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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 239, 270, and 274
Release Nos. 33-7143, IC-20915, File No. S7-32-93
RIN 3235-AF00
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
AGENCY: Securities and Exchange Commission
ACTION: Final Rules
SUMMARY: The Securities and Exchange Commission is adopting a
rule under the Investment Company Act of 1940 ("Investment
Company Act") to permit open-end management investment companies
("mutual funds") to issue multiple classes of voting stock
representing interests in the same portfolio. The new rule will
eliminate the need for funds seeking to issue multiple classes of
their shares to apply for exemptions. The Commission also is
adopting amendments to certain registration statement forms under
the Investment Company Act and the Securities Act of 1933
("Securities Act") and publishing a staff guide to one
registration form. These amendments require that multiple class
and master-feeder funds provide investors with certain
disclosure. The disclosure will allow investors to obtain
information about these funds and their structures.
DATES:
Effective Date: [insert date 30 days after publication in
the Federal Register].
Compliance Date: Registration statements and post-effective
amendments filed with the Commission after the effective date
must be in compliance with the amendments to Forms N-1A and N-
14.
FOR FURTHER INFORMATION CONTACT: Karrie McMillan, Senior Counsel
(202) 942-0695, or Robert G. Bagnall, Assistant Chief (202) 942-
0686, Office of Regulatory Policy, Division of Investment
Management, 450 Fifth Street, N.W., Stop 10-6, Washington, D.C.
20549.
Requests for formal interpretive advice should be directed
to the Office of Chief Counsel (202) 942-0659, Division of
Investment Management, 450 Fifth Street, N.W., Washington, D.C.
20549.
SUPPLEMENTARY INFORMATION: The Commission is today adopting rule
18f-3 [17 CFR 270.18f-3] and a related amendment to rule 12b-1
[17 CFR 270.12b-1], both under the Investment Company Act. The
Commission is also adopting amendments to Forms N-1A [17 CFR
239.15A, 274.11A] and N-14 [17 CFR 239.23].
Most multiple class funds have also obtained exemptive
relief to impose contingent deferred sales loads ("CDSLs"). In
separate releases, the Commission also is adopting rule 6c-10 [17
CFR 270.6c-10] under the Investment Company Act, to allow mutual
funds to impose CDSLs, and proposing to amend the rule to permit
other forms of deferred loads, such as installment loads, and to
remove many of the requirements of the rule as adopted.-[1]-
TABLE OF CONTENTS
EXECUTIVE SUMMARY
I. BACKGROUND
II. DISCUSSION
-[1]-Exemption for Certain Open-End Management Investment
Companies to Impose Contingent Deferred Sales Loads, Investment
Company Act Release No. 20916 (Feb. 23, 1995); 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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A. Rule 18f-3
1. Differences in Distribution and
Shareholder Services
2. Allocation of Expenses
a. Class Expenses
b. Allocation of Fund Income and
Expenses
c. Accountant's Report on System of
Internal Control
d. Waivers and Reimbursements of
Expenses
3. Voting and Other Rights and Obligations
4. Exchange Privileges and Conversions
5. Board Review of Plans
B. Rule 12b-1
C. Disclosure
1. Prospectus Disclosure Concerning Other
Classes or Feeder Funds
2. Discussion of Classes or Feeder Funds
Offered in Prospectus
3. Discussion of Classes Into Which Shares
May Convert or Be Exchanged
4. Advertising and Sales Literature
D. Effective Dates
III. COST/BENEFIT OF THE PROPOSALS
IV. REGULATORY FLEXIBILITY ACT ANALYSIS
V. STATUTORY AUTHORITY
VI. TEXT OF ADOPTED RULE AND RULE AND FORM AMENDMENTS
EXECUTIVE SUMMARY
Since 1985, the Commission has issued approximately 200
exemptive orders allowing funds to issue multiple classes of
shares representing interests in the same portfolio, typically
with different distribution arrangements. The orders frequently
impose as many as 20 conditions designed to address various
investor protection concerns.
The Commission is adopting rule 18f-3 under the Investment
Company Act, which will permit funds to issue multiple classes of
shares without the need to seek exemptions from the Commission.
The rule will decrease the amount of time and expense involved in
creating these structures. It also will reduce the Commission's
burden of reviewing the applications. The rule requires certain
differences in the expenses, rights, and obligations of different
classes, permits certain other differences among classes,
specifies the matters on which class voting is required, and
prescribes how income and expenses must be allocated. The rule
also emphasizes the responsibilities of the board of directors to
establish and monitor allocation and other procedures in the best
interests of each class and of the fund as a whole. Finally, the
rule permits, but does not require, different classes to have
different exchange privileges and conversion rights. A related
amendment to rule 12b-1 clarifies that a rule 12b-1 plan must
have separate provisions for each class; any action on the plan,
such as director or shareholder approval, must take place
separately for each class.
Over the past few years, many fund sponsors have adopted
another distribution arrangement designed to achieve many of the
same business goals as the multiple class structure without the
need to obtain exemptions under section 18. This "master-feeder"
arrangement comprises a two-tier structure in which one or more
funds (the upper tier) invest solely in the securities of another
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fund (the lower tier).-[2]- Although master-feeder structures
are functionally similar to multiple class funds, they are viewed
as not needing exemptions and have been subject to different
disclosure requirements.
The disclosure requirements adopted today apply equally to
multiple class and master-feeder funds, and are similar to those
currently in effect for master-feeder funds. A prospectus for a
class or feeder fund will be required to include disclosure about
other publicly offered classes or feeder funds not offered
through the prospectus and a telephone number an investor may
call to receive additional information about other classes or
feeder funds sold by the same bank, broker, or other financial
intermediary. In view of commenters' concerns, the Commission is
not adopting the more extensive disclosure requirements
originally proposed. The provisions as adopted are consistent
with the Commission's encouragement of simplified prospectuses.
I. BACKGROUND
Both the multiple class and master-feeder structures may
benefit shareholders and fund sponsors. These structures may
increase investor choice, result in efficiencies in the
distribution of fund shares, and allow fund sponsors to tailor
products more closely to different investor markets. Fund
sponsors assert that multiple classes may enable funds to attract
larger asset bases, permitting them to spread fixed costs over
more shares, qualify for discounts in advisory fees
("breakpoints"), and otherwise experience economies of scale,
resulting in lower fees and expenses. They also state that
multiple classes avoid the need to create "clone" funds, which
require duplicative portfolio and fund management expenses.
Furthermore, fund sponsors state that a larger asset base permits
greater portfolio liquidity and diversification.
Master-feeder funds may achieve similar benefits of
economies of scale, thus potentially lowering expenses, and also
allow several different small funds access to the same management
and compliance personnel. The master-feeder structure allows a
fund sponsor to offer feeder funds that invest in specialized
portfolios, even though the sponsor's expected asset base may not
justify organizing a stand-alone fund for that market or market
segment. Sponsors also use this structure to offer off-shore and
other unregistered feeder funds.-[3]-
Investor understanding of sales and service charges in both
arrangements, however, has been a subject of concern to the
Commission.-[4]- Some commentators have asserted that the
-[2]-Master-feeder funds are often referred to as "core and
feeder" or "hub and spoke" funds. Signature Financial Group is
the originator and patent licensor of the Hub and Spoke
form of
the master-feeder structure.
-[3]-P.W. Coolidge, Business Applications of the Hub and Spoke
Structure, 1993 MUTUAL FUNDS & INVESTMENT MANAGEMENT CONFERENCE
X-3 (Mar. 11, 1993); R.M. Phillips and C.E. Plaza, Hub & Spoke
Mutual Funds, 26 SECURITIES & COMMODITIES REGULATION 137 (Aug.
1993). See also "Hub-and-Spoke" Funds: A Report Prepared by
the Division of Investment Management, submitted with letter from
Richard C. Breeden, Chairman, SEC, to John D. Dingell, Chairman,
House Comm. on Energy and Commerce (Apr. 15, 1992).
-[4]-See, e.g., Exemption for Open-End Management Investment
Companies Issuing Multiple Classes of Shares; Disclosure by
Multiple Class and Master-Feeder Funds, Investment Company Act
Release No. 19955 (Dec. 15, 1993), 58 FR 68074 (Dec. 23, 1993)
[hereinafter Proposing Release].
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complexity generated by these arrangements may confuse many
investors, who often may not understand them or the effect that
fees have upon performance.-[5]-
On December 15, 1993, the Commission proposed for public
comment rule 18f-3 and related amendments to rule 12b-1 under the
Investment Company Act and advertising and prospectus disclosure
requirements.-[6]- Among other things, rule 18f-3 would have
allowed funds to issue multiple classes of shares without the
need to apply for and receive an exemption from the Commission
and largely would have codified the exemptive orders. The
proposal also would have made consistent the disclosure
requirements of Form N-1A for multiple class and master-feeder
funds by imposing disclosure requirements based on those in the
multiple class exemptive orders. These requirements would have
included a prominent legend following the fee table disclosing
the availability of other classes or feeder funds not offered in
that prospectus, and an undertaking to provide investors with
additional information about other classes or feeder funds. They
also would have required full cross-disclosure in the prospectus
about any other classes or feeder funds that were offered or made
available through the same broker, dealer, bank, or other
financial intermediary, and permitted investors to choose among
alternative arrangements for sales and related charges. The
proposal also would have required a line graph comparing the
hypothetical value of holdings of the classes or feeder funds
described in the prospectus upon redemption at the end of each
year during a ten-year period. The proposal would have made
conforming changes to advertising and sales literature rules and
Form N-14. A related amendment to rule 12b-1 would have
clarified that a rule 12b-1 plan must treat each class separately
and required separate director and shareholder approval.
