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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 270
[Release No. IC-22203; File No. S7-24-96]
RIN 3235-AG72
Rule Amendments Relating to Multiple Class and Series
Investment Companies
AGENCY: Securities and Exchange Commission
ACTION: Proposed Rule
SUMMARY: The Commission is proposing for public comment
amendments to the rule under the Investment Company Act of
1940 that permits open-end management investment companies
(''funds'') to issue multiple classes of shares representing
interests in the same portfolio. The proposed amendments
would expand and clarify the methods a fund may use to
allocate among its classes income, gains and losses, and the
expenses that are not attributable to a particular class. The
proposed amendments also would clarify the shareholder voting
provisions of the rule. The Commission also is proposing a
technical amendment to the rule under the Investment Company
Act that governs the use of fund assets to pay for the
distribution of fund shares, as it applies to series funds.
DATES: Comments must be received on or before (sixty days
after date of publication in the Federal Register).
ADDRESSES: Comments should be submitted in triplicate to
Jonathan G. Katz, Secretary, Securities and Exchange
Commission, 450 Fifth Street, N.W., Stop 6-9, Washington, D.C.
20549. Comments also may be submitted electronically at the
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following E-mail address: rule-comments@sec.gov. All comment
letters should refer to File No. S7-24-96; this file number
should be included on the subject line if E-mail is used.
Comment letters will be available for public inspection and
copying in the Commission's Public Reference Room, 450 Fifth
Street, N.W., Washington, D.C. 20549. Electronically
submitted comment letters also will be posted on the
Commission's Internet web site (http://www.sec.gov).
FOR FURTHER INFORMATION CONTACT: Marilyn Mann, Senior
Counsel, Office of Regulatory Policy, (202) 942-0690, or,
regarding accounting issues, Lawrence A. Friend, Chief
Accountant, Office of the Chief Accountant, (202) 942-0590,
both in the Division of Investment Management, Stop 10-2,
Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION: The Commission today is requesting
public comment on proposed amendments to rules 12b-1 [17 CFR
270.12b-1] and 18f-3 [17 CFR 270.18f-3] under the Investment
Company Act of 1940 [15 U.S.C. 80a] (the ''Investment Company
Act'').
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TABLE OF CONTENTS
Page
EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . .
I. DISCUSSION . . . . . . . . . . . . . . . . . . . . .
A. Rule 18f-3 . . . . . . . . . . . . . . . . . .
1. Background: Allocation Methods . . . . .
a. Settled Shares Method . . . . . . . .
(1) Requirement For Same NAV Per
Share Among Classes . . . . . .
(2) Consistent Application
Requirement . . . . . . . . . .
b. Simultaneous Equations Method . . . .
c. Request for Comments . . . . . . . .
2. Purchase Class Voting Rights . . . . . . .
B. Rule 12b-1 . . . . . . . . . . . . . . . . . .
II. COST/BENEFIT ANALYSIS . . . . . . . . . . . . . . .
III. INITIAL REGULATORY FLEXIBILITY ANALYSIS . . . . . .
A. Reasons for the Proposed Action . . . . . . . .
B. Objectives . . . . . . . . . . . . . . . . . .
C. Legal Basis . . . . . . . . . . . . . . . . . .
D. Small Entities Subject to the Rule . . . . . .
E. Reporting, Recordkeeping, and Other Compliance
Requirements . . . . . . . . . . . . . . . . .
F. Duplicative, Overlapping or Conflicting Federal
Rules . . . . . . . . . . . . . . . . . . . . .
G. Significant Alternatives . . . . . . . . . . .
1. The Establishment of Differing Compliance
or Reporting Requirements or Timetables
That Take Into Account the Resources
Available to Small Entities . . . . . . .
2. The Clarification, Consolidation, or
Simplification of Compliance and Reporting
Requirements Under the Rule for Such Small
Entities . . . . . . . . . . . . . . . . .
3. The Use of Performance Rather Than Design
Standards . . . . . . . . . . . . . . . .
4. An Exemption From Coverage of the Rule, or
Any Part Thereof, for Such Small Entities
H. Solicitation of Comments . . . . . . . . . . .
IV. STATUTORY AUTHORITY . . . . . . . . . . . . . . . .
TEXT OF PROPOSED RULE AMENDMENTS . . . . . . . . . . . .
