[Federal Register Volume 64, Number 208 (Thursday, October 28, 1999)]
[Notices]
[Pages 58112-58117]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-28199]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-42043; File No. SR-NASD-98-14]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Granting Approval of and Notice of Filing and
Order Granting Accelerated Approval of Amendment Nos. 4, 5, and 6 to
the Proposed Rule Change Relating to Sales Charges and Prospectus
Disclosure for Mutual Funds and Variable Contracts
October 20, 1999.
I. Introduction
On March 12, 1998,\1\ the National Association of Securities
Dealers, Inc. (``NASD'' or ``Association''), through its wholly owned
subsidiary, NASD Regulation, Inc. (``NASD Regulation'') submitted to
the Securities and Exchange Commission (``SEC'' or ``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'') \2\ and Rule 19b-4 thereunder,\3\ a proposed rule
change to amend Rule 2820 (the ``Variable contracts Rule'') and Rule
2830 (the ``Investment Company Rule'') of the Conduct Rules of the
NASD. The Investment Company Rule would be amended to: (1) provide
maximum aggregate sales charge limits for fund-of-funds arrangements;
(2) permit mutual funds to charge installment loads; (3) prohibit loads
on reinvested dividends; (4) impose redemption order requirements for
shares subject to contingent deferred sales loads
[[Page 58113]]
(``CDSLs''); and (5) eliminate duplicative prospectus disclosure. The
Variable Contracts Rule would be amended to eliminate the specific
sales charge limitations in the rule and a filing requirement relating
to changes in sales charges.
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\1\ NASD Regulation initially submitted the proposed rule change
on February 17, 1998; however, the submission failed to provide a
statutory basis section. Because proposed rule changes are not
deemed filed until all necessary components, such as a statutory
basis section, are provided, the proposed rule change was deemed
filed when the Commission received NASD Regulation's amendment
providing the statutory basis for the proposed rule change
(``Amendment No. 1''). See Letter to Katherine A. England, Assistant
Director, Commission, from Joan C. Conley, Secretary, NASD
Regulation, dated March 12, 1998. NASD Regulation submitted another
amendment on June 11, 1998, making certain technical corrections
(``Amendment No. 2''). See Letter to Katherine A. England, Assistant
Director, Commission, from Joan C. Conley, Secretary, NASD
Regulation, dated June 10, 1998. Amendment No. 2, however, was
insufficient in form. As a result, on July 13, 1998, NASD Regulation
filed another amendment, superseding and replacing all previous
versions of the filing (``Amendment No. 3''). See Letter to
Katherine A. England, Assistant Director, Commission, from Joan C.
Conley, Secretary, NASD Regulation, dated July 10, 1998. The
substance of Amendment No. 3 was published in the Federal Register.
\2\ 15 U.S.C. 78s(b)(1).
\3\ 17 CFR 240.19b-4.
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The proposed rule change was published for comment in the Federal
Register on August 17, 1998.\4\ The NASD subsequently filed amendments
to the proposed rule change on August 13, 1998, June 4, 1999, and
September 13, 1999, respectively.\5\ The Commission received 8 comments
on the proposal.\6\ This order approves the proposed rule change, as
amended.
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\4\ See Exchange Act Release No. 40310 (August 7, 1998), 63 FR
43974 (August 17, 1998).
\5\ See Letter from Joan C. Conley, Secretary, NASD Regulation,
to Katherine A. England, Assistant Director, Division of Market
Regulation, Commission, dated August 12, 1998 (``Amendment No. 4'').
Amendment No. 4 made grammatical and technical changes to the
proposed rule language. NASD Regulation asserted that the changes
contained in Amendment No. 4 were non-substantial, and that
Amendment No. 4 superseded and replaced the previous filing and
amendments thereto. See Letter from Thomas M. Selman, Vice
President, Investment Companies/Corporate financing, NASD
Regulation, to Katherine A. England, Assistant Director, Division of
Market Regulation, Commission, dated July 19, 1999 (``Amendment No.
