[Federal Register Volume 63, Number 158 (Monday, August 17, 1998)]
[Notices]
[Pages 43974-43980]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-21957]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40310; File No. SR-NASD-98-14]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the National Association of Securities Dealers, Inc.
(``NASD'' or ``Association'') Concerning Related Performance
Information
August 7, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'' or ``Act''),\1\ notice is hereby given that on March
12, 1998, that National Association of Securities Dealers, Inc.
(``NASD'' or ``Association''), through its wholly-owned subsidiary,
NASD Regulation, Inc. (``NASD Regulation''), filed with the Securities
and Exchange Commission (``SEC'' or ``Commission'') the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared by the self-regulatory organization.\2\ The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 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''). 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''). The substance of Amendment No. 3 is
being published today.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
NASD Regulation is proposing amendments to Rule 2820 (the
``Variable
[[Page 43975]]
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; 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. Below is the text of the proposed rule
change. Proposed new language is italicized; proposed deletions are
[bracketed].
2800 SPECIAL PRODUCTS
* * * * *
2820 VARIABLE CONTRACTS OF AN INSURANCE COMPANY
(a) Application
This Rule shall apply exclusively (and in lieu of Rule 2830) to the
activities of members in connection with variable contracts to the
extent such activities are subject to regulation under the federal
securities laws.
(b) Definitions
(1) The term ``purchase payment'' as used throughout this Rule
shall mean the consideration paid at the time of each purchase or
installment for or under the variable contract.
(2) The term ``variable contracts'' shall mean contracts providing
for benefits or values which may vary according to the investment
experience of any separate or segregated account or accounts maintained
by an insurance company.
[(c) Sales Charges]
[No member shall participate in the offering or in the sale of
variable annuity contracts if the purchase payment includes a sales
charge which is excessive:]
[(1) Under contracts providing for multiple payments a sales charge
shall not be deemed to be excessive if the sales charge stated in the
prospectus does not exceed 8.5% of the total payments to be made
thereon as of a date not later than the end of the twelfth year of such
payments, provided that if a contract be issued for any stipulated
shorter payment period, the sales charge under such contract shall not
exceed 8.5% of the total payments thereunder for such period.]
[(2) Under contracts providing for single payments a sales charge
shall not be deemed to be excessive if the prospectus sets forth a
scale of reducing sales charges related to the amount of the purchase
payment which is not greater than the following schedule:
First $25,000-8.5% of purchase payment
Next $25,000-7.5% of purchase payment
Over $50,000-6.5% of purchase payment
[(3) Under contracts where sales charges and other deductions for
purchase payments are not stated separately in the prospectus the total
deductions from purchase payments (excluding those for insurance
premiums and premium taxes) shall be treated as a sales charge for
purposes of this rule and shall not be deemed to be excessive if they
do not exceed the percentages for multiple and single payment contracts
described in paragraphs (1) and (2) above.]
[(4) Every member who is an underwriter and/or issuer of variable
annuities shall file with Advertising/Investment Companies Regulation
Department, prior to implementation, the details of any changes or
proposed changes in the sales charges of such variable annuities, if
the changes or proposed changes would increase the effective sales
charge on any transaction. Such filings should be clearly identified as
an ``Amendment to Variable Annuity Sales Charges.'']
[d](c) Receipt of Payment
No member shall participate in the offering or in the sale of a
variable contract on any basis other than at a value to be determined
following receipt of payment therefore in accordance with the
provisions of the contract, and, if applicable, the prospectus, the
Investment Company Act of 1940 and applicable rules thereunder.
Payments need not be considered as received until the contract
application has been accepted by the insurance company, except that by
mutual agreement it may be considered to have been received for the
risk of the purchaser when actually received.
[e](d) Transmittal
Every member who receives applications and/or purchase payments for
variable contracts shall transmit promptly to the issuer all such
applications and at least that portion of the purchase payment required
to be credited to the contract.
