
acceptance of the order. In circumstances in which a broker-dealer 
could solicit transactions and receive compensation without opening 
customer accounts or handling customer orders, however, disclosure 
would have to have been received upon initial communication with a 
customer.
    Consumer advocates stated that investors should receive disclosure 
earlier in the sales process to have adequate time to consider the 
information when making investment decisions. They suggested adding a 
time-of-recommendation component to trigger the disclosure. Some 
securities industry commenters suggested that point of sale disclosure 
could be provided most efficiently at the time of account opening. Some 
also indicated that the proposed communication-based standard would be 
difficult to implement and would lead to duplicative disclosure.
    The timing of point of sale disclosure is critically important, as 
investors should receive information early enough in the sales process 
to give them adequate time to consider the information, but not so 
early that they receive multiple disclosures for securities they may 
not be interested in purchasing. The timing of the point of sale 
trigger also should reflect the various ways in which customers may 
convey orders.\39\
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    \39\ For example, an order-based trigger would not appear 
practical when a broker-dealer can solicit transactions and receive 
compensation without executing customer orders (such as may be 
present in so-called ``check and application'' arrangements), 
because in these circumstances the purchase may be completed before 
the soliciting broker-dealer is even aware of the order.
---------------------------------------------------------------------------

    Request for comment. The Commission solicits comment on the timing 
of point of sale disclosure. Should the Commission adopt a revised 
``point of sale'' definition that would allow investors to receive 
disclosure earlier in the sales process than they would have in the 
initial proposal? If so, how should the Commission define the ``point 
of sale'' to promote timely disclosure while minimizing implementation 
and compliance difficulties? Commenters are also requested to discuss 
the following issues relating to the ``point of sale'' definition:
    Q. How could the general point of sale trigger be moved earlier in 
the sales process while remaining meaningful? For example, should it be 
based on the earlier of the time that a customer expresses a 
``preliminary intent'' to purchase the covered security or the time 
that a broker-dealer recommends a covered security? \40\ If so, should 
the

[[Page 10531]]

standard for disclosure ``immediately prior'' to receipt of the order 
be retained as a backstop if disclosure otherwise is not provided 
earlier? What regulatory requirements or compliance procedures could 
help ensure that such an option would be treated as a backstop, rather 
than the primary option for timing the delivery of point of sale 
information? \41\
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    \40\ Some commenters have suggested that point of sale 
information should be disclosed only when a broker-dealer recommends 
a transaction, not when a customer places an unsolicited order. 
However, when a broker-dealer does not specifically recommend the 
securities it is selling, investors may wish to scrutinize whether 
the fees they are paying to the broker-dealer, and the rersulting 
reduciton in net investment and in return on their money, are 
justified by the relatively limited services they receive. Moreover, 
even absent an explicit recommendation, a broker-dealer can 
influence a customer's investment decision through the way it 
presents investment options. Allowing disclosure to vary depending 
on whether a recommendation has occurred also may give some broker-
dealers the incentive to inappropriately assert that they are not 
making recommendations when in fact they are.
    \41\ We recognize that requiring earlier point of sale 
disclosure also may impact other proposed rule requirements. For 
example, one proposed provision of the point of sale rule states 
that orders would only be ``indications of interest'' prior to point 
of sale disclosure being provided. Some commenters criticized that 
provision as facilitating rescission based on ``buyer's remorse,'' 
and as potentially promoting market timing. Some commenters also 
raised operational questions related to that provision, such as how 
trades would be unwound (including whether the issuer would have to 
enter into an offsetting trade or whether the broker-dealer would 
simply bear a monetary loss). An earlier point of sale trigger, in 
combination with other investor remedies for broker-dealer 
violations of securities regulations, may influence our 
consideration of whether explicit ``indication of interest'' 
language would be appropriate.
---------------------------------------------------------------------------

    Q. How could the point of sale trigger avoid disclosure gaps when a 
broker-dealer solicits and is compensated for an order, but does not 
execute the order? In these circumstances, should the point of sale be 
the later of the time the broker-dealer ``first communicates'' with the 
customer about the covered security, or the time the customer expresses 
a ``potential interest'' in purchasing the covered security? Would 
other standards for the definition of ``point of sale'' better provide 
timely disclosure, while reflecting the fact that there may be an 
ongoing dialogue between the broker-dealer and the customer? If so, 
what would those standards be?

D. Exceptions to Point of Sale Disclosure Requirements

1. Exception for Subsequent Purchases of a Particular Covered Security 
and Class
    Some commenters urged the Commission to implement a point of sale 
exception that encompasses an investor's non-periodic purchases of a 
covered security following his or her initial purchase.\42\ In their 
view, the critical decision related to an investment in a covered 
security is made prior to the investor's first purchase of that 
security, and requiring point of sale disclosure for subsequent 
purchases would be duplicative and unlikely to promote informed 
investment decisionmaking.
---------------------------------------------------------------------------

    \42\ The proposed point of sale rule included an exception for 
periodic purchases.
---------------------------------------------------------------------------

    Request for comment. We solicit comments on the appropriateness and 
necessity of point of sale disclosure for subsequent non-periodic 
purchases of a covered security. Would a subsequent purchase exception 
appropriately balance the goal of enhancing investment decisionmaking 
with reducing potentially duplicative disclosures? Commenters 
specifically are invited to discuss:
    Q. How could a point of sale exception for subsequent purchases of 
a covered security be crafted to reduce disclosures that otherwise 
would be redundant? Should such an exception be absolute, or should it 
require occasional redundant disclosure to accommodate investors who 
might have been distracted at the time of the initial point of sale 
disclosure, or might have forgotten about it because substantial time 
has passed since receiving the disclosure?
    Q. To address the possibility that prior point of sale information 
becomes outdated, should the exception be limited by how much time 
separates the original transaction and the subsequent transaction, such 
as six months, 12 months, or some other time period? Should such an 
exception require the broker-dealer periodically to provide the 
customer with some or all of the information that otherwise would be 
provided at the point of sale? Should broker-dealers be permitted to 
satisfy such a requirement by providing standardized point of sale 
forms periodically to the customer? Should a subsequent purchase 
exception be conditioned on the broker-dealer providing transaction-
specific point of sale disclosures upon the customer's request? Should 
an investor be able to request point of sale disclosure and thus 
override an exception? What other conditions or limitations would be 
appropriate for such an exception?
    Q. Should such an exception apply to purchases of money market 
funds? If so, how? Should broker-dealers be required to make disclosure 
about money market funds at the time the customer funds a brokerage 
account? \43\
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    \43\ Money market funds, including funds that may be purchased 
through brokerage ``sweep'' accounts, may bear asset-based 
distribution fees and may be associated with revenue sharing 
payments.
---------------------------------------------------------------------------

    Q. To what extent could an exception for subsequent purchases be 
subject to abuse by unscrupulous salespersons who seek to obscure the 
impact of distribution costs by following a relatively modest initial 
sale that bears small distribution costs with a much larger subsequent 
sale, without disclosure at the latter time? \44\ Are there ways, such 
as limiting the subsequent sale exception to purchases in amounts equal 
or less than the initial purchase, that would help prevent such abuse? 
How would such a limitation affect broker-dealer system costs?
---------------------------------------------------------------------------

    \44\ Does the inclusion of disclosure based on standardized 
purchase amounts help to address that potential problem?
---------------------------------------------------------------------------

    Q. How narrowly should an exception for subsequent purchases be 
drafted? Would it be enough to limit such an exception to purchases of 
a covered security having the issuer, program series (or portfolio in 
the case of 529 savings plans), and share class (or pricing structure 
in the case of variable insurance products) for which the customer 
previously received point of sale disclosure from the broker-dealer? In 
the case of 529 savings plans and variable insurance products, should 
such an exception be further limited to subsequent purchases of the 
same portfolio or directed to the same subaccounts?
    Q. Would the use of Internet web sites help customers receive point 
of sale information when making subsequent purchases? For example, 
would making standardized point of sale information available on the 
Internet be a useful means by which broker-dealers would be required to 
provide point of sale information upon subsequent purchases, to 
customers who want additional information but are willing to accept 
Internet-based disclosure?
    Q. Commenters are invited to estimate the total number of 
transactions that would be subject to any such exception, as well as 
the potential cost savings to broker-dealers.
2. Exception for Purchases by Institutional Investors
    In proposing rule 15c2-3, we requested comment about whether to 
include an exception for purchases by institutional investors. Several 
commenters supported such an exception, and one recommended that we 
refer to NASD rules to define ``institutional investor.'' \45\
---------------------------------------------------------------------------

    \45\ NASD rules 2211(a)(3) and 3110(c)(4), in conjunction, 
designate the following persons as ``institutional investors': (i) A 
bank, savings and loan association, insurance company, or registered 
investment company; (ii) an investment adviser registered with the 
Commission or with a state securities commission (or any agency or 
office performing like functions); (iii) any other entity (whether a 
natural person, corporation, partnership, trust, or otherwise) with 
total assets of at least $50 million; (iv) a governmental entity or 
subdivision thereof; (v) an employee benefit plan that meets the 
requirements of Section 403(b) or Section 457 of the Internal 
Revenue Code and has at least 100 participants (but not including 
any participant of such a plan); (vi) a qualified plan, as defined 
in Section 3(a)(12)(C) of the Act, that has at least 100 
participants (but not including any participant of such a plan); 
(vii) an NASD member or registered associated person of such a 
member; and (viii) a person acting solely on behalf of any such 
institutional investor.