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EXECUTIVE SUMMARY
The Commission is proposing amendments to rule 18f-3
under the Investment Company Act. Rule 18f-3 permits funds to
issue multiple classes of shares representing interests in the
same portfolio. Funds generally establish multiple classes of
shares as a vehicle for offering investors a choice of methods
for paying distribution costs or to allow funds to access
alternative distribution channels more efficiently. The rule,
among other things, prescribes how a fund must allocate to
each class income, gains and losses, and the expenses that are
not attributable to a particular class. The proposed
amendments would provide greater flexibility in allocating
these items. The proposed amendments would permit any fund
that declares dividends daily to base allocations on settled
shares (i.e., shares for which payment in federal funds has
been received). Currently, only funds that declare daily
dividends and maintain the same net asset value (''NAV'') per
share in each class may use this method. The proposed
amendments also would permit funds to base allocations on an
additional method, the simultaneous equations method. Under
this method, income, gains and losses, and expenses are
allocated based on simultaneous equations that are designed to
result in the annualized rate of return of each class
generally differing from that of the other classes only by the
expense differentials among the classes.
The proposed amendments also would clarify shareholder
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voting rights under the rule when a fund offers one class of
shares (the ''purchase class'') that automatically converts
into another class (the ''target class''). Rule 18f-3
currently requires shareholders of the purchase class to
approve increases in the expenses of the target class under
certain circumstances. The proposed amendments would clarify
that purchase class shareholders have voting rights only with
respect to material increases in expenses that are submitted
separately to target class shareholders for their approval.
The Commission is also proposing to amend rule 12b-1
under the Investment Company Act, the rule that governs the
use of fund assets to pay for the distribution of fund shares
in accordance with a ''rule 12b-1 plan.'' The proposed
amendments would clarify how various provisions of the rule
(e.g., those requiring shareholder voting) apply to a
''series'' fund. A series fund is a fund that offers
investors an opportunity to invest in one or more portfolios,
each of which has a specific investment objective. The
amendments would clarify that a series fund's rule 12b-1 plan
must be severable for each series and that whenever an action
is required with respect to the plan (e.g., a shareholder vote
on a proposal to increase the fee payable under the plan),
that action must be taken separately for each series.
I. DISCUSSION
A. Rule 18f-3
1. Background: Allocation Methods
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Rule 18f-3 permits funds to issue multiple classes of
shares representing interests in the same portfolio of
securities.-[1]- Funds generally establish multiple
classes as a vehicle for offering investors a choice of
methods for paying distribution costs or to allow funds to
access alternative distribution channels more efficiently.
Rule 18f-3 provides a framework for addressing certain
corporate governance and accounting issues that may create
conflicts among the classes. Among other things, the rule
prescribes how a fund must allocate to each class income,
gains and losses,-[2]- and expenses that are not
attributable to a particular class (''fundwide expenses'').
Rule 18f-3 generally requires a fund to allocate income,
gains and losses, and fundwide expenses based on the net
assets of each class in relation to the net assets of the fund
(''relative net assets'').-[3]- The rule permits a fund
that declares dividends daily, such as a money market fund or
a fund that invests in fixed-income securities (a ''daily
-[1]- Funds that issue multiple classes of shares
must rely on rule 18f-3 or on an exemptive
order because such issuances implicate section
18 of the Investment Company Act [15 U.S.C.
80a-18], which, among other things, generally
makes it unlawful for a fund to issue any class
of ''senior security'' or to issue classes of
shares with different voting rights.
-[2]- In this release, ''gains and losses'' refers to
both realized gains and losses and unrealized
appreciation and depreciation.
-[3]- Rule 18f-3(c)(1) [17 CFR 270.18f-3(c)(1)].
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dividend fund''), to use two alternative allocation methods,
provided the fund maintains the same NAV per share in each
class.-[4]- A daily dividend fund may allocate income,
gains and losses, and fundwide expenses (i) to each share
without regard to class,-[5]- or (ii) to each class based
on relative net assets, excluding the value of subscriptions
for shares for which payment in federal funds has not been
received (the ''Settled Shares Method'').-[6]-
a. Settled Shares Method
(1) Requirement For Same NAV Per Share
Among Classes
Many daily dividend funds pay dividends from net
investment income only on settled shares (i.e., shares that
-[4]- Rule 18f-3(c)(2) [17 CFR 270.18f-3(c)(2)].