[f](e) Selling Agreements
No member who is a principal underwriter as defined in the
Investment Company Act of 1940 may sell variable contracts through
another broker/dealer unless (1) Such broker/dealer is a member, and
(2) there is a sales agreement in effect between the parties. Such
sales agreement must provide that the sales commission be returned to
the issuing insurance company if the variable contract is tendered for
redemption within seven business days after acceptance of the contract
application.
[g](f) Redemption
No member shall participate in the offering or in the sale of a
variable contract unless the insurance company, upon receipt of a
request in proper form for partial or total redemption in accordance
with the provisions of the contract undertakes to make prompt payment
of the amounts requested and payable under the contract in accordance
with the terms thereof, and, if applicable, the prospectus, the
Investment Company Act of 1940 and applicable rule thereunder.
2830 INVESTMENT COMPANY SECURITIES
(a) Application
This Rule shall apply exclusively to the activities of members in
connection with the securities of companies under the Investment
Company Act of 1940 (the 1940 Act); provided however, that Rule 2820
shall apply, in lieu of this Rule, to members' activities in connection
with ``variable contracts'' as defined therein.
(b) Definitions
(1) ``Associated persons of an underwriter,'' as used in paragraph
(l), shall include an issuer for which an underwriter is the sponsor or
a principal underwriter, any investment adviser of such issuer, or any
affiliated person (as defined in Section 2(a)(3) of the [Investment
Company Act of 1940] 1940 Act) of such underwriter, issuer or
investment adviser.
(2) ``Brokerage commissions,'' as used in paragraph (k), shall not
be limited to commissions on agency transactions but shall include
underwriting discounts or concessions and fees to members in connection
with tender offers.
(2) ``Covered account,'' as used in paragraph (k), shall mean (A)
any other investment company or other account managed by the investment
adviser of such investment company, or (B) any other account from which
brokerage commissions are received or expected as a result of the
request or direction of any principal underwriter of such investment
company or of any affiliated person (as defined in the [Investment
Company Act of 1940] 1940 Act) of such
[[Page 43976]]
investment company or of such underwriter, or of any affiliated person
of an affiliated person of such investment company.
(4) ``Person'' shall mean ``person'' as defined in the [Investment
Company Act of 1940] 1940 Act.
(5) ``Prime rate,'' as used in paragraph (d) shall mean the most
preferential interest rate on corporate loans at large U.S. money
center commercial banks.
(6) ``Public offering price'' shall mean a public offering price as
set forth in the prospectus of the issuing company.
(7) ``Rights of accumulation'' as used in paragraph (d), shall mean
a scale of reducing sales charges in which the sales charge applicable
to the securities being purchased is based upon the aggregate quantity
of securities previously purchased or acquired and then owned plus the
securities being purchased.
The quantity of securities owned shall be based upon:
(A) the current value of such securities (measured by either net
asset value or maximum offering price); or
(B) Total purchases of such securities at actual offering prices;
or
(C) The higher of the current value or the total purchases of such
securities.
The quantity of securities owned may also include redeemable
securities of other registered investment companies having the same
principal underwriter.
(8) ``Sales Charge'' and ``sales charges,'' as used in paragraph
(d), shall mean all charges or fees that are paid to finance sales or
sales promotion expenses, including front-end deferred and asset-based
sales charges, excluding charges and fees for ministerial,
recordkeeping or administrative activities and investment management
fee. For purposes of this Rule, members may rely on the sales-related
fees and charges disclosed in the prospectus of an investment company.
(A) An ``asset-based sales charge'' is a sales charge that is
deducted from the net assets of an investment company and does not
include a service fee.
(B) A ``deferred sales charge'' is [a sales charge that is deducted
from the proceeds of the redemption of shares by an investor, excluding
any such charges that are (i) nominal and are for services in
connection with a redemption or (ii) discourage short-term trading,
that are not used to finance sales-related expenses, and that are
credited to the net assets of the investment company] any amount
properly chargeable to sales or promotional expenses that is paid by a
shareholder after purchase but before or upon redemption.
