11876 Federal Register / Vol. 60, No. 41 / Thursday, March 2, 1995 / Rules and Regulations

1Exemption for Certain Open-End Management

Investment Companies to Impose Contingent

Deferred Sales Loads, Investment Company Act

Release No. 20916 (Feb. 23, 1995); Exemption for

Certain Open-End Management Investment

Companies to Impose Deferred Sales Loads,

Investment Company Act Release No. 20917 (Feb.

23, 1995).

2Master-feeder funds are often referred to as

‘‘core and feeder’’ or ‘‘hub and spoke’’ funds.

Signature Financial Group is the originator and

patent licensor of the Hub and Spoke form of the

master-feeder structure.

SECURITIES AND EXCHANGE

COMMISSION

17 CFR Parts 239, 270, and 274

[Release Nos. 33–7143, IC–20915, File No.

S7–32–93]

RIN 3235–AF00

Exemption for Open-End Management

Investment Companies Issuing

Multiple Classes of Shares; Disclosure

by Multiple Class and Master-Feeder

Funds; Class Voting on Distribution

Plans

AGENCY: Securities and Exchange

Commission

ACTION: Final Rules

SUMMARY: The Securities and Exchange

Commission is adopting a rule under

the Investment Company Act of 1940

(‘‘Investment Company Act’’) to permit

open-end management investment

companies (‘‘mutual funds’’) to issue

multiple classes of voting stock

representing interests in the same

portfolio. The new rule will eliminate

the need for funds seeking to issue

multiple classes of their shares to apply

for exemptions. The Commission also is

adopting amendments to certain

registration statement forms under the

Investment Company Act and the

Securities Act of 1933 (‘‘Securities Act’’)

and publishing a staff guide to one

registration form. These amendments

require that multiple class and masterfeeder funds provide investors with

certain disclosure. The disclosure will

allow investors to obtain information

about these funds and their structures.

DATES: Effective Date: April 3, 1995.

Compliance Date: Registration

statements and post-effective

amendments filed with the Commission

after the effective date must be in

compliance with the amendments to

Forms N–1A and N–14.

FOR FURTHER INFORMATION CONTACT:

Karrie McMillan, Senior Counsel (202)

942–0695, or Robert G. Bagnall,

Assistant Chief (202) 942–0686, Office

of Regulatory Policy, Division of

Investment Management, 450 Fifth

Street, NW., Stop 10–6, Washington,

D.C. 20549.

Requests for formal interpretive

advice should be directed to the Office

of Chief Counsel (202) 942–0659,

Division of Investment Management,

450 Fifth Street, N.W., Washington, D.C.

20549.

SUPPLEMENTARY INFORMATION: The

Commission is today adopting rule 18f–

3 [17 CFR 270.18f–3] and a related

amendment to rule 12b–1 [17 CFR

270.12b–1], both under the Investment

Company Act. The Commission is also

adopting amendments to Forms N–1A

[17 CFR 239.15A, 274.11A] and N–14

[17 CFR 239.23].

Most multiple class funds have also

obtained exemptive relief to impose

contingent deferred sales loads

(‘‘CDSLs’’). In separate releases, the

Commission also is adopting rule 6c–10

[17 CFR 270.6c–10] under the

Investment Company Act, to allow

mutual funds to impose CDSLs, and

proposing to amend the rule to permit

other forms of deferred loads, such as

installment loads, and to remove many

of the requirements of the rule as

adopted.1

Table of Contents

Executive Summary

I. Background

II. Discussion

A. Rule 18f–3

1. Differences in Distribution and

Shareholder Services

2. Allocation of Expenses

a. Class Expenses

b. Allocation of Fund Income and

Expenses

c. Accountant’s Report on System of

Internal Control

d. Waivers and Reimbursements of

Expenses

3. Voting and Other Rights and Obligations

4. Exchange Privileges and Conversions

5. Board Review of Plans

B. Rule 12b–1

C. Disclosure

1. Prospectus Disclosure Concerning Other

Classes or Feeder Funds

2. Discussion of Classes or Feeder Funds

Offered in Prospectus

3. Discussion of Classes Into Which Shares

May Convert or Be Exchanged

4. Advertising and Sales Literature

D. Effective Dates

III. Cost/Benefit of the Proposals

IV. Regulatory Flexibility Act Analysis

V. Statutory Authority

VI. Text of Adopted Rule and Rule and Form

Amendments

Executive Summary

Since 1985, the Commission has

issued approximately 200 exemptive

orders allowing funds to issue multiple

classes of shares representing interests

in the same portfolio, typically with

different distribution arrangements. The

orders frequently impose as many as 20

conditions designed to address various

investor protection concerns.

The Commission is adopting rule 18f–

3 under the Investment Company Act,

which will permit funds to issue

multiple classes of shares without the

need to seek exemptions from the

Commission. The rule will decrease the

amount of time and expense involved in

creating these structures. It also will

reduce the Commission’s burden of

reviewing the applications. The rule

requires certain differences in the

expenses, rights, and obligations of

different classes, permits certain other

differences among classes, specifies the

matters on which class voting is

required, and prescribes how income

and expenses must be allocated. The

rule also emphasizes the responsibilities

of the board of directors to establish and

monitor allocation and other procedures

in the best interests of each class and of

the fund as a whole. Finally, the rule

permits, but does not require, different

classes to have different exchange

privileges and conversion rights. A

related amendment to rule 12b–1

clarifies that a rule 12b–1 plan must

have separate provisions for each class;

any action on the plan, such as director

or shareholder approval, must take

place separately for each class.

Over the past few years, many fund

sponsors have adopted another

distribution arrangement designed to

achieve many of the same business goals

as the multiple class structure without

the need to obtain exemptions under

section 18. This ‘‘master-feeder’’

arrangement comprises a two-tier

structure in which one or more funds

(the upper tier) invest solely in the

securities of another fund (the lower

tier).2 Although master-feeder structures

are functionally similar to multiple class

funds, they are viewed as not needing

exemptions and have been subject to

different disclosure requirements.

The disclosure requirements adopted

today apply equally to multiple class

and master-feeder funds, and are similar

to those currently in effect for masterfeeder funds. A prospectus for a class or

feeder fund will be required to include

disclosure about other publicly offered

classes or feeder funds not offered

through the prospectus and a telephone

number an investor may call to receive

additional information about other

classes or feeder funds sold by the same

bank, broker, or other financial

intermediary. In view of commenters’

concerns, the Commission is not

adopting the more extensive disclosure

requirements originally proposed. The

provisions as adopted are consistent
Federal Register / Vol. 60, No. 41 / Thursday, March 2, 1995 / Rules and Regulations 11877

3P.W. Coolidge, Business Applications of the Hub

and Spoke Structure, 1993 Mutual Funds &

Investment Management Conference X–3 (Mar. 11,

1993); R.M. Phillips and C.E. Plaza, Hub & Spoke

Mutual Funds, 26 Securities & Commodities

Regulation 137 (Aug. 1993). See also ‘‘Hub-andSpoke’’ Funds: A Report Prepared by the Division

of Investment Management, submitted with letter

from Richard C. Breeden, Chairman, SEC, to John

D. Dingell, Chairman, House Comm. on Energy and

Commerce (Apr. 15, 1992).

4See, e.g., Exemption for Open-End Management

Investment Companies Issuing Multiple Classes of

Shares; Disclosure by Multiple Class and MasterFeeder Funds, Investment Company Act Release

No. 19955 (Dec. 15, 1993), 58 FR 68074 (Dec. 23,

1993) [hereinafter Proposing Release].

