6438 Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 

1We do not edit personal identifying information, 

such as names or electronic mail addresses, from 

electronic submissions. You should submit only 

information that you wish to make available 

publicly.

2These proposed rules would apply to banks that 

act as municipal securities dealers in transactions 

involving municipal fund securities.

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Parts 239, 240 and 274

[Release Nos. 33–8358; 34–49148; IC–

26341; File No. S7–06–04] 

RIN 3235–AJ11; 3235–AJ12; 3235–AJ13; 

3235–AJ14

Confirmation Requirements and Point 

of Sale Disclosure Requirements for 

Transactions in Certain Mutual Funds 

and Other Securities, and Other 

Confirmation Requirement 

Amendments, and Amendments to the 

Registration Form for Mutual Funds

AGENCY: Securities and Exchange 

Commission.

ACTION: Proposed rule.

SUMMARY: The Securities and Exchange 

Commission is proposing two new rules 

and rule amendments under the 

Securities Exchange Act of 1934 that are 

designed to enhance the information 

broker-dealers provide to their 

customers in connection with 

transactions in certain types of 

securities. The two new rules would 

require broker-dealers to provide their 

customers with targeted information, at 

the point of sale and in transaction 

confirmations, regarding the costs and 

conflicts of interest that arise from the 

distribution of mutual fund shares, unit 

investment trust interests (including 

insurance securities), and municipal 

fund securities used for education 

savings. The Commission is also 

proposing conforming amendments to 

its general confirmation rule, as well as 

amendments to that rule to provide 

investors with additional information 

about call features of debt securities and 

preferred stock. Finally, the 

Commission is proposing amendments 

to Form N–1A, the registration form for 

mutual funds, to improve disclosure of 

sales loads and revenue sharing.

DATES: Comments must be submitted on 

or before April 12, 2004.

ADDRESSES: Comments should be 

submitted in triplicate to Jonathan G. 

Katz, Secretary, Securities and Exchange 

Commission, 450 Fifth Street NW., 

Washington, DC 20549–0609. 

Comments also may be submitted 

electronically at the following E-mail 

address: rule-comments@sec.gov. All 

comment letters should refer to File No. 

S7–06–04; this file number should be 

included on the subject line if E-mail is 

used. Comment letters will be available 

for inspection and copying in the 

Commission’s Public Reference Room at 

the same address. Electronically 

submitted comment letters will be 

posted on the Commission’s Internet 

Web site (http://www.sec.gov).1

FOR FURTHER INFORMATION CONTACT:

With respect to Securities Exchange Act 

rules 10b–10, 15c2–2, and 15c2–3, 

contact Catherine McGuire, Chief 

Counsel, Paula R. Jenson, Deputy Chief 

Counsel, Joshua S. Kans, Special 

Counsel, or David W. Blass, Attorney, at 

202/942–0073, Office of Chief Counsel, 

Division of Market Regulation, 

Securities and Exchange Commission, 

450 Fifth Street NW., Washington, DC 

20549–1001. 

With respect to Form N–1A, contact 

Tara L. Royal, Senior Counsel, Office of 

Disclosure Regulation, at 202/942–0721, 

Division of Investment Management, 

Securities and Exchange Commission, 

450 Fifth Street NW., Washington, DC 

20549–0506.

SUPPLEMENTARY INFORMATION: The 

Securities and Exchange Commission 

(‘‘SEC’’ or ‘‘Commission’’) is publishing 

for comment proposed rules 15c2–2 and 

15c2–3, as well as amendments to rule 

10b–10 under the Securities Exchange 

Act of 1934 (‘‘Exchange Act’’) and 

proposed amendments to Form N–1A 

under the Securities Act of 1933 

(‘‘Securities Act’’) and the Investment 

Company Act of 1940 (‘‘Investment 

Company Act’’).

Table of Contents 

I. Executive Summary 

II. Introduction 

III. Special Request for Comments from 

Investors 

IV. Improved Confirmation Disclosure for 

Transactions in Mutual Fund Shares, 

Unit Investment Trust Interests and 529 

Plan Interests 

V. Point of Sale Disclosure for Transactions 

in Mutual Fund Shares, Unit Investment 

Trust Interests and 529 Plan Interests 

VI. Prospectus Disclosure 

VII. Disclosure Related to Transactions in 

Callable Preferred Stock and Callable 

Debt Securities, and Other Amendments 

to Rule 10b–10

VIII. Paperwork Reduction Act Analysis 

IX. Costs and Benefits of the Proposed Rule 

and Rule Amendments 

X. Consideration of Burden on Promotion of 

Efficiency, Competition, and Capital 

Formation 

XI. Consideration of Impact on the Economy 

XII. Initial Regulatory Flexibility Analysis 

XIII. Statutory Authority 

Text of Proposed Rules

I. Executive Summary 

The Commission is publishing for 

comment two proposed new rules and 

rule amendments under the Exchange 

Act. The proposed new rules seek to 

improve investor access to material 

information about investments in openend management investment company 

securities, unit investment trust 

interests, and municipal fund securities 

used for education savings. The 

proposals would accomplish that by 

requiring brokers, dealers and 

municipal securities dealers 2 to make 

additional disclosures, beyond those 

currently required, in transaction 

confirmations that they provide to 

customers at the time of a transaction, 

and also by requiring point of sale 

disclosure of material information prior 

to the transaction.

The proposed new confirmation rules 

would require brokers, dealers and 

municipal securities dealers to provide 

customers with information about 

distribution-related costs that investors 

incur when they purchase those types of 

securities. The confirmation rule 

proposals would also require disclosure 

of distribution-related arrangements 

involving those types of securities that 

pose conflicts of interest for brokers, 

dealers and municipal securities 

dealers, as well as their associated 

persons. These disclosures would 

promote more informed decisionmaking by investors in securities issued 

by open-end management investment 

companies (also referred to here as 

‘‘mutual funds’’ or ‘‘funds’’), interests 

issued by unit investment trusts or 

‘‘UITs’’ (including insurance company 

separate accounts that offer variable 

annuity contracts and variable life 

insurance policies) and securities issued 

by education savings ‘‘529’’ plans. 

The proposed new point of sale 

disclosure rule would require brokers, 

dealers and municipal securities dealers 

to provide point of sale disclosure to 

customers about costs and conflicts of 

interest. In contrast to confirmation 

disclosure, which a customer will not 

receive in writing until after a 

transaction has been effected, point of 

sale disclosure would specifically 

require that investors be provided with 

information that they can use as they 

determine whether to enter into a 

transaction to purchase one of those 

types of securities. 

The proposed new point of sale 

disclosure and confirmation rules and 

rule amendments also would clarify that 

the rules do not provide safe harbors for 

activity that would violate the antifraud 

provisions of the federal securities laws 

or other legal requirements. 

Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 6439

3The term ‘‘broker’’ as used in this release also 

includes municipal securities brokers.

4The existing confirmation rule, Exchange Act 

rule 10b–10, would continue to govern brokerdealers’ confirmation obligations for transactions in 

other securities.

5Rule 10b–10 was adopted in 1977, and it 

became effective the next year following 

amendments. See rule 10b–10 Adopting Release, 

Exchange Act Release No. 13508 (May 5, 1977), 42 

FR 25318 (May 17, 1977); Exchange Act Release No. 

15219 (October 6, 1978), 43 FR 47495 (October 16, 

1978) (amendment related to odd-lot differentials, 

mark-ups and mark-downs in certain riskless 

principal transactions, market maker status and 

procedures for periodic disclosure). Rule 10b–10 

replaced the Commission’s previous confirmation 

rule, rule 15c1–4, which had been limited to 

transactions conducted over-the-counter. Prior to 

the adoption of rule 10b–10, transactions on 

national securities exchanges were confirmed 

pursuant to self-regulatory organization rules. See

New York Stock Exchange (‘‘NYSE’’) rule 409(c) 

(rescinded on October 6, 1978 upon effectiveness of 

rule 10b–10). 

Rule 10b–10 subsequently has been amended 

several times. See Exchange Act Release No. 19687 

(April 18, 1983), 48 FR 17583 (April 25, 1983) 

(related to yield, call and redemption information 

for debt securities, and monthly statements for 

transaction in money market fund shares); 

Exchange Act Release No. 22397 (September 11, 

1985), 50 FR 37648 (September 17, 1985) (related 

to price and mark-up information for principal 

transactions in reported securities); Exchange Act 

Release No. 34902 (October 27, 1994), 59 FR 55006 

(November 2, 1994) (related to disclosure of receipt 

of payment for order flow); Exchange Act Release 

No. 34962 (November 10, 1994), 59 FR 59612 

(November 17, 1994) (related to unrated securities, 

price and mark-up information for principal 

transactions in Nasdaq small-cap and regional stock 

exchange-listed securities, non-SIPC broker-dealers, 

and factors that affect yield for asset-backed 

securities); Exchange Act Release No. 46471 

(September 6, 2002), 67 FR 58302 (September 13, 

2002) (related to securities futures products in 

futures accounts).

6See Letter regarding Investment Company 

Institute (March 19, 1979, available April 18, 1979).

7Rule 10b–10 does not apply to transactions in 

municipal securities.

8 17 CFR 239.15A and 274.11A.

We are also proposing amendments to 

the Commission’s general confirmation 

rule to require broker-dealers to provide 

customers with additional information 

in connection with transactions in 

callable preferred stock and debt 

securities, and to make additional 

conforming and technical changes to the 

rule. 

Finally, we are proposing to amend 

Form N–1A, the registration form used 

by mutual funds to register under the 

Investment Company Act and to offer 

their securities under the Securities Act, 

to require improved disclosure 

regarding sales loads and revenue 

sharing arrangements. 

In proposing this rule, we have 

requested comments on a variety of 

issues. We wish to emphasize that we 

particularly hope to receive comments 

from investors. As part of this proposed 

rulemaking, we have also proposed new 

forms for confirmation disclosure and 

point of sale disclosure. We want to 

know whether the forms clearly 

communicate the information that 

investors need to make investment 

decisions, and whether the forms will 

provide investors with the information 

they need, at the time they need it.

II. Introduction 

The Commission is proposing new 

rule 15c2–2 under the Exchange Act, 

which would govern the obligations of 

brokers (including municipal securities 

brokers),3 dealers and municipal 

securities dealers to disclose 

transaction-related information in 

confirmations or other documents when 

customers buy or sell certain investment 

company securities and municipal fund 

securities.4 The Commission also is 

proposing new rule 15c2–3 under the 

Exchange Act, which would govern the 

obligation of brokers, dealers and 

municipal securities dealers to disclose 

information to investors prior to 

effecting transactions in those securities.

The proposed new rules respond to 

concerns that investors in mutual fund 

shares, UIT interests (including certain 

insurance company separate accounts 

that issue variable insurance products) 

and municipal fund securities used for 

education savings lack adequate 

information about certain distributionrelated costs, as well as certain 

distribution arrangements, that create 

conflicts of interest for brokers, dealers, 

municipal securities dealers, and their 

associated persons. Those costs and 

other distribution arrangements have 

evolved substantially since 1977, when 

the Commission adopted its general 

confirmation rule, rule 10b–10.5 We 

believe that disclosure of information 

about those costs and conflicts can help 

investors make better informed 

investment decisions.

Proposed rule 15c2–2 would require 

specific confirmation disclosure of 

information about front-end and 

deferred sales fees (‘‘loads’’) and other 

distribution-related costs that directly 

impact the returns earned by investors 

in mutual fund shares, UIT interests and 

529 plan securities. It also would 

require brokers, dealers and municipal 

securities dealers to disclose their 

compensation for selling those 

securities, and to disclose information 

about revenue sharing arrangements and 

portfolio brokerage arrangements that 

create conflicts of interest for them. 

Moreover, the proposed rule would 

require brokers, dealers and municipal 

securities dealers to inform customers 

about whether their salespersons or 

other associated persons receive extra 

compensation for selling certain fund 

shares or fund share classes. 

As part of this rulemaking process, 

the Commission intends to withdraw a 

no-action letter that the Commission’s 

Division of Market Regulation granted to 

the Investment Company Institute 

(‘‘ICI’’) in 1979, related to confirmation 

disclosure of mutual fund sales loads 

and related fees.6 The relief granted by 

that letter is inconsistent with proposed 

rule 15c2–2, which would mandate 

specific disclosure of load information 

on customer confirmations.

To avoid redundancy with proposed 

new rule 15c2–2, we are also proposing 

to modify rule 10b–10 to exclude certain 

transactions in mutual fund shares and 

UIT interests from the rule’s scope, and 

to make other changes consistent with 

proposed rule 15c2–2.7 In addition, we 

are proposing to modify rule 10b–10 to 

clarify, consistent with proposed rule 

15c2–2, that the rule does not provide 

a safe harbor for activity that would 

violate the antifraud provisions of the 

federal securities laws or other legal 

requirements.

Because confirmation disclosure does 

not provide information to investors 

prior to transactions in securities—i.e., 

at the time they make investment 

decisions—we also are proposing new 

rule 15c2–3 to require brokers, dealers 

and municipal securities dealers to 

provide point of sale disclosure to 

customers prior to effecting transactions 

in mutual fund shares, UIT interests and 

529 plan securities. The proposed rule 

would enable investors to see 

transaction-specific information about 

distribution-related costs, and about 

remuneration arrangements that lead to 

conflicts of interest for their brokers, 

dealers or municipal securities dealers. 

That information would enable 

investors to better understand the costs 

and conflicts associated with 

investments in those securities prior to 

entering into transactions, which should 

promote better informed investment 

decision-making. The Commission also 

proposes to amend Form N–1A 8 to 

require improved disclosure by mutual 

funds regarding sales loads and revenue 

sharing arrangements.

In addition, the Commission also 

proposes to amend rule 10b–10 to 

require broker-dealers to disclose 

whenever preferred stock can be called 

by the issuer. Rule 10b–10 requires 

similar disclosure for transactions in 

debt securities that are callable by the 

issuer. The Commission further 

proposes to amend rule 10b–10 to 

require disclosure of the date of first call 

for certain transactions in callable debt 

securities. 

6440 Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 

9These proposed rules are written to exclude 

transactions in exchange-traded funds (‘‘ETFs’’), 

even though ETFs technically are open-end 

investment companies or unit investment trusts. 

ETF transactions would remain subject to the 

confirmation requirements of rule 10b–10.

10Open-end management investment companies 

are defined in Section 5(a)(1) of the Investment 

Company Act, and unit investment trusts are 

defined in Section 4(2) of that Act.

11The definition of ‘‘municipal fund security’’

under the rules of the Municipal Securities 

Rulemaking Board (‘‘MSRB’’) also encompasses 

interests in local government investment pools. 

This proposal, however, would not apply to brokerdealer transactions involving interests in those 

investment pools. See Proposed paragraph (f)(12) of 

rule 15c2–2.

12Commission rules and rules of National 

Association of Securities Dealers, Inc. (‘‘NASD’’) 

address broker-dealer practices for distributing 

mutual funds. Commission rules and rules of the 

MSRB address broker-dealer (including municipal 

securities dealer) practices for distributing 

municipal fund securities.

13See Investment Company Act Section 18(f) and 

rule 18f–3 thereunder (relating to multiple share 

classes of open-end investment companies).

14Based upon information filed publicly with the 

Commission on Form N–SAR, the Commission staff 

estimates that for the one year period between 

September 2002 and August 2003, investors in 

open-end investment companies paid more than 

$6.7 billion in aggregate sales loads, consisting of 

approximately $4.9 billion in front-end sales loads 

and $1.8 billion in deferred sales loads. In addition, 

funds and their affiliates paid about $13 billion in 

marketing and distribution payments pursuant to 

12b–1 plans.

15Rule 12b–1 permits a fund’s board of directors 

to adopt a plan to use fund assets to finance 

activities that primarily are intended to result in the 

sale of the fund’s shares. NASD rule 2830 bars 

member broker-dealers from offering or selling 

securities of investment companies other than 

variable contracts if annual asset-based sales 

charges exceed 0.75% of net asset value, or if 

annual service fees for ‘‘personal service and/or 

maintenance of shareholder accounts’’ exceed 

0.25% of net asset value. See NASD rule 2830(b)(8), 

(b)(9), (d)(2)(E), and (d)(5). That rule also restricts 

NASD members from distributing shares of funds 

that have excessive front-end or deferred sales 

loads. See NASD rule 2830(d). 

Mutual fund principal underwriters use deferred 

sales loads in conjunction with rule 12b–1 fees. 

Usually, the deferred sales load is intended to 

recover amounts that the principal underwriter 

advances to a selling broker-dealer to compensate 

it for mutual fund share transactions if the customer 

redeems its shares before the underwriter can 

recover such amounts through the rule 12b–1 fee.

III. Special Request for Comments From 

Investors 

Brokers may have conflicts of interest 

when they sell mutual funds and other 

investments. For instance, your broker 

may get paid more if you purchase one 

fund over another, or the broker may 

receive other fees or payments from a 

fund for selling its shares. 

We have proposed two new forms that 

would require brokers to tell you how 

much you must pay when you buy a 

particular fund and how much your 

broker and the firm will receive for 

selling that fund. These two forms are 

designed to provide you with 

information at two points in time—

either orally or in writing immediately 

before your broker places the order 

(which is also called the ‘‘point-of-sale’’) 

and in a written confirmation statement 

after the transaction occurs. The 

purpose of the forms is to give you 

enough information so that you can 

understand what conflicts your broker 

and the firm have. That way, when a 

broker recommends a particular fund, 

you can assess with full knowledge 

whether the investment is better for you 

or for your broker. 

We want to know whether the forms 

clearly communicate the information 

you need to make your investment 

decisions. If not, why not? We further 

want to know whether the forms will 

provide you with the information you 

need at the time you need to receive it. 

If not, when would you want to receive 

the information? Finally, we would like 

to know what improvements, if any, you 

would make to the forms.

IV. Improved Confirmation Disclosure 

for Transactions in Mutual Fund 

Shares, Unit Investment Trust Interests 

and 529 Plan Interests 

A. Investors Need Better Disclosure 

About Distribution-Related Costs and 

Conflicts 

1. Types of Distribution-Related Costs 

and Conflicts 

This proposal is intended to improve 

investors’ ability to obtain information 

about costs and conflicts arising from 

transactions in mutual fund shares, UIT 

interests, and municipal fund securities 

used for education savings.9 Open-end 

management investment company 

shares and UIT interests are securities 

issued by investment companies that are 

registered with the Commission under 

the Investment Company Act.10

Municipal fund securities—which are 

popularly known as ‘‘529’’ plans after 

the section of the Internal Revenue Code 

that governs the federal tax treatment of 

those securities—are issued by tuition 

programs that are sponsored by state 

governments to provide investment 

vehicles that parents and others can use 

to save for educational expenses.11

While 529 plan securities differ from 

mutual fund shares because the states 

that issue those securities are not 

registered under the Investment 

Company Act, municipal fund securities 

can provide investors with investment 

alternatives that are similar to those 

provided by mutual fund shares. 

Moreover, the assets that underlie 

municipal fund securities may be 

invested in shares of registered 

investment companies.12

a. Distribution-related costs. Mutual 

fund investors may, directly or 

indirectly, incur distribution-related 

costs that can reduce their investment 

returns. The type and amount of those 

costs often vary among funds and 

among share classes issued by the same 

fund.13 Some mutual funds issue share 

classes that impose sales fees, or loads, 

on investors when they purchase the 

fund shares (‘‘front-end’’ sales loads). 

Mutual funds may also sell share classes 

with sales loads that investors must pay 

when they redeem fund shares 

(‘‘deferred’’ or ‘‘back-end’’ sales 

loads).14 The amount of the deferred 

sales load, generally calculated as the 

lesser of a percentage of the value of the 

initial investment or the account’s value 

upon redemption, typically declines 

each year that the investor holds the 

shares, and eventually disappears 

entirely. Some mutual funds also use 

their assets to pay distribution-related 

expenses, including compensation of 

broker-dealers in connection with 

distributing fund shares, under plans 

adopted pursuant to rule 12b–1 under 

the Investment Company Act (‘‘12b–1 

fees’’).15 Sales loads and asset-based 

sales charges and service fees reduce the 

returns that investors earn on their 

mutual fund investments. Not all 

mutual funds are sold subject to frontend or deferred sales loads or impose 

asset-based sales charges and service 

fees.

b. Conflicts-of-interest. As discussed 

in detail below, broker-dealers that sell 

mutual fund shares to customers may 

participate in distribution arrangements 

that create conflicts of interest for the 

broker-dealers as well as their 

personnel. Those arrangements can give 

broker-dealers a heightened financial 

incentive to sell particular funds or 

share classes, and therefore may lead a 

broker-dealer to provide some groups of 

funds with heightened visibility and 

access to the broker-dealer’s sales force, 

or otherwise influence the way that 

broker-dealers and their associated 

persons market those funds or share 

classes to customers. Those 

arrangements therefore pose special 

confirmation disclosure issues. 

Moreover, some of those arrangements 

may violate NASD rules, and the failure 

to disclose relevant information about 

those arrangements—regardless of 

whether disclosure specifically is 

required by the confirmation rules—also 

may violate the antifraud provisions of 

the federal securities laws. 

As part of those distribution 

arrangements, broker-dealers that sell 

mutual fund shares generally earn sales 

fees from the fund’s principal 

Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 6441

16Spreading the payment of sales fees over time 

is the customary method for compensating selling 

broker-dealers for sales of class C mutual fund 

shares.

17Revenue sharing arrangements may encompass 

multiple revenue streams. For example, an adviser 

within a fund complex may give a broker-dealer one 

set of payments that is linked to the broker-dealer’s 

recent sales of shares issued by that fund complex 

(which would give the broker-dealer an incentive to 

sell more shares of that fund complex), together 

with another set of payments that is linked to the 

asset-based fees that the adviser earns in connection 

with shares of a fund complex held by customers 

of a broker-dealer (which would give the brokerdealer an incentive to keep its customers invested 

in that fund complex). 

We understand that fund investment advisers 

typically make revenue-sharing payments to selling 

broker-dealers at the rate of between 0.20% and 

0.25% of the annual gross sales of shares of a fund 

complex made by a broker-dealer, and between 

0.01% and 0.05% of the net asset value of shares 

of a fund complex held by customers of a brokerdealer.

18The payments may be made either to the 

broker-dealer or to its affiliates. At times those 

payments may compensate the broker-dealer for 

work that it performs on behalf of the fund, and that 

the broker-dealer otherwise would not be required 

to perform, such as mailing certain documents 

(other than the prospectus) to customers. At other 

times, those payments may offset the brokerdealer’s expenses in connection with activities that 

it would be required to perform in any event, such 

as educating personnel and maintaining records.

19The amount of commissions that a brokerdealer earns through portfolio brokerage 

arrangements often is based on its total sales of all 

funds issued by that mutual fund complex. 

Payments of portfolio brokerage commissions, 

however, are not invariably linked to distribution. 

Some mutual funds may direct portfolio 

transactions to a particular broker-dealer for 

execution without reference to the broker-dealer’s 

success in distributing fund shares. 

Broker-dealers, at times, may also execute 

portfolio securities transactions on a principal 

basis. In those cases, the firms would be 

compensated through mark-ups rather than through 

commissions.

20We recently took action against Morgan Stanley 

DW Inc. in connection with several of those 

practices, for violations of rule 10b–10 and the 

antifraud provisions of Section 17(a)(2) of the 

Securities Act. Morgan Stanley entered into special 

marketing arrangements with several funds, and 

was compensated in part through revenue sharing 

payments and portfolio brokerage commissions. In 

return, Morgan Stanley placed participating funds 

on preferred lists and otherwise specially promoted 

them through its sales system. Morgan Stanley also 

specially promoted proprietary, or affiliated, funds. 

Moreover, in calculating manager compensation, 

which it based in part on branch profitability, 

Morgan Stanley allocated lower overhead costs in 

connection with the sale of proprietary or other 

favored funds than it allocated in connection with 

the sale of less favored funds. As discussed below, 

Morgan Stanley also paid special incentives to 

registered representatives in connection with the 

sale of proprietary and other favored funds. Morgan 

Stanley’s failure to disclose those practices to 

customers violated rule 10b–10 and Section 

17(a)(2). See In the Matter of Morgan Stanley DW 

Inc., Securities Act Release No. 8339 (November 17, 

2003). 

At the same time, the Commission sanctioned 

Morgan Stanley under Section 17(a)(2) in 

connection with its sale of class B mutual fund 

shares. Morgan Stanley failed to adequately disclose 

certain features that could make class A shares 

more attractive to customers than the class B shares 

it sold. Also, Morgan Stanley failed to adequately 

follow its compliance procedures governing large 

purchases of class B shares. See id. 

The NASD also has sanctioned Morgan Stanley 

for regulatory violations arising from its marketing 

arrangements on behalf of participating funds. The 

NASD determined that Morgan Stanley violated 

NASD rule 2830(k), which prohibits a member firm 

from favoring the distribution of particular mutual 

fund shares on the basis of brokerage commissions 

to be paid by the fund companies and which also 

prohibits a member firm from allowing sales 

personnel from sharing in directed brokerage 

commissions. See NASD, ‘‘Disciplinary and Other 

NASD Actions,’’ December 2003, at D18 (available 

on the Internet at http://www.nasdr.com/pdf-text/

0312dis.pdf).

21Revenue sharing arrangements not only pose 

potential conflicts of interest, but also may have the 

indirect effect of reducing investors’ returns by 

increasing the distribution-related costs incurred by 

funds. Even though revenue sharing is paid to 

broker-dealers directly by fund investment advisers, 

rather than out of fund assets, it is possible that 

some advisers may seek to increase the advisory 

fees that they charge the fund to finance those 

distribution activities. It is not clear whether that 

has occurred. See U.S. General Accounting Office, 

Mutual Funds: Greater Transparency Needed in 

Disclosures to Investors (June 2003) at 39 

(discussing uncertainty about how revenue sharing 

has affected fund fees). Moreover, revenue sharing 

arrangements may prevent some advisers from 

reducing their current advisory fees. 

We have noted that fund assets would be 

indirectly used for distribution ‘‘if any allowance 

were made in the investment adviser’s fee to 

provide money to finance distribution.’’ See

Investment Company Act Release No. 16431 (June 

13, 1988) at text accompanying note 124.

22 If the associated person is paid a fixed 

percentage of the broker-dealer’s fee, then he or she 

may earn more to sell one fund instead of another 

when the broker-dealer receives a higher fee for 

selling the first fund. Also, in some circumstances, 

an associated person may receive a higher 

percentage of the broker-dealer’s compensation 

when he or she sells a fund that is favored by the 

broker-dealer (such as a fund that is affiliated with 

the broker-dealer or that pays revenue sharing to the 

broker-dealer). The latter arrangement was a factor 

in the Commission’s recent action against Morgan 

Stanley, as associated persons whose annual 

production exceeded $1 million received a 42% 

payout to sell favored products but only a 40% 

payout to sell other products. See In the Matter of 

Morgan Stanley DW Inc., supra note 20. Associated 

persons with lower annual production also received 

higher payouts to sell favored products.

23Associated persons may earn more when they 

sell class B shares than when they sell the same 

dollar amount of class A shares of the same fund. 

Because class B shares are not associated with 

breakpoint discounts that can reduce the 

distribution costs that investors pay, broker-dealers 

often receive higher sales fees for distributing class 

B shares.

24NASD rules prohibit non-cash compensation 

through sales contests for mutual funds and 

variable products, except under certain conditions. 

Continued

underwriter at the time of sale. 

Alternatively, the principal underwriter 

may pay the selling broker-dealer sales 

fees attributable to a particular sales 

transaction over time, for as long as the 

customer holds the shares purchased.16

The amount of those sales fees is not 

uniform, however, and a broker-dealer 

may receive a higher fee for selling a 

particular dollar amount of shares 

issued by one fund rather than shares 

issued by another fund, or for selling 

one share class rather than other share 

classes issued by the same fund and 

available to the customer.

Broker-dealers also may be paid in 

other ways for distributing fund shares, 

such as through revenue sharing 

payments from a fund’s investment 

adviser.17 In some cases, a broker-dealer 

may receive payments from a fund or a 

fund’s affiliates that are characterized as 

service fees, recordkeeping and transfer 

fees, seminar sponsorships or other 

types of payments that ostensibly 

compensate the broker-dealer for costs 

that it incurs as part of its mutual fund 

distribution activities.18 Broker-dealers 

may also be compensated for 

distribution through receiving 

commissions for portfolio transactions 

executed on behalf of the fund or 

affiliated funds, even though the brokerdealer may not necessarily execute 

those transactions.19

These types of distribution-related 

arrangements may give broker-dealers 

heightened incentives to market the 

shares of particular mutual funds, or 

particular classes of fund shares. Those 

incentives may be reflected in a brokerdealer’s use of ‘‘preferred lists’’ that 

explicitly favor the distribution of 

certain funds, or they may be reflected 

in other ways, including incentives or 

instructions that the broker-dealer 

provides to its managers or its 

salespersons.20 Such incentives create 

conflicts between broker-dealers’

financial interests and their agency 

duties to customers.21

In addition to conflicts of interest at 

the firm level, associated persons of 

broker-dealers face conflicts arising 

from financial incentives that promote 

the sale of some shares or share 

classes—or differential compensation.’’

Associated persons may receive higher 

commissions when they sell shares of a 

particular fund than they would if they 

sold the same dollar amount of the 

shares of another fund.22 They may also 

receive higher commissions when they 

sell a particular class of shares within a 

fund than they would if they sold the 

same dollar amount of another share 

class within that same fund.23 Other 

forms of differential compensation may 

include a broker-dealer waiving certain 

fees or reimbursement of certain 

expenses ordinarily borne by an 

associated person, when the associated 

person sells the shares of particular 

mutual funds. Broker-dealers may also 

sponsor sales contests that provide cash 

compensation to representatives and 

managers for meeting certain sales 

goals.24 Associated persons, moreover, 

6442 Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 

Those rules, however, do not regulate contests that 

result in cash awards. See NASD Notice to Members 

99–81 (September 1999). The NASD sanctioned 

Morgan Stanley for violating the non-cash 

compensation rules to promote the sale of 

proprietary mutual funds and selected variable 

annuities. Prohibited sales contests within the firm 

offered a variety of rewards, including tickets to 

Britney Spears and Rolling Stones concerts. See

NASD, ‘‘Disciplinary and Other NASD Actions,’’

October 2003, at D18–D19 (available on the Internet 

at http://www.nasdr.com/pdf-text/0310dis.pdf).

25A fund may pay a service fee of up to 0.25% 

to a broker-dealer out of fund assets pursuant to 

rule 12b–1 plans. See supra note 15. Associated 

persons may receive some of those fees. The 

Commission’s recent action against Morgan Stanley 

also noted that associated persons received a 

portion of the ongoing revenue sharing payments 

that fund complexes provided to Morgan Stanley. 

See In the Matter of Morgan Stanley DW Inc., supra

note 20.

26Although most variable insurance products are 

issued by insurance company separate accounts 

that are structured as UITs, some are issued by 

insurance company separate accounts that are 

structured as open-end management investment 

companies. Because proposed rules 15c2–2 and 

15c2–3 would apply to transactions involving 

interests in UITs and open-end companies, they 

would encompass transactions in both types of 

variable insurance products.

27 In contrast to NASD rules, MSRB rules do not 

generally bar associated persons from receiving 

non-cash compensation. The MSRB has noted, 

however, that its fair dealing rule and other 

customer protection rules do apply to the marketing 

of 529 plans. See Municipal Securities Rulemaking 

Board, Application of fair practice and advertising 

rules to municipal fund securities (May 14, 2002). 28Rule 10b–10 applies to broker-dealer 

transactions in all securities, excluding U.S. 

Savings Bonds and municipal securities. The MSRB 

has a separate confirmation rule that governs 

member transactions in municipal securities, 

including municipal fund securities. See MSRB rule 

G–15.

29Rule 10b–10 defines ‘‘completion of the 

transaction’’ by reference to rule 15c1–1 under the 

Exchange Act. See infra note 125.

30See Rule 10b–10(a) (general disclosure 

requirement) and rule 10b–10(b) (periodic reporting 

alternative).

31See Rule 10b–10(a)(2)(i)(B) (customer 

remuneration) and Rule 10b–10(a)(2)(i)(D) (third 

party remuneration). In the mutual fund context, 

third party remuneration generally is paid by the 

fund and its affiliates. Rule 10b–10 also requires 

disclosure of the mark-ups and mark-downs that a 

broker-dealer earns on transactions involving a 

contemporaneous sale and purchase when it acts as 

a principal for its own account in a transaction, 

other than as a market maker. See Rule 10b–

10(a)(2)(ii)(A).

32See Rule 10b–10 Adopting Release, supra note 

5, at n.41.

33Of course, this applies only to information 

disclosed in a prospectus that is delivered to 

customers at or before completion of the 

transaction. The requirements of rule 10b–10 

cannot be satisfied via disclosure in a document 

that is not delivered at or before completion of the 

transaction, such as a statement of additional 

information (‘‘SAI’’). The SAI is part of a fund’s 

registration statement and contains information 

about a fund in addition to that contained in the 

prospectus. The SAI is required to be delivered to 

investors upon request and is available on the 

Commission’s Electronic Data Gathering, Analysis, 

and Retrieval System.

may receive additional fees in the years 

after a sale, such as fees that some funds 

pay to broker-dealers for providing 

shareholder services.25 Each of those 

types of arrangements may motivate 

broker-dealer personnel to promote the 

sale of some funds over others. The 

funds that are favored by those 

arrangements may include proprietary 

funds that are affiliated with the brokerdealer, or funds whose advisers pay 

revenue sharing to the broker-dealer. 

Differential compensation may give the 

associated person an incentive to 

improperly limit the range of mutual 

fund choices presented to customers, or 

may affect the associated person’s 

recommendations.

UITs, which include certain insurance 

company separate accounts that issue 

variable insurance products (i.e., 

variable annuity contracts and variable 

life insurance policies),26 are subject to 

similar distribution-related costs and 

conflicts.

c. Costs and conflicts related to 529 

plans. Compensation practices for 

municipal fund securities used for 

education savings, or ‘‘529’’ plans, raise 

many of the same issues. Those 

securities may be sold subject to loads 

that can reduce the returns they 

produce. At times, brokers, dealers and 

municipal securities dealers that 

distribute municipal fund securities also 

may participate in distribution-related 

arrangements that create conflicts of 

interest for them, including revenue 

sharing payments and the use of 

portfolio commissions to reward 

distribution. In some cases, a broker, 

dealer or municipal securities dealer 

chooses to distribute only the municipal 

fund securities issued by a particular 

state, and does not provide its 

customers with the opportunity to 

invest in 529 plans issued by other 

states, even though those other plans 

may have lower loads or lower expense 

ratios, or may provide state income tax 

benefits that are absent from the plans 

being offered.

The associated persons of brokers, 

dealers and municipal securities dealers 

selling 529 plans may also receive 

incentives, such as differential 

compensation, that create conflicts of 

interest for them. Moreover, in contrast 

to NASD rules applicable to the 

distribution of mutual fund shares, 

associated persons of brokers, dealers 

and municipal securities dealers are not 

generally precluded from receiving noncash compensation for selling municipal 

fund securities.27

2. Current Confirmation Disclosure 

Requirements for Mutual Funds and 

Municipal Fund Securities 

Rule 10b–10 under the Exchange Act 

requires broker-dealers to disclose 

specific information to their customers 

about securities transactions.28 While 

the rule generally directs broker-dealers 

to disclose the required information at 

or before the completion of each 

securities transaction,29 broker-dealers 

may also disclose the information 

monthly or quarterly in limited 

situations, such as when a customer has 

entered into a periodic plan for 

purchasing mutual fund shares.30 The 

rule requires disclosure of, among other 

information, the identity of the security, 

the number of shares purchased or sold, 

and the price at which the transaction 

was effected. When a broker-dealer acts 

as the customer’s agent, it must also 

disclose the amount of the remuneration 

it receives from the customer. For 

agency transactions in which the brokerdealer also participates in the 

distribution of the securities, it must 

disclose the source and amount of 

remuneration that it receives from third 

parties.31

The Commission and its staff have 

taken the position, with respect to 

mutual fund transactions, that a brokerdealer may satisfy its rule 10b–10 

obligations without providing customers 

with a transaction-specific document 

that discloses information about loads 

or third-party remuneration, so long as 

the customer receives a fund prospectus 

that adequately discloses that 

information. This position had its 

genesis in a statement by the 

Commission when it adopted rule 10b–

10. In response to comments related to 

the rule’s disclosure requirement about 

third-party remuneration, the 

Commission suggested that prospectus 

disclosure would be an adequate 

substitute for confirmation disclosure, 

explaining:

[I]n the case of offerings registered under 

the Securities Act of 1933, the final 

prospectus delivered to the customer should 

generally set forth the information required 

by the proviso with respect to source and 

amount of remuneration. * * *

In such situations the information 

specified in the proviso need not be 

separately set forth in the confirmation.32

In other words, the Commission was of 

the view that broker-dealer disclosure of 

third-party remuneration would be 

redundant if the customer received a 

prospectus disclosing that 

information.33

The Commission’s staff reflected that 

position in a 1979 letter to the 

Investment Company Institute, in which 

the Division of Market Regulation stated 

that it would not recommend 

enforcement action against brokerdealers that did not provide transactionspecific disclosure about mutual fund

Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 6443

34See Letter regarding Investment Company 

Institute, supra note 6. That 1979 letter referred 

both to the agency disclosure and the principal 

disclosure requirements of rule 10b–10. 

Although in 1994 the staff indicated that it 

intended to withdraw the 1979 letter, the letter 

currently remains in effect. The staff was concerned 

that confirmations that do not disclose any 

transaction charges could mislead customers who 

might not look to the prospectus for a full 

description of the remuneration. See Letter 

regarding Investment Company Institute (March 16, 

1994). The mutual fund industry commenced 

discussions with the staff noting that some mutual 

funds impose transaction charges over the duration 

of or at the end of the investment, and asserted that 

disclosing the transaction charges through 

prospectus fee tables was more accurate than trying 

to estimate them on the confirmation at the 

beginning of the investment. As a result of that 

dialogue, the staff decided not to withdraw the 

letter.

35See Commission brief, Cohen v. Donaldson, 

Lufkin & Jenrette Securities Corp., reported as Press

v. Quick & Reilly, Inc., 218 F.3d 121 (2d Cir. 2000) 

(No. 97–9159) (‘‘amicus brief’’). The Commission 

filed the brief in two separate dockets that were 

consolidated before the Second Circuit.

36 Id. at 10–12, 21, 24–28.

37 Id. at 24.

38See id.

39See Press v. Quick & Reilly, Inc., 218 F.3d 121, 

129 (2d Cir. 2000).

40 Industry data indicates that between 1977 and 

2002, the number of mutual funds increased from 

477 to 8,256, total fund assets increased from $49 

billion to $6.4 trillion, and the number of 

shareholder accounts increased from 8.7 million to 

251 million. The magnitude of the changes, 

however, is likely greater than what those figures 

depict. The earlier figures include data for funds 

that invested in other mutual funds, while the latter 

figures exclude that data. See Investment Company 

Institute, Mutual Fund Fact Book (43rd ed., 2003) 

at 63.

41Mutual funds typically offer discounts on frontend sales loads assessed on class A shares if the 

amount of an investor’s investment in the fund 

reaches certain pre-determined ‘‘breakpoint’’ levels. 

Examinations by the Commission staff and selfregulatory organizations determined that many 

investors did not receive the breakpoint discounts 

to which they were entitled.

loads and related charges, so long as the 

customer received a prospectus that 

‘‘disclosed the precise amount of the 

sales load or other charges or a formula 

that would enable the customer to 

calculate the precise amount of those 

fees.’’ 34

The Commission later discussed how 

Rule 10b–10 disclosure obligations 

apply to mutual fund transactions in an 

amicus brief filed with the Second 

Circuit in 2000.35 That brief focused on 

the adequacy of prospectus disclosure 

by broker-dealers that received thirdparty remuneration—in the form of rule 

12b–1 payments from funds and 

revenue sharing payments from fund 

investment advisers—in connection 

with sweeping customer funds into 

money market accounts. We concluded 

that the prospectus disclosure at issue 

substituted for confirmation disclosure, 

when the prospectuses included the 

information required to be disclosed by 

Form N–1A, including the maximum 

rule 12b–1 fees payable by the funds as 

a percentage of net assets, and noted the 

presence of ‘‘significant amounts’’ of 

non-rule 12b–1 payments by the funds’

investment advisers. In arriving at that 

conclusion, we interpreted the rule 10b–

10 Adopting Release as establishing the 

general principle that ‘‘delivery of a 

prospectus containing sufficient 

disclosure can satisfy a broker-dealer’s 

obligations under Rule 10b–10.’’

