[Federal Register Volume 62, Number 192 (Friday, October 3, 1997)]
[Rules and Regulations]
[Pages 51762-51766]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-26145]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 270
[Release No. IC-22835; File No. S7-24-96]
RIN 3235-AG72
Rule Amendments Relating to Multiple Class and Series Investment
Companies
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Commission is adopting amendments to the rule under the
Investment Company Act of 1940 that permits open-end management
investment companies (``funds'') to issue multiple classes of shares
representing interests in the same portfolio. The amendments expand and
clarify the methods by which a multiple class fund may allocate among
its classes income, gains and losses, and expenses not allocated to a
particular class, and clarify the shareholder voting provisions of the
rule. The Commission also is adopting a technical amendment that
clarifies the application to series funds of the rule under the
Investment Company Act that governs the use of fund assets to pay for
the distribution of fund shares.
EFFECTIVE DATE: November 10, 1997.
FOR FURTHER INFORMATION CONTACT: Thomas M. J. Kerwin, Senior Counsel,
Office of Regulatory Policy, at (202) 942-0690, or, regarding
accounting issues, John S. Capone, Assistant Chief Accountant, Office
of the Chief Accountant, at (202) 942-0590, in the Division of
Investment Management, Mail Stop 10-2, Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. Requests
for formal interpretive advice should be directed to the Office of
Chief Counsel at (202) 942-0659, Division of Investment Management,
Mail Stop 10-6, Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to
rules 18f-3 [17 CFR 270.18f-3] and 12b-1 [17 CFR 270.12b-1] under the
Investment Company Act of 1940 [15 U.S.C. 80a] (the ``Investment
Company Act'').
Executive Summary
The Commission is adopting amendments to rule 18f-3 under the
Investment Company Act, the rule that permits a fund to issue multiple
classes of shares representing interests in the same investment
portfolio. The amendments expand the specified methods a multiple class
fund may use to allocate among its classes income, gains and losses
(including unrealized appreciation or depreciation), and expenses not
allocated to a particular class. The amendments also permit a fund to
use any other allocation method that the fund's board of directors
determines is fair to the shareholders of each class. In addition, the
amendments clarify the shareholder voting rights provision of the rule.
The Commission also is adopting a technical amendment to rule 12b-1
under the Investment Company Act, the rule that governs the use of fund
assets to pay for the distribution of fund shares in accordance with a
``rule 12b-1 plan.'' The amendment codifies existing interpretations of
how various provisions of the rule apply to a ``series''
[[Page 51763]]
fund (i.e., a fund that offers investors an opportunity to invest in
one or more portfolios, each of which has a specific investment
objective).
I. Discussion
A. Rule 18f-3
Rule 18f-3 under the Investment Company Act establishes a framework
for a fund's issuance of multiple classes of shares representing
interests in the same portfolio. A fund generally establishes a
multiple class arrangement to offer investors a choice of methods for
paying distribution costs or to allow the fund to use alternative
distribution channels more efficiently. Rule 18f-3 addresses issues
that may create conflicts among multiple classes, including how a fund
must allocate to each class its share of income, gains and losses, and
expenses that are not allocated to a particular class (``fundwide
expenses'').1
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\1\ In this release, ``gains and losses'' include both realized
gains and losses and unrealized appreciation and depreciation.
``Fundwide expenses'' may include expenses that are attributable to
more than one class but fewer than all classes, such as the costs of
adding new classes to an existing multiple class structure. See
Exemption for Open-End Management Investment Companies Issuing
Multiple Classes of Shares; Disclosure by Multiple Class and Master-
Feeder Funds; Class Voting on Distribution Plans, Investment Company
Act Release No. 20915 at nn.26-27 and accompanying text (Feb. 23,
1995) [60 FR 11876 (Mar. 2, 1995)] [hereinafter 1995 Release].