5''). Amendment No. 5 provided certain changes, discussed below, in
response to commenters' concerns. See Letter from Thomas M. Selman,
Vice President, Investment Companies/Corporate Financing, NASD
Regulation, to Christine Richardson, Division of Market Regulation,
Commission, dated September 13, 1999 (``Amendment No. 6''). As
discussed below, Amendment No. 6 provides clarification with respect
to certain issues.
\6\ See Letters from Kathleen H. Moriarty, Carter, Ledyard &
Milburn, to Jonathan G. Katz, Secretary, Commission, dated September
4, 1998 (``Carter Letter''); Felice R. Foundos, Chapman & Cutler, to
Jonathan G. Katz, Secretary, Commission, dated September 4, 1998
(``Chapman & Cutler Letter''); Michael R. Rosella, Battle Fowler, to
Jonathan G. Katz, Secretary, Commission, dated September 8, 1998
(``Battle Fowler Letter''); Nora M. Jordan, Davis Polk & Wardwell,
dated September 8, 1998 (``Davis Polk Letter''); Frances M. Stadler,
Deputy Senior Counsel, Investment Company Institute, to Jonathan G.
Katz, Secretary, Commission, dated September 8, 1998 (```ICI
Letter''); Nathalie P. Maio, Senior Vice President, Deputy General
Counsel, Prudential, to Jonathan G. Katz, Secretary, Commission,
dated September 4, 1998 (``Prudential Letter''); Philip A.
Heimowitz, Cahill Gordon & Reindel, to Jonathan G. Katz, Secretary,
Commission, dated September 4, 1998 (``Cahill Letter''); and Mark J.
Mackey, President and Chief Executive Officer, National Association
for Variable Annuities, to Jonathan G. Katz, Secretary, Commission,
dated September 8, 1998 (``NAVA Letter'').
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II. Description
A. Proposed Amendments to the Investment Company Rule
1. Fund-of-Funds
The National Securities Market Improvement Act of 1996 (the ``1996
Amendments'') amended the Investment Company Act of 1940 (``1940 Act'')
to, among other things, broaden the ability of mutual fund sponsors to
establish ``fund-of-funds'' arrangements.
The Investment Company Rule currently does not take into account
two-tier fund-of-funds structures in which asset-based sales charges
are imposed at both the acquiring and underlying fund levels. The
proposed amendments would amend the Investment Company Rule to ensure
that, if a fund-of-funds charges distribution fees at both levels, the
combined sales charges do not exceed the maximum percentage limits
currently contained in the rule. The amended rule would permit an
acquiring fund, an underlying fund, or both, to charge an asset-based
sales fee that in the aggregate may not exceed .75 percent of average
net assets and a service fee that in the aggregate does not exceed .25
percent of average net assets. Consistent with the current rule,
aggregate front-end and deferred sales charges would be limited in any
transaction to 7.25 percent, or 6.25 percent if the contract includes a
service fee.
2. Deferred Sales Loads
In September 1996, the Commission amended Rule 6c-10 under the 1940
Act to permit new types of deferred stocks, such as back-end and
installment loads. The proposed amendments to the Investment Company
Rule also would permit these types of deferred sales charges. The
amendments would conform the definition of ``deferred sales charge'' in
the Investment Company Rule to the definition of ``deferred sales
load'' in Rule 6c-10 under the 1940 Act (i.e., ``any amount properly
chargeable to sales or promotional expenses that is paid by a
shareholder after purchase but before or upon redemption'').