-[5]- Because the fund must maintain the same NAV per
share in each class, this method is equivalent
to allocations based on relative net assets.
Rule 18f-3 requires funds using this method to
obtain the agreement of their service providers
that, to the extent necessary to assure that
all classes maintain the same NAV, the
providers will waive or reimburse class
expenses. Rule 18f-3(c)(2)(i) [17 CFR 270.18f-
3(c)(2)(i)]. The proposed amendments would
clarify that payments waived or reimbursed
under such an undertaking may not be carried
forward or recouped at a later time. Proposed
rule 18f-3(c)(1)(iv).
-[6]- The term ''net assets'' includes the value of
any receivables, including subscriptions
receivable. See AICPA, AUDITS OF INVESTMENT
COMPANIES: AUDIT AND ACCOUNTING GUIDE 5.13
(May 1994). A fund that requires subscriptions
to be accompanied by federal funds will record
cash, rather than a receivable, as the asset
that relates to the subscription.
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are paid for in federal funds or for which payment has been
converted into federal funds). Funds with this dividend
policy have noted that the payment of daily dividends to a
purchaser of fund shares that did not purchase its shares with
immediately available funds would dilute the dividends of
other shareholders, since the fund would not yet have invested
the proceeds from such purchase.-[7]- Using the Settled
Shares Method to allocate income and fundwide expenses is
consistent with this dividend policy.
Some daily dividend fixed-income funds currently use the
Settled Shares Method pursuant to exemptive orders that
predate the adoption of rule 18f-3. These funds are unable to
rely on rule 18f-3 because they do not necessarily maintain
-[7]- See Exemption for Open-End Management
Investment Companies Issuing Multiple Classes
of Shares; Disclosure by Multiple Class and
Master-Feeder Funds; Class Voting on
Distribution Plans, Investment Company Act
Release No. 20915 (Feb. 23, 1995) [60 FR 11876,
11878-79 & n.20 (Mar. 2, 1995)] (hereinafter
''Adopting Release''); T. Rowe Price
Associates, Inc. (pub. avail. Dec. 22, 1986).
A daily dividend fund may invest in securities that
settle daily against federal funds (in contrast to
other securities that have ''regular way'' (i.e.,
''T + 3'') settlement). A daily dividend fund that
invests in income-producing securities that have a
longer settlement period may choose to place orders
for such securities when it receives orders for
shares that are not accompanied by payment in
federal funds, since it will not have to make
payment for such securities before receiving payment
for the shares. Id. The fund does not start
earning interest on such securities until it has
paid for them, however; therefore, these securities
do not contribute to the fund's income immediately.
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the same NAV per share in each class, a requirement for funds
that use the Settled Shares Method and rely on rule 18f-3.
The proposed amendments would permit a daily dividend fund to
use the Settled Shares Method without requiring the fund to
maintain the same NAV per share in each class.-[8]- This
requirement may be unnecessary, since the Settled Shares
Method will result in appropriate allocations even if NAV per
share differs among the classes.
(2) Consistent Application Requirement
The release adopting rule 18f-3 stated that the
allocation method selected by a fund ''must be applied
consistently.''-[9]- The Commission staff has indicated,
however, that funds may allocate gains and losses based on
relative net assets, while using the Settled Shares Method for
allocating income and fundwide expenses.-[10]-
Allocating gains and losses based on relative net assets is
-[8]- Proposed rule 18f-3(c)(1)(iii). The amended
rule would define a daily dividend fund as
''any company that has a policy of declaring
distributions of net investment income daily,
including any money market fund that determines
its net asset value using the amortized cost
method permitted by rule 2a-7.'' The reference
to funds that use the amortized cost method
under rule 2a-7 is designed to make it clear
that valuing net assets based on amortized cost
is permitted under rule 18f-3(c) [17 CFR
270.18f-3(c)]. See Adopting Release, supra
note 7, at 11879.
-[9]- Adopting Release, supra note 7, at 11879.
-[10]- Letter to Investment Company Chief Financial
Officers from the Division of Investment
Management 5 (Nov. 2, 1995).