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[[Page 10532]]

    Request for comment. We request additional comment regarding the 
advisability, scope and limitations of such an exception. In 
particular, if the Commission were to adopt an exception for purchases 
by institutional investors, how could we define ``institutional 
investor'' to limit the exception to transactions with persons who may 
be expected to have sufficient financial sophistication to make point 
of sale disclosure unnecessary? Commenters are specifically invited to 
discuss:
    Q. Should a definition of ``institutional investor'' include banks, 
savings associations, insurance companies, or registered investment 
companies?
    Q. Should it include other entities, including corporations, 
partnerships and trusts, with total assets of at least $50 million? 
\46\ Should a $50 million threshold also apply to government or 
political subdivisions, or other government agencies or 
instrumentalities? \47\
---------------------------------------------------------------------------

    \46\ The $50 million threshold is consistent with NASD rules.
    \47\ That $50 million threshold would be consistent with the 
``qualified investor'' definition set forth in Section 3(a)(54) of 
the Exchange Act.
---------------------------------------------------------------------------

    Q. Should natural persons with assets of at least $50 million be 
included within the definition of ``institutional investor''? \48\ 
Commenters may also wish to discuss the extent to which including 
natural persons would not be necessary if a point of sale exemption for 
transactions subject to investment adviser discretion, discussed below, 
were adopted.
---------------------------------------------------------------------------

    \48\ Such natural persons may be institutional investors under 
NASD rules.
---------------------------------------------------------------------------

    Q. Should a definition of ``institutional investor'' include 
persons acting solely on behalf of any other person who meets that 
definition? Should a definition of ``institutional investor'' be 
extended to other persons? Should it instead be based on the definition 
of ``qualified investor'' set forth in Section 3(a)(54) of the Exchange 
Act? \49\ Alternatively, should the definition be based on the related 
definitions set forth in NASD rules? \50\
---------------------------------------------------------------------------

    \49\ The definition of ``qualified investor'' in general 
encompasses: (i) Investment companies registered with the 
Commission; (ii) issuers eligible for an exclusion from the 
definition of investment company pursuant to section 3(c)(7) of the 
Investment Company Act; (iii) banks, savings associations, brokers, 
dealers, insurance companies, or business development companies; 
(iv) certain small business investment companies licensed by the 
U.S. Small Business Administration; (v) certain benefit plans; (vi) 
certain trusts; (vii) market intermediaries exempt under section 
3(c)(2) of the Investment Company Act; (viii) associated persons of 
a broker-dealer other than a natural person; (ix) foreign banks; (x) 
foreign governments; (xi) corporations, companies, or partnerships 
that own and invest not less than $25 million on a discretionary 
basis; (xii) any natural person who owns and invests not less than 
$25 million on a discretionary basis; (xiii) any government or 
political subdivision, agency, or instrumentality of a government 
who owns and invests not less than $50 million on a discretionary 
basis; and (xiv) multinational or supranational entities or related 
agencies or instrumentalities. See Section 3(a)(54) of the Exchange 
Act.
    \50\ See supra n. 44.
---------------------------------------------------------------------------

    Q. Should any exception for purchases by institutional investors be 
conditioned on the broker-dealer providing point of sale disclosure 
upon an institutional investors' request? Would other conditions be 
appropriate for such an exception?
    Q. Commenters are also invited to estimate the cost savings to 
broker-dealers if a point of sale exception for purchases by 
institutional investors is adopted. Commenters are invited to include 
an estimate of the total number of transactions that would be subject 
to any such exception, and to discuss whether broker-dealer compliance 
systems would be readily able to identify transactions with such 
persons.
3. Exception for Transactions Subject to Investment Adviser Discretion
    Proposed rule 15c2-3 included an exception to point of sale 
disclosure for transactions in which the broker-dealer exercises 
investment discretion. Commenters generally supported this exception. 
Some commenters recommended extending the exception to transactions in 
which an investment adviser exercises investment discretion for the 
customer. Absent such an exception, the rule would require broker-
dealers to provide or to send information to the investment adviser 
acting on behalf of the customer.
    Request for comment. If the Commission were to adopt an exception 
to point of sale disclosure for transactions in which an investment 
adviser exercises investment discretion, should it be limited to 
investment advisers that are registered either with the Commission 
under Section 203 of the Investment Advisers Act of 1940, or with a 
state securities commission or agency or office performing like 
functions? Should the broker-dealer be required to provide point of 
sale information upon the request of the investment adviser? If so, 
should we require that the information be delivered in the same time 
frame as other required point of sale disclosures?
4. Potential Changes to Exception for Mailed Orders
    Proposed rule 15c2-3 included a limited exception for transactions 
received from a customer via U.S. mail, messenger delivery or similar 
third-party delivery services.\51\ The purpose of an exception for 
mailed-in orders is to promote effective disclosure while avoiding the 
need to delay the execution of orders received via mail or similar 
services. It was intended to recognize that it may not be possible to 
quickly locate those customers and provide the required disclosure. One 
commenter criticized the proposed exception as overly broad, indicating 
that it could allow broker-dealers to evade disclosure by recommending 
a fund and then having customers mail in orders. That commenter 
suggested narrowing the exception to apply only when there has been 
``no prior contact'' about the transaction at which disclosure could 
have occurred.
---------------------------------------------------------------------------

    \51\ As set forth in the Proposing Release, this exception would 
have been available only to broker-dealers that receive no 
compensation for effecting transactions for customers that have no 
accounts with them. Moreover, the exception would have been 
conditioned on the broker-dealer providing, within the prior six 
months, information about the maximum potential size of sales loads, 
and asset-based sales charges and service fees, associated with 
covered securities sold by that broker, dealer or municipal 
securities dealer, as well as statements about whether the broker, 
dealer or municipal securities dealer receives revenue sharing or 
portfolio brokerage commissions or pays differential compensation.
---------------------------------------------------------------------------

    Request for comment. The Commission solicits comments on the 
appropriateness and necessity of the mailed order exception. Could the 
potential for abuse be minimized if the Commission were to make the 
exception unavailable to a broker-dealer that prompts a customer to use 
the mail, messenger delivery or similar third-party delivery service to 
submit an order? Commenters are specifically invited to address:
    Q. Would a ``no prior contact'' standard for mailed-in orders, 
discussed above, be practical?
    Q. Should the exception require a broker-dealer relying on it to 
provide to its customers, every six months, standardized information 
about distribution costs and compensation associated with covered 
securities sold by the broker-dealer?
    Q. What are other possible ways to appropriately tailor the 
exception for orders received via the mail, messenger

[[Page 10533]]

delivery or similar third-party delivery service?

E. Special Issues Relating to Point of Sale Disclosure for Variable 
Insurance Products

    When we proposed rule 15c2-3, we drafted a single set of disclosure 
requirements to apply to variable insurance products as well as other 
covered securities. Commenters, however, stated that the proposed point 
of sale forms were not well suited to illustrating the costs associated 
with variable insurance products and did not reflect the products' 
particular terminology, features, and pricing structure.\52\
---------------------------------------------------------------------------

    \52\ For example, the concept of ``share class'' generally is 
not applicable to variable annuities. In addition, variable 
annuities impose charges for available insurance features, which 
were not addressed in the original proposal.
---------------------------------------------------------------------------

    To be effective, required point of sale disclosures for purchases 
of variable insurance products should take into account the unique 
characteristics of those products. This could be done through 
disclosure forms that are tailored to address the costs and conflicts 
particularly associated with variable annuities and variable life 
insurance products. Attachment 7 sets forth a point of sale disclosure 
form for variable annuities.\53\ While this form is based on the point 
of sale forms for mutual funds and 529 savings plan interests discussed 
above, it is tailored to reflect the unique features of variable 
annuities. For example, it would require disclosure of insurance-
related costs associated with variable annuities, and would alert 
investors to the existence of the ``free look'' right available to them 
under state law.
---------------------------------------------------------------------------

    \53\ Like the other point of sale forms discussed above, the 
proposed new form in Attachment 7 depicts how the required form 
would be filled in for a hypothetical variable annuity. The form is 
designed to disclose standardized information, plus transaction-
specific information upon the customer's request or as part of the 
broker-dealer's standard practice. Similarly, the form would include 
quantified information about upfront sales fees and investment 
amount, deferred sales fees, and ongoing fees and expenses, as well 
as narrative information regarding potential conflicts of interest.
---------------------------------------------------------------------------

    Request for comment. The Commission solicits comment generally on 
the appropriateness and necessity of written point of sale disclosure 
for variable annuity and variable life insurance products. If the 
Commission were to adopt written point of sale disclosure requirements 
for variable annuities and variable life insurance products based on 
the attached form, would the form enhance investor understanding of 
those products? Does the attached form provide appropriate disclosure 
of the costs and conflicts associated with variable annuities? \54\ 
Does it provide appropriate disclosure for variable life insurance 
products? Commenters are also invited to suggest alternative models and 
submit alternative forms for both variable annuities and variable life 
insurance products. In addition, commenters specifically are invited to 
discuss the following:
---------------------------------------------------------------------------

