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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 200, 239 and 270
Release No. IC-22201; File No. S7-2-96
RIN 3235-AG59
Technical Amendments to Rule Relating to Payments for the
Distribution of Shares by a Registered Open-End Management
Investment Company
AGENCY: Securities and Exchange Commission
ACTION: Final Rule
SUMMARY: The Commission is adopting a technical amendment to the
rule under the Investment Company Act of 1940 that governs the
use of assets of registered open-end management investment
companies ("funds") to pay for the distribution of fund shares.
The amendment provides that a plan to use fund assets to pay for
the distribution of fund shares adopted prior to a fund's initial
public offering does not have to be approved by shareholders.
Because the fund's directors must approve the plan, and investors
that buy their shares in the fund's public offering, in effect,
"vote with their dollars" to accept the plan, shareholder
approval of the plan prior to the fund's public offering is not
necessary.
EFFECTIVE DATE: The rule amendments will become effective
[insert date thirty days after publication in the Federal
Register].
FOR FURTHER INFORMATION CONTACT: Marilyn K. Mann, Senior
Counsel, or Kenneth J. Berman, Assistant Director, at (202)
942-0690, Office of Regulatory Policy, Division of Investment
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Management, 450 Fifth Street, N.W., Mail Stop 10-2, Washington,
D.C. 20549. Requests for formal interpretive advice should be
directed to the Office of Chief Counsel at (202) 942-0659,
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 a
technical amendment to rule 12b-1 [17 CFR 270.12b-1] under the
Investment Company Act of 1940 [15 U.S.C. 80a] (the "Investment
Company Act"). The Commission also is making technical
corrections to rule 30-5 [17 CFR 200.30-5] and Form N-14 [17 CFR
239.23].
I. DISCUSSION
The Commission is adopting a technical amendment to rule
12b-1 under the Investment Company Act, which governs the use of
fund assets to pay for the distribution of fund shares.-[1]-
The amendment provides that a plan to use fund assets to pay for
the distribution of fund shares (a "rule 12b-1 plan") adopted
prior to a fund's initial public offering does not have to be
approved by the fund's shareholders. The Commission received
---------FOOTNOTES----------
-[1]- The Commission proposed this amendment on January
5, 1996. Distribution of Shares by Registered
Open-End Management Investment Company, Investment
Company Act Release No. 21660 (Jan. 5, 1996) [61
FR 1313 (Jan. 19, 1996)] [hereinafter Proposing
Release].
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four comments in response to the proposal, all supporting the
amendment.-[2]-
Shareholder approval of a rule 12b-1 plan is unnecessary
when the plan is adopted prior to a fund's initial public
offering. Under these circumstances, the shareholders voting
typically are comprised of persons involved in organizing the
fund (i.e., the fund's investment adviser or its affiliates).
Shareholder approval, therefore, is virtually automatic,
mechanical, and offers no significant protection to the fund's
shareholders. Rule 12b-1 requires a rule 12b-1 plan to be
approved by a majority of the fund's board of directors,
including a majority of the independent directors, prior to the
plan's implementation.-[3]- In addition, investors
purchasing shares in a fund's initial public offering, in effect,
"vote with their dollars" to accept the fund's rule 12b-1 plan
since the terms of the plan, and its effects on fund expenses,
are disclosed in the fund's prospectus.-[4]-
---------FOOTNOTES----------
-[2]- The commenters were the Subcommittee on Investment
Companies and Investment Advisers, Committee on
Federal Regulation of Securities, Section of
Business Law, American Bar Association; the
Investment Company Institute; Bank One
Corporation; and Capital Research and Management
Company.
-[3]- Rule 12b-1(b)(2) [17 CFR 270.12b-1(b)(2)]. The
fund's board also must approve the continuation of
the plan at least annually. Rule 12b-1(b)(3)(i)
[17 CFR 270.12b-1(b)(3)(i)].
-[4]- Items 2 and 7 of Form N-1A under the Securities
Act of 1933 and the Investment Company Act [17 CFR
239.15A and 274.11A]. In addition, rule 12b-1
(continued...)