Recognizing that ‘‘there is no precise 

standard as to how much disclosure the 

Rule currently requires,’’ we went on to 

note that the staff’s 1979 letter, with its 

‘‘precise amount’’ standard for 

prospectus disclosure of loads and 

related fees, did not apply to third-party 

remuneration because precision was not 

necessary to inform customers about 

conflicts of interest.

While the Commission has never 

directly addressed the disclosure of 

payments to a broker-dealer in the form 

of portfolio brokerage commissions, the 

same principles apply. Currently, if a 

prospectus is not delivered at or before 

completion of the transaction, or if the 

prospectus fails to disclose the fact that 

the fund pays portfolio brokerage 

commissions to broker-dealers that 

participate in distribution, or fails to 

disclose information about the degree of 

the resulting conflict, then the 

transaction confirmation must provide 

information about the source and 

amount of those payments.36

In one case before the Second Circuit, 

we viewed the disclosures at issue as 

meeting the requirements of rule 10b–

10, but we went on to state: ‘‘We are not 

saying that this is necessarily all the 

disclosure about these types of fees that 

should be required as a matter of 

policy.’’ 37 We also noted that we had 

directed the staff to make 

recommendations to us about whether 

to require new disclosures or to refine 

the existing disclosures.38 The Second 

Circuit also questioned whether the 

prospectus disclosure at issue 

adequately placed investors on notice 

about the receipt of those payments and 

any resulting conflicts of interest.39 The 

rules we propose today address those 

concerns.

3. Concerns About the Adequacy of 

Current Disclosure Practices 

The disclosure rules we are proposing 

are designed to respond to the ways in 

which the mutual fund industry and its 

distribution practices have evolved in 

the years since the 1977 adoption of rule 

10b–10 and the staff’s 1979 letter to the 

ICI. 

During the past quarter century, the 

number of mutual fund customers, the 

value of mutual fund investments, and 

the number of mutual funds all have 

increased exponentially.40 The public 

increasingly has placed retirement 

savings into mutual funds through 

individual retirement accounts and 

other retirement plans. In addition, 

distribution costs and broker-dealer 

conflicts have grown more complex. 

Since 1980, many funds have offered 

multiple share classes, including class B 

shares with deferred sales loads that can 

have the effect of obscuring the 

distribution costs borne by investors. 

Many mature funds continue to rely on 

rule 12b–1 fees to pay for distribution, 

even though those fees were intended 

by the Commission to be short-term 

tools for helping funds gather assets. 

The increase in the number of mutual 

funds has made broker-dealer ‘‘shelf 

space’’ more critical to investment 

companies, leading to revenue sharing 

and other distribution arrangements that 

quietly compensate broker-dealers for 

distribution. The growth of funds 

affiliated with broker-dealers has also 

generated special broker-dealer 

marketing incentives to promote the 

distribution of those affiliated 

‘‘proprietary’’ funds. In addition, the 

development of fund ‘‘supermarkets’’

sponsored by broker-dealers has led to 

related arrangements in which a fund or 

its affiliates compensates broker-dealers 

in ways that are not generally disclosed 

to investors. Moreover, the introduction 

of highly promoted 529 plans has 

brought many new investors into 

products that themselves invest in 

mutual funds and that are associated 

with similar distribution-related costs 

and conflicts.

Those changes raise significant 

concerns about the adequacy of current 

disclosure practices. For example, we 

are concerned that some investors may 

misunderstand the costs associated with 

purchasing mutual fund shares and 529 

plan securities because they lack 

transaction-specific confirmation and 

point of sale information about loads 

and fees. 

In late 2002, in response to learning 

that some mutual fund investors did not 

receive appropriate volume discounts 

on the front-end sales loads they paid—

commonly known as ‘‘breakpoint 

discounts’’—NASD, the ICI, and the 

Securities Industry Association (‘‘SIA’’) 

convened a task force to recommend 

industry-wide changes relating to 

breakpoints.41 The task force issued a 

report in July 2003 recommending, 

among other changes, that mutual fund 

confirmations include front-end sales 

6444 Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 

42 ‘‘Confirmations should reflect the entire 

percentage sales load charged to each front-end load 

mutual fund purchase transaction. This information 

would enable investors to verify that the proper 

charge was applied.’’ Report of the Joint NASD/

Industry Task Force on Breakpoints (July 2003) at 

10 (footnote omitted) (‘‘Task Force Report’’) 

(available at http://www.nasdr.com/

breakpoints_report.asp).

43See id.

44See Letter to Jonathan Katz, Secretary, 

Commission, from Donna Matheney, Vice 

President, Joe Becks & Associates, Inc., January 22, 

2003. The petition was written on behalf of a 

company profit sharing plan that was invested in 

mutual funds.

45See NASD Investor Alert, ‘‘Class B Mutual 

Fund Shares: Do They Make the Grade?’’ (June 

2003).

46See ‘‘Why B Shares Deserve to Get an ‘F’: These 

Broker-Sold Funds are a Bad Deal,’’ Wall Street 

Journal, July 2, 2003 at D1.

47 In one matter, the Commission affirmed a 

NASD disciplinary action against an associated 

person of a broker-dealer who placed a customer 

into class B shares of a mutual fund instead of the 

more appropriate class A shares. The associated 

person testified that he generally recommended that 

his clients purchase class B shares because he 

received higher commissions for selling that class. 

The Commission affirmed the NASD’s conclusion 

that the associated person violated NASD suitability 

requirements and standards of conduct 

requirements. See In the Matter of Wendell D. 

Belden, Securities Exchange Act Release No. 47859 

(May 14, 2003). 

In another matter, the Commission sanctioned a 

broker-dealer for failing to adequately supervise an 

associated person who inappropriately placed 

investors into class B shares to generate higher 

commissions. See In the Matter of Prudential 

Securities, Inc., Securities Exchange Act Release 

No. 48149 (July 10, 2003). 

As discussed above, we found that Morgan 

Stanley violated the antifraud provisions of Section 

17(a)(2) of the Securities Act by placing customers 

into class B shares without adequately disclosing 

information about the relative costs of class A and 

class B shares. See In the Matter of Morgan Stanley 

DW Inc., supra note 20.

48See ‘‘How high can costs go?,’’ Institutional 

Investor, May 2001 at 56.

49 ‘‘Of particular concern is the practice of firms 

offering higher payouts when [registered 

representatives] sell proprietary mutual funds 

instead of funds of a similar class managed by 

outside investment companies. (Proprietary funds 

are those created and/or managed by the firm.) This 

differentiation raised the question: Is the [registered 

representative] rendering objective advice or simply 

maximizing commission income?’’

Report of the Committee on Compensation 

Practices (April 10, 1995) at 7–8 (available at http:/

/www.sec.gov/news/studies/bkrcomp.txt). The 

committee was chaired by Daniel Tully of Merrill 

Lynch & Co., and its report commonly is known as 

the ‘‘Tully report.’’

50As discussed above, Morgan Stanley had a 

practice of paying associated persons a higher 

percentage payout for selling proprietary funds or 

other funds that were favored by the firm. See In 

the Matter of Morgan Stanley DW Inc., supra note 

20. This was not a unique situation, as other brokerdealers also provide associated persons with higher 

percentage payouts for selling proprietary funds.

51See NASD Notice to Members 03–54 

(September 2003).

52The SIA recently submitted suggestions to the 

staff for amending rule 10b–10 to provide 

additional disclosure about revenue sharing and 

differential compensation related to purchases of 

mutual fund shares. See Letter from Stuart 

load disclosure.42 The task force also 

recommended that the Commission staff 

revisit its 1979 letter to the ICI.43 While 

the task force was studying the issue, 

the Commission also received a 

rulemaking petition on behalf of a 

mutual fund customer asking the 

Commission to require broker-dealer 

confirmations to specifically disclose 

the front-end sales loads that customers 

incur with mutual fund transactions.44

Our concerns, however, go beyond the 

adequacy of front-end load disclosure. 

More complete disclosure also may help 

customers understand the costs 

associated with purchasing fund share 

classes that carry deferred sales loads, as 

well as the potential conflicts of interest 

that broker-dealers and their associated 

persons have in connection with the 

sale of those share classes. For example, 

when the amount invested reaches 

certain breakpoint discount levels, 

associated persons of broker-dealers 

generally are paid more for selling class 

B shares than for selling shares of other 

classes. Because class A shares typically 

carry front-end sales loads while class B 

shares do not, some investors may be 

inclined to purchase class B shares 

believing that they are cheaper, even 

though class B shares generally carry 

contingent deferred sales loads and 

higher 12b–1 fees. NASD has issued an 

alert informing investors that, before 

purchasing class B shares, ‘‘you should 

determine whether this investment is in 

your interest, and not just in the interest 

of your broker or adviser who may 

receive higher commissions from the 

sale of Class B shares than other classes 

of fund shares.’’45 In fact, questions 

have been raised about whether class B 

shares ever would be appropriate for 

most investors.46 Recent enforcement 

actions have underscored how those 

types of compensation arrangements 

produce conflicts of interest that lead 

associated persons of broker-dealers to 

act against the interests of their 

customers.47

Investors also lack information about 

whether their broker-dealers receive 

revenue sharing or other third-party 

remuneration to distribute particular 

mutual funds. Prospectus disclosure 

does not identify which individual 

broker-dealers receive revenue sharing, 

let alone quantify those arrangements. 

Yet the magnitude of revenue sharing 

payments—estimated in 2001 to be $2 

billion annually 48—suggests that those 

arrangements influence the mutual fund 

choices that broker-dealers and their 

representatives present to investors. 

Prospectus disclosure, moreover, is not 

designed to inform investors about 

whether their particular broker-dealers 

are compensated in other ways for 

distributing fund shares, such as by 

receiving commissions for fund 

portfolio brokerage transactions.

Broker-dealer compensation practices 

related to proprietary funds raise 

additional disclosure issues. In 1994, a 

committee was formed at the request of 

the Commission’s Chairman to examine 

securities industry compensation 

practices, identify actual and perceived 

conflicts of interest, and identify ‘‘best 

practices’’ for controlling those 

conflicts. The committee raised a 

number of concerns in its 1995 report, 

including concerns about the practice of 

offering higher payouts for selling 

proprietary mutual funds. It 

recommended that broker-dealers pay 

identical commissions to registered 

representatives for selling proprietary 

and non-proprietary products within a 

product category.49 While some brokerdealers followed that recommendation, 

its adoption has not been uniform.50

In September 2003, NASD requested 

comment on proposed rules to require 

member firms to disclose certain 

information about revenue sharing and 

differential compensation to customers 

at account opening or, if no account is 

established, at the time the customer 

first purchases shares of an investment 

company.51 Stating that those 

compensation arrangements could 

create conflicts of interest for brokerdealers and their associated persons, 

NASD added, ‘‘Disclosure of revenue 

sharing and differential cash 

compensation arrangements would 

enable investors to evaluate whether a 

registered representative’s particular 

product recommendation was 

inappropriately influenced by these 

arrangements.’’ The Commission will 

consider the proposal in the event that 

NASD submits it as a proposed rule 

change. We note, however, that NASD’s 

proposal is geared to giving customers 

generalized access to information about 

revenue sharing and differential 

compensation at the time the customer 

is evaluating potential mutual fund 

investments. That particular focus 

would complement the disclosures we 

propose today—which would improve 

disclosure of transaction-specific 

information about distribution-related 

costs and arrangements that lead to 

conflicts of interest. Investors who have 

access to relevant transaction-specific 

information about those costs and 

conflicts of interest should be better 

prepared to scrutinize the adequacy of 

the investment choices presented by 

their broker-dealers as well as the 

recommendations their broker-dealers 

make.52

Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 6445

Strachan, Chair, Investment Company Committee, 

SIA, to Paul Roye, Director, Division of Investment 

Management, Commission, October 31, 2003. This 

letter will be available in the public comment file. 

The SIA recommends that, when applicable, 

confirmations should include a statement 

indicating that associated persons may have 

received additional compensation in connection 

with the purchase. The SIA further suggests that 

when a broker-dealer has received a cash payment 

‘‘as a condition for inclusion of the investment 

company on a preferred or select sales list, or 

similar grouping, in connection with any other sales 

program, or as a reimbursement of advancement of 

expenses,’’ then the confirmation should contain a 

statement indicating that it ‘‘may have received a 

cash payment relating to the distribution.’’ In either 

case, the SIA suggests that the disclosure should 

also indicate that the customer can obtain ‘‘further 

information’’ by calling a toll-free or collect 

telephone number or by visiting a website. As 

discussed below, we are taking a different 

approach.

53While Exchange Act rule 10b–10 does not 

apply to transactions in municipal securities, 

transactions in 529 plan interests nonetheless pose 

cost and conflict concerns similar to those 

associated with transactions in mutual fund shares 

and UIT interests. Including municipal fund 

securities within the ambit of rule 15c2–2 therefore 

would promote a consistent disclosure framework.

54While the confirmation rules require delivery 

of information at or before a securities transaction, 

the antifraud provisions of the securities laws at 

times require a broker, dealer or municipal 

securities dealer to disclose particular information 

before a securities transaction. See Ettinger v. 

Merrill Lynch Pierce Fenner & Smith, Inc., 835 F.2d 

1031, 1036 (3d Cir. 1987); Krome v. Merrill Lynch 

& Co., 637 F. Supp. 910, 916 (S.D.N.Y. 1986). 

Moreover, the Commission recently sanctioned 

Morgan Stanley for violating certain antifraud 

provisions of the Securities Act with respect to its 

sale of class B mutual fund shares, based in part on 

a failure to disclose material information about 

differences between class B and class A shares. The 

Commission did not sanction Morgan Stanley for 

those omissions under rule 10b–10. See In the 

Matter of Morgan Stanley DW Inc., supra note 20.

55The Second Circuit, in Press v. Quick & Reilly, 

Inc., 218 F.3d 121 (2d Cir. 2000), expressed the 

view that the confirmation requirements of rule 

10b–10 also could determine which information is 

material under the antifraud standards of rule 10b–

5 under the Exchange Act. The court reasoned that 

the Commission ‘‘has decided precisely’’ what 

disclosure was needed with regard to conflicts of 

interest arising from third-party payments to brokerdealers, and concluded that ‘‘we will not 

undermine the SEC’s interpretation of its regulation 

by requiring even greater disclosure about that 

conflict of interest under the general antifraud 

provisions of Rule 10b–5.’’ Id. at 131–32. We 

recognize the importance of the principle that 

guided the court. That principle, however, is not 

what we intended when we adopted rule 10b–10. 

Even if a confirmation rule specifically addresses a 

particular practice, a broker, dealer or municipal 

securities dealer could provide enough disclosure 

to satisfy that rule, but nonetheless violate the 

antifraud provisions of the securities laws through 

its omission of material information to its customer 

in a particular transaction or under particular 

arrangements. When we adopt confirmation rules, 

we cannot consider all information that will be 

material in a particular transaction, and we do not 

determine that additional information is not 

material under the antifraud provisions. The 

confirmation rules cannot account for the variety of 

conflicts that are encompassed by the antifraud 

provisions. See SEC v. Capital Gains Research 

Bureau, Inc., 375 U.S. 180, 195 (1963) (noting that 

Congress intended ‘‘securities regulation ‘enacted 

for the purpose of avoiding frauds’ ’’ to be construed 

‘‘not technically and restrictively, but flexibly to 

effectuate its remedial purposes’’). Similarly, with 

regard to other courts that have looked to rule 10b–

10 in a more general context, we emphasize that 

rule 10b–10 was not intended to limit a brokerdealer’s obligation to disclose information, or 

otherwise to limit a broker-dealer’s responsibilities 

to its customers. See, e.g., Orman v. Charles Schwab 

& Co., 179 Ill. 29 282, 688 N.E.2d 620 (Ill. 1998), 

cert. denied, 523 U.S. 1075 (1998).

56As discussed below, we also propose to amend 

the preliminary note to rule 10b–10 to be consistent 

with this language.

57As the preliminary note to the rule would make 

clear, municipal securities brokers would be subject 

to the proposed rule because they are a type of 

‘‘broker.’’ See Exchange Act Section 3(a)(31) 

(definition of ‘‘municipal securities broker’’).

B. New Rule and Proposed Amendments 

Regarding Cost and Conflict Disclosure 

1. Proposed Rule 15c2–2

To provide investors with adequate 

access to information regarding the costs 

of their investments, as well as the 

conflicts of interest their broker-dealers 

face, the Commission is proposing a 

new rule to require brokers, dealers and 

municipal securities dealers to provide 

their customers with certain information 

in connection with certain transactions 

in mutual fund shares, UIT interests and 

529 plan shares. Because those 

securities have special distribution and 

compensation practices, the 

Commission is proposing to address 

those disclosure requirements in a new 

rule, rather than in rule 10b–10. A 

broker, dealer or municipal securities 

dealer that misstates information in a 

confirmation delivered pursuant to 

proposed rule 15c2–2 with an intent to 

mislead may be subject to liability 

under the antifraud provisions of 

section 10(b) and rule 10b–5. 

Proposed rule 15c2–2 would retain 

much of the disclosure framework of 

rule 10b–10, while also providing 

customers of brokers, dealers and 

municipal securities dealers with 

targeted cost and conflict information 

that is relevant to purchases and sales 

of those securities.53 Accordingly, the 

preliminary note to proposed rule 15c2–

2 would explain that the rule requires 

brokers, dealers and municipal 

securities dealers to provide specified 

information in writing to customers at 

or before completion of a transaction in 

certain investment company securities 

or municipal fund securities. The 

preliminary note also would state that 

rule 10b–10 would continue to set forth 

the confirmation requirements that 

apply to broker-dealer transactions in 

other securities. More generally, as is 

the case under current law, disclosure 

provided pursuant to the proposed rules 

would not derogate from a brokerdealer’s other legal obligations to 

customers, such as in the context of 

making recommendations or suitability 

determinations.

a. No safe harbor from antifraud 

provisions or other legal requirements.

Proposed rule 15c2–2, like rule 10b–10, 

would not function as a safe harbor for 

non-disclosure that constitutes 

deception or that otherwise violates a 

securities firm’s legal obligations. 

Rather, it would provide a minimal 

benchmark for disclosing certain costs 

and conflicts related to the distribution 

of these securities, in a manner that 

would be accessible to investors and 

that could fit on a single piece of paper. 

In setting forth the minimum level of 

disclosure, the proposed rule also 

would not preclude additional 

disclosures, as appropriate. While we 

believe the information required to be 

disclosed under the proposed rule is 

material to investors, there may be other 

information that is material for purposes 

of alerting investors about the costs of 

these transactions and the conflicts 

raised by them.54 That is true even in 

instances where the confirmation rules 

specifically address the categories of 

information at issue, but do not require 

disclosure of the information in 

question.

Accordingly, we propose to make that 

point explicit in the preliminary note to 

proposed rule 15c2–2. Currently, the 

preliminary note to rule 10b–10 

explains that the confirmation 

disclosure requirements do not exhaust 

a firm’s obligation under the general 

antifraud provisions of the federal 

securities laws to disclose additional 

information to a customer at the time of 

the customer’s investment decision. We 

are aware, however, that a court has 

interpreted rule 10b–10 to limit 

disclosure obligations in a way that is 

inconsistent with our intent.55 To clarify 

our intent, the preliminary note to 

proposed rule 15c2–2 would state that 

the confirmation disclosure 

requirements are not determinative of, 

and do not exhaust, a broker’s, dealer’s 

or municipal securities dealer’s 

disclosure obligations under the 

antifraud provisions of the federal 

securities laws or under any other legal 

requirements.56

b. Securities transactions covered.

The disclosure requirements of 

proposed rule 15c2–2 would apply to 

transactions by brokers, dealers and 

municipal securities dealers 57 on behalf 

of customers in ‘‘covered securities.’’

Proposed paragraph (f)(6) of rule 15c2–

2 would define the term ‘‘covered 

security’’ as: (i) Any security issued by 

an ‘‘open-end company,’’ as defined by 

section 5(a)(1) of the Investment 

Company Act, that is not traded on a 

6446 Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 

58That definition excludes securities issued by 

exchange traded funds (‘‘ETFs’’). Although ETFs are 

open-end management investment companies or 

unit investment trusts, they do not present the same 

disclosure concerns as other open-end investment 

companies or UITs. Rather then being sold and 

redeemed through retail transactions, large blocks 

of ETF shares are created and redeemed through the 

exchange of large blocks of the underlying 

securities. Retail investors then can buy or sell ETF 

shares on the secondary market. Broker-dealers that 

effect retail transactions in ETFs generally charge 

commissions that are disclosed on the 

confirmations. Moreover, we do not believe that 

ETFs pose the same type of potential conflicts of 

interest that are associated with traditional openend fund shares. We therefore do not believe it is 

necessary to include ETFs within the scope of the 

rule.

59Broker-dealers may buy and sell UITs on the 

secondary market, following their initial 

distribution. Because proposed rule 15c2–2 focuses 

on disclosure of costs and conflicts when covered 

securities are distributed, we would except 

secondary market transactions in UITs from the 

rule’s scope.

60Section 2(b) of the Investment Company Act 

excludes the United States, states and certain other 

government-related instrumentalities and 

corporations from the scope of that Act. 

Because our proposed definition of ‘‘municipal 

fund security’’ does not encompass interests in 

local government investment pools, it would differ 

from the way the term is defined in MSRB rule D–

12.

61 In general, shares of closed-end investment 

companies are distributed through one-time 

underwritings, rather than on an ongoing basis. The 

broker-dealers that distribute the shares are 

compensated through the receipt of underwriting 

fees, and practices such as revenue sharing may not 

be present. As a result, transactions in those 

securities generally may not raise the same 

disclosure issues as transactions in open-end 

investment companies. Some closed-end 

investment companies, however, may offer to 

repurchase their shares on a periodic basis. See, 

e.g., Investment Company Act section 23(c) and rule 

23c–3 thereunder.

62As discussed below, certain arrangements that 

raise cost and conflict concerns raise special 

disclosure challenges, particularly with regard to 

disclosure of deferred sales loads, revenue sharing 

and portfolio brokerage commissions.

63When we use the term ‘‘net asset value’’ in this 

release, it includes ‘‘accumulation unit value’’ in 

the case of variable insurance products.

national securities exchange; 58 (ii) any 

security issued by a ‘‘unit investment 

trust,’’ as that term is defined by Section 

4(2) of the Investment Company Act, 

other than an ETF that is traded on a 

national securities exchange or facility 

of a national securities association, or a 

unit investment trust that is the subject 

of a secondary market transaction; 59

and (iii) any ‘‘municipal fund security.’’

Proposed paragraph (f)(12) of rule 15c2–

2 would define a ‘‘municipal fund 

security’’ as any municipal security that 

is issued pursuant to a qualified state 

tuition program as defined by Section 

529 of the Internal Revenue Code [26 

U.S.C. 529], and that is issued by an 

issuer that, but for the application of 

Section 2(b) of the Investment Company 

Act, would constitute an investment 

company within the meaning of Section 

3 of the Investment Company Act.60

• The Commission requests comment 

on the proposed definition of ‘‘covered 

security,’’ including whether the 

definition appropriately encompasses 

all the types of securities having 

distribution practices that warrant 

targeted confirmation disclosure of 

information about distribution-related 

costs and conflicts.

• The Commission seeks comment on 

whether proposed rule 15c2–2 should 

encompass transactions in all UIT 

interests, given the differences in 

distribution practices between UIT 

interests and other securities within the 

scope of the proposed rule. While some 

UIT interests are associated with 

revenue sharing (e.g., revenue sharing 

with respect to the underlying funds of 

variable annuity contracts and variable 

life insurance policies), commenters are 

invited to address the extent to which 

revenue sharing and other arrangements 

that raise conflict of interest issues are 

not associated with the distribution of 

UIT interests. 

• The Commission also seeks 

comment about whether proposed rule 

15c2–2 should also apply to other types 

of investment company securities, such 

as ETF shares. Commenters moreover 

are invited to address whether the rule 

also should apply to closed-end 

investment companies generally, or to 

particular closed-end companies such as 

‘‘interval funds’’ that make regular 

repurchase offers.61 Do transactions in 

closed-end company shares at those 

times raise the types of costs or conflicts 

that warrant proposed rule 15c2–2’s 

disclosure requirements?

• We also request comment about 

whether persons other than brokers, 

dealers or municipal securities dealers 

also should be required to deliver 

confirmations to investors pursuant to 

proposed rule 15c2–2. Commenters are 

invited to discuss whether other persons 

that participate in the distribution of 

covered securities—such as banks—are 

subject to the same or similar conflicts 

of interest as brokers, dealers and 

municipal securities dealers. 

Commenters also are invited to discuss 

whether the Commission should 

propose rules to require those other 

persons to disclose confirmation 

information on or before the completion 

of such transactions. 

• In addition, the Commission 

requests comment on whether a 

transitional period is necessary to make 

adjustments necessary to deliver 

confirmations that comply with 

proposed rule 15c2–2. 

c. Schedule 15C and the form of 

disclosure. Proposed rule 15c2–2 would 

require brokers, dealers and municipal 

securities dealers to disclose a range of 

cost and conflict information arising 

from transactions in covered securities. 

To be effective, this information would 

have to be disclosed in a manner that is 

clear and that provides useful context to 

investors.62 Thus, paragraph (a) of 

proposed rule 15c2–2 would require a 

broker, dealer or municipal securities 

dealer to make the required disclosures 

(other than disclosures subject to the 

periodic disclosure alternative, 

discussed below) in a manner that is 

‘‘consistent with Schedule 15C’’ under 

the Exchange Act. Proposed Schedule 

15C, which is set forth at Figure 1, 

would establish the format for 

disclosing the required information to 

investors. While much of the form 

would be standardized, we have 

included flexibility to accommodate 

implementation costs as well as the fact 

that confirmations are business forms 

traditionally utilized by brokers, dealers 

and municipal securities dealers for 

their own business purposes. Proposed 

Schedule 15C has six main parts: A, 

general information; B, distribution-cost 

information; C, broker-dealer 

compensation information; D, 

differential compensation information; 

E, breakpoint discount information, and 

F, explanations and definitions. 

Proposed paragraph (f)(4) of rule 15c2–

2 would provide that the term 

‘‘consistent with Schedule 15C’’ means 

using Schedule 15C, or using a similar 

layout of disclosure so long as: (i) All 

information specified in Schedule 15C 

is set forth in the confirmation; (ii) 

information specified in Sections B 

through F of Schedule 15C (if 

applicable) is included with no change, 

including the use of bold print for data 

items printed in bold in Schedule 15C, 

and in the order set forth in Schedule 

15C; and (iii) information specified in 

Section A of Schedule 15C is displayed 

prominently.

Proposed Schedule 15C would not 

only provide the format for disclosing 

quantitative information about a 

transaction, but also would provide 

definitions and explanatory information 

intended to help make the quantitative 

information more useful to investors. By 

supplementing the required disclosures 

with explanations of the meaning of 

terms such as net asset value,63 revenue 

sharing and portfolio brokerage 

commissions, and by explaining why 

investors may wish to scrutinize 

information about revenue sharing and 

differential compensation, proposed 

Schedule 15C is intended to help give 

investors the tools they need to ask the 

Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 6447

64This discussion’s references to ‘‘share’’ and 

‘‘per-share’’ information also apply to ‘‘unit’’ and 

‘‘per-unit’’ information connected to transactions 

involving UITs.

65Proposed paragraph (c)(4) of rule 15c2–2, 

discussed below, would require disclosure of dealer 

concessions and other types of sales fees received 

from the issuer, its agent or primary distributor, or 

others. Brokers, dealers or municipal securities 

dealers would not receive those fees directly from 

customers, although the fees may be funded by 

sales loads paid by customers. 

Proposed paragraphs (c)(1) and (c)(2) of rule 

15c2–2, also discussed below, would require 

disclosure of front-end and deferred sales loads that 

the customer would incur in connection with the 

transaction.

66 In some cases, a broker, dealer or municipal 

securities dealer itself may impose a special fee on 

a customer that sells a mutual fund share shortly 

after purchase, to discourage short-term trading. 

Paragraph (b)(5) would not require disclosure of 

that type of fee at the time of purchase, unless the 

amount and timing of the fee is reasonably 

foreseeable to the firm at the time of purchase (such 

as because the broker, dealer or municipal 

securities dealer is aware of the customer’s intent 

to sell). This paragraph, however, would require 

disclosure of that type of fee when it is incurred at 

the time of the subsequent sale.

right questions and to make informed 

decisions. Attachments 1, 2 and 3 to this 

proposal set forth examples of 

confirmations that are consistent with 

Schedule 15C.

• We are not at this time proposing a 

form for disclosures made pursuant to 

proposed rule 15c2–2’s periodic 

disclosure alternative. Because of the 

variance in the types of transactions that 

could be disclosed pursuant to this 

alternative, we do not believe that a 

standardized disclosure form would be 

appropriate. We request comment, 

however, on whether standardized 

disclosure should be required with 

respect to periodic disclosures. If so, 

should the format follow Schedule 15C? 

In the event a customer invests in 

multiple securities, including mutual 

fund shares, UIT interests and 529 plan 

securities, should the information 

pertaining to each be in a separate 

section? Alternatively, should there be 

separate forms for each category of 

investment? Commenters are invited to 

send prototype forms reflecting their 

view. 

• The Commission also requests 

comment on whether proposed 

Schedule 15C is an appropriate template 

for disclosing information to customers. 

The Commission also requests comment 

on whether disclosure should be 

required to be in the exact form of 

proposed Schedule 15C, rather than 

merely consistent with it. 

• The Commission further requests 

comment on whether it is appropriate 

for the proposed form of Schedule 15C 

to combine quantitative information 

with explanatory and definitional 

information. Commenters are invited to 

address the issue of whether the 

inclusion of both types of materials may 

conflict with the business purposes that 

confirmations fundamentally address. 

Commenters also are invited to discuss 

whether there are preferable alternatives 

for providing explanatory and 

definitional information that would 

permit investors to fully use the 

information set forth in the 

confirmation.

d. General and purchase-specific 

disclosure requirements. As outlined 

above, the disclosure requirements of 

proposed rule 15c2–2 in large part are 

based on existing rule 10b–10, with 

modifications to alert customers to 

targeted information about the special 

cost and conflicts raised by transactions 

in mutual fund shares and municipal 

fund securities. 

Paragraph (a) of proposed rule 15c2–

2 would provide that it is unlawful for 

any broker, dealer or municipal 

securities dealer to effect any customer 

transaction in, or to induce any 

customer purchase or sale of, any 

covered security unless the broker, 

dealer or municipal securities dealer 

complies with the requirements set forth 

in paragraphs (b), (c), (d) and (e) of the 

rule. Paragraph (b) would set forth 

general disclosure requirements under 

the rule. Paragraph (c) would set forth 

additional disclosures that customers 

shall receive when they purchase 

mutual fund shares, UIT interests and 

municipal fund securities, because 

purchase transactions implicate the 

costs and conflicts associated with the 

distribution of these securities. 

Paragraph (d) would set forth alternative 

requirements for periodic reporting. 

Paragraph (e) would set forth the 

requirement to disclose median 

information and comparison ranges for 

the types of information required under 

paragraphs (b), (c) and (d). 

i. General disclosure requirements.

Proposed paragraphs (b)(1) and (b)(2) of 

rule 15c2–2 would require disclosure of 

the date of the transaction, and the 

issuer and class of the covered security. 

Those requirements are similar to the 

requirements of rule 10b–10(a)(1). While 

rule 10b–10(a)(1) does not specifically 

mention share class, disclosure of class, 

when applicable, is necessary to 

identify the security. 

Proposed paragraph (b)(3) of rule 

15c2–2 would require disclosure of both 

the net asset value of the shares or units 

and, if different, their public offering 

price.64 Rule 10b–10(a)(1) only requires 

disclosure of price. Fund share classes 

that charge front-end sales loads are 

sold to investors at a public offering 

price that exceeds the net asset value by 

the size of the load. Providing customers 

with information about both price and 

net asset value would help them verify 

whether they are obtaining the benefit of 

any applicable breakpoints, and would 

make the costs associated with front-end 

sales loads more transparent in general.

Proposed paragraph (b)(4) of rule 

15c2–2 would require disclosure of the 

number of shares of a covered security 

purchased or sold by the customer. It 

also would require the total dollar 

amount paid or received in the 

transaction and the net amount of the 

investment bought or sold in the 

transaction, which would be equal to 

the number of shares or units bought or 

sold multiplied by the net asset value of 

those shares or units. Rule 10b–10(a)(1) 

requires disclosure of the number of 

shares. Specific disclosure of the dollar 

value of the transaction—equal to the 

number of shares bought or sold 

multiplied by the transaction price—

would help safeguard against 

misunderstandings about the value of 

the transaction. Confirmations already 

typically contain information about the 

dollar value of the transaction, together 

with the price of the shares and the 

number of shares bought or sold. 

Proposed paragraph (b)(5) of rule 

15c2–2 would require disclosure of any 

commission, markup or other 

remuneration the broker, dealer or 

municipal securities dealer will receive 

from the customer in connection with 

the transaction. Rule 10b–10(a)(2)(i)(B) 

already requires disclosure of 

remuneration from customers. This 

remuneration is distinct from dealer 

concessions and other types of sales fees 

that a broker, dealer or municipal 

securities dealer may receive from the 

fund or its primary distributor. 

Remuneration from customers also is 

distinct from any sales load that the 

customer may pay in connection with a 

transaction. Both of those would be 

disclosed separately.65 Under proposed 

paragraph (b)(5), a broker, dealer or 

municipal securities dealer often would 

not be required to disclose any 

information because the firm would 

receive all of its compensation from the 

issuer or distributor of the covered 

security, or other third parties, rather 

than directly from the customer. 

Proposed paragraph (b)(5) would require 

separate disclosure or commissions or 

other compensation from the customer, 

however, when a broker, dealer or 

municipal securities dealer, such as a 

fund ‘‘supermarket,’’ charges its 

customer a commission or service fee 

for purchasing a fund.66

Proposed paragraph (b)(6) of rule 

15c2–2 would require disclosure, for 

any transaction in which a customer 

6448 Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 

67Proposed paragraph (c)(2) of rule 15c2–2, 

discussed below, would separately require 

prospective disclosure, in the confirmation, of the 

potential amounts of the deferred sales load that the 

customer may incur when he or she later sells the 

shares. Proposed paragraph (b)(6), in contrast, 

would require disclosure of deferred sales loads 

actually incurred at the time of sale.

68SIPC is a private-sector, nonprofit membership 

corporation that Congress created under the 

Securities Investor Protection Act of 1970 to help 

protect customers of failed broker-dealers. 

Generally, all broker-dealers registered with the 

Commission must be members of SIPC. If a brokerdealer fails and is unable to meet its obligations to 

customers, SIPC steps in as quickly as possible and, 

within certain limits, returns cash and securities to 

customers. Broker-dealers who sell only shares of 

mutual funds are exempt from the requirement to 

be a member of SIPC. 

If disclosure of SIPC membership is adopted, it 

may be placed in the part A (general information) 

of Schedule 15C.

69We are proposing conforming changes to rule 

10b–10.

70We note that customers who purchase a 

variable life insurance policy will buy an insurance 

component as well as make an investment, and that 

the investment component initially may be 

relatively small. That would be reflected in 

disclosure of net amount invested.

71The fee table set forth in the front of a fund 

prospectus expresses front-end sales loads as a 

percentage of the offering price, pursuant to Item 3 

of Form N–1A, which governs prospectus content. 

A separate table in the prospectus expresses the 

front-end sales loads as a percentage of both the 

offering price and the net asset value, pursuant to 

Item 8(a)(1) of Form N–1A. The differences between 

those two amounts is significant. For example, a 

front-end sales charge that equals 5.75% of the 

public offering price would equal approximately 

6.10% of net asset value. We are proposing to 

amend the prospectus fee table to require disclosure 

of loads as a percentage of net asset value. See infra

section VI. 

We also note that industry practice is to round 

the public offering price to two decimal places 

when calculating the number of shares purchased, 

and to round the number of shares purchased to 

three decimal places. That rounding practice can 

lead to an actual front-end sales load as a 

percentage of gross amount invested or net amount 

invested that is higher or lower than the sales load 

disclosed in the prospectus as a percentage of 

offering price or net asset value. See infra note 154 

and accompanying text. Accordingly, as discussed 

below, the Commission is proposing prospectus 

disclosure requirements to address these 

differences. Proposed rule 15c2–2 would require 

disclosure of the load as a percentage of the net 

amount invested in the transaction, regardless of 

that rounding practice. Attachment 1 illustrates the 

practical impact of the rounding practice. The frontend sales load in that example is 4.0% of the public 

offering price. Rounding, however, causes the sales 

load charged on that $8,000 purchase to equal 

$321.18, rather than $320. The impact of the 

rounding practice can be more significant when net 

asset value is relatively low.

72Broker-dealers who sell fund shares to retail 

customers must disclose breakpoint discount 

information to their customers and must have 

procedures reasonably designed to ascertain 

information necessary to determine the availability 

and appropriate level of breakpoints. A failure to do 

so can result not only in the customer being 

deprived of a benefit to which he or she is entitled, 

but also in the broker-dealer and representative 

receiving increased commissions at the customer’s 

expense. See In the Matter of Application of Harold 

R. Fenocchio for Review of Disciplinary Action 

Taken by NASD, 46 SEC 279 (1976) (registered 

representatives had a responsibility to make certain 

that a letter of intent was filed with the mutual fund 

or, at the very least, to inform the clients of their 

rights of accumulation). Because of the large 

number of mutual funds offering different discounts 

and employing different criteria for determining 

breakpoint eligibility, many broker-dealers have 

experienced operational challenges and other 

difficulties in assuring that customers consistently 

receive the applicable discounts. Nevertheless, each 

broker-dealer is responsible for exercising due care, 

based on information reasonably ascertainable by 

the broker-dealer, to provide the appropriate 

breakpoint discounts. 

Part E of Attachment 1, which illustrates a 

confirmation for a transaction in class A shares with 

a front-end sales load, states the front-end sales load 

set forth in the prospectus. Note that the $8,000 

purchase in that example is entitled to a breakpoint 

discount. This could be because the current 

purchase should be considered in conjunction with 

other purchases by the investor or the investor’s 

family under rights of accumulation, or because it 

is subject to a letter of intent.

sells a covered security, of the amount 

of any deferred sales loads incurred by 

the customer. Rule 10b–10 does not 

explicitly require that disclosure, 

although rule 10b–10 does require 

disclosure of price, and the deferred 

sales load charged to a customer at the 

time of sale does affect the effective 

price that the customer receives. 

Disclosure of the deferred sales loads 

that customers incur when they sell 

their shares would make those 

distribution costs more transparent.67

Proposed paragraph (b)(7) of rule 

15c2–2, when applicable, would require 

disclosure of the fact that a broker, 

dealer or municipal securities dealer is 

not a member of the Securities Investor 

Protection Corporation (‘‘SIPC’’), or that 

the broker, dealer or municipal 

securities dealer clearing or carrying the 

customer account is not a member of 

SIPC.68 That disclosure would not be 

required, however, if the customer 

sends funds or securities directly to, or 

receives funds or securities directly 

from, the issuer or its transfer agent, 

custodian, or other designated agent that 

is not an associated person of the 

broker, dealer or municipal securities 

dealer, and if that other person would 

provide disclosure on behalf of the 

broker, dealer or municipal securities 

dealer. This would be consistent with 

the disclosure requirement of rule 10b–

10(a)(9).69

• The Commission requests comment 

on whether these proposed general 

disclosure requirements would provide 

customers with adequate information 

about transactions in covered securities. 

