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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 239, 270, and 274
Release Nos. 33-7328; IC-22202; File No. S7-8-95
RIN 3235-AD18
Exemption for Certain Open-End Management Investment Companies
to Impose Deferred Sales Loads
AGENCY: Securities and Exchange Commission
ACTION: Final rule
SUMMARY: The Commission is adopting amendments to the rule
under the Investment Company Act of 1940 that permits
contingent deferred sales loads to be imposed on the shares of
certain registered open-end management investment companies
("mutual funds" or "funds"). The Commission also is adopting
amendments to the registration form for mutual funds, and
publishing a staff guide to the registration form. The rule
amendments allow mutual funds to offer investors a wider
variety of deferred sales loads, including installment loads,
and eliminate certain requirements in the rule. The form
amendments modify the requirements for disclosing deferred
sales loads in mutual fund prospectuses to reflect the changes
made by the rule amendments.
EFFECTIVE DATE: The rule and form amendments will become
effective [insert date thirty days after publication in the
Federal Register].
FOR FURTHER INFORMATION CONTACT: Nadya B. Roytblat, Assistant
Chief, or Kenneth J. Berman, Assistant Director, at (202)
942-0690, Office of Regulatory Policy, Division of Investment
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Management, Securities and Exchange Commission, 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
amendments to rule 6c-10 [17 CFR 270.6c-10] under the
Investment Company Act of 1940 [15 U.S.C. 80a] (the
"Investment Company Act" or the "Act"), and to Form N-1A [17
CFR 239.15A, 274.11A] under the Securities Act of 1933 [15
U.S.C. 77a-77aa] (the "Securities Act") and the Investment
Company Act. The Commission also is adopting a conforming
amendment to rule 11a-3 [17 CFR 270.11a-3] under the
Investment Company Act.
Table of Contents
I. Executive Summary
II. Background
III. Discussion of Amendments to Rule 6c-10
A. Scope of the Amended Rule
B. Deferred Load Calculation
C. Deferred Loads on Reinvested Distributions
D. "No-Load" Labeling
E. Rule 11a-3
IV. Discussion of Revised Disclosure Requirements
A. Changes to the Fee Table and the Example
B. General Prospectus Disclosure
C. Performance Data
1. Total Return
2. Yield
D. Dealer Compensation Disclosure
V. Compliance Date
VI. Cost/Benefit Analysis
VII. Summary of the Regulatory Flexibility Analysis
VIII. Statutory Authority
Text of Rule and Form Amendments
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Appendix A -- Illustration of Fee Table and Example
Appendix B -- Illustration of Fee Table and Example
I. EXECUTIVE SUMMARY
The Commission is adopting amendments to rule 6c-10 under
the Investment Company Act to remove certain restrictions on
the types of deferred sales loads that may be imposed on the
shares of mutual funds. Rule 6c-10 currently permits only
contingent deferred sales loads ("CDSLs"). A CDSL is paid at
redemption, but declines to zero if the shares are held for a
certain period of time. The amendments allow sales charges
paid upon redemption ("back-end loads") that differ from CDSLs
(e.g., sales loads that do not decline to zero) as well as
loads paid after purchase during the term of a shareholder's
investment in a fund, for example, in installments
("installment loads"). These new types of deferred sales
loads would be alternatives to existing load structures.
II. BACKGROUND
The Commission is adopting amendments to rule 6c-10 under
the Investment Company Act, the rule that permits CDSLs to be
imposed on mutual fund shares. The amendments allow funds to
offer other types of deferred sales loads that may provide
desirable flexibility for both investors and funds.
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Rule 6c-10 was adopted in February, 1995.-[1]- The
rule essentially codified the conditions in the nearly 300
exemptive orders permitting CDSLs that had been issued by the
Commission since 1981. A CDSL is paid at redemption, but
declines to zero if the shares are held for a certain period
of time. CDSLs typically are imposed in combination with an
asset-based distribution fee charged in accordance with rule
12b-1 under the Act ("rule 12b-1 fee"),-[2]- an
arrangement commonly called a "spread load."
Contemporaneously with the adoption of rule 6c-10, the
Commission proposed amendments designed to allow greater
flexibility in the types of deferred sales load structures
offered to investors, including loads payable in
installments.-[3]- The Commission also proposed changes
to the prospectus disclosure requirements for deferred loads
to complement the proposed changes to rule 6c-10.
-[1]- Exemption for Certain Open-End Management
Investment Companies to Impose Contingent
Deferred Sales Loads, Investment Company Act
Release No. 20916 (Feb. 23, 1995) [60 FR 11887
(Mar. 2, 1995)].
-[2]- 17 CFR 270.12b-1.
-[3]- Exemption for Certain Open-End Management
Investment Companies to Impose Deferred Sales
Loads, Investment Company Act Release No. 20917
(Feb. 23, 1995) [60 FR 11890 (Mar. 2, 1995)]
[hereinafter Proposing Release].