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The amended rule requires shareholder approval of a rule
12b-1 plan that is adopted after a fund's initial public
offering. Shareholder approval also is required for a rule 12b-1
plan adopted prior to a public offering when fund shares have
been sold to persons other than those involved in organizing the
fund.-[5]- Two commenters requested the Commission to
clarify how the amended rule would apply to a newly created
series or class of shares of an existing fund.-[6]- The
---------FOOTNOTES----------
-[4]-(...continued)
requires fund shareholders to approve any changes
in the rule 12b-1 plan that would materially
increase the amount of the asset-based sales load
and gives shareholders the right to terminate the
plan at any time. Rule 12b-1(b)(3)(iii) and (4)
[17 CFR 270.12b-1(b)(3)(iii) and (4)].
-[5]- This provision addresses funds that adopt a rule
12b-1 plan following the sale of shares to persons
other than affiliates of the fund or its promoter
without engaging in a public offering. The
proposed amendment referred only to affiliates of
the fund and their affiliated persons. See
Proposing Release, supra note 1, at n.6.
Consistent with the intent of the amendment and a
commenter's recommendation, the adopted amendment
also refers to the fund's promoter and its
affiliated persons. See Section 2(a)(30) of the
Investment Company Act [15 U.S.C. 80a-2(a)(30)]
(defining promoter as a person who, alone or
acting in concert, initiates or directs the
organization of a fund).
-[6]- Funds often organize themselves as series funds
and offer investors an opportunity to invest in
one or more "portfolios" each of which has a
specific investment objective. The fund will
offer a series of shares that represents an
interest in the portfolio in which the investor
desires to participate. A fund, or a portfolio of
a fund, also may offer different classes of shares
that have different distribution and shareholder
service arrangements. See rule 18f-3 under the
Investment Company Act [17 CFR 270.18f-3].
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commenters suggested that a series or class that had not been
publicly offered should be treated in the same manner as a fund
that had not been publicly offered. The Commission agrees. If
an existing fund that already offers its shares to the public
adds a new series or class subject to a rule 12b-1 plan, approval
of the plan by shareholders of the new series or class is not
required prior to any public offering of the shares of that
series or class. This interpretation is consistent with the
approach that the Commission has taken with respect to series
funds.-[7]- In addition, rule 12b-1 specifically provides
that a plan that covers more than one class of shares must be
severable for each class, and that whenever action is required to
be taken with respect to a class, that action must be taken
separately for each class.-[8]-
II. TECHNICAL CORRECTIONS
The Commission is making a technical correction to paragraph
(a)(8)(ii)(B) of rule 30-5, Delegation of Authority to Director
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-[7]- See 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)] at
n.53 (rule 12b-1 has been interpreted to treat
each series of a fund as a separate fund). See
also rule 18f-2 under the Investment Company Act
[17 CFR 270.18f-2] (requiring the shareholders of
the series affected by the matter to vote on that
matter); Item 22 of Schedule 14A under the
Securities Exchange Act of 1934 [17 CFR
240.14a-101] (defining a fund for purposes of the
Commission's proxy rules as a registrant or a
separate series of a registrant).
-[8]- Rule 12b-1(g) [17 CFR 270.12b-1(g)].
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of Division of Investment Management.-[9]- That paragraph
currently contains a reference to paragraphs (a)(9)(i)(A) and (C)
of rule 30-5. There are no such paragraphs in the rule. The
reference instead should be to paragraphs (a)(8)(i)(A) and (C) of
rule 30-5. The Commission also is making a technical correction
to Item 16(10) of Form N-14.-[10]- The last clause of Item
16(10) currently includes the phrase "a meeting of the minutes."
That phrase should be "the minutes of the meeting."