5See Proposing Release, 58 FR at 68082 n.59; see

also Jeff Kelly, A Fine Mess, Morningstar Mutual

Funds, Nov. 25, 1994, at S1; Carole Gould, Brokers’

New Pitch; Level Load on Funds, N.Y. Times, May

7, 1994, at 37 (‘‘If investors are confused about

which pricing method is best for them, it’s no

wonder’’); Vanessa O’Connell, Mastering the ABCs

of Fund Shares, Money, Sept. 1993 (‘‘Counting A,

B and C shares, analysts now predict that the

number of fund options could double to a mindnumbing 8,000 within the next 18 months’’).

6Proposing Release, supra note 4.

7The comment letters, as well as a comment

summary dated Dec. 21, 1994 prepared by the

Commission’s staff, are available for public

inspection and copying at the Commission’s public

reference room in File No. S7–32–93.

8 15 U.S.C. § 80a–18(f)(1) and –(i). Section 18(f)(1)

generally makes it ‘‘unlawful for any registered

open-end company to issue any class of senior

security.’’ Section 18(g) defines senior security to

include any stock of a class having a priority over

any other class as to distribution of assets or

payment of dividends. Section 18(i) requires that

every share of stock issued by a registered

investment company be voting stock, with the same

voting rights as every other outstanding voting

stock.

9Funds currently relying on exemptive orders

that choose to operate instead under the new rule

must first prepare plans under paragraph (d) of the

rule and file copies of the plans with the

Commission as exhibits to their registration

statements under new Item 24(b)(18) of Form N–1A.

Provided that no changes are made to arrangements

and expense allocations under an existing order,

paragraph (d) does not require board approval of the

plan. A fund choosing to rely on an existing

exemptive order, including one providing an

exemption for ‘‘future classes,’’ may continue to do

so, provided it complies with all of the conditions

in the order (including the disclosure conditions);

in addition, such a fund would also be subject to

the disclosure requirements adopted today. See

discussion at II.A.5. regarding the adoption of a

multiple class plan under the rule.

with the Commission’s encouragement

of simplified prospectuses.

I. Background

Both the multiple class and masterfeeder structures may benefit

shareholders and fund sponsors. These

structures may increase investor choice,

result in efficiencies in the distribution

of fund shares, and allow fund sponsors

to tailor products more closely to

different investor markets. Fund

sponsors assert that multiple classes

may enable funds to attract larger asset

bases, permitting them to spread fixed

costs over more shares, qualify for

discounts in advisory fees

(‘‘breakpoints’’), and otherwise

experience economies of scale, resulting

in lower fees and expenses. They also

state that multiple classes avoid the

need to create ‘‘clone’’ funds, which

require duplicative portfolio and fund

management expenses. Furthermore,

fund sponsors state that a larger asset

base permits greater portfolio liquidity

and diversification.

Master-feeder funds may achieve

similar benefits of economies of scale,

thus potentially lowering expenses, and

also allow several different small funds

access to the same management and

compliance personnel. The masterfeeder structure allows a fund sponsor

to offer feeder funds that invest in

specialized portfolios, even though the

sponsor’s expected asset base may not

justify organizing a stand-alone fund for

that market or market segment.

Sponsors also use this structure to offer

off-shore and other unregistered feeder

funds.3

Investor understanding of sales and

service charges in both arrangements,

however, has been a subject of concern

to the Commission.4 Some

commentators have asserted that the

complexity generated by these

arrangements may confuse many

investors, who often may not

understand them or the effect that fees

have upon performance.5

On December 15, 1993, the

Commission proposed for public

comment rule 18f–3 and related

amendments to rule 12b–1 under the

Investment Company Act and

advertising and prospectus disclosure

requirements.6 Among other things, rule

18f–3 would have allowed funds to

issue multiple classes of shares without

the need to apply for and receive an

exemption from the Commission and

largely would have codified the

exemptive orders. The proposal also

would have made consistent the

disclosure requirements of Form N–1A

for multiple class and master-feeder

funds by imposing disclosure

requirements based on those in the

multiple class exemptive orders. These

requirements would have included a

prominent legend following the fee table

disclosing the availability of other

classes or feeder funds not offered in

that prospectus, and an undertaking to

provide investors with additional

information about other classes or

feeder funds. They also would have

required full cross-disclosure in the

prospectus about any other classes or

feeder funds that were offered or made

available through the same broker,

dealer, bank, or other financial

intermediary, and permitted investors to

choose among alternative arrangements

for sales and related charges. The

proposal also would have required a

line graph comparing the hypothetical

value of holdings of the classes or feeder

funds described in the prospectus upon

redemption at the end of each year

during a ten-year period. The proposal

would have made conforming changes

to advertising and sales literature rules

and Form N–14. A related amendment

to rule 12b–1 would have clarified that

a rule 12b–1 plan must treat each class

separately and required separate

director and shareholder approval.

II. Discussion

The Commission received 24

comments on the proposal.7 Most of the

commenters were fund groups, law

firms, and trade associations. Although

all commenters favored a rule allowing

multiple class structures without the

need for exemptive orders, most

strongly opposed the proposed

disclosure requirements. The

Commission is adopting rule 18f–3 and

related prospectus disclosure

requirements with modifications that

address the comments received. Rule

18f–3 allows funds flexibility in

tailoring many aspects of their multiple

class structures, overseen by the board

of directors, while preserving investor

protection conditions based on the

exemptive orders and derived from the

concerns underlying section 18. The

Commission has reconsidered the

disclosure aspects of the proposal in

light of the strong opposition of the

commenters, and is adopting much less

extensive requirements than proposed.

The rule and form amendments will

give investors the means to obtain

information about certain other classes

or other feeder funds investing in the

same master fund, but do not require

extensive cross-disclosure in

prospectuses and advertisements.

A. Rule 18f–3

The Commission is adopting rule 18f–

3 to create a limited exemption from

sections 18(f)(1) and 18(i) 8 for funds

that issue multiple classes of shares

with varying arrangements for the

distribution of securities and provision

of services to shareholders. Multiple

class funds relying on existing

exemptive orders would be allowed to

use the rule but would not be required

to do so.9 The Commission has made

several modifications to the rule in view

of the comments received.

The rule largely codifies the

exemptive order approach of addressing
11878 Federal Register / Vol. 60, No. 41 / Thursday, March 2, 1995 / Rules and Regulations

10A rule 12b–1 fee is a charge to fund assets that

may be used to pay certain distribution expenses in

accordance with rule 12b–1 (17 CFR 270.12b–1)

under the Investment Company Act.

11Letter from the Investment Company Institute

to Jonathan G. Katz, Secretary, SEC 22 (Feb. 22,

1994).

12 Under rule 18f–3, the investment advisory fee

charged to each class generally must be the same

percentage amount. In the case of a multiple class

fund with an advisory contract that provides for

compensation to the adviser on the basis of

performance, paragraph (a)(1)(iii) clarifies that the

percentage amount may vary for each class to the

extent that any difference is the result of the

application of the same performance fee provisions

to the different investment performance of each

class.