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Rule 18f-3(c) permits a fund generally to allocate income, gains
and losses, and fundwide expenses based on the ratio of class net
assets to fund net assets (``relative net assets'').2 The
rule also permits a fund that declares dividends daily (a ``daily
dividend fund''), such as a money market fund, to select either of two
alternative allocation methods.3 A daily dividend fund that
maintains the same net asset value (``NAV'') per share in each class
may allocate income, gains and losses, and fundwide expenses to each
share without regard to class.4 A daily dividend fund that
maintains the same NAV per share in each class may also make these
allocations to each class based on relative net assets after
subtracting the value of subscriptions for non-settled shares (i.e.,
shares for which payment in federal funds has not been received) (the
``settled shares method'').5
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\2\ Rule 18f-3(c)(1) [17 CFR 270.18f-3(c)(1)]; see amended rule
18f-3(c)(1)(i) [17 CFR 270.18f-3(c)(1)(i)].
\3\ Rule 18f-3(c)(2) [17 CFR 270.18f-3(c)(2)]; see amended rule
18f-3(c)(2)(i) [17 CFR 270.18f-3(c)(2)(i)] (defining a daily
dividend fund as ``any company that has a policy of declaring
distributions of net investment income daily, including any money
market fund that determines net asset value using the amortized cost
method permitted by section 270.2a-7 [rule 2a-7]'').
\4\ Rule 18f-3(c)(2)(i) [17 CFR 270.18f-3(c)(2)(i)]; see amended
rule 18f-3(c)(1)(iv) [17 CFR 270.18f-3(c)(1)(iv)]. Use of this
method in those circumstances is equivalent to allocation based on
relative net assets. The rule also requires funds using this method
to obtain the agreement of their service providers that, to the
extent necessary to assure that all classes maintain the same NAV
per share, providers will waive or reimburse class expenses. Rule
18f-3(c)(2)(i). The amended rule clarifies that amounts waived or
reimbursed by service providers under these agreements may not be
carried forward or recouped later. Amended rule 18f-3(c)(1)(iv).
\5\ Rule 18f-3(c)(2)(ii) [17 CFR 270.18f-3(c)(2)(ii)]; see
amended rule 18f-3(c)(1)(iii), (c)(2)(iii) [17 CFR 270.18f-
3(c)(1)(iii), (c)(2)(iii)]. The settled shares method is consistent
with the policy of many daily dividend funds to withhold dividends
from non-settled shares. Payment of dividends on non-settled shares
would dilute dividends paid on settled shares, since fund income is
attributable only to settled shares. See Rule Amendments Relating to
Multiple Class and Series Investment Companies, Investment Company
Act Release No. 22203 at n.7 (Sept. 9, 1996) [61 FR 49022 (Sept. 17,
1996)] [hereinafter Proposing Release] (investor's payment in
federal funds may not be collected until three days after share
purchase; at time of purchase fund may buy portfolio securities to
be paid for in three days, but fund does not earn interest on
securities until it makes payment; buying other portfolio securities
that settle daily against federal funds is not feasible until
investor's payment has been collected).
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In September 1996 the Commission proposed amendments to rule 18f-3
to give daily dividend funds greater flexibility in using the settled
shares method, to permit funds to use a new allocation method (the
``simultaneous equations method''), and to clarify certain other
aspects of the rule.6 The Commission received letters from
two commenters in response to the proposal, both generally favoring the
proposed amendments.7 The Commission is adopting the
proposed amendments with certain revisions, as described below.
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\6\ See Proposing Release, supra note .
\7\ See Letter from Subcommittee on Investment Companies and
Investment Advisers, Committee on Federal Regulation of Securities,
Section of Business Law, American Bar Association (``ABA''), to
Jonathan G. Katz, Secretary, SEC (Nov. 19, 1996) (hereinafter ``ABA
Letter''); Letter from Gregory M. Smith, Director-Operations,
Investment Company Institute (``ICI''), to Jonathan G. Katz,
Secretary, SEC (Nov. 18, 1996) (hereinafter ``ICI Letter'').