3. Loads on Reinvested Dividends
The proposed amendments would prohibit loads on reinvested
dividends. When NASD Regulation proposed to prohibit loads on
reinvested dividends in Notice to Members 97-48, commenters
representing unit investment trust (``UIT'') sponsors objected to the
proposed amendments. Although NASD Regulation does not believe that
this practice is prevalent, it continues to believe that it is
appropriate to prohibit loads on reinvested dividends for all
investment companies, including UITs. It asserts that loads on
reinvested dividends constitute excessive compensation, regardless of
the type of investment company that imposes them. NASD Regulation
proposes to defer implementation of this prohibition until April 1,
2000, to address the commenters' Y2K concerns.\7\
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\7\ See Amendment No. 5. NASD Regulation originally proposed to
include a ``grandfather provision'' that would exempt from the
operation of the prohibition all investment companies that currently
impose such fees. The grandfather clause provision has since been
eliminated. See Amemdment No. 6.
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4. CDSL Calculations
The proposed amendments would prohibit members from selling fund
shares that impose a CDSL unless the method used by the fund to
calculate CDSLs in partial redemptions requires that investors be given
full credit for the time they have invested in the fund. Because a CDSL
declines over the period of a shareholder's investment, a first-in-
first-out (``FIFO'') redemption order requirement generally would
ensure that transactions are subject to the lowest applicable CDSL. The
proposed amendments, however, also would expressly provide that if a
redemption order other than FIFO (e.g., last-in-first-out, or ``LIFO'')
would result in a redeeming shareholder paying a lower CDSL, the other
method could be used.
5. Prospectus Disclosure
The Investment Company Rule currently prohibits a member from
offering or selling shares of a fund with an asset-based sales charge
unless its prospectus discloses that long-term shareholders may pay
more than the economic equivalent of the maximum front-end sales
charges permitted by the rule. In March 1998, the Commission adopted
significant revisions to prospectus disclosure requirements for mutual
funds. Included in the amendments is a requirement that the
prospectuses of funds with asset-based sales charges include disclosure
regarding Rule 12b-1 plans that is similar to the type of disclosure
required by the Investment Company Rule. Accordingly, the proposed
amendments would eliminate the prospectus disclosure requirement in the
Investment Company Rule.
B. Proposed Amendment to the Variable Contracts Rule
In Notice to Members 97-48, NASD Regulation proposed to amend the
Variable Contracts Rule to eliminate the maximum sales charge
limitations. The commenters to NTM 97-48 strongly supported the
proposed amendment because they viewed specific sales charge limits in
the Variable Contracts Rule as unnecessary and inconsistent
[[Page 58114]]
with the ``reasonableness'' standard enacted in the 1996 Amendments.
Consistent with these comments, the proposed amendments would eliminate
the maximum sales charge limitations in the Variable Contracts Rule.
The proposed amendments also would make a conforming change to
eliminate the requirement in the rule to file with the Advertising/
Investment Companies Regulation Department the details of any changes
in a variable annuity's sales charges.
III. Summary of Comments
A. Proposed Amendments to the Investment Company Rule
1. Fund-of-Funds
NASD Regulation proposed to amend the Investment Company Rule to
ensure that the combined sales charges of a fund-of-funds that charges
a distribution fee at both the acquiring and underlying fund levels, do
not exceed the maximum percentage limits that are currently permitted
by the rule. Under the proposed amendment, the aggregate asset-based
sales charges of an acquiring fund and an underlying fund would not be
subject to the cumulative sales limits that apply to other investment
companies with asset-based sales charges. Instead, any asset-based fee
charged by the acquiring fund and the underlying fund could not, in the
aggregate, exceed .75% of average net assets. In addition, any service
fee charged by the acquiring fund and the underlying fund could not, in
the aggregate, exceed .25% of average net assets. The acquiring and
underlying funds in a fund-of-funds structure, however, would remain
individually subject to the cumulative limits in the Investment Company
Rule.
