[Federal Register Volume 61, Number 181 (Tuesday, September 17, 1996)]
[Rules and Regulations]
[Pages 49011-49021]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23438]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 239, 270, and 274
[Release Nos. 33-7328; IC-22202; File No. S7-8-95]
RIN 3235-AD18
Exemption for Certain Open-End Management Investment Companies to
Impose Deferred Sales Loads
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 contingent deferred sales
loads to be imposed on the shares of certain registered open-end
management investment companies (``mutual funds'' or ``funds''). The
Commission also is adopting amendments to the registration form for
mutual funds, and publishing a staff guide to the registration form.
The rule amendments allow mutual funds to offer investors a wider
variety of deferred sales loads, including installment loads, and
eliminate certain requirements in the rule. The form amendments modify
the requirements for disclosing deferred sales loads in mutual fund
prospectuses to reflect the changes made by the rule amendments.
EFFECTIVE DATE: The rule and form amendments will become effective
October 17, 1996.
FOR FURTHER INFORMATION CONTACT: Nadya B. Roytblat, Assistant Chief, or
Kenneth J. Berman, Assistant Director, at (202) 942-0690, Office of
Regulatory Policy, Division of Investment Management, Securities and
Exchange Commission, 450 Fifth Street, N.W., Mail Stop 10-2,
Washington, D.C. 20549. Requests for formal interpretive advice should
be directed to the Office of Chief Counsel at (202) 942-0659,
[[Page 49012]]
Division of Investment Management, Securities and Exchange Commission,
450 Fifth Street, N.W., Mail Stop 10-6, Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to
rule 6c-10 [17 CFR 270.6c-10] under the Investment Company Act of 1940
[15 U.S.C. 80a] (the ``Investment Company Act'' or the ``Act''), and to
Form N-1A [17 CFR 239.15A, 274.11A] under the Securities Act of 1933
[15 U.S.C. 77a-77aa] (the ``Securities Act'') and the Investment
Company Act. The Commission also is adopting a conforming amendment to
rule 11a-3 [17 CFR 270.11a-3] under the Investment Company Act.
Table of Contents
I. Executive Summary
II. Background
III. Discussion of Amendments to Rule 6c-10
A. Scope of the Amended Rule
B. Deferred Load Calculation
C. Deferred Loads on Reinvested Distributions
D. ``No-Load'' Labeling
E. Rule 11a-3
IV. Discussion of Revised Disclosure Requirements
A. Changes to the Fee Table and the Example
B. General Prospectus Disclosure
C. Performance Data
1. Total Return
2. Yield
D. Dealer Compensation Disclosure
V. Compliance Date
VI. Cost/Benefit Analysis
VII. Summary of the Regulatory Flexibility Analysis
VIII. Statutory Authority
Text of Rule and Form Amendments
Appendix A--Illustration of Fee Table and Example
Appendix B--Illustration of Fee Table and Example
I. Executive Summary
The Commission is adopting amendments to rule 6c-10 under the
Investment Company Act to remove certain restrictions on the types of
deferred sales loads that may be imposed on the shares of mutual funds.
Rule 6c-10 currently permits only contingent deferred sales loads
(``CDSLs''). A CDSL is paid at redemption, but declines to zero if the
shares are held for a certain period of time. The amendments allow
sales charges paid upon redemption (``back-end loads'') that differ
from CDSLs (e.g., sales loads that do not decline to zero) as well as
loads paid after purchase during the term of a shareholder's investment
in a fund, for example, in installments (``installment loads''). These
new types of deferred sales loads would be alternatives to existing
load structures.
II. Background
The Commission is adopting amendments to rule 6c-10 under the
Investment Company Act, the rule that permits CDSLs to be imposed on
mutual fund shares. The amendments allow funds to offer other types of
deferred sales loads that may provide desirable flexibility for both
investors and funds.
Rule 6c-10 was adopted in February, 1995.1 The rule
essentially codified the conditions in the nearly 300 exemptive orders
permitting CDSLs that had been issued by the Commission since 1981. A
CDSL is paid at redemption, but declines to zero if the shares are held
for a certain period of time. CDSLs typically are imposed in
combination with an asset-based distribution fee charged in accordance
with rule 12b-1 under the Act (``rule 12b-1 fee''),2 an
arrangement commonly called a ``spread load.''
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\1\ Exemption for Certain Open-End Management Investment
Companies to Impose Contingent Deferred Sales Loads, Investment
Company Act Release No. 20916 (Feb. 23, 1995) [60 FR 11887 (Mar. 2,
1995)].
\2\ 17 CFR 270.12b-1.
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Contemporaneously with the adoption of rule 6c-10, the Commission
proposed amendments designed to allow greater flexibility in the types
of deferred sales load structures offered to investors, including loads
payable in installments.3 The Commission also proposed changes to
the prospectus disclosure requirements for deferred loads to complement
the proposed changes to rule 6c-10.
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\3\ Exemption for Certain Open-End Management Investment
Companies to Impose Deferred Sales Loads, Investment Company Act
Release No. 20917 (Feb. 23, 1995) [60 FR 11890 (Mar. 2, 1995)]
[hereinafter Proposing Release].
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The Commission received letters from three commenters, all of which
strongly supported the proposed amendments.4 In addition, when
rule 6c-10 was initially proposed in 1988 to allow various types of
deferred sales charges, the Commission received 33 comments, including
19 comments from individual investors.5 Both in 1988 and in
response to the proposed amendments, commenters indicated that
flexibility in deferred load structures would be desirable for both
funds and investors. Individual investors commenting on the 1988
proposal in particular supported installment loads as an option in
paying a sales charge.6 Some investors, for example, compared
installment loads to front-end loads and preferred the former as
allowing them to defer the payment of a sales charge; others compared
installment loads to rule 12b-1 fees, and believed that installment
loads represent a more precise charge, as well as one that would be
payable within a more definite term.7 The Commission is adopting
the amendments to rule 6c-10, and modifying the prospectus disclosure
requirements to reflect these comments as well as its continued study
of deferred sales charges.