(C) A ``front-end sales charge'' is a sales charge that is included
in the public offering price of the shares of an investment company.
(9) ``Service fees,'' as used in paragraph (d), shall mean payments
by an investment company for personal service and/or the maintenance of
shareholder accounts.
(10) The terms ``underwriter,'' ``principal underwriter,
``redeemable security,'' ``periodic payment plan,'' ``open-end
management investment company,'' and ``unit investment trust,'' shall
have the same definitions used in the [Investment Company Act of 1940]
1940 Act.
(11) A ``fund of funds'' is an investment company that invests any
portion of its assets in the securities of registered open-end
investment companies or registered unit investment trusts. An
``acquiring company'' in a fund of funds is the investment company that
purchases or otherwise acquires the securities of another investment
company and an ``acquired company'' is the investment company whose
securities are acquired.
(12) ``Investment companies in a single complex'' are any two or
more companies that hold themselves out to investors as related
companies for purposes of investment and investor services.
(c) Conditions of Discounts to Dealers
No member who is an underwriter of the securities of an investment
company shall sell any such security to any dealer or broker at any
price other than a public offering price unless such sale is in
conformance with Rule 2420 and, if the security is issued by an open-
end management company or by a unit investment trust which invests
primarily in securities issued by other investment companies, unless a
sales agreement shall set forth the concessions to be received by the
dealer or broker.
(d) Sales Charge
No member shall offer or sell the shares of any open-end investment
company or any ``single payment'' investment plan issued by a unit
investment trust (collectively ``investment companies'') registered
under the [Investment Company Act of 1940] 1940 Act if the sales
charges described in the prospectus are excessive. Aggregate sales
charges shall be deemed excessive if they do not conform to the
following provisions:
(1) Investment Companies Without an Asset-Based Sales Charge
(A) Aggregate front-end and[/or] deferred sales charges described
in the prospectus which may be imposed by an investment company without
an asset-based sales charge shall not exceed 8.5% of the offering
price.
[(B)(i) Dividend reinvestment may be made available at net asset
value per share to any person who requests such reinvestment.
(ii) If dividend reinvestment is not made available as specified in
subparagraph (B)(i) above, the maximum aggregate sales charge shall not
exceed 7.25% of offering price.]
[(C)(i)](B)(i) Rights of accumulation (cumulative quantity
discounts) may be made available to any person in accordance with one
of the alternative quantity discount schedules provided in subparagraph
[(D)](C)(i) below, as in effect on the date the right is exercised.
(ii) If rights of accumulation are not made available on terms at
least as favorable as those specified in subparagraph (C)(i) the
maximum aggregate sales charge shall not exceed[:]
[(a)] 8.0% of offering price. [if the provisions of subparagraph
(B)(i) are met; or
(b) 6.75% of offering price if the provisions of subparagraph
(B)(i) are not met.]
[(D)](C)(i) Quantity discounts, if offered, shall be made available
on single purchases by any person in accordance with one of the
following two alternatives:
a. A maximum aggregate sales charge of 7.75% on purchases of
$10,000 or more and a maximum aggregate sales charge of 6.25% on
purchases of $25,000 or more, or
b. A maximum aggregate sales charge of 7.50% on purchases of
$15,000 or more and a maximum aggregate sales charge of 6.25% on
purchases of $25,000 or more.
(ii) If quantity discounts are not made available on terms at least
as favorable as those specified in subparagraph [(D)(i)](C)(i)) the
maximum aggregate sales charge shall not exceed:
a. 7.75% of offering price if the provisions of subparagraphs
[(B)(i) and (C)(i)(B) are met.
b. 7.25% of offering price if [the provisions of subparagraph
(B)(i) are met but] the provisions of subparagraph [(C)(i)](B) are not
met.