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consistent with the participation of all shares in any
increase or decrease in NAV that results from appreciation or
depreciation of the underlying securities, including shares
that have not yet settled.-[11]- The proposed
amendments would explicitly permit this approach.-[12]-
The Commission believes that many funds take this approach and
requests comment whether this approach should be mandatory for
funds using the Settled Shares Method.
b. Simultaneous Equations Method
The proposed amendments would permit funds to allocate
income, gains and losses, and fundwide expenses based on an
additional method, the ''Simultaneous Equations
Method.''-[13]- Under this method, allocation is based
on simultaneous equations that are designed to result in the
-[11]- Using the Settled Shares Method to allocate
gains and losses may cause a divergence of NAV
per share among classes, creating a particular
problem for those funds that seek to maintain
the same or a similar NAV per share in each
class. Id. This is because NAV per share is
based on, among other things, the value of any
receivables, including subscriptions to
purchase shares for which the fund has not yet
received payment. See supra note 6.
Allocating gains and losses to classes based on
the net assets of each class excluding
subscriptions receivable causes the shares of
each class to increase or decrease in value by
a proportionately different amount per share
than the shares of other classes.
-[12]- Proposed rule 18f-3(c)(1)(iii).
-[13]- Proposed rule 18f-3(c)(1)(ii); see also
proposed rule 18f-3(c)(2)(iv) (defining the
Simultaneous Equations Method).
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annualized rate of return of each class generally differing
from that of the other classes only by the expense
differentials among the classes. Using this method allows a
fund to simultaneously allocate (or reallocate) various income
and capital items based on the fund's operating results,
changes in ownership interests of each class, and expense
differentials among the classes.-[14]- Industry
representatives have suggested that the results derived from
this method are consistent with the purpose of the rule's
allocation provisions.
The Commission understands that the equations used in
connection with this method continue to be refined. The
equations would therefore not be specified in the amended
rule. Comment is requested whether they should be specified.
An example of the equations that have been used is attached to
this Release as Appendix A. (Appendix A is not attached to
this version of the release. To obtain a copy, please contact
Marilyn Mann at (202) 942-0690.)
c. Request for Comments
The Commission requests comment on the Settled Shares and
Simultaneous Equations Methods and whether there are any other
allocation methods that should be included in the rule.
-[14]- The equations would allocate the day's income,
realized gains (or losses), unrealized
appreciation (or depreciation), and fundwide
expenses and reallocate each class's
undistributed net investment income,
undistributed realized gains (or losses), and
unrealized appreciation (or depreciation).
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The Commission also requests comment on the rule's overall
approach of describing specific allocation methods and
restrictions on the funds that may use them. In particular,
the Commission requests comment whether the rule should permit
a fund to use any method that results in shareholders of each
class receiving their proportionate share of income, gains and
losses, and fundwide expenses. Such an approach would provide
funds with flexibility and avoid the possible need for further
administrative relief. The Commission requests that, in
connection with commenting on such approach, commenters
address the need for the development of accounting standards
applicable to allocation methods to be followed by multiple
class funds. Commenters should address, for example, whether
Generally Accepted Accounting Principles currently provide
appropriate guidance on the allocation methods to be followed
by multiple class funds and whether more specific guidance
needs to be developed.
Commenters favoring this approach should formulate a
recommended standard. Should the rule, for example, permit
allocations to be based on any method that is fair to the
shareholders of each class? Should the rule permit funds to
use any allocation method that produces substantially similar
allocations to those that would have resulted if one of the
allocation methods prescribed by the rule had been applied?
Commenters should also consider whether the rule should
require a particular party (e.g., the fund's investment
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adviser, independent accountants, or board of directors) to
determine that the standard had been met. For example, would
the accountant's report on internal controls required by sub-
item 77B of Form N-SAR offer adequate safeguards for
permitting additional flexibility?-[15]- If so, is it
necessary to amend the instructions to sub-item 77B to have
the accountant's report specifically address the allocation
controls relied upon? Commenters favoring this approach
should provide language for any recommended changes to the
instructions.