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\4\ The commenters were the American Bar Association
Subcommittee on Investment Companies and Investment Advisers, the
law firm of Davis Polk & Wardwell, and the Investment Company
Institute (``ICI'').
\5\ Exemptions for Certain Registered Open-End Management
Investment Companies to Impose Deferred Sales Loads, Investment
Company Act Release No. 16619 (Nov. 2, 1988) [53 FR 45275 (Nov. 19,
1988)].
\6\ All but one of 19 letters from individual investors favored
installment loads.
\7\ Industry commenters also suggested that installment loads
would offer greater certainty than CDSLs and spread load structures,
thereby making it easier for certain mutual fund sponsors to obtain
financing for their distribution expenses.
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III. Discussion of Amendments to Rule 6c-10
The amendments to rule 6c-10 allow back-end sales loads other than
CDSLs, as well as loads payable during the term of a shareholder's
investment in a fund, such as in installments. The amendments remove
certain requirements in the rule regarding the way in which a load must
be calculated, as well as the current prohibition on imposing deferred
sales loads on shares purchased through reinvested dividends and other
distributions. The terms of any deferred sales load, however, must be
covered by the NASD Sales Charge Rule.8
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\8\ The NASD Sales Charge Rule prohibits NASD members from
offering or selling shares of a mutual fund if the sales charges
described in the fund's prospectus are excessive. Aggregate sales
charges are deemed excessive under the Rule if they do not conform
to the specific provisions set forth in the Rule. NASD Conduct
Rules, Rule 2830(d) (1) and (2).
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A. Scope of the Amended Rule
The rule as amended defines a deferred sales load as any amount
properly chargeable to sales or promotional expenses that is paid by a
shareholder after purchase but before or upon redemption.\9\ The
definition includes CDSLs as well as loads paid at redemption whose
amount may remain the same or change over time in a manner different
from a CDSL, for
[[Page 49013]]
example, not decline to zero. The definition also includes loads paid
after purchase during the term of a shareholder's investment in a fund,
such as in one or more installments that may (or may not) be
accelerated upon early redemption.\10\
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\9\ Paragraph (b)(3) of rule 6c-10 as amended. The rule is not
applicable to certain charges that may be imposed by a mutual fund
to compensate the fund for the cost of redeeming shares and that are
paid directly to the fund. See, e.g., rule 11a-3 under the Act [17
CFR 270.11a-3(a)(7)] (defining a ``redemption fee''). The Commission
staff has taken the position that these charges may be imposed
without the need for exemptive relief under the Act. See, e.g., John
P. Reilly & Associates (pub. avail. July 12, 1979).
\10\ The NASD Sales Charge Rule currently governs only deferred
loads ``deducted from the proceeds of the redemption of shares by an
investor.'' NASD Conduct Rules, Rule 2830(b)(8)(B). A deferred load
paid other than upon redemption (e.g., an installment load) would
fall outside the current definition and would not be covered by the
Rule. Therefore, such a load could not be imposed until the NASD
Sales Charge Rule is amended to cover it. The Commission staff has
requested the NASD to review its Sales Charge Rule in light of the
amendments to rule 6c-10.
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Rule 6c-10 does not apply to insurance company separate accounts,
which are permitted to deduct deferred loads under an existing
rule,\11\ or unit investment trusts (``UITs''). While commenters
generally supported extending the rule to UITs, they identified issues
related to disclosure, the method for calculating deferred sales loads
and the interplay of rules 6c-10 and 11a-3 (the Investment Company Act
rule governing exchanges of fund shares) \12\ that are unique to UITs.
The Commission will continue to study these issues, consider
applications for exemptive orders \13\ and, if appropriate, propose
amendments that would extend rule 6c-10 to UITs.
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\11\ Rule 6c-8 under the Act [17 CFR 270.6c-8].
\12\ 17 CFR 270.11a-3.
\13\ See, e.g., Merrill Lynch, Pierce, Fenner & Smith, Inc.,
Investment Company Act Release Nos. 13801 (Feb. 29, 1984) [49 FR
8512 (Mar. 7, 1984)] (Notice of Application) and 13848 (Mar. 27,
1984) [30 SEC Docket 192] (Order), and 15120 (May 29, 1986) [51 FR
20389 (June 4, 1986)] (Notice of Application) and 15167 (June 24,
1986) [35 SEC Docket 1735] (Order); PaineWebber, Inc., Investment
Company Act Release Nos. 20755 (Dec. 6, 1994) [59 FR 64003 (Dec. 12,
1994)] (Notice of Application) and 20819 (Jan. 4, 1995) [58 SEC
Docket 1504] (Order) (allowing UITs to impose deferred sales loads
payable in installments).
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B. Deferred Load Calculation
Rule 6c-10 currently contains two requirements relating to the
calculation of CDSLs. Under the first requirement, a CDSL must be based
on the lesser of the NAV of the shares at the time of purchase or the
NAV at the time of redemption.\14\ Under the second requirement, in a
partial redemption, the CDSL must be calculated by treating as
redeemed, first shares not subject to a load, and second other shares
as if redeemed in the order they were purchased.\15\
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\14\ Rule 6c-10(a)(1) [17 CFR 270.6c-10(a)(1)].
\15\ Rule 6c-10(a)(3) [17 CFR 270.6c-10(a)(3)].
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The Commission is eliminating both of these requirements and
deferring to the NASD to address these matters in its Sales Charge
Rule. The Commission is, however, limiting the amount of a deferred
sales load to an amount not to exceed a specified percentage of the NAV
of the fund's shares at the time of purchase.\16\ The effect of this
provision would be to require that investors be given the benefit, if
any, of deferring the load payment should there be an increase in the
shares' NAV.
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\16\ The deferred load amount will be specified by the fund in
its prospectus. See infra section IV.A.