    \54\ Broker-dealers would be required to disclose upfront sales 
fees on the proposed new form for variable annuities. Although 
front-end sales fees typically have not been charged on variable 
insurance products in recent years, we understand that a number of 
issuers are considering that pricing option. See Annuity Market News 
(October 2004).
---------------------------------------------------------------------------

    Q. How could disclosure of comprehensive information about the 
costs of owning variable insurance products, such as mortality and 
expense risk fees, insurance costs, and fees associated with underlying 
funds, be accomplished? \55\ Should each fee category be listed 
separately, or would disclosure of aggregate fees associated with a 
particular type of expense, such as insurance or fund costs, be 
preferable? Would disclosure of aggregate underlying fund fees, rather 
than discrete disclosure of each element of the fees' composition, be 
sufficient?
---------------------------------------------------------------------------

    \55\ Mortality and expense risk fees are imposed, in part, to 
compensate the insurance company for insurance risks it assumes 
under the contract.
---------------------------------------------------------------------------

    Q. Should broker-dealers be required in point of sale disclosure to 
inform investors about how variable insurance product fees and expenses 
are charged? Should it explain that insurance and underlying fund costs 
may be deducted daily from contract value, while other charges may be 
imposed quarterly or annually?
    Q. Does the proposed disclosure of annual percentage ranges 
accommodate the different ways in which variable insurance product fees 
are calculated? If not, how might this be accomplished? \56\
---------------------------------------------------------------------------

    \56\ For example, mortality and expense risk charges for some 
variable life insurance products are calculated based on 
underwriting characteristics of the contract owner or the insured.
---------------------------------------------------------------------------

    Q. Would point of sale disclosure of the maximum surrender charge 
percentage, and the general basis for its calculation, be sufficient to 
alert investors to these costs, particularly in light of the potential 
complexity of the surrender charge calculation? \57\ Should broker-
dealers be required in the point of sale disclosure to disclose the 
potential recapture of bonus credits? Commenters are invited to provide 
specific suggestions for making this disclosure.
---------------------------------------------------------------------------

    \57\ A surrender charge may be imposed if an investor withdraws 
money from the annuity before a specified time period, often from 
seven to nine years.
---------------------------------------------------------------------------

    Q. Should we require the inclusion in point of sale disclosure of 
costs associated with assets directed to the insurance company's fixed 
account? \58\ If so, would quantitative disclosure be necessary or 
would narrative disclosure suffice?
---------------------------------------------------------------------------

    \58\ The term ``fixed account'' refers to an account supported 
by an insurance company's general account. Variable insurance 
product investors who direct funds to the fixed account are credited 
a predetermined interest rate, which is typically reset from time to 
time.
---------------------------------------------------------------------------

    Q. Commenters also are invited to specifically address what 
terminology should be used in the point of sale disclosure for variable 
annuities. Should terms used in the point of sale disclosure be 
consistent with language commonly used in variable insurance product 
disclosure documents, including prospectuses, and sales materials? If 
not, commenters are invited to suggest ``plain English'' substitutes.
    Q. Should broker-dealers be required in point of sale disclosure to 
enumerate any non-recurring costs of owning variable insurance 
products, such as fees associated with excessive underlying fund 
transfers, or loan processing fees?
    Q. Because variable annuities typically do not impose both upfront 
and deferred sales fees, should the rule require broker-dealers to 
exclude the inapplicable section?
    Q. Should we require that the point of sale disclosure for variable 
insurance products describe the features and risks particular to these 
products, such as their insurance aspects, tax treatment and penalties 
for early withdrawal?
    Q. Although variable annuities and variable life insurance share 
many characteristics, the products differ in a number of ways.\59\ 
Comment is requested on how to tailor point of sale disclosure for 
variable life insurance. How should the insurance costs associated with 
variable life insurance be disclosed? Many broker-dealers use 
personalized illustrations to provide information to prospective 
variable life insurance purchasers. Personalized illustrations are 
tables that demonstrate how the cash value, cash surrender value, and 
death benefit under a policy change over time based on (i) assumed 
gross rates of return on the underlying mutual funds, and (ii) 
deduction of applicable fees and expenses. These

[[Page 10534]]

illustrations are based on the investor's particular circumstances, 
such as age, gender, risk classification, and premium payment pattern, 
and they reflect the effect of costs on death benefits and cash values. 
As an alternative to requiring point of sale cost disclosure for 
variable life insurance, should we instead mandate uniformity among 
personalized illustrations or otherwise regulate their content?
---------------------------------------------------------------------------

    \59\ For example, while both products offer insurance features, 
variable life insurance typically has a more significant life 
insurance component, while a variable annuity typically may be 
utilized as a retirement investment vehicle. In addition, a variable 
life insurance purchase is typically subject to an insurance 
underwriting process, while a variable annuity purchase is not.
---------------------------------------------------------------------------

    Q. Finally, commenters are invited to address any issues raised 
above regarding mutual funds and 529 savings plan interests that they 
believe are relevant to variable insurance product disclosure.

III. Confirmation Proposal

    Commenters raised a number of issues about the proposed rule 15c2-2 
confirmation requirements. Some were similar to issues discussed above 
with regard to point of sale disclosure, while others were specific to 
confirmation disclosure. In light of those issues and further analysis 
of the proposal, we seek additional comment on the confirmation 
disclosure in a number of particular areas.

A. Format of Confirmation Disclosure

    Proposed rule 15c2-2 would require broker-dealers to deliver 
confirmation disclosures to customers ``in a manner consistent with 
Schedule 15C,'' subject to an exception for a periodic reporting 
alternative. The proposed Schedule 15C confirmation disclosure form 
includes general transaction information (e.g., price and net asset 
value) plus purchase-specific information about distribution costs, 
broker-dealer compensation, differential compensation and breakpoint 
discounts, as well as extensive definitions and explanations.
    Several commenters stated that the proposed disclosure form was 
inadequate in that it would omit important information, would not 
permit adequate operational flexibility, and would not permit 
disclosure of additional information that may be needed to prevent the 
confirmation from being misleading. Commenters also highlighted the 
industry-wide cost of upgrading confirmation generation and delivery 
systems to produce two-page confirmations consistent with Schedule 15C. 
Conversely, one commenter suggested that the proposal would not 
adequately ensure standardized and transparent disclosure. Our own 
investor outreach and AARP's testing indicated that Schedule 15C was 
less effective than intended.
    Request for comment. If the Commission were to adopt revisions to 
the confirmation requirements in connection with transactions in 
covered securities, should it allow broker-dealers to use their own 
format for presentation of information in the confirmation (in contrast 
to our proposal to mandate the format of point of sale disclosures) in 
order to avoid costs for upgrading existing confirmation generation and 
delivery systems? Would this approach still appropriately convey the 
necessary information to investors? Alternatively, should the 
Commission prescribe a format for confirmation disclosures, such as the 
format used to produce the proposed new confirmations set forth in 
Attachments 8-13? Attachments 8-10 show possible confirmations for 
mutual fund purchases and Attachments 11-13 show possible confirmations 
for 529 savings plans. Commenters particularly are invited to discuss 
the following:
    Q. Would it be appropriate to permit broker-dealers to deliver 
confirmations in varying formats so long as required information is 
disclosed? If no specific format is required, should the Commission 
require broker-dealers to follow specific disclosure criteria? \60\
---------------------------------------------------------------------------

    \60\ For example, such criteria could require broker-dealers to 
provide confirmations in a format readily communicated to investors, 
using layout and presentation that is reasonably calculated to draw 
attention to the information required under the confirmation 
disclosure rule, and using terminology that is intended to clearly 
convey required information to the investor.
---------------------------------------------------------------------------

    Q. If a specific confirmation disclosure form is not prescribed, 
should broker-dealers be precluded from using different terminology 
(e.g., terms such as ``sales load'' or ``12b-1 fee'') on confirmations 
than on point of sale disclosure forms?
    Q. Will investors be more likely to be confused or unable to elicit 
relevant information if the format is not specified by the Commission? 
Commenters are also invited to estimate the cost savings that might be 
realized if broker-dealers were not required to deliver confirmations 
in a particular format.