2. Purchase Class Voting Rights
Rule 18f-3 contains certain conditions that address
arrangements that involve a class of shares with one type of
distribution charge that automatically convert into another
class after a specified period of time. The purchase class
is generally a class with a higher distribution fee and a
contingent deferred sales load (''CDSL'').-[16]- A CDSL
-[15]- See 17 CFR 274.101. Prior to the adoption of
rule 18f-3, Commission orders required an
expert retained by each multiple class fund to
file a report with the Commission on the
adequacy of accounting procedures of the fund.
This requirement was not included in the rule
because the Commission and commenters agreed
that rule 18f-3 adequately defined the
methodology that a fund should follow in
allocating income, expenses and other items
among the classes. See Adopting Release, supra
note 7, at 11879 & nn.28-29.
-[16]- A distribution fee is a charge to fund assets
that may be used to pay certain distribution
expenses in accordance with rule 12b-1 [17 CFR
(continued...)
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is a sales charge that is assessed when shares are redeemed.
The CDSL generally declines to zero over time and is designed
to recover any distribution costs that have not yet been
recovered from the distribution fees. After a specified
period, the purchase class shares convert automatically into
the target class, which generally has a low (or no)
distribution fee.
One of rule 18f-3's conditions states that if expenses,
including payments of distribution fees, are increased
materially for the target class without approval of the
shareholders of the purchase class, the fund will establish a
new target class for the purchase class on the same terms as
applied to the target class before the increase.-[17]-
This condition, read literally, appears to require approval by
the purchase class shareholders (or the creation of a new
target class) for any material expense increase that applies
to the target class. This could include increases in expenses
that are not required to be submitted for shareholder approval
-[16]-(...continued)
270.12b-1]. Such fees often are referred to as
''rule 12b-1 fees.'' See infra part I.B. See
generally Exemption for Certain Open-End
Management Investment Companies to Impose
Deferred Sales Loads, Investment Company Act
Release No. 22202 (September 9, 1996).
-[17]- Rule 18f-3(e)(2)(iii) [17 CFR 270.18f-
3(e)(2)(iii)]; see also rule 12b-1(b)(4) [17
CFR 270.12b-1(b)(4)] (requiring shareholder
approval of any changes in a rule 12b-1 plan
that would materially increase the fees payable
under the plan).
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(e.g., transfer agency fees) or that are required to be
approved by shareholders on a fundwide basis rather than
separately by class (e.g., advisory fees). This result was
not intended. The condition was designed to give purchase
class shareholders voting rights only when an expense increase
is submitted for a separate vote of the target class
shareholders.
The amended rule would clarify that purchase class
shareholders have voting rights (or rights to a new target
class) with respect to increases in expenses that are
submitted separately for approval by target class
shareholders.-[18]- These expenses would include a
material increase in payments under the target class's rule
12b-1 plan and, if submitted for target class approval, an
increase in payments under a shareholder services
plan.-[19]- The amendment will not affect whether a
-[18]- See proposed rule 18f-3(e)(2)(iii); see also
infra note 23 regarding a technical amendment
to rule 12b-1(g) [17 CFR 270.12b-1(g)], which
refers to the voting rights of purchase class
shareholders in connection with a rule 12b-1
plan applicable to the target class.
-[19]- See rule 18f-3(a)(1)(i) [17 CFR 270.18f-
3(a)(1)(i)] (regarding the allocation of
expenses under a rule 12b-1 plan or shareholder
services plan to a particular class). Purchase
class shareholders also would have voting
rights with respect to increases in any other
expenses specifically assigned to the target
class, such as transfer agency fees, but only
if the increase is submitted for approval by
the target class shareholders. See rule 18f-
3(a)(1)(ii) [17 CFR 270.18f-3(a)(1)(ii)]
(continued...)
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matter is required to be submitted to shareholders of the
target class.
B. Rule 12b-1
Rule 12b-1 governs the use of fund assets to pay for the
distribution of fund shares. Among other things, rule 12b-1
requires that any payments made by the fund in connection with
the distribution of its shares be made pursuant to a written
rule 12b-1 plan that describes all material aspects of the
proposed financing of distribution.-[20]- Rule 12b-1
also requires certain shareholder votes to be taken with
respect to the approval or amendment of the rule 12b-1 plan.
