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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 270
Release No. IC-20916; File No. S7-24-88
RIN 3235-AD18
Exemption for Certain Open-End Management Investment Companies to
Impose Contingent Deferred Sales Loads
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
SUMMARY: The Commission is adopting a new rule under the
Investment Company Act of 1940 to permit certain registered open-
end management investment companies ("mutual funds") to impose
contingent deferred sales loads ("CDSLs"). A CDSL is a sales
charge that is paid at redemption; its amount declines over
several years until it reaches zero. The adoption of the rule is
intended to allow mutual funds to offer investors the choice of
an additional form of sales load without applying to the
Commission for exemptive relief.
EFFECTIVE DATE: The new rule will become effective (insert date
thirty days after the date of publication in the Federal
Register). Mutual funds that have received exemptive orders from
the Commission allowing CDSLs may continue to rely on those
orders for all the funds covered by an order, but must comply
with the new rule if the order is conditioned on compliance with
the rule as adopted.
FOR FURTHER INFORMATION CONTACT: Nadya B. Roytblat, Staff
Attorney, (202) 942-0693, or Robert G. Bagnall, Assistant Chief,
(202) 942-0686, Office of Regulatory Policy, Division of
Investment Management, Securities and Exchange Commission, 450
Fifth Street, N.W., Mail Stop 10-6, Washington, D.C. 20549.
Requests for formal interpretive advice should be directed
to the Office of Chief Counsel at (202) 942-0659, Division of
Investment Management, Securities and Exchange Commission, 450
Fifth Street, N.W., Mail Stop 10-6, Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION: The Commission is adopting 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").
The Commission is not adopting the amendments that were proposed
to Form N-1A [17 CFR 239.15A, 274.11A]. In a companion release,
the Commission is proposing amendments to rule 6c-10 that would
permit mutual funds to impose deferred sales loads generally,
including loads payable in installments ("installment loads");
the amendments also would modify most of the substantive
requirements of rule 6c-10 as adopted here.-[1]-
A condition in many CDSL exemptive orders granted to date
requires applicants to comply with rule 6c-10 as originally
proposed or as it may be reproposed, adopted, or amended. Rule
6c-10 as adopted here constitutes the rule as adopted within the
meaning of that condition; the amendments that the Commission is
proposing in the companion release do not constitute the rule as
reproposed or amended within the meaning of that condition and
may not be relied upon by those applicants.
-[1]-Exemption for Certain Open-End Management Investment
Companies to Impose Deferred Sales Loads, Investment Company Act
Release No. 20917 (Feb. 23, 1995).
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I. INTRODUCTION AND BACKGROUND
The Commission proposed rule 6c-10 in 1988 to allow mutual
funds to impose deferred sales loads generally, including CDSLs,
as well as other loads paid at redemption and sales loads payable
in installments.-[2]- The Commission received 33 comment
letters.-[3]- Although the commenters generally supported the
proposal to allow CDSLs, some commenters questioned the need for
certain substantive requirements in the rule. Commenters had
mixed reactions to the proposed provisions for installment loads.
Since the proposal of rule 6c-10, the Commission (or the
Division of Investment Management exercising delegated authority)
has issued almost 200 exemptive orders permitting funds to impose
CDSLs and continues to receive such applications. Also since the
original proposal, the National Association of Securities
Dealers, Inc. ("NASD") has amended the provisions of its Rules of
Fair Practice that govern mutual fund sales charges ("NASD Sales
Charge Rule"). The amendments address certain deferred sales
charges, including CDSLs, and distribution charges paid by funds
in accordance with rule 12b-1 under the Investment Company
Act.-[4]-
The Commission has considered the comments on the proposal
and the implications of the amendments to the NASD Sales Charge
Rule and has concluded that it may be appropriate to modify the
rule to eliminate most of the substantive requirements in the
original proposal and rely upon the roles of disclosure and the
overall limits in the NASD Sales Charge Rule. Instead of
adopting rule 6c-10 with these changes, the Commission is
proposing modifications to rule 6c-10 to obtain the benefit of
public comment on this approach and on issues raised by deferred
loads other than CDSLs.