II. DISCUSSION
The Commission received 24 comments on the proposal.-[7]-
Most of the commenters were fund groups, law firms, and trade
associations. Although all commenters favored a rule allowing
multiple class structures without the need for exemptive orders,
most strongly opposed the proposed disclosure requirements. The
Commission is adopting rule 18f-3 and related prospectus
disclosure requirements with modifications that address the
comments received. Rule 18f-3 allows funds flexibility in
tailoring many aspects of their multiple class structures,
overseen by the board of directors, while preserving investor
protection conditions based on the exemptive orders and derived
from the concerns underlying section 18. The Commission has
reconsidered the disclosure aspects of the proposal in light of
the strong opposition of the commenters, and is adopting much
-[5]-See Proposing Release, 58 FR at 68082 n.59; see also Jeff
Kelly, A Fine Mess, MORNINGSTAR MUTUAL FUNDS, Nov. 25, 1994, at
S1; Carole Gould, Brokers' New Pitch; Level Load on Funds, N.Y.
TIMES, May 7, 1994, at 37 ("If investors are confused about which
pricing method is best for them, it's no wonder"); Vanessa
O'Connell, Mastering the ABCs of Fund Shares, MONEY, Sept. 1993
("Counting A, B and C shares, analysts now predict that the
number of fund options could double to a mind-numbing 8,000
within the next 18 months").
-[6]-Proposing Release, supra note 4.
-[7]-The comment letters, as well as a comment summary dated Dec.
21, 1994 prepared by the Commission's staff, are available for
public inspection and copying at the Commission's public
reference room in File No. S7-32-93.
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less extensive requirements than proposed. The rule and form
amendments will give investors the means to obtain information
about certain other classes or other feeder funds investing in
the same master fund, but do not require extensive cross-
disclosure in prospectuses and advertisements.
A. Rule 18f-3
The Commission is adopting rule 18f-3 to create a limited
exemption from sections 18(f)(1) and 18(i)-[8]- for funds that
issue multiple classes of shares with varying arrangements for
the distribution of securities and provision of services to
shareholders. Multiple class funds relying on existing exemptive
orders would be allowed to use the rule but would not be required
to do so.-[9]- The Commission has made several modifications to
the rule in view of the comments received.
The rule largely codifies the exemptive order approach of
addressing the potential for conflicts among classes by limiting
the permissible differences among classes in expenses and voting
rights. It specifies permissible methods of allocating expenses,
and allows the waiver of expenses by service providers. Rule
18f-3 also specifies the conditions under which shares of one
class may be converted into or exchanged with shares of another
class.
The rule requires the board of directors of a fund to
approve a plan detailing each class's arrangement for the
distribution of securities and the services provided to each
class, and the payment of other expenses. The board must
determine that the plan is in the best interests of each class
individually and the fund as a whole.
1. Differences in Distribution and Shareholder
Services
Under paragraph (a)(1)(i), classes must differ either in the
manner in which they distribute their securities, or in the
services they provide to their shareholders, or both. As under
the proposal, distribution systems may differ in the amount or
form of payment, or the nature or extent of services provided. A
class that pays a front-end load, for example, differs from a
-[8]-15 U.S.C. 80a-18(f)(1) and -(i). Section 18(f)(1)
generally makes it "unlawful for any registered open-end company
to issue any class of senior security." Section 18(g) defines
senior security to include any stock of a class having a priority
over any other class as to distribution of assets or payment of
dividends. Section 18(i) requires that every share of stock
issued by a registered investment company be voting stock, with
the same voting rights as every other outstanding voting stock.
-[9]-Funds currently relying on exemptive orders that choose to
operate instead under the new rule must first prepare plans under
paragraph (d) of the rule and file copies of the plans with the
Commission as exhibits to their registration statements under new
Item 24(b)(18) of Form N-1A. Provided that no changes are made
to arrangements and expense allocations under an existing order,
paragraph (d) does not require board approval of the plan. A
fund choosing to rely on an existing exemptive order, including
one providing an exemption for "future classes," may continue to
do so, provided it complies with all of the conditions in the
order (including the disclosure conditions); in addition, such a
fund would also be subject to the disclosure requirements adopted
today. See discussion at II.A.5. regarding the adoption of a
multiple class plan under the rule.
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class paying a rule 12b-1 fee-[10]- in a spread load or level
load arrangement in the amount, the form (by shareholders
individually versus the class as a whole), and timing (at
purchase versus over time) of distribution charges.
Funds may also meet paragraph (a)(1)(i) by providing
different services to the shareholders of each class. One
commenter expressed concern that the requirement in proposed
paragraph (a)(5) that all classes have the same rights and
obligations would not permit differences among classes in
services such as checkwriting.-[11]- Presumably, the commenter
viewed the term "shareholder service" as encompassing only
certain services provided to shareholders by banks, brokers, and
other third parties detailed in the many multiple class exemptive
applications, and not shareholder transaction services, such as
checkwriting. The term "shareholder services" in the rule,
however, encompasses both types of services.
2. Allocation of Expenses
a. Class Expenses
Under rule 18f-3, certain expenses must be allocated to
individual classes, while others may be so allocated at the
discretion of the fund's board of directors. Paragraph (a)(1)(i)
provides that expenses relating to the distribution of a class's
shares, or to services provided to the shareholders of that
class, must be allocated to that class. Although this
requirement was implicit in proposed paragraph (a)(1)(i), the
text of the rule as adopted has been clarified to make it
explicit.
Paragraph (a)(1)(ii) provides that other expenses (other
than advisory-[12]- or custodial fees or other expenses relating
-[10]-A rule 12b-1 fee is a charge to fund assets that may be
used to pay certain distribution expenses in accordance with rule
12b-1 (17 CFR 270.12b-1) under the Investment Company Act.
-[11]-Letter from the Investment Company Institute to Jonathan G.
Katz, Secretary, SEC 22 (Feb. 22, 1994).
-[12]- Under rule 18f-3, the investment advisory fee charged to
each class generally must be the same percentage amount. In the
case of a multiple class fund with an advisory contract that
provides for compensation to the adviser on the basis of
performance, paragraph (a)(1)(iii) clarifies that the percentage
amount may vary for each class to the extent that any difference
is the result of the application of the same performance fee
provisions to the different investment performance of each class.
In addition, the Commission believes that it would also be
consistent with section 205(b)(2) and rule 205-1 if a multiple
class fund were to use the investment performance of a single
class for the purpose of calculating the performance fee. In
approving the use of a class, the board of directors of the fund
should consider all of the relevant factors, including the
proposed performance fee schedule, the effect that using one
class instead of another would have on the fees to be paid, the
anticipated relative size of each class, the expense ratio of
each class, the effect of any waiver or reimbursement of expenses
on the performance of that class, the nature of the index to
which the fund's performance will be compared and, if the index
is comprised of comparable funds, the average expense ratio of
those funds. For instance, it would appear difficult for a board
(continued...)
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to the management of the fund's assets, which must be allocated
to all classes in accordance with paragraph (c)) may be allocated
to different classes in different amounts to the extent that they
are incurred by one class in a different amount, or reflect
differences in the amount or kind of services that different
classes receive.-[13]- This paragraph encompasses both
differences in actual out-of-pocket expenses among classes (for
instance, blue sky fees that are incurred for some classes but
not others), and differences in charges when classes receive
services that are different in kind or amount. For example, some
classes may use transfer agency services differently than others.
Thus, the rule contemplates that allocations may be based upon
the level or kind of services used.-[14]-
The proposal requested comment on whether the rule should
provide more specific limits on differential allocations of
expenses. Commenters strongly supported the flexible approach
taken in the proposal.-[15]- In particular, one commenter stated
that "[a] more rigid approach to expense allocation could
undermine the utility of the exemptive rule."-[16]- Another
endorsed the "proposal to leave these determinations to the
Directors."-[17]- A commenter stated that mandating certain
expenses as class expenses could run afoul of Internal Revenue
Service private letter rulings, which only permit de minimis
differences among the expenses of different classes.-[18]-
At several commenters' suggestion, the Commission has
revised paragraph (a)(1)(ii) to delete the word "materially."
Although the materiality qualifier in proposed paragraph
(a)(1)(ii)(B) would have allowed boards of directors to avoid
-[12]-(...continued)
to justify basing the calculation of a performance fee on the
performance of a class with the lowest expenses if the result
would be that shareholders of another class would pay a higher
advisory fee than would be warranted given that class's
performance.
-[13]-The board should monitor whether the fund's allocations
have complied with the requirements of paragraph (a)(1)(ii) when
the board reviews the fund's plan. See section II.A.5., infra.
-[14]-Paragraph (a)(1)(ii) as adopted has been reworded to delete
subparagraph (A) of the proposed rule text. Under proposed
paragraph (a)(1)(A), expenses could have been treated as
belonging to a class if they were directly related to the
arrangement of that class for shareholder services or
distribution. The proposal did not provide any guidance for
determining whether an expense was "directly related," nor did it
explain how these expenses were to be distinguished from expenses
of an arrangement under paragraph (a)(1)(i), or other expenses
under paragraph (a)(1)(ii)(B). Therefore, the Commission has
deleted this provision as unnecessary.