Rule 12b-1 specifies how its shareholder voting and other
requirements apply when a fund offers separate classes of
shares. The rule provides that if a rule 12b-1 plan covers
more than one class, the provisions of the plan must be
severable for each class, and that actions required to be
taken under the rule must be taken separately for each class
(the ''severability provision'').-[21]- Although the
severability provision does not specifically address a fund
-[19]-(...continued)
(regarding expenses other than fees under a
rule 12b-1 or shareholder services plan that
may be allocated to a particular class). Since
the proposed amendment would refer to expenses
allocated under rule 18f-3(a)(1)(i)-(ii), which
includes payments authorized under a rule 12b-1
plan, the reference in the current rule to such
payments would be deleted as unnecessary.
-[20]- Rule 12b-1(b) [17 CFR 270.12b-1(b)].
-[21]- Rule 12b-1(g) [17 CFR 270.12b-1(g)].
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that offers more than one series of shares, the requirements
of rule 12b-1 have been interpreted to apply separately to
each series offered by a fund.-[22]- The Commission
proposes to amend rule 12b-1 to reflect this position. As
amended, the severability provision also would apply to a rule
12b-1 plan that covers more than one series of
shares.-[23]-
II. COST/BENEFIT ANALYSIS
The amendments to rule 18f-3 would provide funds with
greater flexibility in allocating income, gains and losses,
and fundwide expenses among classes and would decrease costs
-[22]- See Distribution of Shares by Registered Open-
End Management Investment Company, Investment
Company Act Release No. 22201 (September 9,
1996). The amendments adopted in Release No.
22201 specified that a rule 12b-1 plan adopted
before the shares of a fund are publicly
offered or sold to persons who are not
affiliated persons of the fund or affiliated
persons of such persons does not have to be
approved by shareholders. Commenters requested
that the Commission clarify that the amendments
also applied to a rule 12b-1 plan that related
to a series that had not been publicly offered.
The Commission adopted that interpretation; the
amendments proposed today would codify it.
-[23]- See proposed rule 12b-1(g). A proviso to
current rule 12b-1(g) states that under rule
18f-3(e)(2), any vote by target class
shareholders with respect to the target class's
rule 12b-1 plan also requires a vote of the
shareholders of the purchase class. Because
the voting rights of purchase class
shareholders are fully described in rule 18f-3,
the Commission proposes to amend rule 12b-1(g)
to delete this proviso. The amended rule would
simply state that the provisions of rule 12b-
1(g) do not affect the rights of purchase class
shareholders under rule 18f-3(e)(2)(iii).
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for certain funds by allowing them to rely on the rule instead
of on an exemptive order. The amendment to rule 12b-1 would
not impose any burden since it merely clarifies an existing
interpretation of the rule.
III. INITIAL REGULATORY FLEXIBILITY ANALYSIS
This Initial Regulatory Flexibility Analysis has been
prepared in accordance with 5 U.S.C. 603. It relates to the
proposed amendments to rules 12b-1 and 18f-3.
A. Reasons for the Proposed Action
As discussed in part I.A.1, the proposed amendments to
rule 18f-3 would provide greater flexibility in allocating
income, realized gains and losses, unrealized appreciation and
depreciation, and fundwide expenses. The proposed amendments
would also permit certain multiple class daily dividend funds
that are currently relying on exemptive orders issued prior to
the adoption of rule 18f-3 to rely on the rule. As discussed
in part I.A.2, another proposed amendment to rule 18f-3 would
clarify that purchase class shareholders have voting rights
(or rights to a new target class) only with respect to
increases in expenses that are submitted separately for
approval by target class shareholders.
As discussed in part I.B, the proposed amendments to rule
12b-1 would clarify how various provisions of the rule apply
to a series investment company.
B. Objectives
The proposed amendments to the accounting provisions of
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rule 18f-3 would give multiple class funds more flexibility
and would permit certain daily dividend funds that are
currently relying on exemptive orders to rely on the rule.
The proposed amendment to the provision of rule 18f-3 relating
to purchase class voting rights would provide greater
certainty by correcting the language of the rule consistent
with its original intent. The proposed amendment to rule 12b-
1 relating to series funds would codify existing
interpretations of the rule.
C. Legal Basis
The Commission is proposing to amend rule 12b-1 under the
authority set forth in sections 12(b) and 38(a) of the
Investment Company Act, and rule 18f-3 under sections 6(c),
18(i), and 38(a) of the Investment Company Act.