Commenters particularly are invited to 

discuss whether all of these proposed 

general disclosure requirements are 

appropriate to transactions in securities 

that have a substantial insurance 

component, such as variable life 

insurance policies.70

• Commenters may also wish to 

discuss whether all of these proposed 

general disclosure requirements are 

appropriate to transactions in variable 

annuities. Commenters are invited to 

discuss any issues they believe are 

relevant to the application of proposed 

rule 15c2–2 to variable insurance 

products, as well as any modifications 

they believe could improve the 

proposed rule’s effectiveness as applied 

to variable insurance products. 

Specifically, commenters may wish to 

address whether alternative or 

additional disclosure requirements 

would provide investors with more 

useful information for transactions in 

variable insurance products. In 

addition, we invite comment on 

whether to use a single confirmation for 

transactions in both the contract or 

policy and the underlying funds. 

Commenters should address whether 

such a single confirmation is 

appropriate under the federal securities 

laws. 

ii. Additional Disclosures For 

Purchases. Proposed rule 15c2–2(c) 

would require additional disclosures 

when customers purchase covered 

securities. 

(a) Cost disclosure. Proposed 

paragraph (c)(1) of rule 15c2–2 would 

require disclosure of the amount of any 

sales load that the customer has 

incurred or will incur at the time of 

purchase, expressed in dollars and as a 

percentage of the net amount invested,71

together with information about the 

potential relevance of breakpoint 

discounts. Specifically, proposed 

paragraph (c)(1)(i) would apply if the 

customer will incur a sales load at the 

time of sale, and would require 

disclosure of information about the 

availability of breakpoints as reflected 

in Schedule 15C with regard to the 

covered security, including a statement 

about what is the applicable sales load 

that is set forth in the prospectus, in 

light of any breakpoint discount and the 

value of the securities position. In 

determining the value of the position 

that may be subject to a breakpoint 

discount, the broker-dealer should 

consider net asset value, public offering 

price, historic cost or any other 

measurement that reflects the covered 

security’s particular method of 

providing breakpoint discounts. This 

proposed paragraph therefore requires 

disclosure not only of the sales load 

actually incurred at the time of 

purchase, but also the sales load that 

should have been charged based on the 

availability of breakpoint discounts.72

Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 6449

73Part E of Attachments 2 and 3, which illustrate 

confirmations for transactions in class B shares with 

a deferred sales load, state what would have been 

the front-end sales loads associated with the 

purchase of class A shares of that dollar amount. 

The $8,000 purchases in those examples would 

have been entitled to breakpoint discounts on frontend sales loads. As noted, brokers, dealers and 

municipal securities dealers must have procedures 

in place to determine the availability and level of 

breakpoint discounts. See supra note 72. Disclosure 

of information about front-end sales loads as part 

of confirmations for the purchase of share classes 

that carry deferred sales loads in no way immunizes 

a broker, dealer or municipal securities dealer from 

its suitability obligations or any other requirements.

74Section 2(a)(35) of the Investment Company 

Act generally defines ‘‘sales load’’ as the difference 

between the price of a security to the public and 

that portion of the proceeds from its sale that is 

received and invested or held for investment by the 

issuer, less any portion of such difference deducted 

for expenses or fees.

75An investor who pays a sales load often will 

not have to separately pay a commission. In some 

circumstances, however, such as certain 

transactions through a broker-dealer’s mutual fund 

‘‘supermarket,’’ an investor may have to pay both.

76 If this proposed provision is adopted, it would 

supercede the 1979 letter to the ICI. See supra note 

6.

77 Deferred sales loads include surrender charges 

on variable contracts.

78At times, purchases of class A shares of more 

than $1 million will not carry any front-end sales 

load due to the availability of breakpoint discounts, 

but a deferred sales load of up to one percent is 

imposed for up to one year to discourage short-term 

holdings. That type of deferred sales load does not 

raise the disclosure issues that this proposed rule 

seeks to address.

79See Investment Company Act rule 6c–10.

80Attachment 2 depicts confirmation disclosure 

of a transaction in a fund share that carries a 

deferred sales load that equals a specified 

percentage multiplied by the minimum of the net 

asset value at the time of purchase or time of 

redemption. Attachment 3 depicts confirmation 

disclosure of a transaction in a fund share that 

carries a deferred sales load that equals a specified 

percentage multiplied by the net asset value at the 

time of purchase.

81For example, while the issuer of a 529 plan 

may not pay rule 12b–1 fees, the plan assets may 

be invested in mutual funds that incur those fees. 

Similarly, mutual funds underlying variable 

insurance contracts may also pay 12b–1 fees. In 

those cases, the confirmation would have to 

disclose information about those fees, even though 

they are not directly paid by the issuer.

Alternatively, proposed paragraph 

(c)(1)(ii) would apply if the customer 

will not incur a sales load at the time 

of sale, and would require disclosure of 

information about the availability of 

breakpoints as reflected in Schedule 

15C with regard to a different class of 

the covered security, including a 

statement of the sales load that the 

customer would have incurred at the 

time of sale if the transaction had been 

in that different class of the covered 

security. In other words, for transactions 

in share classes without a front-end 

sales load, the proposed paragraph 

would require disclosure of information 

about the sales load that would have 

been charged had a share class with a 

front-end load been purchased.73

Proposed paragraph (f)(17) of rule 

15c2–2 would define ‘‘sales load’’ to 

have the meaning set forth in Section 

2(a)(35) of the Investment Company 

Act.74 Proposed paragraph (f)(13) would 

define ‘‘net amount invested’’ to mean 

the price paid to purchase the covered 

securities less any applicable sales 

loads. Proposed paragraph (f)(18) of rule 

15c2–2 would define ‘‘securities 

position’’ to mean the value of the 

purchase of covered securities; the value 

of securities that are subject to rights of 

accumulation under the terms of the 

prospectus with respect to the covered 

security or a related class of the covered 

security, to the extent known by the 

broker, dealer or municipal securities 

dealer, including the value of such 

securities purchased in other accounts 

or by other persons; and the value of 

any such securities that are the subject 

of letters of intent that may be 

considered in computing a breakpoint 

with respect to the covered security or 

a related class of the covered security.

As discussed above, any sales load 

that an investor may pay to a fund’s 

principal underwriter is distinct from 

the commission that the investor may 

pay to a broker, dealer or municipal 

securities dealer.75 Providing customers 

with information about the amount of 

the sales load they pay when they 

purchase covered securities would 

enable them to more effectively monitor 

potential breakpoint discounts and 

would make the impact of distribution 

costs generally more transparent. 

Moreover, brokers, dealers and 

municipal securities dealers are well 

positioned to provide load information 

to customers on a transaction-bytransaction basis. Confirmation 

disclosure should make this information 

more readily accessible to customers, 

rather than expecting them to turn to a 

prospectus to calculate the amount of 

the load paid.76

Proposed paragraph (c)(2) to rule 

15c2–2 would require disclosure of the 

potential amount of deferred sales 

loads 77 (other than a deferred sales load 

of no more than one percent that expires 

no later than one year after purchase, 

when no other sales load would be 

incurred).78 We recognize that brokerdealers would rarely, if ever, know in 

advance when an investor may redeem 

those shares, and therefore would 

generally not be able to disclose the 

specific amount of a deferred sales load. 

Investors nonetheless have an interest in 

seeing transaction-specific information 

about the potential cost of deferred sales 

loads. Deferred sales loads cannot 

exceed a specified percentage of the net 

asset value or the offering price at the 

time of purchase.79 In practice, a 

deferred sales load may equal the lesser 

of a specified percentage of the net asset 

value at the time of purchase ‘‘which 

can be calculated as a dollar amount by 

multiplying that percentage by the net 

asset value and the number of shares 

purchased ‘‘or a specified percentage of 

the net asset value at the time of sale. 

Accordingly, proposed paragraph (c)(2) 

would require the broker, dealer or 

municipal securities dealer to disclose, 

on a year-by-year basis for as long as the 

deferred load may be in effect, 

information about the maximum 

amount of the load expressed in dollars. 

Proposed paragraph (c)(2) also would 

require disclosure of the maximum 

deferred sales load as a percentage of 

net asset value at the time of purchase 

or sale, as applicable.80 This not only 

would improve the transparency of 

distribution costs, but also would 

promote balanced comparisons between 

the distribution costs associated with 

front-end load share classes and those 

associated with deferred sales load 

share classes.

Proposed paragraph (c)(3) of rule 

15c2–2 would require disclosure of any 

asset-based sales charges and service 

fees paid in connection with the 

customer’s purchase of covered 

securities. Proposed paragraph (f)(1) of 

rule 15c2–2 would define ‘‘asset-based 

sales charges’’ as all asset-based charges 

incurred in connection with the 

distribution of a covered security, paid 

by the issuer or paid out of assets of 

covered securities owned by the issuer. 

roposed paragraph (f)(2) of rule 15c2–2 

would define ‘‘asset-based service fee’’

as all asset-based amounts paid for 

personal service and/or the maintenance 

of shareholder accounts by the issuer, or 

paid out of assets of covered securities 

owned by the issuer. Those terms would 

encompass rule 12b–1 fees and any 

similar types of distribution or service 

fees incurred by issuers. Those terms, 

moreover, would be broad enough to 

require disclosure when the issuer of 

the covered security itself does not 

directly pay these fees, but instead 

invests in other covered securities that 

incur those fees.81 We recognize that 

because the amount of rule 12b–1 or 

similar fees would be linked to net asset 

value, a broker, dealer or municipal 

securities dealer would rarely, if ever, 

know in advance what amount of those 

fees would be attributable to the shares 

purchased in a particular transaction. 

This amount could be particularly 

uncertain because a fund’s board of 

directors may later determine not to 

renew the fund’s rule 12b–1 plan. The 

6450 Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 

82Because variable life insurance initially may 

have a relatively small investment component, 

disclosure of the front-end sales load as a 

percentage of net asset value may result in a 

relatively high disclosed percentage.

83Proposed Schedule 15C states those amounts 

(as well as dealer concession, revenue sharing and 

portfolio brokerage commissions, see infra) as a 

percentage of ‘‘your investment.’’ The note on the 

reverse of proposed Schedule 15C explains that the 

term ‘‘your investment’’ generally is based on 

current values, but in the case of deferred sales 

loads and asset-based fees may be based on future 

values. The use of the single term ‘‘your 

investment’’ is intended to be simple to understand, 

while flexible enough to accommodate the fact that 

present values and future values both can be 

relevant.

84As noted above, commissions would be 

disclosed pursuant to proposed paragraph (b)(4) of 

rule 15c2–2. Front-end and deferred loads would be 

disclosed pursuant to proposed paragraphs (c)(1) 

and (c)(2) of that rule. 

For transactions in share classes that impose a 

front-end sales load, the dealer concession is likely 

to be smaller than the amount of the load, because 

the fund’s primary distributor generally will retain 

some of the load to pay its own expenses. For 

transactions in share classes that impose a deferred 

sales load, the amount of the dealer concession may 

be linked to the expected amount of asset-based 

sales charges (e.g., 12b–1 fees) and of deferred sales 

loads associated with the shares.

85Although these disclosures would be consistent 

with the requirements of rule 10b–10(a)(i)(D) 

regarding third-party remuneration, the rule 10b-10 

disclosure requirements have been interpreted in 

the context of the prospectus disclosure principles 

that the Commission articulated in the 1977 release 

adopting that rule. See supra text accompanying 

note 5. Because we conclude that prospectus 

disclosure is inadequate in this context, those 

interpretations—which permit prospectus 

disclosure to satisfy the requirements of rule 10b–

10—would not apply to disclosure requirements 

under new rule 15c2–2.

86A confirmation should inform an investor of 

the potential conflicts of interest that confront a 

broker, dealer or municipal securities dealer. 

Because the relationships that can lead to those 

potential conflicts typically are established on a 

fund complex basis, rather than on a fund-by-fund 

basis, it is appropriate to disclose those 

relationships on a fund complex basis. Given that 

a prospectus is a fund-specific document, a 

prospectus is particularly inappropriate for 

disclosing information about those arrangements.

proposed rule therefore would require 

brokers, dealers and municipal 

securities dealers to disclose asset-based 

sales charges and asset-based service 

fees as a percentage of net asset value, 

and also to disclose an estimate of the 

total annual dollar amount of assetbased sales charges and asset-based 

service fees that would be associated 

with the shares purchased if net asset 

value were to remain unchanged (and 

assuming that the level of fees paid out 

of assets under a rule 12b–1 plan or 

similar distribution arrangement 

remains unchanged).

• The Commission requests comment 

on whether these requirements would 

provide customers with an appropriate 

amount of information about the 

amount of distribution-related costs 

they or the issuer would incur in 

connection with their purchases. If not, 

please describe additional disclosure 

that would be helpful. Commenters are 

specifically invited to comment on 

whether the proposed requirements 

related to deferred sales loads would 

provide disclosure that is sufficiently 

clear to customers. 

• The Commission also requests 

comment on whether these 

requirements would appropriately be 

applied to all types of covered 

securities, or whether in certain 

circumstances the disclosure 

requirements should be modified or 

eliminated. Commenters in particular 

may wish to address how disclosure of 

front-end loads as a percentage of the 

net amount invested would apply to 

securities which include a life insurance 

component, such as variable life 

insurance policies, and whether 

alternative disclosure requirements 

would be preferable for those 

products.82 Commenters also may 

address whether all of these 

requirements are appropriately applied 

to variable annuities. Commenters 

should address whether and how upfront bonus payments on variable 

insurance products and the recapture of 

such bonus payments should be 

disclosed.

• The Commission further requests 

comment about how proposed Schedule 

15C could best disclose sales loads and 

asset-based fees in percentage terms, 

based on the customer’s investment. 

This disclosure needs to reflect the fact 

that while front-end sales loads will 

equal a percentage of the present value

of the securities being purchased, 

deferred sales loads and asset-based fees 

can be a function of the future value of 

those securities. How can Schedule 15C 

best state those percentages in a way 

that is accurate and readily 

understood? 83

(b) Sales fee disclosure. Proposed 

paragraph (c)(4) of rule 15c2–2 would 

require disclosure of any dealer 

concession that the broker, dealer or 

municipal securities dealer earns in 

connection with the transaction, 

expressed in dollars and as a percentage 

of the net amount invested. Proposed 

paragraph (f)(8) of rule 15c2–2 would 

define ‘‘dealer concession’’ as fees that 

the broker, dealer or municipal 

securities dealer will earn at the time of 

the sale, in connection with the 

transaction, from the issuer of the 

covered security, an agent of the issuer, 

the primary distributor, or any other 

broker, dealer or municipal securities 

dealer. That amount would be distinct 

from the commission that the broker, 

dealer or municipal securities dealer 

may receive directly from the customer, 

as well as any load that the investor may 

pay to the fund’s principal 

underwriter.84 Because a dealer 

concession constitutes part of the 

broker’s, dealer’s or municipal securities 

dealer’s financial stake in selling the 

security to the customer, the amount of 

that stake is relevant to customers so 

they can better scrutinize the adequacy 

of the investment options with which 

they were presented, as well as any 

recommendations they received.

• The Commission requests comment 

about whether this requirement is 

adequate to inform customers about the 

incentives associated with sales fees 

and, if not, suggestions as to how it 

could be modified to do so. 

(c) Revenue sharing and portfolio 

brokerage disclosure. Proposed rule 

15c2–2 also seeks to put customers on 

notice about the existence of 

arrangements that lead to conflicts of 

interest, and provide information about 

the degree of those conflicts. That goal 

cannot be satisfied by superficial 

changes, such as boilerplate 

confirmation language that may attract 

the attention only of those investors 

who already are attuned to the potential 

impacts of revenue sharing. For this 

reason, the proposed rule would place 

quantified information about the 

arrangements directly in front of 

investors, so they may immediately 

evaluate its importance and determine 

whether to seek additional information. 

Proposed paragraph (c)(5) of rule 

15c2–2 would require disclosure of 

information related to revenue sharing 

payments and portfolio securities 

transaction commissions received by the 

broker, dealer or municipal securities 

dealer. The proposed rule specifically 

would require disclosure of information 

about two types of arrangements: (i) 

Revenue sharing payments from persons 

within the fund complex; and (ii) 

commissions, including riskless 

principal compensation, associated with 

portfolio securities transactions on 

behalf of the issuer of the covered 

security, or other covered securities 

within the fund complex.85 Because 

revenue sharing and portfolio brokerage 

arrangements may be linked in part or 

in whole to a firm’s success in 

distributing securities on behalf of an 

entire fund complex, the information 

would be disclosed on the basis of the 

firm’s sales on behalf of the fund 

complex, rather than on a fund-by-fund 

basis.86

Proposed paragraph (f)(16) of rule 

15c2–2 would define ‘‘revenue sharing’’

as any arrangement or understanding by 

Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 6451

87See Letter from Stuart Strachan, Chairman, 

Investment Company Committee, SIA, to Barbara 

Sweeny, NASD, October 17, 2003 (available at 

http://www.sia.com/2003_comment_letters/pdf/

NASD10–17–03.pdf). The letter identified the 

following categories of reimbursement of brokerdealer expenses: ‘‘Customer Sub-accounting’; 

mailing disclosure documents; maintaining 

websites; reviewing prospectuses, statements of 

additional information and other ‘‘marketing 

materials’; implementing changes initiated by 

funds, such as systems and procedures changes, 

and communicating changes to registered 

representatives and customers; and ‘‘overseeing and 

coordinating fund wholesaler activities.’’

88 In contrast, we believe that investors should be 

informed about portfolio brokerage commissions 

even though they are subject to regulation under 

Section 12 of the Investment Company Act and 

oversight by the fund’s board of directors. We 

believe that prospectus disclosure requirements for 

such payments are not specific enough to place the 

brokerage customer on notice of the conflicts of 

interest that they present to particular brokers, 

dealers and municipal securities dealers.

89The term ‘‘affiliated person’’ of another person 

is defined by Section 2(a)(3) of the Investment 

Company Act to include, among others, officers, 

directors, partners or employees of the other person, 

and persons directly or indirectly controlling, 

controlled by or under common control with the 

other person, and investment advisers to 

investment companies. 

The definition of ‘‘fund complex,’’ by including 

any agent of the issuer, may at times encompass the 

selling broker, dealer or municipal securities dealer 

that is required to make disclosure under this rule. 

The amounts of revenue sharing to be disclosed 

under this provision would apply only to payments 

made to the broker, dealer or municipal securities 

dealer by other persons within the fund complex.

90The twelve month disclosure period is 

intended to accommodate the fact that certain 

payment streams associated with revenue sharing 

may be annual in nature, such as sponsorship of 

seminars and other events held by brokers, dealers 

and municipal securities dealers. At the same time, 

requiring the information to be updated quarterly is 

intended to permit the disclosure to reflect any 

changes in a distribution relationship.

91 In any event, when a broker, dealer or 

municipal securities dealer is affiliated with a fund 

family, revenue sharing may be less significant as 

a distribution incentive.

which a person within a fund complex, 

other than the issuer of the covered 

security, pays a broker, dealer or 

municipal securities dealer, or any 

associated person of the broker, dealer 

or municipal securities dealer, apart 

from dealer concessions or other sales 

fees that would be disclosed pursuant to 

paragraph (b)(4). This definition of 

revenue sharing would encompass 

payments that have a variety of labels—

including payments that may be 

characterized as having purposes other 

than paying a broker, dealer or 

municipal securities dealer for ‘‘shelf 

space.’’ For example, in responding to 

NASD’s recent proposal regarding 

disclosure of revenue sharing and 

differential compensation, the SIA 

stated that revenue sharing 

arrangements are used to reimburse 

broker-dealers for a variety of expenses, 

such as reviewing fund prospectuses.87

While recognizing that brokers, dealers 

or municipal securities dealers incur 

expenses in connection with selling and 

distributing mutual fund shares and 

maintaining customers accounts, just as 

they incur expenses in connection with 

selling other types of securities and 

maintaining those customer accounts, 

payments that arguably reimburse firms 

for these expenses may still influence 

the firms to promote the sale of 

particular funds. Moreover, payments 

that have the effect of reimbursing 

broker-dealers for expenses that they 

would incur in their normal course of 

business, or that exceed the expenses 

the broker-dealers actually incur, act as 

subsidies that create conflicts of 

interest. The proposed definition of 

revenue sharing excludes payments 

made by the issuer of the covered 

security, because those other payments, 

such as payments for transfer agent 

services, do not raise the same conflict 

of interest concerns that are the subject 

of this proposed rulemaking.88

Proposed paragraph (f)(14) of rule 

15c2–2 would define ‘‘portfolio 

securities transaction’’ as any 

transaction involving securities owned 

by the issuer of a covered security, or 

owned by any other issuer within the 

same fund complex. The required 

disclosure of commissions associated 

with portfolio transactions would 

include disclosure of commissions 

received by a broker, dealer or 

municipal securities dealer as part of a 

‘‘soft dollar’’ arrangement. Proposed 

paragraph (f)(10) of rule 15c2–2 would 

define ‘‘fund complex’’ to include the 

issuer of the covered security (including 

the sponsor, depositor or trustee of a 

unit investment trust, and any insurance 

company issuing a variable annuity 

contract or variable life insurance 

policy), the issuer of any other covered 

security that holds itself out to investors 

as a related company for purposes of 

investment or investor services, any 

agent or investment adviser for such 

issuer, and any affiliated person of any 

such issuer or any such investment 

adviser.89

For both revenue sharing and 

portfolio brokerage commissions, a 

broker, dealer or municipal securities 

dealer would be required to disclose 

information about amounts directly or 

indirectly earned from the fund 

complex by: (A) The broker, dealer or 

municipal securities dealer; (B) any 

associated person (as defined in 

Sections 3(a)(18) and 3(a)(32) of the 

Exchange Act) that is a broker, dealer or 

municipal securities dealer, and (C) if 

the covered security is not a proprietary 

covered security, any other associated 

person. Proposed paragraph (f)(15) of 

rule 15c2–2 would define the term 

‘‘proprietary covered security’’ as any 

covered security as to which the broker, 

dealer or municipal securities dealer is 

an affiliated person, as defined by 

Section 2(a)(3) of the Investment 

Company Act, of the issuer, or is an 

associated person of the issuer’s 

investment adviser or principal 

underwriter, or, in the case of a covered 

security that is an interest in a UIT, is 

an associated person of a sponsor, 

depositor or trustee of the covered 

security. 

Those amounts should be disclosed as 

a percentage of the total net asset value 

represented by such broker’s, dealer’s or 

municipal securities dealer’s (including 

brokers, dealers and municipal 

securities dealers that fall in category 

(B) above) total sales of covered 

securities (as measured by cumulative 

net asset value) on behalf of the fund 

complex over the four most recent 

calendar quarters, updated each 

calendar quarter. The required 

disclosure also would set forth the total 

dollar amount of revenue sharing or 

portfolio brokerage commissions that 

the broker, dealer or municipal 

securities dealer may expect to receive 

in connection with the transaction, 

calculated by multiplying that 

percentage by the net amount invested 

in the transaction. Firms would have 30 

days to update the information 

following the end of the calendar 

quarter.90

By requiring disclosure of information 

about amounts paid to affiliates, as well 

as information about amounts paid 

directly to the broker, dealer or 

municipal securities dealer, the 

proposed rule would inform investors 

about the firm’s conflicts of interest 

even when the firm does not directly 

receive payment. Amounts received by 

affiliates that are not brokers, dealers or 

municipal securities dealers would not 

be included with respect to transactions 

involving proprietary covered securities, 

to avoid requiring disclosure of 

management fees and other payments 

between funds and investment advisers 

and any other service providers that are 

associated with the broker, dealer and 

municipal securities dealer.91

Moreover, to the extent that the 

broker, dealer or municipal securities 

dealer has entered into a revenue 

sharing arrangement or understanding 

that would result in a specific amount 

of remuneration in connection with 

purchases of the covered security, the 

broker, dealer or municipal securities 

dealer would have to disclose that 

expected remuneration as a percentage 

6452 Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 

92Section C of Schedule 15C would provide 

space for disclosure of additional remuneration.

93For example, a one hundred thousand dollar 

annual revenue sharing payment from a mutual 

fund family may pose more of a potential conflict 

of interest to a firm that annually sells ten million 

dollars worth of shares for that fund complex than 

it would pose to a firm that annually sells fifty 

million dollars worth of shares for that fund family.

94NASD rule 2830(k)(1) bars member firms from 

favoring funds on the basis of brokerage 

commissions received or expected from any source. 

That restriction has not been uniformly followed. 

See supra note 20 (discussing NASD action against 

Morgan Stanley). Moreover, NASD rule 2830(k)(4) 

restricts member firms from disseminating 

information about its receipt of commissions from 

fund complexes other than to certain management 

personnel. In proposing required disclosure of 

portfolio brokerage commission arrangements, we 

do not intend to provide any comfort for 

relationships or activities that are barred by existing 

rules.

95See discussion of NASD rule 2830(k)(1), supra

note 94.

of the net amount invested in the 

covered securities, and would have to 

disclose the total dollar amount of 

remuneration it may expect to receive in 

connection with the transaction.92

Disclosing information about revenue 

sharing and portfolio brokerage 

commissions in the context of the firm’s 

total sales on behalf of a fund complex, 

instead of simply disclosing the 

absolute dollar values the firm has 

received from the fund complex, would 

enable customers to see information 

about a firm’s selling stake in a 

standardized manner, regardless of 

whether a customer’s particular broker, 

dealer or municipal securities dealer is 

large or small, and regardless of whether 

the covered security is issued by a large 

or small fund complex.93 Disclosure of 

this information would alert customers 

to the existence and magnitude of 

revenue sharing and portfolio 

commission arrangements that cause 

conflicts of interest for brokers, dealers 

and municipal securities dealers and 

their associated persons. At the same 

time, disclosure of the particular 

arrangements applicable to the 

transaction will provide information to 

investors about the most direct 

incentives for such transactions.

Proposed rule 15c2–2 is not intended 

to preempt or otherwise negate other 

provisions of law that may apply. We 

note that NASD rule 2830(k)(1) bars 

broker-dealers from favoring the 

distribution of funds that pay portfolio 

brokerage commissions.94 We wish to 

stress that the proposal to require 

broker-dealers to disclose information 

about receipt of portfolio brokerage 

commissions in no way should be read 

to condone favoring distribution of 

funds that pay portfolio brokerage 

commissions, and would not prevent a 

broker-dealer from being held liable for 

violating that NASD rule. Moreover, a 

mutual fund that uses brokerage 

commissions to promote the 

distribution of another mutual fund may 

also be in violation of the Investment 

Company Act. Nor would proposed rule 

15c2–2 protect a firm from other forms 

of liability, such as liability under 

agency law principles.

• The Commission requests comment 

on whether the proposed definition of 

revenue sharing appropriately 

encompasses all distribution 

arrangements that pose conflicts of 

interest to brokers, dealers and 

municipal securities dealers. 

Commenters particularly are invited to 

discuss whether the definition should 

include additional distribution-related 

arrangements that lead to conflicts of 

interest, such as distribution-related 

payments to other affiliates of brokers, 

dealers and municipal securities 

dealers. Commenters also are invited to 

discuss whether the definition should 

exclude certain arrangements that 

compensate brokers, dealers or 

municipal securities dealers for actual 

expenses they incur (such as mailing 

expenses) as part of activities that they 

would not generally be expected to 

perform as part of a securities business. 

• In addition, commenters are invited 

to provide information about which 

specific payment streams would be 

encompassed by the proposed definition 

of revenue sharing, the dollar value of 

those payment streams, and the uses of 

those payments.

• Commenters also are invited to 

discuss whether the rule should use a 

term other than ‘‘revenue sharing,’’

given that the proposed disclosure 

requirement would encompass more 

than the traditional use of the term 

‘‘revenue sharing’’ in the mutual fund 

industry, which is limited to payments 

from an investment adviser to the 

broker, dealer or municipal securities 

dealer. Commenters suggesting 

alternative terms should explain why 

those are preferable. Moreover, 

commenters are invited to discuss 

whether the definition of revenue 

sharing appropriately excludes 

payments made by the issuer of the 

covered security, and whether the 

proposed rule should require disclosure 

of payments made out of the issuer’s 

assets, such as transfer agent payments, 

that lead to conflicts, regardless of 

whether those payments already would 

be accounted for in fund financial 

statements and are subject to oversight 

by the fund’s board of directors. 

• More generally, the Commission 

requests comment on whether the 

proposal for disclosure of revenue 

sharing and portfolio brokerage 

arrangements would provide sufficient 

information to investors. Commenters 

particularly are invited to discuss 

whether firms should be required to 

disclose absolute dollar amounts of 

revenue sharing and portfolio 

commissions, in addition to or in lieu of 

disclosing those payments in percentage 

terms and in terms of the amount of the 

transaction. Commenters also are 

invited to discuss whether these 

arrangements more appropriately 

should be disclosed on a different basis 

than for 12 month periods, updated 

quarterly. We request comment on 

whether the proposed approach takes 

sufficient account of the fact that 

revenue sharing arrangements at times 

may consist of separate revenue streams 

arising from a firm’s new sales of fund 

shares and its prior sales of fund shares. 

Given that it is conceivable that a fund 

complex may pay different levels of 

revenue sharing depending on the fund, 

or may pay revenue sharing only in 

connection with selected funds, 

commenters are invited to discuss 

whether the proposed approach can be 

improved to account for differences in 

revenue sharing practices between 

different funds in the same complex. 

• Commenters also are invited to 

discuss whether, when calculating 

revenue sharing and portfolio brokerage 

commissions as a percentage of a 

broker’s, dealer’s, or municipal 

securities dealer’s sales on behalf of a 

fund complex, that percentage should 

be based on all sales, or whether certain 

transactions such as transactions 

involving money market funds should 

be excluded from the denominator used 

to calculate those percentages. We also 

request comment on whether there are 

alternative ways to effectively inform 

investors of material information about 

arrangements that lead to conflicts of 

interest, while posing lower disclosure 

costs. In that regard, commenters may 

wish to discuss whether investors can 

be adequately informed about revenue 

sharing and portfolio commission 

arrangements through disclosures of 

approximate percentage ranges or dollar 

ranges, possibly in conjunction with 

checkboxes. Finally, commenters are 

invited to discuss whether disclosure of 

portfolio brokerage commissions is 

appropriate given existing restrictions 

on those relationships influencing fund 

distribution.95

(d) Differential compensation 

disclosure. Proposed paragraph (c)(6) of 

rule 15c2–2 would require disclosure of 

whether a broker, dealer or municipal 

securities dealer pays differential 

compensation to associated persons 

related to purchases of two specific 

Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 6453

96As noted, some large purchases of class A 

shares will carry a deferred sales load of up to one 

percent is imposed for up to one year to discourage 

short-term holdings. Those sales do not raise the 

conflict concerns that differential compensation 

disclosure is intended to capture.

97Typically, class B shares are subject to a 

decreasing deferred sales load for several years 

following purchase. The amount of the deferred 

sales load, usually calculated as the lesser of a 

percentage of the value of the initial investment or 

the account’s value, declines each year that the 

customer holds the shares and eventually 

disappears entirely. Some class C shares are subject 

to a deferred sales load for the first year after 

purchase. Generally, this disclosure requirement 

would apply to investor purchases of class B shares. 

Purchases of class A shares of $1 million or more 

typically are subject to a one percent deferred sales 

load for one year, but those purchases generally 

would not be within the scope of this requirement. 

When a customer purchases a class B share, the 

question of whether an associated person receives 

differential compensation should take into account 

the remuneration he or she would have earned from 

the sale of class A shares. 

Class B shares often carry relatively high 12b–1 

fees, but may automatically convert into class A 

shares (which generally carry lower 12b–1 fees) 

several years after purchase. Class C shares also 

generally carry relatively high 12b–1 fees, and 

usually do not automatically convert to a class of 

shares with lower 12b–1 fees. The Commission’s 

Internet site contains an online calculator that 

illustrates the impact of loads and other costs on the 

relative total returns earned on mutual fund 

investments in different share classes for different 

holding periods. The calculator is located at http:/

/www.sec.gov/investor/tools/mfcc/mfcc–int.htm. 98For example, suppose that an associated person 

is paid a fixed 50% payout of the dealer concession 

received by a selling broker-dealer in connection 

with the sale of fund shares, and that the dealer 

concession received by the firm for selling $200,000 

of a particular mutual fund’s shares is 4% for class 

B shares and 2.5% for class A shares. In that case, 

the associated person would receive a commission 

of $4,000 for selling the class B shares, but only 

$2,500 for selling the class A shares. That would 

amount to $1,500 (or 60%) higher compensation for 

selling the customer class B shares.

99See supra note 20.

100See supra note 49.

101Broker-dealers that sell class C shares may 

receive a relatively modest upfront dealer 

concession, followed by a portion of the long-term 

12b–1 fees that are paid on those shares. Because 

class C shares generally do not automatically 

convert to a share class associated with lower 12b–

1 fees, unlike class B shares, the broker-dealer’s and 

its associated person’s post-first year compensation 

for selling class C shares may be particularly 

significant.

102Because some non-proprietary securities can 

have a relatively modest payout, a focus on dollar 

amounts would invariably lead to ‘‘yes’’

disclosures.

types of securities: (i) Covered securities 

that carry a deferred sales load (other 

than a deferred load of no more than 

one percent that expires no later than 

one year after purchase, when no other 

sales load would be incurred),96 and (ii) 

shares of ‘‘proprietary covered 

securities’’ that are issued by an affiliate 

of the broker, dealer or municipal 

securities dealer. If a customer 

purchased a proprietary covered 

security that carries a deferred sales 

load, both disclosures would be 

required. The proposed rule would 

provide for affirmative, negative or ‘‘not 

applicable’’ disclosure about differential 

compensation to alert customers to the 

presence of compensation practices that 

provide incentives leading to conflicts 

for associated persons.

Disclosure of differential 

compensation would be limited to 

transactions in those two types of 

securities because of the special 

concerns they raise. Securities that carry 

a deferred sales load—such as class B 

shares—may appear more appealing to 

investors than shares with a front-end 

sales load, but their long-term costs may 

be greater and the personnel of a broker, 

dealer or municipal securities dealer 

may be more highly compensated for 

selling them, particularly when the 

same investment in a share class with a 

front-end sales load would have been 

entitled to a breakpoint discount. 

Moreover, a broker, dealer or municipal 

securities dealer may pay its personnel 

extra compensation for selling securities 

of issuers affiliated with the broker, 

dealer or municipal securities dealer. 

While a broker, dealer or municipal 

securities dealer also may pay extra 

compensation for selling securities that 

generate revenue sharing, revenue 

sharing would be disclosed elsewhere 

on the confirmation. 

The proposed rule would define the 

term ‘‘differential compensation’’

differently depending on the securities 

transaction at issue. With respect to 

customer purchases of a class of covered 

security associated with a deferred sales 

load (other than a deferred load of no 

more than one percent that expires no 

later than one year after purchase, when 

no other sales load would be incurred), 

proposed paragraph (f)(9)(i) of rule 

15c2–2 would define ‘‘differential 

compensation’’ as any form of higher 

compensation (including total 

commissions, reimbursement or 

avoidance of charges or expenses, or 

other cash or non-cash compensation) 

that a broker, dealer or municipal 

securities dealer can be expected to pay 

to any associated person in connection 

with the sale of a stated dollar amount 

of that class of covered security over the 

next year, based on its current practices 

and assuming no change in the shares’

net asset value if applicable, compared 

with the compensation that the 

associated person would have been paid 

over the next year in connection with 

the sale of the same dollar amount of 

another class of the same security that 

is associated with a front-end sales 

load.97 The broker, dealer or municipal 

securities dealer would have to disclose 

the existence of differential 

compensation related to securities with 

a deferred end sales loads whenever any 

associated person—salesperson or 

supervisor—is paid more to sell a 

security that has a deferred sales load—

i.e., differential compensation.98

Disclosure of those incentives should be 

useful to investors, especially given the 

recent instances in which associated 

persons were found to have 

inappropriately placed customers into 

class B shares to increase their own 

compensation.99 Investors have an 

interest in knowing whether 

salespersons or other associated persons 

have those higher incentives.100 The 

proposed rule only relates to 

remuneration expected to be paid in the 

next year when identifying the presence 

or absence of differential compensation, 

because short-term compensation 

reflects the associated person’s most 

immediate financial incentive and 

because of the difficulty of estimating 

the near-term value of later revenues. 

We note, however, that an associated 

person may receive significant 

compensation after the first year for 

selling some share classes.101

In the case of customer purchases of 

proprietary covered securities, proposed 

paragraph (f)(9)(ii) of rule 15c2–2 would 

define ‘‘differential compensation’’ as: 

(A) Any practice by which a broker, 

dealer or municipal securities dealer 

pays an associated person a higher 

percentage of the firm’s gross dealer 

concession in connection with selling a 

proprietary covered security than the 

percentage of the gross dealer 

concession that the firm would pay in 

connection with selling the same dollar 

amount of any non-proprietary covered 

security offered by the firm; and (B) 

other practices of a broker, dealer or 

municipal securities dealer that cause 

an associated person to earn a higher 

rate of compensation in connection with 

selling a proprietary covered security, 

such as additional cash compensation or 

the imposition, allocation, or waiver of 

expenses, overhead costs, or ticket 

charges. That aspect of the proposed 

rule takes percentage payment rates into 

account, rather than absolute dollar 

amounts, because that would lead to 

more effective disclosure.102 Proposed 

paragraph (f)(11) of rule 15c2–2 would 

define the term ‘‘gross dealer 

concession’’ as the total amount of any 

discounts, concessions, fees, service 

fees, commissions, or asset-based sales 

charges received by the broker, dealer or 

municipal securities dealer from the 

issuer in connection with the sale and 

distribution of a covered security, other 

than portfolio brokerage commissions 

for transactions effected on behalf of the 

6454 Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 

103Revenue sharing is not encompassed by the 

term ‘‘gross dealer concession’’ because it is not 

paid by the issuer. These proposed rules contain 

separate definitions for the terms ‘‘gross dealer 

concession’’ and ‘‘dealer concession.’’ The term 

‘‘gross dealer concession’’ would determine the 

baseline for identifying whether associated persons 

are paid differential compensation (through a 

higher percentage payout) in connection with the 

sale of proprietary securities. That term focuses on 

amounts that the broker, dealer or municipal 

securities dealer receives from the issuer. The term 

‘‘dealer concession’’ would govern the obligation of 

a broker, dealer or municipal securities dealer, 

under proposed paragraph (c)(4) of rule 15c2–2, to 

disclose the sales fee that it earns from the issuer 

or issuer’s agent, or from the primary distributor or 

another broker, dealer or municipal securities 

dealer.

104For example, a firm would have to disclose the 

existence of differential compensation when an 

associated person receives a 50% payout of the 

firm’s gross dealer concession in connection with 

selling $200,000 of a proprietary fund, if the 

associated person’s percentage payout associated 

with the sale of $200,000 of any other fund would 

be less than 50%. The firm also would have to 

disclose differential compensation if an associated 

person benefits from any practice that compensates 

him or her in connection with selling the 

proprietary fund, or reimburses his or her expenses 

in connection with selling the proprietary fund, if 

the same programs or practices are not uniformly 

available in connection with the sale of all other 

funds.

105For example, while firms may provide higher 

percentage payouts to associated persons in 

connection with selling mutual funds associated 

with revenue sharing, other requirements of 

proposed rule 15c2–2 should place investors on 

notice about the firms’ potential conflicts associated 

with that practice. Also, while an associated person 

could have a heightened financial interest in selling 

non-proprietary funds associated with relatively 

high dealer concessions (for example, if the 

associated person is compensated by receiving a 

particular percentage of the dealer concessions), the 

proposed requirement that the broker, dealer or 

municipal securities dealer disclose the sales fee it 

receives would provide the customer with 

information about the relative size of the firm’s 

financial stake in the sale.

106As proposed, the rule would not require 

disclosure of all differences in financial incentives. 