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The Commission received letters from three commenters,
all of which strongly supported the proposed
amendments.-[4]- In addition, when rule 6c-10 was
initially proposed in 1988 to allow various types of deferred
sales charges, the Commission received 33 comments, including
19 comments from individual investors.-[5]- Both in 1988
and in response to the proposed amendments, commenters
indicated that flexibility in deferred load structures would
be desirable for both funds and investors. Individual
investors commenting on the 1988 proposal in particular
supported installment loads as an option in paying a sales
charge.-[6]- Some investors, for example, compared
installment loads to front-end loads and preferred the former
as allowing them to defer the payment of a sales charge;
others compared installment loads to rule 12b-1 fees, and
believed that installment loads represent a more precise
charge, as well as one that would be payable within a more
-[4]- The commenters were the American Bar
Association Subcommittee on Investment
Companies and Investment Advisers, the law firm
of Davis Polk & Wardwell, and the Investment
Company Institute ("ICI").
-[5]- Exemptions for Certain Registered Open-End
Management Investment Companies to Impose
Deferred Sales Loads, Investment Company Act
Release No. 16619 (Nov. 2, 1988) [53 FR 45275
(Nov. 19, 1988)].
-[6]- All but one of 19 letters from individual
investors favored installment loads.
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definite term.-[7]- The Commission is adopting the
amendments to rule 6c-10, and modifying the prospectus
disclosure requirements to reflect these comments as well as
its continued study of deferred sales charges.
III. DISCUSSION OF AMENDMENTS TO RULE 6c-10
The amendments to rule 6c-10 allow back-end sales loads
other than CDSLs, as well as loads payable during the term of
a shareholder's investment in a fund, such as in installments.
The amendments remove certain requirements in the rule
regarding the way in which a load must be calculated, as well
as the current prohibition on imposing deferred sales loads on
shares purchased through reinvested dividends and other
distributions. The terms of any deferred sales load, however,
must be covered by the NASD Sales Charge Rule.-[8]-
-[7]- Industry commenters also suggested that
installment loads would offer greater certainty
than CDSLs and spread load structures, thereby
making it easier for certain mutual fund
sponsors to obtain financing for their
distribution expenses.
-[8]- The NASD Sales Charge Rule prohibits NASD
members from offering or selling shares of a
mutual fund if the sales charges described in
the fund's prospectus are excessive. Aggregate
sales charges are deemed excessive under the
Rule if they do not conform to the specific
provisions set forth in the Rule. NASD Conduct
Rules, Rule 2830(d)(1) and (2).
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A. Scope of the Amended Rule
The rule as amended defines a deferred sales load as any
amount properly chargeable to sales or promotional expenses
that is paid by a shareholder after purchase but before or
upon redemption.-[9]- The definition includes CDSLs as
well as loads paid at redemption whose amount may remain the
same or change over time in a manner different from a CDSL,
for example, not decline to zero. The definition also
includes loads paid after purchase during the term of a
shareholder's investment in a fund, such as in one or more
installments that may (or may not) be accelerated upon early
redemption.-[10]-
-[9]- Paragraph (b)(3) of rule 6c-10 as amended. The
rule is not applicable to certain charges that
may be imposed by a mutual fund to compensate
the fund for the cost of redeeming shares and
that are paid directly to the fund. See, e.g.,
rule 11a-3 under the Act [17 CFR
270.11a-3(a)(7)] (defining a "redemption fee").
The Commission staff has taken the position
that these charges may be imposed without the
need for exemptive relief under the Act. See,
e.g., John P. Reilly & Associates (pub. avail.
July 12, 1979).
-[10]- The NASD Sales Charge Rule currently governs
only deferred loads "deducted from the proceeds
of the redemption of shares by an investor."
NASD Conduct Rules, Rule 2830(b)(8)(B). A
deferred load paid other than upon redemption
(e.g., an installment load) would fall outside
the current definition and would not be covered
by the Rule. Therefore, such a load could not
be imposed until the NASD Sales Charge Rule is
amended to cover it. The Commission staff has
requested the NASD to review its Sales Charge
Rule in light of the amendments to rule 6c-10.
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Rule 6c-10 does not apply to insurance company separate
accounts, which are permitted to deduct deferred loads under
an existing rule,-[11]- or unit investment trusts
("UITs"). While commenters generally supported extending the
rule to UITs, they identified issues related to disclosure,
the method for calculating deferred sales loads and the
interplay of rules 6c-10 and 11a-3 (the Investment Company Act
rule governing exchanges of fund shares)-[12]- that are
unique to UITs. The Commission will continue to study these
issues, consider applications for exemptive orders-[13]-
and, if appropriate, propose amendments that would extend rule
6c-10 to UITs.
B. Deferred Load Calculation
Rule 6c-10 currently contains two requirements relating
to the calculation of CDSLs. Under the first requirement, a
CDSL must be based on the lesser of the NAV of the shares at
-[11]- Rule 6c-8 under the Act [17 CFR 270.6c-8].
-[12]- 17 CFR 270.11a-3.
-[13]- See, e.g., Merrill Lynch, Pierce, Fenner &
Smith, Inc., Investment Company Act Release
Nos. 13801 (Feb. 29, 1984) [49 FR 8512 (Mar. 7,
1984)] (Notice of Application) and 13848 (Mar.