In addition, the Commission believes that it

would also be consistent with section 205(b)(2) and

rule 205–1 if a multiple class fund were to use the

investment performance of a single class for the

purpose of calculating the performance fee. In

approving the use of a class, the board of directors

of the fund should consider all of the relevant

factors, including the proposed performance fee

schedule, the effect that using one class instead of

another would have on the fees to be paid, the

anticipated relative size of each class, the expense

ratio of each class, the effect of any waiver or

reimbursement of expenses on the performance of

that class, the nature of the index to which the

fund’s performance will be compared and, if the

index is comprised of comparable funds, the

average expense ratio of those funds. For instance,

it would appear difficult for a board to justify

basing the calculation of a performance fee on the

performance of a class with the lowest expenses if

the result would be that shareholders of another

class would pay a higher advisory fee than would

be warranted given that class’s performance.

13The board should monitor whether the fund’s

allocations have complied with the requirements of

paragraph (a)(1)(ii) when the board reviews the

fund’s plan. See section II.A.5., infra.

14Paragraph (a)(1)(ii) as adopted has been

reworded to delete subparagraph (A) of the

proposed rule text. Under proposed paragraph

(a)(1)(A), expenses could have been treated as

belonging to a class if they were directly related to

the arrangement of that class for shareholder

services or distribution. The proposal did not

provide any guidance for determining whether an

expense was ‘‘directly related,’’ nor did it explain

how these expenses were to be distinguished from

expenses of an arrangement under paragraph

(a)(1)(i), or other expenses under paragraph

(a)(1)(ii)(B). Therefore, the Commission has deleted

this provision as unnecessary.

15E.g., Letter from Ropes & Gray to Jonathan G.

Katz, Secretary, SEC 7 (Feb. 21, 1994); Letter from

Federated Investors to Jonathan G. Katz, Secretary,

SEC 2 (Feb. 15, 1994).

16 ICI Comment Letter, supra note , at 21.

17Letter from the American Bar Association to

Jonathan G. Katz, Secretary, SEC 12 (Mar. 15, 1994).

18Letter from Fidelity Management and Research

Company to Jonathan G. Katz, Secretary, SEC A–1

(May 13, 1994).

19E.g., ICI Comment Letter, supra note 11, at 21.

the potential for conflicts among classes

by limiting the permissible differences

among classes in expenses and voting

rights. It specifies permissible methods

of allocating expenses, and allows the

waiver of expenses by service providers.

Rule 18f–3 also specifies the conditions

under which shares of one class may be

converted into or exchanged with shares

of another class.

The rule requires the board of

directors of a fund to approve a plan

detailing each class’s arrangement for

the distribution of securities and the

services provided to each class, and the

payment of other expenses. The board

must determine that the plan is in the

best interests of each class individually

and the fund as a whole.

1. Differences in Distribution and

Shareholder Services

Under paragraph (a)(1)(i), classes

must differ either in the manner in

which they distribute their securities, or

in the services they provide to their

shareholders, or both. As under the

proposal, distribution systems may

differ in the amount or form of payment,

or the nature or extent of services

provided. A class that pays a front-end

load, for example, differs from a class

paying a rule 12b–1 fee 10 in a spread

load or level load arrangement in the

amount, the form (by shareholders

individually versus the class as a

whole), and timing (at purchase versus

over time) of distribution charges.

Funds may also meet paragraph

(a)(1)(i) by providing different services

to the shareholders of each class. One

commenter expressed concern that the

requirement in proposed paragraph

(a)(5) that all classes have the same

rights and obligations would not permit

differences among classes in services

such as checkwriting.11 Presumably, the

commenter viewed the term

‘‘shareholder service’’ as encompassing

only certain services provided to

shareholders by banks, brokers, and

other third parties detailed in the many

multiple class exemptive applications,

and not shareholder transaction

services, such as checkwriting. The term

‘‘shareholder services’’ in the rule,

however, encompasses both types of

services.

2. Allocation of Expenses

a. Class Expenses. Under rule 18f–3,

certain expenses must be allocated to

individual classes, while others may be

so allocated at the discretion of the

fund’s board of directors. Paragraph

(a)(1)(i) provides that expenses relating

to the distribution of a class’s shares, or

to services provided to the shareholders

of that class, must be allocated to that

class. Although this requirement was

implicit in proposed paragraph (a)(1)(i),

the text of the rule as adopted has been

clarified to make it explicit.

Paragraph (a)(1)(ii) provides that other

expenses (other than advisory 12 or

custodial fees or other expenses relating

to the management of the fund’s assets,

which must be allocated to all classes in

accordance with paragraph (c)) may be

allocated to different classes in different

amounts to the extent that they are

incurred by one class in a different

amount, or reflect differences in the

amount or kind of services that different

classes receive.13 This paragraph

encompasses both differences in actual

out-of-pocket expenses among classes

(for instance, blue sky fees that are

incurred for some classes but not

others), and differences in charges when

classes receive services that are different

in kind or amount. For example, some

classes may use transfer agency services

differently than others. Thus, the rule

contemplates that allocations may be

based upon the level or kind of services

used.14

The proposal requested comment on

whether the rule should provide more

specific limits on differential allocations

of expenses. Commenters strongly

supported the flexible approach taken in

the proposal.15 In particular, one

commenter stated that ‘‘[a] more rigid

approach to expense allocation could

undermine the utility of the exemptive

rule.’’ 16 Another endorsed the

‘‘proposal to leave these determinations

to the Directors.’’ 17 A commenter stated

that mandating certain expenses as class

expenses could run afoul of Internal

Revenue Service private letter rulings,

which only permit de minimis

differences among the expenses of

different classes.18

At several commenters’ suggestion,

the Commission has revised paragraph

(a)(1)(ii) to delete the word ‘‘materially.’’

Although the materiality qualifier in

proposed paragraph (a)(1)(ii)(B) would

have allowed boards of directors to

avoid making allocation determinations

for trivial differences in expenses,

several commenters interpreted the

requirement to mean that boards could

not allocate expenses with immaterial

differences at all.19 Because paragraph

(a)(1)(ii) is permissive, allocations of

differential expenses, regardless of

materiality, are at the board’s discretion.

b. Allocation of Fund Income and

Expenses. Paragraph (c) sets forth the

allocation methods for income, realized

and unrealized capital gains and losses,

and expenses that are not assigned to a

particular class. The proposal would

have required that these items be

allocated to each class based on the

relative net assets. One commenter,

however, argued that requiring

allocations based on net asset value

could result in the dilution of

shareholders in daily dividend funds

such as money market funds that permit

investors to subscribe for shares, but not
Federal Register / Vol. 60, No. 41 / Thursday, March 2, 1995 / Rules and Regulations 11879

20Memorandum to file from Karrie McMillan

regarding telephone conversation with Richard

Peteka, Oppenheimer Management Corporation

(May 11, 1994) (Peteka Comment Memorandum).

The term ‘‘net assets’’ includes the value of any

receivables, including subscriptions to purchase

shares for which the fund has not yet received

payment. See AICPA Audit Guide, supra note 26,

at ¶ 2.22. Because daily distribution fund portfolio

transactions settle daily against federal funds (in

contrast to other securities that have ‘‘regular way’’

(e.g., currently T+5) settlement), many of these

funds only record income and expenses on their

books for shareholders whose subscriptions have

cleared in federal funds. See T. Rowe Price

Associates, Inc. (pub. avail. Dec. 22, 1986). Thus,

allocating on the basis of relative net assets would

be in conflict with typical daily distribution fund

allocations.

21According to the commenter, this problem is

exacerbated when a large disparity exists between

the size of the classes or feeder funds, as each

subscription to the smaller class or feeder fund will

be large relative to the size of the other classes or

feeder funds, and will dilute the classes or feeder

funds having greater assets. Peteka Comment

Memorandum, supra note 20.