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1. Expanded Allocation Methods
a. Settled Shares Method. Some daily dividend funds use the settled
shares method in reliance upon exemptive orders that predate the
adoption of rule 18f-3.8 These funds have been unable to
rely on rule 18f-3 because they do not maintain the same NAV per share
in each class, a condition for use of the settled shares method under
the rule. Because the settled shares method produces appropriate
allocations even if NAV per share differs among classes, the Commission
proposed to amend rule 18f-3 to permit a daily dividend fund to use the
settled shares method without maintaining the same NAV per share in
each class. Commenters supported the amendment, which the Commission is
adopting as proposed.9
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\8\ Such orders may require compliance with conditions, such as
disclosure of differences among multiple classes, that do not apply
to multiple class funds that rely on rule 18f-3 and related
requirements of Form N-1A [17 CFR 239.15A, 274.11A].
\9\ See amended rule 18f-3(c)(1)(iii).
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The Commission is also amending rule 18f-3 to clarify that a daily
dividend fund may simultaneously use the settled shares method to
allocate income and fundwide expenses and use the relative net assets
method to allocate gains and losses.10 This combination of
methods is consistent with fund policies that commonly permit the
participation of non-settled shares in any increase or decrease in NAV
that results from appreciation or depreciation of portfolio securities,
while excluding non-settled shares from participation in daily
dividends.11
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\10\ Amended rule 18f-3(c)(1)(iii). The staff of the Commission
previously approved use of this combination of methods. See Letter
from the Division of Investment Management to Investment Company
Chief Financial Officers at 5 (Nov. 2, 1995).
\11\ See ICI Letter, supra note 7, at 2 (daily dividend funds
generally process purchase orders when received, before the
collection of payment in federal funds, to enable the purchaser of
non-settled shares to participate in changes in NAV per share from
appreciation or depreciation of portfolio securities during
collection period; most funds nevertheless pay dividends only on
settled shares). Combining these methods may be essential if a fund
maintains the same NAV per share for all classes, since allocating
gains and losses (which affect NAV) based only on settled shares
could cause a divergence in NAV among classes. See Proposing
Release, supra note , at n.11 (use of settled shares method requires
reduction of net assets of fund and each class by unpaid
subscriptions; percentage reduction of each class's net assets would
vary for each class because of differing amounts of non-settled
shares; resulting different allocations of gains and losses to each
class would affect NAV differently).
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b. Simultaneous Equations Method. The Commission is adopting, as
proposed, an amendment to rule 18f-3 to permit any fund to allocate
income, gains and losses, and fundwide expenses based on an additional
method, the ``simultaneous equations method.'' 12 Under this
method, allocations are based on simultaneous equations designed to
produce an annualized rate of return of each class that generally
differs from that of the other classes only by the expense
differentials among the classes.13 A fund
[[Page 51764]]
using this method would allocate each day's income, gains and losses,
and fundwide expenses to each class, and simultaneously reallocate
cumulative undistributed income and undistributed or unrealized capital
items among the classes.14 Commenters agreed that the
results derived from this method are consistent with the purpose of the
rule's allocation provisions.
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\12\ Amended rule 18f-3(c)(1)(ii), (c)(2)(iv) [17 CFR 270.18f-
3(c)(1)(ii), (c)(2)(iv)].
\13\ Amended rule 18f-3(c)(2)(iv). For example, if fundwide
expenses amounted to .75% of net assets for each class on average,
and Class A were assessed a class expense ratio of .30% of net
assets annually and Class B were assessed .80% for class expenses,
use of the simultaneous equations method during a full year that
produced gross returns of 10.75% should result in an annualized rate
of return of approximately 9.70% for Class A and 9.20% for Class B.
\14\ The equations should allocate the day's income, realized
gains (or losses), unrealized appreciation (or depreciation), and
fundwide expenses and reallocate each class's undistributed net
investment income, undistributed realized gains (or losses), and
unrealized appreciation (or depreciation).
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The amended rule does not specify particular equations to be used
in implementing this method.15 Appropriate equations may
vary depending on the number of classes offered and other factors such
as whether expense differentials among classes are fixed or variable.