-[15]-E.g., Letter from Ropes & Gray to Jonathan G. Katz,
Secretary, SEC 7 (Feb. 21, 1994); Letter from Federated Investors
to Jonathan G. Katz, Secretary, SEC 2 (Feb. 15, 1994).
-[16]-ICI Comment Letter, supra note 11, at 21.
-[17]-Letter from the American Bar Association to Jonathan G.
Katz, Secretary, SEC 12 (Mar. 15, 1994).
-[18]-Letter from Fidelity Management and Research Company to
Jonathan G. Katz, Secretary, SEC A-1 (May 13, 1994).
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making allocation determinations for trivial differences in
expenses, several commenters interpreted the requirement to mean
that boards could not allocate expenses with immaterial
differences at all.-[19]- Because paragraph (a)(1)(ii) is
permissive, allocations of differential expenses, regardless of
materiality, are at the board's discretion.
b. Allocation of Fund Income and Expenses
Paragraph (c) sets forth the allocation methods for income,
realized and unrealized capital gains and losses, and expenses
that are not assigned to a particular class. The proposal would
have required that these items be allocated to each class based
on the relative net assets. One commenter, however, argued that
requiring allocations based on net asset value could result in
the dilution of shareholders in daily dividend funds such as
money market funds that permit investors to subscribe for shares,
but not pay for them with federal funds.-[20]- According to the
commenter, because an investor's money is not available for
investment by a fund until federal funds have been received, the
payment of dividends to the investor before receipt of federal
funds would dilute the holdings of other shareholders.-[21]-
Therefore, the rule as adopted allows different methods of
allocation for daily distribution funds than for non-daily
distribution funds. Non-daily distribution funds must allocate
these items based on the relative net assets. Money market funds
(including those calculating net assets on an amortized cost
basis) and other funds making daily distributions of their net
investment income may allocate these items to each share
regardless of class,-[22]- or based on the relative net assets
-[19]-E.g., ICI Comment Letter, supra note 11, at 21.
-[20]-Memorandum to file from Karrie McMillan regarding telephone
conversation with Richard Peteka, Oppenheimer Management
Corporation (May 11, 1994) (Peteka Comment Memorandum). The term
"net assets" includes the value of any receivables, including
subscriptions to purchase shares for which the fund has not yet
received payment. See AICPA Audit Guide, supra note 26, at
2.22. Because daily distribution fund portfolio transactions
settle daily against federal funds (in contrast to other
securities that have "regular way" (e.g., currently T+5)
settlement), many of these funds only record income and expenses
on their books for shareholders whose subscriptions have cleared
in federal funds. See T. Rowe Price Associates, Inc. (pub.
avail. Dec. 22, 1986). Thus, allocating on the basis of relative
net assets would be in conflict with typical daily distribution
fund allocations.
-[21]-According to the commenter, this problem is exacerbated
when a large disparity exists between the size of the classes or
feeder funds, as each subscription to the smaller class or feeder
fund will be large relative to the size of the other classes or
feeder funds, and will dilute the classes or feeder funds having
greater assets. Peteka Comment Memorandum, supra note 20.
-[22]-Like some exemptive orders, paragraph (c)(2)(i) requires
funds allocating these items equally to all shares regardless of
class to obtain the agreement of their service providers that, to
the extent necessary to assure that all classes maintain the same
net asset value, the providers will waive or reimburse class
expenses.
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(settled shares).-[23]- The parenthetical reference in the rule
to calculation of net assets using amortized cost recognizes that
money market funds may allocate fund expenses based on the
relative amortized cost net assets.-[24]- The allocation method
selected by the fund must be applied consistently.
A commenter requested that the Commission provide guidance
about the allocation of costs of implementing a multiple class
structure.-[25]- If a fund is organized initially with a
multiple class structure, these costs are part of the fund's
organization expenses and usually are capitalized. Funds may
allocate the amortization of these expenses among the classes
like other expenses under paragraph (c) of the rule. If the
class structure is added after the fund has been organized, or if
new classes are added, these expenditures would not be
capitalized. Instead, they would be expenses of the class or
classes in existence before the addition of the class structure
or the new classes,-[26]- and therefore would be recognized by,
and allocated to, those existing classes as an expense under
paragraph (c) and not charged to the new class or classes.-[27]-
c. Accountant's Report on System of Internal
Control
The Commission is not adopting the proposed amendment to
Form N-SAR, relating to an accountant's report on a fund's system
of internal controls. As proposed, Item 77B would have required
accountants preparing the report on a multiple class fund's
system of accounting controls to refer expressly to the
procedures for calculating the classes' net asset values. This
provision was intended to replace the requirement in the
exemptive orders that an expert file a separate report on the
adequacy of accounting procedures of multiple class funds. One
commenter supported the proposal's omission of a requirement for
the expert's report as no longer necessary. It believed that the
orders granted to date, and the additional guidance in rule 18f-
3, adequately define the methodology that a fund should follow in
allocating income, realized and unrealized capital gains and
losses, and expenses of the company to a class of shares.-[28]-
The commenter, however, disagreed with the proposal's requirement
of a specific reference in the internal controls report to the
-[23]-The rule defines "relative net assets (settled shares)" to
mean net assets valued in accordance with generally accepted
accounting principles, but excluding the value of subscriptions
receivable, in relation to the net assets of the fund.
-[24]-See Fidelity Comment Letter, supra note 18, at A-2.
-[25]-Id. at 3.
-[26]-See Financial Accounting Standards Board, Financial
Accounting Standards No. 7, 8 and 9, ACCOUNTING AND REPORTING
BY DEVELOPMENT STAGE ENTERPRISES, and AICPA, AUDITS OF
INVESTMENT
COMPANIES: AUDIT AND ACCOUNTING GUIDE 8.10 (May 1993).
-[27]-Organization expenses should be distinguished from other
expenses, such as printing of prospectuses. These other non-
organizational expenses may appropriately be capitalized and
amortized in accordance with the provisions of generally accepted
accounting principles. The amortization of these expenses would
be allocated to all classes which benefit from the expense.
-[28]-Letter from the American Institute of Certified Public
Accountants to Jonathan G. Katz, Secretary, SEC 2 (Mar. 18,
1994).
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procedures for calculating multiple class net assets, arguing
that because the internal control structure, required to be
reviewed by Statement on Auditing Standards No. 55,-[29]-
includes the procedures for calculating multiple class net
assets, the report required by Item 77B need not be modified to
emphasize only one of the aspects of the internal control
structure. The Commission believes that since under current
accounting standards, a review of the fund's internal control
structure must include a review of procedures for calculating
multiple class net assets, it is unnecessary to require the
independent accountant's report to include such a reference.
d. Waivers and Reimbursements of Expenses
As adopted, rule 18f-3(b) expressly allows a fund's
underwriter, adviser, or other provider of services to waive or
reimburse the expenses of a specific class or classes. The
proposal would have permitted only waivers or reimbursements by
the fund's adviser or underwriter of class expenses, and would
not have permitted waivers or reimbursements for specific classes
of fund expenses, such as advisory fees. Despite the prohibition
on differential waivers of fund expenses, fund sponsors could
have achieved the same result indirectly by waiving or
reimbursing class expenses. Therefore, the Commission is
deleting the restrictions on waivers in the final rule. This
modification is not intended to allow reimbursements or waivers
to become de facto modifications of the fees provided for in
advisory or other contracts so as to provide a means for cross-
subsidization between classes.-[30]- Consistent with its
oversight of the class system and its independent fiduciary
obligations to each class, the board must monitor the use of
waivers or reimbursements to guard against cross-subsidization
between classes.-[31]-
3. Voting and Other Rights and Obligations
The Commission is adopting the provisions relating to
shareholder voting substantially as proposed.-[32]- These
provisions elicited little comment. Paragraph (a)(2), which
provides that each class must have exclusive voting rights on any
matter submitted to shareholders that relates solely to the
arrangement of that class, governs which class of shareholders
may vote on a matter, but does not affect whether the matter is
one that requires a shareholder vote. Paragraph (a)(3) requires
that each class have the right to vote separately on matters in
which its interests are different from those of other classes.
The Commission is adopting as proposed paragraph (a)(4),
which states that except as provided in the previous paragraphs,
-[29]-Codification of Statements on Auditing Standards, American
Institute of Certified Public Accountants, AU 319 (1994).
-[30]-Rule 18f-3 is only a limited exemption from the literal
application of the prohibitions of section 18 and may not be used
to undermine that section's role in effecting the statutory
purpose of preventing the issuance of "securities containing
inequitable or discriminatory provisions." 15 U.S.C.
80a-1(b)(3).
-[31]-See infra section II.A.5.
-[32]-Paragraphs (a)(2) and (a)(3) of the final rule were
paragraphs (a)(3) and (a)(4), respectively, in the rule as
proposed. They have been renumbered as a result of the transfer
of certain provisions of proposed paragraph (a)(2) into paragraph
(b) of the final rule.
-------------------- BEGINNING OF PAGE #11 -------------------
each class of a fund relying on the rule must have the same
rights and obligations as each other class.-[33]- Among other
things, this paragraph effectively requires multiple class funds
to allocate voting rights that affect all fund shareholders
equally to all shareholders. The Commission had requested
comment on whether to require that voting be allocated based on
relative net asset value per share, rather than one vote per
share.-[34]- All of the commenters addressing the issue opposed
such a requirement. These commenters suggested that the
proposal's more flexible approach of allowing a fund to select
the method most suitable for it would provide the best result for
each fund.-[35]- Several commenters noted that many funds would
be required to hold shareholder meetings in order to amend their
charters to comply with such a requirement, thus incurring
additional expense.-[36]- Therefore, the Commission is not
requiring voting based on relative net asset value per share, but
believes that such voting is permissible under section 18(i) of
the Investment Company Act.-[37]-
-[33]-This provision was paragraph (a)(5) in the rule as
proposed.