22Like some exemptive orders, paragraph (c)(2)(i)

requires funds allocating these items equally to all

shares regardless of class to obtain the agreement

of their service providers that, to the extent

necessary to assure that all classes maintain the

same net asset value, the providers will waive or

reimburse class expenses.

23The rule defines ‘‘relative net assets (settled

shares)’’ to mean net assets valued in accordance

with generally accepted accounting principles, but

excluding the value of subscriptions receivable, in

relation to the net assets of the fund.

24See Fidelity Comment Letter, supra note 18, at

A–2.

25 Id. at 3.

26See Financial Accounting Standards Board,

Financial Accounting Standards No. 7, §§ 8 and 9,

Accounting and Reporting by Development Stage

Enterprises, and AICPA, Audits of Investment

Companies: Audit and Accounting Guide ¶ 8.10

(May 1993).

27Organization expenses should be distinguished

from other expenses, such as printing of

prospectuses. These other non-organizational

expenses may appropriately be capitalized and

amortized in accordance with the provisions of

generally accepted accounting principles. The

amortization of these expenses would be allocated

to all classes which benefit from the expense.

28Letter from the American Institute of Certified

Public Accountants to Jonathan G. Katz, Secretary,

SEC 2 (Mar. 18, 1994).

29Codification of Statements on Auditing

Standards, American Institute of Certified Public

Accountants, AU § 319 (1994).

30Rule 18f–3 is only a limited exemption from

the literal application of the prohibitions of section

18 and may not be used to undermine that section’s

role in effecting the statutory purpose of preventing

the issuance of ‘‘securities containing inequitable or

discriminatory provisions.’’ 15 U.S.C. § 80a–1(b)(3).

31See infra section II.A.5.

32Paragraphs (a)(2) and (a)(3) of the final rule

were paragraphs (a)(3) and (a)(4), respectively, in

the rule as proposed. They have been renumbered

as a result of the transfer of certain provisions of

proposed paragraph (a)(2) into paragraph (b) of the

final rule.

pay for them with federal funds.20

According to the commenter, because an

investor’s money is not available for

investment by a fund until federal funds

have been received, the payment of

dividends to the investor before receipt

of federal funds would dilute the

holdings of other shareholders.21

Therefore, the rule as adopted allows

different methods of allocation for daily

distribution funds than for non-daily

distribution funds. Non-daily

distribution funds must allocate these

items based on the relative net assets.

Money market funds (including those

calculating net assets on an amortized

cost basis) and other funds making daily

distributions of their net investment

income may allocate these items to each

share regardless of class,22 or based on

the relative net assets (settled shares).23

The parenthetical reference in the rule

to calculation of net assets using

amortized cost recognizes that money

market funds may allocate fund

expenses based on the relative

amortized cost net assets.24 The

allocation method selected by the fund

must be applied consistently.

A commenter requested that the

Commission provide guidance about the

allocation of costs of implementing a

multiple class structure.25 If a fund is

organized initially with a multiple class

structure, these costs are part of the

fund’s organization expenses and

usually are capitalized. Funds may

allocate the amortization of these

expenses among the classes like other

expenses under paragraph (c) of the

rule. If the class structure is added after

the fund has been organized, or if new

classes are added, these expenditures

would not be capitalized. Instead, they

would be expenses of the class or

classes in existence before the addition

of the class structure or the new

classes,26 and therefore would be

recognized by, and allocated to, those

existing classes as an expense under

paragraph (c) and not charged to the

new class or classes.27

c. Accountant’s Report on System of

Internal Control. The Commission is not

adopting the proposed amendment to

Form N–SAR, relating to an

accountant’s report on a fund’s system

of internal controls. As proposed, Item

77B would have required accountants

preparing the report on a multiple class

fund’s system of accounting controls to

refer expressly to the procedures for

calculating the classes’ net asset values.

This provision was intended to replace

the requirement in the exemptive orders

that an expert file a separate report on

the adequacy of accounting procedures

of multiple class funds. One commenter

supported the proposal’s omission of a

requirement for the expert’s report as no

longer necessary. It believed that the

orders granted to date, and the

additional guidance in rule 18f–3,

adequately define the methodology that

a fund should follow in allocating

income, realized and unrealized capital

gains and losses, and expenses of the

company to a class of shares.28 The

commenter, however, disagreed with

the proposal’s requirement of a specific

reference in the internal controls report

to the procedures for calculating

multiple class net assets, arguing that

because the internal control structure,

required to be reviewed by Statement on

Auditing Standards No. 55,29 includes

the procedures for calculating multiple

class net assets, the report required by

Item 77B need not be modified to

emphasize only one of the aspects of the

internal control structure. The

Commission believes that since under

current accounting standards, a review

of the fund’s internal control structure

must include a review of procedures for

calculating multiple class net assets, it

is unnecessary to require the

independent accountant’s report to

include such a reference.

d. Waivers and Reimbursements of

Expenses. As adopted, rule 18f–3(b)

expressly allows a fund’s underwriter,

adviser, or other provider of services to

waive or reimburse the expenses of a

specific class or classes. The proposal

would have permitted only waivers or

reimbursements by the fund’s adviser or

underwriter of class expenses, and

would not have permitted waivers or

reimbursements for specific classes of

fund expenses, such as advisory fees.

Despite the prohibition on differential

waivers of fund expenses, fund sponsors

could have achieved the same result

indirectly by waiving or reimbursing

class expenses. Therefore, the

Commission is deleting the restrictions

on waivers in the final rule. This

modification is not intended to allow

reimbursements or waivers to become

de facto modifications of the fees

provided for in advisory or other

contracts so as to provide a means for

cross-subsidization between classes.30

Consistent with its oversight of the class

system and its independent fiduciary

obligations to each class, the board must

monitor the use of waivers or

reimbursements to guard against crosssubsidization between classes.31

3. Voting and Other Rights and

Obligations

The Commission is adopting the

provisions relating to shareholder voting

substantially as proposed.32 These

provisions elicited little comment.

Paragraph (a)(2), which provides that

each class must have exclusive voting

rights on any matter submitted to
11880 Federal Register / Vol. 60, No. 41 / Thursday, March 2, 1995 / Rules and Regulations

33This provision was paragraph (a)(5) in the rule

as proposed.

34See footnote 42 of the Proposing Release.

35E.g., ICI Comment Letter, supra note 11, at 22;

Fidelity Comment Letter, supra note 18, at A–2

(Fidelity stated that dollar-based voting may not be

consistent with state law).

36E.g., Letter from the Chicago Bar Association,

Subcommittee of the Securities Law Committee to

Jonathan G. Katz, Secretary, SEC 3 (Feb. 21, 1994);

Letter from Federated Investors to Jonathan G. Katz,

Secretary, SEC 3 (Feb. 15, 1994).

37See Sentinel Group Funds, Inc. (pub. avail. Oct.

27, 1992) (under section 18(i), voting rights of

different series in a fund may be tied to the relative

net asset value of each series to avoid vesting unfair

voting power in series with per share net asset

values that are significantly lower than those of

other series). In discussing the meaning of ‘‘equal

voting rights’’ under section 18(i), the Commission

has noted that:

Problems of interpretation may very well arise

from defining with exactitude what constitutes

‘‘equal voting rights’’ within the meaning of Section

18(i). It is apparent that in certain cases an

inflexible adherence to any rigid interpretation

could produce grave distortions of the apparent

intent of Congress to require a reasonably equitable

distribution of voting power consistent with the

applicable provisions pertaining to the different

classes of stock.