In light of the Commission's extensive experience under the
CDSL exemptive orders, the Commission does not believe that it is
necessary to require funds seeking to impose CDSLs to continue to
file exemptive applications with the Commission pending
consideration of these proposed modifications. Therefore, the
Commission is adopting rule 6c-10 to permit the imposition of
CDSLs, but not other forms of deferred sales load.-[5]-
-[2]-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
[hereinafter Proposing Release].
-[3]-The commenters included the American Bar Association
Subcommittee on Investment Companies and Investment Advisers (the
"ABA Subcommittee"); the American Council of Life Insurance;
Deutsche Bank AG New York Branch ("Deutsche Bank") (commenting
outside the comment period); Fidelity Management and Research
Company; Gaston & Snow; IDS Financial Services, Inc. ("IDS
Financial"); IDS Mutual Fund Group; the Investment Company
Institute (the "ICI") (commenting both within and outside the
comment period); the Keystone Group, Inc.; the National
Association of Securities Dealers, Inc.; NASL Financial Services,
Inc. (commenting outside the comment period); NYLIFE Securities,
Inc.; Simpson, Thacher & Bartlett ("Simpson Thacher") (commenting
outside the comment period); Templeton Funds Management, Inc.;
and 19 individual investors. The comment letters are available
for public inspection and copying at the Commission's public
reference room in File No. S7-24-88.
-[4]-17 CFR 270.12b-1.
-[5]-See supra note 1.
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II. DISCUSSION
The Commission is adopting rule 6c-10 substantially as
originally proposed to permit mutual funds-[6]- to impose CDSLs.
The rule as adopted and as originally proposed requires CDSLs to
be calculated based on the lesser of the net asset value at the
time of purchase or at the time of redemption; specifies a
particular order of load calculation in a partial redemption;
prohibits CDSLs on reinvested dividends and capital gains
distributions; and allows scheduled CDSL variations. The rule as
adopted does depart from the proposal in certain respects in
light of comments on the 1988 proposal and of the adoption of
amendments to the NASD Sales Charge Rule.
A. The NASD Rule on Maximum Sales Charges
Paragraph (a)(2) in the proposed rule provided that the
maximum amount of a back-end load, or any combination of a back-
end load and a front-end load, may not exceed the maximum allowed
under the NASD Sales Charge Rule. At the time rule 6c-10 was
proposed, the NASD Sales Charge Rule did not expressly apply to
back-end loads. Since then, the NASD has amended its Sales
Charge Rule to include expressly back-end loads, as well as
asset-based distribution fees.-[7]- Because a Commission rule no
longer is necessary to bring CDSLs within the limits of the NASD
Sales Charge Rule, the proposed paragraph has been deleted from
rule 6c-10 as adopted to permit CDSLs.
-[6]-Like the rule as proposed, rule 6c-10 as adopted applies
only to open-end management investment companies other than
registered separate accounts. In the Proposing Release, the
Commission also requested comment on whether to propose
amendments to rules 6c-8 [17 CFR 270.6c-8] and 6e-3(T) [17 CFR
270.6e-3(T)] under the Act, and whether to issue revised proposed
amendments to rule 6e-2 [17 CFR 270.6e-2] under the Act,
governing the use of deferred sales loads by registered insurance
company separate accounts. The Commission received eight comment
letters in response to that request, suggesting that the
Commission not propose any amendments. The Commission is not
taking any action with regard to these rules.
-[7]-The NASD Sales Charge Rule prohibits NASD members from
offering or selling shares of an open-end management investment
company registered under the Act if the sales charges described
in the company'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,
Rules of Fair Practice, Art. III, Secs. 26(d)(1) and (2). See
also Letter from the NASD to Jonathan G. Katz, Secretary, SEC
(March 14, 1989), File No. S7-24-88; Proposed Rule Change by NASD
Relating to the Limitation of Asset-Based Sales Charges as
Imposed by Investment Companies, Securities Exchange Act Release
No. 29070 (Apr. 12, 1991), 56 FR 16137; Order Approving Proposed
Rule Change Relating to the Limitation of Asset-Based Sales
Charges as Imposed by Investment Companies, Securities Exchange
Act Release No. 30897 (July 7, 1992), 57 FR 30985.
Since back-end loads are used by mutual funds to finance the
payment of brokerage commissions, and brokers selling mutual fund
shares must be members of the NASD, virtually all funds that
impose these loads would be distributed by NASD members and
therefore would be subject to the Sales Charge Rule.