The Commission received comment on the proposed definition of
``fund-of-funds.'' As proposed, ``fund-of-funds'' would have been
defined as ``an investment company that invests any portion of its
assets in the securities of registered open-end investment companies or
registered unit investment trusts.'' Chapman & Cutler and the ICI
believed this definition was too broad and might include funds that
invest only a small portion of their assets in other funds. They
suggested that the definition of ``fund-of-funds'' be modified to more
closely reflect traditional fund of funds, such as those companies
relying on Sections 12(d)(1)(F) and 12(d)(1)(G) of the 1940 Act.\8\ In
the alternative, the ICI suggested that the definition include only
funds whose investments in other funds exceed the limits permitted
under Section 12(d)(1)(A) of the 1940 Act.\9\
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\8\ See Chapman & Cutler Letter; and ICI Letter.
\9\ See ICI Letter.
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NASD Regulation has modified the definition of ``fund-of-funds'' by
narrowing its scope to include only investment companies that acquire
securities issued by other investment companies in excess of the
amounts permitted under Section 12(d)(1)(A) of the 1940 Act.\10\
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\10\ See Amendment No. 5.
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2. Deferred Sales Loads
NASD Regulation proposed to conform the definition of ``deferred
sales charge'' in the Investment Company Rule to the definition in Rule
6c-10 under the 1940 Act (i.e., ``any amount properly chargeable to
sales or promotional expenses that is paid by a shareholder after
purchase but before or upon redemption''). The Commission did not
receive comment on this aspect of the proposal.
3. Loads on Reinvested Dividends
NASD Regulation proposed to prohibit NASD members from imposing
front-end or deferred sales loads on the shares purchased through
reinvested dividends. Several commenters objected to this
prohibition.\11\ In particular, the commenters believed that the
prohibition would be especially disadvantageous to UITs. Although the
prohibition contained a ``grandfather clause'' for existing UITs so
that it would only apply to investment companies, including UITs,
registered after a certain date, commenters believed that it would
disrupt the reinvestment options for those UITs that were not eligible
for the ``grandfather clause.'' \12\ Some commenters asserted that such
a prohibition was not justified because UIT investor does not pay a
sales charge twice on the same assets when he or she purchases shares
through reinvested dividends.\13\ Moreover, some commenters pointed out
that unlike mutual fund underwriters, UIT sponsors are not permitted to
receive fees pursuant to Rule 12b-1 under the 1940 Act. Commenters
believe that UIT sponsors should be permitted to recoup their expenses
through sales charges imposed on reinvested dividends.\14\
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\11\ See Carter Letter; Chapman & Cutler Letter; Battle Fowler
Letter; Davis Polk Letter; ICI Letter; Prudential Letter; and Cahill
Letter. NASD Regulation has since eliminated the ``grandfather
clause.'' See Amendment No. 6. Instead, NASD Regulation proposes to
defer the prohibition until April 1, 2000. See Amendment No. 5.
\12\ See Carter Letter; and Davis Polk Letter.
\13\ See Carter Letter; Davis Polk Letter; Prudential Letter;
and Cahill Letter.
\14\ See Chapman & Cutler Letter; Prudential Letter; and Cahill
Letter.
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Several commenters asserted that prohibiting such sales charges
would be inconsistent with Commission exemptive orders that permit
certain UIT sponsors to impose sales charges on reinvested dividends,
subject to certain conditions.\15\ Other commenters asserted that this
prohibition would require certain UITs that offered deferred sales load
structures to create multiple classes of shares, which could raise
issues under the 1940 Act and the federal tax laws.\16\
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\15\ See Carter Letter; ICI Letter; Prudential Letter; and
Cahill Letter.
\16\ See Battle Fowler Letter; and Chapman & Cutler Letter.
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Commmenters also believed that the prohibition would require UITs
to develop expensive new computer systems to separate reinvestment
shares when deferred sales charges are deducted.\17\ Davis Polk
questioned the Commission's authority to approve this portion of the
rule change, given the Commission's moratorium on the implementation of
new Commission rules that require major reprogramming of regulated
entities' computer systems between June 1, 1999, and March 31,
2000.\18\
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\17\ See Carter Letter; and Davis Polk Letter.
\18\ See Davis Polk Letter.