Commenters also confirmed the Commission's understanding that equations
may be further refined as funds gain more experience in using this
method 16
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\15\ An example of equations for a fund having two classes of
shares appeared in an appendix to the Proposing Release, and is
attached to this release as Appendix A.
\16\ See ICI Letter, supra note 7, at 2 (recommending that
Commission not specify particular equations). Any equations selected
generally should be applied on a consistent basis. See infra note 21
and accompanying text.
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c. Other Allocation Methods. The Commission is also amending rule
18f-3 to permit a fund to use any appropriate allocation method not
specified in the rule if the fund's directors, including a majority of
directors who are not interested persons of the fund, determine that
the method is fair to each class of shareholders.17 The
amendment also would require directors to determine that under the new
method, the annualized rate of return of each class will generally
differ from that of the other classes only by the expense differentials
among the classes.18 This amendment will provide funds with
flexibility and avoid the possible need for further administrative
relief to permit new allocation methods that may be developed. The
Commission believes it is appropriate to require a specific board
determination concerning the fairness of an alternative allocation
method to assure that the selection of such a method is fair to each
class.19 In making this determination, the fund board may
reasonably rely on the opinions of experts such as accounting
firms.20 A fund would be expected to apply on a consistent
basis any allocation method selected under this or any other provision
of the rule.21
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\17\ Amended rule 18f-3(c)(1)(v) [17 CFR 270.18f-3(c)(1)(v)];
see section 2(a)(19) of the Investment Company Act [15 U.S.C. 80a-
2(a)(19)] (defining ``interested person'' of a fund).
\18\ See supra note 13 and accompanying text.
\19\ The allocation methods specified in the rule provide
standards for determining whether a new allocation method is fair to
shareholders.
\20\ The amended rule should not impose significant additional
burdens on fund boards, which remain free to permit only the use of
one of the allocation methods specified in the rule.
\21\ Amended rule 18f-3(c)(1) [17 CFR 270.18f-3(c)(1)]; see also
1995 Release, supra note 1, at text accompanying nn. 24-25. Because
the selected allocation method should be consistently applied from
period to period, changes in the method are expected to be rare. See
also rule 18f-3(d) [17 CFR 270.18f-3(d)] (before any material
amendment of a plan governing a multiple class arrangement, the
fund's directors must determine that the plan as proposed to be
amended, including the expense allocation, is in the best interests
of each class individually and the fund as a whole).
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2. Voting Rights
Rule 18f-3 contains certain conditions that are applicable to
arrangements involving a class of shares with one type of distribution
charge (the ``purchase class'') that automatically convert into another
class (the ``target class'') after a specified period of
time.22 The rule requires a fund having such an arrangement
to obtain the approval of the shareholders of the purchase class
whenever the fund materially increases expenses for the target
class.23 The amended rule, as proposed, clarifies that this
provision applies only if the expense increase is submitted for a
separate vote of target class shareholders.24
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\22\ The purchase class typically pays an asset-based
distribution fee and a contingent deferred sales charge. The
conversion feature is intended to permit long-term shareholders to
receive the benefit of a lower distribution fee (or no fee) charged
to the target class. See Proposing Release, supra note 5, at n.16
and accompanying text.
\23\ In the alternative, the fund could establish a new target
class for purchase class shareholders on the same terms that applied
to the target class before the increase.
\24\ Amended rule 18f-3(e)(2)(iii) [17 CFR 270.18f-
3(e)(2)(iii)]. An increase that implicates this provision would
include, for example, a proposal to increase distribution fees
materially for the target class under a rule 12b-1 plan or certain
shareholder services plans.