[c. 6.50% of offering price if the provisions of subparagraph
(C)(i) are met but the provision of subparagraph (B)(i) are not met.]
[d. 6.25% of offering price if the provisions of subparagraphs
(B)(i) and (C)(i) are not met.]
[(E)](D) If an investment company without an asset-based sales
charge pays a service fee, the maximum aggregate sales charge shall not
exceed 7.25% of the offering price.
[[Page 43977]]
[(F) If an investment company without an asset-based sales charge
reinvests dividends at offering price, it shall not offer or pay a
service fee unless it offers quantity discounts and rights of
accumulation and the maximum aggregate sales charge does not exceed
6.25% of the offering price.]
(2) Investment Companies with an Asset-Based Sales Charge
(A) Except as provided in subparagraph (C) and (D), the aggregate
asset-based, front-end and deferred sales charges described in the
prospectus which may be imposed by an investment company with an asset-
based sales charge, if the investment company has adopted a plan under
which service fees are paid, shall not exceed 6.25% of total new gross
sales (excluding sales from the reinvestment of distributions; [and]
exchanges of shares between investment companies in a single complex,
between classes [of shares] of an investment company with multiple
classes of shares or between series [shares] of a series investment
company) plus interest charges on such amount equal to the price rate
plus one percent per annum. The maximum front-end or deferred sales
charge resulting from any transaction shall be 6.25% of the amount
invested.
(B) Except as provided in subparagraph (C) and (D), if an
investment company with an asset-based sales charge does not pay a
service fee, the aggregate asset-based, front-end and deferred sales
charges described in the prospectus shall not exceed 7.25% of total new
gross sales (excluding sales from the reinvestment of distributions;
[and] exchanges of shares between investment companies in a single
complex, between classes [of shares] of an investment company with
multiple classes of shares or between series [shares] of a series
investment company) plus interest charges on such amount equal to the
prime rate plus one percent per annum. The maximum front-end or
deferred sales charge resulting from any transaction shall be 7.25% of
the amount invested.
(C) The maximum aggregate sales charge on total new gross sales set
forth in subparagraph (A) and (B) may be increased by an amount
calculated by applying the appropriate percentages of 6.25% or 7.25% of
total new gross sales which occurred after an investment company first
adopted an asset-based sales charge until July 7, 1993 plus interest
charges on such amount equal to the prime rate plus one percent per
annum less any front-end, asset-based or deferred sales charges on such
sales or net assets resulting from such sales.
(D) The maximum aggregate sales charges of an investment company in
a single complex, a class or share issued by an investment company with
multiple classes of shares or a separate series of a series investment
company, may be increased to include sales of exchanged shares provided
that such increase is deducted from the maximum aggregate sales charges
of the investment company, class or series which redeemed the shares
for the purpose of such exchanges.
(E) No member shall offer or sell the shares of an investment
company with an asset-based sales charge if:
(i) The amount of the asset-based sales charge exceeds .75 of 1%
per annum of the average annual net assets of the investment company;
or
(ii) Any deferred sales charges deducted from the proceeds of a
redemption after the maximum cap described in subparagraph (A), (B),
(C) and (D) hereof, has been attained are not credited to the
investment company.
(3) Fund of Funds
(A) If neither an acquiring company nor an acquired company in a
fund of funds structure has an asset-based sales charge, the maximum
aggregate front-end and deferred sales charges that may be imposed by
the acquiring company, the acquired company and those companies in
combination, shall not exceed the rates provided in paragraph (d)(1).