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The Commission had proposed allowing a deferred load also to be
based on the higher of the NAV at the time of purchase or at the time
the load is paid.\17\ None of the commenters specifically addressed the
higher of standard. Upon reconsideration of the issue, the Commission
believes that allowing the higher of standard would be inconsistent
with the intent of the proposal and the approach the Commission has
taken to deferred loads generally.\18\ Allowing the higher of standard
would leave investors uncertain about the amount of the deferred load
they would pay and significantly reduce their ability to compare the
amounts they would pay under different load structures.
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\17\ For example, if a shareholder makes a $1000 investment that
subsequently increases in value to $2,000 by the time the
shareholder redeems his shares, a 3% deferred load based on the
higher of standard would result in the shareholder paying a $60
deferred load (3% of $2,000), which is 6% of the initial $1,000
investment.
\18\ See, e.g., Exemptive Relief for Separate Accounts to Impose
A Deferred Sales Load on Variable Annuity Contracts Participating in
Such Accounts and to Deduct from Such Contracts in Certain Instances
an Annual Fee for Administrative Services That is Not Prorated,
Investment Company Act Release No. 13048 (Feb. 28, 1983) [48 FR
9532, 9534 (Mar. 7, 1983)] (adopting rule 6c-8 and noting that a
deferred load is intended to reimburse the same expenses as a front-
end load).
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Rule 6c-10, as amended, permits any deferred load in the amount not
greater than a specified percentage of the NAV at the time of
purchase.\19\ This approach is consistent with existing deferred load
structures, and will permit deferred loads to be charged on the same
basis as front-end loads. This approach also will assure that investors
receive the benefit of any growth in the NAV subsequent to purchasing
the shares,\20\ and facilitate investor comparisons of sales load
structures. Unlike the current requirements, whereby fund underwriters
bear the risk of a decrease in NAV (because the amount of the deferred
load is based on the lesser of the NAV at the time of purchase or
redemption), amended rule 6c-10 will permit fund underwriters to
receive the amount they would have received had the sales load been
charged at the time of purchase.
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\19\ Paragraph (a)(1) of rule 6c-10 as amended. The requirement
that the deferred load amount not exceed a ``specified percentage''
of the NAV at the time of purchase does not mean that the load may
not be based on a percentage of the NAV at the time the load is
paid, even if the NAV at the time the load is paid is greater than
the NAV at the time of purchase. The total amount of the load paid
by an investor, however, could not exceed the amount represented by
the specified percentage of the shares' offering price. Thus, if the
final installment of an installment load would result in the
investor paying more than the amount permitted by the rule, the
amount of the final installment would have to be reduced
accordingly.
\20\ Industry representatives have suggested that the principal
benefit of a deferred sales load is that it allows all of an
investor's funds to ``go to work'' immediately rather than being
deducted to pay sales charges. If the deferred sales load is based
on the NAV at the time of payment, and the NAV has increased because
of investment gains, any benefit that would have inured to the
investor as a result of deferring the load payment would be
collected by the fund's distributor when the load is paid.
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The amended rule does not require any particular method of
collecting installment loads. Installment load payments could be
collected, for example, out of distributions, by automatic redemptions,
or through separate billing of an investor's account. Different methods
of collecting installment load payments could result in different tax
consequences for investors.\21\ The method used, and any material tax
consequences of such method, must be described in the fund's
prospectus.\22\
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\21\ Commenters have pointed out, for example, that payment
through automatic redemptions would mean that a shareholder might
incur a capital gain or loss on each such redemption; if additional
shares then were purchased by the shareholder within 30 days of the
automatic redemption, any capital loss might be disallowed under the
``wash sale'' rule contained in the Internal Revenue Code. See,
e.g., Letter from the ICI to Jonathan G. Katz, Secretary, SEC (Jan.
9, 1989), File No. S7-8-95.
\22\ See infra section IV.A.
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C. Deferred Loads on Reinvested Distributions
Rule 6c-10 currently prohibits CDSLs to be imposed on shares
purchased through the reinvestment of dividends or capital gains
distributions.23 The Commission proposed to delete this
prohibition from the rule. The Commission reasoned, and the commenters
agreed, that this prohibition is unnecessary so long as a fund
appropriately discloses the manner in which loads are assessed and so
long as mutual fund sales loads are subject to the limits in the NASD
Sales Charge Rule. The prohibition has been deleted from the rule as
amended.
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\23\ Rule 6c-10(a)(2) [17 CFR 270.6c-10(a)(2)].
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The NASD Sales Charge Rule currently does not cover deferred loads
on reinvested dividends, nor loads on reinvested capital gains
distributions or
[[Page 49014]]
returns of capital.24 Under amended rule 6c-10, therefore,
deferred loads may not be imposed on shares purchased with reinvested
distributions unless and until the NASD amends its Sales Charge Rule to
address this issue. Should the NASD Sales Charge Rule be so amended,
the prospectus disclosure requirements will require deferred sales
charges on shares purchased with reinvested dividends and other
distributions to be disclosed in fund prospectuses.25
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\24\ A return of capital generally occurs when a fund's
distribution exceeds the fund's aggregate amount of undistributed
net taxable income and net realized capital gains. See
Determination, Disclosure, and Financial Statement Presentation of
Income, Capital Gain, and Return of Capital Distributions by
Investment Companies, American Institute of Certified Public
Accountants, Statement of Position 93-2, 8 (Feb. 1, 1993).
\25\ See infra section IV.B.
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D. ``No-Load'' Labeling
The NASD Sales Charge Rule expressly prohibits NASD members and
their associated persons from describing a mutual fund as ``no load''
or as having ``no sales charge'' if the fund imposes a front-end load,
a back-end load, or a rule 12b-1 and/or service fee that exceeds .25%
of average net assets per year.26 When adopting rule 6c-10, the
Commission concluded that it was unnecessary to retain the provision in
the proposed rule which contained a similar ``no-load'' labeling
prohibition for a fund whose shares are subject to a CDSL. The
prohibition similarly is unnecessary for funds whose shares are subject
to deferred loads other than CDSLs under today's amendments to rule 6c-
10. If the NASD amends its Sales Charge Rule to permit installment
loads, the Commission anticipates that the NASD would address the
applicability of its ``no-load'' labeling policy to funds whose shares
are subject to such loads. The Commission reiterates that it would be
misleading and a violation of the federal securities laws for a mutual
fund whose shares are subject to a deferred sales load to be held out
to the public as a no-load fund.27
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\26\ NASD Conduct Rules, Rule 2830(d)(3).