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B. Rule 12b-1
The Commission also is adopting as proposed a technical amendment
to rule 12b-1 that clarifies the rule's application to separate series
or portfolios of a fund.25 Rule 12b-1 permits the use of
fund assets to finance the distribution of fund shares pursuant to a
written plan that describes the distribution financing arrangement and
contains certain conditions.26 Among other conditions, the
rule 12b-1 plan must allow fund shareholders to vote on certain matters
including approval, amendment, or termination of the plan.27
Rule 12b-1 provides that a plan may cover more than one class of shares
if the plan's provisions are severable for each class and if votes by
shareholders and other required actions are taken separately for each
class.28 The amendment codifies prior interpretations that a
rule 12b-1 plan also may cover more than one series or portfolio under
the same conditions applicable when a plan covers more than one
class.29
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\25\ Amended rule 12b-1(g) [17 CFR 270.12b-1(g)].
\26\ Rule 12b-1(b) [17 CFR 270.12b-1(b)].
\27\ See rule 12b-1(b)(1), (b)(3)(iii) to (iv)(A), (b)(4), (g)
[17 CFR 270.12b-1(b)(1), (b)(3)(iii) to (iv)(A), (b)(4), (g)].
\28\ Rule 12b-1(g).
\29\ Amended rule 12b-1(g); see Distribution of Shares by
Registered Open-End Management Investment Company, Investment
Company Act Release No. 22201 at n.7 and accompanying text (Sept. 9,
1996) [61 FR 49010 (Sept. 17, 1996)] (rule 12b-1 has been
interpreted to treat each series of a fund as a separate fund; a
series or class not publicly offered should be treated in same way
as a fund not publicly offered). The amended rule also deletes
current rule 12b-1(g)'s description of certain voting rights of
purchase class shareholders under rule 18f-3, which is a matter
addressed by rule 18f-3 itself. The amended rule substitutes a
reference to amended rule 18f-3(e)(2)(iii). Amended rule 12b-1(g).
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II. Cost/Benefit Analysis and Effects On Competition, Efficiency, And
Capital Formation
In the proposing release, the Commission provided a Cost-Benefit
Analysis on the amendments and requested comments. No comments were
received on the analysis. The Commission is sensitive to the costs and
benefits imposed by its rules. The amendments to rule 18f-3 provide
greater flexibility to multiple class funds in allocating to each class
its proportionate share of income, gains and losses, and fundwide
expenses. The amended rule gives every fund a selection of one or more
new specified methods without limiting the use of previously authorized
methods. The amended rule also authorizes the use of an unspecified
method selected by the fund subject to appropriate safeguards. A fund's
selection of any method permitted by the amendments should not
substantially increase the fund's costs in making allocations. The
amended rule also reduces costs by allowing more funds to rely on the
rule instead of obtaining and complying with exemptive orders, and by
eliminating
[[Page 51765]]
unnecessary requirements to solicit votes of purchase class
shareholders. The amendment to rule 12b-1 does not impose a burden
because it codifies an existing interpretation of the rule.
Section 2(c) of the Investment Company Act provides that whenever
the Commission is engaged in rulemaking and is required to consider or
determine whether an action is necessary or appropriate in the public
interest, the Commission must consider, in addition to the protection
of investors, whether the action will promote efficiency, competition,
and capital formation.30 The Commission has considered the
amendments to rule 18f-3 and rule 12b-1 in light of these standards.
The Commission believes the amendments to rule 18f-3 are consistent
with the public interest and may promote efficiency and competition
because they broaden the scope and flexibility of an exemptive rule,
may reduce costs and other burdens for funds, and may thereby encourage
more funds to offer multiple classes of shares. The Commission believes
that the amendments will have no adverse effect on capital formation.
The amendment to rule 12b-1, as a codification of an existing
interpretation of the rule, will not have significant effects on
efficiency, competition, or capital formation.
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\30\ 15 U.S.C. 80a-2(c).
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III. Summary of Final Regulatory Flexibility Analysis
The Initial Regulatory Flexibility Analysis (``IRFA''), which was
prepared in accordance with 5 U.S.C. 603, was published in Investment
Company Act Release No. 22203. No comments were received on the IRFA.