-[34]-See footnote 42 of the Proposing Release.
-[35]-E.g., ICI Comment Letter, supra note 11, at 22; Fidelity
Comment Letter, supra note 18, at A-2 (Fidelity stated that
dollar-based voting may not be consistent with state law).
-[36]-E.g., Letter from the Chicago Bar Association, Subcommittee
of the Securities Law Committee to Jonathan G. Katz, Secretary,
SEC 3 (Feb. 21, 1994); Letter from Federated Investors to
Jonathan G. Katz, Secretary, SEC 3 (Feb. 15, 1994).
-[37]-See Sentinel Group Funds, Inc. (pub. avail. Oct. 27, 1992)
(under section 18(i), voting rights of different series in a fund
may be tied to the relative net asset value of each series to
avoid vesting unfair voting power in series with per share net
asset values that are significantly lower than those of other
series). In discussing the meaning of "equal voting rights"
under section 18(i), the Commission has noted that:
Problems of interpretation may very well arise from defining
with exactitude what constitutes "equal voting rights"
within the meaning of Section 18(i). It is apparent that in
certain cases an inflexible adherence to any rigid
interpretation could produce grave distortions of the
apparent intent of Congress to require a reasonably
equitable distribution of voting power consistent with the
applicable provisions pertaining to the different classes of
stock.
The Solvay American Corp., 27 SEC 971, 974 n.9 (1948).
The Commission also believes that voting based on relative
net asset value is consistent with the definition of "the vote of
a majority of the outstanding voting securities" in section
2(a)(42) of the Investment Company Act [15 U.S.C. 80a-
2(a)(42)]. That provision does not specify whether the
prescribed percentages are to be determined on the basis of the
number of securities, or the value of the securities.
-------------------- BEGINNING OF PAGE #12 -------------------
4. Exchange Privileges and Conversions
The Commission is adopting provisions relating to
conversions and exchanges of shares substantially as
proposed.-[38]- The rule as adopted also includes a provision
allowing conversions when a shareholder is no longer eligible to
invest in a particular class.-[39]-
Paragraph (e)(1) allows funds to offer different exchange
privileges to different classes.-[40]- Paragraph (e)(2) permits
funds to offer one or more classes with conversion features that
allow for automatic conversions into another class after a
specified period, if the conversions are made at net asset value
without the imposition of any sales load, fee or other charge
upon the conversion. As suggested by a commenter, paragraph
(e)(2) as adopted provides that total expenses (not just those
associated with a rule 12b-1 plan) may not be higher for the new
class than for the old class.-[41]-
The Commission has added paragraph (e)(3), which allows,
under limited circumstances, conversions that occur whenever a
shareholder ceases to be eligible to invest in a class. Unlike
paragraph (e)(2), this provision does not require that the new
class have the same or lower expenses. A commenter objected that
the expense limitation in paragraph (e)(2) would not accommodate
situations in which a shareholder may no longer be eligible to
participate in the class in which he or she originally invested,
and therefore need or wish to be placed into a class that may
have higher expenses.-[42]- For example, an investor in a class
offered only to trust customers may cease to be a trust customer,
and thus no longer be eligible to invest in that class.-[43]- In
-[38]-Exchanges are subject to section 11 of the Investment
Company Act and the rules thereunder. See 15 U.S.C. 80a-
11(a); 17 CFR 270.11a-1, -2 and -3 (requiring offers of exchange
to be made on the basis of net asset value, with certain
exceptions).
-[39]-The Commission also is amending Form N-1A to require
prospectus disclosure for multiple class funds allowing or
requiring conversions or exchanges between classes. See infra
section II.C.3. for a discussion of the amendment.
-[40]-For example, when shares of one class of a fund may be
exchanged for shares of the same class in another fund, but not
for shares of other classes.
-[41]-ICI Comment Letter, supra note 11, at 23-24
-[42]-Letter from Hale and Dorr to Jonathan G. Katz, Secretary,
SEC 7 (Feb. 22, 1994). See Ark Funds, Investment Company Act
Release Nos. 19812 (Oct. 22, 1993), 58 FR 58025 (Oct. 28, 1993)
(Notice of Application), and 19882 (Nov. 17, 1993), 55 SEC Docket
1541 (Order) (allowing automatic conversions when a shareholder
in one class becomes ineligible to purchase shares of the class
originally held); Federated Securities Corp. (pub. avail. Jan.
14, 1992) (permitting shareholders to switch from one class to
another class where, because of a change in circumstances, such
shareholders would no longer be eligible to invest in a
particular class of shares).
-[43]-Although some fees may be lower for classes whose
shareholders have certain other relationships with a financial
institution that provides services to fund shareholders, these
investors may also be paying other fees directly to the
institution in addition to paying expenses at the fund level.
-------------------- BEGINNING OF PAGE #13 -------------------
this event, the commenter suggested that the rule permit the new
class to assess higher rule 12b-1 fees. Paragraph (e)(3) allows
these conversions to occur, if the conversion is effected at net
asset value without the imposition of any sales load, fee, or
other charge upon the conversion and the investor is given
advance notice of the conversion.
5. Board Review of Plans
The Commission is adopting paragraph (d), governing the
adoption and approval of multiple class plans by boards of
directors, with modifications in view of comments received. Rule
18f-3 gives the board of directors, particularly the independent
directors, significant responsibility to approve a fund's plan
and oversee its operation. Paragraph (d) requires that a fund
adopt a written plan specifying all of the differences among
classes, including the various services offered to shareholders,
different distribution arrangements for each class, methods for
allocating expenses relating to those differences, and any
conversion features or exchange privileges.-[44]- The plan
should provide a detailed statement of the differences among the
classes.
The rule requires that the board, including a majority of
the independent directors, find that the plan is in the best
interests of each class individually and the fund as a
whole.-[45]- This approval requirement replaces the several
board reviews under the exemptive orders. The orders required
boards of directors to approve the issuance of multiple classes
of shares, review and approve specific allocations of class
expenses, monitor for conflicts of interest among classes and
take any action necessary to eliminate conflicts.
Paragraph (d) as adopted requires the board to approve a
plan initially and before any material change. The Commission is
not requiring annual approval of the board, which was proposed.
Many commenters objected to the annual review requirement and
argued that it runs counter to the Commission's recent
elimination of certain annual review requirements.-[46]-
Paragraph (d) as adopted does not require the board to approve
the initial adoption of a plan if the plan merely reproduces
without change a fund's existing multiple class structure that
the board has approved under an existing exemptive order. One
commenter requested that the Commission amend the rule to clarify
that board approval is not required for existing classes that
intend to rely on the rule if the board has already approved a
-[44]-Forms N-1A and N-14 have been amended to require that a
copy of the plan be filed as an exhibit to the forms.
-[45]-In making its findings, the board should focus, among other
things, on the relationship among the classes and examine
potential conflicts of interest among classes regarding the
allocation of fees, services, waivers and reimbursements of
expenses, and voting rights. Most significantly, the board
should evaluate the level of services provided to each class and
the cost of those services to ensure that the services are
appropriate and that the allocation of expenses is reasonable.
-[46]-E.g., ABA Comment Letter, supra note 17, at 4; Federated
Investors Comment Letter, supra note 15, at 2; Hale and Dorr
Comment Letter, supra note 42, at 4-5; ICI Comment Letter, supra
note 11, at 23; Letter from Dechert Price & Rhoades to Jonathan
G. Katz, Secretary, SEC 2 (Feb. 22, 1994). See Proposing Release
at 21 n.48, 58 FR at 68080 n.48, for a discussion of recent
Commission actions to reduce the burdens on boards of directors.
-------------------- BEGINNING OF PAGE #14 -------------------
multiple class structure under an order.-[47]- Although the rule
as adopted does not require a vote of the board of directors
under these circumstances, a fund with an existing order that
seeks to rely on rule 18f-3 must create a plan setting forth the
fund's current separate arrangements, expense allocation
procedures and exchange and conversion privileges-[48]- and file
a copy of the plan with the Commission as an exhibit to the
fund's registration statement under new Item 24(b)(18). These
plans create a cohesive structure for monitoring the operation of
the class system, rather than having procedures scattered among
exemptive orders and their amendments, prospectuses and internal
guidelines, and the formulation of a plan from these source
materials should not impose a significant burden.
Finally, the rule text as adopted omits the proposed
requirement that boards find that plans are "fair." This change
recognizes that the term was not a condition of the exemptive
applications, and that the requirement that a board find a plan
to be in the best interests of each class individually and of the
fund as a whole provides the same protection as a separate
fairness requirement.