D. Small Entities Subject to the Rule
Rules 12b-1 and 18f-3 apply to registered open-end
management investment companies. Any registered open-end
management investment company with net assets of $50 million
or less as of the end of its most recent fiscal year is
considered a small entity under Commission rules.-[24]-
It is estimated that out of approximately 3000 active open-end
management investment companies, approximately 500 are
considered small entities. Of these 500 small entities,
approximately 42 offer multiple classes of shares.
E. Reporting, Recordkeeping, and Other Compliance
-[24]- Rule 0-10 [17 CFR 270.0-10].
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Requirements
The proposed amendments would not impose any new
reporting, recordkeeping, or other compliance requirements.
F. Duplicative, Overlapping or Conflicting Federal
Rules
The Commission believes that there are no duplicative,
overlapping, or conflicting federal rules.
G. Significant Alternatives
The Regulatory Flexibility Act directs the Commission to
consider significant alternatives that would accomplish the
stated objective, while minimizing any significant adverse
impact on small issuers. In connection with the proposed
amendments, the Commission considered the following
alternatives.
1. The Establishment of Differing Compliance or
Reporting Requirements or Timetables That Take
Into Account the Resources Available to Small
Entities
If registered open-end management investment companies
that are small entities wish to operate multiple class
structures they must comply with either rule 18f-3 or an
exemptive order. Rule 18f-3 eased the requirements the
Commission imposed in exemptive orders. As discussed above,
the amendment to the requirements for using the settled shares
method of allocation will allow certain funds that are
currently relying on exemptive orders to rely on the rule,
which is expected to reduce costs and improve flexibility for
these funds.
==========================================START OF PAGE 21======
The addition of the simultaneous equations method to the
rule gives funds added flexibility and will not create any
compliance burden since the use of that method is optional.
The proposed amendment to rule 18f-3 relating to purchase
class voting rights and the proposed amendment to rule 12b-1
relating to series funds are merely clarifying changes and
will have no adverse impact on small issuers.
In light of the above, different compliance or reporting
requirements or timetables are not necessary to accommodate
small entities and would not be consistent with the objectives
of investor protection.
2. The Clarification, Consolidation, or
Simplification of Compliance and Reporting
Requirements Under the Rule for Such Small
Entities
As noted above, certain of the proposed amendments are
designed to clarify the requirements of rules 12b-1 and 18f-3.
The proposed amendment to rule 18f-3 relating to the settled
shares method will enable certain funds to rely on the rule,
thereby easing disclosure and compliance requirements for
those funds. Further simplification of the compliance
requirements for small entities would not be consistent with
the protection of investors.
3. The Use of Performance Rather Than Design
Standards
The Commission is requesting comment on rule 18f-3's
approach of describing specific allocation methods and the
funds that may use them. In particular, the Commission is
==========================================START OF PAGE 22======
requesting comment whether the rule should permit a fund to
use any method that results in shareholders of each class
receiving their proportionate share of income, realized gains
and losses, unrealized appreciation and depreciation, and
fundwide expenses. Even if such a general standard were
adopted, however, it would not decrease compliance costs for
multiple class funds since such funds would still have to
allocate the various accounting items on a daily basis using
an appropriate method. At most, such a general standard would
give funds flexibility in choosing the allocation method to be
used.
With respect to the other proposed amendments to rules
18f-3 and 12b-1, the Commission believes that it is not
possible to adopt performance standards that would achieve the
objectives of the rules and be consistent with the
Commission's mandate to protect investors.
4. An Exemption From Coverage of the Rule, or Any
Part Thereof, for Such Small Entities
Exempting small entities from the requirements in the
proposed amendments would not be consistent with the
Commission's statutory mandate of protecting investors.
H. Solicitation of Comments
The Commission encourages the submission of comments with
respect to any aspect of this Initial Regulatory Flexibility
Analysis. As described at the beginning of this release,
comments may be submitted to the Secretary of the Commission
electronically or by letter. Such comments will be considered
==========================================START OF PAGE 23======
in the preparation of the Final Regulatory Flexibility
Analysis, if the proposed amendments are adopted, and will be
placed in the same public file as comments on the proposed
amendments themselves.