27, 1984) [30 SEC Docket 192] (Order), and
15120 (May 29, 1986) [51 FR 20389 (June 4,
1986)] (Notice of Application) and 15167 (June
24, 1986) [35 SEC Docket 1735] (Order);
PaineWebber, Inc., Investment Company Act
Release Nos. 20755 (Dec. 6, 1994) [59 FR 64003
(Dec. 12, 1994)] (Notice of Application) and
20819 (Jan. 4, 1995) [58 SEC Docket 1504]
(Order) (allowing UITs to impose deferred sales
loads payable in installments).
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the time of purchase or the NAV at the time of
redemption.-[14]- Under the second requirement, in a
partial redemption, the CDSL must be calculated by treating as
redeemed, first shares not subject to a load, and second other
shares as if redeemed in the order they were
purchased.-[15]-
The Commission is eliminating both of these requirements
and deferring to the NASD to address these matters in its
Sales Charge Rule. The Commission is, however, limiting the
amount of a deferred sales load to an amount not to exceed a
specified percentage of the NAV of the fund's shares at the
time of purchase.-[16]- The effect of this provision
would be to require that investors be given the benefit, if
any, of deferring the load payment should there be an increase
in the shares' NAV.
The Commission had proposed allowing a deferred load also
to be based on the higher of the NAV at the time of purchase
or at the time the load is paid.-[17]- None of the
-[14]- Rule 6c-10(a)(1) [17 CFR 270.6c-10(a)(1)].
-[15]- Rule 6c-10(a)(3) [17 CFR 270.6c-10(a)(3)].
-[16]- The deferred load amount will be specified by
the fund in its prospectus. See infra section
IV.A.
-[17]- For example, if a shareholder makes a $1000
investment that subsequently increases in value
to $2,000 by the time the shareholder redeems
his shares, a 3% deferred load based on the
higher of standard would result in the
shareholder paying a $60 deferred load (3% of
(continued...)
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commenters specifically addressed the higher of standard.
Upon reconsideration of the issue, the Commission believes
that allowing the higher of standard would be inconsistent
with the intent of the proposal and the approach the
Commission has taken to deferred loads generally.-[18]-
Allowing the higher of standard would leave investors
uncertain about the amount of the deferred load they would pay
and significantly reduce their ability to compare the amounts
they would pay under different load structures.
Rule 6c-10, as amended, permits any deferred load in the
amount not greater than a specified percentage of the NAV at
the time of purchase.-[19]- This approach is consistent
-[17]-(...continued)
$2,000), which is 6% of the initial $1,000
investment.
-[18]- See, e.g., Exemptive Relief for Separate
Accounts to Impose A Deferred Sales Load on
Variable Annuity Contracts Participating in
Such Accounts and to Deduct from Such Contracts
in Certain Instances an Annual Fee for
Administrative Services That is Not Prorated,
Investment Company Act Release No. 13048 (Feb.
28, 1983) [48 FR 9532, 9534 (Mar. 7, 1983)]
(adopting rule 6c-8 and noting that a deferred
load is intended to reimburse the same expenses
as a front-end load).
-[19]- Paragraph (a)(1) of rule 6c-10 as amended. The
requirement that the deferred load amount not
exceed a "specified percentage" of the NAV at
the time of purchase does not mean that the
load may not be based on a percentage of the
NAV at the time the load is paid, even if the
NAV at the time the load is paid is greater
than the NAV at the time of purchase. The
total amount of the load paid by an investor,
however, could not exceed the amount
(continued...)
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with existing deferred load structures, and will permit
deferred loads to be charged on the same basis as front-end
loads. This approach also will assure that investors receive
the benefit of any growth in the NAV subsequent to purchasing
the shares,-[20]- and facilitate investor comparisons of sales
load structures. Unlike the current requirements, whereby
fund underwriters bear the risk of a decrease in NAV (because
the amount of the deferred load is based on the lesser of the
NAV at the time of purchase or redemption), amended rule 6c-10
will permit fund underwriters to receive the amount they would
have received had the sales load been charged at the time of
purchase.
The amended rule does not require any particular method
of collecting installment loads. Installment load payments
could be collected, for example, out of distributions, by
-[19]-(...continued)
represented by the specified percentage of the
shares' offering price. Thus, if the final
installment of an installment load would result
in the investor paying more than the amount
permitted by the rule, the amount of the final
installment would have to be reduced
accordingly.
-[20]- Industry representatives have suggested that
the principal benefit of a deferred sales load
is that it allows all of an investor's funds to
"go to work" immediately rather than being
deducted to pay sales charges. If the deferred
sales load is based on the NAV at the time of
payment, and the NAV has increased because of
investment gains, any benefit that would have
inured to the investor as a result of deferring
the load payment would be collected by the
fund's distributor when the load is paid.
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automatic redemptions, or through separate billing of an
investor's account. Different methods of collecting
installment load payments could result in different tax
consequences for investors.-[21]- The method used, and
any material tax consequences of such method, must be
described in the fund's prospectus.-[22]-
C. Deferred Loads on Reinvested Distributions
Rule 6c-10 currently prohibits CDSLs to be imposed on
shares purchased through the reinvestment of dividends or
capital gains distributions.-[23]- The Commission
proposed to delete this prohibition from the rule. The
Commission reasoned, and the commenters agreed, that this
prohibition is unnecessary so long as a fund appropriately
discloses the manner in which loads are assessed and so long
as mutual fund sales loads are subject to the limits in the
NASD Sales Charge Rule. The prohibition has been deleted from
the rule as amended.