B. Rule 12b-1
The Commission is adopting new paragraph (g) of rule 12b-1
substantially as proposed. It provides that if a plan covers
more than one class of shares, the provisions of the plan must be
severable for each class, and any action taken on the plan must
be taken separately for each class. The board would be required
to make the finding, separately for each class, that a
distribution plan presents a "reasonable likelihood of benefit"
to the company and its shareholders. Similarly, the amendment
requires shareholder approval by the outstanding voting
securities of each separate class when rule 12b-1 requires that a
plan for the distribution of securities be approved by a majority
of the fund's outstanding voting securities. Paragraph (g) also
contains a cross-reference to rule 18f-3 to address the limited
exception that under paragraph (e)(2) of that rule, any
shareholder vote on the rule 12b-1 plan of a target class would
also require a separate vote of any purchase class.-[49]-
C. Disclosure
The Commission is adopting disclosure requirements for
registration statements of master-feeder and multiple class funds
with substantial modifications from the proposal, and is not
adopting any disclosure requirements for advertisements and sales
literature.-[50]- New Item 6(h) provides that multiple class and
-[47]-ICI Comment Letter, supra note 11, at 23.
-[48]-Board approval of the plan is required, though, if it
contains any material deviations from current practice.
-[49]-In light of the adoption of new paragraph (e)(3) of rule
18f-3, the Commission has modified rule 12b-1(g) from the
proposal to limit the cross-reference to paragraph (e)(2).
Whereas conversions under paragraph (e)(2) will occur if
shareholders remain in a class for a specified period of time,
conversions under paragraph (e)(3) will not occur except upon the
happening of a specified contingency that is dependent upon the
shareholder. Therefore, a vote of the class of shares that may
convert is not required.
-[50]-In view of commenters' objections and recent industry
initiatives, the Commission also is not imposing standardized
(continued...)
-------------------- BEGINNING OF PAGE #15 -------------------
master-feeder funds should describe the salient features of the
multiple class or master-feeder structure. Feeder funds should
also disclose the circumstances under which the feeder fund could
no longer invest in the master fund, and the consequences to
shareholders of such an event. Item 6(h) also requires
prospectuses used in connection with a public offering to
disclose that there are other classes or other feeder funds that
invest in the same master fund, and to include a telephone number
investors can call to obtain additional information about other
classes or feeder funds available through their sales
representative.-[51]- These provisions should give funds
flexibility in drafting disclosure while making available to
investors the means to obtain additional information about other
classes or feeder funds investing in the same master fund. These
disclosure requirements are consistent with the Commission's
goals of promoting prospectus simplification and the use of plain
language.-[52]-
Funds must provide more extensive prospectus disclosure
about other classes or feeder funds only in two cases. First,
under new staff Guide 34 to Form N-1A, if a prospectus offers
more than one class or feeder fund, it must discuss briefly the
differences between the classes or feeder funds, and arrange the
fee table to facilitate a comparison by shareholders of the
different fee structures.-[53]- Second, under new General
Instruction I to Form N-1A, if a fund is offering a class that
will or may convert or be exchanged into other classes of the
same fund, the prospectus must provide disclosure about the other
classes.
The Commission is not adopting most of the proposed
disclosure requirements; nearly all commenters expressed strong
opposition to the extent and the details of these
-[50]-(...continued)
class designations upon multiple class funds. See Memorandum of
the ICI, Board of Governors Adopts Voluntary Nomenclature
Standards of Multiple Class Funds (May 16, 1994); Jeff Kelly, A
Fine Mess, MORNINGSTAR MUTUAL FUNDS, Nov. 25, 1994, at S1; ICI
Comment Letter, supra note 11, at 19.
-[51]- This disclosure requirement was proposed as part of
Instruction 1 to Item 2(a) of Form N-1A. Multiple class funds
must comply with the disclosure requirements adopted today
regardless of whether they rely on rule 18f-3 or continue to
operate under and comply with all of the terms (including
disclosure-related conditions) of an existing exemptive order.
The disclosure requirements adopted today also do not alter
feeder funds' existing disclosure obligations. Letter from
Carolyn B. Lewis, Assistant Director, Division of Investment
Management, SEC, to Registrants (Feb. 22, 1993), Comment II.H
(hereinafter "1993 Generic Disclosure Comment Letter"). New
Instruction 4A to Item 2(a) of Form N-1A codifies the requirement
that the expenses of both the master fund and the feeder fund be
reflected in a single fee table.
-[52]-See, e.g., Arthur Levitt, Chairman, SEC, Taking the Mystery
Out of the Marketplace: The SEC's Consumer Education Campaign,
remarks before the National Press Club (Oct. 13, 1994).
-[53]-Funds may either use one fee table with separate and
clearly labeled columns for each class or feeder fund, or may
prepare separate fee tables for each class or feeder offered.
-------------------- BEGINNING OF PAGE #16 -------------------
requirements.-[54]- As discussed in more detail below,
commenters argued, among other things, that the proposed
requirements would have imposed liability burdens and logistical
difficulties on some funds.
The Commission recognizes that the complexity of
distribution charge options can be confusing to some investors.
Instead of relying on prospectus disclosure, however, the
Commission is addressing these concerns through consumer
education and the promotion of good sales practices. In the
proposal, the Commission requested comment on whether, instead of
requiring extensive prospectus disclosure, it should work with
the National Association of Securities Dealers, Inc. ("NASD") to
develop standards for basic information that representatives
should communicate to their clients. Several commenters endorsed
this approach as an alternative to cross-disclosure.-[55]- The
Commission staff has been working, and will continue to work,
with the NASD on providing guidance about the duties of sales
representatives when recommending the purchase of multiple class
and master-feeder funds.-[56]- Finally, the Commission expects
to promote consumer education in this area through the
development and publication of a brochure explaining the
structures and expenses of multiple class and master-feeder
funds.-[57]-
1. Prospectus Disclosure Concerning Other Classes or
Feeder Funds
The Commission is adding new Item 6(h) to Form N-1A-[58]- to
require prospectuses for multiple class and master-feeder funds
to describe the salient features of the multiple class or master-
feeder structure. In addition, Item 6(h) requires prospectuses
of multiple class or master-feeder funds to include disclosure
about other publicly offered-[59]- classes or feeder funds,
-[54]-A few commenters, however, supported requiring disclosure
about other classes or feeder funds. See, e.g., Hale and Dorr
Comment Letter, supra note 42, at 8; Dechert Price Comment
Letter, supra note 46, at 3.
-[55]-E.g., Signature Group Comment Letter, supra note 59, at 14-
15; ABA Comment Letter, supra note 17, at 10; Letter from the
Investment Company Institute (attaching memorandum from
Kirkpatrick and Lockhart) to Matthew A. Chambers, Associate
Director, Division of Investment Management, SEC (Oct. 6, 1994).
-[56]-Since the proposal, the NASD has reminded members of "their
obligations to ensure that the investments are suitable for their
customers and to disclose and discuss certain matters in the sale
of mutual funds." These matters include the disclosure of "all
material facts to the customer" and, in particular, sales
charges. Notice to Members 94-16 (Mar. 1994).
-[57]-The Commission has previously published two brochures
providing general information about investing.
-[58]-17 CFR 239.15A, 274.11A.
-[59]-Item 6(h) refers to any publicly offered class or feeder
fund; thus, no disclosure is required, for example, about
offshore or private funds. See, e.g., Letter from Kirkpatrick &
Lockhart on behalf of Signature Financial Group and certain other
companies to Jonathan G. Katz, Secretary, SEC 11-12 (Mar. 18,
(continued...)
-------------------- BEGINNING OF PAGE #17 -------------------
unless all classes or all feeder funds are offered through the
same prospectus.-[60]- A fund must disclose that it issues other
classes or that other feeder funds invest in the master fund, and
that the other classes or feeder funds may have different sales
charges and expenses, which would affect performance. The
disclosure must also provide a telephone number investors may
call to obtain information concerning other classes or feeder
funds available through their sales representative, and note that
investors may obtain information concerning those classes or
feeder funds from (as applicable) their sales representative, or
any person, such as the principal underwriter, a broker-dealer or
bank, which is offering or making available to them the
securities offered in the prospectus. This disclosure should
provide investors with access to information allowing them to
compare the expenses and services of a given class or feeder fund
to others that are available to them.
Although commenters strongly opposed the more extensive
disclosure requirements in the proposal, they generally agreed
that it is "appropriate to require some disclosure as to the fact
that there are other classes or feeder funds investing in the
underlying portfolio."-[61]- Many agreed that alerting investors
to the relationship between expenses and performance is
appropriate.-[62]-
The Commission is not specifying how fund sponsors must
respond to investors' calls. Unlike the requirements adopted
today, the proposal would have required the statement to include
the names of the other classes or feeder funds, and an
undertaking to provide information over a toll-free number, and
provide a prospectus for the other classes or feeder funds upon
request. Commenters, however, vehemently objected to the
proposed undertaking to provide additional information and
prospectuses for other classes or feeder funds.-[63]- One
commenter stated that independent mutual fund groups and their
sponsors may be disproportionately affected by the undertaking.
"Whereas the toll-free number provided by broker-sponsored mutual
funds will likely have to answer questions only about (and
provide prospectuses for) that particular broker's family of
funds, the Release imposes upon an independent mutual fund
-[59]-(...continued)
1994) (expressing concern about disclosure regarding offshore
funds), ICI Comment Letter, supra note 11, at 11 (expressing
concern that disclosure would be required about private feeder
funds).
-[60]-This requirement is more like the disclosure currently
provided by master-feeder funds than that required under the
exemptive orders for multi-class funds. The requirements adopted
today treat multiple class and master-feeder disclosure in a
consistent manner.
-[61]-ABA Comment Letter, supra note 17, at 8; see also Chicago
Bar Comment Letter, supra note 36, at 2.
-[62]-See, e.g., Hale and Dorr Comment Letter, supra note 42, at
9; Signature Group Comment Letter, supra note 59, at 5.