If an associated person is paid a specified 

percentage payout of the gross dealer concession 

received by the broker, dealer or municipal 

securities dealer, then differences in the dealer 

concession paid on behalf of specific funds can lead 

to significant differences in compensation. For 

example, if a proprietary fund offers a dealer 

concession of 4.0% for selling $100,000 of class A 

fund shares, while another nonproprietary fund 

offers a dealer concession of 2.5% for selling the 

same amount of class A fund shares, then the 

broker, dealer or municipal securities dealer would 

earn $4,000 for selling the proprietary fund and 

$2,500 for the selling the nonproprietary fund. If an 

associated person is paid 50% of the firm’s gross 

dealer concession, then his or her compensation 

would be $2,000 for selling the proprietary fund 

and $1,250 for selling the nonproprietary fund. That 

$750 difference in compensation represents a 

potential conflict of interest, but would not be 

identified if differential compensation related to 

that transaction is identified solely by reference to 

percentage payouts.

107As noted above, funds may pay ongoing 

service fees of 0.25% of assets under their 12b–1 

plans. Brokers, dealers and municipal securities 

dealers may pay some or all of those amounts to 

salespersons as ‘‘trailing commissions.’’ Although 

the fees may be depicted as service fees, they may 

be viewed by registered representatives as deferred 

compensation for sales.

108See rule 10b–10(a)(2).

109See rule 10b–10(a)(2)(ii).

110See rule 10b–10(a)(2)(i)(A).

111See rule 10b–10(a)(2)(i)(C).

112See rule 10b–10(a)(3).

113See rule 10b–10(a)(4).

issuer.103 As discussed above in the 

context of revenue sharing, proposed 

paragraph (f)(15) of rule 15c2–2 would 

define the term ‘‘proprietary covered 

security’’ as any covered security as to 

which the broker, dealer or municipal 

securities dealer is an affiliated person, 

as defined by Section 2(a)(3) of the 

Investment Company Act, of the issuer, 

or is an associated person of the issuer’s 

investment adviser or principal 

underwriter, or, in the case of a covered 

security that is an interest in a UIT, is 

an associated person of a sponsor, 

depositor or trustee of the covered 

security. The broker, dealer or 

municipal securities dealer would be 

required to disclose the existence of 

differential compensation related to the 

sale of proprietary funds because 

investors would benefit from knowing 

whether salespersons or other 

associated persons may receive higher 

incentives, which create conflicts of 

interest for them.104

The proposed rule would not require 

brokers, dealers or municipal securities 

dealers to identify all instances in 

which an associated person has a higher 

financial stake to sell the shares of one 

fund than another. Rather, the proposed 

rule is targeted toward transactions in 

securities without front-end sales loads 

and proprietary securities because other 

aspects of the proposed rule 15c2–2 

should provide customers with 

information about other conflicts of 

interest facing the broker, dealer or 

municipal securities dealer. This point 

of sale proposal is intended to alert 

customers to additional information 

about the existence conflicts that 

otherwise would be hidden.105

• We seek comment on whether this 

proposal would adequately place 

customers on notice about the conflicts 

associated with differential 

compensation. We specifically request 

comment on whether brokers, dealers 

and municipal securities dealers should 

be required to disclose payment of 

differential compensation in contexts 

other than transactions involving shares 

with deferred sales loads and 

proprietary covered securities (such as 

in the context of fund complexes that 

pay revenue sharing to the broker, 

dealer or municipal securities dealer).

• We also specifically request 

comment about whether the proposed 

approach for defining differential 

compensation in transactions involving 

securities with a deferred sales load—

which focuses on compensation per 

dollar of covered security sold, rather 

than on compensation as a percentage of 

the dealer concession—should apply to 

other transactions in light of the fact 

that dealer concessions can vary widely 

among funds.106

• We also request comment on 

whether the definition of ‘‘proprietary 

covered security’’ is sufficiently broad. 

We further request comment on whether 

firms should be required to disclose 

information about their receipt of 

ongoing asset-based payments from 

funds (sometimes known as ‘‘trailing 

commissions’’), or information about 

their payment of those fees to associated 

persons.107 We moreover request 

comment on whether firms should be 

required to account for remuneration 

received after the first year when 

determining whether associated persons 

receive differential compensation in 

connection with selling share classes 

without a front-end load.

• Finally, we request comment on 

whether, in addition to disclosure about 

the fact that associated persons receive 

differential compensation, customers 

should receive information about the 

amount of any differential 

compensation received by associated 

persons. If so, how should the 

differential compensation be quantified? 

What time period or periods would be 

most relevant and useful to investors? 

iii. Provisions not included in general 

and purchase-specific requirements. 

Proposed rule 15c2–2 would not 

incorporate several provisions of rule 

10b-10 that do not appear material to 

customer transactions in mutual fund 

shares, UIT interests and municipal 

fund securities. In particular, proposed 

rule 15c2–2 would not require 

disclosure of whether the broker, dealer 

or municipal securities dealer is acting 

in the capacity of agent or principal 108

because those firms would act in an 

agency capacity for the transactions at 

issue. For the same reason, the rule 10b10 disclosure standards for principal 

transactions 109 would not be 

incorporated into proposed rule 15c2–2. 

Proposed rule 15c2–2 also would not 

incorporate requirements for disclosing 

information about the person from 

whom the security was purchased,110

payment for order flow,111 odd-lot 

differentials 112 and several 

requirements specific to transactions in 

debt securities.113

• The Commission requests comment 

on whether it would be appropriate to 

include any of those requirements in 

proposed rule 15c2–2. Commenters who 

Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 6455

114This alternative would apply to three general 

types of arrangements: (i) individual retirement or 

individual pension plans; (ii) agreements for 

purchasing covered securities at the public offering 

price, or redeeming covered securities at the 

applicable redemption price, at specified time 

intervals and setting forth the commissions or 

charges to be paid by the customer; or (iii) other 

arrangements by which a group of two or more 

customers engage in periodic purchases of covered 

securities through a person designated by the group, 

subject to specific notice requirements. 

As discussed below, we are proposing 

conforming amendments to the periodic disclosure 

provisions of rule 10b–10.

115Because the definition of ‘‘covered securities 

plan’’ encompasses reinvestment of dividends and 

other distributions paid by issuers of covered 

securities, proposed rule 15c2–2 would permit 

quarterly disclosure related to those reinvestment 

transactions. This would encompass covered 

security dividend reinvestment activity that has 

been the subject of exemptive relief under rule 10b–

10. See, e.g., Letter regarding Newbridge Securities 

(February 20, 1997) (providing for monthly 

disclosure in connection with dividend 

reinvestment transactions involving mutual funds 

and other securities); Letter regarding Edward D. 

Jones & Co. (August 1, 2003) (providing for 

quarterly disclosure in connection with dividend 

reinvestment transactions involving money market 

funds). 

We do not propose at this time to amend rule 

10b–10 in a corresponding way to provide for 

quarterly disclosure in connection with dividend 

reinvestment programs involving other securities.

116Those are set forth in paragraph (b) to 

proposed rule 15c2–2.

117Those are set forth in paragraph (c)(1) to 

proposed rule 15c2–2.

118Those are set forth in paragraph (c)(4) to 

proposed rule 15c2–2.

119Those are set forth in paragraph (c)(5) to 

proposed rule 15c2–2.

120Those are set forth in paragraph (c)(6) to 

proposed rule 15c2–2.

121Those are set forth in paragraph (c)(2) to 

proposed rule 15c2–2.

122Those are set forth in paragraph (c)(3) to 

proposed rule 15c2–2.

123 In other words, if a covered securities plan 

encompasses purchases of three separate mutual 

funds, the broker, dealer or municipal securities 

dealer would have to provide a purchase-specific 

disclosure upon the first purchase of each of those 

funds. Subsequent purchases of each particular 

fund would not require the purchase-specific 

disclosure, because the customer already has been 

alerted to the costs and conflicts at issue.

124The Commission, acting by authority 

delegated to its staff, has granted a significant 

number of exemptions under rule 10b–10. Persons 

who have received those exemptions would not be 

automatically exempt from the provisions of 

proposed rule 15c2–2. As discussed above, 

however, the periodic disclosure alternative 

Continued

believe that proposed rule 15c2–2 

should be expanded to encompass 

transactions in additional types of 

securities also should address what 

additional disclosure provisions such 

inclusion would require. 

e. Periodic disclosure alternative.

Proposed paragraph (d) of rule 15c2–2 

would permit brokers, dealers and 

municipal securities dealers to disclose 

the required information periodically, 

rather than transaction-by-transaction, 

in certain limited circumstances 

involving transactions in a ‘‘covered 

securities plan’’ or in no-load open-end 

money market funds. This provision is 

based on the periodic disclosure 

requirements of rule 10b–10(b), but 

modified to be consistent with the 

targeted disclosure standards of 

proposed rule 15c2–2. Proposed 

paragraph (f)(5) of rule 15c2–2 would 

define ‘‘covered securities plan’’ as any 

plan for direct purchase or sale of a 

covered security pursuant to certain 

retirement or pension plans or other 

agreements or arrangements.114 While 

this definition in large part would be 

analogous to the rule 10b-10 definition 

of ‘‘investment company plan,’’ it also 

would encompass arrangements for 

automatic reinvestment of dividends or 

other distributions paid by the issuer of 

a covered security. The periodic 

disclosure alternative of proposed rule 

15c2–2 would require a broker, dealer or 

municipal securities dealer to provide 

quarterly disclosure for transactions 

involving covered securities plans, and 

monthly disclosure for money market 

fund transactions subject to the periodic 

disclosure alternative.115

This disclosure would encompass 

summary information designed to 

inform investors about costs and 

conflicts, consistent with the general 

and purchase-specific disclosure 

requirements in other provisions of 

proposed rule 15c2–2. In general, it 

would require disclosure of the same 

types of information that are required by 

paragraphs (b) and (c), but some 

information would be disclosed in 

summary form that reflects all 

transactions within a period, rather than 

each individual transaction. Proposed 

paragraph (d)(2) of rule 15c2–2 would 

require disclosure of each transaction, 

and of the total number of shares in the 

customer’s account at the end of the 

period. It would further require, for each 

transaction, disclosure of the general 

information related to date, issuer and 

class of the security, price and net asset 

value, number of shares, the total 

amount paid or received and the net 

amount of the investment bought or 

sold, commissions from the customer, 

deferred sales load charges, and SIPC 

membership.116 Also, to the extent 

applicable, it would require disclosure 

of information about front-end sales 

loads charged to the customer,117 and 

about dealer concessions received by 

the firm.118 As of the date of the final 

purchase or reinvestment during the 

period, the provision would require 

disclosure of information about revenue 

sharing and portfolio brokerage 

commission arrangements 119 and about 

differential compensation.120 Based on 

the total value of the purchases and 

reinvestments during the period, and 

the net asset value at the end of the 

period, the rule would also require 

disclosure of information related to 

deferred sales loads 121 and to assetbased sales charges and service fees 

such as rule 12b–1 fees.122

Proposed paragraph (d)(3) of rule 

15c2–2 would require a broker, dealer or 

municipal securities dealer to provide 

the customer with written notification 

before it could take advantage of the 

periodic disclosure alternative. 

Moreover, the broker, dealer or 

municipal securities dealer would be 

required to provide the customer with at 

least one written disclosure document 

consistent with the general and 

purchase-specific disclosure standards 

at the time of each purchase of a 

particular security within a covered 

securities plan, prior to relying on the 

periodic disclosure alternative.123 This 

latter requirement is intended to help 

customers to receive timely notice about 

the costs and conflicts raised by 

purchases involving each security that 

is the subject of the covered securities 

plan.

• The Commission requests comment 

on whether any periodic disclosure 

alternative is appropriate, in light of the 

distribution-related concerns associated 

with covered securities. 

• The Commission also requests 

comment on whether this proposal 

strikes the right balance between 

alerting investors to the distributionrelated issues associated with these 

securities and minimizing firms’ cost of 

disclosure. Should we require periodic 

disclosures to be made more frequently? 

If so, commenters are requested to 

suggest alternative time frames and their 

reasons for believing they would 

provide more meaningful information to 

investors. 

• We also request comment about 

whether permitting some categories of 

information to be disclosed in summary 

fashion is appropriate, or if brokerdealers should be required to provide all 

the transaction-by-transaction 

information otherwise required by the 

rule in the periodic statements. 

f. Other provisions and definitions.

Proposed paragraph (g) of rule 15c2–2 

would permit the Commission to 

exempt any broker, dealer or municipal 

securities dealer from the provisions of 

the rule with regard to any transactions 

or any class of transactions, when the 

Commission finds that firm will provide 

alternative procedures to effect the 

purposes of the rule. Rule 10b–10 has a 

similar exemptive provision.124

6456 Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 

provisions of proposed rule 15c2–2 encompass 

dividend reinvestment activities that have been the 

subject of several of those exemptions under rule 

10b–10. See supra note 115.

125Rule 10b–10(d)(2) defines ‘‘completion of the 

transaction’’ by reference to rule 15c1–1 under the 

Exchange Act. Rule 15c1–1 defines that term by 

reference to the time of payment, delivery, transfer 

or bookkeeping entry, depending on the specific 

circumstances.

126Rule 10b–10(d)(1) provides that the term 

‘‘customer’’ does not include a broker or dealer.

127Our goal is to do this annually.

128 In an introducing-clearing relationship, both 

the introducing firm and the clearing firm effect the 

transaction and are subject to confirmation 

requirements. The agreement between the two firms 

would be provided to customers upon the 

establishment of the account or the establishment 

of the introducing-clearing arrangement, and the 

customers thereafter have a reasonable expectation 

of the responsibilities of both the introducing 

broker-dealer and the clearing broker-dealer in 

transactions effected for their accounts. See NYSE 

rule 382 and NASD rule 3230.

Proposed paragraph (f)(3) of rule 

15c2–2 would also use the same 

definition of the term ‘‘completion of 

the transaction’’ as is found in rule 10b–

10.125 In addition, proposed paragraph 

(f)(7) of rule 15c2–2, consistent with 

rule 10b–10, would provide that the 

term ‘‘customer’’ does not include any 

broker, dealer or municipal securities 

dealer.126 Because the two confirmation 

rules have parallel goals, it is 

appropriate for those definitions to be 

the same.

g. Comparison range disclosure.

Proposed paragraph (e) of rule 15c2–2 

would provide a mechanism to give 

investors additional context for 

evaluating the significance of certain 

required disclosures by requiring 

brokers, dealers and municipal 

securities dealers to provide comparison 

information. In many cases, including 

disclosures about sales loads, assetbased sales charges and service fees, 

revenue sharing and portfolio brokerage 

commissions, investors could benefit 

from knowing how the position of the 

broker, dealer or municipal securities 

dealer compares to industry practices. 

Investors may obtain that context if they 

are provided information about where 

costs and payments fall in comparison 

to the median and ranges in the 

marketplace. In the case of disclosures 

of loads, asset-based sales charges and 

service fees, and dealer concessions, 

these comparisons would be based on 

the median of, and the ranges associated 

with, 95 percent of the transactions 

involving the same type of covered 

security (i.e., mutual fund, unit 

investment trust or 529 plan). In the 

case of disclosures of revenue sharing 

and portfolio brokerage, these would be 

the medians and the ranges associated 

with 95 percent of the brokers, dealers 

or municipal securities dealers that 

distribute the same type of covered 

security. Median and 95th percentile 

range information are accepted 

statistical methods that, applied here, 

would provide a snapshot about 

whether a cost or conflict is typical or 

is an outlier. The Commission would 

publish the medians and comparison 

ranges from time to time in the Federal 

Register.127 The Commission would 

publish those medians and ranges in 

percentage form. Firms would have to 

update median and percentage range 

information on their confirmations 

within 90 days of their publication. If 

adopted, this requirement would not 

take effect until 90 days after the 

Commission publishes the initial 

schedule of comparison ranges.

• We request comment about the 

utility and implementation of this 

proposal to disclose median and 

comparison range information. For 

example, in calculating comparison 

ranges related to loads and dealer 

concessions, to what extent is it 

appropriate to take into account the type 

of security (such as equity fund, debt 

fund, money market fund, or blend) that 

is the subject of the transaction. Are 

there specific categories of covered 

securities that would lead to the fairest 

‘‘apples to apples’’ comparisons? 

Should all UITs be in a single category, 

or would it be necessary, for example, 

to separate variable annuities, variable 

life insurance, and other UITs? Should 

issuers of covered securities, or brokers, 

dealers or municipal securities dealers, 

be able to select the comparison 

category applicable to particular 

securities, or should the Commission 

assign covered securities to specific 

categories? Should median and 

percentile range information related to 

covered securities be weighted to 

account for the relative sales of covered 

securities? In other words, should 

covered securities that are more highly 

sold have a higher weight in calculating 

the medians and 95th percentile ranges? 

Similarly, should median and range 

information related to brokers, dealers 

and municipal securities dealers be 

weighted to account for relative sales by 

those firms? In other words, should 

brokers, dealers and municipal 

securities dealers that sell more covered 

securities have a higher weight in 

calculating the medians and 95th 

percentile ranges? Should transactions 

be compared to other transactions of a 

similar dollar amount? Moreover, 

should confirmations disclose 

comparison information that is more 

specific than medians and 95th 

percentile ranges, such as by stating the 

percentile rank of the loads, other costs 

or compensation associated with a 

transaction? Should the Commission be 

responsible for analyzing the 

information used to calculate medians 

and comparison ranges, or should the 

Commission permit or require the 

disclosure of median and comparison 

range information published by a 

vendor or other third-party source? 

Should the Commission establish 

standards for vendors or other third 

parties to derive and publish that 

information? 

We recognize that implementing these 

reporting requirements for medians and 

comparison ranges will require 

additional rulemaking to implement 

reporting requirements to permit the 

Commission or its vendors to gather 

information to calculate appropriate 

medians and comparison ranges. 

• What entities should be required to 

disclose information that is necessary to 

calculate median and comparative range 

information? In particular, should 

investment companies or brokers, 

dealers and municipal securities dealers 

be required to provide us with 

information to expedite the calculation 

of comparison ranges? 

There will be additional opportunity 

to comment about those requirements at 

the time of a reporting requirement 

proposal. If we conclude that 

publication of median and comparison 

range information is not feasible due to 

implementation issues, then brokers, 

dealers and municipal securities dealers 

would not be required to disclose 

median and comparative range 

information. 

If we conclude that comparative 

information would be useful to 

investors in this context, we may 

consider implementing comparative 

information disclosure requirements in 

other contexts, as well. 

h. Disclosures about transactions 

effected by multiple firms. The 

requirements of proposed rule 15c2–2 

would apply to every broker, dealer or 

municipal securities dealer that effects a 

transaction in a covered security, 

including transactions effected by more 

than one broker, dealer or municipal 

securities dealer. As is the case today, 

customers whose transactions have been 

effected in the context of an 

introducing-clearing arrangement 

nonetheless may receive a single 

confirmation if the two brokers, dealers 

or municipal securities dealers enter 

into a written agreement—disclosed to 

the customer—that determines the 

responsibilities of each, including the 

responsibility to provide confirmations 

to customers.128

Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 6457

129Attachments 1–3 hereto provide models for 

confirmations sent by clearing firms on behalf of 

themselves and introducing firms that receive sales 

fees, revenue sharing and portfolio brokerage 

commissions. Generally, so long as the fees that a 

clearing firm receives in connection with a 

transaction do not constitute sales fees, revenue 

sharing and portfolio brokerage commissions, the 

clearing firm would not have to separately state that 

it does not receive that type of remmeration.

130Absent an agreement disclosed to the 

customer, it is unlikely that the selling broker, 

dealer or municipal securities dealer would be able 

to send a single confirmation jointly with another 

firm effecting the transaction. See Office of 

Compliance Inspections and Examinations, 

Commission, ‘‘Inspection Report on the Soft Dollar 

Practices of Broker-Dealers, Investment Advisers 

and Mutual Funds’’ (September 22, 1998) at n.78. 

The Commission, however, will consider requests 

for exemptive relief permitting joint confirmations 

in circumstances where the customer may 

reasonably consent to such use.

131As noted, rule 10b–10 already exempts 

transactions in municipal securities.

132Specifically, the preliminary note to rule 10b–

10 would be amended to note that rule 15c2–2, not 

rule 10b–10, governs disclosure requirements 

related to transactions in open-end management 

investment company shares, interests in unit 

investment trusts, and municipal fund securities 

used for education savings.

133Proposed rule 15c2–2 would not apply to 

secondary market transactions in interests in UITs. 

That does not preclude this proposed amendment 

to rule 10b–10, however, because secondary market 

transactions in UITs would not fall within the scope 

of the ‘‘investment company plan’’ exception of rule 

10b–10.

134For example, the antifraud provisions at times 

require disclosure prior to transactions about 

Continued

Although a customer may receive a 

single confirmation for a transaction 

effected as part of an introducingclearing arrangement, proposed rule 

15c2–2 would require specific 

disclosure of sales fees, revenue sharing 

and portfolio brokerage commissions 

received by any broker, dealer or 

municipal securities dealer that effects a 

transaction. It is important that an 

investor see information about those 

types of remuneration specifically 

attributed to each broker, dealer or 

municipal securities dealer, so the 

investor may evaluate conflicts of 

interest. Thus, a single confirmation still 

shall separately disclose the sales fees, 

revenue sharing and portfolio brokerage 

commissions earned by each firm.129

That may require a broker, dealer or 

municipal securities dealer that receives 

sales fees, revenue sharing or portfolio 

brokerage to convey responsive 

information to the firm that sends out 

the confirmation, which may require 

enhancement of existing flows of 

information. There are other instances 

in which a broker, dealer or municipal 

securities dealer may effect transactions 

in covered securities in conjunction 

with another broker, dealer or 

municipal securities dealer. For 

example, a broker, dealer or municipal 

securities dealer may solicit persons at 

their workplaces, as part of an 

employer-sponsored marketing 

arrangement, to invest in covered 

securities. Although the broker, dealer 

or municipal securities dealer that 

solicits transactions may be paid on a 

transaction-basis, the customer accounts 

may be opened at a different firm. 

Proposed rule 15c2–2 would require 

disclosure of payments to the broker, 

dealer or municipal securities dealer 

soliciting the transaction, even if it does 

not maintain the account.130

• We request comment on whether 

proposed rule 15c2–2 would result in 

adequate disclosure of information 

about distribution-related costs and 

conflicts connected with transactions 

effected by more than one broker, dealer 

or municipal securities dealer. 

Commenters are invited to discuss any 

potential implementation issues 

associated with the proposed rule, 

including any operational challenges or 

difficulties that the requirement may 

pose to introducing and clearing firms 

or other firms that together effect 

securities transactions. Commenters 

may also wish to discuss the application 

of the proposed rule to the principal 

underwriter or distributor of a covered 

security.

2. Amendments to Rule 10b-10 

Because proposed rule 15c2–2, if 

adopted, would govern confirmation 

disclosure of purchases and sales in 

investment company securities, we also 

propose to amend rule 10b-10 to 

exclude those securities.131 In 

particular, we propose to amend 

paragraph (a) of rule 10b-10 to provide 

that the rule does not apply to securities 

excluded by paragraph (g) of the rule. 

Proposed paragraph (g) would provide 

that rule 10b-10 does not extend to 

transactions in: (i) U.S. Savings Bonds, 

(ii) municipal securities, and (iii) any 

other security that is defined as a 

‘‘covered security’’ by rule 15c2–2. 

Transactions in savings bonds and 

municipal securities already are 

excluded from the application of rule 

10b-10. The Commission also proposes 

amending the preliminary note to rule 

10b-10 to clarify the application of the 

rule.132

Two other changes to rule 10b-10 are 

necessary to accommodate the addition 

of proposed rule 15c2–2. First, we 

propose to modify paragraph (a)(9) of 

rule 10b-10, which, when applicable, 

requires disclosure when a brokerdealer that effects a transaction is not a 

member of SIPC. As currently written, 

that paragraph contains an exception for 

certain transactions in open-end 

investment companies and UITs. 

Because proposed rule 15c2–2 would 

encompass transactions in those 

securities, we propose eliminating that 

exception from rule 10b-10.133

Second, we propose to modify the 

periodic reporting alternative permitted 

by paragraph (b) of rule 10b-10. That 

alternative applies to transactions 

effected pursuant to a ‘‘periodic plan’’

or ‘‘investment company plan,’’ or to 

transactions in no-load money market 

funds. Because the latter two categories 

would be encompassed within the 

periodic alternative of rule 15c2–2, we 

propose deleting them from the scope of 

the periodic alternative of rule 10b-10. 

Because the term will no longer be used 

in the rule, we also propose removing 

the definition of ‘‘investment company 

plan’’ from rule 10b-10. 

Finally, we propose to modify the 

preliminary note of rule 10b-10 to be 

consistent with the preliminary note of 

proposed rule 15c2–2. As explained 

above, this would reflect the fact that 

the confirmation disclosure 

requirements are not determinative of, 

and do not exhaust, a broker-dealer’s 

disclosure obligations under the 

antifraud provisions of the federal 

securities laws or under any other legal 

requirements. 

V. Point of Sale Disclosure for 

Transactions in Mutual Fund Shares, 

Unit Investment Trust Interests and 529 

Plan Interests 

In addition to the tailored 

confirmation requirements of rule 15c2–

2, the Commission is also proposing 

rule 15c2–3, which would require 

brokers, dealers and municipal 

securities dealers to provide customers 

with specified information at the point 

of sale—prior to the time they purchase 

mutual fund shares, UIT interests and 

529 plan securities. Investors, therefore, 

would have this information before they 

finalize their investment decision to 

purchase a covered security, regardless 

of whether the transaction is solicited or 

unsolicited. The proposed rule would 

not apply to transactions in which an 

investor sells a covered security, 

because those transactions do not raise 

the same special cost and conflict 

concerns. 

The new rule is designed to be 

consistent with the existing obligations 

of brokers, dealers and municipal 

securities dealers under the antifraud 

provisions of the securities laws, which 

at times require a broker, dealer or 

municipal securities dealer to disclose 

information about particular costs and 

conflicts prior to effecting a transaction 

in a covered security.134 It is also 

6458 Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 

revenue sharing and portfolio brokerage 

arrangements, and about the cost differences 

between various mutual fund share classes. See 

generally In the Matter of Morgan Stanley DW Inc., 

supra note 20.

135As noted above, the confirmation also serves 

as a record of previous transactions that customers 

can assess in determining whether to make further 

investments with the same broker-dealer in the 

same mutual fund or similar type of security. 

Confirmation disclosure can be particularly 

valuable with respect to transactions in mutual 

fund shares and municipal fund securities, given 

that customers often invest in those securities 

through a regular course of purchases. Moreover, 

brokers, dealers and municipal securities dealers 

may supplement the disclosures required by 

proposed rule 15c2–2 by providing their customers 

with additional information about costs and 

conflicts, using media such as the Internet.

136Other than in connection with transactions in 

‘‘penny stocks,’’ the rules we have promulgated 

under the Exchange Act generally do not 

specifically require a broker, dealer or municipal 

securities dealer to disclose particular information 

prior to transactions. See Exchange Act rules 15g–

2 to 15g–5. As discussed above, however, the 

antifraud provisions of the federal securities laws 

may mandate certain disclosures prior to 

transactions.

137Those may include brokers, dealers or 

municipal securities dealers that market covered 

security investments in the workplace of potential 

investors.

intended to supplement the prudent 

business ethic of firms that assure their 

customers will be apprised of key facts 

prior to sales, to avoid surprises and 

broken trades. Point of sale disclosure 

should also complement confirmation 

disclosure, which provides a 

retrospective record of the complete 

terms of a transaction for customers to 

assess in determining whether the 

transaction occurred as described and 

whether they received any applicable 

breakpoint discounts.135 A broker, 

dealer or municipal securities dealer 

that misstates information in a point of 

sale disclosure with an intent to mislead 

may be subject to liability under the 

antifraud provisions of section 10(b) and 

rule 10b-5.

The preliminary note to proposed rule 

15c2–3, consistent with the preliminary 

note to proposed rule 15c2–2 and the 

proposed amendment to the preliminary 

note of rule 10b-10, would state that the 

point of sale disclosure requirements are 

not determinative of, and do not 

exhaust, a broker’s, dealer’s or 

municipal securities dealer’s disclosure 

obligations under the antifraud 

provisions of the federal securities laws 

or under any other legal requirements. 

Paragraph (a) of proposed rule 15c2–

3 would provide that it is unlawful for 

any broker, dealer or municipal 

securities dealer to effect a purchase of 

any covered security for a customer 

unless the broker, dealer or municipal 

securities dealer delivers to the 

customer, at the point of sale, quantified 

information regarding distributionrelated costs and the dealer concession 

that would be connected with the 

purchase, along with qualitative 

information about revenue sharing, 

portfolio brokerage commissions and 

differential compensation.

A. Securities Transactions and Persons 

Covered 

The point of sale disclosure 

requirements of proposed rule 15c2–3 

would govern purchase transactions in 

the same securities that are subject to 

the confirmation requirements of 

proposed rule 15c2–2, because those are 

the securities that raise the cost and 

conflict issues that warrant this type of 

disclosure requirement. Accordingly, 

the disclosure requirements of proposed 

rule 15c2–3 would apply to transactions 

in ‘‘covered securities.’’ Paragraph (f)(2) 

of proposed rule 15c2–3 provides that 

the term ‘‘covered security’’ has the 

meaning set forth in rule 15c2–2. 

• We request comment on whether 

this proposed rule appropriately 

encompasses the types of securities that 

raise distribution-related concerns that 

warrant point of sale disclosure. 

Commenters specifically are invited to 

address whether this type of disclosure 

requirement could have the effect of 

directing investors away from mutual 

funds and related securities.136

• We also request comment about 

whether persons other than brokers, 

dealers or municipal securities dealers 

also should be required disclose 

information to investors prior to 

transactions in covered securities. 

Commenters are invited to discuss 

whether other persons that participate 

in the distribution of covered 

securities—such as banks—are subject 

to the same or similar conflicts of 

interest as brokers, dealers and 

municipal securities dealers. 

Commenters also are invited to discuss 

whether the Commission should 

propose rules to require those other 

persons to disclose specific information 

to investors prior to transactions, or to 

disclose confirmation information on or 

before the completion of such 

transactions. 

• Commenters may also wish to 

discuss whether the point of sale 

disclosure requirements of proposed 

rule 15c2–3 would be appropriate to 

transactions in variable annuities. 

Commenters are invited to discuss any 

issues they believe would be relevant to 

the application of proposed rule 15c2–

3 to variable insurance products, as well 

as any modifications they believe could 

improve the proposed rule’s 

effectiveness as applied to variable 

insurance products. Specifically, 

commenters may wish to address 

whether point of sale disclosure would 

provide investors with more useful 

information for transactions in variable 

insurance products. In addition, we 

invite comment on whether point of sale 

disclosure is appropriate at or prior to 

the time the contract or policy is entered 

into or at the time the underlying funds 

are allocated. Commenters should 

address whether such point of sale 

disclosure is appropriate under the 

federal securities laws. 

B. Timing of Disclosure 

Proposed rule 15c2–3 would require 

the broker, dealer or municipal 

securities dealer to deliver information 

at the point of sale. Proposed paragraph 

(f)(1) of the rule would define ‘‘point of 

sale’’ differently depending on the 

relationship between the broker, dealer 

or municipal securities dealer and the 

customers that it solicits. Generally, the 

time of the point of sale would be 

immediately prior to the time that the 

broker, dealer or municipal securities 

dealer accepts the order from the 

customer. In the case of transactions in 

which the customer has not opened an 

account with the broker, dealer or 

municipal securities dealer, or in which 

the broker, dealer or municipal 

securities dealer does not accept the 

order from the customer—such as may 

be the case with workplace marketing of 

529 plans—the point of sale would be 

the time that the broker, dealer or 

municipal securities dealer first 

communicates with the customer about 

the covered security, specifically or in 

conjunction with other potential 

investments. 

This definition of point of sale is 

geared to be as simple as possible while 

avoiding disclosure gaps. For most 

transactions, the time of disclosure is 

based on the time that the broker, dealer 

or municipal securities dealer receives 

the order from the customer—a standard 

that should allow customers to consider 

material information when they make 

their investment decisions. That 

standard would not work, however, in 

the case of brokers, dealers or municipal 

securities dealers that solicit 

transactions in covered securities—and 

receive compensation in connection 

with those transactions—without 

opening accounts for or handling orders 

from the investors who make those 

purchases.137 Because the investors 

solicited by those firms instead would 

contact another broker, dealer or 

municipal securities dealer or the issuer 

to complete those transactions, it would 

not be feasible to trigger the disclosure 

obligations of those soliciting brokers, 

Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 6459

138 In fact, the broker, dealer or municipal 

securities dealer may not even know the identities 

of the persons whom it solicits until after the 

investment is made and it is paid for helping make 

the sale.

139See supra text accompanying note 51.

140As noted above, NASD rule 2830(k)(1) bars 

member firms from favoring funds on the basis of 

brokerage commissions received or expected, and 

NASD rule 2830(k)(4) restricts member firms from 

disseminating information about its receipt of 

commissions from fund complexes other than to 

certain management personnel. See supra note 94. 

In proposing required disclosure of portfolio 

brokerage commission arrangements, we do not 

intend to provide any comfort for relationships or 

activities that are precluded by existing rules.

dealers or municipal securities dealers 

on the time that an order is accepted.138

Those soliciting firms therefore would 

disclose the required information at the 

time they recommend the security or 

otherwise discuss the investment.

• We request comment on the point 

of sale definition, and more generally on 

the question of when, prior to 

transactions, should disclosure be 

provided to customers. Commenters 

specifically are invited to address 

whether alternative times of disclosure 

would be more effective. In their 

responses, commenters may wish to 

discuss alternatives such as at the time 

of account opening or shortly thereafter, 

at the time a broker, dealer or municipal 

securities dealer solicits a transaction, 

on a periodic or annual basis, or at 

certain other times. Commenters also 

may wish to address whether early 

disclosure that is not specific to a 

particular contemplated transaction 

would be an adequate substitute for 

disclosure later in time (but prior to the 

transaction) that does contain 

information that is specific to the 

transaction being contemplated. 

• In addition, commenters are invited 

to discuss how to harmonize point of 

sale disclosure requirements with 

NASD’s proposal to require member 

firms to disclose information about 

revenue sharing and differential 

compensation.139 Commenters further 

are invited to discuss whether the 

proposed point of sale disclosure 

requirement would impact the need for 

the transaction confirmation 

requirements we propose in rule 15c2–

2. For example, would the transaction 

confirmation disclosures we propose be 

less necessary if the point of sale 

disclosure requirements of proposed 

rule 15c2–3 were combined with 

additional periodic disclosures that 

inform customers about distributionrelated costs and conflicts of interest, 

such as quarterly account statements 

from the broker, dealer or municipal 

securities dealer? Commenters are 

invited to provide empirical information 

to support their views.

• In addition, the Commission 

requests comment on whether a 

transitional period is necessary to make 

adjustments necessary to deliver 

confirmations that comply with 

proposed rule 15c2–3. 

C. Information Requirements 

Proposed paragraph (a) would require 

a broker, dealer or municipal securities 

dealer to deliver quantitative 

information about distribution-related 

costs that the investor may bear and the 

dealer concession that the broker, dealer 

or municipal securities dealer may 

expect to receive in connection with the 

transaction, combined with qualitative 

information about practices that lead to 

conflicts of interest in connection with 

the transaction. This proposed scope of 

information is intended to give investors 

useful context for evaluating whether to 

proceed with a possible investment, 

while accommodating practicalities of 

disclosure. 

Proposed paragraph (a)(1) specifically 

would require the broker, dealer or 

municipal securities dealer to inform its 

customer about the distribution-related 

costs that the customer would be 

expected to incur in connection with 

the transaction, with separate disclosure 

about: the amount of sales loads that 

would be incurred at the time of 

purchase; estimated asset-based sales 

charges and asset-based service fees 

paid out of fund assets in the year 

following the purchase if net asset value 

remained unchanged; and the maximum 

amount of any deferred sales load that 

would be associated with the purchase 

if those shares are sold within one year 

(other than deferred sales loads of no 

more than one percent that expire no 

later than one year after purchase, when 

no other sales load would be incurred 

on that transaction), along with a 

statement about how many years a 

deferred sales load may be in effect. 

Proposed paragraph (a)(1) also would 

require the broker, dealer or municipal 

securities dealer to disclose the dealer 

concession or other sales fees it would 

expect to receive in connection with the 

transaction. Those amounts would be 

disclosed by reference to the value of 

the purchase, or, if that value is not 

reasonably estimable at the time of the 

disclosure, by reference to a model 

investment of $10,000. 

Proposed paragraphs (a)(2)(i) and 

(a)(2)(ii) would require the broker, 

dealer or municipal securities dealer to 

state whether it receives revenue 

sharing or portfolio brokerage 

commissions from the fund complex. 

Proposed paragraph (a)(2)(iii) would 

require the broker, dealer or municipal 

securities dealer to state whether it pays 

differential compensation in connection 

with transactions in the covered 

security, if the covered security charges 

a deferred sales load or is a proprietary 

covered security. 

The definitions of the terms ‘‘assetbased sales charge,’’ ‘‘asset-based 

service fee,’’ ‘‘dealer concession,’’

‘‘differential compensation,’’ ‘‘portfolio 

securities transaction,’’ ‘‘revenue 

sharing’’ and ‘‘sales load’’ would be the 

same as the definitions used in 

proposed rule 15c2–2. Proposed 

paragraph (f)(2) of rule 15c2–3 would 

cross-reference those definitions. 

Like the confirmation provisions of 

proposed rule 15c2–2, the point of sale 

provisions of proposed rule 15c2–3 are 

not intended to preempt or negate any 

other provisions of law that may 

apply.140

• The Commission requests comment 

about the form and specificity of the 

information that should be disclosed at 

the point of sale. Commenters 

specifically are invited to discuss 

whether information about costs and 

information about conflicts both are 

appropriate elements of point of sale 

disclosure. Commenters may also wish 

to discuss whether the proposed 

combination of qualitative and 

quantitative disclosure is appropriate, 

and whether the choice of quantitative 

or qualitative disclosure is appropriate 

in each instance. In that regard, should 

all of the disclosures be qualitative? 

Alternatively, should all of the 

disclosures be quantitative? 

• Commenters also are invited to 

address whether this proposed rule 

should encompass additional categories 

of information, and whether the cost of 

providing certain types of information is 

justified by the benefits to investors. 

Commenters further are invited to 

address whether, if applicable, the 

broker, dealer or municipal securities 

dealer should be required to identify the 

type of differential compensation (e.g.,

related to sales of proprietary securities, 

or related to sales of securities without 

a front-end load) it pays in connection 

with transactions in the covered 

security. Commenters further are invited 

to address whether a broker, dealer or 

municipal securities dealer should be 

required, at the point of sale, to deliver 

the same information that is required be 

disclosed in a transaction confirmation 

under proposed rule 15c2–2. 

• In addition, commenters are invited 

to address whether disclosure related to 

breakpoint discounts would be 

6460 Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 

141When we recently proposed rules to require 

open-end management investment companies to 

disclose enhanced information about breakpoint 

discounts, we pointed out that a ‘‘broker-dealer who 

sells fund shares to retail customers must disclose 

breakpoint information to its customers and must 

have procedures reasonably designed to ascertain 

information necessary to determine the availability 

and appropriate level of breakpoints.’’ See

Securities Act Release No. 8349 (December 17, 

2003), 68 FR 74732 (December 24, 2003). 

Moreover, the joint NASD/industry task force on 

breakpoints recommended that broker-dealers 

provide disclosure statements to investors at the 

time of or prior to the confirmation of the initial 

purchase of front-end load fund shares, and 

thereafter on a periodic basis or at the time of or 

prior to the confirmation of subsequent purchases. 

See Task Force Report, supra note 42 at 14–15.

142For instance, broker-dealer recommendations 

related to investment switching would be subject to 

NASD rule 2310, regarding suitability. 

NASD Notice to Members 99–35 (May 1999), 

which discussed the responsibility of members 

related to sales of variable annuities, noted that 

member firms may develop an analysis document 

or use a state-authorized form in connection with 

the replacement of variable annuities. If the firm 

uses that type of document, then it ‘‘should include 

an explanation of the benefits of replacing one 

contract for another variable contract,’’ and the 

document should be signed by the customer, the 

registered representative and the registered 

principal. We note, of course, that any practice that 

provides information about the ‘‘benefits’’ of 

switching, without discussing the costs of 

switching, may be inconsistent with the antifraud 

provisions of the federal securities laws.