-[21]- Commenters have pointed out, for example, that
payment through automatic redemptions would
mean that a shareholder might incur a capital
gain or loss on each such redemption; if
additional shares then were purchased by the
shareholder within 30 days of the automatic
redemption, any capital loss might be
disallowed under the "wash sale" rule contained
in the Internal Revenue Code. See, e.g.,
Letter from the ICI to Jonathan G. Katz,
Secretary, SEC (Jan. 9, 1989), File No. S7-8-
95.
-[22]- See infra section IV.A.
-[23]- Rule 6c-10(a)(2) [17 CFR 270.6c-10(a)(2)].
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The NASD Sales Charge Rule currently does not cover
deferred loads on reinvested dividends, nor loads on
reinvested capital gains distributions or returns of
capital.-[24]- Under amended rule 6c-10, therefore,
deferred loads may not be imposed on shares purchased with
reinvested distributions unless and until the NASD amends its
Sales Charge Rule to address this issue. Should the NASD
Sales Charge Rule be so amended, the prospectus disclosure
requirements will require deferred sales charges on shares
purchased with reinvested dividends and other distributions to
be disclosed in fund prospectuses.-[25]-
D. "No-Load" Labeling
The NASD Sales Charge Rule expressly prohibits NASD
members and their associated persons from describing a mutual
fund as "no load" or as having "no sales charge" if the fund
imposes a front-end load, a back-end load, or a rule 12b-1
and/or service fee that exceeds .25% of average net assets per
year.-[26]- When adopting rule 6c-10, the Commission
-[24]- A return of capital generally occurs when a
fund's distribution exceeds the fund's
aggregate amount of undistributed net taxable
income and net realized capital gains. See
Determination, Disclosure, and Financial
Statement Presentation of Income, Capital Gain,
and Return of Capital Distributions by
Investment Companies, American Institute of
Certified Public Accountants, Statement of
Position 93-2, 8 (Feb. 1, 1993).
-[25]- See infra section IV.B.
-[26]- NASD Conduct Rules, Rule 2830(d)(3).
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concluded that it was unnecessary to retain the provision in
the proposed rule which contained a similar "no-load" labeling
prohibition for a fund whose shares are subject to a CDSL.
The prohibition similarly is unnecessary for funds whose
shares are subject to deferred loads other than CDSLs under
today's amendments to rule 6c-10. If the NASD amends its
Sales Charge Rule to permit installment loads, the Commission
anticipates that the NASD would address the applicability of
its "no-load" labeling policy to funds whose shares are
subject to such loads. The Commission reiterates that it
would be misleading and a violation of the federal securities
laws for a mutual fund whose shares are subject to a deferred
sales load to be held out to the public as a no-load
fund.-[27]-
E. Rule 11a-3
The Commission requested comment whether the definition
of deferred sales load in rule 11a-3 under the Investment
Company Act, governing exchanges of fund shares, should be
amended to correspond expressly with the proposed definition
in rule 6c-10. Commenters favored amending the definition in
rule 11a-3 to avoid any confusion over the interaction of
rules 6c-10 and 11a-3. The Commission is adopting the
conforming amendment.-[28]-
-[27]- See Proposing Release, supra note 3, at 11893.
-[28]- Paragraph (a)(3) of rule 11a-3 as amended. 17
CFR 270.11a-3. Commenters also suggested
(continued...)
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IV. DISCUSSION OF REVISED DISCLOSURE REQUIREMENTS
The Commission is tailoring the prospectus disclosure
requirements applicable to deferred sales loads in light of
the changes to rule 6c-10 discussed above. These
modifications relate to the disclosure of deferred sales loads
in the fee table and the example in the front of fund
prospectuses. The modifications also relate to the general
prospectus disclosure about the deferred load calculation and
payment. Finally, the amendments address the manner in which
deferred sales loads are required to be reflected in
calculations of fund performance data.
A. Changes to the Fee Table and the Example
The front part of every mutual fund prospectus is
required to contain a fee table -- a tabular presentation of
the transactional expenses paid by an investor, such as sales
loads, and the annual fund operating expenses, such as
management and any rule 12b-1 fees. The fee table is followed
by an example that sets forth the cumulative amount of various
fund expenses over one, three, five and ten year periods based
on a hypothetical investment of $1000 and an annual 5% return
("Example"). The Example was intended to provide a relatively
straight-forward means for investors to compare the expense
-[28]-(...continued)
other, substantive amendments to rule 11a-3.
The Commission will continue to study the
issues raised by the commenters and consider
them in the context of a separate proposal.
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levels of funds with different fee structures over varying
time periods.