The Solvay American Corp., 27 SEC 971, 974 n.9

(1948).

The Commission also believes that voting based

on relative net asset value is consistent with the

definition of ‘‘the vote of a majority of the

outstanding voting securities’’ in section 2(a)(42) of

the Investment Company Act [15 U.S.C. § 80a–

2(a)(42)]. That provision does not specify whether

the prescribed percentages are to be determined on

the basis of the number of securities, or the value

of the securities.

38Exchanges are subject to section 11 of the

Investment Company Act and the rules thereunder.

See 15 U.S.C. § 80a–11(a); 17 CFR 270.11a–1, –2

and –3 (requiring offers of exchange to be made on

the basis of net asset value, with certain

exceptions).

39The Commission also is amending Form N–1A

to require prospectus disclosure for multiple class

funds allowing or requiring conversions or

exchanges between classes. See infra section II.C.3.

for a discussion of the amendment.

40For example, when shares of one class of a fund

may be exchanged for shares of the same class in

another fund, but not for shares of other classes.

41 ICI Comment Letter, supra note 11, at 23–24.

42Letter from Hale and Dorr to Jonathan G. Katz,

Secretary, SEC 7 (Feb. 22, 1994). See Ark Funds,

Investment Company Act Release Nos. 19812 (Oct.

22, 1993), 58 FR 58025 (Oct. 28, 1993) (Notice of

Application), and 19882 (Nov. 17, 1993), 55 SEC

Docket 1541 (Order) (allowing automatic

conversions when a shareholder in one class

becomes ineligible to purchase shares of the class

originally held); Federated Securities Corp. (pub.

avail. Jan. 14, 1992) (permitting shareholders to

switch from one class to another class where,

because of a change in circumstances, such

shareholders would no longer be eligible to invest

in a particular class of shares).

43Although some fees may be lower for classes

whose shareholders have certain other relationships

with a financial institution that provides services to

fund shareholders, these investors may also be

paying other fees directly to the institution in

addition to paying expenses at the fund level.

44Forms N–1A and N–14 have been amended to

require that a copy of the plan be filed as an exhibit

to the forms.

45 In making its findings, the board should focus,

among other things, on the relationship among the

classes and examine potential conflicts of interest

among classes regarding the allocation of fees,

services, waivers and reimbursements of expenses,

and voting rights. Most significantly, the board

should evaluate the level of services provided to

each class and the cost of those services to ensure

that the services are appropriate and that the

allocation of expenses is reasonable.

shareholders that relates solely to the

arrangement of that class, governs

which class of shareholders may vote on

a matter, but does not affect whether the

matter is one that requires a shareholder

vote. Paragraph (a)(3) requires that each

class have the right to vote separately on

matters in which its interests are

different from those of other classes.

The Commission is adopting as

proposed paragraph (a)(4), which states

that except as provided in the previous

paragraphs, each class of a fund relying

on the rule must have the same rights

and obligations as each other class.33

Among other things, this paragraph

effectively requires multiple class funds

to allocate voting rights that affect all

fund shareholders equally to all

shareholders. The Commission had

requested comment on whether to

require that voting be allocated based on

relative net asset value per share, rather

than one vote per share.34 All of the

commenters addressing the issue

opposed such a requirement. These

commenters suggested that the

proposal’s more flexible approach of

allowing a fund to select the method

most suitable for it would provide the

best result for each fund.35 Several

commenters noted that many funds

would be required to hold shareholder

meetings in order to amend their

charters to comply with such a

requirement, thus incurring additional

expense.36 Therefore, the Commission is

not requiring voting based on relative

net asset value per share, but believes

that such voting is permissible under

section 18(i) of the Investment Company

Act.37

4. Exchange Privileges and Conversions

The Commission is adopting

provisions relating to conversions and

exchanges of shares substantially as

proposed.38 The rule as adopted also

includes a provision allowing

conversions when a shareholder is no

longer eligible to invest in a particular

class.39

Paragraph (e)(1) allows funds to offer

different exchange privileges to different

classes.40 Paragraph (e)(2) permits funds

to offer one or more classes with

conversion features that allow for

automatic conversions into another

class after a specified period, if the

conversions are made at net asset value

without the imposition of any sales

load, fee or other charge upon the

conversion. As suggested by a

commenter, paragraph (e)(2) as adopted

provides that total expenses (not just

those associated with a rule 12b–1 plan)

may not be higher for the new class than

for the old class.41

The Commission has added paragraph

(e)(3), which allows, under limited

circumstances, conversions that occur

whenever a shareholder ceases to be

eligible to invest in a class. Unlike

paragraph (e)(2), this provision does not

require that the new class have the same

or lower expenses. A commenter

objected that the expense limitation in

paragraph (e)(2) would not

accommodate situations in which a

shareholder may no longer be eligible to

participate in the class in which he or

she originally invested, and therefore

need or wish to be placed into a class

that may have higher expenses.42 For

example, an investor in a class offered

only to trust customers may cease to be

a trust customer, and thus no longer be

eligible to invest in that class.43 In this

event, the commenter suggested that the

rule permit the new class to assess

higher rule 12b–1 fees. Paragraph (e)(3)

allows these conversions to occur, if the

conversion is effected at net asset value

without the imposition of any sales

load, fee, or other charge upon the

conversion and the investor is given

advance notice of the conversion.

5. Board Review of Plans

The Commission is adopting

paragraph (d), governing the adoption

and approval of multiple class plans by

boards of directors, with modifications

in view of comments received. Rule

18f–3 gives the board of directors,

particularly the independent directors,

significant responsibility to approve a

fund’s plan and oversee its operation.

Paragraph (d) requires that a fund adopt

a written plan specifying all of the

differences among classes, including the

various services offered to shareholders,

different distribution arrangements for

each class, methods for allocating

expenses relating to those differences,

and any conversion features or exchange

privileges.44 The plan should provide a

detailed statement of the differences

among the classes.

The rule requires that the board,

including a majority of the independent

directors, find that the plan is in the best

interests of each class individually and

the fund as a whole.45 This approval

requirement replaces the several board

reviews under the exemptive orders.

The orders required boards of directors

to approve the issuance of multiple

classes of shares, review and approve

specific allocations of class expenses,
Federal Register / Vol. 60, No. 41 / Thursday, March 2, 1995 / Rules and Regulations 11881

46E.g., ABA Comment Letter, supra note 17, at 4;

Federated Investors Comment Letter, supra note 15,

at 2; Hale and Dorr Comment Letter, supra note 42,

at 4–5; ICI Comment Letter, supra note 11, at 23;

Letter from Dechert Price & Rhoades to Jonathan G.

Katz, Secretary, SEC 2 (Feb. 22, 1994). See

Proposing Release at 21 n.48, 58 FR at 68080 n.48,

for a discussion of recent Commission actions to

reduce the burdens on boards of directors.

47 ICI Comment Letter, supra note 11, at 23.

48Board approval of the plan is required, though,

if it contains any material deviations from current

practice.

49 In light of the adoption of new paragraph (e)(3)

of rule 18f–3, the Commission has modified rule

12b–1(g) from the proposal to limit the crossreference to paragraph (e)(2). Whereas conversions

under paragraph (e)(2) will occur if shareholders

remain in a class for a specified period of time,

conversions under paragraph (e)(3) will not occur

except upon the happening of a specified

contingency that is dependent upon the

shareholder. Therefore, a vote of the class of shares

that may convert is not required.