143For example, brokers, dealers and municipal 

securities dealers may limit their exposure to losses 

resulting from violations of the rule by maintaining 

records demonstrating that the customer received 

the disclosure information.

144The use of electronic media to deliver the 

required disclosure is subject to applicable legal 

requirements.

145 If the customer were to conclude the purchase, 

then this supplementary disclosure may arrive at 

roughly the same time as the confirmation.

warranted as part of point of sale 

disclosure. In that regard, we note that 

broker-dealers already are required to 

provide information about breakpoint 

discounts to customers.141

• Commenters moreover are invited 

to discuss whether additional point of 

sale disclosures are appropriate when a 

broker, dealer or municipal securities 

dealer recommends that an investor sell 

a covered security that the investor 

currently owns, and invest in or ‘‘switch 

to’’ a different covered security. At 

times, a broker, dealer or municipal 

securities dealer may recommend 

switching of securities even if the 

investor would incur extra fees to make 

the switch, or even if the investor has 

already incurred a front-end sales load 

on the covered security he or she 

currently owns. While this is a complex 

issue that is addressed by other rules 

including the antifraud provisions of the 

federal securities laws and selfregulatory organization sales practice 

rules and related guidance,142 we seek 

comment on the extent to which 

additional specific confirmation or 

point of sale disclosure should be 

required, and possible disclosure 

alternatives.

D. Customers’ Right To Terminate 

Orders Made Prior to Disclosure 

Proposed paragraph (b) of rule 15c2–

3 would provide that an order made 

prior to the disclosure required by 

paragraph (a) must be treated as an 

indication of interest until after the 

point of sale information is disclosed, 

and customers have received an 

opportunity to terminate any order 

following disclosure of the information. 

It further would provide that the broker, 

dealer or municipal securities dealer 

shall disclose this right to the customer 

at the time it discloses the information 

required under the paragraph to the 

customer. This provision is intended to 

enable customers to consider material 

information prior to a transaction being 

finalized. Based on the information, 

customers may conclude that it would 

be prudent to explore alternative 

investments, such as investments that 

carry lower distribution-related costs. In 

that case, the customer may determine 

not to make the order effective. 

Because disclosure of information is 

necessary for orders to be effective, we 

expect that brokers, dealers and 

municipal securities dealers would 

engage in careful procedures to ensure 

that only effective orders are conveyed 

to the issuer, and would be required to 

keep appropriate records demonstrating 

compliance with the rule, as discussed 

below.143

• We request comment on this 

proposed provision. Commenters 

specifically are invited to address how 

customers may terminate orders made 

prior to receiving point of sale 

disclosure, and whether the rule should 

specify how customers may terminate 

orders. 

E. Manner of Disclosure 

Proposed paragraph (c) generally 

would require the broker, dealer or 

municipal securities dealer to give or 

send the information to the customer in 

writing using Schedule 15D, 

supplemented by oral disclosure if the 

point of sale occurs at an in-person 

meeting. If the point of sale occurs 

through means of an oral 

communication other than at an inperson meeting, however, then the 

information shall be disclosed to the 

customer orally at the point of sale. 

Attachments 4 and 5 to this proposal 

set forth examples of point of sale 

disclosure that are consistent with 

Schedule 15D. Like Schedule 15C for 

confirmation disclosure, Schedule 15D 

provides the format for the required 

disclosure accompanied by materials 

that will help permit the customer to 

evaluate the significance of the 

disclosure information. 

Those requirements are geared to 

promote effective disclosure while 

accommodating practicality. For 

example, if the broker, dealer or 

municipal securities dealer took the 

customer’s order over the telephone, 

then oral disclosure over the telephone 

would be required. If the broker, dealer 

or municipal securities dealer took the 

customer’s order over the Internet, then 

the Internet could be used to provide 

the required disclosure.144 If the broker, 

dealer or municipal securities dealer 

solicited the transaction in a seminar or 

meeting, then the firm would have to 

provide the disclosure orally and in 

writing. A written disclosure document 

that provides information consistent 

with the confirmation disclosure 

requirement of rule 15c2–2 generally 

also would satisfy this requirement.

• We request comment on these 

proposed requirements about the 

manner of disclosure. Commenters 

particularly are invited to discuss 

whether customers should have the 

right to receive this information in 

writing as a supplement to oral 

disclosure, when the rule otherwise 

would only require oral disclosure.145

• Commenters also are invited to 

discuss whether Schedule 15D is an 

appropriate form for written disclosures, 

and whether the explanatory 

information accompanying Schedule 

15D is appropriate. 

• Commenters further may wish to 

discuss whether the rule should require 

the broker, dealer or municipal 

securities dealer to obtain from the 

customer a signed acknowledgement of 

having received point of sale disclosure, 

and, if so, what would be the 

appropriate exceptions to that 

requirement. Commenters also should 

discuss appropriate practices or 

safeguards that may be necessary to 

prevent brokers, dealers, or municipal 

securities dealers from delivering point 

of sale disclosure in a manner that 

undermines its purpose. 

F. Recordkeeping 

Proposed paragraph (d) of rule 15c2–

3 would require brokers, dealers or 

municipal securities dealers, at the time 

they disclose information required by 

this rule, to make records of 

communications and their disclosure 

sufficient to demonstrate compliance 

with the delivery requirements of 

paragraphs (a) and (b). The brokers, 

dealers or municipal securities dealers 

Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 6461

146Broker-dealers are required to maintain copies 

of outgoing communications relating to their 

business for a period of not less than three years, 

the first two years in an easily accessible place. See

rule 17a–4(b)(4).

147As discussed above with respect to the 

definition of point of sale, brokers, dealers or 

municipal securities dealers that may be paid for 

effecting transactions without having to open 

accounts with those customers would have to 

provide disclosure at the time they recommend or 

discuss the investment, regardless of how the 

investor ultimately transmits the order.

148The rules of the NASD and the NYSE require 

clearing and carrying agreements to specify the 

responsibilities of each party with respect to a 

number of matters, including confirmations and 

statements, as well as maintenance of books and 

records. See NASD rule 3230, NYSE rule 382. 

Agreements that specify the responsibilities of 

parties with respect to point of sale disclosure, and 

associated recordkeeping, may form the basis for a 

reasonable belief. 

A fund’s primary distributor may enter into 

arrangements with other brokers, dealers or 

municipal securities dealers to sell interests in the 

fund. That primary distributor may demonstrate the 

requisite reasonable belief if its selling agreement 

with those other firms provides that the selling 

brokers, dealers or municipal securities dealers will 

deliver point of sale information, and if the primary 

distributor audits the compliance of those other 

firms.

would have to preserve those records 

and for the period specified in Exchange 

Act rule 17a–4(b), or, in the case of 

records of oral communications and 

their disclosures, in accordance with 

Rule 17a–4(f) and for the period 

specified in Exchange Act rule 17a–4(b) 

with regard to similar written 

communications and records. 

Often maintaining a copy of the 

disclosure document that was provided 

to the customer can satisfy this 

requirement. In the case of disclosure 

solely by means of oral 

communications, this provision would 

require the broker, dealer or municipal 

securities dealer to have compliance 

procedures in place that are adequate to 

demonstrate that it provided the 

required disclosure.146

• We request comment on this 

recordkeeping requirement. 

Commenters are invited to discuss 

whether, in the case of information that 

only is delivered orally, the rule should 

require electronic copies. Commenters 

also are invited to address, in the case 

of oral disclosures, what records or 

procedures would be necessary to 

demonstrate compliance with the rule. 

Also, should the recordkeeping 

provisions of proposed rule 15c2–3(d) 

instead be included in rules 17a–3 and 

17a–4, the Commission’s books and 

records rules? 

G. Exceptions 

Proposed paragraph (e) of rule 15c2–

3 would except several types of 

transactions from the rule’s scope. First, 

proposed paragraph (e)(1) would 

conditionally except transactions 

resulting from orders that a customer 

placed via U.S. mail, messenger delivery 

or a similar third-party delivery service. 

Proposed paragraph (e)(1)(i) would 

provide that the exception is available 

only to brokers, dealers or municipal 

securities dealers that meet the 

requirements of proposed paragraph 

(e)(1)(ii), discussed below, and that the 

broker, dealer or municipal securities 

dealer must have, within the prior six 

months, provided the customer with 

information about the maximum 

potential size of sales loads and assetbased sales charges and service fees 

associated with covered securities sold 

by that broker, dealer or municipal 

securities dealer, as well as statements 

about whether the broker, dealer or 

municipal securities dealer receives 

revenue sharing or portfolio brokerage 

commissions or pays differential 

compensation. Proposed paragraph 

(e)(1)(ii) of the rule would further 

specify that the exception in paragraph 

(e)(1) is available only to brokers, 

dealers or municipal securities dealers 

that are not compensated for effecting 

transactions for customers that do not 

have accounts with that broker, dealer 

or municipal securities dealer.147 This 

proposed exception is intended to 

promote disclosure while avoiding the 

need to delay the execution of orders 

received via mail or similar services, 

given that it may not be possible to 

quickly locate those customers, let alone 

provide disclosure.

• We request comment on this 

proposed exception, and particularly if 

the scope of the exception is 

appropriate. 

Proposed paragraph (e)(2) of rule 

15c2–3 would except a clearing broker, 

dealer or municipal securities dealer, or 

a fund’s primary distributor, from 

having to disclose information under 

the rule if the clearing firm or the 

primary distributor did not 

communicate with the customer about 

the transaction other than to accept the 

customer’s order, and if that clearing or 

distributing firm reasonably believed 

that another broker, dealer or municipal 

securities dealer (such as an introducing 

firm or a selling firm) has delivered the 

information to the customer required by 

rule 15c2–3. The clearing or distributing 

firm could demonstrate this ‘‘reasonable 

belief’’ if it has entered into an 

agreement providing for the other 

broker, dealer or municipal securities 

dealer to make the required point of sale 

disclosures, supplemented with 

appropriate auditing practices.148 This 

proposed exception in paragraph (a)(2) 

is intended to preclude imposing 

unnecessary burdens on clearing firms 

and on primary distributors that do not 

solicit transactions, when the investor 

can be expected to receive the required 

disclosure from another broker, dealer 

or municipal securities dealer.

• We request comment on whether 

this proposed exception avoids 

unnecessary duplication of disclosure 

and whether it is tailored appropriately. 

Commenters specifically are invited to 

discuss, based on their experiences, 

what types of agreements, certification 

or verification would be appropriate for 

establishing a ‘‘reasonable belief.’’

Proposed paragraphs (e)(3) through 

(e)(5) of rule 15c2–3 would provide 

additional targeted exceptions. 

Proposed paragraph (e)(3) would 

provide an exception for transactions 

effected as part of a covered securities 

plan, as defined under proposed rule 

15c2–2, so long as the broker, dealer or 

municipal securities dealer provides 

disclosure consistent with proposed 

rule 15c2–3 prior to the first purchase 

of any covered security as part of the 

plan. Proposed paragraph (e)(4) would 

provide an exception for reinvestments 

of dividends earned. Proposed 

paragraph (e)(5) would provide an 

exception for transactions in which the 

broker, dealer or municipal securities 

dealer exercises investment discretion. 

Paragraph (f)(2) of proposed rule 15c2–

3 provides that the term ‘‘covered 

securities plan’’ has the meaning set 

forth in proposed rule 15c2–2. We 

believe that transactions that would be 

excluded by these three proposed 

exceptions do not link the customer’s 

investment decision to the customer’s 

communications with the broker, dealer 

or municipal securities dealer in a way 

that establishes a compelling need for 

point of sale disclosure. 

• We request comment on those 

proposed exceptions. Commenters are 

also invited to discuss whether 

additional exceptions may be 

appropriate. Commenters particularly 

are invited to discuss whether the 

proposed rule should have an exception 

for institutional orders and, if so, what 

the appropriate scope of such an 

exception would be. 

H. Definitions 

As noted above, proposed paragraph 

(f)(1) of rule 15c2–3 would define the 

term ‘‘point of sale.’’ Proposed 

paragraph (f)(2) would define the terms 

‘‘asset-based sales charges,’’ ‘‘assetbased service fee,’’ ‘‘covered securities 

plan,’’ ‘‘covered security,’’ ‘‘dealer 

concession,’’ ‘‘differential 

compensation,’’ ‘‘fund complex,’’

‘‘portfolio securities transaction,’’

‘‘revenue sharing’’ and ‘‘sales load’’ by 

6462 Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 

149 Item 3 of Form N–1A.

150 Item 8(a)(1) of Form N–1A.

151Proposed Item 3 of Form N–1A (fee table 

caption).

152Proposed Instruction 2(a)(i) to Item 3 of Form 

N–1A.

153Proposed Instruction 2(a)(ii) to Item 3 of Form 

N–1A.

154As described below, there are differences 

attributable to rounding between sales loads as a 

percentage of net and gross amount invested, on the 

one hand, and sales loads as a percentage of net 

asset value and offering price, on the other. Because 

prospectus disclosure does not relate to a particular 

amount invested, it must be based on net asset 

value or offering price rather than net amount 

invested or gross amount invested.

155For example, if the net asset value per share 

is $1.98 and the applicable sales load is 4.25% of 

the offering price, the offering price would be 

calculated as follows: $1.98/(1.00 – 0.0425), which 

equals $2.07 when rounded to two decimal places. 

The number of shares purchased is determined by 

dividing the gross amount invested by this offering 

price. Thus, if the gross amount invested is $30,000, 

the number of shares purchased is 14,492.754 

(rounded to three decimal places) ($30,000/$2.07). 

The net amount invested would be the number of 

shares purchased, multiplied by the net asset value 

per share, or $28,695.65 (14,492.754 × $1.98), and 

the remaining $1,304.35 would be deducted as a 

sales load. This $1,304.35 is equivalent to 4.35% of 

the gross amount invested of $30,000, rather than 

the 4.25% sales load shown as a percentage of 

offering price. 

As a second example, if the net asset value per 

share is $7.78 and the applicable sales load is 

5.75% of the offering price, the offering price would 

be calculated as follows: $7.78/(1.00 – 0.0575), 

which equals $8.25 when rounded to two decimal 

places. If the gross amount invested is $30,000, the 

number of shares purchased is 3,636.364 (rounded 

to three decimal places) ($30,000/$8.25). The net 

amount invested would be the number of shares 

purchased, multiplied by the net asset value per 

share, or $28,290.91 (3,636.364 × $7.78), and the 

remaining $1,709.09 would be deducted as a sales 

load. This $1,709.09 is equivalent to 5.70% of the 

gross amount invested of $30,000, rather than the 

5.75% sales load shown as a percentage of offering 

price.

156Proposed Instruction 2(a)(iv) to Item 3 of Form 

N–1A. For example, if the maximum front-end sales 

load shown as a percentage of net asset value is 

6.10%, but the maximum front-end sales load that 

may be paid by an investor may range between 

6.00% and 6.20% of the net amount invested, the 

fund would be required to disclose the maximum 

6.20% figure in the footnote.

157Proposed Instruction 4 to Item 8(a)(1) of Form 

N–1A.

158For example, if the front-end sales load is 

6.10% of net asset value and 5.80% of offering 

price, but the front-end sales load that may be paid 

by an investor may range between 6.00% and 

6.20% of the net amount invested and 5 .70% and 

5.90% of the gross amount invested, the fund 

would be required to disclose these sales load 

ranges of 6.00%–6.20% of net amount invested and 

5.70%–5.90% of gross amount invested.

referring to the definition of those terms 

in proposed rule 15c2–2. Paragraph 

(f)(2) also would define the term 

‘‘customer’’ by reference to the 

definition in proposed rule 15c2–2. 

VI. Prospectus Disclosure 

The Commission is proposing to 

amend Form N–1A in order to enhance 

disclosure of sales loads. Currently, a 

fund is required to disclose the 

maximum sales loads as a percentage of 

offering price in the fee table that is 

located in the front of the prospectus.149

In addition, elsewhere in the 

prospectus, a fund is required to include 

a table of front-end sales loads at each 

breakpoint, shown as a percentage of 

both the offering price and the net 

amount invested.150

The Commission is proposing to 

amend the fee table to require the 

maximum front-end sales load to be 

shown as a percentage of net asset value 

rather than as a percentage of offering 

price.151 The proposed amendment 

would make disclosure of front-end 

sales loads in the prospectus fee table 

consistent with that in the confirmation 

that would be required by proposed rule 

15c2–2. For consistency, the proposed 

amendments would also remove the 

current requirement that a deferred sales 

load based on net asset value at the time 

of purchase be shown in the fee table as 

a percentage of offering price at the time 

of purchase. Instead, the proposed 

amendments would require that a 

deferred sales load based on offering 

price at the time of purchase be shown 

in the fee table as a percentage of net 

asset value at the time of purchase.152

Similarly, we are proposing to revise the 

instructions to the fee table to clarify 

that if a fund imposes more than one 

type of sales load (e.g., a deferred sales 

load and a front-end sales load), the 

aggregate load should be shown in the 

fee table as a percentage of net asset 

value.153

We believe that disclosure of sales 

loads as a percentage of net asset value 

rather than offering price would better 

help investors to understand the true 

costs of investing in a load fund. This 

method would present sales loads as a 

percentage of the net amount invested 

in the fund, rather than a percentage of 

the sum of the net amount invested in 

the fund plus the load. For example, if 

an investor started with $10,000 and 

paid a 5% front-end load on the gross 

amount, the load would be $500. The 

net amount invested would be $9,500 

($10,000–$500), and the load as a 

percentage of the net amount invested 

would be 5.26% ($500/$9,500 x 100%). 

The fee table currently requires the load 

to be disclosed as 5%. Our proposed 

amendment would require the load to 

be disclosed as 5.26%.154

The Commission is also proposing to 

amend Form N–1A to require disclosure 

in the fund prospectus that would alert 

investors to the fact that sales loads 

shown in the prospectus as a percentage 

of the net asset value or offering price 

may be higher or lower than the actual 

sales load that an investor would pay as 

a percentage of the net or gross amount 

invested. This difference is a result of 

rounding.155

Specifically, we are proposing to 

require a fund to disclose in a footnote 

to the fee table, if applicable, that the 

actual maximum sales load that may be 

paid by an investor as a percentage of 

the net amount invested may be higher 

than the maximum sales load shown as 

a percentage of net asset value in the fee 

table. The footnote would be required to 

explain briefly the reason for this 

variation and disclose the maximum 

sales load as a percentage of the net 

amount invested.156 The footnote 

requirement would apply to front-end 

and back-end sales loads, as well as 

cumulative sales loads where more than 

one type of sales load is imposed.

We are also proposing to require 

similar footnote disclosure with respect 

to the table of front-end sales loads that 

is required elsewhere in the 

prospectus.157 Our proposal would 

require a fund to disclose in a footnote 

to the table of front-end sales loads, if 

applicable, that the actual front-end 

sales load that may be paid by an 

investor as a percentage of the gross or 

net amount invested at any breakpoint 

may be higher or lower than the 

applicable load in the table of front-end 

sales loads. The footnote also would be 

required to explain briefly the reason for 

this variation and to disclose the range 

of the actual front-end sales loads at 

each sales load breakpoint as a 

percentage of the gross and net amount 

invested.158

• The Commission requests comment 

on the proposed amendments to the fee 

table and front-end sales load table of 

Form N–1A. In particular, the 

Commission requests comment on the 

proposed requirement that the fee table 

of the prospectus disclose the sales 

loads as a percentage of net asset value 

rather than offering price. Commenters 

are specifically invited to comment on 

whether continuing to require 

disclosure of sales loads in the fee table 

as a percentage of offering price may 

confuse investors if the confirmation 

that would be required by proposed rule 

15c2–2 requires sales loads to be shown 

as a percentage of net amount invested. 

Which presentation better reflects costs 

to investors? Which presentation is 

easier for investors to use and 

understand? 

• Commenters are also invited to 

comment on whether the proposed 

disclosure alerting investors to the fact 

that, as a result of rounding, sales loads 

shown in the prospectus as a percentage 

of the offering price or net asset value 

Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 6463

159Proposed Item 8(c) of Form N–1A.

160 17 CFR 239.17a and 274.11b. Form N–3 is 

used by all insurance company separate accounts 

offering variable annuity contracts that are 

registered under the Investment Company Act as 

management investment companies.

161 17 CFR 239.17b and 274.11c. Form N–4 is 

used by all insurance company separate accounts 

offering variable annuity contracts that are 

registered under the Investment Company Act as 

unit investment trusts.

162 17 CFR 239.17c and 274.11d. Form N–6 is 

used by all insurance company separate accounts 

offering variable life insurance policies that are 

registered under the Investment Company Act as 

unit investment trusts.

may be higher or lower than the actual 

sales load that an investor would pay as 

a percentage of the gross or net amount 

invested is appropriate. Is this 

disclosure necessary for both sales loads 

disclosed as a percentage of net asset 

value and sales loads disclosed as a 

percentage of offering price? Should this 

disclosure be required with respect to 

both front-end sales loads and deferred 

sales loads? Should this disclosure be 

required in both the prospectus fee table 

and the table of front-end sales loads? 

• The Commission also requests 

comment on whether it is possible to 

quantify the variation between sales 

loads disclosed as a percentage of net 

asset value or offering price and the 

amounts that investors will pay as a 

percentage of net or gross amount 

invested, as would be required by the 

proposals. If it is possible to quantify 

this variation, should the fee table and 

the table of front-end sales loads, rather 

than a footnote, contain the sales loads 

that an investor would pay as a 

percentage of net or gross amount 

invested after rounding is taken into 

consideration? 

The Commission is also proposing to 

amend Form N–1A to require that a 

mutual fund include brief disclosure in 

its prospectus regarding revenue sharing 

payments, in order to direct investors to 

the disclosure regarding revenue sharing 

that we are proposing to require in the 

confirmation and point of sale 

disclosure. If any person within a fund 

complex makes revenue sharing 

payments, the proposed amendment 

would require a fund to disclose that 

fact in its prospectus.159 For this 

purpose, ‘‘fund complex’’ and ‘‘revenue 

sharing’’ would have the meanings set 

forth in proposed rule 15c2–2(f)(10) and 

(15). If any such revenue sharing 

payments are made, the fund would also 

be required to disclose that specific 

information about revenue sharing 

payments to an investor’s financial 

intermediary is included in the 

confirmation or periodic statement 

required under proposed rule 15c2–2 

and in the disclosure provided at the 

point of sale required under proposed 

rule 15c2–3.

• The Commission requests comment 

on whether this proposed requirement 

for prospectus disclosure regarding 

revenue sharing payments, including 

the reference to the confirmation and 

periodic statement required under 

proposed rule 15c2–2, and the point of 

sale disclosure required under proposed 

rule 15c2–3, would provide useful 

information to investors. 

• We also request comment on 

whether additional prospectus 

disclosure requirements regarding 

revenue sharing payments would be 

appropriate. Should we adopt similar 

prospectus disclosure requirements 

regarding portfolio securities transaction 

commissions?

• The Commission further requests 

comment on whether amendments 

parallel to those being proposed for 

Form N–1A should be made to Forms 

N–3,160 N–4,161 and N–6,162 the 

registration forms for separate accounts 

that offer variable annuity contracts and 

variable life insurance policies. In 

particular, the Commission invites 

comment on whether the prospectus fee 

tables of these registration forms should 

disclose sales loads as a percentage of 

accumulation unit value or net amount 

invested. Would such a requirement be 

appropriate for separate accounts that 

offer variable life insurance policies, 

given that significant deductions may be 

made from premium payments for these 

policies for the cost of insurance, in 

addition to deductions for sales loads?

• Commenters are also invited to 

comment on whether the actual sales 

loads paid by investors in variable 

insurance products may be higher or 

lower than the sales loads disclosed in 

the prospectuses for these products as a 

result of rounding. If so, would 

disclosure regarding the effects of 

rounding parallel to that proposed for 

mutual funds be appropriate? 

• The Commission further requests 

comment on whether the proposed 

prospectus disclosure regarding revenue 

sharing payments, including the 

reference to the confirmation and 

periodic statements required under 

proposed rule 15c2–2 and the point of 

sale disclosure required under proposed 

rule 15c2–3, would be appropriate for 

the registration forms for variable 

insurance products. Are revenue sharing 

payments to financial intermediaries 

made in connection with these 

products, other than those made in 

connection with underlying funds? 

VII. Disclosure Related to Transactions 

in Callable Preferred Stock and 

Callable Debt Securities, and Other 

Amendments to Rule 10b–10 

In addition to the amendments to rule 

10b–10 noted above, we are also 

proposing to amend rule 10b–10 in 

connection with transactions involving 

callable preferred stock and callable 

debt securities. Finally, we propose to 

amend the rule to delete an expired 

transition period related to the 

confirmation of transactions involving 

securities futures products. 

A. Proposed Amendment Related to 

Transactions in Callable Preferred Stock 

We are proposing to amend rule 10b–

10 to require broker-dealers that effect 

transactions in shares of preferred stock 

to inform customers about whether the 

issuer of the stock has reserved the right 

to repurchase—or call—the shares. 

Currently, paragraph (a)(4) of Rule 10b–

10 requires broker-dealers that effect 

transactions in callable debt securities 

to disclose the fact that the debt security 

may be subject to redemption in 

advance of maturity, and that the 

redemption may affect the yield of the 

debt security. Rule 10b–10, however, 

does not require similar disclosure for 

transactions in preferred stock that is 

callable. 

Information about whether shares of 

preferred stock are callable is material to 

investors. Investors often purchase 

shares of preferred stock for their 

dividend yield. If the preferred stock is 

callable and is repurchased by the 

issuer, then the investor may not be able 

to reinvest his or her proceeds in an 

instrument with an equivalent yield. 

This is particularly significant given 

that issuers are most likely to call 

preferred stock when interest rates are 

declining. Confirmation disclosure of 

this material information could alert an 

investor to any misunderstandings 

about the rights associated with the 

preferred stock, promote the timely 

resolution of problems, and better 

enable the investor to evaluate potential 

future transactions involving that 

security. 

Accordingly, we propose amending 

rule 10b–10 to redesignate current 

paragraph (a)(4) as ‘‘(a)(4)(A),’’ and add 

a new paragraph (a)(4)(B) that would 

require a broker-dealer that effects a 

transaction in callable preferred stock to 

disclose to the customer that the 

preferred stock may be repurchased at 

the election of the issuer and that 

additional information is available upon 

request. 

• The Commission requests comment 

about whether this proposal would 

6464 Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 

163Paragraphs (a)(5) and (a)(6) of rule 10b–10 

require yield disclosure for transactions in debt 

securities. Paragraph (a)(5) requires disclosure of 

yield to maturity for transactions in debt that are 

effected on the basis of dollar price. Paragraph (a)(6) 

requires disclosure of yield to maturity, current 

yield or yield to call for transactions in debt that 

are effected on the basis of yield.

164Exchange Act Release No. 19687 (April 18, 

1983), 48 FR 17583 (April 25, 1983).

165Consistent with the discussion above, we note 

that a broker-dealer has an obligation to disclose 

material information to investors that goes beyond 

the information that is strictly required to be 

disclosed in the confirmation. 166 44 U.S.C. 3501, et seq.

provide adequate notice to investors. 

Commenters are specifically invited to 

address whether transaction 

confirmations also should state that the 

callability of preferred stock may affect 

the yield earned on that stock. The 

Commission is particularly interested in 

learning more about current industry 

practice regarding the disclosure of the 

callable nature preferred stock and 

whether broker-dealers already disclose 

such information as a matter of prudent 

business practice on confirmations or in 

some other way highlight such 

information to their customers. 

• Moreover, commenters are invited 

to address whether transaction 

confirmations should provide additional 

disclosures about preferred stock, such 

as disclosures about annual yield, yieldto-redemption and, if callable, the fixed 

price at which the preferred stock may 

be repurchased and the date or dates 

upon which the issuer may repurchase 

the preferred stock.163

• Commenters also may wish to 

address whether confirmation 

disclosure of such information would 

serve as a useful means of informing 

customers as to the investment features 

of preferred stock. 

B. Proposed Amendment Related to 

Transactions in Callable Debt Securities 

We also are proposing to amend rule 

10b–10 to require disclosure of the first 

date on which a debt security may be 

called. Currently, paragraph (a)(6) of 

rule 10b–10 requires a broker-dealer that 

has effected a transaction in a debt 

security on the basis of yield-to-call to 

disclose, among other information, the 

type of call, the call date and the call 

price. In practice, a bond may be subject 

to call on a series of dates. As a result, 

although a confirmation may state what 

the bond’s yield-to-call would be if the 

bond is called on one of those dates, the 

confirmation may not inform a customer 

about the first possible date on which a 

bond is subject to call. We believe this 

may confuse investors who are not 

otherwise aware that a bond may be 

called on a date earlier than the one 

specified on the confirmation. The 

possibility of earlier call can subject the 

investor to additional reinvestment risk, 

because the investor likely would be left 

with worse alternatives for reinvesting 

the proceeds if the issuer calls the 

security when prevailing interest rates 

decline. 

We considered the adequacy of yieldto-call disclosure in the early 1980s, 

when we proposed and adopted 

amendments to rule 10b–10. In 

proposing the amendments, we noted 

that investors could be surprised by the 

early redemption of investments in 

long-term debt securities. We 

concluded, however, in light of the 

variety and number of call provisions, 

that ‘‘a legend advising the customer 

that he may request information from 

his broker-dealer is a sensible approach 

to this problem.’’164 Nonetheless, a 

confirmation does not provide optimal 

disclosure if it specifically identifies 

one call date, but requires an investor to 

contact the broker-dealer to find out the 

first call date.165

In our view, disclosure of the first 

date upon which a debt security may be 

called would provide customers with 

meaningful information that would help 

avoid confusion. We therefore propose 

amending rule 10b–10 to provide for 

that additional disclosure. Specifically, 

we propose to amend paragraph (a)(6)(i) 

to require a broker-dealer that effects a 

transaction in a debt security on the 

basis of yield-to-call to disclose the date 

upon which the debt security may first 

be called.

• We request comment on whether 

this proposal would provide adequate 

notice to investors, and whether 

additional information should be 

disclosed on the confirmation related to 

the impact of callability on yield. 

Commenters are requested to address to 

what extent broker-dealers currently 

disclose call information in connection 

with transactions involving debt 

securities and whether broker-dealers 

already disclose the first possible call 

date as a matter of prudent business 

practice on confirmations or in some 

other way highlight such information to 

their customers. 

C. Outdated Transitional Provisions 

Related to Security Futures Product 

Transactions 

Paragraph (e) of rule 10b–10 contains 

a conditional exception from the general 

requirements of the rule for certain 

transactions in securities futures 

products. Transitional provisions 

permitted broker-dealers to take 

advantage of that exception up to June 

1, 2003 without having to comply with 

specific conditions. Because those 

transitional provisions no longer are in 

effect, we are proposing to delete 

subparagraph (2) of paragraph (e) of rule 

10b–10, and make corresponding 

technical changes. 

VIII. Paperwork Reduction Act 

Analysis 

Certain provisions of proposed 

Exchange Act rules 15c2–2 and 15c2–3, 

the amendments to Exchange Act rule 

10b–10, and the amendments to Form 

N–1A contain ‘‘collection of 

information’’ requirements within the 

meaning of the Paperwork Reduction 

Act of 1995.166 The Commission has 

submitted them to the Office of 

Management and Budget (‘‘OMB’’) for 

review in accordance with 44 U.S.C. 

3507(d) and 5 CFR 1320.11. The 

collections of information under 

proposed rules 15c2–2 and 15c2–3 are 

new. The title for the new collection of 

information under proposed rule 15c2–

2 is ‘‘Rule 15c2–2 Confirmation of 

transactions in open-end management 

investment company shares, unit 

investment trust interests, and 

municipal fund securities used for 

education savings’’. The title for the 

new collection of information under 

proposed rule 15c2–3 is ‘‘Rule 15c2–3 

Point-of-sale disclosure for purchase 

transactions in open-end management 

investment company shares, unit 

investment trust interests, and 

municipal fund securities used for 

education savings’’. The OMB has not 

yet assigned a control number to the 

new collections of information under 

proposed rules 15c2–2 and 15c2–3. In 

addition, the Commission is revising the 

collection of information entitled ‘‘Rule 

10b–10 Confirmation of Transactions,’’

OMB Control Number 3235–0444 and 

the collection of information entitled 

‘‘Form N–1A under the Investment 

Company Act of 1940 and Securities Act 

of 1933, Registration Statement of OpenEnd Management Investment 

Companies,’’ OMB Control No. 3235–

0307. An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless it displays a currently valid 

control number.

Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 6465

167Source: MSRB Registrants List (available on 

the Internet at http://www.msrb.org/msrb1/PQweb/

Registrants.xls).

168This estimate is based on discussions with 

industry participants.

169MSRB rule G–15.

170The Commission staff understands that, 

because confirmation delivery systems already 

exist, new systems are not needed to generate the 

confirmations that would be required under 

proposed rule 15c2–2.

171Based on discussions with industry 

representatives, the Commission staff estimates that 

over 5,000 brokers, dealers and municipal securities 

dealers use vendors’ confirmation data services.

A. Rule 15c2–2 

1. Collection of Information in 

Connection With Certain Transactions 

Involving Open-End Management 

Investment Company Securities, Unit 

Investment Trust Interests, and 

Municipal Fund Securities Used for 

Education Savings 

As discussed previously in this 

release, proposed rule 15c2–2 would 

apply to transactions in mutual fund 

shares, UIT interests and 529 plan 

securities. The proposed rule would 

require brokers, dealers and municipal 

securities dealers to make certain of the 

disclosures that rule 10b–10 currently 

requires them to make. Thus, brokers, 

dealers and municipal securities dealers 

would no longer be required to comply 

with the requirements of rule 10b–10 

when effecting transactions in the 

securities covered by proposed rule 

15c2–2. Proposed rule 15c2–2 would 

require brokers, dealers and municipal 

securities dealers to disclose targeted 

information about the costs and 

conflicts of interest connected with 

those transactions. In particular, they 

would be required to disclose (a) 

information about loads and other 

distribution-related costs that directly 

impact the returns earned by investors 

in those securities; (b) information about 

compensation of brokers, dealers and 

municipal securities dealers for selling 

those securities and information about 

revenue sharing arrangements and 

portfolio brokerage arrangements that 

create conflicts of interest for them; and 

(c) information about whether their 

associated persons receive extra 

compensation for selling proprietary 

fund shares or certain fund share 

classes. Brokers, dealers and municipal 

securities dealers would provide this 

information to customers in the form of 

written confirmations.

2. Proposed Use of Information 

The purpose of proposed rule 15c2–

2 is to provide investors in mutual fund 

shares, UIT interests and 529 plan 

securities with the relevant information 

currently required by rule 10b–10, as 

well as information about certain 

distribution-related costs and certain 

distribution arrangements that create 

conflicts of interest for brokers, dealers, 

municipal securities dealers, and their 

associated persons. In addition to 

certain basic transaction information 

currently required by rule 10b–10, 

proposed rule 15c2–2 specifically 

would require confirmation disclosure 

of information about loads and other 

distribution-related costs that directly 

impact the returns earned by investors 

in those securities. It also would require 

brokers, dealers and municipal 

securities dealers to disclose their 

compensation for selling those 

securities, and to disclose information 

about revenue sharing arrangements and 

portfolio brokerage arrangements that 

create conflicts of interest for them. 

Moreover, the proposed rule would 

require brokers, dealers and municipal 

securities dealers to inform customers 

about whether their salespersons or 

other associated persons receive extra 

compensation for selling certain covered 

securities. 

The new rule’s more targeted 

informational requirements would 

provide investors in mutual fund shares, 

UIT interests and 529 plan securities 

with important information about their 

brokers’, dealers’ or municipal securities 

dealers’ conflicts of interest and about 

distribution costs that can reduce their 

investment returns. In addition, the 

Commission, the self-regulatory 

organizations, and other securities 

regulatory authorities would be able to 

use records of confirmations delivered 

pursuant to proposed rule 15c2–2 in the 

course of examinations, and 

investigations, as well as enforcement 

proceedings against brokers, dealers and 

municipal securities dealers. However, 

no governmental agency would 

regularly receive any of the information 

described above. 

3. Respondents 

By its terms, proposed rule 15c2–2 

potentially would apply to all of the 

approximately 5,338 brokers, dealers 

and municipal securities dealers that are 

registered with the Commission and that 

are members of NASD. It would also 

potentially apply to approximately 62 

additional municipal securities 

dealers.167 It is important to note, 

however, that only those brokers, 

dealers and municipal securities dealers 

that effect transactions in mutual fund 

shares, UIT interests and 529 plan 

securities would have to comply with 

the provisions of proposed rule 15c2–2. 

Although the staff believes some 

brokers, dealers and municipal 

securities dealers do not effect 

transactions in mutual fund shares, UIT 

interests or 529 plan securities, the staff 

is unable to estimate the number of such 

brokers, dealers and municipal 

securities dealers and has, therefore, 

assumed that all brokers, dealers and 

municipal securities dealers effect such 

transactions. This assumption may 

result in the paperwork burdens and 

costs of proposed rule 15c2–2 being 

overstated.

4. Reporting and Recordkeeping Burden 

The Commission staff estimates that 

there are 1 billion confirmations 

delivered annually to customers in 

connection with securities transactions 

involving mutual fund shares, UIT 

interests and 529 plan securities.168

Rule 10b–10 currently requires brokerdealers to deliver confirmations to 

customers in connection with 

transactions in mutual fund shares and 

UIT interests. In addition, brokers, 

dealers and municipal securities dealers 

are required under the rules of the 

MSRB to deliver confirmations to 

customers in connection with 

transactions involving municipal fund 

securities.169 The Commission staff does 

not anticipate that a significant number 

of new confirmations would be required 

to be generated if proposed rule 15c2–

2 is adopted. The proposed rule would, 

however, require additional information 

in confirmations that would otherwise 

be required to be delivered under 

Exchange Act rule 10b–10 and MSRB 

rule G–15.

The Commission staff estimates that 

brokers, dealers and municipal 

securities dealers would have a onetime burden associated with 

reprogramming software and otherwise 

updating systems in order to enable 

confirmation delivery systems to 

generate the information required under 

proposed rule 15c2–2.170 We 

understand that some brokers, dealers 

and municipal securities dealers have 

developed their own proprietary 

confirmation delivery systems, which 

would need to be reprogrammed and 

updated to comply with proposed rule 

15c2–2. As a general matter, mediumsized and smaller firms, but also some 

larger firms, use third-party service 

providers, or vendors, to generate the 

data necessary to send confirmations.171

They may also use vendors to actually 

send confirmations to investors. 

Therefore, the firms’ vendors would be 

required to reprogram their software and 

update their systems to generate the 

data that would allow their clients to 

comply with proposed rule 15c2–2. 

Some, if not all, of the cost for this 

6466 Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 

172This estimate is based on the staff’s 

understanding that 5,000 brokers, dealers and 

municipal securities dealers, including virtually all 

small entities, directly or indirectly through 

clearing brokers, use the services of 10 vendors. The 

staff estimates that the total one-time burden to the 

10 vendors would be 1,580,000 hours, or 158,000 

hours per vendor. Although the staff understands 

from discussions with vendors that this burden 

would be allocated to all of the vendors’ clients in 

a manner that reflects the volume of transactions 

the broker, dealer or municipal securities dealer 

effects, the staff assumes for purposes of estimating 

the total burden that the burden would be allocated 

to each client on a pro rata basis (316 hours per 

broker, dealer or municipal security dealer that uses 

vendors’ services). In addition, the staff estimates, 

based on discussions with industry representatives, 

that 400 brokers, dealers and municipal securities 

dealers use proprietary confirmation delivery 

systems that each of them, on average, would have 

a one-time burden of 33,550 hours. Thus, the total 

one-time burden is estimated to be 15 million hours 

((5,000 × 316) + (400 × 33,550) = 15,000,000).

