SUMMARY OF COMMENTS: ON
|1.||Galaviz Investment Management, LLC||Galaviz|
|Professional and Trade Associations|
|1.|| Association for Investment Management
and Research (U.S. Advocacy Comm.)
|2.||Financial Planning Association||FPA|
|3.||Financial Services Roundtable||FSR|
|4.||Investment Company Institute||ICI|
|5.|| North American Securities
|Securities Industry Association||SIA|
|Investor Advocacy and Other Groups|
|1.||Coalition of Mutual Fund Investors||CMFI|
|2.||Fund Democracy/Consumer Federation of Fund Democracy/ America||Consumer Federation|
On December 17, 2003, the Securities and Exchange Commission (the "Commission") issued a release proposing amendments to Form N-1A under the Securities Act of 1933 and the Investment Company Act of 1940 to require an open-end management investment company ("mutual fund") to provide enhanced disclosure regarding breakpoint discounts on front-end sales loads.1 Under the proposed amendments, a mutual fund would be required to describe in its prospectus any arrangements that result in breakpoints in sales loads and to provide a brief summary of shareholder eligibility requirements.
The comment period closed on February 13, 2004. The Commission received fourteen comment letters, including one from an investment adviser; six from professional and trade associations; two from investor advocacy and consumer groups; and five from individuals. Commenters generally supported the Commission's proposals to provide enhanced disclosure regarding breakpoint discounts on front-end sales loads.2 In addition, commenters provided suggestions that they believed would further assist investors in understanding breakpoint information.
Summary: The Commission proposed Form N-1A amendments that would require a mutual fund to provide a brief description in its prospectus of arrangements that result in sales load breakpoints, including a summary of shareholder eligibility requirements.
Seven commenters addressed issues related to the disclosure of arrangements that result in breakpoints in sales loads.3 Several of these commenters expressed general support for this proposal.4 For example, one commenter argued that the disclosure would contribute to investor awareness and knowledge regarding breakpoint opportunities.5 Another commenter argued that the proposal is essential to ensuring that investors and their broker-dealers or financial intermediaries can make informed decisions.6 This commenter believed that requiring this disclosure to be in the prospectus would provide a format to be used by investors to compare and better select funds. This commenter argued, however, that the proposed division of disclosure of breakpoint information between the prospectus and SAI, and discretion regarding where to disclose breakpoint information that is not required to be in the prospectus, may result in inconsistent disclosure among funds.
Other commenters argued that by requiring that a summary of eligibility requirements be included in the prospectus, the Commission has struck an appropriate balance between the disclosures in the prospectus and statement of additional information ("SAI"),7 and that the summary would significantly help investors to understand the ways that they can best avail themselves of breakpoint opportunities.8 In addition, one commenter agreed with the Commission's proposed requirement that the disclosure be brief, so as to not overwhelm investors.9
Some commenters recommended that breakpoint information also be provided through other means. For example, one commenter recommended that the Commission require that advisory firms provide investors with a separate sheet that shows how much they will pay per year on the mutual fund investment, including breakpoints and management fees.10 Another commenter argued that the Commission should require any broker or mutual fund to inform potential investors, in an easy-to-understand disclosure document, that breakpoint discounts may be available to them before they purchase mutual fund shares.11
In addition, a commenter argued that improved prospectus disclosure should be accompanied by better pre-sale discussion of breakpoint issues with investors (e.g., using standardized checklists and worksheets), because it would be effective in conveying key information to investors and encouraging them to act on it.12 Furthermore, this commenter argued that it would be beneficial to provide follow-up disclosure on confirmation statements, which could provide the level of the next breakpoint, contain a brief statement regarding the investments that count toward breakpoint eligibility, and direct investors to detailed information on how to obtain these discounts.
Similar suggestions were offered by another commenter, who urged the Commission to consider requiring an additional one or two page document to be given to investors for discussion at the point of sale.13 This document would disclose sales loads, breakpoint levels, and shareholder qualifications, as well as provide a simplified discussion of the valuation method and the records that the customer would need to retain in order to ensure that the discount is applied each time the customer is eligible. Further, this commenter argued that it would be beneficial that the document contain a worksheet that investors or their financial representatives could use to calculate estimated fees and discounts.
Summary: The Commission proposed to require a mutual fund to describe in its prospectus the methods used to value accounts in order to determine whether a shareholder has met sales load breakpoints.
Five commenters addressed issues related to the disclosure of methods used to value accounts.14 All five commenters expressed general support for this proposal. One commenter also provided two suggestions regarding the disclosure of these methods.15 First, although this commenter supported the requirement that the disclosure be in a fund's prospectus, it argued that this information should also be provided in a summary document provided to the investor at the point of sale, and in confirmations, account statements, shareholder reports, and any documents provided by an intermediary prior to share purchase. Second, the commenter argued that an example demonstrating the valuation method also would be helpful to investors and their financial representatives in applying the methodology to the investor's account.