50 In view of commenters’ objections and recent

industry initiatives, the Commission also is not

imposing standardized class designations upon

multiple class funds. See Memorandum of the ICI,

Board of Governors Adopts Voluntary

Nomenclature Standards of Multiple Class Funds

(May 16, 1994); Jeff Kelly, A Fine Mess, Morningstar

Mutual Funds, Nov. 25, 1994, at S1; ICI Comment

Letter, supra note 11, at 19.

51This disclosure requirement was proposed as

part of Instruction 1 to Item 2(a) of Form N–1A.

Multiple class funds must comply with the

disclosure requirements adopted today regardless of

whether they rely on rule 18f–3 or continue to

operate under and comply with all of the terms

(including disclosure-related conditions) of an

existing exemptive order. The disclosure

requirements adopted today also do not alter feeder

funds’ existing disclosure obligations. Letter from

Carolyn B. Lewis, Assistant Director, Division of

Investment Management, SEC, to Registrants (Feb.

22, 1993), Comment II.H (hereinafter ‘‘1993 Generic

Disclosure Comment Letter’’). New Instruction 4A

to Item 2(a) of Form N–1A codifies the requirement

that the expenses of both the master fund and the

feeder fund be reflected in a single fee table.

52See, e.g., Arthur Levitt, Chairman, SEC, Taking

the Mystery Out of the Marketplace: The SEC’s

Consumer Education Campaign, remarks before the

National Press Club (Oct. 13, 1994).

53Funds may either use one fee table with

separate and clearly labeled columns for each class

or feeder fund, or may prepare separate fee tables

for each class or feeder offered.

54A few commenters, however, supported

requiring disclosure about other classes or feeder

funds. See, e.g., Hale and Dorr Comment Letter,

supra note 42, at 8; Dechert Price Comment Letter,

supra note 46, at 3.

monitor for conflicts of interest among

classes and take any action necessary to

eliminate conflicts.

Paragraph (d) as adopted requires the

board to approve a plan initially and

before any material change. The

Commission is not requiring annual

approval of the board, which was

proposed. Many commenters objected to

the annual review requirement and

argued that it runs counter to the

Commission’s recent elimination of

certain annual review requirements.46

Paragraph (d) as adopted does not

require the board to approve the initial

adoption of a plan if the plan merely

reproduces without change a fund’s

existing multiple class structure that the

board has approved under an existing

exemptive order. One commenter

requested that the Commission amend

the rule to clarify that board approval is

not required for existing classes that

intend to rely on the rule if the board

has already approved a multiple class

structure under an order.47 Although the

rule as adopted does not require a vote

of the board of directors under these

circumstances, a fund with an existing

order that seeks to rely on rule 18f–3

must create a plan setting forth the

fund’s current separate arrangements,

expense allocation procedures and

exchange and conversion privileges 48

and file a copy of the plan with the

Commission as an exhibit to the fund’s

registration statement under new Item

24(b)(18). These plans create a cohesive

structure for monitoring the operation of

the class system, rather than having

procedures scattered among exemptive

orders and their amendments,

prospectuses and internal guidelines,

and the formulation of a plan from these

source materials should not impose a

significant burden.

Finally, the rule text as adopted omits

the proposed requirement that boards

find that plans are ‘‘fair.’’ This change

recognizes that the term was not a

condition of the exemptive applications,

and that the requirement that a board

find a plan to be in the best interests of

each class individually and of the fund

as a whole provides the same protection

as a separate fairness requirement.

B. Rule 12b–1

The Commission is adopting new

paragraph (g) of rule 12b–1 substantially

as proposed. It provides that if a plan

covers more than one class of shares, the

provisions of the plan must be severable

for each class, and any action taken on

the plan must be taken separately for

each class. The board would be required

to make the finding, separately for each

class, that a distribution plan presents a

‘‘reasonable likelihood of benefit’’ to the

company and its shareholders.

Similarly, the amendment requires

shareholder approval by the outstanding

voting securities of each separate class

when rule 12b–1 requires that a plan for

the distribution of securities be

approved by a majority of the fund’s

outstanding voting securities. Paragraph

(g) also contains a cross-reference to rule

18f–3 to address the limited exception

that under paragraph (e)(2) of that rule,

any shareholder vote on the rule 12b–

1 plan of a target class would also

require a separate vote of any purchase

class.49

C. Disclosure

The Commission is adopting

disclosure requirements for registration

statements of master-feeder and

multiple class funds with substantial

modifications from the proposal, and is

not adopting any disclosure

requirements for advertisements and

sales literature.50 New Item 6(h)

provides that multiple class and masterfeeder funds should describe the salient

features of the multiple class or masterfeeder structure. Feeder funds should

also disclose the circumstances under

which the feeder fund could no longer

invest in the master fund, and the

consequences to shareholders of such an

event. Item 6(h) also requires

prospectuses used in connection with a

public offering to disclose that there are

other classes or other feeder funds that

invest in the same master fund, and to

include a telephone number investors

can call to obtain additional information

about other classes or feeder funds

available through their sales

representative.51 These provisions

should give funds flexibility in drafting

disclosure while making available to

investors the means to obtain additional

information about other classes or

feeder funds investing in the same

master fund. These disclosure

requirements are consistent with the

Commission’s goals of promoting

prospectus simplification and the use of

plain language.52

Funds must provide more extensive

prospectus disclosure about other

classes or feeder funds only in two

cases. First, under new staff Guide 34 to

Form N–1A, if a prospectus offers more

than one class or feeder fund, it must

discuss briefly the differences between

the classes or feeder funds, and arrange

the fee table to facilitate a comparison

by shareholders of the different fee

structures.53 Second, under new

General Instruction I to Form N–1A, if

a fund is offering a class that will or

may convert or be exchanged into other

classes of the same fund, the prospectus

must provide disclosure about the other

classes.

The Commission is not adopting most

of the proposed disclosure

requirements; nearly all commenters

expressed strong opposition to the

extent and the details of these

requirements.54 As discussed in more

detail below, commenters argued,

among other things, that the proposed

requirements would have imposed

liability burdens and logistical

difficulties on some funds.

The Commission recognizes that the

complexity of distribution charge
11882 Federal Register / Vol. 60, No. 41 / Thursday, March 2, 1995 / Rules and Regulations

55E.g., Signature Group Comment Letter, supra

note 59, at 14–15; ABA Comment Letter, supra note

17, at 10; Letter from the Investment Company

Institute (attaching memorandum from Kirkpatrick

and Lockhart) to Matthew A. Chambers, Associate

Director, Division of Investment Management, SEC

(Oct. 6, 1994).

56Since the proposal, the NASD has reminded

members of ‘‘their obligations to ensure that the

investments are suitable for their customers and to

disclose and discuss certain matters in the sale of

mutual funds.’’ These matters include the

disclosure of ‘‘all material facts to the customer’’

and, in particular, sales charges. Notice to Members

94–16 (Mar. 1994).

57The Commission has previously published two

brochures providing general information about

investing.

58 17 CFR 239.15A, 274.11A.