\27\ See Proposing Release, supra note , at 11893.
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E. Rule 11a-3
The Commission requested comment whether the definition of deferred
sales load in rule 11a-3 under the Investment Company Act, governing
exchanges of fund shares, should be amended to correspond expressly
with the proposed definition in rule 6c-10. Commenters favored amending
the definition in rule 11a-3 to avoid any confusion over the
interaction of rules 6c-10 and 11a-3. The Commission is adopting the
conforming amendment.28
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\28\ Paragraph (a)(3) of rule 11a-3 as amended. 17 CFR 270.11a-
3. Commenters also suggested other, substantive amendments to rule
11a-3. The Commission will continue to study the issues raised by
the commenters and consider them in the context of a separate
proposal.
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IV. Discussion of Revised Disclosure Requirements
The Commission is tailoring the prospectus disclosure requirements
applicable to deferred sales loads in light of the changes to rule 6c-
10 discussed above. These modifications relate to the disclosure of
deferred sales loads in the fee table and the example in the front of
fund prospectuses. The modifications also relate to the general
prospectus disclosure about the deferred load calculation and payment.
Finally, the amendments address the manner in which deferred sales
loads are required to be reflected in calculations of fund performance
data.
A. Changes to the Fee Table and the Example
The front part of every mutual fund prospectus is required to
contain a fee table--a tabular presentation of the transactional
expenses paid by an investor, such as sales loads, and the annual fund
operating expenses, such as management and any rule 12b-1 fees. The fee
table is followed by an example that sets forth the cumulative amount
of various fund expenses over one, three, five and ten year periods
based on a hypothetical investment of $1000 and an annual 5% return
(``Example''). The Example was intended to provide a relatively
straight-forward means for investors to compare the expense levels of
funds with different fee structures over varying time periods.
The fee table requirements in Item 2 of Form N-1A, among other
things, currently require a line showing the maximum sales load imposed
on purchases (i.e., a front-end load) and a separate line showing any
deferred sales load based on the purchase price or redemption proceeds.
The fee table currently does not contemplate deferred loads payable
other than upon redemption (e.g., in installments) and based on a share
price or NAV other than that at purchase or redemption (i.e., at the
time an installment is paid). Similarly, Instructions to the Example
currently refer only to CDSLs.
The Commission proposed to amend the deferred sales load line in
the fee table so that the total installment load or the maximum
contingent deferred load (expressed as a percentage) would be shown
there. Specifically, the Commission proposed to replace most of the
current wording inside the parentheses following the words ``Deferred
Sales Load'' with a blank, requiring funds to insert the appropriate
description of the basis on which the load is computed. The Commission
is adopting this amendment.29 The Commission also is amending
Instruction 14(f) to Item 2 of Form N-1A to require deferred loads
other than CDSLs to be reflected in the Example as well.30
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\29\ The ``Deferred Sales Load'' line also is redesignated
``Maximum Deferred Sales Load.''
\30\ Amended Instruction 14(f) to Item 2 also requires a
deferred load that is calculated based on the shares' NAV at the
time the load is paid to be based on an account value that
incorporates the 5% annual return for each year during the period.
Under amended rule 6c-10, a deferred load may be calculated based on
the NAV at the time the load is paid, even if the NAV at the time
the load is paid is greater than the NAV at the purchase, provided
the total amount of the deferred load paid by an investor does not
exceed the amount represented by the specified percentage of the
offering price. See supra note 19.
In addition, as suggested by a commenter, the Commission is
clarifying that any deferred sales load, whether based on the offering
price or on the NAV, be shown in the fee table as a percentage of the
offering price. This is the same basis on which front-end loads are
presented.31 This presentation is intended to enable investors to
better compare sales loads (whether front-end or deferred), since the
percentage will be based on the same amount (the offering price).
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\31\ A fund that calculates its deferred load on the basis of
the NAV at the time of purchase that does not equal the offering
price (i.e., a fund with a front-end load), should explain in the
prospectus, in response to new Item 7(g) of Form N-1A, that the load
amount paid by investors is the same even though the percentage
amount used in load calculations is different from that shown in the
fee table.
When a combination of sales loads is imposed on a fund's shares
(e.g., a 1% front-end and a 5% deferred load), the fee table is
required to include a ``Maximum Sales Load'' line showing the
cumulative percentage of those charges; the terms of the particular
sales charges comprising that figure must be shown on separate lines
underneath the ``Maximum Sales Load'' line. This format is designed to
enable investors to better appreciate the cumulative effect of the
sales charges and compare one fund's sales charges to another's.
Finally, as proposed, the Commission is allowing funds to include
within the larger fee table a tabular presentation of the schedule of a
deferred sales load, including installment payments.32
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\32\ As currently required by Instruction 1 to the fee table, a
fund also must provide a reference following the fee table to the
discussion of any scheduled sales load variations and other
information about installment loads elsewhere in the prospectus.
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[[Page 49015]]
With regard to loads on shares purchased with reinvested
distributions, the fee table currently includes a line showing the
``Maximum Sales Load on Reinvested Dividends (as a percentage of the
offering price).'' The current format does not contemplate deferred
loads on reinvested capital gains distributions and returns of capital,
nor loads based on a price other than the offering price. The
Commission is modifying this line in the fee table to read ``Maximum
Sales Load on Reinvested Dividends [and other Distributions]'' and is
replacing most of the current wording in the parenthetical with a
blank. A fund that charges a deferred load on shares purchased with
reinvested capital gains distributions or returns of capital would
include the bracketed words in the caption. Funds will fill in the
blank in the parenthetical with the basis on which the load is
computed. A conforming amendment is made to Instruction 14(d) regarding
disclosure in the Example of deferred sales loads on shares purchased
with reinvested distributions.