The Commission has prepared a Final Regulatory Flexibility Analysis
(``FRFA'') in accordance with 5 U.S.C. 604. The FRFA indicates that the
amendments to rule 18f-3 enable multiple class funds, including small
entities, to rely on the rule instead of exemptive orders and to
benefit from more flexible compliance requirements by expanding
specified allocation methods and permitting the use of an unspecified
method if directors determine that it is fair. In addition, the FRFA
states that the amendments clarify compliance requirements by
eliminating unnecessary voting provisions consistent with the
Commission's original intent. The FRFA explains that the amendment to
rule 12b-1 codifies existing interpretations treating multiple series
of a series fund like multiple classes of a portfolio.
The FRFA notes that in response to comments from the public, the
Commission modified the amendments to permit the selection of
unspecified methods. The FRFA also discusses the amendments' effect on
small entities that are registered open-end management investment
companies. For purposes of the amendments, small entities are those
having net assets of $50 million or less as of the end of their most
recent fiscal year. The Commission estimates that there are 500 small
entities out of 3000 active open-end management investment companies,
and that 43 of those 500 offer multiple classes of shares. The FRFA
states that the rules do not impose any new reporting, recordkeeping,
or other compliance requirements.
The FRFA also discusses the Commission's efforts to minimize
significant economic impact on small entities, noting that the
amendments' effect is generally positive for all affected funds
including small entities. The FRFA notes that the Commission considered
several alternatives that might minimize any effect on small entities,
including (a) the establishment of differing compliance or reporting
requirements or timetables that take into account the resources
available to small entities; (b) the clarification, consolidation, or
simplification of compliance and reporting requirements under the rules
for small entities; (c) the use of performance rather than design
standards; and (d) an exemption from coverage of the rules or any part
of the rules for small entities. The FRFA states that the amendments
generally increase flexibility, simplify or clarify existing compliance
requirements, and introduce performance standards by permitting the use
of an unspecified allocation method determined to be fair. In light of
these considerations, the FRFA states that it would be inconsistent
with the purposes of the Act to exempt small entities from the
amendments or to specify different requirements for small entities.
Different compliance or reporting requirements for small entities are
not necessary because the rules do not establish any new reporting,
recordkeeping, or compliance requirements. The Commission has
determined that it is not feasible to further clarify, consolidate, or
simplify the rules for small entities consistently with the protection
of investors.
Cost-benefit information in the ``Cost/Benefit Analysis'' section
of this Release is reflected in the Analysis. A copy of the Final
Regulatory Flexibility Analysis may be obtained by contacting Thomas M.
J. Kerwin, Mail Stop 10-2, Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549.
IV. Statutory Authority
The Commission is amending rule 12b-1 pursuant to the authority set
forth in sections 12(b) and 38(a) of the Investment Company Act [15
U.S.C. 80a-12(b), -37(a)], and is amending rule 18f-3 under sections
6(c), 18(i), and 38(a) of the Investment Company Act [15 U.S.C. 80a-
6(c), -18(i), -37(a)].
List of Subjects in 17 CFR Part 270
Investment companies, Reporting and recordkeeping requirements,
Securities.
Text Of Rule Amendments
For the reasons set out in the preamble, Title 17, Chapter II of
the Code of Federal Regulations is amended as follows:
PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940
1. The authority citation for Part 270 continues to read, in part,
as follows:
Authority: 15 U.S.C. 80a-1 et seq., 80a-37, 80a-39 unless
otherwise noted;
* * * * *
2. Section 270.12b-1 is amended by revising paragraph (g) to read
as follows:
Sec. 270.12b-1 Distribution of shares by registered open-end
management investment company.
* * * * *
(g) If a plan covers more than one series or class of shares, the
provisions of the plan must be severable for each series or class, and
whenever this section provides for any action to be taken with respect
to a plan, that action must be taken separately for each series or
class affected by the matter. Nothing in this paragraph (g) shall
affect the rights of any purchase class under Sec. 270.18f-
3(e)(2)(iii).
3. Section 270.18f-3 is amended by revising paragraphs (c) and
(e)(2)(iii) to read as follows:
Sec. 270.18f-3 Multiple class companies.