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B. "No-Load" Labeling
As initially proposed, rule 6c-10 would have prohibited any
exempted person and its first and second tier affiliates (all as
set forth in the proposed rule), from holding a mutual fund out
to the public as being "no-load" or as having "no sales charge"
if the fund imposed a deferred sales load. The amendments to the
NASD Sales Charge Rule also expressly prohibited 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 12b-1 and/or service fee that
exceeds .25% of average net assets per year.-[8]- Therefore, the
rule as adopted to permit CDSLs omits the prohibition in proposed
paragraph (b) as duplicative of the provision in the NASD Sales
Charge Rule. The Commission also believes that it would be
misleading and a violation of the federal securities laws for a
fund that imposes a deferred sales load to be held out as a no-
load fund.-[9]-
C. Interest, Carrying, and Finance Charges
As proposed in 1988, rule 6c-10 would have prohibited a fund
from imposing a deferred load if any amount were charged on the
shareholders or the fund that was intended to be a payment of
interest related to the load or a similar charge. Several
commenters pointed out that a prohibition on interest charges
would leave a fund's underwriter uncompensated for the cost of
advancing the sales and promotional expenses later reimbursed
through deferred loads.-[10]- Commenters noted that the NASD
Sales Charge Rule allows the inclusion of an interest component
in the computation of the aggregate sales load limits.-[11]-
The proposed provision was not intended to prohibit any
interest charges that might be reflected in the specified load
amount. Rather, the provision was designed to prohibit any
interest or similar charge that was separate from and in addition
to the load amount. Because paragraph (a)(1) of the rule already
requires all components of a deferred load to be included in one
specified amount, rule 6c-10 as adopted does not include the
interest charge prohibition.-[12]-
-[8]-NASD, Rules of Fair Practice, Art. III, Sec. 26(d)(3).
-[9]-See Proposing Release, supra note 2, at 45283 (referring, in
turn, to an earlier Commission statement of its view).
-[10]-Letter from the ABA to Jonathan G. Katz, Secretary, SEC at
7-8 (Jan. 31, 1989); Letter from Deutsche Bank, submitted on its
behalf by Simpson Thacher, to the Division of Investment
Management, SEC 8-9 (Nov. 5, 1993); Letter from the ICI to Barry
Barbash, Director, Division of Investment Management, SEC 3-4
(June 14, 1994); Letter from the ICI to Jonathan G. Katz,
Secretary, SEC 7-8 (Jan. 9, 1989); Letter from IDS Financial to
Jonathan G. Katz, Secretary, SEC 1-2 (Jan. 3, 1989).
-[11]-ICI June 14 comment letter, supra note 10, at 3-4; Deutsche
Bank November 5, 1993 comment letter, supra note 10, at 9.
-[12]-The initial proposal stated that in the view of the
Commission's Division of Market Regulation, deferred sales loads
likely would not involve an extension of credit from a fund's
underwriter to the shareholders that would be prohibited under
section 11(d)(1) of the Securities Exchange Act of 1934 (the
"Exchange Act"). One commenter nevertheless raised a concern
that section 11(d)(1) of the Exchange Act would prohibit deferred
(continued...)
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D. Scheduled Variations
Paragraph (a)(4) of the rule as adopted permits a fund to
offer a scheduled variation in, or eliminate, a CDSL for a
particular class of shareholders or transactions, provided that
the scheduled variation meets the conditions in rule 22d-1 under
the Act.-[13]- Paragraph (a)(4) also permits a fund to offer an
existing shareholder any new scheduled variation that would waive
or reduce the amount of a CDSL not yet paid.
E. Other Changes
The text of the rule as adopted also departs from the
originally proposed text in two other respects. First, because
the adoption of the rule is limited to CDSLs, the adopted rule
text omits provisions relating to installment loads or other
forms of back-end loads.-[14]- Second, paragraph (a) of the rule
as adopted omits an exemption from section 22(c) of the
Investment Company Act [15 U.S.C. 80a-22(c)], because section
22(c) is solely a grant of rulemaking authority to the Commission
and no exemption from that section is required.
F. Form N-1A
The Commission is not adopting the amendments to Form N-1A
that were proposed in 1988. Because the Commission is not
adopting the provisions of rule 6c-10 for installment loads, no
adjustments to the fee table are necessary now.