An illustration of fee table disclosure reflecting the amendments
adopted today, and suggested calculation methodologies for the Example,
appear as Appendices A and B to this Release.
B. General Prospectus Disclosure
As proposed, the Commission is amending prospectus disclosure
requirements concerning the way in which a specific fund's deferred
sales load is imposed and computed.33 New Item 7(g) of Form N-1A
covers many operational details that have been mandatory for all funds
under current rule 6c-10 but are now subject to greater flexibility
under the amendments. These details include the price on which the load
is based, whether deferred sales loads may be imposed on shares
acquired through reinvested distributions, and the way in which the
load is calculated. In a change from the proposal, a deferred load
calculated based on the offering price or the NAV at the time of
purchase must be presented both as a percentage of the offering price
and of the NAV. This disclosure will demonstrate that, although the
percentage amount used in load calculation and that shown in the fee
table may be different, the dollar amount of the load paid by the
investor is the same.
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\33\ The Commission also is amending Instruction 2 to Item 5A of
Form N-1A, Management's Discussion of Fund Performance, to require
that deferred loads charged other than upon redemption (i.e.,
installment loads) be reflected in the line graph showing fund
performance. This change is similar to the amendment to Instruction
14(f) to Item 2 discussed in section IV.A above.
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If a deferred load is charged on shares acquired through reinvested
dividends or other distributions, Item 7(g) requires a statement to
that effect, but it does not require this disclosure if the fund does
not charge such a load. Item 7(g) also requires an explanation of the
way(s) in which a shareholder may be required to pay an installment
load, such as through the withholding of dividend payments, involuntary
redemptions, or separate billing of an investor's account. Because
different methods of collecting load payments could carry different
potential tax consequences for investors, the Commission also is
publishing a revision to staff Guide 30 of the Guidelines for Form N-1A
to require funds to describe briefly in the prospectus any material tax
consequences for investors related to an installment load.34
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\34\ See supra note 21 and accompanying text.
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C. Performance Data
1. Total Return
The Commission is amending Instruction 1 to Item 22(b)(i) of Form
N-1A, as proposed, to require deferred sales loads to be included in
calculations of advertised total return data. The amendment requires
the calculation to be based on the deduction of the maximum amount of a
deferred sales load at the times, in the amounts, and under the terms
disclosed in the prospectus.
2. Yield
CDSLs currently are not included in advertised yield calculations.
Under existing rule 482(a)(6) under the Securities Act, however,
advertisements containing yield data must disclose the maximum amount
of a CDSL, state that the performance figures do not reflect the load
and that, if reflected, the load would reduce the quoted
performance.\35\ In addition, rule 12b-1 fees that usually accompany
CDSLs are required to be included in the numerator in the yield formula
in Item 22(b)(ii) of Form N-1A as expenses, and thereby reflected in
the yield data. The amendments will not change the current approach
with regard to CDSLs.
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\35\ 17 CFR 230.482(a)(6).
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With regard to installment loads, the Commission requested comment
on two possible approaches to including them in the yield formula. The
first approach, modeled on the existing treatment of front-end loads,
would require that the total installment load be added to the NAV to
reach an assumed ``offering price'' in the denominator in the yield
formula (the ``gross-up'' approach). Under the second approach, a
thirty-day percentage amount of an installment load would be included
as an expense in calculating the yield formula (similar to the manner
in which rule 12b-1 fees are treated). This method would understate the
yield for those shareholders that have completed paying the installment
load.\36\
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\36\ This method also would have suggested that installment
loads should be reflected in a fund's expense ratio as are rule 12b-
1 fees. It is more appropriate, however, for transaction-specific
expenses such as installment loads to be considered separately
rather than as a component of the fund's expense structure.
---------------------------------------------------------------------------
Commenters believed that installment loads should not be reflected
in yield calculations, but that performance data should be accompanied
by disclosure of the existence of an installment load pursuant to rule
482(a)(6) under the Securities Act. The Commission, however, has
determined that installment loads should be reflected in fund yield
calculations, and that the ``gross-up'' approach is the most
appropriate way to do so. The fixed percentage amounts of installment
loads, and the certainty that the load will be paid, suggest similarity
to front-end loads. Installment loads also are assessed on the
shareholder account level, rather than deducted from fund assets as is
the case for rule 12b-1 fees. Therefore, new Instruction 10 is added to
Item 22(b)(ii) of Form N-1A to require installment loads to be
reflected in the yield calculations based on the gross-up approach.
D. Dealer Compensation Disclosure
Deferred sales charges are used to pay for a fund's sales or
promotional expenses, including commissions to persons who sell fund
shares. The amount of commissions paid from front-end sales loads and
rule 12b-1 fees currently is required to be disclosed in fund
prospectuses.\37\ The Commission requested comment whether it should
amend Item 7(b)(iv) of Form N-1A to require funds that impose deferred
sales loads to provide disclosure about the commissions comparable to
that now provided by funds with front-end loads. Alternatively, the
Commission requested comment whether proposed new Item 7(g) of Form N-
1A should be modified to require this disclosure.
---------------------------------------------------------------------------
\37\ Item 7(b)(iv) of Form N-1A requires funds to show in a
tabular format in the prospectus the sales load reallowed to dealers
as a percentage of the public offering price. Item 7(c) requires
similar disclosure for payments to dealers from rule 12b-1 fees.
---------------------------------------------------------------------------
Commenters generally opposed any changes from the current
disclosure requirements for dealer compensation.
[[Page 49016]]
They pointed out that the NASD currently is studying dealer
compensation practices and that related disclosure issues would best be
addressed in that context. The Commission will consider revisiting the
issue of dealer compensation disclosure in fund prospectuses after the
NASD has had an opportunity to complete its study and after further
experience with installment loads.