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NASD Regulation responded to these comments by stating that it
continues to believe that loads on reinvested dividends constitute
excessive compensation, regardless of the type of investment company
that imposes them. NASD Regulation believes that the proposed rule is
not inconsistent with exemptive relief granted to UITs under the 1940
act, as that relief does not refer to any dividend reinvestment
program, and that the exemptive orders provide no relief from the
application of NASD Conduct Rules.\19\
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\19\ NASD Regulation asserts that although the exemptive relief
``permitted UIT sponsors to charge installment loads, it does not
appear to refer to any dividend reinvestment program. Indeed, we
understand that at least two of these orders applied to fixed
portfolio UITs that offered dividend reinvestment only into no-load
mutual funds.'' See Amendment No. 5.
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NASD Regulation asserted that the proposed rule would not require
UITs to adopt a multiple class structure, but provided no rationale to
support this belief. Instead, it deferred to the Commission's Division
of Investment Management for its expertise on the matter. In contrast
to commenters' interpretation of the potential effect of the rule
change, NASD Regulation believes that, whether an investment
[[Page 58115]]
company's loads on reinvested dividends are excessive, is unrelated to
whether the investment company charges Rule 12b-1 fees. NASD Regulation
stated that the prohibition on charging front-end or deferred sales
loads on shares purchased through reinvested dividends would apply to
investment companies that have no Rule 12b-1 plan just as it would
apply to investment companies that have such plans. It notes that,
under the proposed rule change, UITs would not be prohibited from
imposing sales charges on the initial purchase of UIT shares, which
UITs may set at a level to adequately compensate them for their
distribution costs.
NASD Regulation responded to the commenters' Y2K concerns by
amending the proposed rule change to delay implementation of the
prohibition until April 1, 2000.\20\
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\20\ See Amendment No. 5.
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4. CDSL Calculations
NASD Regulation also proposed to reinstate requirements previously
applicable under Rule 6c-10 under the 1940 Act concerning the order in
which fund shares subject to a CDSL must be redeemed when an investor
redeems some, but not all, of his fund shares. Chapman & Cutler
commented that some investors, for business or tax reasons, may want to
apply a different order of redemption than the one specified by the
proposed rule (FIFO), and that the proposed rule therefore should be
modified to allow investors to dictate a different order of
redemption.\21\ The ICE commented that, while it does not object to the
provision, it believes that the rule language should be modified to
specify that it applies to partial redemptions. The ICI also
recommended that the proposed rule language be modified to provide that
an order of redemption other than FIFO may be used if such an order
``could'' (rather than ``would'') result in the shareholder paying a
lower CDSL.\22\
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\21\ See Chapman & Cutler Letter.
\22\ See ICI Letter.
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NASD Regulation indicated that it does not intend to modify the
proposed rule. NASD Regulation stated that it was not aware of any
significant problems that had arisen as a result of identical
requirements that were previously imposed on the investment company
industry by Rule 6c-10 under the 1940 Act. NASD Regulation also is
concerned that if investors were permitted to consent to a different
order of redemption, investment company account agreements could
include standard language that effectively would allow a fund sponsor
to determine the order of redemption. Further, NASD Regulation does not
believe it is necessary to modify its proposal to reflect that it
applies only to partial redemptions because, if all shares are
redeemed, the issue of redemption order becomes moot.\23\
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\23\ See Amendment No. 5.
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5. Prospectus Disclosure
NASD Regulation proposes to eliminate a prospectus disclosure
requirement in the Investment Company Rule that is already required by
Commission rules. The Commission did not receive comment on this aspect
of the proposal.
B. Proposed Amendment to the Variable Contracts Rule
NASD Regulation proposes to amend the Variable Contracts Rule to
eliminate sales charge limits for variable annuity contracts, as well
as to eliminate the requirement in the rule to file the details of any
changes in a variable annuity's sales charges. NAVA strongly supported
eliminating the sales charge limits on variable annuity sales loads.