* * * * *
(c) (1) Income, realized gains and losses, unrealized appreciation
and depreciation, and Fundwide Expenses shall be allocated based on one
of the following methods (which method shall be applied on a consistent
basis):
(i) To each class based on the net assets of that class in relation
to the net assets of the company (``relative net assets'');
(ii) To each class based on the Simultaneous Equations Method;
(iii) To each class based on the Settled Shares Method, provided
that the
[[Page 51766]]
company is a Daily Dividend Fund (such a company may allocate income
and Fundwide Expenses based on the Settled Shares Method and realized
gains and losses and unrealized appreciation and depreciation based on
relative net assets);
(iv) To each share without regard to class, provided that the
company is a Daily Dividend Fund that maintains the same net asset
value per share in each class; that the company has received
undertakings from its adviser, underwriter, or any other provider of
services to the company, agreeing to waive or reimburse the company for
payments to such service provider by one or more classes, as allocated
under paragraph (a)(1) of this section, to the extent necessary to
assure that all classes of the company maintain the same net asset
value per share; and that payments waived or reimbursed under such an
undertaking may not be carried forward or recouped at a future date; or
(v) To each class based on any other appropriate method, provided
that a majority of the directors of the company, and a majority of the
directors who are not interested persons of the company, determine that
the method is fair to the shareholders of each class and that the
annualized rate of return of each class will generally differ from that
of the other classes only by the expense differentials among the
classes.
(2) For purposes of this section:
(i) Daily Dividend Fund means any company that has a policy of
declaring distributions of net investment income daily, including any
money market fund that determines net asset value using the amortized
cost method permitted by Sec. 270.2a-7;
(ii) Fundwide Expenses means expenses of the company not allocated
to a particular class under paragraph (a)(1) of this section;
(iii) The Settled Shares Method means allocating to each class
based on relative net assets, excluding the value of subscriptions
receivable; and
(iv) The Simultaneous Equations Method means the simultaneous
allocation to each class of each day's income, realized gains and
losses, unrealized appreciation and depreciation, and Fundwide Expenses
and reallocation to each class of undistributed net investment income,
undistributed realized gains or losses, and unrealized appreciation or
depreciation, based on the operating results of the company, changes in
ownership interests of each class, and expense differentials between
the classes, so that the annualized rate of return of each class
generally differs from that of the other classes only by the expense
differentials among the classes.
* * * * *
(e) * * *
(2) * * *
(iii) If the shareholders of the target class approve any increase
in expenses allocated to the target class under paragraphs (a)(1)(i)
and (a)(1)(ii) of this section, and the purchase class shareholders do
not approve the increase, the company will establish a new target class
for the purchase class on the same terms as applied to the target class
before that increase.
* * * * *
Dated: September 26, 1997.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
Note: Appendix A to the preamble will not appear in the Code of
Federal Regulations.
Appendix A--Simultaneous Equations Method
The equations set forth below are examples of a set of
simultaneous equations that could be used as an allocation method in
a multiple class fund with two classes at the end of day t. The
inception date of class B shares is assumed to be on or after the
inception date of class A shares.
Equation 1: At + Bt = Gt +
Ct
Equation 2: At/Sat-Bt/
Sbt = dx(NAV0)
where:
At: the total net assets to be allocated to class A at
the end of day t
Bt: the total net assets to be allocated to class B at
the end of day t
Gt: the cumulative undistributed net change in assets
from operations for the fund at the end of day t
Ct: the cumulative capital for the fund at the end of day
t
Sat: the number of shares in class A at the end of day t
Sbt: the number of shares in class B at the end of day t
d: the time adjustment factor, calculated as the number of days
since the inception of class B or the ex-dividend date of the last
income distribution, whichever is more recent, divided by 365
x: the differential in expense ratios between the two classes
NAV0: the NAV per share for class A and class B on day 0,
where day 0 is either the day class B commences trading or the ex-
dividend date of the last income distribution, whichever is more
recent.
[FR Doc. 97-26145 Filed 10-2-97; 8:45 am]
BILLING CODE 8010-01-P