III. COST/BENEFIT ANALYSIS
The amendment provides that a rule 12b-1 plan adopted prior
to a fund's initial public offering does not have to be approved
by shareholders. Shareholder approval in these circumstances is
unnecessary since the fund's board of directors must approve the
rule 12b-1 plan, and investors participating in the fund's
initial public offering effectively "vote with their dollars" to
accept the plan. Under the amended rule, funds are no longer
required to undergo the perfunctory exercise of obtaining
approval from persons who have supplied the fund with its initial
capital prior to the fund's initial public offering.
IV. REGULATORY FLEXIBILITY ACT CERTIFICATION
Pursuant to section 605(b) of the Regulatory Flexibility Act
[5 U.S.C. 605(b)], the Chairman of the Commission certified, at
the time that the proposed technical amendment to rule 12b-1 was
published for public comment, that the amendment would not, if
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-[9]- 17 CFR 200.30-5(a)(8)(ii)(B).
-[10]- 17 CFR 239.23.
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adopted, have a significant economic impact on a substantial
number of small entities. No comments were received regarding
the certification. The amendment enables funds, including small
entities, to forgo the minimal time and expense associated with
obtaining shareholder approval of rule 12b-1 plans from persons
who have supplied the fund with its initial capital prior to the
fund's initial public offering.
V. STATUTORY AUTHORITY
The Commission is amending rule 12b-1 pursuant to the
authority set forth in sections 12(b) and 38(a) of the Investment
Company Act [15 U.S.C. 12(b), 37(a)]. The Commission is making
technical corrections to rule 30-5 pursuant to section 4A of the
Securities Exchange Act of 1934 [15 U.S.C. 78d-1] ("Exchange
Act"), and Form N-14 pursuant to sections 6, 7, 8, 10 and 19(a)
of the Securities Act of 1933 [15 U.S.C. 77f, 77h, 77j and
77s(a)] and sections 14(a), 14(c) and 23(a) of the Exchange Act
[15 U.S.C. 78n(a), 78n(c) and 78w].
List of Subjects in 17 CFR Parts 200, 239 and 270
Authority delegations (Government agencies), Investment
companies, Reporting and recordkeeping requirements, Securities.
TEXT OF RULE AND FORM AMENDMENTS
For the reasons set out in the preamble, Title 17, Chapter
II of the Code of Federal Regulations is amended as follows:
PART 200 - ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION
REQUESTS
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1. The authority citation for part 200, subpart A continues
to read in part as follows:
Authority: 15 U.S.C. 77s, 78d-1, 78d-2, 78w, 78ll(d), 79t,
77sss, 80a-37, 80b-11, unless otherwise noted.
* * * * *
2. Section 200.30-5 is amended in paragraph (a)(8)(ii)(B)
by removing the cite "(a)(9)(i)(A) and (C)" and inserting
"(a)(8)(i)(A) and (C)".
PART 239 - FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
3. The authority citation for Part 239 continues to read,
in part, as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77sss, 78c,
78l, 78m, 78n, 78o(d), 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 79l,
79m, 79n, 79q, 79t, 80a-8, 80a-29, 80a-30 and
80a-37, unless otherwise noted.
* * * * *
4. Form N-14 [referenced in 17 CFR 239.23] is amended in
the last clause of Item 16(10) by removing the phrase "a meeting
of the minutes" and inserting in its place "the minutes of the
meeting".
Note: Form N-14 does not, and the amendment to Form N-14
will not, appear in the Code of Federal Regulations.
PART 270 - RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940
5. The authority citation for Part 270 continues to read,
in part, as follows:
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Authority: 15 U.S.C. 80a-1 et seq., 80a-37, 80a-39 unless
otherwise noted;
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6. Section 270.12b-1 is amended by revising paragraph
(b)(1) to read as follows:
270.12b-1 Distribution of shares by registered open-end
management investment company.
* * * * *
(b) * * *
(1) Such plan has been approved by a vote of at least a
majority of the outstanding voting securities of such
company, if adopted after any public offering of the
company's voting securities or the sale of such securities
to persons who are not affiliated persons of the company,
affiliated persons of such persons, promoters of the
company, or affiliated persons of such promoters;
* * * * *
By the Commission
Jonathan G. Katz
Secretary
September 9, 1996