The fee table requirements in Item 2 of Form N-1A, among
other things, currently require a line showing the maximum
sales load imposed on purchases (i.e., a front-end load) and a
separate line showing any deferred sales load based on the
purchase price or redemption proceeds. The fee table
currently does not contemplate deferred loads payable other
than upon redemption (e.g., in installments) and based on a
share price or NAV other than that at purchase or redemption
(i.e., at the time an installment is paid). Similarly,
Instructions to the Example currently refer only to CDSLs.
The Commission proposed to amend the deferred sales load
line in the fee table so that the total installment load or
the maximum contingent deferred load (expressed as a
percentage) would be shown there. Specifically, the
Commission proposed to replace most of the current wording
inside the parentheses following the words "Deferred Sales
Load" with a blank, requiring funds to insert the appropriate
description of the basis on which the load is computed. The
Commission is adopting this amendment.-[29]- The
Commission also is amending Instruction 14(f) to Item 2 of
-[29]- The "Deferred Sales Load" line also is
redesignated "Maximum Deferred Sales Load."
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Form N-1A to require deferred loads other than CDSLs to be
reflected in the Example as well.-[30]-
In addition, as suggested by a commenter, the Commission
is clarifying that any deferred sales load, whether based on
the offering price or on the NAV, be shown in the fee table as
a percentage of the offering price. This is the same basis on
which front-end loads are presented.-[31]- This
presentation is intended to enable investors to better compare
sales loads (whether front-end or deferred), since the
percentage will be based on the same amount (the offering
price).
When a combination of sales loads is imposed on a fund's
shares (e.g., a 1% front-end and a 5% deferred load), the fee
-[30]- Amended Instruction 14(f) to Item 2 also
requires a deferred load that is calculated
based on the shares' NAV at the time the load
is paid to be based on an account value that
incorporates the 5% annual return for each year
during the period. Under amended rule 6c-10, a
deferred load may be calculated based on the
NAV at the time the load is paid, even if the
NAV at the time the load is paid is greater
than the NAV at the purchase, provided the
total amount of the deferred load paid by an
investor does not exceed the amount represented
by the specified percentage of the offering
price. See supra note 19.
-[31]- A fund that calculates its deferred load on the
basis of the NAV at the time of purchase that
does not equal the offering price (i.e., a fund
with a front-end load), should explain in the
prospectus, in response to new Item 7(g) of
Form N-1A, that the load amount paid by
investors is the same even though the
percentage amount used in load calculations is
different from that shown in the fee table.
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table is required to include a "Maximum Sales Load" line
showing the cumulative percentage of those charges; the terms
of the particular sales charges comprising that figure must be
shown on separate lines underneath the "Maximum Sales Load"
line. This format is designed to enable investors to better
appreciate the cumulative effect of the sales charges and
compare one fund's sales charges to another's. Finally, as
proposed, the Commission is allowing funds to include within
the larger fee table a tabular presentation of the schedule of
a deferred sales load, including installment
payments.-[32]-
With regard to loads on shares purchased with reinvested
distributions, the fee table currently includes a line showing
the "Maximum Sales Load on Reinvested Dividends (as a
percentage of the offering price)." The current format does
not contemplate deferred loads on reinvested capital gains
distributions and returns of capital, nor loads based on a
price other than the offering price. The Commission is
modifying this line in the fee table to read "Maximum Sales
Load on Reinvested Dividends [and other Distributions]" and is
replacing most of the current wording in the parenthetical
with a blank. A fund that charges a deferred load on shares
-[32]- As currently required by Instruction 1 to the
fee table, a fund also must provide a reference
following the fee table to the discussion of
any scheduled sales load variations and other
information about installment loads elsewhere
in the prospectus.
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purchased with reinvested capital gains distributions or
returns of capital would include the bracketed words in the
caption. Funds will fill in the blank in the parenthetical
with the basis on which the load is computed. A conforming
amendment is made to Instruction 14(d) regarding disclosure in
the Example of deferred sales loads on shares purchased with
reinvested distributions.
An illustration of fee table disclosure reflecting the
amendments adopted today, and suggested calculation
methodologies for the Example, appear as Appendices A and B to
this Release. (The Appendices are not available in the
electronic version of this Release, but can be obtained by
calling (202) 942-0690.)
B. General Prospectus Disclosure
As proposed, the Commission is amending prospectus
disclosure requirements concerning the way in which a specific
fund's deferred sales load is imposed and
computed.-[33]- New Item 7(g) of Form N-1A covers many
operational details that have been mandatory for all funds
under current rule 6c-10 but are now subject to greater
flexibility under the amendments. These details include the
-[33]- The Commission also is amending Instruction 2
to Item 5A of Form N-1A, Management's
Discussion of Fund Performance, to require that
deferred loads charged other than upon
redemption (i.e., installment loads) be
reflected in the line graph showing fund
performance. This change is similar to the
amendment to Instruction 14(f) to Item 2
discussed in section IV.A above.
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price on which the load is based, whether deferred sales loads
may be imposed on shares acquired through reinvested
distributions, and the way in which the load is calculated.
In a change from the proposal, a deferred load calculated
based on the offering price or the NAV at the time of purchase
must be presented both as a percentage of the offering price
and of the NAV. This disclosure will demonstrate that,
although the percentage amount used in load calculation and
that shown in the fee table may be different, the dollar
amount of the load paid by the investor is the same.