59 Item 6(h) refers to any publicly offered class or

feeder fund; thus, no disclosure is required, for

example, about offshore or private funds. See, e.g.,

Letter from Kirkpatrick & Lockhart on behalf of

Signature Financial Group and certain other

companies to Jonathan G. Katz, Secretary, SEC 11–

12 (Mar. 18, 1994) (expressing concern about

disclosure regarding offshore funds), ICI Comment

Letter, supra note 11, at 11 (expressing concern that

disclosure would be required about private feeder

funds).

60This requirement is more like the disclosure

currently provided by master-feeder funds than that

required under the exemptive orders for multi-class

funds. The requirements adopted today treat

multiple class and master-feeder disclosure in a

consistent manner.

61ABA Comment Letter, supra note 17, at 8; see

also Chicago Bar Comment Letter, supra note 36, at

2.

62See, e.g., Hale and Dorr Comment Letter, supra

note 42, at 9; Signature Group Comment Letter,

supra note 59, at 5.

63E.g., ABA Comment Letter, supra note 17, at 8–

9; Signature Group Comment Letter, supra note 59,

at 10; ICI Comment Letter, supra note 11, at 13

(‘‘[s]uch a proposal ignores market realities, and

would greatly limit the very benefits of multiple

class and master-feeder structures that the

Commission has itself commented on.’’).

64Eaton Vance Comment Letter, supra note 66, at

8.

65See Chicago Bar Comment Letter, supra note

36, at 2 (a toll-free number should not be required);

Fidelity Comment Letter, supra note 18, at 2 (the

proposal’s toll-free number requirement would

cause an issuer to deal directly with investors,

when it intended to sell through intermediaries,

‘‘effectively chill[ing] the use of multi-class and

feeder funds’’).

66Signature Group Comment Letter, supra note

59, at 10. See also Letter from Eaton Vance

Management to Jonathan G. Katz, Secretary, SEC 4

(Feb. 24, 1994).

67Eaton Vance Comment Letter, supra note 66, at

4 n.4.

options can be confusing to some

investors. Instead of relying on

prospectus disclosure, however, the

Commission is addressing these

concerns through consumer education

and the promotion of good sales

practices. In the proposal, the

Commission requested comment on

whether, instead of requiring extensive

prospectus disclosure, it should work

with the National Association of

Securities Dealers, Inc. (‘‘NASD’’) to

develop standards for basic information

that representatives should

communicate to their clients. Several

commenters endorsed this approach as

an alternative to cross-disclosure.55 The

Commission staff has been working, and

will continue to work, with the NASD

on providing guidance about the duties

of sales representatives when

recommending the purchase of multiple

class and master-feeder funds.56 Finally,

the Commission expects to promote

consumer education in this area through

the development and publication of a

brochure explaining the structures and

expenses of multiple class and masterfeeder funds.57

1. Prospectus Disclosure Concerning

Other Classes or Feeder Funds

The Commission is adding new Item

6(h) to Form N–1A 58 to require

prospectuses for multiple class and

master-feeder funds to describe the

salient features of the multiple class or

master-feeder structure. In addition,

Item 6(h) requires prospectuses of

multiple class or master-feeder funds to

include disclosure about other publicly

offered 59 classes or feeder funds, unless

all classes or all feeder funds are offered

through the same prospectus.60 A fund

must disclose that it issues other classes

or that other feeder funds invest in the

master fund, and that the other classes

or feeder funds may have different sales

charges and expenses, which would

affect performance. The disclosure must

also provide a telephone number

investors may call to obtain information

concerning other classes or feeder funds

available through their sales

representative, and note that investors

may obtain information concerning

those classes or feeder funds from (as

applicable) their sales representative, or

any person, such as the principal

underwriter, a broker-dealer or bank,

which is offering or making available to

them the securities offered in the

prospectus. This disclosure should

provide investors with access to

information allowing them to compare

the expenses and services of a given

class or feeder fund to others that are

available to them.

Although commenters strongly

opposed the more extensive disclosure

requirements in the proposal, they

generally agreed that it is ‘‘appropriate

to require some disclosure as to the fact

that there are other classes or feeder

funds investing in the underlying

portfolio.’’ 61 Many agreed that alerting

investors to the relationship between

expenses and performance is

appropriate.62

The Commission is not specifying

how fund sponsors must respond to

investors’ calls. Unlike the requirements

adopted today, the proposal would have

required the statement to include the

names of the other classes or feeder

funds, and an undertaking to provide

information over a toll-free number, and

provide a prospectus for the other

classes or feeder funds upon request.

Commenters, however, vehemently

objected to the proposed undertaking to

provide additional information and

prospectuses for other classes or feeder

funds.63 One commenter stated that

independent mutual fund groups and

their sponsors may be

disproportionately affected by the

undertaking. ‘‘Whereas the toll-free

number provided by broker-sponsored

mutual funds will likely have to answer

questions only about (and provide

prospectuses for) that particular broker’s

family of funds, the Release imposes

upon an independent mutual fund

sponsor with a master-feeder structure

the much broader obligation to provide

information * * * about any other

entity’s proprietary feeder funds feeding

into the same master fund.’’ 64 Several

commenters objected to the toll-free

number requirement.65 The Commission

is continuing to require the inclusion of

a telephone number, but is not requiring

that the number be toll-free; the

requirement of a telephone number is

consistent with the disclosure

guidelines of the Commission staff and

state regulators, to which master-feeder

funds are already subject. By not

requiring any specific procedures with

callers, the Commission is leaving fund

sponsors the flexibility to determine

how best to respond to inquiries.

A commenter noted that compliance

with the proposed requirement to name

other classes or feeder funds would be

difficult for unaffiliated feeder funds;

they would be required to keep abreast

of the creation of or changes to other

feeder funds and sticker their

prospectuses to reflect such changes.66

A commenter also speculated that

mentioning feeder funds in states where

they are not registered could create

problems under state securities laws

because such a statement could be

considered to be an offer.67

The disclosure requirement that the

Commission is adopting is similar to the

recommendations of some commenters.

For example, one commenter suggested

that the Commission require a narrative

following the fee table stating that (i) the

fund issues other classes or feeder funds

that invest in the master fund; (ii)

because sales charges and expenses

vary, performance may also vary; and

(iii) the customer may call a toll-free

number to obtain further information
Federal Register / Vol. 60, No. 41 / Thursday, March 2, 1995 / Rules and Regulations 11883

68 Id. at 9.

69 Disclosure responding to Items 2 through 9 of

Form N–1A.

70The Proposing Release listed as examples of

‘‘financial intermediaries’’ brokers, dealers, banks

and any other entities that act as agents or

principals in the sale of a fund’s shares, or that, like

some banks, provide shareholder services under an

agreement with a fund. See 58 FR 68083, n.69.

71Although the Commission is not adopting the

proposed cross-disclosure requirement, it believes

that disclosure about more than one class or feeder

fund in the same prospectus can be consistent with

clear, simple, and effective disclosure and

prospectus simplification. Similarly, Guide 34

expressly contemplates that more than one class or

feeder fund may be offered in the same prospectus.

See discussion of Guide 34, infra at section II.C.2.

72Chicago Bar Comment Letter, supra note 36, at

2; see also ICI Comment Letter, supra note 11, at

5–7; Signature Group Comment Letter, supra note

59, at 6–8 (disputing the proposal’s assumption that

investor confusion about these instruments ‘‘is a

serious and widespread problem’’).

73E.g., Signature Group Comment Letter, supra

note 59 at 5; see also letter from Fidelity

Investments to Barry Barbash, Director, Division of

Investment Management, SEC 1–2 (July 22, 1994).