173The staff estimates that the burden to the 10 

vendors to maintain their systems would be 500,000 

million hours annually, or 50,000 hours per vendor. 

The staff estimates that the burden allocated to each 

client on a pro rata basis would be 100 hours 

annually per broker, dealer or municipal security 

dealer that uses vendors’ services (500,000 hours/

5,000 = 100 hours). The staff estimates, based on 

discussions with industry representatives, that the 

400 brokers, dealers and municipal securities 

dealers that use proprietary confirmation delivery 

systems, on average, would have a burden of 3,750 

hours annually for maintaining systems. Thus, the 

annual burden for maintaining systems is estimated 

to be 2 million hours ((5,000 × 100) + (400 × 3,750) 

= 2,000,000 hours).

174 (1 billion confirmations at one minute per 

confirmation = 1 billion minutes; 1 billion minutes/

60 minutes per hour = 16.7 million hours.)

175 (16.7 million hours to generate and send 

confirmations to customers + 2 million hours to 

calculate revenue sharing and portfolio brokerage 

amounts and to maintain and further update the 

confirmation delivery systems = 18.7 million 

hours.)

reprogramming and systems upgrading 

would be allocated to the vendors’

clients—the brokers, dealers and 

municipal securities dealers. The staff 

understands from discussions with 

vendors that the allocation of costs 

would coincide roughly with the 

volume of the client’s transactions, so 

that a broker, dealer or municipal 

securities dealer that executes fewer 

transactions involving covered 

securities would be allocated less of its 

vendor’s costs than a broker, dealer or 

municipal securities dealer that 

executes more transactions.

The Commission staff estimates from 

information provided by industry 

participants that the one-time burden to 

brokers, dealers and municipal 

securities dealers, and their vendors, for 

reprogramming software and otherwise 

updating systems to permit the 

confirmation delivery systems required 

under proposed rule 15c2–2 would be 

15 million hours.172

• The Commission requests comment 

on the staff’s estimates of the one-time 

reprogramming software and otherwise 

updating systems to permit the 

confirmation delivery systems required 

under proposed rule 15c2–2. 

In addition to the one-time burden 

associated with reprogramming software 

and upgrading confirmation delivery 

systems, the Commission anticipates ongoing burdens for complying with the 

requirements of proposed rule 15c2–2, 

including calculating revenue sharing 

and portfolio brokerage amounts 

required under rule 15c2–2. Based upon 

discussions with industry 

representatives, the Commission staff 

understands that, once completed, this 

reprogramming and systems updating 

would permit brokers, dealers, and 

municipal securities dealers to have 

automated access to the information that 

would be required to be disclosed in 

confirmations delivered pursuant to 

proposed rule 15c2–2. As a result, the 

burden associated with obtaining data to 

be included in confirmations would be 

de minimis. The Commission staff 

estimates from information provided by 

industry participants that the annual 

burden to brokers, dealers and 

municipal securities dealers, and their 

vendors, to comply with the 

requirements under proposed rule 

15c2–2 to calculate revenue sharing and 

portfolio brokerage amounts and to 

maintain and further update the 

confirmation delivery systems, would 

be 2 million hours.173

• The Commission requests comment 

on the staff’s estimates of the burdens 

associated with complying with the 

requirements of proposed rule 15c2–2, 

including calculating revenue sharing 

and portfolio brokerage amounts, as 

well as maintaining and updating 

confirmation delivery systems. The 

Commission specifically requests 

comment on the estimate that, after 

reprogramming, the burden associated 

with obtaining the data necessary to 

comply with the confirmation delivery 

requirements of proposed rule 15c2–2 

would be de minimis. In particular, 

commenters are requested to address 

whether reprogramming software and 

updating systems would, in fact, permit 

the data to be automatically transmitted 

to brokers’, dealers’ and municipal 

securities dealers’ systems or whether 

data would need to be manually entered 

into such systems. Commenters are 

further requested to provide quantitative 

data on the burdens associated with 

manually entering data into systems, if 

necessary. 

Brokers, dealers and municipal 

securities dealers also would have a 

burden for generating and sending 

confirmations to investors. The 

Commission staff estimates from 

information provided by industry 

participants that it takes about one 

minute to generate and send a 

confirmation. Based on the estimate that 

there are 1 billion transactions annually 

in the covered securities, the 

Commission staff estimates that the 

annual burden to brokers, dealers and 

municipal securities dealers to generate 

and send confirmations to customers 

pursuant to proposed rule 15c2–2 

would be 16.7 million hours.174 It is 

important to note, however, that 

confirmations for transactions in 

covered securities are currently required 

to be delivered pursuant to rule 10b–10 

or MSRB rule G–15, as applicable. As a 

result, the burden for generating and 

sending confirmations would not be 

entirely new, but would reflect a shift of 

burdens from rule 10b–10 to proposed 

rule 15c2–2. In addition, brokers, 

dealers and municipal securities dealers 

routinely send customers account 

statements pursuant to self-regulatory 

organizations’ requirements and for 

reasons of prudent business practice. 

Nonetheless, the Commission staff 

estimates that the total annual burden 

for complying with the requirements of 

proposed rule 15c2–2 would be 18.7 

million hours.175 The number of 

confirmations sent and the cost of the 

confirmations vary from firm to firm. 

Smaller firms typically send fewer 

confirmations than larger firms because 

they effect fewer transactions.

Based upon discussions with industry 

participants, the Commission staff 

anticipates that there would be one-time 

external costs for upgrading and 

reprogramming printing systems for 

brokers, dealers municipal securities 

dealers who use out-sourced printing 

and other out-sourced services. The staff 

anticipates that these costs would be 

passed on to brokers, dealers and 

municipal securities dealers in the form 

of higher fees. While the staff is 

currently unable to determine the 

number of brokers, dealers and 

municipal securities dealers that utilize 

such outsourced services, based on 

discussions with industry 

representatives the staff estimates that 

the cost per broker, dealer or municipal 

securities would be approximately 

$18,500. Assuming that all of the 

approximately 5,400 brokers, dealers 

and municipal securities dealers subject 

to proposed rule 15c2–2 use such outsourced services, the total one-time 

external cost would be about $100 

million. We note that this assumption 

may result in a significant overstatement 

of these external costs. 

Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 6467

176 (1 billion confirmations at $1.05 per 

confirmation = $1.05 billion.) As noted above, 

confirmations for transactions in covered securities 

are currently required to be delivered pursuant to 

rule 10b–10 or MSRB rule G–15, as applicable. As 

a result, this estimated cost is not entirely a new 

cost, but reflects a shift of costs from rule 10b–10 

to proposed rule 15c2–2. This estimated cost also 

reflects an incremental increase in the cost of 

generating confirmations from 89 cents under rule 

10b–10 to $1.05 under proposed rule 15c2–2. This 

incremental cost is associated with generating the 

two-page confirmation that would be required 

under proposed rule 15c2–2, as compared to a halfpage or one-page confirmation that is currently 

permitted under rule 10b–10.

177 (1 billion confirmations delivered pursuant to 

rule 10b–10 at $0.89 per confirmation = $890 

million; $1.05 billion ¥ $890 million = $160 

million.) 178 17 CFR 240.17a–4(b)(1).

As stated earlier, the Commission staff 

estimates that there are 1 billion 

securities transactions annually 

involving mutual fund shares, UIT 

interests and 529 plan securities. 

According to information provided by 

industry participants, the Commission 

staff estimates that the average cost, 

including postage and printing, for a 

two-page confirmation is about $1.05. 

As a result, the Commission staff 

estimates that the annual costs of 

complying with the requirements of 

proposed rule 15c2–2, including the 

printing and postal costs for generating 

and sending confirmations, would be 

$1.05 billion,176 reflecting an increase of 

$160 million over the cost of the 

confirmations had they been delivered 

pursuant to rule 10b–10.177

In summary, the Commission staff 

estimates that there would be a one-time 

burden of 15 million hours associated 

with reprogramming software and 

upgrading systems to permit brokers, 

dealer and municipal securities dealers, 

and their vendors, to comply with the 

requirements of proposed rule 15c2–2. 

The staff further estimates that there 

would be an additional one-time cost of 

$100 million for fees of service 

providers. The staff estimates that the 

annual burden for complying with the 

requirements of proposed rule 15c2–2 

would be 18.7 million and that the 

annual costs of complying with the 

requirements of proposed rule 15c2–2, 

including the printing and postal costs 

for generating and sending 

confirmations, would be $1.05 billion. 

We note that, as stated above, many of 

these costs and burdens, including the 

majority of the annual costs and 

burdens, would be shifted from rule 

10b–10 to proposed rule 15c2–2. We 

also note that some of the assumptions 

the staff has made may result in the 

costs and burdens being overstated. 

5. Collection of Information Is 

Mandatory 

This collection of information would 

be mandatory. 

6. Confidentiality 

The collection of information 

delivered pursuant to the proposed rule 

15c2–2 would be provided by brokers, 

dealers and municipal securities dealers 

to customers, and also would be 

maintained by brokers, dealers and 

municipal securities dealers. 

7. Record Retention Period 

Exchange Act Rule 17a–4(b)(1) 178

requires broker-dealers to preserve 

confirmations for three years, the first 

two years in an accessible place. 

Similarly MSRB rule G–9 requires 

brokers, dealers and municipal 

securities dealers to preserve 

confirmations of transactions involving 

municipal securities for three years, the 

first two years in an accessible place.

B. Rule 15c2–3 

1. Collection of Information at the Point 

of Sale in Connection With Certain 

Transactions Involving Open-End 

Management Investment Company 

Securities, Unit Investment Trust 

Interests, and Municipal Fund 

Securities Used for Education Savings 

Proposed rule 15c2–3 under the 

Exchange Act would require brokers, 

dealers and municipal securities dealers 

to provide point of sale disclosure to 

investors prior to effecting transactions 

in mutual fund shares, UIT interests and 

529 plan securities. The disclosure 

would provide investors with targeted 

material information about distributionrelated costs and remuneration that lead 

to conflicts of interest for their brokers, 

dealers or municipal securities dealers. 

The collection of information under 

proposed rule 15c2–3 would require 

some of the disclosure that is also 

required under rule 15c2–2. However, 

in contrast to the confirmation 

disclosure required under proposed rule 

15c2–2, which a customer will not 

receive in writing until after a 

transaction has been effected, the point 

of sale disclosure that would be 

required under rule 15c2–3 would 

specifically require that investors be 

provided with information that they can 

use at the time they determine whether 

to enter into a transaction to purchase 

one of the covered securities.

2. Proposed Use of Information 

The purpose of proposed rule 15c2–

3 is to provide information to investors 

at the time they make their investment 

decisions with respect to transactions in 

mutual fund shares, UIT interests and 

529 plan securities. The rule specifically 

is intended to give investors timely 

access to information about sales loads 

and other distribution-related costs 

associated with transactions in those 

securities, as well as distribution 

arrangements that pose conflicts of 

interest for the brokers, dealers or 

municipal securities dealers, or their 

associated persons, that effect those 

transactions. In the absence of the new 

rule’s requirements, investors in such 

transactions would lack, at the time they 

make their investment decision, 

important information about 

distribution costs that can reduce 

investment returns, and about conflicts 

of interest. 

Records of the disclosure described 

above may be used by the Commission, 

the self-regulatory organizations, and 

other securities regulatory authorities in 

the course of examinations, 

investigations, and enforcement 

proceedings. No governmental agency 

regularly would receive any of the 

information described above. 

3. Respondents 

By its terms, proposed rule 15c2–3 

potentially would apply to all of the 

approximately 5,338 brokers, dealers 

and municipal securities dealers that are 

registered with the Commission and that 

are members of NASD. It would also 

potentially apply to approximately 62 

additional municipal securities dealers. 

It is important to note, however, that 

only those broker, dealers and 

municipal securities dealers that effect 

transactions in mutual fund shares, UIT 

interests and 529 plan securities would 

be affected by the provisions of 

proposed rule 15c2–3. Although as 

stated above, the staff believes some 

brokers, dealers and municipal 

securities dealers do not effect 

transactions in mutual fund shares, UIT 

interests and 529 plan securities, the 

staff is unable to estimate the number of 

such brokers, dealers and municipal 

securities dealers and has, therefore, 

assumed that all brokers, dealers and 

municipal securities dealers effect such 

transactions. This assumption may 

result in the paperwork burdens and 

costs of proposed rule 15c2–3 being 

overstated. 

4. Reporting and Recordkeeping Burden 

As noted above, the Commission staff 

estimates that there are 1 billion 

confirmations delivered annually in 

connection with securities transactions 

involving mutual fund shares, UIT 

interests and 529 plan securities. 

6468 Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 

179The staff estimates that the total one-time 

burden to the 10 vendors would be 1,040,000 hours, 

or 104,000 hours per vendor. Although the staff 

understands from discussions with vendors that 

this burden would be allocated to all of the vendors’

clients in a manner that reflects the volume of 

transactions the broker, dealer or municipal 

securities dealer effects, for purposes of this 

calculation, the staff assumes that the burden would 

be allocated to each client on a pro rata basis (208 

hours per broker, dealer or municipal security 

dealer that uses vendors’ services). In addition, the 

staff estimates, based on discussions with industry 

representatives, that 400 brokers dealers and 

municipal securities dealers use proprietary 

confirmation delivery systems that each of them, on 

average, would have a one-time burden of 22,400 

hours. Thus, the total one-time burden is estimated 

to be 7 million hours ((5,000 × 208) + (400 × 14,900) 

= 7,000,000 hours).

180The staff estimates that the burden to the 10 

vendors to maintain their systems would be 500,000 

million hours annually, or 50,000 hours per vendor. 

The staff estimates that the burden allocated to each 

client on a pro rata basis would be 100 hours 

annually per broker, dealer or municipal security 

dealer that uses vendors’ services (500,000 hours/

5,000 = 100 hours). The staff estimates, based on 

discussions with industry representatives, that the 

400 brokers dealers and municipal securities 

dealers that use proprietary confirmation delivery 

systems, on average, would have a burden of 3,750 

hours annually for maintaining systems. Thus, the 

annual burden for maintaining systems is estimated 

to be 2 million hours ((5,000 × 100) + (400 × 3,750) 

= 2,000,000).

181 (1 billion transactions at one minute per point 

of sale disclosure = 1 billion minutes; 1 billion 

minutes/60 minutes per hour = 16.7 million hours.)

182 (16.7 million hours per point of sale disclosure 

+ 2 million hours to develop and implement 

compliance procedures = 18.7 million hours.)

183See supra section V.G. for a detailed 

discussion of this exception.

Proposed rule 15c2–3 would require 

brokers, dealers and municipal 

securities dealers to provide disclosure 

to customers about costs and conflicts at 

the point of sale for each of these 

transactions. The information that 

would be required to be delivered 

pursuant to proposed rule 15c2–3 

would be derived from information that 

brokers, dealers and municipal 

securities dealers would otherwise 

prepare in order to fulfill their 

confirmation disclosure requirements 

under proposed rule 15c2–2. The 

Commission staff anticipates that one of 

the primary burdens to the industry of 

proposed rule 15c2–3 would be a onetime burden associated with 

reprogramming software and other such 

activities that will enable confirmation 

delivery systems to generate the 

information at the point of sale. Based 

on discussions with industry 

representatives, the Commission staff 

does not expect that brokers, dealers or 

municipal securities dealers would 

require new systems to be developed. 

Rather, the reprogramming and 

updating of current systems will enable 

brokers, dealers and municipal 

securities dealers to have access to such 

information at the point of sale, and to 

provide such information to investors at 

that time. Based on discussions with 

industry participants, the Commission 

staff estimates that the one-time burden 

to brokers, dealers and municipal 

securities dealers to reprogram software 

and conduct such other activities that 

will enable confirmation delivery 

systems to generate information 

required by proposed rule 15c2–3 to be 

delivered at the point of sale would be 

approximately 7 million hours.179 We 

note that some, but not all of the 

burdens for complying with proposed 

rule 15c2–3 would be shared with 

burdens for complying with proposed 

rule 15c2–2. The estimates of burdens 

and costs in this section reflect this 

shared burden. However, if proposed 

rule 15c2–3 is adopted and proposed 

rule 15c2–2 is not, the burdens for 

complying with proposed rule 15c2–3 

may increase.

Proposed rule 15c2–3(d) would 

require brokers, dealers and municipal 

securities dealers to make records of 

their disclosure sufficient to 

demonstrate compliance with the 

delivery requirements of paragraphs (a) 

and (b) of proposed rule 15c2–3. The 

brokers, dealers or municipal securities 

dealers would have to preserve those 

records for the period specified in 

Exchange Act rule 17a–4(b), or, in the 

case of records of oral communications 

or the disclosures, for the period 

specified in Exchange Act rule 17a–4(b) 

with regard to similar written 

communications and records. While this 

requirement often can be satisfied by 

maintaining a copy of the disclosure 

document that was provided to the 

customer, in the case of disclosure 

solely by means of oral 

communications, this provision would 

require the broker, dealer or municipal 

securities dealer to have compliance 

procedures in place that are adequate to 

demonstrate that it provided the 

required disclosure. Based on 

discussions with industry participants, 

the Commission staff estimates that the 

annual burden to brokers, dealers and 

municipal securities dealers to develop 

and implement such compliance 

procedures would be approximately 2 

million hours.180

The Commission staff further 

estimates from information provided by 

industry participants that it will take, on 

average, about one minute to deliver to 

customers the point of sale disclosure 

required under proposed rule 15c2–3. 

The Commission staff also estimates 

from information provided by industry 

participants that the annual burden to 

brokers, dealers and municipal 

securities dealers to deliver at the point 

of sale the disclosure that would be 

required under proposed rule 15c2–3, 

and to maintaining systems that would 

permit such disclosure, would be 16.7 

million hours.181 As a result, the 

Commission staff estimates that the total 

annual burden to brokers, dealers and 

municipal securities dealers to comply 

with the requirements of proposed rule 

15c2–3, would be 18.7 million hours.182

It is important to note that, under 

specified conditions, paragraph (e)(1) of 

proposed rule 15c2–3 would 

conditionally except transactions 

resulting from orders that a customer 

places via U.S. mail, messenger delivery 

or a similar third-party delivery service. 

The exception would be available to 

brokers, dealers or municipal securities 

dealers that, within the prior six 

months, have provided the customer 

with information about the maximum 

potential size of sales loads and assetbased sales charges and service fees 

associated with covered securities sold 

by that broker, dealer or municipal 

securities dealer, as well as statements 

about whether the broker, dealer or 

municipal securities dealer receives 

revenue sharing or portfolio brokerage 

commissions or pays differential 

compensation.183 This exception would 

have the result of in a decrease in the 

burden to the industry of proposed rule 

15c2–3.

Based upon discussions with industry 

participants, the Commission staff 

anticipates that there would be one-time 

external costs for out-sourced services, 

including call center services for 

brokers, dealers and municipal 

securities dealers that may use such 

services for delivery of point of sale 

information for transactions placed by 

telephone. The staff anticipates that 

these costs would be passed on to 

brokers, dealers and municipal 

securities dealers in the form of higher 

fees. While the staff is currently unable 

to determine the number of brokers, 

dealers and municipal securities dealers 

that utilize such outsourced services, 

based on discussions with industry 

representatives the staff estimates that 

the cost per broker, dealer or municipal 

securities dealer would be 

approximately $18,500. Assuming that 

all of the approximately 5,400 brokers, 

dealers and municipal securities dealers 

subject to proposed rule 15c2–3 use 

such out-sourced services, the total onetime external cost would be about $100 

million. We note that this assumption 

may result in a significant overstatement 

of these external costs. 

Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 6469

184Based on discussions with industry 

representatives, the staff estimates that the annual 

cost would be $7,400 per broker, dealer or 

municipal securities dealer. (5,400 brokers, dealers 

and municipal securities dealers × $7,400 = 

$39,996,000.)

185 17 CFR 240.17a–4(b)(1).

186FOCUS Reports are annual reports that brokerdealers are required to file with the Commission. 

They are contained in the broker-dealers’ Form X–

17A–5 (17 CFR 249.617).

187 (295 million confirmations/month × 12 

months/year = 3.54 billion confirmations.)

188 (2.54 billion confirmations at one minute per 

confirmation = 2.54 billion minutes; 2.54 billion 

minutes/60 minutes per hour = 42.3 million hours.) 

We note that the estimates of this annual burden 

reflects a shift of confirmation delivery 

requirements with respect to open-end investment 

company securities and unit investment trust 

interests from rule 10b–10 to proposed rule 15c2–

2.

Based on discussions with industry 

participants, the Commission staff 

estimates that the annual cost to 

brokers, dealers and municipal 

securities dealers for call center services 

and other service providers which 

would assist with development and 

implementation of procedures sufficient 

to demonstrate compliance with the 

delivery requirements of paragraphs (a) 

and (b) of proposed rule 15c2–3 would 

be approximately $40 million.184

In summary, the Commission staff 

estimates that there would be a one-time 

burden of 7 million hours associated 

with reprogramming software and 

upgrading systems to permit brokers, 

dealers and municipal securities 

dealers, and their vendors, to comply 

with the requirements of proposed rule 

15c2–3. The staff further estimates that 

there would be an additional one-time 

cost of $100 million for fees of service 

providers. The staff estimates that the 

annual burden for complying with the 

requirements of proposed rule 15c2–3 

would be 18.7 million hours and that 

the annual costs of complying with the 

requirements of proposed rule 15c2–3, 

including call center services, and 

recordkeeping and compliance costs, 

would be $40 million. 

5. Collection of Information Is 

Mandatory 

This collection of information would 

be mandatory. 

6. Confidentiality 

The collection of information 

delivered pursuant to the proposed rule 

15c2–3 would be provided by brokers, 

dealers and municipal securities dealers 

to customers, and also would be 

maintained by brokers, dealers and 

municipal securities dealers. 

7. Record Retention Period 

Proposed rule 15c2–3 would require 

brokers, dealers and municipal 

securities dealers to preserve records for 

the period specified in Exchange Act 

rule 17a–4(b), or, in the case of records 

of oral communications and their 

disclosures, for the period specified in 

Exchange Act rule 17a–4(b) with regard 

to similar written communications and 

records. Exchange Act Rule 17a–

4(b)(1)185 requires the preservation of 

confirmations for three years, the first 

two years in an accessible place.

C. Proposed Amendments to Rule 10b–

10 

1. Collection of Information 

For the reasons discussed above and 

consistent with proposed Rule 15c2–2, 

rule 10b–10 would be modified to 

exclude transactions in mutual fund 

shares and UIT interests (other than UIT 

interests that are traded in a secondary 

market). The purpose of the exclusion is 

to enhance disclosure efficiency and to 

avoid duplicative regulatory burdens. 

This exclusion from a regulatory burden 

would not impose recordkeeping or 

information collection requirements, or 

other collections of information under 

rule 10b–10 that require approval of the 

Office of Management and Budget under 

44 U.S.C. 3501, et seq. However, the 

proposed amendments to rule 10b–10 

would also require brokers and dealers 

to disclose additional information in 

confirmations that would otherwise be 

delivered in connection with 

transactions involving callable preferred 

stock and callable debt. Specifically, the 

proposed amendments would require 

disclosure of the callable nature of 

preferred stock, if such is the case, and, 

in the case of callable debt that is 

effected on the basis of price to call, the 

date upon which the debt security may 

first be called. This information would 

be provided to customers in the form of 

written confirmations. 

2. Proposed Use of Information 

The purpose of the proposed 

amendments to rule 10b–10 is to 

provide to investors the information 

necessary to evaluate their transactions 

in callable preferred stock and 

redeemable debt. In the absence of the 

proposed amendments, investors in 

such transactions may not be fully 

informed of important information, such 

as whether the preferred stock is 

callable and the first date upon which 

callable debt securities may be called. In 

addition, the Commission, the selfregulatory organizations, and other 

securities regulatory authorities may use 

the confirmations described above in 

the course of examinations, 

investigations, and enforcement 

proceedings. No governmental agency 

would regularly receive any of the 

information described above. 

3. Respondents 

Rule 10b–10 applies to all of the 5,338 

brokers and dealers that are registered 

with the Commission and that effect 

transactions for customers. 

4. Reporting and Recordkeeping Burden 

Based on information provided by 

registered broker-dealers to the 

Commission in FOCUS Reports186, the 

Commission staff estimates that 

registered broker-dealers process 

approximately 295 million order tickets 

per month for transactions on behalf of 

customers. Each order ticket 

representing a transaction effected on 

behalf of a customer results in one 

confirmation. Therefore, the 

Commission staff estimates that 

approximately 3.54 billion 

confirmations187 are sent to customers 

annually. As noted above, the staff 

estimates that approximately 1 billion 

confirmations are generated in 

connection with transactions in mutual 

funds, UIT interests and 529 plan 

securities and will be delivered 

pursuant to proposed rule 15c2–2, if 

adopted, and will accordingly decrease 

the number of confirmations delivered 

pursuant to rule 10b–10 by a like 

amount. As a result, the Commission 

staff estimates that approximately 2.54 

billion confirmations will be sent to 

customers annually pursuant to rule 

10b–10 if proposed rule 15c2–2 and the 

proposed amendments to rule 10b–10 

are adopted.

The Commission staff estimates from 

information provided by industry 

participants that it takes about one 

minute to generate and send a 

confirmation. As a result, the 

Commission staff estimates that the 

annual burden to brokers, dealers and 

municipal securities dealers to comply 

with the confirmation delivery 

requirements of the proposed 

amendments to rule 10b–10 would be 

42.3 million hours.188 The number of 

confirmations sent and the cost of the 

confirmations vary from firm to firm as 

smaller firms send fewer confirmations 

than larger firms because they effect 

fewer transactions.

The Commission staff estimates that 

the one-time burden associated with 

reprogramming of software and other 

such activities to enable confirmation 

delivery systems to include the call 

information required under the 

proposed amendments to rule 10b–10 

would be minimal. The Commission 

staff further estimates that the on-going 

6470 Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 

189 (2.54 billion confirmations at $0.89 per 

confirmation = $2.26 billion.)

190 17 CFR 240.17a–4(b)(1).

191See Investment Company Act Release No. 

26287 (Dec. 11, 2003) [68 FR 70402 (Dec. 17, 2003)]; 

Investment Company Act Release No. 26298 (Dec. 

17, 2003) [68 FR 74732 (Dec. 24, 2003)].

192This estimate is based on the following 

calculation: (812.5 hours × 483 portfolios) + (104.5 

hours × 6,542 portfolios) = 1,076,080 hours. An 

additional annual hour burden of 30,998 hours 

resulting from the proposed rule relating to frequent 

purchases and redemptions and selective 

disclosure, and an additional annual hour burden 

of 2,252 hours resulting from the proposed 

amendments relating to breakpoints disclosure, 

yield a total annual hour burden of 1,109,330 hours.

193This estimate is based on information 

regarding the number of mutual fund portfolios 

with front-end or deferred sales loads, derived by 

the staff from Commission filings and third-party 

information sources.

194The Commission estimates, for purposes of the 

Paperwork Reduction Act, that a significant 

majority of mutual fund portfolios either have 

revenue sharing arrangements or are part of a fund 

complex that has such an arrangement and thus 

would be affected by the proposed amendments 

regarding revenue sharing disclosure.

burden for complying with the 

additional disclosure requirements of 

rule 10b–10 with respect to callable 

securities would be minimal. In 

addition, there would be no additional 

cost in connection with the deletion of 

the expired transition period related to 

the confirmation of transactions 

involving securities futures products.

According to information previously 

provided by industry participants, the 

Commission staff estimates that the 

average cost, including postage, for a 

one-page confirmation is 89 cents. 

Based upon discussions with industry 

participants, the Commission staff 

estimates that the total annual cost 

associated with generating and 

delivering to investors the information 

required under rule 10b–10, including 

the proposed amendments, would be 

$2.26 billion.189 It is important to note, 

however, that the confirmation is a 

customary document used by the 

industry for business purposes.

5. Collection of Information Is 

Mandatory 

This collection of information would 

be mandatory. 

6. Confidentiality 

The collection of information 

delivered pursuant to rule 10b–10 

would be provided by broker-dealers to 

customers, and also would be 

maintained by broker-dealers. 

7. Record Retention Period 

Exchange Act Rule 17a–4(b)(1)190

requires broker-dealers to preserve 

confirmations for three years, the first 

two years in an accessible place.

D. Proposed Amendments to Form N–

1A 

1. Collection of Information in 

Connection With Prospectus Disclosure 

The Commission is proposing to 

amend the fee table of the mutual fund 

prospectus to require the maximum 

sales loads to be shown as a percentage 

of net asset value rather than as a 

percentage of offering price. The 

proposed amendments also would 

require a fund to provide disclosure in 

the fund prospectus to alert investors to 

the fact that sales loads shown in the 

prospectus as a percentage of net asset 

value or offering price may be higher or 

lower than the actual sales load that an 

investor would pay as a percentage of 

the net or gross amount invested, due to 

rounding. Finally, the proposed 

amendments would require that a 

mutual fund include brief disclosure in 

its prospectus regarding revenue sharing 

payments, in order to direct investors to 

the disclosure regarding revenue sharing 

that the Commission is proposing to 

require in the confirmation and point of 

sale disclosure. 

2. Proposed Use of Information 

The purpose of the proposed 

amendments is to provide investors in 

mutual funds with enhanced disclosure 

regarding sales loads, and to direct 

investors to disclosure regarding 

revenue sharing arrangements that a 

fund may have with an investor’s 

financial intermediary. 

3. Respondents 

The likely respondents to this 

information collection are mutual funds 

registering or already registered with the 

Commission. We estimate that there are 

approximately 7,025 mutual fund 

portfolios that fit this description. 

4. Reporting and Recordkeeping Burden 

The current hour burden for preparing 

an initial Form N–1A filing is 812.5 

hours per portfolio, and the current 

annual hour burden for preparing a 

post-effective amendment on Form N–

1A is 104.5 hours per portfolio. The 

Commission staff estimates that, on an 

annual basis, registrants file initial 

registration statements on Form N–1A 

covering 483 portfolios, and file posteffective amendments on Form N–1A 

covering 6,542 portfolios. An additional 

burden of 33,250 hours is expected to 

result from the Commission’s recent 

proposed rule relating to frequent 

purchases and redemptions of fund 

shares and selective disclosure of 

portfolio holdings, and the recent 

proposed rule relating to disclosure of 

sales load breakpoints.191 Thus, the 

Commission staff estimates that the total 

annual hour burden for the preparation 

and filing of Form N–1A would be 

1,109,330 hours.192

The Commission staff estimates that 

the proposed amendments regarding 

sales loads would increase the hour 

burden per portfolio per filing of an 

initial registration statement or a posteffective amendment on Form N–1A by 

0.5 hours, and that 36% of mutual fund 

portfolios have sales loads and hence 

would be affected by the proposed 

amendments regarding sales load 

disclosure.193 Thus, the additional 

incremental hour burden resulting from 

the proposed amendments relating to 

sales load disclosure would be 1265 

hours ((0.5 hours for initial registration 

statements × 483 portfolios × 36%) + 

(0.5 hours for post-effective 

amendments × 6,542 portfolios × 36%)). 

The Commission staff estimates that the 

proposed amendments regarding 

revenue sharing arrangements would 

increase the hour burden per portfolio 

per filing of an initial registration 

statement or post-effective amendment 

on Form N–1A by 0.1 hours.194 Thus, 

the staff estimates that the additional 

incremental hour burden resulting from 

the proposed amendments relating to 

disclosure of revenue sharing would be 

703 hours ((0.1 hours for initial 

registration statements × 483 portfolios) 

+ (0.1 hours for post-effective 

amendments × 6,542 portfolios)). If the 

proposed amendments to Form N–1A 

are adopted, the total annual hour 

burden for all funds for preparation and 

filing of initial registration statements 

and post-effective amendments to Form 

N–1A would be 1,111,298 hours (1265 

hours + 703 hours + 1,109,330 hours).

5. Collection of Information Is 

Mandatory 

This collection of information would 

be mandatory. 

6. Confidentiality 

Responses to the disclosure 

requirements are not confidential. 

7. Record Retention Period 

There is no mandatory record 

retention period associated with these 

amendments. 

E. Request for Comment 

Pursuant to 44 U.S.C. 3506(c)(2)(B), 

the Commission solicits comments to: 

(i) Evaluate whether the proposed 

collection of information is necessary 

for the proper performance of the 

functions of the Commission, including 

whether the information would have 

practical utility; 

Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 6471

195See supra, note 5.

196The Commission staff estimates that for the 

one-year period between September 2002 and 

August 2003, investors in open-end management 

investment company securities paid more than $6.7 

billion in aggregate sales loads, consisting of 

approximately $4.9 billion in front-end loads and 

$1.8 billion in back-end loads.

197These figures are based on an estimated hourly 

wage rate of $50. The estimated wage figure is based 

on published compensation for compliance 

attorneys outside New York City ($39) and 

computer programmers ($34), and the estimate that 

attorneys and programmers would divide time 

equally on compliance with the proposed 

disclosure requirements, yielding a weighted wage 

rate of $36.50 ((39 × .50) + (34 × .50)) = $36.50). 

See Securities Industry Association, Report on 

Management & Professional Earnings in the 

Securities Industry 2002 (Sept. 2002). This 

weighted wage rate was then adjusted upward by 

35% for overhead, reflecting the costs of 

supervision, space, and administrative support, to 

obtain the total per hour internal cost of about $50 

((36.50 × 1.35) = $49.28).

198As noted above, while the staff is currently 

unable to determine the number of brokers, dealers 

and municipal securities dealers that utilize 

outsourced services, based on discussions with 

Continued

(ii) Evaluate the accuracy of the 

Commission staff’s estimate of the 

burden of the proposed collection of 

information; 

(iii) Enhance the quality, utility, and 

clarity of the information to be 

collected; and 

(iv) Minimize the burden of the 

collection of information on those 

required to respond, including through 

the use of automated collection 

techniques or other forms of information 

technology. 

Persons desiring to submit comments 

on the collection of information 

requirements should direct them to the 

Office of Management and Budget, 

Attention: Desk Officer for the 

Securities and Exchange Commission, 

Office of Information and Regulatory 

Affairs, Washington, DC 20503, and 

should also send a copy of their 

comments to Jonathan G. Katz, 

Secretary, Securities and Exchange 

Commission, 450 Fifth Street, NW, 

Washington, DC 20549–0609, and refer 

to File No. S7–06–04. OMB is required 

to make a decision concerning the 

collection of information between 30 

and 60 days after publication of this 

release in the Federal Register. 

Therefore, comments to OMB are best 

assured of having full effect if OMB 

receives them within 30 days of this 

publication. Requests for materials 

submitted to OMB by the Commission 

with regard to this collection of 

information should be in writing, refer 

File No. S7–06–04, and be submitted to 

the Securities and Exchange 

Commission, Records Management, 

Office of Filings and Information 

Services, 450 Fifth Street, NW, 

Washington, DC 20549. 

IX. Costs and Benefits of the Proposed 

Rule and Rule Amendments 

A. Introduction 

Proposed rules 15c2–2 and 15c2–3 are 

intended to improve investor access to 

information about investments in 

mutual fund shares, UIT interests and 

529 plan securities. The Commission is 

sensitive to the costs and benefits that 

result from its rules. In proposing new 

rules 15c2–2 and 15c2–3 and the 

amendments to rule 10b–10 and Form 

N–1A, the Commission has strived to 

minimize compliance costs while 

promoting investor protection.

In considering the potential costs and 

benefits of proposed rules 15c2–2 and 

15c2–3, the Commission has considered 

the transaction confirmation practices of 

brokers, dealers and municipal 

securities dealers that effect transactions 

in mutual fund shares, UIT interests and 

529 plan securities. The Commission 

has also considered the practices of 

mutual funds in disclosing sales loads. 

Similarly, in considering the potential 

costs and benefits of the proposed 

amendments to rule 10b–10, the 

Commission has considered the 

transaction confirmation practices of 

broker-dealers, including those that 

effect transactions in callable preferred 

securities and callable debt securities. 

The amendments to rule 10b–10 are 

intended to provide investors with 

information that is helpful in making an 

informed decision when investing in 

callable preferred stock and redeemable 

debt securities. The amendments to 

Form N–1A are intended to provide 

investors with a better understanding of 

the costs of investing in a fund with a 

sales load, and of revenue sharing 

received by financial intermediaries. 

B. Rule 15c2–2 

Proposed rule 15c2–2 responds to 

concerns that investors in mutual fund 

shares, UIT interests and 529 plan 

securities lack adequate information 

about certain distribution-related costs, 

as well as certain distribution 

arrangements, that create conflicts of 

interest for brokers, dealers, municipal 

securities dealers, and their associated 

persons. As noted above, those costs 

and other distribution arrangements 

have evolved substantially since 1977, 

when the Commission adopted its 

general confirmation rule, rule 10b–

10.195

1. Benefits 

The Commission believes that 

permitting investors to more readily 

obtain information about distributionrelated costs that have the potential to 

reduce their investment returns and to 

give investors a better understanding of 

some of the distribution-related 

arrangements that create conflicts of 

interest for brokers, dealers, municipal 

securities dealers, and their associated 

persons.196 The disclosure of 

information about these costs and 

arrangements can help investors make 

better informed investment decisions. 

Investors will also be in a better position 

to compare the costs of these 

investments, which we preliminarily 

believe will lead to a general increase in 

the transparency and efficiency of the 

market for mutual fund shares, UIT 

interests and 529 plan securities. 

Furthermore, as a result of the 

standardized disclosure that would be 

required under proposed rule 15c2–2, 

the Commission believes that the 

aggregate amount of the distributionrelated costs associated with mutual 

fund shares, UIT interests and 529 plan 

securities may well decline over time. 

These benefits, while qualitatively 

important, are necessarily difficult to 

quantify. Therefore, the Commission is 

unable to provide a quantitative 

estimate of the benefits of proposed rule 

15c2–2.

2. Costs 

Proposed rule 15c2–2 would require 

brokers, dealers and municipal 

securities dealers to include additional 

information in confirmations that are 

currently sent to investors pursuant to 

rule 10b–10. The costs of adding this 

new information into confirmation 

disclosures may include both internal 

costs (for information technology 

specialists to re-program and update 

confirmation delivery systems, and for 

compliance officers and other staff to 

oversee and maintain confirmation 

delivery systems) and external costs (for 

printing and typesetting of the 

confirmation disclosure), all of which 

are included in the estimates of the 

Paperwork Reduction Act burden. For 

purposes of the Paperwork Reduction 

Act, the Commission staff has estimated 

that the one-time burden to brokers, 

dealers and municipal securities 

dealers, and their vendors, associated 

with reprogramming software and 

otherwise updating systems to permit 

the confirmation delivery systems 

required under proposed rule 15c2–2 

would be 15 million hours. We estimate 

that this one-time burden would equal 

total internal costs of $750 million.197

The staff further estimates that there 

would be an additional one-time cost of 

$100 million for fees of service 

providers 198, for a total cost of $850 

6472 Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 

industry representatives the staff estimates that the 

cost per broker, dealer or municipal securities 

dealer would be approximately $18,500. Assuming 

that all of the approximately 5,400 brokers, dealers 

and municipal securities dealers subject to 

proposed rule 15c2–2 use such out-sourced 

services, the total one-time external cost would be 

about $100 million. We note that this assumption 

may result in a significant overstatement of these 

external costs.