If a deferred load is charged on shares acquired through
reinvested dividends or other distributions, Item 7(g)
requires a statement to that effect, but it does not require
this disclosure if the fund does not charge such a load. Item
7(g) also requires an explanation of the way(s) in which a
shareholder may be required to pay an installment load, such
as through the withholding of dividend payments, involuntary
redemptions, or separate billing of an investor's account.
Because different methods of collecting load payments could
carry different potential tax consequences for investors, the
Commission also is publishing a revision to staff Guide 30 of
the Guidelines for Form N-1A to require funds to describe
briefly in the prospectus any material tax consequences for
investors related to an installment load.-[34]-
-[34]- See supra note 21 and accompanying text.
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C. Performance Data
1. Total Return
The Commission is amending Instruction 1 to Item 22(b)(i)
of Form N-1A, as proposed, to require deferred sales loads to
be included in calculations of advertised total return data.
The amendment requires the calculation to be based on the
deduction of the maximum amount of a deferred sales load at
the times, in the amounts, and under the terms disclosed in
the prospectus.
2. Yield
CDSLs currently are not included in advertised yield
calculations. Under existing rule 482(a)(6) under the
Securities Act, however, advertisements containing yield data
must disclose the maximum amount of a CDSL, state that the
performance figures do not reflect the load and that, if
reflected, the load would reduce the quoted
performance.-[35]- In addition, rule 12b-1 fees that
usually accompany CDSLs are required to be included in the
numerator in the yield formula in Item 22(b)(ii) of Form N-1A
as expenses, and thereby reflected in the yield data. The
amendments will not change the current approach with regard to
CDSLs.
With regard to installment loads, the Commission
requested comment on two possible approaches to including them
in the yield formula. The first approach, modeled on the
-[35]- 17 CFR 230.482(a)(6).
==========================================START OF PAGE 22======
existing treatment of front-end loads, would require that the
total installment load be added to the NAV to reach an assumed
"offering price" in the denominator in the yield formula (the
"gross-up" approach). Under the second approach, a thirty-day
percentage amount of an installment load would be included as
an expense in calculating the yield formula (similar to the
manner in which rule 12b-1 fees are treated). This method
would understate the yield for those shareholders that have
completed paying the installment load.-[36]-
Commenters believed that installment loads should not be
reflected in yield calculations, but that performance data
should be accompanied by disclosure of the existence of an
installment load pursuant to rule 482(a)(6) under the
Securities Act. The Commission, however, has determined that
installment loads should be reflected in fund yield
calculations, and that the "gross-up" approach is the most
appropriate way to do so. The fixed percentage amounts of
installment loads, and the certainty that the load will be
paid, suggest similarity to front-end loads. Installment
loads also are assessed on the shareholder account level,
rather than deducted from fund assets as is the case for rule
-[36]- This method also would have suggested that
installment loads should be reflected in a
fund's expense ratio as are rule 12b-1 fees.
It is more appropriate, however, for
transaction-specific expenses such as
installment loads to be considered separately
rather than as a component of the fund's
expense structure.
==========================================START OF PAGE 23======
12b-1 fees. Therefore, new Instruction 10 is added to Item
22(b)(ii) of Form N-1A to require installment loads to be
reflected in the yield calculations based on the gross-up
approach.
D. Dealer Compensation Disclosure
Deferred sales charges are used to pay for a fund's sales
or promotional expenses, including commissions to persons who
sell fund shares. The amount of commissions paid from front-
end sales loads and rule 12b-1 fees currently is required to
be disclosed in fund prospectuses.-[37]- The Commission
requested comment whether it should amend Item 7(b)(iv) of
Form N-1A to require funds that impose deferred sales loads to
provide disclosure about the commissions comparable to that
now provided by funds with front-end loads. Alternatively,
the Commission requested comment whether proposed new Item
7(g) of Form N-1A should be modified to require this
disclosure.
Commenters generally opposed any changes from the current
disclosure requirements for dealer compensation. They pointed
out that the NASD currently is studying dealer compensation
practices and that related disclosure issues would best be
addressed in that context. The Commission will consider
-[37]- Item 7(b)(iv) of Form N-1A requires funds to
show in a tabular format in the prospectus the
sales load reallowed to dealers as a percentage
of the public offering price. Item 7(c)
requires similar disclosure for payments to
dealers from rule 12b-1 fees.
==========================================START OF PAGE 24======
revisiting the issue of dealer compensation disclosure in fund
prospectuses after the NASD has had an opportunity to complete
its study and after further experience with installment loads.
V. COMPLIANCE DATE
The rule and form amendments will become effective thirty
days after publication in the Federal Register. Funds may
begin to comply with amended rule 6c-10 on the effective date.
Funds that have received exemptive orders allowing deferred
sales loads may continue to rely on those orders for all the
funds covered by the order.
Registration statements and post-effective amendments
filed with the Commission, and yield quotations appearing in
fund advertisements or other sales literature, after the
effective date must be in compliance with the form amendments.
Post-effective amendments made for the purpose of complying
with the amendments to Form N-1A may be made pursuant to the
immediate effectiveness provisions of rule 485(b) under the
Securities Act [17 CFR 230.485(b)], provided the post-
effective amendment otherwise meets the conditions for
immediate effectiveness under that rule.