-[63]-E.g., ABA Comment Letter, supra note 17, at 8-9; Signature
Group Comment Letter, supra note 59, at 10; ICI Comment Letter,
supra note 11, at 13 ("[s]uch a proposal ignores market
realities, and would greatly limit the very benefits of multiple
class and master-feeder structures that the Commission has itself
commented on.").
-------------------- BEGINNING OF PAGE #18 -------------------
sponsor with a master-feeder structure the much broader
obligation to provide information . . . about any other entity's
proprietary feeder funds feeding into the same master
fund."-[64]- Several commenters objected to the toll-free number
requirement.-[65]- The Commission is continuing to require the
inclusion of a telephone number, but is not requiring that the
number be toll-free; the requirement of a telephone number is
consistent with the disclosure guidelines of the Commission staff
and state regulators, to which master-feeder funds are already
subject. By not requiring any specific procedures with callers,
the Commission is leaving fund sponsors the flexibility to
determine how best to respond to inquiries.
A commenter noted that compliance with the proposed
requirement to name other classes or feeder funds would be
difficult for unaffiliated feeder funds; they would be required
to keep abreast of the creation of or changes to other feeder
funds and sticker their prospectuses to reflect such
changes.-[66]- A commenter also speculated that mentioning
feeder funds in states where they are not registered could create
problems under state securities laws because such a statement
could be considered to be an offer.-[67]-
The disclosure requirement that the Commission is adopting
is similar to the recommendations of some commenters. For
example, one commenter suggested that the Commission require a
narrative following the fee table stating that (i) the fund
issues other classes or feeder funds that invest in the master
fund; (ii) because sales charges and expenses vary, performance
may also vary; and (iii) the customer may call a toll-free number
to obtain further information about the other funds not offered
through the prospectus but available through the same financial
intermediary. The commenter also recommended that the prospectus
should contain prominent disclosure recommending that the
investor contact his or her broker or financial adviser for
further information about suitable classes or feeder funds
offered by the intermediary.-[68]-
Commenters suggested the above approach as an alternative to
the proposed cross-disclosure requirements, which commenters
strongly criticized and which the Commission is not adopting.
The proposal would have required a prospectus for one class or
feeder fund to provide full cross-disclosure-[69]- about all
other classes or all other feeder funds investing in the same
master fund that were not offered in the prospectus and that met
two conditions. First, the classes or feeder funds had to be
-[64]-Eaton Vance Comment Letter, supra note 66, at 8.
-[65]-See Chicago Bar Comment Letter, supra note 36, at 2 (a
toll-free number should not be required); Fidelity Comment
Letter, supra note 18, at 2 (the proposal's toll-free number
requirement would cause an issuer to deal directly with
investors, when it intended to sell through intermediaries,
"effectively chill[ing] the use of multi-class and feeder
funds").
-[66]-Signature Group Comment Letter, supra note 59, at 10. See
also Letter from Eaton Vance Management to Jonathan G. Katz,
Secretary, SEC 4 (Feb. 24, 1994).
-[67]-Eaton Vance Comment Letter, supra note 66, at 4 n.4.
-[68]-Id. at 9.
-[69]-Disclosure responding to Items 2 through 9 of Form N-1A.
-------------------- BEGINNING OF PAGE #19 -------------------
offered through the same financial intermediary.-[70]- Second,
they had to permit investors to choose among alternative
arrangements for sales and related charges.-[71]-
Many commenters argued that cross-disclosure would not
achieve the Commission's goal of promoting investor understanding
of multiple class and master-feeder funds because of the volume
of disclosure that the proposal might require, arguing that "the
disclosure requirements of the Proposal run counter to the
staff's professed desire for prospectus simplification and the
desire to avoid `prospectus creep.'"-[72]- Several commenters
cautioned that if the Commission adopted the proposed disclosure
requirements, sponsors would not use the master-feeder form and
would create "less efficient and more expensive clone
funds."-[73]- One commenter representing a fund family that
offers both no-load and broker-sold products objected to
requiring brokers to disclose that the same fund is available
without a sales charge, arguing that if a client receives advice
from a broker, the broker deserves to be paid for those
services.-[74]-
Some commenters strongly criticized the proposal for
requiring an issuer to provide prospectus disclosure about
securities it does not intend to offer through that prospectus.
Several expressed concern that feeder funds would have to assume
liability for disclosure about unrelated feeder funds even though
they are distinct entities and may have different advisers,
underwriters, and boards of directors.-[75]-
-[70]-The Proposing Release listed as examples of "financial
intermediaries" brokers, dealers, banks and any other entities
that act as agents or principals in the sale of a fund's shares,
or that, like some banks, provide shareholder services under an
agreement with a fund. See 58 FR 68083, n.69.
-[71]-Although the Commission is not adopting the proposed cross-
disclosure requirement, it believes that disclosure about more
than one class or feeder fund in the same prospectus can be
consistent with clear, simple, and effective disclosure and
prospectus simplification. Similarly, Guide 34 expressly
contemplates that more than one class or feeder fund may be
offered in the same prospectus. See discussion of Guide 34,
infra at section II.C.2.
-[72]-Chicago Bar Comment Letter, supra note 36, at 2; see also
ICI Comment Letter, supra note 11, at 5-7; Signature Group
Comment Letter, supra note 59, at 6-8 (disputing the proposal's
assumption that investor confusion about these instruments "is a
serious and widespread problem").
-[73]-E.g., Signature Group Comment Letter, supra note 59 at 5;
see also letter from Fidelity Investments to Barry Barbash,
Director, Division of Investment Management, SEC 1-2 (July 22,
1994).
-[74]-See Letter and memorandum from Robert Pozen, General
Counsel and Managing Director, FMR Corp. to Arthur Levitt,
Chairman, SEC 2 (Nov. 18, 1994) ("This would be the equivalent of
requiring Filenes to tell all of its customers that the same
goods may be purchased at a discount in the basement or from a
competitor.").
-[75]-E.g., ICI Comment Letter, supra note 11, at 7. See also
ABA Comment Letter, supra note 17, at 8-9; Signature Group
(continued...)
-------------------- BEGINNING OF PAGE #20 -------------------
Commenters also criticized the financial intermediary test -
- one of the proposal's two triggers for cross-disclosure.-[76]-
One commenter stated, for example, that "[t]he Proposal
erroneously assumes that all financial intermediaries are
homogeneous organizations, serving only a single market or
customer base."-[77]- Much of the commenters' concern centered
on the effect of the proposed requirement on independent sponsors
of feeder funds and on financial intermediaries with more than
one distribution network. One commenter noted that "feeder
funds, unlike different classes of shares, often are organized to
serve customers of unaffiliated third party banks, insurance
companies or brokerage firms who are competitors of each other
and, in many cases, of the master fund."-[78]-
One independent sponsor of mutual funds argued that the
proposal would create unique problems for independent mutual fund
groups, and would discourage brokers from offering funds if
prospectuses must describe funds offered by unaffiliated
brokers.-[79]- This commenter asserted that fund sponsors would
have to create a different prospectus for each possible
combination of the different classes or feeder funds that in
theory a broker might offer; therefore, the preparation of
numerous prospectuses would create increased costs for these
funds and an "administrative nightmare" for their sponsors, while
in-house master-feeder or multiple class funds and their sponsors
would not face comparable burdens.
The disclosure requirement as adopted addresses the
commenters' concerns. The disclosure that investors may ask
their sales representatives about other classes or feeder funds
should alleviate the concern that the disclosure would encourage
investors to deal directly with issuers, rather than their
intermediaries. This dialogue should further investor
understanding of the different fee arrangements or distribution
possibilities associated with the fund without imposing a burden
on issuers. Retaining a telephone number requirement, but not
requiring the other disclosure or obligations should provide
investors with a source for obtaining more information about
other classes or feeder funds available through their sales
representative without raising the practical concerns voiced by
many commenters. Not requiring cross-disclosure about other
classes or feeder funds not offered through the prospectus
removes the logistical and competitive concerns voiced by many
-[75]-(...continued)
Comment Letter, supra note 59, at 5 and 9 ("[s]uch a requirement
of disclosure about products offered by competitors and the
assumption of liability for such disclosures would be entirely
unprecedented in the securities industry") (emphasis deleted).
-[76]-The proposal would have required cross-disclosure only
about classes or feeder funds both offered through the same
financial intermediary and with alternative arrangements for
sales and related charges, and made clear that not all cases
would involve alternative arrangements. See text accompanying
notes 70-72 of the Proposing Release, 58 FR at 68083. Most
commenters, however, appeared to assume that there would be
alternative sales charges in all cases.
-[77]-Signature Group Comment Letter, supra note 59, at 5.
-[78]-Id. at 8.
-[79]-Eaton Vance Comment Letter, supra note 66.
-------------------- BEGINNING OF PAGE #21 -------------------
commenters. This approach is also consistent with the
Commission's goals of promoting prospectus simplification.
2. Discussion of Classes or Feeder Funds Offered in
Prospectus
New staff Guide 34 to Form N-1A requires a discussion of the
differences between classes or feeder funds whenever two or more
classes or feeder funds are offered through the same prospectus.
In addition, new Guide 34 advises that if a single prospectus is
used to offer more than one class or feeder fund, and the classes
or feeder funds have different expense and/or sales load
arrangements, the prospectus should clearly explain the
differences in the features, and should provide a separate
response to Item 2(a)(i) for each class or feeder. These
requirements are intended to inform investors about the
differences between the investment options offered together to
them.