B. Confirmation Disclosure of Comprehensive Ownership Cost Information

    Proposed rule 15c2-2 would require confirmation disclosure of the 
potential amount of any asset-based sales charges and service fees that 
would be incurred by the issuer of the covered security in connection 
with the shares or units purchased. That was consistent with the rule's 
proposed focus on distribution costs rather than total ownership costs. 
As with point of sale disclosure, many investors favored confirmation 
disclosure of comprehensive information about ownership costs, beyond 
distribution costs, including disclosure of non-distribution costs such 
as fund management fees and other expenses.\61\
---------------------------------------------------------------------------

    \61\ See Siegel & Gale/Gelb Consulting Report.
---------------------------------------------------------------------------

    Request for comment. Should the Commission require confirmations to 
include information about all ongoing costs of owning covered 
securities, such as ``management fees'' and ``other expenses'', and not 
merely distribution costs? Commenters also may wish to address the 
forms in Attachments 8-13, which illustrate how such fees could be set 
forth on confirmations. Commenters particularly are invited to discuss:
    Q. Would comprehensive confirmation disclosure of all the asset-
based distribution charges, management fees and other expenses that 
constitute the annual asset-based costs of owning covered securities be 
particularly appropriate in light of the possibility that point of sale 
disclosures could be given orally, or that no point of sale disclosure 
could be given at all if a subsequent purchase exception is adopted? 
Would disclosure in a specified format and/or using specific 
terminology be particularly appropriate for the same reasons?
    Q. Should information about comprehensive asset-based fees and 
costs be disclosed separately by category and in the aggregate, or only 
in the aggregate? Should the fees be expressed as a percentage of asset 
value and in dollars?
    Q. In the case of two-tiered products, such as 529 savings plan 
interests and variable insurance products, should the disclosure 
requirement encompass fees associated with underlying securities as 
well as fees incurred by the issuers of covered securities? If 
disclosing the ownership fees associated with each fund underlying an 
insurance separate account or other covered security would not be 
useful, should confirmations instead set forth information about the 
fees associated with the underlying funds that are involved in a 
particular transaction, or about the range of possible fees? In such 
circumstances, should percentage disclosure be based on either the net 
asset value of the underlying securities purchased using money invested 
in the covered security or on the asset value of the covered security, 
itself?
    Q. What operational issues would be related to the inclusion of 
comprehensive disclosure of the asset-based charges on transaction 
confirmations? Commenters are invited to estimate the cost of including 
this information.

[[Page 10535]]

C. Confirmation Disclosure of Broker-Dealer Compensation

    As described in the Proposing Release, proposed rule 15c2-2 would 
have required confirmation disclosure of the amount of dealer 
concessions earned by the broker-dealer in connection with the 
transaction, as well as estimates about the amounts of revenue sharing 
and portfolio brokerage commissions that a broker-dealer or its 
affiliates receives from persons within the fund complex. It also would 
require ``yes'' or ``no'' disclosure about whether the broker-dealer 
engaged in certain differential compensation practices.
    While many investors supported the concept of confirmation 
disclosure about broker-dealer compensation, the results of our in-
depth investor interviews and focus group testing suggested that 
investors are more interested in seeing the total amounts they pay for 
investments in covered securities than in seeing the broker-dealer's 
precise compensation. Some securities industry commenters discussed the 
difficulty of placing quantitative information about compensation on 
confirmations, and emphasized the cost required to convey compensation 
information from selling brokers to firms that issue confirmations or 
to other entities that prepare confirmations on behalf of selling 
broker (as well as the fact that investors ultimately may be expected 
to bear the bulk of those costs). A number of commenters stated that 
confirmation disclosure of broker-dealer compensation and conflicts of 
interest would be duplicative of the point of sale disclosure, and that 
disclosure of compensation and conflicts could be done more effectively 
through broker-dealer Internet web sites. Some securities industry 
commenters also stated that the proposed method of quantifying revenue 
sharing payments would be misleading, and that the disclosure of 
differential compensation was unclear and not well tailored to those 
payments.
    As discussed in more detail below, we are asking for comments about 
the possible use of Internet-based disclosure as a supplement to, but 
not a replacement for, point of sale and confirmation disclosure. Under 
such an alternative, broker-dealers would be permitted to show the 
quantified details of their compensation practices to interested 
investors via a web site, while continuing to disclose the existence of 
the conflict of interest arising from such practices on point of sale 
and confirmation disclosure documents.
    Request for comment. The Commission solicits comment on all aspects 
of the proposed disclosure of broker-dealer compensation. Should the 
Commission require broker-dealers to show quantified details of their 
compensation practices via a web site, and disclose only the existence 
of the conflict of interest arising from such practices on point of 
sale and confirmation disclosure documents? Commenters specifically are 
invited to discuss the following:
    Q. Would supplementary Internet-based disclosure of the type 
discussed below serve as an appropriate and useful alternative to the 
confirmation disclosure proposed in the Proposing Release about how 
much and how broker-dealers and their personnel are compensated, 
particularly in light of concerns about ``information overload''?
    Q. If confirmation disclosure about compensation is appropriate to 
assist investors, should information about revenue sharing payments be 
quantified on confirmations? If so, how could that accurately be done? 
Should we require, in addition to amount, the sources of revenue 
sharing payments received by the broker-dealer on the confirmation 
(e.g., ``Last year, fund manager AAA or its affiliates paid us $XX to 
promote the sale of their funds'').
    Q. What are the potential cost savings associated with requiring 
disclosure of the existence of the conflict of interest arising from 
broker compensation practices on the confirmation and point of sale 
documents and more detailed, quantified information about those 
practices on the Internet?
    Q. If a transaction confirmation is issued by a clearing broker-
dealer, but the sale also was effected by an introducing broker-dealer, 
should confirmation disclosure identify conflicts of interest 
separately for each broker-dealer?

D. Confirmations for Transactions Involving 529 Savings Plan Interests

    As described in the Proposing Release, proposed rule 15c2-2 would 
require confirmation disclosure of the net asset value of the covered 
security, and, if different, the public offering price. One commenter 
noted that in the context of 529 savings plan interests there may not 
be an issuer-calculated net asset value available, and suggested that 
broker-dealers, issuers and other industry participants will need to 
work toward making net asset value, or information necessary to 
calculate net asset value, available on a daily basis.
    Because 529 savings plan interests are two-tiered products, and 
their underlying portfolios may be purchased at a different time than 
the investment in some plans, the proposed rule may require multiple 
confirmations.
    Request for comment. Commenters are invited to discuss generally 
confirmation disclosure in connection with transactions in 529 savings 
plan interests, as well as the following issues:
    Q. In the event that a 529 savings plan issuer does not make 
information about net asset value and price available daily, how should 
a broker-dealer effecting a transaction in an interest in that plan 
report the net asset value and public offering price on the 
confirmation? Should the initial confirmation report that amount as 
``unknown''? Should the broker-dealer be required to subsequently send 
the customer complete information as soon as it becomes available, 
through a supplementary confirmation? Are there other mechanisms that 
the Commission should permit broker-dealers to use to provide the 
required disclosure?
    Q. To what extent do existing 529 savings plans hold investor money 
for one or more days before placing that investment into an underlying 
security? In such circumstances, should broker-dealers be required to 
provide separate confirmations (the first at the time of the customer's 
investment, and the second when the state issuer places that money into 
the underlying security)? In these circumstances, would the broker-
dealer be sufficiently apprised of the state's practices to enable it 
to comply? For each such confirmation, what price or net asset value 
should be conveyed? Commenters are invited to suggest alternatives to 
this approach that would be consistent with investor protection.

E. Confirmations for Transactions Involving Variable Insurance Products

    Attachment 14 sets forth a confirmation related to a transaction in 
a variable annuity. This confirmation form seeks to reflect the special 
characteristics and terminology associated with those products. For 
example, the form uses the term ``unit value'' rather than ``net asset 
value,'' and sets forth the unit value and number of units for each 
subaccount involved in a transaction. When appropriate, as shown on 
Attachment 14, the confirmation would set forth dollar amounts for each 
subaccount when accumulation units are not used.
    Request for comment. The Commission solicits comment on all aspects 
of variable insurance product confirmation disclosure. If the 
Commission were to adopt confirmation disclosure requirements for 
variable insurance products similar to those on this form, would 
investors be

[[Page 10536]]

adequately informed about transactions in those products? Is the 
confirmation in Attachment 14 appropriate for transactions in variable 
life insurance products? Commenters specifically are invited to 
discuss:
    Q. Would the confirmation form appropriately inform customers about 
the particulars of the investment, including information about the 
value and price of the investment (including amounts allocated to 
particular subaccounts and the insurance company fixed account) and the 
costs associated with owning underlying securities?
    Q. What would be the implementation and cost issues associated with 
applying such confirmation requirements to variable insurance products?
    Q. How should we tailor the confirmation disclosure requirement to 
variable life insurance products? How should the insurance costs 
associated with variable life insurance be disclosed? Should the forms 
include any explanation or definitions of the insurance terms that are 
used, such as ``mortality and expense risk fees,'' ``cost of 
insurance,'' ``death benefit,'' and ``fixed account''? Are there other 
insurance terms which should be used on the disclosures? Are there 
terms for which explanatory definitions would be useful to investors? 
\62\ If so, what definitions should be used? Alternatively, would 
including definitions of insurance terms on the forms lead to 
``information overload'' or otherwise not be useful to investors?
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    \62\ For example, the Commission explains terms in its 
publication ``Variable Annuities: What You Should Know'' (available 
at http://www.sec.gov/investor/pubs/varannty.htm). Would these terms 
be appropriate to use in the context of variable life products?
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IV. Supplemental Internet-based Disclosure of Detailed Information 
About Revenue Sharing Payments and Other Broker Compensation Practices