V. Compliance Date
The rule and form amendments will become effective thirty days
after publication in the Federal Register. Funds may begin to comply
with amended rule 6c-10 on the effective date. Funds that have received
exemptive orders allowing deferred sales loads may continue to rely on
those orders for all the funds covered by the order.
Registration statements and post-effective amendments filed with
the Commission, and yield quotations appearing in fund advertisements
or other sales literature, after the effective date must be in
compliance with the form amendments. Post-effective amendments made for
the purpose of complying with the amendments to Form N-1A may be made
pursuant to the immediate effectiveness provisions of rule 485(b) under
the Securities Act [17 CFR 230.485(b)], provided the post-effective
amendment otherwise meets the conditions for immediate effectiveness
under that rule.
VI. Cost/Benefit Analysis
The amendments to rule 6c-10 and Form N-1A should not impose any
significant burdens on mutual funds. Rather, the amendments should
benefit funds by providing them with alternatives in financing their
sales and promotional expenses. The amendments also will enable
investors to defer the payment of a sales charge on the purchase of
mutual fund shares until redemption or over one or more installment
payments during the term of their investment.
VII. Summary of the Regulatory Flexibility Analysis
A summary of the Initial Regulatory Flexibility Analysis, which was
prepared in accordance with 5 U.S.C. 603, was published in Investment
Company Act Release No. 20917. No comments were received on that
analysis. The Commission has prepared a Final Regulatory Flexibility
Analysis in accordance with 5 U.S.C. 604. The Analysis explains that
the amendments to rule 6c-10 allow mutual funds to impose deferred
sales loads other than CDSLs and remove certain restrictions in the
rule. The Analysis further explains that the amendments to Form N-1A
modify the prospectus disclosure requirements for deferred loads to
reflect the changes to rule 6c-10, but provide for disclosure similar
to that currently made by funds and, therefore, do not impose any
additional burdens. A copy of the Analysis may be obtained by
contacting Nadya B. Roytblat, Mail Stop 10-2, Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
VIII. Statutory Authority
The Commission is adopting the amendments to rules 6c-10 and 11a-3
under sections 6(c), 11(a) and 38(a) of the Investment Company Act [15
U.S.C. 80a-6(c), -11(a), and -37(a)]. The authority citations for the
amendments to Form N-1A precede the text of the amendments.
List of Subjects in 17 CFR Parts 239, 270 and 274
Investment companies, Reporting and recordkeeping requirements,
Securities.
Text of Rule and Form 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 270.6c-10 is revised to read as follows:
Sec. 270.6c-10 Exemption for certain open-end management investment
companies to impose deferred sales loads.
(a) A company and any exempted person shall be exempt from the
provisions of sections 2(a)(32), 2(a)(35), and 22(d) of the Act [15
U.S.C. 80a-2(a)(32), 80a-2(a)(35), and 80a-22(d), respectively] and
Sec. 270.22c-1 to the extent necessary to permit a deferred sales load
to be imposed on shares issued by the company, Provided, that:
(1) The amount of the deferred sales load does not exceed a
specified percentage of the net asset value or the offering price at
the time of purchase;
(2) The terms of the deferred sales load are covered by the
provisions of Rule 2830 of the Conduct Rules of the National
Association of Securities Dealers, Inc.; and
(3) The same deferred sales load is imposed on all shareholders,
except that scheduled variations in or elimination of a deferred sales
load may be offered to a particular class of shareholders or
transactions, Provided, that the conditions in Sec. 270.22d-1 are
satisfied. Nothing in this paragraph (a) shall prevent a company from
offering to existing shareholders a new scheduled variation that would
waive or reduce the amount of a deferred sales load not yet paid.
(b) For purposes of this section:
(1) Company means a registered open-end management investment
company, other than a registered separate account, and includes a
separate series of the company;
(2) Exempted person means any principal underwriter of, dealer in,
and any other person authorized to consummate transactions in,
securities issued by a company; and
(3) Deferred sales load means any amount properly chargeable to
sales or promotional expenses that is paid by a shareholder after
purchase but before or upon redemption.
3. Section 270.11a-3 is amended by revising paragraph (a)(3) to
read as follows:
Sec. 270.11a-3 Offers of exchange by open-end investment companies
other than separate accounts.
(a) * * *
(3) Deferred sales load means any amount properly chargeable to
sales or promotional expenses that is paid by a shareholder after
purchase but before or upon redemption;
* * * * *
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940
4. The authority citation for Part 239 continues to read, in part,
as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77sss, 78c, 78l,
78m, 78n, 78o(d), 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 79l, 79m,
79n, 79q, 79t, 80a-8, 80a-29, 80a-30 and 80a-37, unless otherwise
noted.
* * * * *
5. The authority citation for Part 274 continues to read as
follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m,
78n, 78o(d), 80a-8, 80a-24, and 80a-29, unless otherwise noted.
Note: Form N-1A does not, and the amendments will not, appear in
the Code of Federal Regulations.
6. Item 2 of Part A of Form N-1A [referenced in sections 239.15A
and
[[Page 49017]]
274.11A] is amended by revising the caption ``Deferred Sales Load'' and
the parenthetical after such caption in paragraph (a)(i), and revising
the caption ``Maximum Sales Load Imposed on Reinvested Dividends'' and
the parenthetical in paragraph (a)(i), Instruction 5, the parenthetical
in Instruction 14(d), and Instruction 14(f) to read as follows:
Form N-1A
* * * * *
Part A. Information Required in a Prospectus
* * * * *
Item 2. Synopsis
(a)(i) * * *
* * * * *
Shareholder Transaction Expenses
* * * * *
Maximum Deferred Sales Load (as a percentage of
____________)............%
Maximum Sales Load Imposed on Reinvested Dividends [and other
Distributions]............% (as a percentage of____________)
* * * * *
Instructions:
* * * * *
Shareholder Transaction Expenses
5. ``Maximum Deferred Sales Load'' includes the maximum total
deferred sales load payable upon redemption, in installments, or
both, expressed as a percentage of the amount or amounts stated in
response to Item 7(g), provided that a sales load that is based on
the net asset value at the time of purchase shall be expressed as a
percentage of the offering price at the time of purchase. The fee
table may include a tabular presentation, within the larger table,
of the range over time of any deferred sales load (such as a
contingent deferred sales load) that may change over time, or a
schedule of any installment load payments.