199As noted above, based on discussions with 

vendors, the Commission staff anticipates that 

vendors will allocate costs to brokers, dealers and 

municipal securities dealers roughly on the basis of 

the volume of transactions in the covered securities.

million, or approximately $157,407 per 

broker, dealer or municipal securities 

dealer. These figures will vary 

depending on whether a firm must 

update its own proprietary confirmation 

delivery system or whether it uses 

vendor services, in which case the cost 

will likely vary depending on the 

number of transactions the firm 

executes on an annual basis.199

In addition, for purposes of the 

Paperwork Reduction Act, the 

Commission staff has estimated that the 

annual burden to brokers, dealers and 

municipal securities dealers for 

complying with the requirements of 

proposed rule 15c2–2, including 

generating and sending confirmations to 

investors, calculating revenue sharing 

and portfolio brokerage amounts and 

maintaining and further updating the 

confirmation delivery systems, would 

be 18.7 million hours annually. As 

noted above, confirmations for 

transactions in covered securities are 

currently required to be delivered 

pursuant to rule 10b–10 or MSRB rule 

G–15, as applicable. As a result, the 

burden for generating and sending 

confirmations would not be entirely 

new, but would reflect a shift of an 

annual burden of 16.7 million hours 

from rule 10b–10 to proposed rule 

15c2–2. Nonetheless, the Commission 

staff estimates that the annual burden 

for complying with the requirements of 

proposed rule 15c2–2 would equal total 

internal costs of $935 million annually, 

based on an estimated hourly wage of 

$50. The Commission staff further has 

estimated for purposes of the Paperwork 

Reduction Act that the external costs of 

complying with the requirements of 

proposed rule 15c2–2, including the 

printing and postal costs for generating 

and sending confirmations, would be 

$1.05 billion. The staff has estimated for 

purposes of the Paperwork Reduction 

Act that these external costs would 

reflect an increase of $160 million over 

the external cost of delivering the 

confirmations were they to be delivered 

pursuant to rule 10b–10. The 

Commission estimates that the annual 

costs for complying with proposed rule 

15c2–2 would be $1.99 billion, or 

approximately $367,593 per broker, 

dealer or municipal securities dealer. It 

is important to note, however, no new 

confirmations will be required to be sent 

to investors under proposed rule 15c2–

2; rather new information would be 

required to be included in confirmations 

that would otherwise be sent.

In addition to the foregoing costs, the 

Commission notes that other possible 

costs resulting from proposed rule 

15c2–2 include the possibility that 

investors’ ready access to information 

about the costs and conflicts associated 

with mutual fund shares, UIT interests 

and 529 plan securities may lead to a 

net reduction in the amount invested in 

those types of securities. Investors may 

pursue other types of investments that 

do not have, or do not appear to have, 

such costs and conflicts. In addition, the 

disclosure of distribution-related costs 

may result in a restructuring of the way 

funds compensate sellers of their 

securities. 

3. Request for Comments 

The Commission requests comment 

on the costs and benefits of proposed 

rule 15c2–2. Commenters are strongly 

encouraged to identify and supply any 

relevant data, analysis, and estimates 

concerning the costs and/or benefits of 

proposed rule 15c2–2, including any 

costs and benefits not described above. 

Commenters should address in 

particular the cost associated with 

adjusting operational systems to provide 

the disclosure required under proposed 

rule 15c2 and whether the proposed 

rule will generate the benefits described 

above. In addition, the Commission 

requests comment on whether a 

transitional period is necessary to make 

these adjustments. As always, 

commenters are specifically invited to 

share additional quantifiable costs and 

benefits that they believe may be 

imposed or generated by new rule 15c2–

2. 

C. Proposed Rule 15c2–3 

Proposed rule 15c2–3 is intended to 

provide information to investors in 

mutual fund shares, UIT interests and 

529 plan securities at the time they 

make their investment decisions. 

1. Benefits 

Proposed rule 15c2–3 would require 

brokers, dealers and municipal 

securities dealers to provide point of 

sale disclosure to customers prior to 

effecting transactions in those securities 

i.e., at the time they make investment 

decisions. The Commission staff 

estimates that for the one-year period 

between September 2002 and August 

2003, investors in open-end 

management investment company 

securities paid more than $6.7 billion in 

aggregate sales loads, consisting of 

approximately $4.9 billion in front-end 

loads and $1.8 billion in back-end loads. 

In addition, funds and their affiliates 

paid about $13 billion in marketing and 

distribution payments pursuant to 12b–

1 plans. Absent proposed rule 15c2–3, 

investors in mutual fund shares, UIT 

interests, and municipal fund securities 

used for education savings would, at the 

time they make their investment 

decision, lack ready transaction-specific 

access to this information. 

The proposed rule specifically would 

enable investors to see targeted, 

transaction-specific, information about 

these distribution-related costs, and 

about remuneration that lead to 

conflicts of interest for their brokers, 

dealers or municipal securities dealers. 

That would enable investors to better 

understand the costs and conflicts 

associated with each investment in 

those securities prior to entering into 

the transactions, which should promote 

better informed investment decisionmaking. In addition, as a result of the 

standardized disclosure that would be 

required under proposed rule 15c2–3, 

the Commission believes that the 

aggregate amount of the distributionrelated costs associated with mutual 

fund shares, UIT interests and 529 plan 

securities may well decline over time. 

Furthermore, the record-retention 

requirements of proposed rule 15c2–3 

would enable regulators to review the 

compliance of brokers, dealers and 

municipal securities dealers with the 

proposed rule as well as other legal 

obligations. These benefits, while 

qualitatively important, are necessarily 

difficult to quantify. Therefore, the 

Commission is unable to provide a 

quantitative estimate of the benefits of 

proposed rule 15c2–3. 

2. Costs 

Proposed rule 15c2–3 would require 

brokers, dealers and municipal 

securities dealers to provide point of 

sale disclosure to customers prior to 

effecting transactions in mutual fund 

shares, UIT interests and 529 plan 

securities. The costs of delivering this 

information to investors at the point of 

sale may include both internal costs (for 

information technology specialists to reprogram and update confirmation 

delivery systems to allow point of sale 

disclosure, and for compliance officers 

and other staff to oversee and maintain 

point of sale disclosure systems) and 

external costs (for services related to 

point of sale disclosure, such as call 

center services and out-sourced services 

Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 6473

200As noted above, while the staff is currently 

unable to determine the number of brokers, dealers 

and municipal securities dealers that utilize 

outsourced services, based on discussions with 

industry representatives the staff estimates that the 

cost per broker, dealer or municipal securities 

dealers would be approximately $18,500. Assuming 

that all of the approximately 5,400 brokers, dealers 

and municipal securities dealers subject to 

proposed rule 15c2–3 use such out-sourced 

services, the total one-time external cost would be 

about $100 million. We note that this assumption 

may result in a significant overstatement of these 

external costs.

201 (7 million hours × $50 per hour = $350 

million; $350 million + $100 million for other 

external costs = $450 million.)

202As noted above, based on discussions with 

vendors, the Commission staff anticipates that 

vendors will allocate costs to brokers, dealers and 

municipal securities dealers based roughly on the 

volume of transactions that require confirmations to 

be generated and sent.

203Based on discussions with industry 

participants, the Commission staff estimates that 

the annual cost to brokers, dealers and municipal 

securities dealers for call center services and other 

service providers which would assist with 

development and implementation of procedures 

sufficient to demonstrate compliance with the 

delivery requirements of paragraphs (a) and (b) of 

proposed rule 15c2–3 would be approximately 

$7,400 per broker, dealer or municipal securities 

dealer, for a total of $40 million. (5,400 brokers, 

dealers and municipal securities dealers × $7,400 = 

$39,996,000.)

204 (2.54 billion confirmations at $0.89 per 

confirmation = $2.26 billion.)

to assist firms with developing and 

implementing compliance procedures), 

all of which are included in the 

estimates of the Paperwork Reduction 

Act burden. For purposes of the 

Paperwork Reduction Act, the 

Commission staff has estimated that the 

one-time burden to brokers, dealers and 

municipal securities dealers, and their 

vendors, associated with reprogramming 

software and otherwise updating 

systems to permit the confirmation 

delivery systems to deliver point of sale 

disclosure required under proposed rule 

15c2–3 would be 7 million hours and 

that the one-time external cost would be 

$100 million.200 We estimate that these 

one-time burdens and costs would equal 

total internal costs of $450 million 201, 

or approximately $83,333 per broker, 

dealer or municipal securities dealer. 

These figures will vary depending on 

whether a firm must update its own 

proprietary confirmation delivery 

system or whether it uses vendor 

services, in which case the cost will 

likely vary depending on the number of 

transactions the firm executes on an 

annual basis.202

In addition, for purposes of the 

Paperwork Reduction Act, the 

Commission staff has estimated that the 

annual burden to brokers, dealers and 

municipal securities dealers for 

complying with the point of sale 

disclosure requirements of proposed 

rule 15c2–3, including delivering point 

of sale disclosure to investors and 

maintaining and further updating point 

of sale disclosure systems, would be 

18.7 million hours. The Commission 

staff estimates that this burden would 

equal total internal costs of $935 million 

annually, based on an estimated hourly 

wage of $50. The Commission staff 

further estimated for purposes of the 

Paperwork Reduction Act that the 

additional external costs of complying 

with the requirements of proposed rule 

15c2–3 would be $40 million per 

year.203 Therefore, the Commission 

estimates that the costs annual costs for 

complying with proposed rule 15c2–3 

would be $975 million, or 

approximately $180,556 per broker, 

dealer or municipal securities dealer.

In addition to the foregoing costs, as 

would be the case with proposed rule 

15c2–2, the Commission notes that 

other possible costs resulting from 

proposed rule 15c2–3 include the 

possibility that investors’ ready access 

to information about the costs and 

conflicts associated with mutual fund 

shares, UIT interests and 529 plan 

securities may lead to a net reduction in 

the amount invested in those types of 

securities. Investors may pursue other 

types of investments that do not have, 

or do not appear to have, such costs and 

conflicts. In addition, the disclosure of 

distribution-related costs may result in 

a restructuring of the way funds 

compensate sellers of their securities. 

3. Request for Comments 

The Commission requests comment 

on the costs associated with requiring 

brokers, dealers and municipal 

securities dealers to disclose part or all 

of the information proposed to be 

required under rule 15c2–3 prior to each 

customer purchase or sale of mutual 

fund shares, UIT interests and 529 plan 

securities. The Commission requests 

estimates of the costs and benefits 

described above, as well as any costs 

and benefits, not already defined, that 

may result from the adoption of these 

proposed amendments. The 

Commission specifically requests 

estimates of the one-time costs 

associated with reprogramming software 

to permit firms’ systems to generate the 

information required under proposed 

rule 15c2–3 and estimates of the costs 

for complying with the record-keeping 

requirements of paragraph (d) of the 

proposed rule. In addition, the 

Commission requests comment on the 

benefits and costs of requiring brokers, 

dealers and municipal securities dealers 

to disclose all or parts of the 

information proposed to be required 

under new rule 15c2–2 prior to each 

customer purchase or sale of mutual 

fund shares and municipal fund 

securities.

D. Amendments to Rule 10b–10 

The proposed amendments to rule 

10b–10 would require a broker-dealer 

effecting transactions in shares of 

preferred stock to inform customers in 

writing, at or before the completion of 

the transaction, if the issuer of the stock 

has reserved the right to repurchase—or 

call—the shares. The proposed 

amendments would also require a 

broker-dealer effecting a transaction in a 

debt security on the basis of yield-to-call 

to disclose the first possible date on 

which the debt security may be called. 

Finally, the amendments would exclude 

transactions subject to rule 15c2–2 from 

the confirmation delivery requirements 

of rule 10b–10. 

1. Benefits 

The proposed amendments to rule 

10b–10 are intended to avoid customer 

confusion by alerting customers to any 

misunderstandings about the rights 

associated with preferred stock and 

callable debt, and to promote the timely 

resolution of problems. This leads to 

better informed decision-making by 

investors. 

2. Costs 

For purposes of the Paperwork 

Reduction Act, the Commission staff has 

estimated that the annual burden to 

brokers, dealers and municipal 

securities dealers for complying with 

the confirmation delivery requirements 

of rule 10b–10, as modified by the 

proposed amendments, would be 42.3 

million hours. The Commission staff 

estimates that this burden would equal 

total internal costs of $2.12 billion 

annually, based on an estimated hourly 

wage of $50. The Commission staff 

further estimated for purposes of the 

Paperwork Reduction Act that the 

additional external costs of complying 

with the requirements of proposed rule 

10b–10, as amended, including postage 

costs to send confirmations, would be 

$2.26 billion.204 Therefore, the 

Commission estimates that the annual 

costs for complying with proposed rule 

10b–10, as amended, would be $4.38 

billion, or approximately $811,111 per 

broker, dealer or municipal securities 

dealer. We note that this is a net 

reduction in the annual costs for 

complying with rule 10b–10, as 

transactions that would otherwise be 

required to be delivered pursuant to rule 

6474 Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 

205This estimate is based on the following 

calculation: (0.5 hours per initial registration 

statement for sales load disclosure × 483 portfolios 

× 36% of portfolios) + (0.5 hours per post-effective 

amendment for sales load disclosure × 6,542 

portfolios × 36% of portfolios) + (0.1 hours per 

initial registration statement for revenue sharing 

disclosure × 483 portfolios) + (0.1 hours per posteffective amendment for revenue sharing disclosure 

× 6,542 portfolios) = 1,968 hours.

206These figures are based on a Commission 

estimate that initial registration statements for 483 

portfolios and post-effective amendments for 6,542 

portfolios are filed annually that would be subject 

to the proposed disclosure requirements, and an 

estimated hourly wage rate of $50. The estimate of 

the number of filings is based on data derived from 

the Commission’s EDGAR filing system. For a 

discussion of the estimated hourly wage rate, see 

supra note 197.

207 15 U.S.C. 78c(f).

208 15 U.S.C. 77b(b).

209 15 U.S.C. 80a–2(c).

210 15 U.S.C. 78w(a)(2).

to 10b–10 would be delivered pursuant 

to rule 15c2–2.

3. Request for Comments 

The Commission requests comment 

on the costs and benefits of the 

proposed amendments to rule 10b–10, 

including the costs and benefits 

described above. As always, 

commenters are specifically invited to 

share additional quantifiable costs and 

benefits that they believe may be 

imposed or generated by the proposed 

amendments to rule 10b–10. The 

Commission is particularly interested in 

learning more about current industry 

practice regarding the disclosure of call 

and redemption information in 

connection with transactions involving 

preferred stock and debt securities and 

whether broker-dealers already disclose 

such information as a matter of prudent 

business practice on confirmations or in 

some other way highlight such 

information to their customers. The 

Commission also solicits comment on 

what additional costs the required 

disclosure of such information would 

impose on those broker-dealers not 

currently providing such information to 

customers. The Commission requests 

that commenters provide supporting 

empirical data for any positions 

advanced. 

E. Amendments to Form N–1A 

The proposed amendments to Form 

N–1A would require mutual funds to 

provide enhanced prospectus disclosure 

regarding sales loads and revenue 

sharing payments. 

1. Benefits 

The proposed amendments to Form 

N–1A are expected to benefit mutual 

fund investors by providing them with 

a better understanding of sales loads 

and revenue sharing arrangements. 

Specifically, we believe that the 

proposed amendments relating to 

disclosure of sales loads as a percentage 

of net asset value rather than as a 

percentage of offering price may benefit 

investors by requiring that information 

regarding sales loads be provided in a 

manner that would better help investors 

to understand the true costs of investing 

in a load fund. Further, investors would 

benefit because disclosure of sales loads 

as a percentage of net asset value would 

be consistent with the disclosure in the 

confirmation that would be required by 

proposed rule 15c2–2. In addition, the 

proposed requirement that mutual funds 

disclose in the fund prospectus the fact 

that sales loads shown in the prospectus 

as a percentage of the net asset value or 

offering price may be higher or lower 

than the actual sales load that an 

investor would pay as a percentage of 

the net or gross amount invested may 

also assist investors in better 

understanding the sales load that they 

may pay. Finally, the proposed 

amendments relating to disclosure of 

revenue sharing payments may benefit 

investors by directing them to the 

disclosure regarding these arrangements 

that would be required in the 

confirmation and point of sale 

disclosure, and therefore may enhance 

investors’ understanding of 

arrangements that may lead to conflicts 

of interest.

2. Costs 

The proposals would impose new 

requirements on mutual funds to 

provide certain new prospectus 

disclosures regarding sales loads and 

revenue sharing arrangements. We 

estimate that complying with the 

proposed new disclosures would entail 

a relatively limited burden. The 

proposals to require fee table disclosure 

of sales loads on the basis of net asset 

value rather than offering price would 

impose a minimal burden, because 

mutual funds are already required to 

determine and disclose sales loads on 

this basis elsewhere in the prospectus. 

The additional disclosure that would be 

required regarding the effects of 

rounding in calculating sales loads 

would be limited, and the additional 

calculations regarding the range of 

variation resulting from rounding that 

would be required should be 

straightforward for funds to compute. 

Similarly, the additional disclosure that 

would be required regarding revenue 

sharing arrangements would be brief, 

and would only be required if any 

person within the fund complex that 

includes the fund makes revenue 

sharing payments. 

The costs of adding these new 

prospectus disclosures may include 

both internal costs (for attorneys and 

other non-legal staff of a fund, such as 

computer programmers, to prepare and 

review the required disclosure) and 

external costs (for printing and 

typesetting of the disclosure). For 

purposes of the Paperwork Reduction 

Act, we have estimated that the 

proposed new disclosure requirements 

would add 1,968 hours to the total 

annual burden of completing Form N–

1A.205 We estimate that this additional 

burden would equal total internal costs 

of $98,400 annually, or approximately 

$14.01 per fund portfolio.206 We expect 

the external costs of providing the new 

prospectus disclosure regarding sales 

loads and revenue sharing arrangements 

will be limited, because we do not 

expect that the proposed disclosure 

would add significant length to the 

prospectus.

3. Request for Comments 

The Commission requests comment 

on the costs and benefits of the 

proposed amendments to Form N–1A. 

Commenters are strongly encouraged to 

identify and supply any relevant data, 

analysis, and estimates concerning the 

costs and/or benefits of the proposed 

amendments to Form N–1A, including 

any costs and benefits not described 

above. 

X. Consideration of Burden on 

Promotion of Efficiency, Competition, 

and Capital Formation 

Section 3(f) of the Exchange Act,207

Section 2(b) of the Securities Act of 

1933,208 and Section 2(c) of the 

Investment Company Act 209 require the 

Commission, whenever it is engaged in 

rulemaking and is required to consider 

or determine whether an action is 

necessary or appropriate in the public 

interest, to consider whether the action 

will promote efficiency, competition, 

and capital formation. In addition, 

section 23(a)(2) of the Exchange Act 210

requires the Commission, in making 

rules under the Exchange Act, to 

consider the impact that any such rule 

would have on competition. Exchange 

Act Section 23(a)(2) prohibits the 

Commission from adopting any rule that 

would impose a burden on competition 

not necessary or appropriate in 

furtherance of the purposes of the 

Exchange Act.

Proposed rules 15c2–2 and 15c2–3 are 

intended to improve investor access to 

material information about investments 

and contemplated investments in 

mutual fund shares, UIT interests and 

529 plan securities. Similarly, the 

Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 6475

211Pub. L. 104–121, Title II, 110 Stat. 857 (1996) 

(codified in various sections of 5 U.S.C., 15 U.S.C. 

and as a note to 5 U.S.C. 601). 212See supra note 5.

proposed amendments to rule 10b–10 

are intended to eliminate duplicative 

requirements and to improve investor 

access to material information about 

investments in callable preferred stock 

and callable debt securities. The 

proposed amendments to Form N–1A 

are intended to provide investors in 

mutual funds with enhanced disclosure 

regarding sales loads, and to direct 

investors to disclosure regarding 

revenue sharing payments to an 

investor’s financial intermediary. 

The Commission preliminarily 

believes that mandating certain 

disclosure for transactions in mutual 

fund shares, UIT interests and 529 plan 

securities should serve as an efficient 

and cost-effective means for those 

entities to deliver information to 

consumers. The proposals should not 

hinder efficiency because firms should 

be able to use present confirmation 

delivery systems, after making 

appropriate adjustments, rather than 

having to build new information 

delivery systems. In addition, the 

Commission preliminarily believes that 

the new rules and the proposed 

amendments would improve investor 

confidence and, therefore, would 

promote capital formation. With respect 

to the proposed requirements for 

enhanced disclosure by mutual funds, 

although we believe that the proposed 

amendments would benefit investors, 

the magnitude of the effect of the 

proposed amendments on efficiency, 

competition, and capital formation, and 

the extent to which they would be offset 

by the costs of the proposals, are 

difficult to quantify. 

The Commission also preliminarily 

believes that the proposals would 

enhance competition because investors 

would have access to information that 

would allow them to better understand 

and differentiate among various 

investments. Because investors would 

be in a better position to better compare 

the costs of these investments, market 

participants would be encouraged to 

compete on price, thereby increasing 

market efficiency. 

• The Commission requests comment 

on whether the proposed amendments 

are expected to promote efficiency, 

competition, and capital formation. 

XI. Consideration of Impact on the 

Economy 

For purposes of the Small Business 

Regulatory Enforcement Fairness Act of 

1996, or ‘‘SBREFA,’’ 211 we must advise 

the Office of Management and Budget as 

to whether the proposed regulation and 

disclosure requirements constitute 

‘‘major’’ rules. Under SBREFA, a rule is 

considered ‘‘major’’ where, if adopted, it 

results or is likely to result in:

• An annual effect on the economy of 

$100 million or more (either in the form 

of an increase or a decrease); 

• A major increase in costs or prices 

for consumers or individual industries; 

or 

• Significant adverse effect on 

competition, investment or innovation. 

If a rule is ‘‘major,’’ its effectiveness 

will generally be delayed for 60 days 

pending Congressional review. We 

request comment on the potential 

impact of the proposed regulation and 

disclosure requirements on the economy 

on an annual basis. Commenters are 

requested to provide empirical data and 

other factual support for their view to 

the extent possible.

XII. Initial Regulatory Flexibility Act 

Analysis 

Congress enacted the Regulatory 

Flexibility Act, 5 U.S.C. 601 et seq, to 

address concerns related to the effects of 

agency rules on small entities. The 

Commission is sensitive to the impact 

its rules may impose on small entities. 

This Initial Regulatory Flexibility 

Analysis has been prepared in 

accordance with 5 U.S.C. 603, and 

relates to the Commission’s proposed 

rule 15c2–2, 15c2–3 and amendments to 

rule 10b–10 and Form N–1A. 

A. Reasons for, and Objectives of, 

Proposed Rules 15c2–2 and 15c2–3 and 

Proposed Amendments to Rule 10b–10 

and Form N–1A 

The Commission is proposing rules 

15c2–2 and 15c3–3 to address the 

concerns that investors in mutual fund 

shares, UIT interests and 529 plan 

securities be provided with adequate 

access to information regarding the costs 

of their investments, as well as the 

conflicts of interest their broker-dealers 

face. As noted above, those costs, and 

related distribution arrangements, have 

evolved substantially since 1977, when 

the Commission adopted its general 

confirmation rule—rule 10b–10.212 We 

believe that disclosure of information 

about those costs and the arrangements 

that lead to conflicts of interest can help 

investors make better informed 

investment decisions.

Similarly, the Commission is 

proposing amendments to rule 10b–10 

to eliminate duplicative requirements 

and to address concerns that certain 

material information has not been 

included in confirmations of 

transactions of callable preferred stock 

and redeemable debt. As described in 

detail above, the Commission proposes 

to amend rule 10b–10 to require brokerdealers to disclose whenever preferred 

stock could be called by the issuer. Rule 

10b–10 requires similar disclosure for 

transactions in callable debt securities. 

The Commission further proposes to 

amend rule 10b–10 to require disclosure 

of the date of first call for transactions 

in callable debt securities. Finally, the 

Commission is proposing amendments 

to Form N–1A in order to provide 

investors with a better understanding of 

the costs of investing in a fund with a 

sales load, and of revenue sharing 

payments to an investor’s financial 

intermediary. 

B. Legal Basis 

The Commission is proposing new 

rule 15c2–2, new rule 15c2–3 and 

amendments to rule 10b–10 under the 

Exchange Act pursuant to the authority 

conferred by the Exchange Act, 

including Sections 10, 11, 15, 17, 23(a), 

and 36 [15 U.S.C. 78j, 78k, 78o, 78q, 

78w(a), and 78mm] and Sections 12(b) 

and 38 of the Investment Company Act 

[15 U.S.C. 80a–12(b) and 80a–37]. The 

Commission is proposing amendments 

to Form N–1A pursuant to authority set 

forth in Sections 5, 6, 7, 10, and 19(a) 

of the Securities Act [15 U.S.C. 77e, 77f, 

77g, 77j, and 77s(a)], and Sections 8, 

12(b), 24(a), 30, and 38 of the 

Investment Company Act [15 U.S.C. 

80a–8, 80a–12(b), 80a–24(a), 80a–29, 

and 80a–37]. 

C. Small Entities Subject to Proposed 

Rules 15c2–2 and 15c2–3 and Proposed 

Amendments to Rule 10b–10 and Form 

N–1A 

Proposed rules 15c2–2 and 15c2–3 

would apply to all brokers, dealers and 

municipal securities dealers, regardless 

of size, that effect transactions in mutual 

fund shares, UIT interests and 529 plan 

securities. The proposed amendments to 

rule 10b–10 would exclude from the 

general disclosure requirements of rule 

10b–10 transactions in those securities. 

The proposed amendments to rule 10b–

10 would also require all broker-dealers, 

regardless of size, to provide 

confirmation disclosure about the 

callable nature of preferred stock and, in 

the case of debt securities that are 

effected on the basis of yield-to-call, the 

date upon which the debt securities may 

first be called. 

For purposes of the Regulatory 

Flexibility Act, a broker-dealer is a 

small business if it had total capital (net 

worth plus subordinated liabilities) of 

less than $500,000 on the date in the 

prior fiscal year as of which its audited 

6476 Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 

213 17 CFR 240.0–10.

214This estimate is based on information 

provided by registered broker-dealers to the 

Commission in FOCUS Reports.

215 17 CFR 270.0–10.

216This estimate is based on analysis by the 

Division of Investment Management staff of 

information from databases compiled by third-party 

information providers, including Morningstar, Inc., 

and Lipper.

217 It is important to note, however, that 

confirmations for transactions in covered securities 

are currently required to be delivered pursuant to 

rule 10b–10 or MSRB rule G–15, as applicable. As 

a result, the burden for generating and sending 

confirmations would not be entirely new, but 

would reflect a shift of a burden of 16.7 million 

hours from rule 10b–10 to proposed rule 15c2–2.

218The staff has estimated for purposes of the 

Paperwork Reduction Act that these external costs 

would reflect an increase of $160 million over the 

external cost of delivering the confirmations were 

they to be delivered pursuant to rule 10b–10.

financial statements were prepared 

pursuant to rule 17a–5(d) of the 

Exchange Act or, if not required to file 

such statements, a broker or dealer that 

had total capital (net worth plus 

subordinated liabilities) of less than 

$500,000 on the last business day of the 

preceding fiscal year (or in the time that 

it has been in business, if shorter) and 

if it is not an affiliate of an entity that 

is not a small business.213 The 

Commission staff estimates that 

approximately 885 brokers, dealers and 

municipal securities dealers meet this 

definition.214

The proposed amendments to Form 

N–1A would apply to all mutual funds. 

For purposes of the Regulatory 

Flexibility Act, an investment company 

is a small entity if it, together with other 

investment companies in the same 

group of related investment companies, 

has net assets of $50 million or less as 

of the end of its most recent fiscal 

year.215 Approximately 145 investment 

companies registered on Form N–1A 

meet this definition.216

D. Reporting, Recordkeeping and Other 

Compliance Requirements 

As described above, proposed rule 

15c2–2 and the amendments to rule 

10b–10 would require additional 

information to be provided to investors 

in transaction confirmations. Proposed 

rule 15c2–3 would require information 

to be delivered to customers at the time 

they make investment decisions in 

connection with transactions involving 

mutual fund shares, UIT interests and 

529 plan securities. 

For purposes of the Paperwork 

Reduction Act, the Commission staff has 

estimated that the proposed disclosure 

requirements under proposed rule 

15c2–2 would result in a one-time 

burden of 15 million hours and an 

annual burden of 18.7 million hours 217

to brokers, dealers and municipal 

securities dealers, and their vendors, in 

connection with delivering 

confirmations in for transactions in 

mutual fund shares and UIT interests. 

The Commission staff estimates that the 

one-time burden would result in total 

internal costs of $850 million, or 

approximately $157,407, on average, per 

broker, dealer and municipal securities 

dealer, and that the annual burden 

would result in total internal costs of 

$1.99 billion,218 or approximately 

$367,593, on average, per broker, dealer 

and municipal securities dealer. As 

discussed above, as a general matter 

medium-sized and smaller firms, and 

also some larger firms, use third-party 

service providers, or vendors, to 

generate the data necessary to send 

confirmations. They may also use 

vendors to actually send confirmations 

to investors. Therefore, the firms’

vendors would be required to reprogram 

their software and update their systems 

to generate the data that would allow 

their clients to comply with proposed 

rule 15c2–2. The staff understands from 

discussions with vendors that the 

allocation of costs would coincide 

roughly with the volume of the client’s 

transactions, so that a broker, dealer or 

municipal securities dealer that 

executes fewer transactions involving 

covered securities would be allocated 

less of its vendor’s costs than a broker, 

dealer or municipal securities dealer 

that executes more transactions.

The Commission staff has further 

estimated that the disclosure 

requirements of rule 15c2–3 would 

result in a one-time burden of 7 million 

hours and an annual burden of 18.7 

million hours to brokers, dealers and 

municipal securities dealers, and their 

vendors, in connection with delivering 

point of sale disclosure for transactions 

in mutual fund shares and UIT interests. 

The Commission staff estimates that the 

one-time burden would result in total 

internal costs of $450 million, or 

approximately $83,333, on average, per 

broker, dealer and municipal securities 

dealer, and that the annual burden 

would result in total internal costs of 

$935 million, or approximately 

$173,148, on average, per broker, dealer 

and municipal securities dealer. 

In addition, the Commission staff has 

further estimated that the disclosure 

requirements of rule 10b–10, including 

the proposed amendments, would result 

in an annual burden of 42.3 million 

hours to brokers, dealers and municipal 

securities dealers, and their vendors, in 

connection with delivering 

confirmations in connection with 

securities transactions. The Commission 

staff estimates that this burden would 

result in total internal costs of $1.91 

billion annually, or approximately 

$773,000, on average, per affected 

entity. We note that this is a net 

reduction in the annual costs for 

complying with rule 10b–10, as 

transactions that would otherwise be 

required to be delivered pursuant to rule 

to 10b–10 would be delivered pursuant 

to rule 15c2–2. 

Finally, the Commission staff has 

further estimated that the disclosure 

requirements of the proposed 

amendments to Form N–1A would 

increase the hour burden of prospectus 

disclosure by 1,968 hours. The 

Commission staff has estimated that this 

additional burden would increase total 

internal costs of filing an initial 

registration statement or post-effective 

amendment by $98,400 annually, or 

$14.01 per affected mutual fund 

portfolio.

• The Commission requests comment 

on the effect proposed new rules 15c2–

2 and 15c2–3 and the proposed 

amendments to rule 10b–10 and Form 

N–1A would have on small entities. The 

Commission specifically requests data 

and analysis of the costs to implement 

and comply with the proposals, 

including expenditures of time and 

money for: any employee training; 

attorney, computer programmer or other 

professional time; preparing and 

processing relevant materials; and 

recordkeeping. 

E. Duplicative, Overlapping or 

Conflicting Federal Rules 

There are currently no rules that 

conflict with proposed new rules 15c2–

2 and 15c2–3 or the amendments to rule 

10b–10. The Commission notes, 

however, that MSRB rule G–15 is a 

separate confirmation rule that governs 

member transactions in municipal 

securities, including municipal fund 

securities. Furthermore, NASD Rule 

2230 requires broker-dealers that are 

members of NASD to deliver a written 

notification containing certain 

information, including whether the 

member is acting as a broker for the 

customer or is working as a dealer for 

its own account. Brokers and dealers 

typically deliver this information in 

confirmations that fulfill the 

requirements of rule 10b–10. The 

Commission staff believes that, where 

required, brokers and dealers would 

incorporate such information into 

confirmations delivered pursuant to rule 

15c2–2. 

In addition, the Commission notes 

that information required for the point 

of sale disclosures pursuant to proposed 

rule 15c2–3 would also be required in 

confirmations delivered pursuant to 

Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 6477

219We do not edit personal identifying 

information, such as names or electronic mail 

addresses, from electronic submissions. You should 

submit only information that you wish to make 

available publicly.

proposed rule 15c2–2. The Commission 

believes that this overlap is appropriate 

because the information to be provided 

to investors at point of sale is helpful for 

the customer when making his or her 

investment decision. Confirmation 

disclosure of this information would 

serve to alert the customer to any 

misunderstandings about the rights 

associated with his or her investment in 

a security, promote the timely 

resolution of problems, and better 

enable the investor to evaluate potential 

future transactions involving that 

security. 

Finally, there are no rules that 

duplicate, overlap, or conflict with the 

proposed amendments to Form N–1A. 

F. Significant Alternatives 

The Regulatory Flexibility Act directs 

us to consider significant alternatives 

that would accomplish our stated 

objective, while minimizing any 

significant adverse impact on small 

issuers. In connection with the 

proposed amendments, the Commission 

considered the following alternatives: (i) 

The establishment of differing 

compliance or reporting requirements or 

timetables that take into account the 

resources available to small entities; (ii) 

the clarification, consolidation, or 

simplification of compliance and 

reporting requirements under the 

proposed amendments for small 

entities; (iii) the use of performance 

rather than design standards; and (iv) an 

exemption from coverage of the 

proposed amendments, or any part 

thereof, for small entities. 

The Commission believes at the 

present time that special compliance or 

reporting requirements for small 

entities, or an exemption from coverage 

for small entities, would not be 

appropriate or consistent with investor 

protection. Different disclosure 

requirements for brokers, dealers, or 

municipal securities dealers that are 

small entities may create the risk that 

the investors who effect securities 

transactions through such small entities 

would not be as able as investors who 

effect transactions through larger such 

entities to assess information, including 

the distribution-related costs or conflicts 

of interest. Moreover, different 

disclosure requirements could create 

investor confusion if it creates the 

impression that small brokers, dealers or 

municipal securities dealers do not 

engage in the arrangements that are 

addressed by the proposals, while large 

such entities do. We believe, therefore, 

that it is important for the disclosure 

that would be required by the proposed 

amendments to be provided to 

shareholders by all brokers, dealers and 

municipal securities dealers, not just 

those that are not considered small 

entities. 

We have endeavored through 

proposed new rules 15c2–2 and 15c2–

3 and the amendments to rule 10b–10 

and Form N–1A to minimize the 

regulatory burden on all brokers, dealers 

and municipal securities dealers, 

including small entities, while meeting 

our regulatory objectives. Small entities 

should benefit from the Commission’s 

reasoned approach to the proposed new 

rules and proposed amendments to the 

same degree as other brokers, dealers 

and municipal securities dealers. 

Further consolidation or simplification 

of the proposals for brokers, dealers and 

municipal securities dealers that are 

small entities would be inconsistent 

with the Commission’s goals for 

fostering investor protection. Finally, 

we do not consider using performance 

rather than design standards to be 

consistent with our statutory mandate of 

investor protection in the present 

context. 

G. Solicitation of Comments 

The Commission encourages the 

submission of written comments with 

respect to any aspect of this analysis. 

Comment is specifically requested on 

the number of small entities that would 

be affected by proposed new rules 15c2–

2 and 15c2–3 and the proposed 

amendments to rule 10b–10 and Form 

N–1A and the likely impact of the 

proposals on small entities. Commenters 

are asked to describe the nature of any 

impact and provide empirical data 

supporting the extent of the impact. 

These comments will be considered in 

the preparation of the Final Regulatory 

Flexibility Analysis, if the proposals are 

adopted, and will be placed in the same 

public file as comments on the 

proposals themselves. Commenters 

should provide empirical data to 

support their views. Comments should 

be submitted in triplicate to Jonathan G. 

Katz, Secretary, Securities and Exchange 

Commission, 450 Fifth Street, NW., 

Washington, DC 20549–0609. 

Comments also may be submitted 

electronically at the following e-mail 

address: rule-comments@sec.gov. All 

comment letters should refer to File No. 

S7–06–04; this file number should be 

included on the subject line if E-mail is 

used. Comment letters will be available 

for inspection and copying in the 

Commission’s Public Reference Room at 

the same address. Electronically 

submitted comment letters will be 

posted on the Commission’s Internet 

Web site (http://www.sec.gov).219

XIII. Statutory Authority 

The Commission is proposing new 

rule 15c2–2, new rule 15c2–3 and 

amendments to rule 10b–10 under the 

Exchange Act pursuant to the authority 

conferred by the Exchange Act, 

including Sections 10, 11, 15, 17, 23(a), 

and 36 [15 U.S.C. 78j, 78k, 78o, 78q, 

78w(a), and 78mm] and Sections 12(b) 

and 38 of the Investment Company Act 

[15 U.S.C. 80a–12(b) and 80a–37]. The 

Commission is proposing amendments 

to Form N–1A pursuant to authority set 

forth in Sections 5, 6, 7, 10, and 19(a) 

of the Securities Act [15 U.S.C. 77e, 77f, 

77g, 77j, and 77s(a)], and Sections 8, 

12(b), 24(a), 30, and 38 of the 

Investment Company Act [15 U.S.C. 

80a–8, 80a–12(b), 80a–24(a), 80a–29, 

and 80a–37].

Text of Proposed Rules

List of Subjects 

17 CFR Part 239

Reporting and recordkeeping 

requirements, Securities. 

17 CFR Part 240

Broker-dealers, Reporting and 

recordkeeping requirements, Securities. 

17 CFR Part 274

Investment companies, Reporting and 

recordkeeping requirements, Securities.

For the reasons set forth in the 

preamble, Title 17, Chapter II of the 

Code of Federal Regulations is proposed 

to be amended as follows:

PART 239—FORMS PRESCRIBED 

UNDER THE SECURITIES ACT OF 1933

1. The authority citation for part 239 

continues to read in part as follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 

77z–2, 77sss, 78c, 78l, 78m, 78n, 78o(d), 

78u–5, 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 79l, 

79m, 79n, 79q, 79t, 80a–8, 80a–24, 80a–26, 

80a–29, 80a–30, and 80a–37, unless 

otherwise noted.

* * * * *

PART 240—GENERAL RULES AND 

REGULATIONS, SECURITIES 

EXCHANGE ACT OF 1934

2. The authority citation for Part 240 

continues to read, in part, as follows:

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 

77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 

77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j, 

6478 Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 

78j–l, 78k, 78k–1, 78l, 78m, 78n, 78o, 78p, 

78q, 78s, 78u–5, 78w, 78x, 78ll, 78mm, 79q, 

79t, 80a–20, 80a–23, 80a–29, 80a–37, 80b–3, 

80b–4, 80b–11, and 7201 et seq.; and 18 

U.S.C. 1350, unless otherwise noted.

* * * * *

3. Section 240.10b–10 is amended by: 

a. Revising the Preliminary Note; 

b. Revising the introductory text of 

paragraph (a) and paragraphs (a)(4), 

(a)(6), (a)(9) and (b); 

c. Removing paragraph (d)(6); 

d. Redesignating paragraphs (d)(7), 

(d)(8), (d)(9) and (d)(10) as paragraphs 

(d)(6), (d)(7), (d)(8) and (d)(9); 

e. Revising paragraph (e); and 

f. Adding paragraph (g). 

The additions and revisions read as 

follows:

§ 240.10b–10 Confirmation of transactions.

Preliminary Note. This section requires 

broker-dealers to disclose specified 

information in writing to customers at or 

before completion of a transaction. Section 

240.15c2–2 sets forth the confirmation 

requirements that apply to broker-dealer 

transactions in certain investment company 

securities or municipal fund securities. The 

requirements under this section that 

particular information be disclosed at or 

before completion of a transaction are not 

determinative of, and do not exhaust, a 

broker’s, dealer’s or municipal securities 

dealer’s obligations under the general 

antifraud provisions of the federal securities 

laws, or under any other legal requirements, 

to disclose additional information to a 

customer at the time of the customer’s 

investment decision.