    Some commenters recommended permitting the proposed point-of-sale 
disclosures to be made on a broker-dealers' web site. We do not believe 
that Internet-based disclosure would be an adequate substitute for 
point of sale disclosure and improved confirmation disclosure.\63\ We 
also do not believe that requiring investors to use the Internet as the 
sole means to obtain key information about their own costs of owning 
covered securities and about special compensation arrangements that 
lead to conflicts of interest will adequately serve investors' 
interests, or adequately address broker-dealers' obligations.
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    \63\ However, in part II.B above we requested comment about 
whether it would be appropriate to permit broker-dealers to deliver 
point of sale disclosures over the Internet or by e-mail to those 
customers who have opted to receive such disclosures electronically.
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    At the same time, a number of factors suggest that Internet-based 
disclosure could supplement point of sale and confirmation disclosures, 
and could adequately serve as a primary means of providing some types 
of information to customers. As noted above, investors generally 
expressed more interest in information about the costs of owning 
covered securities than about broker-dealer compensation.\64\ Moreover, 
point of sale and confirmation disclosure of quantified compensation 
information also may lead to ``information overload.'' This may 
distract investor attention from information about distribution costs. 
Also, it would be difficult to accurately depict some compensation 
arrangements on simple disclosure documents given that any such 
approach may inaccurately cause investors to think their particular 
purchase would lead their broker-dealer to receive precisely the 
disclosed amount of revenue sharing, when in reality there would be no 
such causal link.\65\
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    \64\ See Siegel & Gale/Gelb Consulting Report.
    \65\ As set forth in the Proposing Release, rule 15c2-2 would 
have required broker-dealers to quantify revenue sharing and 
portfolio brokerage commissions on confirmations using a pro rata 
estimate approach that considered: (i) the amount of the customer's 
transaction, (ii) the broker-dealer's prior receipt of compensation 
from the fund complex, and (iii) the broker-dealer's prior 
distribution of shares on behalf of the fund complex. Some 
securities industry commenters objected to the proposed 
quantification of revenue sharing associated with particular 
transactions.
    Securities industry commenters also emphasized that providing 
transaction-specific quantified information about compensation could 
be particularly costly on confirmations, as that could require 
selling broker-dealers to develop linkages to convey relevant data 
to clearing firms or others that issue confirmations.
---------------------------------------------------------------------------

    Internet-based disclosure that provides customers with quantified 
information about broker-dealer compensation arrangements (not merely 
generic descriptive information) and identifies the sources of payments 
made under those arrangements could help customers evaluate how those 
arrangements can impact broker-dealers' recommendations and 
presentation of investment options. Necessarily, Internet-based 
disclosure must be supplemented with other means for investors to 
obtain the disclosure if they have no access to the Internet or desire 
to receive the disclosure by other means. Accordingly, we are 
considering requiring broker-dealers to maintain a toll-free telephone 
number which investors could call to request that a copy of the 
Internet-based disclosure be mailed to them.
    Some broker-dealers currently disclose on their web sites 
quantified information about potential amounts of revenue sharing or 
other payments from fund families, including information about payments 
the broker-dealers receives from mutual funds for recordkeeping 
activities. While those web sites that have quantitative information 
represent steps in the right direction, customers should be able to see 
more information about how their sales personnel are compensated.\66\ 
Moreover, customers should have ready access to quantified information 
rather than having to search for the information in the midst of 
extensive explanations. Customers also should be able to see 
compensation information that is labeled clearly and consistently, and 
not referred to by vague or generic terms such as ``administrative 
service'' or ``support fees'' or ``expense reimbursement.''
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    \66\ For example, an investor should be able to see not only 
what is the maximum possible fee a broker-dealer may receive, but 
also what a broker-dealer actually has received or can expect to 
receive for selling a particular covered security. That is because a 
customer would be better able to scrutinize a broker-dealer's sales 
efforts if, for example, the customer can see that one potential 
investment is associated with a 0.25 percent transaction-based fee, 
but another is associated with a 0.15 percent transaction-based fee.
---------------------------------------------------------------------------

    If the Commission were to require Internet-based disclosure of 
compensation arrangements--as a supplement to proposed disclosure of 
the existence of the conflict of interest arising from such practices 
on point of sale and confirmation disclosure documents--such Internet-
based disclosure could include information about:
     Revenue sharing payments;
     Certain other payments out of issuer assets that may 
provide incentives for broker-dealers to distribute covered securities;
     Special compensation-related conditions that broker-
dealers place on fund distribution;
     Broker compensation; and
     Brokers' differential compensation practices.
    Attachment 15 illustrates how such Internet-based disclosure could 
appear in practice, if we were to adopt a rule requiring Internet-based 
disclosure of broker-dealer compensation arrangements.\67\
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    \67\ As noted in the Proposing Release, in 2003 NASD requested 
comment on proposed rules to require member firms to disclose 
certain information about revenue sharing and differential 
compensation to customers at account opening or, if no account is 
established, at the time the customer first purchases shares of an 
investment company. The proposal also would require broker-dealers 
to use the Internet or a toll-free telephone number to provide 
updated information, or else to send updated information to 
customers semi-annually. Among other features, that NASD proposal 
would require broker-dealers to rank fund families that make revenue 
sharing payments in descending order of amounts paid to the broker-
dealer (without having to identify the actual amount of compensation 
received). It also would require broker-dealers to state whether 
they pay differential compensation in the form of heightened payout 
ratios, and to identify the investment companies favored by those 
arrangements. See NASD Notice to Members 03-54 (Sept. 2003).
    The approach to Internet-based disclosure we are considering 
here would focus on quantifying compensation resulting from a 
customer's purchase of a specific covered security. Thus, the 
approach described here would appear to complement the approach 
described by NASD (which has yet to be submitted as a proposed rule 
change).

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[[Page 10537]]

    Finally, for those customers who have no access to the Internet or 
who prefer other means of receiving the proposed Internet-based 
disclosures, we would also require broker-dealers to maintain toll-free 
telephone numbers by which investors can request a mailed copy of the 
disclosure information. As discussed in previous sections, the toll-
free number would be disclosed on point of sale disclosures and on 
transaction confirmations.

A. Detailed Disclosure of Revenue Sharing Payments

    A critically important component of any Internet-based disclosure 
of broker-dealer compensation arrangements would be detailed 
disclosures of revenue sharing payments that selling broker-dealers or 
their affiliates may receive for distributing fund shares from a fund's 
investment adviser or others.\68\ As with qualitative point of sale 
disclosure, we are proposing to require quantitative Internet-based 
disclosure of revenue sharing payments, regardless of how they are 
labeled. Even if a particular payment from a fund complex fairly can be 
depicted as offsetting broker-dealer expenses connected with fund 
distribution, the payments still can constitute direct financial 
incentives for a broker-dealer to favor that fund complex over fund 
complexes that do not make such payments. The proposed disclosure 
requirement would be targeted toward payments that are most likely to 
impact the broker-dealer's distribution of the covered security, by 
excluding payments from certain sources and certain payments to 
affiliates.\69\ On the Internet, the compensation that is required to 
be disclosed could be broken down by payment stream (with separate 
disclosure of transaction-based payments), asset-based payments, and 
miscellaneous payments.\70\ The source of payments would also be 
disclosed.
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    \68\ Those payments provide sales incentives that create 
conflicts between broker-dealers' financial interests and their 
agency duties to customers. Revenue sharing payments may lead a 
broker-dealer to use ``preferred lists'' that explicitly favor the 
distribution of certain funds. Revenue sharing payments also may 
lead to favoritism that is less explicit but just as real, such as 
through broker-dealer practices allowing funds that make revenue 
sharing payments to have special access to broker-dealer sales 
personnel, and through other incentives or instructions that a 
broker-dealer may provide to managers or salespersons. See, e.g., In 
the matter of Edward D. Jones & Co., Securities Act Release No. 8520 
(Dec. 22, 2004) (broker-dealer violated antifraud provisions of 
Securities Act and Exchange Act by failing to disclose conflicts of 
interest arising from receipt of revenue sharing, directed brokerage 
payments and other payments from ``preferred'' families that were 
exclusively promoted by broker-dealer); In the Matter of Morgan 
Stanley DW Inc., Securities Act Release No. 8339 (Nov. 17, 2003) 
(broker-dealer violated antifraud provisions of Securities Act by 
failing to disclose special promotion of funds from families that 
paid revenue sharing and portfolio brokerage).
    Revenue sharing payments also can play a role in compensating 
broker-dealers that distribute no-load funds through mutual fund 
``supermarkets.'' Those broker-dealers may charge commissions for 
some fund purchases, but provide commission-free purchases of funds 
from fund complexes that make revenue sharing payments. Funds that 
make revenue sharing payments also may be placed on lists of mutual 
funds that a broker-dealer suggests or otherwise highlights to 
customers.
    \69\ In asking above about revenue sharing disclosure 
requirements at the point of sale, we discuss potential definitions 
and exclusions that may appropriately focus the disclosure 
requirement in that way.
    \70\ Payments linked to a broker-dealer's recent sales of shares 
issued by a fund complex give the broker-dealer an incentive to sell 
more shares of that fund complex. Payments linked to the asset-based 
fees that the adviser earns in connection with shares of a fund 
complex held by broker-dealer customers give the broker-dealer an 
incentive to sell more shares of, and keep its customers invested 
in, that fund complex. Miscellaneous payments such as sponsorships 
of broker-dealer training programs further promote the sale of 
shares on behalf of the fund complex.
---------------------------------------------------------------------------