Summary: The Commission proposed to require a mutual fund to state in its prospectus, if applicable, that in order to obtain a breakpoint discount, it may be necessary at the time of purchase for a shareholder to inform the fund or his or her financial intermediary of the existence of other accounts in which there are holdings eligible to be aggregated to meet sales load breakpoints. The proposal would also require a mutual fund to describe any information or records, such as account statements, that may be necessary for a shareholder to provide to the fund or his or her financial intermediary in order to verify his or her eligibility for a breakpoint discount.
Five commenters addressed issues related to the disclosure regarding information and records necessary to aggregate holdings.16 Three of these commenters expressed general support for this proposal.17 Three commenters argued, however, that the burden of providing investment records and cost information and performing record-keeping tasks to ensure that breakpoints are applied properly should not be placed on investors.18 One of these commenters argued that these tasks would be difficult for the average investor, especially in instances where multiple intermediaries and accounts are used by various investors who, as a group, qualify for discounts.19 In addition, one of these commenters argued that the burden also should not be placed on brokers.20
Another commenter argued that the prospectus disclosure alone would be insufficient and that the proposal should be amended to emphasize the role and responsibility of the financial intermediary in ensuring that the investor understands and can provide the appropriate documentation regarding breakpoints.21 This commenter argued that the Commission should require a financial representative to provide investors with a description of the information and records that they must retain and submit in order to demonstrate eligibility for a breakpoint discount, and that the information should be in plain English and provided at the point of sale.
Summary: The Commission proposed to require a mutual fund to state in its prospectus whether it makes available free of charge, on or through its Web site at a specified Internet address, and in a clear and prominent format, the information that would be required regarding the fund's sales loads and breakpoints in the prospectus and SAI, including whether the Web site includes hyperlinks that facilitate access to the information.
Seven commenters addressed issues related to the disclosure of availability of sales load and breakpoint information on a fund's Web site.22 Four commenters expressed general support for this proposal.23 One commenter argued that the disclosure regarding availability should also be required in confirmations and account statements.24 This commenter also argued that if a fund provides breakpoint information on its Web site, it should be required to disclose the Web site address in a summary document provided at the point of sale. Another commenter argued that if any breakpoint discount policies are placed in a fund's SAI, a fund with an Internet site should be required to provide access to the SAI on the site.25
Several commenters argued that breakpoint information should be included on a fund's Web site.26 One commenter argued that the Commission should require an explanation of breakpoint eligibility requirements on the Web sites of funds that maintain them.27 This commenter noted that fund and broker-dealer Web sites have the potential to be useful in conveying breakpoint eligibility requirements to the growing number of investors who use the Internet. Another commenter argued that breakpoint disclosure on a fund's Web site would enhance investor access to information about mutual funds and would facilitate comparison of the fees that they charge.28
One commenter recommended that the Commission limit the proposed disclosure requirements.29 This commenter argued that the Commission should only require a fund that includes breakpoint information on its Web site to state that fact in its prospectus and to provide the Web site address. Further, this commenter argued that the prospectus of a fund without a Web site should not be required to state as part of the breakpoint discussion in the prospectus that the fund does not have a Web site. This commenter expressed concern that the disclosures that would be required by this proposal would not be particularly helpful to investors and could instead detract from the useful information that the Commission has proposed to be included in the prospectus discussion of breakpoints.
Summary: The Commission proposed to require that the disclosure by a mutual fund regarding arrangements resulting in breakpoints in, or elimination of, sales loads, and certain other sales load disclosure, be adjacent to the required table of sales loads and breakpoints. The proposal also would require that a mutual fund present information regarding breakpoint discounts in a clear, concise, and understandable manner, and include tables, schedules, and charts as required or where doing so would facilitate understanding.
Four commenters addressed issues related to the presentation requirements.30 One commenter was concerned that it might be difficult to locate the disclosure regarding breakpoint discounts in the prospectus.31 Therefore, the commenter recommended that the Commission consolidate the disclosure requirements by requiring a one-page summary at the front of a fund's prospectus that would include all costs of investing in a particular fund or class of shares, including breakpoint discounts. The commenter argued that a mandated prospectus format would provide investors with the most significant cost considerations as well as a basis for comparison among funds. Another commenter with similar concerns also recommended that the Commission specify the format of the prospectus so that the disclosure would be at the front of the document.32 This commenter argued that the disclosure should show the cost of making and closing an investment in the fund during a five-year period, including all known fees, costs, and estimated taxes.