VI. COST/BENEFIT ANALYSIS
The amendments to rule 6c-10 and Form N-1A should not
impose any significant burdens on mutual funds. Rather, the
amendments should benefit funds by providing them with
alternatives in financing their sales and promotional
==========================================START OF PAGE 25======
expenses. The amendments also will enable investors to defer
the payment of a sales charge on the purchase of mutual fund
shares until redemption or over one or more installment
payments during the term of their investment.
VII. SUMMARY OF THE REGULATORY FLEXIBILITY ANALYSIS
A summary of the Initial Regulatory Flexibility Analysis,
which was prepared in accordance with 5 U.S.C. 603, was
published in Investment Company Act Release No. 20917. No
comments were received on that analysis. The Commission has
prepared a Final Regulatory Flexibility Analysis in accordance
with 5 U.S.C. 604. The Analysis explains that the amendments
to rule 6c-10 allow mutual funds to impose deferred sales
loads other than CDSLs and remove certain restrictions in the
rule. The Analysis further explains that the amendments to
Form N-1A modify the prospectus disclosure requirements for
deferred loads to reflect the changes to rule 6c-10, but
provide for disclosure similar to that currently made by funds
and, therefore, do not impose any additional burdens. A copy
of the Analysis may be obtained by contacting Nadya B.
Roytblat, Mail Stop 10-2, Securities and Exchange Commission,
450 Fifth Street, N.W., Washington, D.C. 20549.
==========================================START OF PAGE 26======
VIII. STATUTORY AUTHORITY
The Commission is adopting the amendments to rules 6c-10
and 11a-3 under sections 6(c), 11(a) and 38(a) of the
Investment Company Act [15 U.S.C. 80a-6(c), -11(a),
and -37(a)]. The authority citations for the amendments to
Form N-1A precede the text of the amendments.
LIST OF SUBJECTS IN 17 CFR PARTS 239, 270 and 274
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 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 270.6c-10 is revised to read as follows:
270.6c-10 Exemption for certain open-end management
investment companies to impose deferred sales loads.
(a) A company and any exempted person shall be exempt
from the provisions of sections 2(a)(32), 2(a)(35), and 22(d)
of the Act [15 U.S.C. 80a-2(a)(32), 80a-2(a)(35), and 80a-
22(d), respectively] and 270.22c-1 to the extent necessary
==========================================START OF PAGE 27======
to permit a deferred sales load to be imposed on shares issued
by the company, Provided, that:
(1) The amount of the deferred sales load does not
exceed a specified percentage of the net asset value or the
offering price at the time of purchase;
(2) The terms of the deferred sales load are covered by
the provisions of Rule 2830 of the Conduct Rules of the
National Association of Securities Dealers, Inc.; and
(3) The same deferred sales load is imposed on all
shareholders, except that scheduled variations in or
elimination of a deferred sales load may be offered to a
particular class of shareholders or transactions, Provided,
that the conditions in 270.22d-1 are satisfied. Nothing in
this paragraph (a) shall prevent a company from offering to
existing shareholders a new scheduled variation that would
waive or reduce the amount of a deferred sales load not yet
paid.
(b) For purposes of this section:
(1) Company means a registered open-end management
investment company, other than a registered separate account,
and includes a separate series of the company;
(2) Exempted person means any principal underwriter of,
dealer in, and any other person authorized to consummate
transactions in, securities issued by a company; and
==========================================START OF PAGE 28======
(3) Deferred sales load means any amount properly
chargeable to sales or promotional expenses that is paid by a
shareholder after purchase but before or upon redemption.
3. Section 270.11a-3 is amended by revising paragraph
(a)(3) to read as follows:
270.11a-3 Offers of exchange by open-end investment
companies other than separate accounts.
(a) * * *
* * * * *
(3) Deferred sales load means any amount properly
chargeable to sales or promotional expenses that is paid by a
shareholder after purchase but before or upon redemption;
* * * * *
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 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.
* * * * *
==========================================START OF PAGE 29======
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 will not,
appear in the Code of Federal Regulations.
6. Item 2 of Part A of Form N-1A [referenced in sections
239.15A and 274.11A] is amended by revising the caption
"Deferred Sales Load" and the parenthetical after such caption
in paragraph (a)(i), and revising the caption "Maximum Sales
Load Imposed on Reinvested Dividends" and the parenthetical in
paragraph (a)(i), Instruction 5, the parenthetical in
Instruction 14(d), and Instruction 14(f) to read as follows:
Form N-1A
* * * * *
Part A. Information Required in a Prospectus
* * * * *
Item 2. Synopsis
(a)(i) * * *
* * * * *
Shareholder Transaction Expenses
* * * * *
Maximum Deferred Sales Load (as a percentage of
_______)......%
Maximum Sales Load Imposed on Reinvested Dividends [and other
Distributions] (as a percentage of
__________)................%
==========================================START OF PAGE 30======
* * * * *
Instructions:
* * * * *
Shareholder Transaction Expenses
5. "Maximum Deferred Sales Load" includes the maximum
total deferred sales load payable upon redemption, in
installments, or both, expressed as a percentage of the amount
or amounts stated in response to Item 7(g), provided that a
sales load that is based on the net asset value at the time of
purchase shall be expressed as a percentage of the offering
price at the time of purchase. The fee table may include a
tabular presentation, within the larger table, of the range
over time of any deferred sales load (such as a contingent
deferred sales load) that may change over time, or a schedule
of any installment load payments.