(B) Any acquiring company or acquired company in a fund of funds
structure that has an asset-based sales charge shall individually
comply with the requirements of paragraph (d)(2), provided:
(i) If the acquiring and acquired companies are in a single complex
and the acquired fund has an asset-based sales charge, sales made to
the acquiring fund shall be excluded from total gross new sales for
purposes of acquired fund's calculations under subparagraphs (d)(2)(A)
through (d)(2)(D); and
(ii) If both the acquiring and acquired companies have an asset-
based sales charge: (a) the maximum aggregate asset-based sales charge
imposed by the acquiring company, the acquired company and those
companies in combination, shall not exceed the rate provided in
subparagraph (d)(2)(E)(i); and (b) the maximum aggregate front-end or
deferred sales charges shall not exceed 7.25% of the amount invested,
or 6.25% if either company pays a service fee.
(C) The rates described in subparagraphs (d)(4) and (d)(5) shall
apply to the acquiring company, the acquired company and those
companies in combination. The limitations of subparagraph (d)(6) shall
apply to the acquiring company and the acquired company individually.
[(3)](4) No member or person associated with a member shall, either
orally or in writing, describe an investment as being ``no load'' or as
having ``no sales charge'' if the investment company has a front-end or
deferred sales charge or whose total charges against net assets to
provide for sales related expenses and/or service fees exceed .25 of 1%
of average net asset per annum.
[(4) No member or person associated with a member shall offer or
sell the securities of an investment company 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 this Rule. Such disclosure shall be adjacent to
the fee table in the front section of a prospectus. This subparagraph
shall not apply to money market mutual funds which have asset-based
sales charges equal to or less than .25 of 1% of average net assets per
annum.]
(5) No member or person associated with a member shall offer or
sell the securities of an investment company if the service fees paid
by the investment company, as disclosed in the prospectus, exceed .25
of 1% of its average annual net assets or if a service fee paid by the
investment company, as disclosed in the prospectus, to any person who
sells its shares exceeds .25 of 1% of the average annual net asset
value of such shares.
(6) No member or person associated with a member shall offer or
sell the securities of an investment company if:
(A) The investment company has a deferred sales charge paid upon
redemption that declines over the period of a shareholder's investment
(``contingent deferred sales load''), unless the contingent deferred
sales load is calculated as if the shares or amounts representing
shares not subject to the load are redeemed first, and other shares or
amounts representing shares are then redeemed in the order purchased,
provided that another order of redemption may be used if such order
would result in the redeeming shareholder paying a lower contingent
deferred sales load; or
(B) The investment company has a front-end or deferred sales charge
imposed on shares, or amounts representing shares, that are purchased
through the reinvestment of dividends, unless the registration
statement registering the investment company's
[[Page 43978]]
securities under the Securities Act of 1933 became effective prior to
[insert the effective date of this rule amendment].
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in Sections A, B, and C below, of the
most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
a. Background. Regulatory initiative adopted in 1996 by Congress
and the Commission provide mutal funds and variable insurance sponsors
with greater flexibility in structuring distribution arrangements. In
1997, NASD Regulation published Notice to Members 97-48 requesting
comment on proposed amendments to the sales charge provisions in the
Investment Company Rule and the Variable Contracts Rule that would
adapt the rules to these regulatory initiatives and new distribution
arrangements. NASD Regulation received nine comment letters in response
to Notice to Members 97-48. The commenters generally supported the
proposed amendments to the Investment Company Rule. The commenters
strongly supported the proposed amendments to the Variable Contracts
Rule.
b. Description. (1) Proposed Amendments to the Investment Company
Rule. (A) Fund of Funds. The National Securities Markets 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 acquired 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.
(B) Deferred Sales Loads. In September 1996, the Commission amended
Rule 6c-10 under the 1940 Act to permit new types of deferred loads,
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 (i.e., ``any amount properly
chargeable to sales or promotional expenses that is paid by a
shareholder after purchase but before or upon redemption'').
(C) 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. NASD Regulation, however,
continues to believe that it is appropriate to prohibit loads on
reinvested dividends for all investment companies, including UITs. In
order to minimize the possibility that investors could incur additional
costs associated with the restructuring of distribution financing to
eliminate loads on reinvested dividends, the proposed amendments
include a ``grandfather provision'' that would exempt from the
operation of the prohibition all investment companies that currently
impose such fees.