==========================================START OF PAGE 24======
IV. STATUTORY AUTHORITY
The Commission is proposing to amend rule 12b-1 pursuant
to the authority set forth in sections 12(b) and 38(a) [15
U.S.C. 80a-12(b), -37(a)] of the Investment Company Act, and
rule 18f-3 under sections 6(c), 18(i), and 38(a) of the
Investment Company Act [15 U.S.C. 80a-6(c), -18(i), -37(a)].
List of subjects in 17 CFR Part 270
Investment companies, Reporting and recordkeeping
requirements, Securities.
TEXT OF PROPOSED RULE AMENDMENTS
For the reasons set out in the preamble, Title 17,
Chapter II of the Code of Federal Regulations is proposed to
be amended as follows:
PART 270 - RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF
1940
1. The authority citation for Part 270 continues to
read, in part, as follows:
Authority: 15 U.S.C. 80a-1 et seq., 80a-37, 80a-39
unless otherwise noted;
* * * * *
2. Section 270.12b-1 is amended by revising paragraph
(g) to read as follows:
270.12b-1 Distribution of shares by registered open-end
management investment company.
* * * * *
(g) If a plan covers more than one series or class of
shares, the provisions of the plan must be severable for each
==========================================START OF PAGE 25======
series or class, and whenever this section provides for any
action to be taken with respect to a plan, that action must be
taken separately for each series or class affected by the
matter. Nothing in this paragraph (g) shall affect the rights
of any purchase class under 270.18f-3(e)(2)(iii).
3. Section 270.18f-3 is amended by revising paragraphs
(c) and (e)(2)(iii) to read as follows:
270.18f-3 Multiple class companies.
* * * * *
(c)(1) Income, realized gains and losses, unrealized
appreciation and depreciation, and Fundwide Expenses shall be
allocated based on one of the following methods (which method
shall be applied on a consistent basis):
(i) To each class based on the net assets of that class
in relation to the net assets of the company (''relative net
assets'');
(ii) To each class based on the Simultaneous Equations
Method;
(iii) To each class based on the Settled Shares Method,
provided that the company is a Daily Dividend Fund (such a
company may allocate income and Fundwide Expenses based on the
Settled Shares Method and realized gains and losses and
unrealized appreciation and depreciation based on relative net
assets); or
(iv) To each share without regard to class, provided that
the company is a Daily Dividend Fund that maintains the same
==========================================START OF PAGE 26======
net asset value per share in each class and has received
undertakings from its adviser, underwriter or any other
provider of services to the company, agreeing to waive or
reimburse the company for payments to such service provider by
one or more classes, as allocated under paragraph (a)(1) of
this section, to the extent necessary to assure that all
classes of the company maintain the same net asset value per
share. Payments waived or reimbursed under such an
undertaking may not be carried forward or recouped at a future
date.
(2) For purposes of this section:
(i) Daily Dividend Fund means any company that has a
policy of declaring distributions of net investment income
daily, including any money market fund that determines net
asset value using the amortized cost method permitted by
270.2a-7;
(ii) Fundwide Expenses means expenses of the company not
allocated to a particular class under paragraph (a)(1) of this
section;
(iii) The Settled Shares Method means allocating to each
class based on relative net assets, excluding the value of
subscriptions receivable; and
(iv) The Simultaneous Equations Method means the
simultaneous allocation to each class of each day's income,
realized gains and losses, unrealized appreciation and
depreciation, and Fundwide Expenses and reallocation to each
==========================================START OF PAGE 27======
class of undistributed net investment income, undistributed
realized gains or losses, and unrealized appreciation or
depreciation, based on the operating results of the company,
changes in ownership interests of each class, and expense
differentials between the classes, so that the annualized rate
of return of each class generally differs from that of the
other classes only by the expense differentials among the
classes.
* * * * *
(e) * * *
(2) * * *
(iii) If the shareholders of the target class approve any
increase in expenses allocated to the target class under
paragraphs (a)(1)(i) and (a)(1)(ii) of this section, and the
purchase class shareholders do not approve the increase, the
company will establish a new target class for the purchase
class on the same terms as applied to the target class before
that increase.
* * * * *
By the Commission.
Jonathan G. Katz
Secretary
September 9, 1996