In response to a request for comment regarding the Commission's proposed "adjacent" standard, one commenter argued that a "close proximity" standard would be sufficient as long as the information is presented in a clear and concise manner and is sufficiently prominent.33 Another commenter argued that uniform definitions should be used in describing breakpoint rules.34 In addition, a commenter recommended that the Commission require disclosure about sales loads in general to give investors a context in which to understand breakpoints.35 This commenter argued that until investors understand the reasons for investing in a fund that carries certain sales loads, they cannot fully understand the applicability of breakpoints to their decisionmaking. This commenter also recommended that the Commission provide examples and general guidance regarding the types of disclosure that would be acceptable, and that it consider a mechanism through which investors could indicate that they understand the disclosure (e.g., an acknowledgement form).
The Commission stated in the Proposing Release that it expected to require all new registration statements, and all post-effective amendments that are either annual updates to effective registration statements or that add a new series, filed on or after the effective date of the amendments to comply with the proposed amendments. One commenter argued that, in order to give funds sufficient time to comply with the new requirements, the compliance date for the new disclosure should be no less than sixty days after the date of the adoption of the amendments.36
There were no comments related to the Paperwork Reduction Act.
There were no comments related to the Cost/Benefit Analysis.
There were no comments related to the Consideration of Effects on Efficiency, Competition, and Capital Formation.
One commenter addressed the Regulatory Flexibility Analysis.37 This commenter argued that the Commission should ensure that small mutual funds, and small investment management companies, are not negatively impacted by the proposed rules beyond that permitted by the Regulatory Flexibility Act.
There were no comments related to the Consideration of Impact on the Economy.
Several commenters provided suggestions regarding the regulation of omnibus accounts. For example, one commenter urged the Commission to end the practice of using omnibus accounts, and in the meantime to require broker-dealers who rely on omnibus accounts and other methods of settling transactions without providing identifying information to show that their methods are as accurate as methods that do provide this information.38 In addition, commenters argued that a central database for breakpoint information should be established,39 and that the Commission should require financial intermediaries to disclose shareholder identity and transaction information to mutual funds, which should ensure the uniform application of their breakpoint discount policies and be the sole record keepers responsible for all shareholder accounts and activity.40
In addition, two commenters recommended that regulators take other action with respect to breakpoint discounts. One commenter argued that Section 22(d) of the Investment Company Act of 1940 ("Investment Company Act") should be repealed.41 Section 22(d) of the Investment Company Act generally prohibits a mutual fund and a principal underwriter of or a dealer in its redeemable securities from selling the securities except at a current public offering price described in its prospectus.42 Another commenter argued that the Commission should ban front-end sales loads imposed on the investing public because they lead to inappropriate behavior.43 This commenter argued in the alternative that the Commission's proposals would be of strong benefit to the investing public.
|1||Disclosure of Breakpoint Discounts by Mutual Funds, Release Nos. 33-8347, 34-48939, IC-26298 (Dec. 17, 2003) [68 FR 74732 (Dec. 24, 2003)] ("Proposing Release").|
|2||AIMR, FPA, FSR, Fund Democracy/Consumer Federation, ICI, Lindauer, NASAA, SIA, Stewart, Thomas.|
|3||AIMR, FPA, Fund Democracy/Consumer Federation, ICI, Jackson, NASAA, SIA.|
|4||AIMR, FPA, Fund Democracy/Consumer Federation, ICI, NASAA.|
|7||Fund Democracy/Consumer Federation.|
|12||Fund Democracy/Consumer Federation.|
|14||FPA, Fund Democracy/Consumer Federation, ICI, NASAA, SIA.|
|16||CMFI, Fund Democracy/Consumer Federation, ICI, Jamieson, NASAA.|
|17||Fund Democracy/Consumer Federation, ICI, NASAA.|
|18||CMFI, Jamieson, NASAA.|
|22||CMFI, FPA, Fund Democracy/Consumer Federation, ICI, Jamieson, NASAA, SIA.|
|23||FPA, Fund Democracy/Consumer Federation, NASAA, SIA.|
|26||Fund Democracy/Consumer Federation, Jamieson, NASAA.|
|27||Fund Democracy/Consumer Federation.|
|30||AIMR, Jamieson, NASAA, Stewart.|
|38||Fund Democracy/Consumer Federation.|
|39||Fund Democracy/Consumer Federation, Jamieson.|
|42||15 U.S.C. § 80a-22(d). Rule 22d-1 under the Investment Company Act permits a mutual fund to sell shares at prices reflecting scheduled breakpoints if it meets certain requirements, such as furnishing to existing shareholders and prospective investors the information regarding breakpoints required by applicable registration statement form requirements. 17 CFR 270.22d-1.|
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