(D) 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 (for
example, last-in first-out) would result in a redeeming shareholder
paying a lower CDSL, the other method could be used.
(E) 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 disclosures 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 disclosure required in the Investment Company Rule. Accordingly,
the proposed amendments would eliminate the prospectus disclosure
requirement in the Investment Company Rule.
(2) Proposed Amendments 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 strongly supported the proposed amendment because they view
specific sales charge limits in the Variable Contracts Rule as
unnecessary and inconsistent 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 requirements in
the rule to file with the Advertising/Investment Companies Regulation
Department the details of any changes in a variable annuity's sales
charges.
2. Statutory Basis
NASD Regulation believes that the proposed rule change is
consistent with Section 15A(b)(6) of the Act,\3\ which requires, among
other things, that the Association's rules 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, in that the proposed rule change, 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, will further these
requirements.
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\3\ 15 U.S.C. 78o-3.
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[[Page 43979]]
B. Self-Regulatory Organization's Statement on Burden on Competition
NASD Regulation does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as amended.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The commenters generally supported the proposed amendments to the
Investment Company Rule. The commenters strongly supported the proposed
amendments to the Variable Contracts Rule. The comments are summarized
below.
1. Amendments to the Investment Company Rule
a. Fund of Funds. NASD Regulation proposed to amend the Investment
Company Rule to ensure that the combined sales charges for funds of
funds that charge a sales load or asset-based distribution fee at both
the acquiring and underlying fund levels do not exceed the maximum
percentage limits that are currently contained in the Rule. The
proposed amendments, however, would not require funds of funds to
calculate cumulative sales charge limits required for funds that charge
asset-based fees. The Investment Company Institute (ICI) and the
Securities Industry Association (SIA) supported the proposed approach
to regulating fees charged by funds of funds. The ICI recommended
certain technical changes to the proposed rule language to clarify that
the limits apply to the aggregate rate of asset-based sales charges
rather than the amount deducted based on net asset values. In addition,
the ICI recommended that NASD Regulation clarify that the acquiring and
acquired funds in a fund of funds structure remain individually subject
to the cumulative limits in the rule.
Banc One Corporation (Banc One) stated that the cumulative limits
should apply to funds of funds. Banc One noted that acquiring funds in
a fund of funds structure typically purchase institutional class shares
in underlying funds that typically do not carry an asset-based sales
charge. Accordingly, Banc One believes that it is feasible for the
acquiring fund to calculate a single remaining amount that reflects
both its own gross new sales and its proportionate share of the
underlying fund's new sales and charges.
b. Installment Loads. NASD Regulation proposed to amend the
definition of ``deferred sales charge'' in the Investment Company Rule
to permit installment loads. The ICI was the only commenter on this
proposal, which it supported.
c. Loads on Reinvested Dividends. NASD Regulation proposed to
prohibit sales loads on reinvested dividends. The ICI and Davis Polk &
Wardell (Davis Polk) opposed this proposal. The ICI believes that, as
an alternative to prohibiting loads on reinvested dividends, funds that
impose such charges should be subject to lower maximum limits in the
Rule and be required to make appropriate disclosure.
d. CDSL Calculations. NASD Regulation proposed to impose redemption
order requirements (first-in-first-out or FIFO) for shares subject to
contingent deferred sales loads so that investors incur only the lowest
applicable CDSL. The proposed amendments also would provide that if a
redemption order other than FIFO (e.g., LIFO) would result in a
redeeming shareholder paying a lower CDSL, that method could be used.