The proposal would have required that whenever a prospectus
offered two or more classes or feeder funds, or provided cross-
disclosure about one or more classes or feeder funds, it must
also contain a discussion of the differences between the classes
or feeder funds. This aspect of the proposal elicited little
comment. The proposal also would have required a line graph
comparing the feeder funds' or classes' performance over a
hypothetical ten-year period, assuming an initial investment of
$10,000 and a 5% rate of return.-[80]- The Commission intended
that the graph demonstrate the circumstances under which holding
shares of each class or feeder fund for various lengths of time
would produce the highest return. The Commission is not adopting
this aspect of the proposal. The narrative discussion called for
by Guide 34 should provide investors with similar information.
Moreover, the line graph proposal was predicated upon the cross-
disclosure requirement, which the Commission is not adopting.
The proposed line graph met with significant opposition from
a number of commenters, many of which conjectured that it could
mislead investors into believing that the "market always goes
up."-[81]- One commenter expressed concern that the graph
creates a "significant potential for litigation."-[82]- Another
commenter observed that, except for variable life illustrations,
"the Commission has not previously used these investment
assumptions to project hypothetical future performance."-[83]-
Many commenters raised numerous concerns regarding the accuracy
of the graphs given the myriad redemption possibilities,
expenses, sales charges, and exchange privileges.-[84]- A
commenter also argued that much of the information would
-[80]-Both of these requirements would have been contained in a
new Item 6(h) of Form N-1A.
-[81]-Chicago Bar Comment Letter, supra note 36, at 3; See also
Signature Group Comment Letter, supra note 59, at 16; Fidelity
Comment Letter, supra note 18, at 2.
-[82]-Federated Investors Comment Letter, supra note 15, at 3.
-[83]-Chicago Bar Comment Letter, supra note 36, at 2-3.
-[84]-E.g., Signature Group Comment Letter, supra note 59, at 15-
16; ICI Comment Letter, supra note 11, at 15-16 (the ICI also
suggested that the line graph requirement could pose problems for
EDGAR filers, since the EDGAR system cannot recognize more than a
limited set of characters, id. at 16 n.20).
-------------------- BEGINNING OF PAGE #22 -------------------
duplicate disclosure in the fee table, and thus would be contrary
to the goal of prospectus simplification.-[85]-
3. Discussion of Classes Into Which Shares May
Convert or Be Exchanged
The Commission is adopting new General Instruction I to Form
N-1A. This Instruction states that multiple class funds that
provide for conversions or exchanges of shares from one class to
another should provide disclosure in the prospectus about all
other classes into which the shares may be converted or
exchanged. Although Instruction I does not specify a particular
format, it states that the disclosure should be designed to aid
investor comprehension, and when appropriate, should use tables,
side-by-side comparisons, or other parallel presentations to
assist an investor's understanding of the other class or classes.
4. Advertising and Sales Literature
The Commission is not adopting requirements for
advertisements or sales literature about multiple class or
master-feeder funds. The Commission had proposed amending rules
134 and 482 under the Securities Act and rule 34b-1 under the
Investment Company Act to require multiple class and master-
feeder fund advertisements to contain a prominent legend
substantially similar to that proposed for prospectus disclosure.
In addition, the Commission had proposed amending rules 482 and
34b-1 to require multiple class and master-feeder fund
advertisements that contain performance figures to include, with
equal prominence, the performance of all classes and feeder funds
that would have been subject to the proposed prospectus cross-
disclosure requirement. The proposal would also have required
that when an advertisement contains performance figures for a
class or feeder fund for which average annual total return
information is not available for one, five, and ten year periods,
and this information is available for another class, feeder or
master fund, then the advertisement must include quotations of
average annual total return for the securities of the other
class, feeder or master fund together with any necessary
explanation.
Commenters opposed the requirement of disclosure about other
classes or feeder funds in advertisements.-[86]- One stated that
"[i]n many respects, these requirements are so onerous that they
are unworkable" and that "[t]he volume of disclosure required by
the Proposal and the equal prominence requirement would make
advertising prohibitively expensive as well as highly impractical
for funds in the master-feeder fund structure."-[87]- Some
commenters objected to the requirement because of the amount of
space the disclosure would occupy in an average
advertisement.-[88]-
-[85]-Letter from IDS Financial Corporation to Jonathan G. Katz,
Secretary, SEC 2 (Feb. 22, 1994). See also ICI Comment Letter,
supra note 11, at 14.
-[86]-See, e.g., Fidelity Comment Letter, supra note 18, at 3
("cross-disclosure is particularly burdensome in
advertisements"); ICI Comment Letter, supra note 11, at 17-18.
-[87]-Signature Group Comment Letter, supra note 59, at 16-17.
-[88]-Id.; ICI Comment Letter, supra note 11, at 17-18 (the
expense of cross-disclosure, together with the equal prominence
requirement, would place multiple class and master-feeder funds
at a competitive disadvantage).
-------------------- BEGINNING OF PAGE #23 -------------------
In view of those objections, the Commission has determined
not to adopt the proposed advertising disclosure
requirements.-[89]- Instead, the Commission will address
disclosure of performance under the general anti-fraud provisions
of the federal securities laws-[90]- and expects that the staff
will continue to address issues relating to performance
disclosure on an interpretive or no-action basis.-[91]-
D. Effective Dates
Rule 18f-3 and the amendment to rule 12b-1 will become
effective [insert date 30 days after publication in the Federal
Register]. Registration statements and post-effective amendments
filed with the Commission after [insert date 30 days after
publication in the Federal Register] must be in compliance with
the amendments to Forms N-1A and N-14.
III. COST/BENEFIT OF THE PROPOSALS
Rule 18f-3 and the rule and form amendments adopted today
should impose less of a reporting or recordkeeping burden and
less regulatory compliance cost on multiple class funds than
those imposed by the multiple class exemptive orders. Under rule
18f-3 and the form amendments, multiple class funds would be
subject to fewer disclosure requirements and lower costs than
under the exemptive orders. Any additional time required to
comply with the rule's written plan requirement should be minimal
because multiple class funds already would have to commit
material class differences to writing in order to enter into
distribution or service agreements, or to disclose their terms.
The prospectus disclosure should impose little burden, and in
fact requires less disclosure than currently required for
multiple class funds. The disclosure is similar to that
presently required for master-feeder funds, and thus should
impose little or no additional burden on those funds.
The amendment to rule 12b-1 should not impose any additional
costs because it essentially would incorporate in the rule
existing requirements in the exemptive orders for multiple class
funds.
-[89]-Footnote 88 in the proposing release erroneously stated
that "rule 134 advertisements, however, may include rankings
based on performance data." 58 FR at 68085, n.88. Rule 134
advertisements may not contain performance rankings.
-[90]-Therefore, funds relying on rule 18f-3 will not be required
to quote the performance of all classes when they quote
performance in advertisements under rule 482, as was required
generally under the exemptive orders. The Commission cautions
multiple class funds to use care not to mislead investors in
advertising the performance of one class when multiple classes
are being offered to the same persons. For example, it may be
misleading to quote only performance of a class for institutional
or inside investors (with low expenses) in a publication with a
retail readership.
-[91]-See, e.g., IDS Financial Corp. (pub. avail. Dec. 19, 1994)
(allowing a multiple class fund to calculate standardized total
return of a new class following a merger based upon the
performance of the acquiring (and surviving) fund, adjusted to
reflect differences in the sales load, but not differences in
rule 12b-1 fees).
-------------------- BEGINNING OF PAGE #24 -------------------
IV. REGULATORY FLEXIBILITY ACT ANALYSIS
A summary of the Initial Regulatory Flexibility Analysis,
which was prepared in accordance with 5 U.S.C. 603, was published
in the Proposing Release. No comments were received on this
analysis. The Commission has prepared a Final Regulatory
Flexibility Analysis, a copy of which may be obtained by writing
to Karrie McMillan, Esq., Division of Investment Management, Mail
Stop 10-6, Securities and Exchange Commission, 450 Fifth Street,
N.W. 20549.
V. STATUTORY AUTHORITY
The Commission is adopting rule 18f-3 under the authority in
sections 6(c), 18(i), and 38(a) of the Investment Company Act [15
U.S.C. 6(c), 18(i), and 37(a)], and the amendment to rule 12b-
1 under section 12(b) of the Investment Company Act [15 U.S.C.
12(b)]. The Commission is adopting the amendments to Form N-
1A under sections 6, 7(a), 10 and 19(a) of the Securities Act [15
U.S.C. 77g(a), 77j, and 77s(a)], and sections 8(b), 24(a), and
38(a) of the Investment Company Act [15 U.S.C. 80a-8(b),
24(a), and 37(a)], and the amendments to Form N-14 under sections
6, 7, 8, 10 and 19(a) of the Securities Act [15 U.S.C. 77f,
77h, 77j and 77s(a)] and sections 14(a), 14(c) and 23(a) of the
Exchange Act of 1934 [15 U.S.C. 78n(a), 78n(c) and 78w].
VI. TEXT OF ADOPTED RULE AND RULE AND FORM AMENDMENTS
List of Subjects in 17 CFR Parts 239, 270 and 274
Investment Companies, Reporting and record keeping
requirements, Securities
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 270.12b-1 is amended by adding 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 class of shares, the
provisions of the plan must be severable for each 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
class, provided, however, that under 270.18f-3(e)(2), any
shareholder vote on a plan of a target class must also require a
vote of any purchase class.