    Attachment 15 illustrates how those separate types of payment 
streams could be disclosed under such a requirement. For example, 
disclosure of transaction-based revenue sharing payments that the 
broker-dealer or associated person receives from certain affiliates of 
a fund would be required to be expressed in dollars received per $1,000 
of covered securities sold, reflecting benchmarks that may lead to 
stepped-up compensation when the broker-dealer sells more shares of a 
particular mutual fund or fund family. Similarly, disclosure of asset-
based revenue sharing payments would be required to be expressed in 
dollars received per $1,000 dollars sold, again reflecting benchmarks 
that may impact the compensation. Such disclosures would encompass 
revenue sharing payments received, whether by a broker-dealer or by an 
affiliate, in connection with securities that underlie a covered 
security, including revenue sharing payments received from underlying 
funds in connection with sales of 529 savings plans and variable 
insurance products.
    This type of approach to disclosure also would require broker-
dealers to summarize other revenue sharing payments that do not reflect 
transaction-based, and asset-based, income streams. Such amounts would 
be depicted retrospectively in terms of total dollars received in the 
prior fiscal year, along with a statement of the value of the covered 
securities that the broker-dealer or associated person sold on behalf 
of that group of issuers (or ``related issuers'') during that period. 
Such amounts also would be depicted prospectively as a reasonable 
estimate of such revenue sharing payments expected to be received in 
the current fiscal year based on present arrangements or 
understandings, along with a statement of the amount of revenue sharing 
payments received in the prior fiscal quarter.\71\
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    \71\ Retrospective information would have the benefit of being 
comprehensive, while prospective information would have the benefit 
of being more timely. Such prospective information alone may be 
incomplete given that broker-dealers and fund families may adjust 
revenue sharing payments to reflect prior sales efforts, and due to 
the informal nature of some of these arrangements. There may be 
special disclosure challenges because certain promotional payment 
arrangements are not reduced to written agreements. Under such an 
approach, broker-dealers would have to fairly and accurately depict 
their understandings, together with any ambiguities in compensation 
that may exist. Investors would then have to weigh the significance 
of those ambiguities.
---------------------------------------------------------------------------

    Request for comment. Commenters are invited to discuss the possible 
contours of an Internet-based disclosure requirement for revenue 
sharing payments as an alternative to disclosure in point of sale or 
confirmation documents, including the adequacy of the disclosure set 
forth in Attachment 15. Commenters particularly are invited to discuss 
the following:
    Q. Would such disclosure adequately set forth information about the 
various possible payment streams? Would more particularized disclosure 
better alert customers to the resulting conflicts of interest? If so, 
how should we tailor the required disclosure to do so? Should we 
require broker-dealers to state the total amounts of revenue sharing 
payments received by source? Should the Commission instead require 
disclosure of the source and amounts of payments at the point of sale 
or on transaction confirmations?
    Q. How should customers be informed about revenue sharing payments 
and other payments that are not subject to formal agreements, but

[[Page 10538]]

instead take the form of ad hoc payment arrangements?
    Q. How should customers be informed about prospective revenue 
sharing payments that a broker-dealer expects to receive in the future 
but that have not been paid or accrued?
    Q. How should investors be informed of payments received by the 
insurance company issuing a variable product from the investment 
advisers of underlying funds? What types of conflicts do these payments 
raise?

B. Disclosure of Certain Payments Out of Issuer Assets

    Internet-based disclosure also might be appropriate for certain 
payments that broker-dealers receive out of fund assets. These payments 
may not pose the same conflicts of interest as certain payments 
received from investment advisers and other non-issuers but they may 
provide incentives for broker-dealers to distribute covered securities. 
For example, payments out of issuer assets may represent compensation 
for the broker-dealer's own recordkeeping activities. Even when 
payments out of fund assets could be justified as bona fide 
compensation for non-distribution services, they may constitute a 
direct financial incentive for a broker-dealer to favor fund complexes 
that make such payments.\72\
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    \72\ Other payments out of issuer assets would not appear to 
pose a significant influence on broker-dealer distribution. For 
example, payments from issuers to compensate broker-dealers for 
mailing certain documents (other than the prospectus) to customers 
are subject to cost limits imposed by NASD rules, and as such may 
not be expected to provide compensation for distribution services. 
See NASD rule IM-2260 (approved rates of reimbursement).
    Also, as noted above, payments from funds for brokerage services 
are barred from being used to finance distribution. In September 
2004, we amended rule 12b-1 under the Investment Company Act to 
prohibit the use of fund brokerage to compensate broker-dealers for 
selling fund shares. See Investment Company Act Release No. 26591 
(Sept. 2, 2004), 69 FR 54728 (Sept. 9, 2004).
---------------------------------------------------------------------------

    Attachment 15 illustrates how such payments might be depicted in a 
way that would allow customers to evaluate the significance of the 
incentives they provide. As shown in this illustration, the broker-
dealer would be required to disclose a summary of all payments it 
receives from the issuer of the covered security (or from the issuer of 
an underlying covered security in the case of two-tiered products). 
Such amounts would be disclosed retrospectively (as a statement of the 
total dollars of such payments that the broker-dealer received from 
such issuer in the prior fiscal year) and prospectively (as a 
reasonable estimate of such payments that the broker-dealer can expect 
to receive from such issuer in the current fiscal year, based on 
present arrangements or understandings).
    Request for comment. Would requiring a broker-dealer to disclose 
certain payments received from issuers discussed above be useful to 
investors? Commenters particularly are invited to discuss the 
following:
    Q. Would disclosure of amounts received from issuers, with specific 
exclusions for brokerage commissions, mailing fees and other payments 
disclosed elsewhere, appropriately provide customers with information 
about issuer payments that can pose conflicts of interest? Should such 
a disclosure requirement be more specific, perhaps by focusing on 
payments for transfer agent-related activities or other recordkeeping-
related activities?
    Q. Should such a disclosure requirement encompass payments received 
by certain affiliates of broker-dealers? To what extent do broker-
dealer affiliates receive such payments in connection with securities 
distributed by broker-dealers? How could required disclosure of those 
issuer payments be implemented for payments received by associated 
persons of a broker-dealer?
    Q. Are there other payments or economic benefits that broker-
dealers receive from issuers or their affiliates that we should require 
broker-dealers to disclose?
    Q. Broker-dealers particularly are invited to discuss how the 
amounts they receive via such payments compare to the costs they would 
incur to provide such services (particularly costs they would not 
otherwise incur as part of their normal course of business).

C. Disclosure of Other Distribution-Related Factors That Influence 
Broker-Dealer Sales of Covered Securities

    Internet-based disclosure also may be appropriate for informing 
customers about factors in addition to those disclosed at point of sale 
that influence broker-dealer sales of covered securities. For example, 
as noted above, some broker-dealers give fund complexes that make 
revenue sharing payments special marketing access to broker-dealer 
sales personnel that is not available to other fund complexes. Some 
broker-dealers may have a practice of restricting recommendations of 
securities to the funds of complexes that make revenue sharing 
payments, or of restricting placement of securities on a highlighted 
list to only those funds of complexes that make revenue sharing 
payments. We understand that some broker-dealers may require that a 
fund complex pay asset-based distribution fees under a rule 12b-1 plan 
with regard to other mutual funds of that complex, including mutual 
funds that are closed to new investors, as a condition of selling one 
or more other funds of that fund complex.
    Additional information about these practices may help customers 
evaluate broker-dealer sales incentives. Attachment 15 illustrates the 
types of disclosure that could result if broker-dealers were required 
to use the Internet to set forth any explicit or implicit arrangement 
by which they condition any distribution-related benefit to a fund or 
fund complex upon the receipt of certain compensation or other economic 
benefits. In fulfilling their disclosure obligations under such a 
provision, a broker-dealer would need to comprehensively inform 
customers about all arrangements by which distribution is conditioned 
on special compensation or benefits. Under this form, required 
disclosures would include, if applicable, statements: (i) That the 
broker-dealer does not sell no-load funds; (ii) that the broker-dealer 
provides preferred salesperson access to fund complexes or other 
issuers that make revenue sharing payments; (iii) that the broker-
dealer only distributes covered securities whose issuer pays a certain 
threshold of recordkeeping-related fees; (iv) that all covered 
securities on the broker-dealer's ``preferred'' or ``select'' list of 
securities make revenue sharing payments to the broker-dealer; or (v) 
that the broker-dealer conditions distribution of any covered security 
of the fund complex or other issuer to the receipt of rule 12b-1 fees 
in connection with other covered securities of that fund complex or 
other issuer.
    Request for comment. Should the Commission adopt a requirement for 
broker-dealers to disclose additional distribution-related conditions? 
If adopted, should this disclosure be on the Internet? Would such 
disclosures assist customers in understanding broker-dealer financial 
incentives?
    Q. To what extent do broker-dealers currently have a practice of 
conditioning recommendations and placement on preferred lists to fund 
families that make revenue sharing payments? To what extent do broker-
dealers currently condition distribution of funds on receipt of rule 
12b-1 fees from all funds in the complex?
    Q. Should any rules explicitly identify certain arrangements that 
would have to be disclosed under this type of provision, such as those 
in statements (i) through (v) above? If so, which arrangements should 
be identified with particularity in a rule?