If more than one type of sales load is charged (e.g., a deferred
sales load and a front-end sales load), the first line in the table
should read ``Maximum Sales Load'' and show the maximum cumulative
percentage. Show the percentage amounts and the terms of each sales
charge comprising that figure on separate lines just below.
If a sales charge is imposed on shares purchased with reinvested
capital gains distributions or returns of capital, the third line in
the table should include the bracketed words.
* * * * *
Example
14. For purposes of the Example in the table:
* * * * *
(d)* * * (A Registrant that charges a sales load on shares
purchased with reinvested dividends or other distributions should
not reflect these fees in the Example, but should explain in the
brief narrative following the table that the Example does not
reflect these fees and that the amounts shown would be increased if
the fees were reflected.)
* * * * *
(f) Reflect any contingent deferred sales load by assuming
redemption of the entire account on the last day of the year;
reflect any other type of deferred sales load as being paid at the
end of the year in which it is due. In the case of a deferred sales
load that is based on the Registrant's net asset value at the time
of payment, assume that the net asset value at the end of each year
includes the assumed 5% annual return for that and each preceding
year.
* * * * *
7. Instruction 2 to Item 5A of Part A of Form N-1A [referenced in
sections 239.15A and 274.11A] is amended by removing the phrase ``(or
other amounts at redemption or upon closing of an account)'' in the
third sentence and adding at the end a sentence to read as follows:
Form N-1A
* * * * *
Part A. Information Required in a Prospectus
* * * * *
Item 5A. Management's Discussion of Fund Performance
* * * * *
Instructions:
* * * * *
2. Sales Load. * * * In the case of any other deferred sales
load, assume the deduction in the amount(s) and at the time(s) the
load actually would have been deducted.
* * * * *
8. Item 7 of Part A of Form N-1A [referenced in sections 239.15A
and 274.11A] is amended by removing the word ``and'' at the end of
paragraph (e), removing the period at the end of paragraph (f) and
adding ``; and'' in its place, and adding paragraph (g) to read as
follows:
Form N-1A
* * * * *
Part A. Information Required in a Prospectus
* * * * *
Item 7. Purchase of Securities Being Offered
* * * * *
(g) a concise explanation of the way in which any deferred sales
load is imposed and computed, including: (i) an explanation of the
basis on which the specified percentage is calculated (i.e., the
offering price, or the lesser of the offering price or the net asset
value at the time the load is paid); (ii) the sales charges as a
percentage of both the offering price and the net asset value at the
time of purchase; (iii) if the method of determining the amount of
the load results in the load being applied to shares or amounts
representing shares acquired through the reinvestment of dividends
or other distributions, a statement to that effect; (iv) a
description of the way in which the load is calculated (e.g., in the
case of a partial redemption, whether or not the load is calculated
as if shares or amounts representing shares not subject to a load
are redeemed first, and other shares or amounts representing shares
are then redeemed in the order purchased); and (v) if applicable, an
explanation of the way(s) in which a shareholder may be required to
pay an installment load (e.g., through the withholding of dividend
payments, involuntary redemptions, separate billing of an investor's
account).
9. Item 22 of Part B of Form N-1A [referenced in sections 239.15A
and 274.11A] is amended by adding a sentence to the end of Instruction
1 to paragraph (b)(i) and an Instruction 10 to paragraph (b)(ii) to
read as follows:
Form N-1A
* * * * *
Part B. Information Required in a Statement of Additional
Information
* * * * *
Item 22. Calculation of Performance Data
* * * * *
(b) Other Registrants
(i) Total Return * * *
Instructions:
1. * * * If shareholders are charged a deferred sales load,
assume the maximum deferred sales load is deducted at the times, in
the amounts, and under the terms disclosed in the prospectus.
* * * * *
(ii) Yield * * *
Instructions:
* * * * *
10. If a Registrant (other than a Registrant described in
paragraph (a)) imposes, in connection with sales of its shares, a
deferred sales load payable in installments, the ``maximum public
offering price'' shall include the aggregate amount of such
installments (``installment load amount'').
10. Guide 30 to Form N-1A [referenced in sections 239.15A and
274.11A] is amended by adding a paragraph before the last paragraph to
read as follows:
Guidelines for Form N-1A
* * * * *
Guide 30. Tax Consequences
* * * * *
If the registrant imposes a sales load payable in installments
on the securities being offered, the registrant must describe
briefly in response to Item 6 any related material tax consequences
for investors.
* * * * *
By the Commission.
Dated: September 9, 1996.
Margaret H. McFarland,
Deputy Secretary.
BILLING CODE 8010-01-P
[[Page 49018]]
[GRAPHIC] [TIFF OMITTED] TR17SE96.000
BILLING CODE 8010-01-C
[[Page 49019]]
Appendix A Continued.--Example Calculations
Assuming Redemption at the End of Each Time Period
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Annual
Ending Average value Annual Deferred deferred Amount
Year Amount invested- Front-end load= Beginning value+(5%-1.4%)= value x 1.4%= expenses load @ load shown in
redemption installment table
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
(1)................................. $1,000.00- $10.00= $990.00+$35.64= $1,025.64 $1,007.82 $14.11 $50.00 [$10.00] $74
(2)................................. ....................... ..................... $1,015.64+$36.56= $1,052.20 $1,033.92 $14.47 $40.00 [$10.00] ..........