NAVA also believed that the imposition of sales charge restrictions on
variable annuities would be inconsistent with the purpose and intent of
the ``reasonableness'' standard adopted in the 1996 Amendments.\24\
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\24\ See NAVA Letter.
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IV. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to the Association, and, in particular, with the
requirements of Section 15A(b)(6).\25\ Section 15A(b) requires that the
rules of the Association, among other things, be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to remove impediments to and perfect the
mechanism of a free and open market, and, in general, to protect
investors and the public interest. The Commission finds that the
proposed rule change will further these requirements by adapting the
Investment Company Rule and the Variable Contracts Rule to take into
account recent legislation, regulations promulgated by the Commission,
and new distribution arrangements.\26\
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\25\ 15 U.S.C. 78o-3(b)(6).
\26\ In approving this rule change, the Commission notes that it
has considered the proposal's impact on efficiency, competition, and
capital formation, consistent with Section 3 of the Act. 15 U.S.C.
78c(f).
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A. Amendments to the Investment Company Rule
1. Fund-of-Funds
The Commission finds that the proposed application of aggregate
sales charge limits on fund-of-funds that charge distribution fees at
both levels to be consistent with the Act. Specifically, the Commission
believes that the proposed amendment clarifies that the Investment
Company Rule applies to two-tier fund-of-funds structures in which
asset-based sales charges are imposed at both the acquiring and
underlying fund levels. The application of these sales charge limits
should help to ensure that charges remain reasonable and do not become
excessive for investors.
The Commission also believes that the definition of ``fund-of-
funds'' being adopted is consistent with the common understanding of
the type of investment company that constitutes a fund-of-funds. As
proposed, ``fund-of-funds'' would have been defined as ``an investment
company that invests any portion of its assets in the securities of
registered open-end investment companies or registered unit investment
trusts.'' The commenters indicated that the proposed definition was
broader than the traditional understanding of what constitutes a fund-
of-funds. In response to public comment, NASD Regulation revised this
definition to include only those investment companies that acquire
securities issues by another investment company in excess of the
amounts permitted under Section 12(d)(1)(A) of the 1940 Act. Section
12(d)(1)(A) of the 1940 Act permits an investment company to purchase a
limited amount of the total outstanding voting stock of another
investment company.\27\ Therefore, the definition of fund-of-funds will
exclude investment companies that invest only a small portion of their
assets in other funds' shares. The Commission believes that the
definition being adopted
[[Page 58116]]
sufficiently addresses the concern that a fund-of-fund might assess
unlimited sales loads (i.e., excessive layering of sales loads) by
clarifying that the Investment Company Rule applies to those fund-of-
funds that invest more than a de minimis amount of their assets in the
shares of other investment companies. The Commission further believes
that NASD Regulation's modification to its proposed definition of fund-
of-funds will make it more manageable for investment companies in a
fund-of-funds structure to monitor and enforce compliance with the
requirements of the Investment Company Rule.
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\27\ Section 12(d)(1)(A) generally prohibits any registered
investment company and companies controlled by it (the ``acquiring
company'') from acquiring securities of any other investment company
(the ``acquired company''), and any investment company and companies
controlled by it (the ``acquiring company'') from acquiring any
security issued by a registered investment company (the ``acquired
company'') if, after the acquisition, the acquiring company would
own in the aggregate (i) more than 3% of the total outstanding
voting stock of the acquired company; (ii) securities issued by the
acquired company having an aggregate value in excess of 5% of the
value of the total assets of the acquiring company; or (iii)
securities issued by the acquired company and all other investment
companies (other than treasury stock of the acquiring company)
having an aggregate value in excess of 10% of the value of the total
assets of the acquiring company.