[[Page 10539]]

Should such conditions also have to be disclosed at the point of sale?

D. Disclosure of Compensation That Broker-Dealers Receive in Connection 
With Distributing Covered Securities

    An Internet-based disclosure requirement could encompass disclosure 
of the concessions that broker-dealers earn in connection with a 
transaction, and annual asset-based payments that broker-dealers would 
expect to receive for selling the covered security or for providing 
services to the customer's account (including payments denoted as 
compensation for providing shareholder services, as well as other 
distribution-related compensation). Such disclosures would include 
payments in connection with underlying securities purchased via two-
tiered products, such as 529 savings plans and variable insurance 
products. As depicted in Attachment 15, such payments would be 
quantified based on model purchases to allow investors to see how much 
of a dealer concession the broker-dealer would receive in connection 
with various transaction sizes or asset amounts.
    Request for comment. Should the Commission adopt an Internet-based 
disclosure requirement of broker-dealer compensation arrangements, 
including dealer concessions and annual asset-based payments that 
broker-dealers would expect to receive for selling the covered security 
or for providing services to the customer's account? Commenters 
specifically are invited to discuss whether the Commission should 
require such Internet-based disclosure as a supplement to point of sale 
and confirmation disclosure. In addition, commenters are requested to 
discuss the following:
    Q. Would disclosure about dealer concessions and annual asset-based 
fees earned by each broker-dealer effecting a transaction appropriately 
encompass all standard types of compensation?
    Q. How should disclosure of such amounts be quantified? Would 
requiring thresholds of $1,000, $50,000 and $100,000 be appropriate? 
Should disclosure of compensation related to front-end sales fees 
reflect a model purchase of $1,000 and any breakpoint threshold?
    Q. How should such disclosure requirements be applied to broker-
dealer underwriters for mutual funds and other covered securities? \73\ 
Would investors benefit from disclosure of underwriter compensation in 
the same way they would benefit from disclosure of the compensation 
received by selling broker-dealers? Would that benefit depend on the 
types of compensation received or an underwriter's direct versus 
indirect interaction with a customer, such as instances in which an 
underwriter is also broker of record for the customer (so-called 
``orphan accounts'')?
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    \73\ The amounts earned by an underwriter may be difficult to 
quantify in a fee schedule because an underwriter may retain the 
residual between sales fees paid by investors and dealer concessions 
paid to selling brokers, rather than a preset amount. That 
particularly would be an issue in the case of share classes with a 
deferred sales load.
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    Q. How should such disclosure requirements be applied to broker-
dealers that clear purchase transactions on behalf of other broker-
dealers? Would it be adequate for a clearing firm to satisfy its 
disclosure requirements by setting forth its fee schedule for clearing 
covered securities, and disclosing the source of its compensation 
(e.g., selling broker-dealer or mutual fund complex)? \74\ How would 
customers be informed about the conflicts of interest posed by 
promotional arrangements between clearing broker-dealers and fund 
complexes, such as arrangements by which a fund complex agrees to pay 
ticket charges imposed by a clearing broker-dealer, so the charges are 
not passed on to selling broker-dealers and their sales personnel?
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    \74\ Disclosure of the source of clearing firm compensation 
would appear appropriate because some clearing broker-dealers enter 
into promotional arrangements through which clearing fees are paid 
by a fund complex rather than by selling broker-dealers.
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E. Disclosure of Differential Compensation

    The Internet, supplemented with investors' ability to call toll-
free numbers to request mailed copies of required disclosures made on 
the Internet, also may provide a useful medium for broker-dealers to 
provide customers with quantitative information about differential 
compensation practices. As noted in the Proposing Release, conflicts of 
interest may result from practices by which an associated person is 
paid a heightened percentage of the broker-dealer's compensation when 
he or she sells a fund that is favored by the broker-dealer (such as a 
fund that is affiliated with the broker-dealer or that makes revenue 
sharing payments to the broker-dealer), and practices by which an 
associated person earns more for selling ``class B'' shares with 
deferred sales fees than other share classes because of the higher 
sales compensation received by the broker-dealer firm for selling class 
B shares. Point of sale disclosure of differential compensation 
practices as proposed, however, would not cover situations in which an 
associated person has a financial incentive to sell securities that pay 
a relatively high dealer concession or commission to the broker-dealer, 
even though that would translate into a relatively high payment to the 
associated person.\75\
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    \75\ That type of compensation incentive was not proposed to be 
captured at the point of sale due to the need to keep point of sale 
disclosure simple and the risk that such disclosure either would 
invariably lead to a ``yes'' answer or else would be too unwieldy at 
the point of sale.
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    Requiring Internet-based disclosure of a broker-dealer's 
compensation practices, however, may provide an appropriate forum for 
disclosure of additional compensation incentives to sales personnel and 
other associated persons. Attachment 15 depicts how, under such a 
requirement, a broker-dealer could use the Internet to illustrate the 
compensation incentives associated with relatively high dealer 
concessions, compared to comparable covered securities.\76\ Under such 
an approach, multiple covered securities may be ``comparable'' if they 
are not materially different with respect to their investment 
objectives and goals, its principal investment strategies, and the 
principal risks that would result from investing in such a covered 
security. That disclosure also illustrates how the Internet could be 
used to illustrate and quantify differential compensation in connection 
with the sale of a class of covered securities that charges a deferred 
sales fee, and information about the payment of any other form of 
differential compensation to any associated persons in connection with 
the purchase of the covered security.
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    \76\ A broker-dealer might determine that a particular set of 
funds are ``comparable'' if they fall within the same grouping or 
categorizations provided by major vendors of mutual fund data. Such 
groupings may focus on particular investment styles as ``mid cap 
value'' or industry sector funds, as well as distinguishing between 
index funds and actively managed funds. Such a type of highly 
focused categorization appears appropriate for disclosure of 
differential compensation, because that focus would appear 
consistent with differences in broker-dealer compensation. Such a 
type of ``comparable'' categorization standard is intended to avoid 
comparisons that would invariably lead to ``yes'' answers, such as 
comparisons of load funds with no-load funds. Broker-dealers would 
have to determine whether or not the compensation associated with a 
particular mutual fund is above the average compensation associated 
with the applicable category.
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    Request for comment. Should the Commission require broker-dealers 
to make enhanced disclosure of differential compensation on the 
Internet? Should the Commission also require broker-dealers to permit 
customers the ability to request the Internet-based disclosures be 
mailed to them by calling a toll-free telephone

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number? Commenters particularly are invited to discuss the following:
    Q. Should we require broker-dealers to identify any payment 
practice by which the issuer or underwriter of a covered security pays 
the broker-dealer a higher dealer concession than the average dealer 
concession paid in connection with the distribution of comparable 
covered securities, when that would lead an associated person of the 
broker-dealer to receive more in connection with the sale of the 
covered security than would be received in connection with the sale of 
the same dollar amount of a comparable covered security that pays an 
average dealer concession? For those purposes, should we state that the 
term ``comparable'' means another covered security that is not 
materially different with respect to its investment objectives and 
goals, its principal investment strategies, and the principal risks 
that would result from investing in such a covered security?
    Q. Would such a requirement be feasible to implement? Would the 
resulting information be useful to investors? Commenters may wish to 
suggest criteria for identifying ``comparable'' funds, or suggest 
existing databases or assessments that would be useful in identifying 
practical fund categories. For example, would it be appropriate for 
groupings of ``comparable'' funds to be based on particular investment 
styles such as ``mid cap value'' or industry sector funds? Would it be 
appropriate for such groupings to distinguish between index funds and 
actively managed funds? Would it be appropriate for broker-dealer to 
determine that a particular set of funds are ``comparable'' if they 
fall within the same grouping set forth by a nationally recognized 
categorization of mutual funds, such as categorizations provided by 
major vendors of mutual fund data? Should the Commission seek to 
develop and publish lists of ``comparable'' covered securities for 
these purposes? Alternatively, even if a focus on relatively narrow 
categories of funds would accurately reflect differences in broker-
dealer compensation among categories, should the groupings of funds be 
broader to more fully inform investors about the differences in 
incentives facing broker-dealer personnel? \77\
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    \77\ An analogous issue arise in the distinct context of 
calculating comparative information. Comparative information should 
provide investors with context about whether a particular fund has 
relatively high or low ownership costs. In calculating comparative 
information, using groupings of securities that are overly narrow 
would not lead to data that adequately informs investors about the 
ownership costs associated with alternative investment. When 
identifying the presence or absence of differential compensation, 
however, groupings of securities that are overly broad (such as 
including no-load funds with load funds) may invariably lead to 
``yes'' answers, which would not appear useful to investors.
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    Q. Should Internet disclosure of differential compensation related 
to share classes sold reflect higher payments for selling class C 
shares as well as for selling class B shares?