(3)................................. ....................... ..................... $1,042.20+$37.52= $1,079.72 $1,060.96 $14.85 $30.00 [$10.00] $103
(4)................................. ....................... ..................... $1,069.72+$38.51= $1,108.22 $1,088.98 $15.25 $20.00 [$10.00] ..........
(5)................................. ....................... ..................... $1,098.22+$39.54= $1,137.76 $1,117.99 $15.65 $10.00 [$10.00] $134
(6)................................. ....................... ..................... $1,127.76+$40.60= $1,168.36 $1,148.06 $16.07 .......... ........... ..........
(7)................................. ....................... ..................... $1,168.36+$42.06= $1,210.42 $1,189.39 $16.65 .......... ........... ..........
(8)................................. ....................... ..................... $1,210.42+$43.58= $1,254.00 $1,232.21 $17.25 .......... ........... ..........
(9)................................. ....................... ..................... $1,254.00+$45.14= $1,299.41 $1,276.57 $17.87 .......... ........... ..........
(10)................................ ....................... ..................... $1,299.14+$46.77= $1,345.91 $1,322.52 $18.52 .......... ........... $221
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Assuming No Redemption
--------------------------------------------------------------------------------------------------------------------------------------------------------
Annual
Amount invested- Front-end Beginning value+(5%- Ending Average value Annual deferred Amount
Year load= 1.4%)= value x 1.4%= expenses load shown in
installment table
--------------------------------------------------------------------------------------------------------------------------------------------------------
(1).......................... $1,000.00- $10.00= $990.00+$35.64= $1,025.64 $1,007.82 $14.11 $10.00 $34
(2).......................... ............... ............. $1,015.64+$36.56= $1,052.20 $1,033.92 $14.47 $10.00
(3).......................... ............... ............. $1,042.20+$37.52= $1,079.72 $1,060.96 $14.85 $10.00 $83
(4).......................... ............... ............. $1,069.72+$38.51= $1,108.22 $1,088.98 $15.25 $10.00 ..........
(5).......................... ............... ............. $1,098.22+$39.54= $1,137.76 $1,117.99 $15.65 $10.00 $134
(6).......................... ............... ............. $1,127.76+$40.60= $1,168.36 $1,148.06 $16.07 ........... ..........
(7).......................... ............... ............. $1,168.36+$42.06= $1,210.42 $1,189.39 $16.65 ........... ..........
(8).......................... ............... ............. $1,210.42+$43.58= $1,254.00 $1,232.21 $17.25 ........... ..........
(9).......................... ............... ............. $1,254.00+$45.14= $1,299.14 $1,276.57 $17.87 ........... ..........
(10)......................... ............... ............. $1,299.14+$46.77= $1,345.91 $1,322.52 $18.52 ........... $221
--------------------------------------------------------------------------------------------------------------------------------------------------------
BILLING CODE 8010-01-P
[[Page 49020]]
[GRAPHIC] [TIFF OMITTED] TR17SE96.001
BILLING CODE 8010-01-C
[[Page 49021]]
Appendix B Continued.--Example Calculations
Assuming Redemption at the End of Each Time Period
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Average Amount
Year Amount invested Front-end load = Beginning value+(5%-1.9%) = Ending value x 1.9% Annual Deferred shown in
value = expenses load table
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
(1)................................... $1,000.00- $0.00= $1,000.00+31.00= $1,031.00 $1,015.50 $19.29 $50.00 $69
(2)................................... ......................... ...................... 1,031.00+31.96= 1,062.96 1,046.98 19.89 40.00 ...........
(3)................................... ......................... ...................... 1,062.96+32.95= 1,095.91 1,079.44 20.51 30.00 90
(4)................................... ......................... ...................... 1,095.91+33.97= 1,129.88 1,112.90 21.15 20.00 ...........
(5)................................... ......................... ...................... 1,129.88+35.03= 1,164.91 1,147.39 21.80 10.00 113
(6)................................... ......................... ...................... 1,164.91+36.11= 1,201.02 1,182.97 22.48 ........... ...........
(7)................................... ......................... ...................... 1,201.02+37.23= 1,238.25 1,219.64 23.17 ........... ...........
(8)................................... ......................... ...................... 1,238.25+38.39= 1,276.64 1,257.44 23.89 ........... ...........
(9)................................... ......................... ...................... 1,276.64+39.58= 1,316.22 1,296.43 24.63 ........... ...........
(10).................................. ......................... ...................... 1,316.22+40.80= 1,357.02 1,336.62 25.40 ........... 222
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Assuming No Redemption
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Average Amount
Year Amount invested Front-end load = Beginning value+(5%-1.9%) = Ending value x 1.9% Annual Deferred shown in
value = expenses load table
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
(1)................................... $1,000.00- $0.00= $1,000+31.00= $1,031.00 $1,015.50 $19.29 $0.00 $19
(2)................................... ......................... ...................... 1,031.00+31.96= 1,062.96 1,046.98 19.89 0.00 ...........
(3)................................... ......................... ...................... 1,062.96+32.95= 1,095.91 1,079.44 20.51 0.00 60
(4)................................... ......................... ...................... 1,095.91+33.97= 1,129.88 1,112.90 21.15 0.00 ...........
(5)................................... ......................... ...................... 1,129.88+35.03= 1,164.91 1,147.39 21.80 0.00 103
(6)................................... ......................... ...................... 1,164.91+36.11= 1,201.02 1,182.97 22.48 0.00 ...........
(7)................................... ......................... ...................... 1,201.02+37.23= 1,238.25 1,219.64 23.17 0.00 ...........
(8)................................... ......................... ...................... 1,238.25+38.39= 1,276.64 1,257.44 23.89 0.00 ...........
(9)................................... ......................... ...................... 1,276.64+39.58= 1,316.22 1,296.43 24.63 0.00 ...........
(10).................................. ......................... ...................... 1,316.22+40.80= 1,357.02 1,336.62 25.40 0.00 222
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[FR Doc. 96-23438 Filed 9-16-96; 8:45 am]
BILLING CODE 8010-01-P