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2. Deferred Sales Loads
The Commission finds it appropriate to amend the definition of
``deferred sales charge'' in the Investment Company Rule to conform to
the definition in Rule 6c-10 under the 1940 Act (i.e., ``any amount
properly chargeable to sales or promotional expenses that is paid by a
shareholder after purchase but before or upon redemption''). The
Commission believes that conforming the definition in this manner will
allow for more flexibility in structuring deferred sales loads (e.g.,
by permitting installment loads), as taken into account by the 1996
Amendments to Rule 6c-10. The Commission also notes that the conforming
definition will prevent possible confusion and compliance burdens that
could result from inconsistent definitions in Commission and NASD
rules.
3. Loads on Reinvested Dividends
NASD Regulation proposed to prohibit NASD members from imposing
front-end or deferred sales loads on shares purchased with reinvested
dividends. As noted above, the Commission received substantial comment
on this aspect of the proposal, all of it critical. Specifically,
commenters believed that the proposed prohibition included in NASD Rule
2830(d)(6) would create a disadvantage for UITs by restricting only
front-end and deferred sales loads, but not asset-based sales charges,
e.g., Rule 12b-1 fees, which UIT's are not permitted to charge.
Commenters believe that UITs would be disadvantaged because non-UIT
funds would be permitted to charge Rule 12b-1 fees on reinvested
dividends, and therefore recoup their distribution costs, while UITs
would not. As noted by the NASD, UITs may set the sales charge on the
initial purchase at a level to adequately compensate them for their
distribution costs.
Commenters further asserted that the proposed rule change would
require UITs to create two classes of units with different
characteristics, which would result in each class representing a
different pool or specified securities, and would therefore raise
issues under the 1940 Act and federal tax law. NASD Regulation asserted
its view that ``complying with the proposed amendments should not
require UITs to adopt a multiple class structure.'' NASD Regulation
also consulted with staff in the Commission's Division of Investment
Management on the matter, and the staff agrees that complying with the
proposed amendments should not result in the creation of multiple
classes.\28\ The Commission believes that the proposed rule change is
consistent with the Act in that it should prevent sales charges from
exceeding the appropriate limits, thereby benefiting investors and the
public interest.
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\28\ See Amendment No. 5.
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4. CDSL Calculations
The Commission believes that it is consistent with the Act to
reinstate requirements previously applicable under Rule 6c-10 under the
1940 Act, concerning the order in which fund shares subject to a CDSL
must be redeemed when an investor redeems some, but not all, of his
fund shares. Although commenters asserted that investors should be able
to choose the order of redemption used in calculating the CDSL applied
to their shares, the Commission agrees with NASD Regulation that such
discretion could result in investment companies incorporating standard
language into account agreements, effectively allowing a fund sponsor
to determine the order of redemption. The Commission believes that the
provision provides sufficient flexibility as proposed. Specifically,
the provision provides that if a redemption order other than FIFO
(e.g., LIFO) would result in a redeeming shareholder paying a lower
CDSL, the other method may be used. This approach should benefit
investors by permitting them to pay the lowest CDSL when partially
redeeming shares.
5. Prospectus Disclosure
The Commission finds it appropriate to eliminate a prospectus
disclosure requirement currently included in the Investment Company
Rule in light of the Commission's 1998 revisions to the prospectus
disclosure requirements for mutual funds. Specifically, the Commission
requires that mutual funds with asset-based sales charges include
disclosure in their prospectuses regarding Rule 12b-1 plans that is
similar to the disclosure required in the Investment Company Rule. The
adoption of this prospectus disclosure requirement made the prospectus
disclosure requirement in the Investment Company Rule duplicative and
unnecessary.
B. Proposed Amendment to the Variable Contracts Rule
The Commission believes that the elimination of the maximum sales
charge limitations from the Variable Contracts Rule is appropriate in
light of the ``reasonable'' standard adopted in the 1996 Amendments.