(a) Disclosure requirement. It shall be 

unlawful for any broker or dealer to 

effect for or with an account of a 

customer any transaction in, or to 

induce the purchase or sale by such 

customer of, any security (other than 

securities exempted by paragraph (g) of 

this section) unless such broker or 

dealer, at or before completion of such 

transaction, gives or sends to such 

customer written notification disclosing:

* * * * *

(4) (i) In the case of any transaction in 

a debt security subject to redemption 

before maturity, a statement to the effect 

that such debt security may be 

redeemed in whole or in part before 

maturity, that such a redemption could 

affect the yield represented and the fact 

that additional information is available 

upon request; 

(ii) In the case of any transaction in 

preferred stock that is subject to 

repurchase by the issuer at a specified 

price, a statement to the effect that such 

preferred stock may be repurchased at 

the election of the issuer at any time; 

and

* * * * *

(6) In the case of a transaction in a 

debt security effected on the basis of 

yield: 

(i) The yield at which the transaction 

was effected, including the percentage 

amount and its characterization (e.g.,

current yield, yield to maturity, or yield 

to call) and if effected at yield to call, 

the type of call, the call date and, if 

different, the first date upon which the 

security may be called, and call price; 

and 

(ii) The dollar price calculated from 

the yield at which the transaction was 

effected; and 

(iii) If effected on a basis other than 

yield to maturity and the yield to 

maturity is lower than the represented 

yield, the yield to maturity as well as 

the represented yield; provided, 

however, that this paragraph (a)(6)(iii) 

shall not apply to a transaction in a debt 

security that either: 

(A) Has a maturity date that may be 

extended by the issuer thereof, with a 

variable interest rate payable thereon; or 

(B) Is an asset-backed security, that 

represents an interest in or is secured by 

a pool of receivables or other financial 

assets that are subject continuously to 

prepayment; and

* * * * *

(9) That the broker or dealer is not a 

member of the Securities Investor 

Protection Corporation (SIPC), or that 

the broker or dealer clearing or carrying 

the customer account is not a member 

of SIPC, if such is the case. 

(b) Alternative periodic reporting. A 

broker or dealer may effect transactions 

for or with the account of a customer 

without giving or sending to such 

customer the written notification 

described in paragraph (a) of this 

section if: 

(1) Such transactions are effected 

pursuant to a periodic plan; and 

(2) Such broker or dealer gives or 

sends to such customer within five 

business days after the end of each 

quarterly period, a written statement 

disclosing each purchase or redemption, 

effected for or with, and each dividend 

or distribution credited to or reinvested 

for, the account of such customer during 

the month; the date of such transaction; 

the identity, number, and price of any 

securities purchased or redeemed by 

such customer in each such transaction; 

the total number of shares of such 

securities in such customer’s account; 

any remuneration received or to be 

received by the broker or dealer in 

connection therewith; and that any 

other information required by paragraph 

(a) of this section will be furnished 

upon written request; provided, 

however, that the written statement may 

be delivered to some other person 

designated by the customer for 

distribution to the customer; and 

(3) Such customer is provided with 

prior notification in writing disclosing 

the intention to send the written 

information referred to in paragraph 

(b)(1) of this section in lieu of an 

immediate confirmation.

* * * * *

(e) Security futures products. The 

provisions of paragraphs (a) and (b) of 

this section shall not apply to a broker 

or dealer registered pursuant to section 

15(b)(11)(A) of the Act (15 U.S.C. 

78o(b)(11)(A)) to the extent that it effects 

transactions for customers in security 

futures products in a futures account (as 

that term is defined in § 240.15c3–

3(a)(15)) and a broker or dealer 

registered pursuant to section 15(b)(1) of 

the Act (15 U.S.C. 78o(b)(1)) that is also 

a futures commission merchant 

registered pursuant to section 4f(a)(1) of 

the Commodity Exchange Act (7 U.S.C. 

6f(a)(1)), to the extent that it effects 

transactions for customers in security 

futures products in a futures account (as 

that term is defined in § 240.15c3–

3(a)(15)); provided that the broker or 

dealer that effects any transaction for a 

customer in security futures products in 

a futures account gives or sends to the 

customer no later than the next business 

day after execution of any futures 

securities product transaction, written 

notification disclosing: 

(1) The date the transaction was 

executed, the identity of the single 

security or narrow-based security index 

underlying the contract for the security 

futures product, the number of contracts 

of such security futures product 

purchased or sold, the price, and the 

delivery month; 

(2) The source and amount of any 

remuneration received or to be received 

by the broker or dealer in connection 

with the transaction, including, but not 

limited to, markups, commissions, 

costs, fees, and other charges incurred 

in connection with the transaction; 

provided that if no remuneration is to be 

paid for an initiating transaction until 

the occurrence of the corresponding 

liquidating transaction, that the broker 

or dealer shall disclose the amount of 

remuneration only on the confirmation 

for the liquidating transaction; 

(3) The fact that information about the 

time of the execution of the transaction, 

the identity of the other party to the 

contract, and whether the broker or 

dealer is acting as agent for such 

customer, as agent for some other 

person, as agent for both such customer 

and some other person, or as principal 

for its own account, and if the broker or 

Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 6479

dealer is acting as principal, whether it 

is engaging in a block transaction or an 

exchange of security futures products 

for physical securities, will be available 

upon written request of the customer; 

and 

(4) Whether payment for order flow is 

received by the broker or dealer for such 

transactions, the amount of this 

payment and the fact that the source 

and nature of the compensation 

received in connection with the 

particular transaction will be furnished 

upon written request of the customer; 

provided that brokers or dealers that do 

not receive payment for order flow have 

no disclosure obligation under this 

paragraph.

* * * * *

(g) This section does not apply to 

transactions in any of the following 

securities: 

(1) U.S. Savings Bonds; 

(2) Municipal securities; and 

(3) Any other security that is a 

‘‘covered security’’ as provided in 

§ 240.15c2–2. 

4. Section 240.15c2–2 is added to read 

as follows:

§ 240.15c2–2 Confirmation of transactions 

in open-end management investment 

company shares, unit investment trust 

interests, and municipal fund securities 

used for education savings.

Preliminary Note. This section requires 

brokers (including municipal securities 

brokers), dealers and municipal securities 

dealers to disclose specified information in 

writing to customers at or before completion 

of a transaction in certain investment 

company securities or municipal fund 

securities, while § 240.10b–10 sets forth the 

confirmation requirements that apply to 

other transactions. The requirements under 

this section that particular information be 

disclosed at or before completion of a 

transaction are not determinative of, and do 

not exhaust, a broker’s, dealer’s or municipal 

securities dealer’s obligations under the 

general antifraud provisions of the federal 

securities laws, or under any other legal 

requirements, to disclose additional 

information to a customer at the time of the 

customer’s investment decision.

(a) Disclosure requirement. It shall be 

unlawful for any broker, dealer or 

municipal securities dealer to effect for 

or with an account of a customer any 

transaction in, or to induce the purchase 

or sale by such customer of, any covered 

security unless the broker, dealer or 

municipal securities dealer complies 

with the requirements set forth in 

paragraphs (b), (c), (d) and (e) of this 

section. All disclosures made pursuant 

to paragraphs (b) and (c) of this section 

shall be made in a manner consistent 

with Schedule 15C (§ 240.15c–100). 

(b) General disclosure requirement. At 

or before the completion of a transaction 

in any covered security, the broker, 

dealer or municipal securities dealer 

shall give or send to such customer 

written notification disclosing: 

(1) The date of the transaction; 

(2) The issuer and class of the covered 

security; 

(3) The net asset value of the shares 

or units and, if different, the public 

offering price of the shares or units; 

(4) The number of shares or units of 

the security purchased or sold by the 

customer, the total dollar amount paid 

or received in the transaction and the 

net amount of the investment bought or 

sold in the transaction (equal to the 

number of shares or units bought or sold 

multiplied by the net asset value of 

those shares or units); 

(5) Any commission, markup or other 

remuneration received or to be received 

by the broker, dealer or municipal 

securities dealer from the customer in 

connection with the transaction; 

(6) In the case of transactions in 

which a customer sells shares or units 

of a covered security, the amount of any 

deferred sales load that the customer 

has incurred or will incur in connection 

with the transaction; and 

(7) That the broker, dealer or 

municipal securities dealer (other than 

a municipal securities dealer that is a 

bank) is not a member of the Securities 

Investor Protection Corporation (SIPC), 

or that the broker, dealer or municipal 

securities dealer clearing or carrying the 

customer account is not a member of 

SIPC, if such is the case; provided, 

however, that this paragraph (b)(7) shall 

not apply in the case of a transaction in 

shares or units of a covered security if: 

(i) The customer sends funds or 

securities directly to, or receives funds 

or securities directly from, the issuer of 

the covered security, its transfer agent, 

its custodian, or other designated agent, 

and such person is not an associated 

person of the broker or dealer required 

by paragraph (a) of this section to send 

written notification to the customer; and 

(ii) The written notification required 

by paragraph (a) of this section is sent 

on behalf of the broker or dealer to the 

customer by a person described in 

paragraph (b)(7)(i) of this section. 

(c) Additional disclosure requirement 

for purchases. At or before the 

completion of any transaction in which 

a customer purchases a covered 

security, the broker, dealer or municipal 

securities dealer also shall give or send 

to such customer written notification 

that discloses the following information: 

(1) The amount of any sales load that 

the customer has incurred or will incur 

at the time of purchase, expressed in 

dollars and as a percentage of the net 

amount invested, together with: 

(i) If the customer will incur a sales 

load at the time of sale, information 

about the availability of breakpoints as 

reflected in Schedule 15C (§ 240.15c–

100). with regard to the covered 

security, including a statement of the 

applicable sales load as set forth in the 

prospectus, reflecting any breakpoint 

discount and the value of the securities 

position (based on net asset value, 

public offering price, or other applicable 

value) to which the sales load is 

applied; or 

(ii) If the customer will not incur a 

sales load at the time of sale, 

information about the availability of 

breakpoints as reflected in Schedule 

15C (§ 240.15c–100) with regard to a 

different class of the covered security, 

including a statement of the sales load 

that the customer would have incurred 

at the time of sale if the transaction had 

been in that different class of the 

covered security. 

(2) An explanation of the potential 

amount of any deferred sales load that 

the customer may incur in connection 

with any subsequent sale of the shares 

or units purchased in the transaction 

(other than deferred sales loads of no 

more than one percent that expire no 

later than one year after purchase, when 

no other sales load would be incurred 

on that transaction), including, for each 

year that the deferred sales load may be 

in effect: 

(i) The maximum amount of the 

deferred sales load that would be 

associated with the sale of those shares 

or units, expressed in dollars; and 

(ii) The maximum amount of the 

deferred sales load that would be 

associated with the sale of those shares 

or units, expressed as a percentage of 

the net asset value at the time of 

purchase or at the time of sale, as 

applicable. 

(3) An explanation of any asset-based 

sales charges and asset-based service 

fees incurred, or to be incurred, by the 

issuer of the covered security in 

connection with the customer’s 

purchase of the shares or units. Based 

on the issuer’s policies at the time of the 

purchase, this explanation shall state: 

(i) The annual amount of asset-based 

sales charges and asset-based service 

fees incurred in connection with the 

shares or units purchased, as a 

percentage of net asset value; and 

(ii) The total annual dollar amount of 

asset-based sales charges and assetbased service fees incurred in 

connection with the shares or units 

purchased in the transaction, if the net 

asset value does not change. 

(4) The amount of any dealer 

concession that the broker, dealer or 

municipal securities dealer will earn in 

6480 Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 

connection with the transaction, 

expressed in dollars and as a percentage 

of the net amount invested. 

(5)(i) The amount directly or 

indirectly earned from the fund 

complex by:

(A) The broker, dealer or municipal 

securities dealer; and 

(B) Any associated person that is a 

broker, dealer or municipal securities 

dealer; and 

(C) If the covered security is not a 

proprietary covered security, any other 

associated person of the broker, dealer 

or municipal securities dealer. 

(ii) The broker, dealer or municipal 

securities dealer may disclose the 

information required to be disclosed 

pursuant to paragraphs (c)(5)(i)(A), (B) 

and (C) of this section as a percentage 

of the total cumulative net asset value 

of the covered securities issued by the 

fund complex that are sold by such 

broker, dealer or municipal securities 

dealer over the four most recent 

calendar quarters (or over the four 

calendar quarters preceding the most 

recent calendar quarter if the date of the 

transaction is less than 30 days after the 

end of the most recent calendar quarter), 

in connection with the following types 

of arrangements: 

(A) Revenue sharing payments from 

persons within the fund complex; or 

(B) Commissions associated with 

portfolio securities transactions, 

including markups or other 

remuneration associated with 

transactions effected on a riskless 

principal basis, on behalf of the issuer 

of the covered security, or issuers of 

other covered securities within the fund 

complex. 

(iii) For each of the types of 

arrangements described in paragraph 

(c)(5)(ii) of this section, the broker, 

dealer or municipal securities dealer 

shall disclose the percentage required 

pursuant to that paragraph and the total 

dollar amount of remuneration it may 

expect to receive in connection with the 

transaction, calculated by multiplying 

that percentage by the net amount 

invested in the transaction. In addition, 

to the extent that the broker, dealer or 

municipal securities dealer has entered 

into a revenue sharing arrangement or 

understanding that would result in a 

specific amount of remuneration in 

connection with purchases of the 

covered security, the broker, dealer or 

municipal securities dealer shall also 

disclose that remuneration as a 

percentage of the net amount invested 

and the total dollar amount of 

remuneration it may expect to receive in 

connection with the transaction. 

(6) If applicable, that the broker, 

dealer or municipal securities dealer 

engages in the following types of 

differential compensation practices 

related to the covered security 

purchased: 

(i) Payment of differential 

compensation to any associated persons 

in connection with the sale of a class of 

covered securities that charges a 

deferred sales load (other than deferred 

sales loads of no more than one percent 

that expire no later than one year after 

purchase, when no other sales load 

would be incurred on that transaction), 

if the customer purchased a covered 

security that charges that type of sales 

load; and 

(ii) Payment of differential 

compensation to any associated persons 

in connection with the sale of a 

proprietary covered security, if the 

customer purchased a proprietary 

covered security; and 

(iii) For each of the types of 

differential compensation described in 

paragraphs (c)(6)(i) and (ii) of this 

section, the broker, dealer or municipal 

securities dealer shall disclose whether 

it provides differential compensation by 

means of a series of three checkboxes, 

associated with a yes, no or ‘‘not 

applicable’’ response. 

(d) Alternative periodic reporting. A 

broker, dealer or municipal securities 

dealer may effect transactions for or 

with the account of a customer without 

giving or sending to such customer the 

written notification described in 

paragraphs (b) and (c) of this section if: 

(1) The broker, dealer or municipal 

securities dealer: 

(i) Effects such transactions pursuant 

to a covered securities plan, or 

(ii) Effects such transactions in shares 

of any open-end management 

investment company registered under 

the Investment Company Act of 1940 

(15 U.S.C. 80a) (the ‘‘Investment 

Company Act’’) that holds itself out as 

a money market fund and attempts to 

maintain a stable net asset value per 

share if no sales load is deducted upon 

the purchase or redemption of shares in 

the money market fund; and 

(2) The broker, dealer or municipal 

securities dealer gives or sends to the 

customer within five business days after 

the end of each quarterly period, for 

transactions involving covered 

securities plans, and after the end of 

each monthly period for other 

transactions described in paragraph 

(d)(1) of this section, a written statement 

disclosing: 

(i) Each purchase or redemption, 

effected for or with, and each dividend 

or distribution credited to or reinvested 

for, the account of such customer during 

the period; 

(ii) The total number of shares or 

units of the covered security in the 

customer’s account; 

(iii) The information required by 

paragraph (b) of this section and, to the 

extent applicable, paragraphs (c)(1) and 

(c)(4) of this section, related to each 

purchase, redemption, credit or 

reinvestment; 

(iv) The information required by 

paragraphs (c)(5) and (c)(6) of this 

section, as of the date of the final 

purchase or reinvestment during the 

period; 

(v) The information required by 

paragraph (c)(2) of this section, based on 

the total value of the purchases or 

reinvestments during the period; and 

(vi) The information required by 

paragraph (c)(3) of this section, based on 

the total purchases or reinvestments 

during the period and on the net asset 

value of the covered security at the end 

of the period; and 

(3) The broker, dealer or municipal 

securities dealer provides prior 

notification to the customer, in writing, 

disclosing the intention to send the 

written information referred to in 

paragraph (d)(1) of this section in lieu 

of an immediate confirmation, and 

provides to the customer at least one 

written disclosure document consistent 

with paragraphs (b) and (c) of this 

section prior to relying on this 

paragraph (d) for any transaction in 

which the customer purchases a covered 

security. 

(e) Comparison ranges. (1) For the 

following disclosures required by 

paragraphs (b), (c) and (d) of this 

section, the broker, dealer or municipal 

securities dealer also shall disclose the 

median information and comparison 

ranges for the following: 

(i) Front-end sales loads (paragraph 

(c)(1) of this section)—the median and 

95th percentile range of front-end sales 

loads involving the same category of 

covered security (i.e., mutual fund, unit 

investment trust or municipal fund 

security); 

(ii) Deferred sales loads (paragraph 

(c)(2) of this section)—the median and 

95th percentile range of deferred sales 

loads involving the same category of 

covered security, for each year in which 

the sales load may be in effect; 

(iii) Annual asset-based sales charges 

and service fees (paragraph (c)(3)(iv) of 

this section)—the median and 95th 

percentile range of asset-based 

distribution and service fees involving 

the same category of covered security; 

(iv) Dealer concession or other sales 

fees (paragraph (c)(4) of this section)—

the median and 95th percentile range of 

dealer concessions or other sales fees 

Federal Register / Vol. 69, No. 27 / Tuesday, February 10, 2004 / Proposed Rules 6481

involving the same category of covered 

security; 

(v) Revenue sharing (paragraph 

(c)(5)(i) of this section)—the median and 

95th percentile range of revenue sharing 

involving transactions by all brokers, 

dealers or municipal securities dealers 

that distribute that category of covered 

security; and 

(vi) Portfolio brokerage commissions 

(paragraph (c)(5)(ii) of this section)—the 

median and 95th percentile range of 

portfolio brokerage commissions 

involving transactions by all brokers, 

dealers or municipal securities dealers 

that distribute that category of covered 

security. 

(2) The median information and 

comparison ranges will be published 

from time to time by the Commission as 

percentages; provided, however, that

this paragraph (e) will not be effective 

until 90 days after the Commission 

publishes the initial schedule of 

comparison ranges in the Federal 

Register. The Commission will publish 

revised ranges in the Federal Register. 

When a range is revised, all disclosures 

pursuant to this section that are 

provided to customers more than 90 

days following the publication of the 

revised ranges shall conform to the 

revised ranges. 

(f) Definitions. For purposes of this 

section: 

(1) Asset-based sales charges means 

all asset-based charges incurred in 

connection with the distribution of a 

covered security, paid by the issuer or 

paid out of the assets of covered 

securities owned by the issuer.

(2) Asset-based service fee means all 

asset-based amounts for personal service 

and/or the maintenance of shareholder 

accounts, paid by the issuer or paid out 

of the assets of covered securities owned 

by the issuer. 

(3) Completion of the transaction has 

the meaning provided in § 240.15c1–1. 

(4) Consistent with Schedule 15C

means using Schedule 15C (§ 240.15c–

100), or using a similar layout of 

disclosure so long as: 

(i) All information specified in 

Schedule 15C is set forth in the 

confirmation; 

(ii) Information specified in Sections 

B through F of Schedule 15C are 

included with no change, including the 

use of bold print for data items printed 

in bold in Schedule 15C, and in the 

order set forth in Schedule 15C; and 

(iii) Information specified in Section 

A of Schedule 15C is displayed 

prominently. 

(5) Covered securities plan means any 

plan under which covered securities are 

purchased by a customer (the payments 

being made directly to, or made payable 

to, the issuer of the securities, or the 

principal underwriter, custodian, 

trustee, or other designated agent of the 

registered investment company), or sold 

by a customer pursuant to: 

(i) An individual retirement or 

individual pension plan qualified under 

the Internal Revenue Code (26 U.S.C. et 

seq. (1986)); 

(ii) A contractual or systematic 

agreement under which the customer 

purchases at the applicable public 

offering price, or redeems at the 

applicable redemption price, such 

securities in specified amounts 

(calculated in security units or dollars 

or by reference to dividends or other 

distributions paid by the issuer) at 

specified time intervals, or at the time 

dividends or other distributions are paid 

by the issuer, and setting forth the 

commissions or charges to be paid by 

such customer in connection therewith 

(or the manner of calculating them); or 

(iii) Any other arrangement involving 

a group of two or more customers and 

contemplating periodic purchases of 

such securities by each customer 

through a person designated by the 

group; provided that such arrangement 

requires the issuer of the covered 

security or its agent: 

(A) To give or send to the designated 

person, at or before the completion of 

the transaction for the purchase of such 

securities, a written notification of the 

receipt of the total amount paid by the 

group; 

(B) To send to anyone in the group 

who was a customer in the prior quarter 

and on whose behalf payment has not 

been received in the current quarter a 

quarterly written statement reflecting 

that a payment was not received on his 

behalf; and 

(C) To advise each customer in the 

group if a payment is not received from 

the designated person on behalf of the 

group within 10 days of a date certain 

specified in the arrangement for 

delivery of that payment by the 

designated person and thereafter to send 

to each such customer the written 

notification described in paragraph (a) 

of this section for the next three 

succeeding payments. 

(6) Covered security means: 

(i) Any security issued by an openend company, as defined by section 

5(a)(1) of the Investment Company Act 

(15 U.S.C. 80a–5(a)(1)), that is not 

traded on a national securities exchange 

or a facility of a national securities 

association; 

(ii) Any security issued by a unit 

investment trust as that term is defined 

by section 4(2) of the Investment 

Company Act (15 U.S.C. 80a–4(2)), but 

is not an exchange-traded fund that is 

traded on a national securities 

exchange; provided, however, that an 

interest in a unit investment trust that 

is the subject of a secondary market 

transaction is not a covered security for 

purposes of this section; and 

(iii) Any municipal fund security. 

(7) Customer shall not include a 

broker, dealer or municipal securities 

dealer. 

(8) Dealer concession means any fees 

that the broker, dealer or municipal 

securities dealer will earn at the time of 

the sale, in connection with the 

transaction, from the issuer of the 

covered security, an agent of the issuer, 

the primary distributor, or any other 

broker, dealer or municipal securities 

dealer. 

(9) Differential compensation means: 

(i) In the case of transactions 

involving the purchase of a class of 

covered security that is associated with 

a deferred sales load (other than classes 

associated with a deferred sales load of 

no more than one percent that expires 

no later than one year after purchase for 

certain transactions, when no other 

sales load would be incurred on that 

transaction), any form of higher 

compensation (including total 

commissions, reimbursement of charges 

or expenses, avoidance of charges or 

expenses, other cash compensation, or 

non-cash compensation) that a broker, 

dealer or municipal securities dealer 

can be expected to pay to any of its 

associated persons over the next year 

(assuming no change in net asset value 

if applicable) in connection with the 

sale of a stated dollar amount of that 

class of covered security, compared 

with the compensation that would have 

been paid to the associated person over 

the next year in connection with the 

sale of the same dollar amount of 

another class of the same covered 

security that is associated with a sales 

load at the time of purchase; and 

(ii) In the case of transactions 

involving the purchase of a proprietary 

covered security: 

(A) Any practice by which a broker, 

dealer or municipal securities dealer 

pays an associated person a higher 

percentage of the firm’s gross dealer 

concession in connection with the sale 

of a proprietary covered security than 

the percentage of the gross dealer 

concession that firm would pay in 

connection with the sale of the same 

dollar amount of any non-proprietary 

covered security offered by the firm; and 

(B) Other practices of a broker, dealer 

or municipal securities dealer that cause 

an associated person to earn a higher 

rate of compensation in connection with 

the sale of a proprietary covered 

security, including but not limited to 

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additional cash compensation or the 

imposition, allocation or waiver of 

expenses, overhead costs or ticket 

charges. 

(10) Fund complex shall include the 

issuer of the covered security (including 

the sponsor, depositor or trustee of a 

unit investment trust, and any insurance 

company issuing a variable annuity 

contract or variable life insurance 

policy), the issuer of any other covered 

security that holds itself out to investors 

as a related company for purposes of 

investment or investor services, any 

agent of any such issuer, any investment 

adviser for any such issuer, and any 

affiliated person (as defined by section 

2(a)(3) of the Investment Company Act 

(15 U.S.C. 80a–2(a)(3))) of any such 

issuer or any such investment adviser. 

(11) Gross dealer concession means 

the total amount of any discounts, 

concessions, fees, service fees, 

commissions or asset-based sales 

charges provided by the issuer of a 

covered security to the broker, dealer or 

municipal securities dealer in 

connection with the sale and 

distribution of the covered security; but 

does not include any commissions 

associated with portfolio securities 

transactions on behalf of the issuer. 

(12) Municipal fund security means 

any municipal security that is issued 

pursuant to a qualified State tuition 

program as defined by section 529 of the 

Internal Revenue Code (26 U.S.C. 529), 

and that is issued by an issuer that, but 

for the application of section 2(b) of the 

Investment Company Act (15 U.S.C. 

80a–2(b)), would constitute an 

investment company within the 

meaning of section 3 of the Investment 

Company Act (15 U.S.C. 80a–3). 

(13) Net amount invested means the 

price paid to purchase the covered 

securities less any applicable sales load. 

(14) Portfolio securities transaction

means any transaction involving 

securities owned by the issuer of a 

covered security, or owned by any other 

issuer within the same fund complex. 

(15) Proprietary covered security

means any covered security as to which 

the broker, dealer or municipal 

securities dealer is an affiliated person 

(as defined by section 2(a)(3) of the 

Investment Company Act (15 U.S.C. 

80a–2(a)(3))) of the issuer, or is an 

associated person of the issuer’s 

investment adviser or principal 

underwriter, or, in the case of a covered 

security that is an interest in a unit 

investment trust, is an associated person 

of a sponsor, depositor or trustee of the 

covered security. 

(16) Revenue sharing means any 

arrangement or understanding by which 

a person within a fund complex, other 

than the issuer of the covered security, 

makes payments to a broker, dealer or 

municipal securities dealer, or any 

associated person of the broker, dealer 

or municipal securities dealer, 

excluding amounts earned at the time of 

the sale that constitute a dealer 

concession or other sales fee and that 

are disclosed pursuant to paragraph 

(b)(4) of this section. 

(17) Sales load has the meaning set 

forth in section 2(a)(35) of the 

Investment Company Act (15 U.S.C. 

80a–2(a)(35)). 

(18) Securities position means the 

value of the purchase of covered 

securities; the value of securities that 

are subject to rights of accumulation 

under the terms of the prospectus with 

respect to the covered security or a 

related class of the covered security, to 

the extent known by the broker, dealer 

or municipal securities dealer, 

including the value of such securities 

purchased in other accounts or by other 

persons; and the value of any such 

securities that are the subject of letters 

of intent that may be considered in 

computing a breakpoint with respect to 

the covered security or a related class of 

the covered security. 

(g) Exemptions. The Commission may 

exempt any broker, dealer or municipal 

securities dealer from the requirements 

of paragraphs (b), (c) (d) and (e) of this 

section with regard to specific 

transactions or specific classes of 

transactions for which the broker, dealer 

or municipal securities dealer will 

provide alternative procedures to effect 

the purposes of this section; any such 

exemption may be granted subject to 

compliance with such alternative 

procedures and upon such other stated 

terms and conditions as the Commission 

may impose. 

5. Section 240.15c2–3 is added to read 

as follows:

§ 240.15c2–3 Point-of-sale disclosure for 

purchase transactions in open-end 

management investment company shares, 

unit investment trust interests, and 

municipal fund securities used for 

education savings.

Preliminary Note. This section requires 

brokers (including municipal securities 

brokers), dealers and municipal securities 

dealers to disclose specified information in 

writing to customers prior to transactions in 

certain investment company securities or 

municipal fund securities. The requirements 

under this section that particular information 

be disclosed at the point of sale are not 

determinative of, and do not exhaust, a 

broker’s, dealer’s or municipal securities 

dealer’s obligations under the general 

antifraud provisions of the federal securities 

laws, or under any other legal requirements, 

to disclose additional information to a 

customer at the time of the customer’s 

investment decision.

(a) Requirement. Except as provided 

in paragraph (e) of this section, it shall 

be unlawful for any broker, dealer or 

municipal securities dealer to effect a 

purchase of a covered security for a 

customer without disclosing 

information consistent with this 

paragraph at the point of sale. 

(1) The broker, dealer or municipal 

securities dealer shall separately 

disclose each of the following categories 

of information by reference to the value 

of the purchase, or, if that value is not 

reasonably estimable at the time of 

disclosure, by reference to a model 

investment of $10,000: 

(i) The amount of any sales load that 

the customer would incur at the time of 

purchase; 

(ii) An estimate of the amount of any 

asset-based sales charge and asset-based 

service fees that, in the year following 

the purchase, would be incurred by the 

issuer of the covered security in 

connection with the shares or units 

purchased over the next year if net asset 

value does not change; 

(iii) An estimate of the maximum 

amount of any deferred sales load that 

would be associated with the shares or 

units purchased if those shares or units 

are sold within one year (other than 

deferred sales loads of no more than one 

percent that expire no later than one 

year after purchase, when no other sales 

load would be incurred on that 

transaction), along with a statement 

informing the customer about how 

many years a deferred sales load may be 

in effect; and 

(iv) The amount of any dealer 

concession that the broker, dealer or 

municipal securities dealer would earn 

at the time of sale in connection with 

the transaction; and 

(2) The broker, dealer or municipal 

securities dealer also shall disclose: 

(i) Whether the broker, dealer or 

municipal securities dealer, or any 

affiliate, receives revenue sharing from 

the fund complex; 

(ii) Whether the broker, dealer or 

municipal securities dealer, or any 

affiliate, receives portfolio brokerage 

commissions from the fund complex; 

and 

(iii) If applicable, whether the broker, 

dealer or municipal securities dealer 

engages in the following types of 

differential compensation practices 

related to the covered security 

purchased: 

(A) Payment of differential 

compensation to any associated persons 

in connection with the sale of a class of 

covered securities that charges a 

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deferred sales load (other than deferred 

sales loads of no more than one percent 

that expire no later than one year after 

purchase, when no other sales load 

would be incurred on that transaction), 

if the customer purchased a covered 

security that charges that type of sales 

load; and 

(B) Payment of differential 

compensation to any associated persons 

in connection with the sale of a 

proprietary covered security, if the 

customer purchased a proprietary 

covered security. 

(b) Customers’ right to terminate 

orders made prior to disclosure. An 

order received by the broker, dealer or 

municipal securities dealer prior to the 

disclosure required by this section shall 

be treated as an indication of interest 

until after the information required by 

paragraph (a) of this section is disclosed 

to the customer, and, following 

disclosure, the customer has had an 

opportunity to determine whether to 

place an order. The broker, dealer or 

municipal securities dealer shall 

disclose this right to the customer at the 

time it discloses the information 

required by this paragraph (b). 

(c) Manner of disclosure—(1) 

Generally. The information required to 

be disclosed pursuant to paragraph (a) 

or (b) of this section shall be given or 

sent to the customer in writing using 

Schedule 15D (§ 240.15c–101); 

provided, however, that if the point of 

sale occurs at an in-person meeting, the 

information shall also be disclosed 

orally to the customer at the in-person 

meeting. 

(2) Exception for oral communication.

Notwithstanding paragraph (c)(1) of this 

section, if the point of sale occurs 

through means of oral communication 

other than at an in-person meeting, the 

information shall be disclosed orally to 

the customer at the point of sale. 

(d) Recordkeeping. A broker, dealer or 

municipal securities dealer, at the time 

of disclosing information pursuant to 

this section, shall make records of 

communications and records of such 

disclosure sufficient to demonstrate 

compliance with the requirements of 

paragraphs (a) and (b) of this section. 

The broker, dealer or municipal 

securities dealer shall preserve such 

records for the period specified in 

§ 240.17a–4(b). Records of oral 

communications and records of 

disclosure of oral communications shall 

be kept in accordance with § 240.17a–

4(f) and for the period specified in 

§ 240.17a–4(b) with regard to similar 

written communications and records. 

(e) Exceptions. This section shall not 

apply to the following transactions in a 

covered security, or participants in a 

transaction: 

(1) Transactions resulting from orders 

received from the customer via U.S. 

mail, messenger delivery or similar 

third-party delivery service if: 

(i) The broker, dealer or municipal 

securities dealer meets the requirements 

of paragraph (e)(1)(ii) of this section 

and, within the previous six months, 

has provided the following information 

to the customer: 

(A) A statement of the maximum 

front-end and deferred sales loads that 

may be associated with investments in 

covered securities offered by the broker, 

dealer or municipal securities dealer, 

expressed as a percentage of net asset 

value, along with an explanation of how 

sales loads can reduce investment 

returns; 

(B) A statement of the maximum 

asset-based sales charge or asset-based 

service fees that may directly or 

indirectly be paid out of the assets of 

issuers of covered securities offered by 

the broker, dealer or municipal 

securities dealer, expressed as a 

percentage of net asset value, along with 

an explanation of how asset-based 

charges can reduce investment returns; 

(C) A statement about whether the 

broker, dealer or municipal securities 

dealer receives revenue sharing or 

portfolio brokerage commissions from 

any fund complex, along with an 

explanation of how those arrangements 

pose conflicts of interest; and

(D) A statement about whether the 

broker, dealer or municipal securities 

dealer pays differential compensation in 

connection with transactions in covered 

securities, along with an explanation of 

how differential compensation pose 

conflicts of interest; and 

(ii) The broker, dealer or municipal 

securities dealer is not compensated for 

effecting transactions for customers that 

do not have accounts with that broker, 

dealer or municipal securities dealer; 

(2) A broker, dealer or municipal 

securities dealer that clears transactions 

on behalf of another broker, dealer or 

municipal securities dealer, or that 

serves as the primary distributor of a 

covered security, with respect to 

transactions in which: 

(i) The broker, dealer or municipal 

securities dealer did not communicate 

with the customer about the transaction 

other than to accept the customer’s 

order; and 

(ii) The broker, dealer or municipal 

securities dealer reasonably believes 

that another broker, dealer or municipal 

securities dealer has delivered the 

information to the customer as required 

by this section; 

(3) Transactions as part of a covered 

securities plan; provided, however, that

the broker, dealer or municipal 

securities dealer provides disclosure 

consistent with this section prior to the 

first transaction in any covered security 

that is purchased as part of a covered 

securities plan; 

(4) Reinvestments of dividends 

earned; or 

(5) Transactions in which the broker, 

dealer or municipal securities dealer is 

exercising investment discretion. 

(f) Definitions.

(1) Point of sale shall mean: 

(i) Except as provided by paragraph 

(f)(1)(ii) of this section, immediately 

prior to the time that the broker, dealer 

or municipal securities dealer accepts 

the order from the customer. 

(ii) As to transactions for customers 

who have not opened an account with 

the broker, dealer or municipal 

securities dealer, and transactions in 

which the broker, dealer or municipal 

securities dealer does not accept the 

order from the customer, the time that 

the broker, dealer or municipal 

securities dealer first communicates 

with the customer about the covered 

security, specifically or in conjunction 

with other potential investments. 

(2) The terms asset-based sales 

charges, asset-based service fee, covered 

securities plan, covered security, 

customer, dealer concession, differential 

compensation, fund complex, portfolio 

securities transaction, revenue sharing

and sales load shall have the meanings 

provided in § 240.15c2–2. 

6. Section 240.15c–100 is added to 

read as follows:

§ 240.15c–100 Schedule 15C. 

Securities and Exchange Commission, 

Washington, DC 20549. 

Schedule 15C

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7. Section 240.15c–101 is added to 

read as follows:

§ 240.15c–101 Schedule 15D. 

Securities and Exchange Commission, 

Washington, DC 20549. 

Schedule 15D


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PART 274—FORMS PRESCRIBED 

UNDER THE INVESTMENT COMPANY 

ACT OF 1940

8. The authority citation for part 274 

continues to read, in part, as follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 

78c(b), 78l, 78m, 78n, 78o(d), 80a–8, 80a–24, 

80a–26, and 80a–29, unless otherwise noted.

* * * * *

9. Form N–1A (referenced in 

§§ 239.15A and 274.11A) is amended 

by: 

a. In the table entitled ‘‘Fees and 

expenses of the Fund’’ in Item 3, 

revising the caption ‘‘Maximum Sales 

Charge (Load) Imposed on Purchases (as 

a percentage of offering price)’’ to read 

‘‘Maximum Sales Charge (Load) 


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Imposed on Purchases (as a percentage 

of net asset value)’’; 

b. In Item 3, revising the first sentence 

of Instruction 2(a)(i); 

c. In Item 3, revising Instruction 

2(a)(ii); 

d. In Item 3, adding a new Instruction 

2(a)(iv); 

e. In Item 8, adding new Instruction 

4 to paragraph (a)(1); 

f. In Item 8, redesignating paragraph 

(c) as paragraph (d); and 

g. In Item 8, adding new paragraph 

(c). 

These additions and revisions read as 

follows:

Note: The text of Form N–1A does not, and 

these amendments will not, appear in the 

Code of Federal Regulations.

Form N–1A

* * * * *

Item 3. Risk/Return Summary: Fee Table

* * * * *

Instructions.

* * * * *

2. Shareholder Fees.

(a)(i) ‘‘Maximum Deferred Sales 

Charge (Load)’’ includes the maximum 

total deferred sales charge (load) 

payable upon redemption, in 

installments, or both, expressed as a 

percentage of the amount or amounts 

stated in response to Item 8(a), except 

that, for a sales charge (load) based on 

offering price at the time of purchase, 

show the sales charge (load) as a 

percentage of the net asset value at the 

time of purchase. * * *

(ii) If more than one type of sales 

charge (load) is imposed (e.g., a deferred 

sales charge (load) and a front-end sales 

charge (load)), the first caption in the 

table should read ‘‘Maximum Sales 

Charge (Load) (as a percentage of net 

asset value)’’ and show the maximum 

cumulative percentage of net asset 

value. Show the percentage amounts 

and the terms of each sales charge (load) 

comprising that figure on separate lines 

below.

* * * * *

(iv) If applicable, disclose in a 

footnote that the maximum sales charge 

(load) that may be paid by an investor 

as a percentage of the net amount 

invested may be higher than the 

maximum sales charge (load) shown as 

a percentage of net asset value in the fee 

table, and briefly explain the reason for 

this variation. The footnote, if 

applicable, should disclose the 

maximum sales charge (load) that may 

be paid by an investor as a percentage 

of the net amount invested. This 

footnote requirement applies to all types 

of sales charges (loads) (e.g., front-end 

and deferred), as well as cumulative 

sales charges (loads) disclosed pursuant 

to Instruction 2(a)(ii).

* * * * *

Item 8. Distribution Arrangements 

(a)(1) * * *

Instructions.

* * * * *

4. If applicable, disclose in a footnote 

that the actual front-end sales load that 

may be paid by an investor as a 

percentage of the gross or net amount 

invested at any breakpoint may be 

higher or lower than the applicable sales 

load in the table of front-end sales loads, 

and briefly explain the reason for this 

variation. The footnote, if applicable, 

should disclose the range of the actual 

front-end sales loads that may be paid 

by an investor at each sales load 

breakpoint, as a percentage of the gross 

and net amount invested.

* * * * *

(c) Revenue Sharing Arrangements. If 

any person within the fund complex 

that includes the Fund makes revenue 

sharing payments, disclose that fact and 

disclose that specific information about 

revenue sharing payments to an 

investor’s financial intermediary, if any, 

is included in the written notification or 

periodic statement required under rule 

15c2–2 under the Securities Exchange 

Act and in the disclosure provided at 

the point of sale required under rule 

15c2–3 under the Securities Exchange 

Act. For purposes of this Item 8(c), 

‘‘fund complex’’ and ‘‘revenue sharing’’

have the meanings set forth in rule 

15c2–2(f)(10) and (15) under the 

Securities Exchange Act.

* * * * *

Dated: January 29, 2004.

By the Commission. 

J. Lynn Taylor, 

Assistant Secretary.

Note: Attachments 1–5 to the preamble 

will not appear in the Code of Federal 

Regulations.

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[FR Doc. 04–2327 Filed 2–9–04; 8:45 am] 

BILLING CODE 8010–01–C


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