In addition, the Notice to Members clarified that the proposed
amendment would concern only the manner in which a fund calculated the
CDSL and should not affect a shareholder's ability to identify for tax
purposes which shares have been redeemed. The ICI did not object to
NASD Regulation's approach. The SIA, however, stated that NASD
Regulation should not impose order of redemption requirements because
marketing or business considerations may justify use of methodologies
other than FIFO, and investors should retain the right to designate
which shares they wish to sell for tax purposes.
e. Prospectus Disclosure. In deference to the recent adoption by
the SEC of new prospectus disclosure regarding the long-term effects of
Rule 12b-1 fees, NASD Regulation proposed to eliminate the equivalent
prospectus disclosure requirement in the Investment Company Rule. The
ICI and the SIA supported this proposal.
f. Other Comments. Federated Investors (Federated) recommended that
NASD Regulation consider an additional amendment to the Investment
Company Rule that would permit funds to calculate the cumulative limits
in the Rule by aggregating all shares of the same class within a fund
complex that have exchange privileges, rather than calculating the cap
for each fund individually. For example, all sales charges for ``B''
shares in a fund complex and gross new sales of B shares would be
aggregated to determine the remaining amount under the Rule.
Federated claimed that the current calculation methods for the
transfer of remaining amount balances in share exchanges within a fund
complex result in some funds being undercharged while others are
overcharged. (The Investment Company Rule permits a fund either to
increase its remaining amount by treating the shares received through
an exchange as gross new sales and deducting the amount of such
increase from the remaining amount of the fund from which shares were
exchanged, or to transfer less than this maximum amount pursuant to a
fund policy that is consistently applied.) Federated believes that if
fund companies are permitted to aggregate the remaining amount pools
for exchangeable shares, inaccuracies inherent in the current methods
would be significantly reduced.
2. Amendments to the Variable Contracts Rule
a. Sales Charge Limits. The National Association for Variable
Annuities (NAVA), Allstate Life Financial Services (Allstate), and New
England Insurance and Investment Company (New England) strongly
supported the proposed amendment to the Variable Contracts Rule to
eliminate the sales charge limit for variable annuities. They viewed
the specific sales charge limits in the Rule as unnecessary and
inconsistent with the ``reasonableness standard'' enacted in the 1996
Amendments. NAVA described the reasonableness standard as a compromise
between the SEC and the insurance industry that was intended to
eliminate SEC regulation of individual charges in favor of the new
comprehensive standard. Allstate believes that the intent of the 1996
Act was to eliminate specific limits on fees in favor of a
reasonableness standard for aggregate fees. New England also noted that
practical considerations render the fee limits in the Variable
Contracts Rule ineffective because distribution expenses typically are
not recovered by charging sales loads on premium payments.
b. Limitations on Sales Charges of Underlying Funds. NAVA and New
England believe that sales charge limits on funds underlying variable
annuities would be unnecessary and inconsistent with the 1996 Act. NAVA
notes that the 1996 Act provides that for purposes of the
reasonableness requirement, ``the fees and charges deducted under the
contract shall include all fees and charges imposed for any purpose and
in any manner.'' Allstate stated that specific limits on underlying
funds should not be necessary, but NASD
[[Page 43980]]
Regulation should consider how insurance company issuers are
administering the ``reasonableness'' requirement. The NASD has
determined not to impose sales charge limits in the Investment Company
Rule on funds underlying variable annuities. The Variable Contracts
Rule will continue to apply exclusively to the activities of members in
connection with variable contracts.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the publication of this notice in the Federal
Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. In addition, the Commission solicits
comment on whether the proposed ``grandfather provision'' relating to
the prohibition on loads on reinvested dividends should become
effective as of the date this proposed rule change is approved, or,
rather, as of the date the proposed rule change was filed with the
Commission. 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. 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
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, located at the above address. Copies of such filing
will also be available for inspection and copying at the principal
office of the NASD. All submissions should refer to File No. SR-NASD-
98-14 and should be submitted by September 8, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\4\
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\4\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-21957 Filed 8-14-98; 8:45 am]
BILLING CODE 8010-01-M