F. Format of Disclosure

    The format of disclosure would be critical to any Internet 
disclosure requirements, as well as disclosure through any other media. 
Information may be presented on the Internet in a way that is intended 
to obscure, rather than to provide effective disclosure. Moreover, many 
investors may not have Internet access or choose to use the Internet. 
Accordingly, we would require that broker-dealers maintain a toll-free 
telephone number which investors could call to request that a copy of 
the Internet-based disclosure be mailed to them.
    To promote clear disclosure, we propose to require information to 
be highly visible, and depicted in a tabular format that is readily 
communicated to investors, using layout and presentation that is 
reasonably calculated to draw attention to the required information, 
and using terminology that is intended to clearly convey required 
information to the investor.\78\ Other requirements that we could adopt 
as appropriate could include: (i) That the web site not (1) have 
password protection, (2) require entry of identifying information or e-
mail addresses, or (3) otherwise restrict access (including the use of 
``cookies''); \79\ (ii) that disclosure be assessed through a prominent 
link on the principal Internet homepage of the broker-dealer; \80\ and 
(iii) that the web site have a Uniform Resource Locator (URL) that is 
disclosed in conjunction with all point of sale and confirmation 
disclosures that the broker-dealer is required to make. We also could 
require broker-dealers to maintain toll-free telephone numbers by which 
investors can request a mailed copy of the disclosure information.\81\
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    \78\ Such a requirement would prevent broker-dealers from 
providing responsive information that is obscured with excess 
verbiage. Such a requirement would mean that the information must be 
disclosed in tabular form in a highly visible location within a 
disclosure document, possible using easily navigable links within a 
particular webpage.
    \79\ Such a requirement that the web site not be restricted in 
access does not preclude the broker-dealer from taking down the web 
sit on occasion as necessary to perform technical maintenance.
    \80\ Such a requirement would not apply to a broker-dealer that 
does not maintain a principal Internet homepage.
    \81\ Moreover, we could require that broker-dealers update 
Internet-disclosed information promptly to maintain accuracy, and 
that information about payments received in the prior fiscal year be 
updated within 30 days of the end of that fiscal year.
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    Any Internet disclosure requirement should require broker-dealers 
to depict information that is specific to share classes, as 
applicable.\82\ We would anticipate that multiple broker-dealers may 
opt to maintain disclosure on a single webpage, with each recipient of 
a payment clearly identified.\83\
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    \82\ Some relevant disclosures, such as dealer concessions and 
trailing commissions, may vary by the share class of the covered 
security. Other disclosures, such as revenue sharing payments, would 
appear less likely to differ according to share class.
    \83\ More than one broker-dealer may receive compensation in 
connection with a customer's purchase of a covered security. For 
example, a selling broker may receive the bulk of a sales fee, while 
the fund distributor retains a small portion of that fee. Also, 
introducing firms and clearing firms both may receive revenue 
sharing payments from a fund complex.
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    Request for comment. How could an Internet disclosure rule be 
crafted to ensure that investors have clear and timely access to 
information? Commenters particularly are invited to discuss the 
following:
    Q. Should an Internet-based disclosure requirement mandate the use 
of a standardized template or form, or the use of certain terminology, 
perhaps as defined by the Commission? Commenters are invited to suggest 
models.
    Q. Should broker-dealers be permitted to establish links to third-
party web sites where definitions or explanatory information would be 
available? Would this help investors better understand the meaning of 
particular terms without providing information that potentially is 
biased or otherwise misleading? Alternatively, would such a linkage to 
third-party web sites have the effect of seeming to endorse that 
information? Commenters may wish to refer to existing Internet web 
sites that contain glossaries or other models of terminology or 
explanatory materials that could effectively improve investor 
understanding of this information. Should the Commission instead adopt 
standardized definitions to be used in this context?
    Q. What are the costs to broker-dealers of making the kinds of 
Internet-based disclosures discussed in this section? In addition, what 
are the cost savings to broker-dealers of making such Internet-based 
disclosures in lieu of making such disclosures at the point-of-sale or 
on transactions confirmations?

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Would there be cost savings or other efficiencies from maintaining 
disclosures for multiple broker-dealers on a single web page?
    Q. Is it appropriate and useful for the Commission to require that 
broker-dealers update Internet-disclosed information promptly to 
maintain accuracy? Should the Commission also require that broker-
dealers update information about payments received in the prior fiscal 
year within 30 days of the end of that fiscal year?
    Q. Would it be useful to investors if we require broker-dealers to 
maintain a toll-free number investors can call to request copies of the 
Internet-based disclosure be mailed to them? What procedures would be 
necessary to ensure compliance with this requirement? Commenters may 
wish to discuss the cost to broker-dealers of implementing such a 
requirement.

V. Prospectus Disclosure of Revenue Sharing Payments

    Along with the amendments discussed above, the Commission proposed 
to amend Form N-1A in order to improve disclosure in fund prospectuses 
of revenue sharing payments.\84\ If any person within a fund complex 
makes revenue sharing payments, the proposed amendment would have 
required a fund to disclose that fact in its prospectus and also to 
disclose that specific information about revenue sharing payments is 
included in the confirmation and point of sale disclosure as originally 
proposed.\85\ We are considering whether to adopt modified or 
additional Form N-1A requirements to complement the disclosure by 
broker-dealers on which we are requesting comment in this release. 
Specifically, we are considering whether it may be helpful to investors 
to receive additional information in a fund's prospectus regarding 
revenue sharing payments.\86\
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    \84\ See Proposing Release, Section VI. The Commission also 
proposed amendments to Form N-1A that would enhance disclosure of 
sales loads in the fund prospectus.
    \85\ Proposed subparagraph (c) to Item 8 (now Item 7) of Form N-
1A.
    \86\ We recently brought enforcement cases against fund advisers 
concerning their failure to adequately disclose arrangements for 
increased ``shelf space'' with various broker-dealer. See In the 
Matter of Franklin Advisers, Inc. and Franklin/Templeton 
Distributors, Inc., Investment Advisers Act Release No. 2337 
(December 13, 2004); In the Matter of PA Fund Management LLC, et 
al., Investment Advisers Act Release No. 2295 (September 15, 2004); 
In the Matter of Massachusetts Financial Services Company, 
Investment Advisers Act Release No. 2224 (March 31, 2004).
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    Request for comment. Are prospectus disclosure requirements 
regarding revenue sharing payments, beyond those we originally 
proposed, appropriate or necessary? Specifically, we seek comment on 
whether a brief description of such revenue sharing payments should be 
required in a mutual fund's prospectus.
    Q. If any person within a fund complex makes revenue sharing 
payments, should a fund be required to disclose this fact in its 
prospectus? Should a fund be required to include information relating 
to these payments, such as the services provided in return for the 
payments; the factors considered in determining the payments to be made 
(including the number of fund shares sold by a financial intermediary, 
the amount of fund assets held through that intermediary, the 
redemption rate of fund shares held through that intermediary, and the 
quality of the intermediary's relationship with the fund's principal 
underwriters); and the basis on which such payments are made (e.g., 
percentage of total sales of fund shares by a financial intermediary, 
percentage of total fund assets attributable to that financial 
intermediary)? Should a fund also be required to disclose the maximum 
amount of revenue sharing payments to a single financial intermediary 
annually? If so, how should this disclosure be stated (e.g., as a 
dollar amount, a percentage of net assets, or otherwise), and what 
period of time should it cover (e.g., the most recent fiscal year, the 
projected total for the current fiscal year, or some other period)? 
Should any other information be required?
    Q. Should we also require disclosure of the aggregate amounts of 
revenue sharing payments that a fund makes to all financial 
intermediaries? If so, how should this disclosure be stated (e.g., as a 
dollar amount, a percentage of net assets, or otherwise), and what 
period of time should it cover (e.g., the most recent fiscal year, the 
projected total for the current fiscal year, or some other period)? 
Should any other information be required?
    Q. We also invite comment on the costs associated with providing 
enhanced disclosure in the prospectus relating to revenue sharing 
payments, including quantification of such payments. To what extent 
would the disclosure of specific information relating to such payments 
increase compliance costs?
    Q. If specific information about revenue sharing payments is 
available through a broker-dealer's Web site or toll-free telephone 
number, should a fund be required to disclose that fact in its 
prospectus, either in addition or as an alternative to other 
disclosure?
    Q. For purposes of enhanced prospectus disclosure of revenue 
sharing payments, what definition of ``revenue sharing'' should the 
Commission use? Should it be consistent with that used in connection 
with the proposed broker-dealer disclosure rules? Commenters are asked 
to address, among other things, the questions about the definition of 
``revenue sharing'' that are raised above in the context of the 
proposed broker-dealer disclosure requirements.\87\
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    \87\ See the request for additional comment relating to the 
proposed definition of ``revenue sharing'' supra, part II.A.3.
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    Q. Commenters are also asked to address what, if any, disclosure 
requirements should be added to Forms N-3, N-4, and N-6 with respect to 
revenue sharing payments? In this context, we invite commenters to 
address the same questions raised above relating to disclosure of 
revenue sharing payments by mutual funds, as well as any other relevant 
matters.

VI. General Request for Comment

    In addition to the supplemental requests for comment set forth 
above, the Commission renews its requests for comment on the proposals 
that were published in the Proposing Release. In its evaluation of 
further rulemaking action, the Commission will consider, in addition to 
the comments received in response to this release, all comments 
received in response to the Proposing Release.

    By the Commission.

    Dated: February 28, 2005.
Margaret H. McFarland,
Deputy Secretary.
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[FR Doc. 05-4215 Filed 3-3-05; 8:45 am]
BILLING CODE 8010-01-C