III. COST/BENEFIT ANALYSIS
Rule 6c-10 as adopted does not impose any significant
burdens on mutual funds. Rather, the rule should benefit the
funds by making it possible to impose CDSLs without having to
file exemptive applications with the Commission. The adoption of
the rule would give investors an additional option for a means of
paying sales charges.
-[12]-(...continued)
sales charges. Deutsche Bank November 5, 1993 comment letter,
supra note 10, at 9-10. The Commission believes that absent an
explicit interest charge, a deferred sales load would not involve
an extension of credit prohibited by section 11(d)(1) of the
Exchange Act. The Commission notes that the NASD Sales Charge
Rule limits the amount that NASD members can charge their
customers for the purchase of mutual fund shares.
-[13]-17 CFR 270.22d-1. Under rule 22d-1, any scheduled
variation must be applied uniformly to all offerees in the
specified class; adequate information about the scheduled
variation must be furnished to the existing and prospective
shareholders; the fund's prospectus and statement of additional
information must be revised to describe the new scheduled
variation prior to making the variation available to investors;
and existing shareholders must be advised of the new scheduled
variation within one year of the date the variation is first made
available to investors.
-[14]-E.g., paragraph (a)(1)(ii) and pertinent provisions of
other paragraphs such as paragraph (c)(3) in the original
proposal.
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IV. SUMMARY OF 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. 16619. No comments were
received on this analysis. The Commission has prepared a Final
Regulatory Flexibility Analysis in accordance with 5 U.S.C. 604.
The Analysis explains that the new rule allows mutual funds to
impose CDSLs without having to file exemptive applications with
the Commission. A copy of the Final Regulatory Flexibility
Analysis may be obtained by contacting Nadya B. Roytblat, Esq.,
Mail Stop 10-6, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549.
V. STATUTORY AUTHORITY
The Commission is adopting rule 6c-10 under sections 6(c)
and 38(a) of the Investment Company Act [15 U.S.C. 80a-6(c), and
-37(a)].
LIST OF SUBJECTS IN 17 CFR PART 270
Investment Companies, Reporting and recordkeeping
requirements, Securities.
TEXT OF ADOPTED RULE
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 is amended by adding
the following citation:
Authority: 15 U.S.C. 80a-1 et seq., 80a-37, 80a-39 unless
otherwise noted;
* * * * *
Section 270.6c-10 is also issued under sec. 6(c) [15 U.S.C.
80a-6(c)];
* * * * *
2. Section 270.6c-10 is added to read as follows:
270.6c-10 Exemption for certain open-end management investment
companies to impose contingent 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 270.22c-1 to the extent necessary to permit a
contingent deferred sales load to be imposed on shares issued by
the company, Provided, that:
(1) The amount of a contingent deferred sales load is
calculated as being the lesser of the amount that represents a
specified percentage of the net asset value of the shares at the
time of purchase, or the amount that represents the same or a
lower percentage of the net asset value of the shares at the time
of redemption;
(2) No contingent deferred sales load is imposed on shares,
or amounts representing shares, that are purchased through the
reinvestment of dividends or capital gains distributions;
(3) The contingent deferred sales 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, Provided, however, that
another order of redemption may be used if such order would
result in the redeeming shareholder paying a lower contingent
deferred sales load; and
(4) The same contingent deferred sales load is imposed on
all shareholders, except that scheduled variations in or
elimination of a contingent deferred sales load may be offered to
particular classes of shareholders or in connection with
particular classes of transactions, Provided, that the conditions
in 270.22d-1 are satisfied. Nothing in this paragraph (a)
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shall prevent a company from offering to existing shareholders a
new scheduled variation that would waive or reduce the amount of
a contingent deferred sales load that has not yet been 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 such company;
(2) Exempted person means any principal underwriter of,
dealer in, and any other person authorized to consummate
transactions in, securities issued by such company; and
(3) Contingent deferred sales load means any amount
properly chargeable to sales or promotional expenses that is paid
by a shareholder, if at all, at the time of redemption, the
amount of which would decrease to zero if the shares were held
for a reasonable period of time specified by the company.
By the Commission.
Jonathan G. Katz
Secretary
February 23, 1995