If more than one type of sales load is charged (e.g., a
deferred sales load and a front-end sales load), the first
line in the table should read "Maximum Sales Load" and show
the maximum cumulative percentage. Show the percentage
amounts and the terms of each sales charge comprising that
figure on separate lines just below.
If a sales charge is imposed on shares purchased with
reinvested capital gains distributions or returns of capital,
the third line in the table should include the bracketed
words.
* * * * *
==========================================START OF PAGE 31======
Example
14. For purposes of the Example in the table:
* * * * *
(d) * * * * * (A Registrant that charges a
sales load on shares purchased with reinvested dividends or
other distributions should not reflect these fees in the
Example, but should explain in the brief narrative following
the table that the Example does not reflect these fees and
that the amounts shown would be increased if the fees were
reflected.)
* * * * *
(f) Reflect any contingent deferred sales load by
assuming redemption of the entire account on the last day of
the year; reflect any other type of deferred sales load as
being paid at the end of the year in which it is due. In the
case of a deferred sales load that is based on the
Registrant's net asset value at the time of payment, assume
that the net asset value at the end of each year includes the
assumed 5% annual return for that and each preceding year.
* * * * *
7. Instruction 2 to Item 5A of Part A of Form N-1A
[referenced in sections 239.15A and 274.11A] is amended by
removing the phrase "(or other amounts at redemption or upon
closing of an account)" in the third sentence and adding at
the end a sentence to read as follows:
Form N-1A
==========================================START OF PAGE 32======
* * * * *
Part A. Information Required in a Prospectus
* * * * *
Item 5A. Management's Discussion of Fund Performance
* * * * *
Instructions:
* * * * *
2. Sales Load. * * * In the case of any other
deferred sales load, assume the deduction in the amount(s) and
at the time(s) the load actually would have been deducted.
* * * * *
8. Item 7 of Part A of Form N-1A [referenced in sections
239.15A and 274.11A] is amended by removing the word "and" at
the end of paragraph (e), removing the period at the end of
paragraph (f) and adding "; and" in its place, and adding
paragraph (g) to read as follows:
Form N-1A
* * * * *
Part A. Information Required in a Prospectus
* * * * *
Item 7. Purchase of Securities Being Offered
* * * * *
(g) a concise explanation of the way in which any
deferred sales load is imposed and computed, including: (i) an
explanation of the basis on which the specified percentage is
calculated (i.e., the offering price, or the lesser of the
==========================================START OF PAGE 33======
offering price or the net asset value at the time the load is
paid); (ii) the sales charges as a percentage of both the
offering price and the net asset value at the time of
purchase; (iii) if the method of determining the amount of the
load results in the load being applied to shares or amounts
representing shares acquired through the reinvestment of
dividends or other distributions, a statement to that effect;
(iv) a description of the way in which the load is calculated
(e.g., in the case of a partial redemption, whether or not the
load is calculated as if shares or amounts representing shares
not subject to a load are redeemed first, and other shares or
amounts representing shares are then redeemed in the order
purchased); and (v) if applicable, an explanation of the
way(s) in which a shareholder may be required to pay an
installment load (e.g., through the withholding of dividend
payments, involuntary redemptions, separate billing of an
investor's account).
9. Item 22 of Part B of Form N-1A [referenced in
239.15A and 274.11A] is amended by adding a sentence to the
end of Instruction 1 to paragraph (b)(i) and an Instruction 10
to paragraph (b)(ii) to read as follows:
==========================================START OF PAGE 34======
Form N-1A
* * * * *
Part B. Information Required in a Statement of Additional
Information
* * * * *
Item 22. Calculation of Performance Data
* * * * *
(b) Other Registrants
(i) Total Return * * *
Instructions:
1. * * * If shareholders are charged a deferred
sales load, assume the maximum deferred sales load is deducted
at the times, in the amounts, and under the terms disclosed in
the prospectus.
* * * * *
(ii) Yield * * *
Instructions:
* * * * *
10. If a Registrant (other than a Registrant described
in paragraph (a)) imposes, in connection with sales of its
shares, a deferred sales load payable in installments, the
"maximum public offering price" shall include the aggregate
amount of such installments ("installment load amount").
10. Guide 30 to Form N-1A [referenced in sections
239.15A and 274.11A] is amended by adding a paragraph before
the last paragraph to read as follows:
==========================================START OF PAGE 35======
Guidelines for Form N-1A
* * * * *
Guide 30. Tax Consequences
* * * * *
If the registrant imposes a sales load payable in
installments on the securities being offered, the registrant
must describe briefly in response to Item 6 any related
material tax consequences for investors.
* * * * *
By the Commission.
Jonathan G. Katz
Secretary
September 9, 1996