Specifically, in 1996, the 1940 Act was amended to exempt variable
annuity (as well as variable life insurance) contracts from the
specific charge restrictions contained in Sections 26 and 27. In place
of the specific charge restrictions, the 1996 amendments added a
section to the 1940 Act \29\ to regulate variable contract charges by
requiring that the fees and charges under a variable contract, in the
aggregate, be reasonable in relation to the services rendered, the
expenses expected to be incurred, and the risks assumed by the
insurance company.\30\ The Commission believes eliminating the maximum
sales charge limitations from the Variable Contracts Rule is
appropriate in light of the 1996 amendments.
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\29\ See Section 26(e)(2) of the 1940 Act.
\30\ Insurance companies issuing variable contracts are required
to represent in the contract registration statements that fees and
charges are reasonable.
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Because Rule 2820 provisions regulating sales charges for variable
annuities are being eliminated, NASD Regulation also proposed to
eliminate the requirement to file with the Advertising/Investment
Companies Regulation Department the details of any changes in a
variable annuity's sales charges.\31\ The Commission believes the
elimination of this filing requirement is appropriate in light of the
concurrent elimination of the maximum sales charge limitations in the
Variable Contracts Rule.
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\31\ See Amendment No. 6.
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The Commission finds good cause to approve Amendment No. 4 to the
proposed rule change prior to the 30th days after the date of
publication of notice filing thereof in the Federal Register. Amendment
No. 4 makes grammatical and technical changes to the proposed rule
language and supersedes and replaces the previous filing and amendments
thereto. It does not substantive modify the proposal. Accordingly, the
Commission believes that it is consistent with Sections
[[Page 58117]]
15A(b)(6) and 19(b)(2) of the Act to approve Amendment No. 4 to the
proposed rule change on an accelerated basis.
The Commission finds good cause to approve Amendment No. 5 to the
proposed rule change prior to the 30th day after the date of
publication of notice of filing thereof in the Federal Register.
Amendment No. 5 does two things. First, in response to commenters,
Amendment No. 5 modifies the definition of ``fund-of-funds'' so that it
includes only those investment companies that acquire securities issued
by any other investment company in excess of the amounts permitted
under Section 12(d)(1)(A) of the 1940 Act. This definition is narrower
than the one originally proposed and should make clear that the
combined sales charge limits apply only to those structures
traditionally understood to be funds-of-funds. Second, also in response
to commenters, Amendment No. 5 delays the implementation of the
prohibition of sales loads on reinvestment dividends until April 1,
2000. This addresses commenters concerns regarding Y2K and the computer
systems changes that the proposed rule change will necessitate.
Accordingly, the Commission believes that is consistent with Sections
15A(b)(6) and 19(b)(2) of the Act to approve Amendment No. 5 to the
proposed rule change on an accelerated basis.
The Commissions finds good cause to approve Amendment No. 6 to the
proposed rule change prior to the 30th day after the date of
publication of notice of filing thereof in the Federal Register.
Amendment No. 6 clarifies that the prohibition of front-end or deferred
sales charges on shares of investment companies purchased with
reinvested dividends is not meant to apply to investment companies
whose registration statements became effective under the Securities Act
of 1933 prior to April 1, 2000. Amendment No. 6 also clarifies that the
definition of ``fund-of-funds'' is intended only to cover an investment
company that invests in the securities of another registered investment
company. Accordingly, the Commission believes that it is consistent
with Sections 15A(b)(6) and 19(b)(2) of the Act to approve Amendment
No. 6 to the proposed rule change on an accelerated basis.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 4, 5, and 6 including whether the
proposed rule changes are consistent with the Act. Persons making
written submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549-0609. Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for inspection
and copying at the Commission's Public Reference Room. Copies of such
filing will also be available for inspection and copying at the
principal office of the Exchange. All submissions should refer to File
No. SR-NASD-98-14 and should be submitted by November 18, 1999.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\32\ that the proposed rule change (SR-NASD-98-14) is approved, as
amended.
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\32\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\33\
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\33\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-28199 Filed 10-27-99; 8:45 am]
BILLING CODE 8010-01-M