3. By adding 270.18f-3 to read as follows:
270.18f-3 Multiple class companies.
Notwithstanding sections 18(f)(1) and 18(i) of the Act (15
U.S.C. 80a-18(f)(1) and (i), respectively), a registered open-
end management investment company or series or class thereof
established in accordance with section 18(f)(2) of the Act (15
U.S.C. 80a-18(f)(2)) whose shares are registered on Form N-1A
[ 239.15A and 274.11A of this chapter] ("company") may issue
more than one class of voting stock, provided that:
(a) Each class:
(1)(i) Shall have a different arrangement for shareholder
services or the distribution of securities or both, and shall pay
all of the expenses of that arrangement;
(ii) May pay a different share of other expenses, not
including advisory or custodial fees or other expenses related to
the management of the company's assets, if these expenses are
-------------------- BEGINNING OF PAGE #25 -------------------
actually incurred in a different amount by that class, or if the
class receives services of a different kind or to a different
degree than other classes; and
(iii) May pay a different advisory fee to the extent that
any difference in amount paid is the result of the application of
the same performance fee provisions in the advisory contract of
the company to the different investment performance of each
class;
(2) Shall have exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement;
(3) Shall have separate voting rights on any matter
submitted to shareholders in which the interests of one class
differ from the interests of any other class; and
(4) Shall have in all other respects the same rights and
obligations as each other class.
(b) Expenses may be waived or reimbursed by the company's
adviser, underwriter, or any other provider of services to the
company.
(c) Income, realized and unrealized capital gains and
losses, and expenses of the company not allocated to a particular
class pursuant to paragraph (a) of this section:
(1) Except as permitted in paragraph (c)(2) of this section,
shall be allocated to each class on the basis of the net asset
value of that class in relation to the net asset value of the
company; or
(2) For companies operating under 270.2a-7 (including the
provision allowing the calculation of net assets on an amortized
cost basis), and for other companies declaring distributions of
net investment income daily that maintain the same net asset
value per share in each class, may be allocated:
(i) To each share without regard to class, provided that the
company 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; or
(ii) On the basis of relative net assets (settled shares).
For purposes of this section, "relative net assets (settled
shares)" are net assets valued in accordance with generally
accepted accounting principles but excluding the value of
subscriptions receivable, in relation to the net assets of the
company.
(d) Any payments made under paragraph (a) of this section
shall be made pursuant to a written plan setting forth the
separate arrangement and expense allocation of each class, and
any related conversion features or exchange privileges. Before
the first issuance of a share of any class in reliance upon this
section, and before any material amendment of a plan, a majority
of the directors of the company, and a majority of the directors
who are not interested persons of the company, shall find that
the plan as proposed to be adopted or amended, including the
expense allocation, is in the best interests of each class
individually and the company as a whole; initial board approval
of a plan under this paragraph (d) is not required, however, if
the plan does not make any change in the arrangements and expense
allocations previously approved by the board under an existing
order of exemption. Before any vote on the plan, the directors
shall request and evaluate, and any agreement relating to a class
arrangement shall require the parties thereto to furnish, such
information as may be reasonably necessary to evaluate the plan.
-------------------- BEGINNING OF PAGE #26 -------------------
(e) Nothing in this section prohibits a company from
offering any class with:
(1) An exchange privilege providing that securities of the
class may be exchanged for certain securities of another company;
or
(2) A conversion feature providing that shares of one class
of the company (the "purchase class") will be exchanged
automatically for shares of another class of the company (the
"target class") after a specified period of time, provided that:
(i) The conversion is effected on the basis of the relative
net asset values of the two classes without the imposition of any
sales load, fee, or other charge;
(ii) The expenses, including payments authorized under a
plan adopted pursuant to 270.12b-1 ("rule 12b-1 plan"), for
the target class are not higher than the expenses, including
payments authorized under a rule 12b-1 plan, for the purchase
class; and
(iii) If the amount of expenses, including payments
authorized under a rule 12b-1 plan, for the target class is
increased materially 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 that increase.
(3) A conversion feature providing that shares of a class in
which an investor is no longer eligible to participate may be
converted to shares of a class in which that investor is eligible
to participate, provided that:
(i) The investor is given prior notice of the proposed
conversion; and
(ii) The conversion is effected on the basis of the relative
net asset values of the two classes without the imposition of any
sales load, fee, or other charge.
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 of 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 to Form N-1A
will not, appear in the Code of Federal Regulations.
6. By adding new General Instruction I to Form N-1A
[referenced in 239.15A and 274.11A] to read as follows:
FORM N-1A
* * * * *
GENERAL INSTRUCTIONS
* * * * *
I. Multiple Class and Master-Feeder Funds
Registrants issuing multiple classes of shares that provide
for conversions or exchanges of shares from one class to another
class of the same fund should disclose the information required
by Form N-1A about all other classes into which the shares may be
converted or exchanged. This information should be presented in
a format designed to facilitate comprehension by investors, and
when appropriate, should use tables, side-by-side comparisons, or
-------------------- BEGINNING OF PAGE #27 -------------------
other presentations to assist an investor's understanding of the
other class or classes. A "multiple class fund" is an open-end
management investment company that issues more than one class of
shares, each of which represents interests in the same portfolio
of securities, and either meets the requirements of rule 18f-3
under the Act [17 CFR 270.18f-3] or operates
pursuant to an exemptive order. A "feeder fund" is an open-end
management investment company, except a company that issues
periodic payment plan certificates, that holds shares of a single
open-end management investment company (the "master fund") as its
only investment securities.
7. By amending Form N-1A [referenced in 239.15A and
274.11A] by adding Instruction 4A to Item 2(a), to read as
follows:
FORM N-1A
* * * * *
Item 2. Synopsis
(a)(i) * * *
General Instructions
* * * * *
4A. If the prospectus offers shares of a feeder fund,
reflect the expenses of both the feeder fund and the master fund
in which the feeder fund invests in a single fee table using the
captions provided. In the brief narrative following the fee
table, state that the fee table reflects the expenses of both
Registrants.
* * * * *
8. By amending Form N-1A [referenced in 239.15A and
274.11A] by adding Item 6(h) to read as follows:
FORM N-1A
* * * * *
Item 6. Capital Stock and Other Securities
* * * * *
(h) Registrants that offer multiple classes of shares or
that are feeder funds should briefly describe the salient
features of the multiple class or master-feeder structure. In
the case of a feeder fund, explain the circumstances under which
the feeder fund could no longer invest in the master fund (e.g.,
if the master fund changed its investment objectives to be
inconsistent with those of the feeder fund), and the consequences
to shareholders of such an event. If the Registrant has publicly
offered any class of shares of the same series not offered
through the prospectus, or if any publicly offered feeder fund
not offered through the prospectus invests in the same master
fund as the Registrant, include the following disclosure: (i)
that the Registrant issues other classes or that other funds
invest in the same master fund (using the same terminology for
classes or master and feeder funds as elsewhere in the
prospectus), (ii) that those other classes or feeder funds may
have different sales charges and other expenses, which may affect
performance, (iii) a telephone number investors may call to
obtain more information concerning the other classes or feeder
funds available to them through their sales representative, and
(iv) that investors may obtain information concerning those
classes or feeder funds from (as applicable) their sales
representative, or any person, such as the principal underwriter,
a broker-dealer or bank, which is offering or making available to
them the securities offered in the prospectus.
9. By amending Form N-1A [referenced in 239.15A and
274.11A] by adding paragraph (b)(18) to Item 24 before the
Instructions to read as follows:
FORM N-1A
* * * * *
Item 24. Financial Statements and Exhibits
-------------------- BEGINNING OF PAGE #28 -------------------
* * * * *
(b) * * *
(18) copies of any plan entered into by Registrant pursuant
to Rule 18f-3 under the 1940 Act, any agreement with any person
relating to the implementation of a plan, any amendment to a plan
or agreement, and a copy of the portion of the minutes of a
meeting of the Registrant's directors describing any action taken
to revoke a plan.
* * * * *
10. By adding Guide 34 to the Guidelines for Form N-1A
[referenced in 239.15A and 274.11A] to read as follows:
Guide 34. Multiple Class and Master-Feeder Structures
In response to Item 6, if a single prospectus is used to
offer more than one class of a multiple class fund or more than
one feeder fund that invests in the same master fund, the
prospectus should provide a separate response to Item 2(a)(i)
(the fee table requirement) for each class or feeder fund and
should clearly explain the differences between the expense and/or
sales load arrangements of the classes or feeder funds. The fee
table information should be arranged to facilitate a comparison
by shareholders of the different fee structures.
11. By amending Form N-14 [referenced in 239.23] by
revising Item 16(10) to read as follows:
Note: Form N-14 does not, and the amendment to Form N-14
will not, appear in the Code of Federal Regulations.
FORM N-14
* * * * *
Item 16. Exhibits
* * * * *
(10) copies of any plan entered into by registrant pursuant
to rule 12b-1 under the 1940 Act [17 CFR 270.12b-1] and any
agreements with any person relating to implementation of the
plan, and copies of any plan entered into by Registrant pursuant
to
Rule 18f-3 under the 1940 Act [17 CFR 270.18f-3], any agreement
with any person relating
-------------------- BEGINNING OF PAGE #29 -------------------
to implementation of the plan, any amendment to the plan, and a
copy of the portion of a meeting of the minutes of the
Registrant's directors describing any action taken to revoke the
plan;
* * * * *
By the Commission
Jonathan G. Katz
Secretary
February 23, 1995