74See Letter and memorandum from Robert

Pozen, General Counsel and Managing Director,

FMR Corp. to Arthur Levitt, Chairman, SEC 2 (Nov.

18, 1994) (‘‘This would be the equivalent of

requiring Filenes to tell all of its customers that the

same goods may be purchased at a discount in the

basement or from a competitor.’’).

75E.g., ICI Comment Letter, supra note 11, at 7.

See also ABA Comment Letter, supra note 17, at 8–

9; Signature Group Comment Letter, supra note 59,

at 5 and 9 (‘‘[s]uch a requirement of disclosure

about products offered by competitors and the

assumption of liability for such disclosures would

be entirely unprecedented in the securities

industry’’) (emphasis deleted).

76The proposal would have required crossdisclosure only about classes or feeder funds both

offered through the same financial intermediary and

with alternative arrangements for sales and related

charges, and made clear that not all cases would

involve alternative arrangements. See text

accompanying notes 70–72 of the Proposing

Release, 58 FR at 68083. Most commenters,

however, appeared to assume that there would be

alternative sales charges in all cases.

77Signature Group Comment Letter, supra note

59, at 5.

78 Id. at 8. 79Eaton Vance Comment Letter, supra note 66.

about the other funds not offered

through the prospectus but available

through the same financial

intermediary. The commenter also

recommended that the prospectus

should contain prominent disclosure

recommending that the investor contact

his or her broker or financial adviser for

further information about suitable

classes or feeder funds offered by the

intermediary.68

Commenters suggested the above

approach as an alternative to the

proposed cross-disclosure requirements,

which commenters strongly criticized

and which the Commission is not

adopting. The proposal would have

required a prospectus for one class or

feeder fund to provide full crossdisclosure 69 about all other classes or

all other feeder funds investing in the

same master fund that were not offered

in the prospectus and that met two

conditions. First, the classes or feeder

funds had to be offered through the

same financial intermediary.70 Second,

they had to permit investors to choose

among alternative arrangements for

sales and related charges.71

Many commenters argued that crossdisclosure would not achieve the

Commission’s goal of promoting

investor understanding of multiple class

and master-feeder funds because of the

volume of disclosure that the proposal

might require, arguing that ‘‘the

disclosure requirements of the Proposal

run counter to the staff’s professed

desire for prospectus simplification and

the desire to avoid ‘prospectus

creep.’ ’’ 72 Several commenters

cautioned that if the Commission

adopted the proposed disclosure

requirements, sponsors would not use

the master-feeder form and would create

‘‘less efficient and more expensive clone

funds.’’ 73 One commenter representing

a fund family that offers both no-load

and broker-sold products objected to

requiring brokers to disclose that the

same fund is available without a sales

charge, arguing that if a client receives

advice from a broker, the broker

deserves to be paid for those services.74

Some commenters strongly criticized

the proposal for requiring an issuer to

provide prospectus disclosure about

securities it does not intend to offer

through that prospectus. Several

expressed concern that feeder funds

would have to assume liability for

disclosure about unrelated feeder funds

even though they are distinct entities

and may have different advisers,

underwriters, and boards of directors.75

Commenters also criticized the

financial intermediary test—one of the

proposal’s two triggers for crossdisclosure.76 One commenter stated, for

example, that ‘‘[t]he Proposal

erroneously assumes that all financial

intermediaries are homogeneous

organizations, serving only a single

market or customer base.’’ 77 Much of

the commenters’ concern centered on

the effect of the proposed requirement

on independent sponsors of feeder

funds and on financial intermediaries

with more than one distribution

network. One commenter noted that

‘‘feeder funds, unlike different classes of

shares, often are organized to serve

customers of unaffiliated third party

banks, insurance companies or

brokerage firms who are competitors of

each other and, in many cases, of the

master fund.’’ 78

One independent sponsor of mutual

funds argued that the proposal would

create unique problems for independent

mutual fund groups, and would

discourage brokers from offering funds

if prospectuses must describe funds

offered by unaffiliated brokers.79 This

commenter asserted that fund sponsors

would have to create a different

prospectus for each possible

combination of the different classes or

feeder funds that in theory a broker

might offer; therefore, the preparation of

numerous prospectuses would create

increased costs for these funds and an

‘‘administrative nightmare’’ for their

sponsors, while in-house master-feeder

or multiple class funds and their

sponsors would not face comparable

burdens.

The disclosure requirement as

adopted addresses the commenters’

concerns. The disclosure that investors

may ask their sales representatives

about other classes or feeder funds

should alleviate the concern that the

disclosure would encourage investors to

deal directly with issuers, rather than

their intermediaries. This dialogue

should further investor understanding

of the different fee arrangements or

distribution possibilities associated with

the fund without imposing a burden on

issuers. Retaining a telephone number

requirement, but not requiring the other

disclosure or obligations should provide

investors with a source for obtaining

more information about other classes or

feeder funds available through their

sales representative without raising the

practical concerns voiced by many

commenters. Not requiring crossdisclosure about other classes or feeder

funds not offered through the

prospectus removes the logistical and

competitive concerns voiced by many

commenters. This approach is also

consistent with the Commission’s goals

of promoting prospectus simplification.

2. Discussion of Classes or Feeder Funds

Offered in Prospectus

New staff Guide 34 to Form N–1A

requires a discussion of the differences

between classes or feeder funds

whenever two or more classes or feeder

funds are offered through the same

prospectus. In addition, new Guide 34

advises that if a single prospectus is

used to offer more than one class or

feeder fund, and the classes or feeder

funds have different expense and/or

sales load arrangements, the prospectus

should clearly explain the differences in

the features, and should provide a

separate response to Item 2(a)(i) for each

class or feeder. These requirements are
11884 Federal Register / Vol. 60, No. 41 / Thursday, March 2, 1995 / Rules and Regulations

80Both of these requirements would have been

contained in a new Item 6(h) of Form N–1A.

81Chicago Bar Comment Letter, supra note 36, at

3; See also Signature Group Comment Letter, supra

note 59, at 16; Fidelity Comment Letter, supra note

18, at 2.

82Federated Investors Comment Letter, supra

note 15, at 3.

83Chicago Bar Comment Letter, supra note 36, at

2–3.

84E.g., Signature Group Comment Letter, supra

note, 59, at 15–16; ICI Comment Letter, supra note

11, at 15–16 (the ICI also suggested that the line

graph requirement could pose problems for EDGAR

filers, since the EDGAR system cannot recognize

more than a limited set of characters, id. at 16 n.20).

85Letter from IDS Financial Corporation to

Jonathan G. Katz, Secretary, SEC 2 (Feb. 22, 1994).

See also ICI Comment Letter, supra note 11, at 14.

86See, e.g., Fidelity Comment Letter, supra note

18, at 3 (‘‘cross-disclosure is particularly

burdensome in advertisements’’); ICI Comment

Letter, supra note 11, at 17–18.

87Signature Group Comment Letter, supra note

59, at 16–17.

88 Id.; ICI Comment Letter, supra note 11, at 17–

18 (the expense of cross-disclosure, together with

the equal prominence requirement, would place

multiple class and master-feeder funds at a

competitive disadvantage).

89Footnote 88 in the proposing release

erroneously stated that ‘‘rule 134 advertisements,

however, may include rankings based on

performance data.’’ 58 FR at 68085, n.88. Rule 134

advertisements may not contain performance

rankings.

90Therefore, funds relying on rule 18f–3 will not

be required to quote the performance of all classes

when they quote performance in advertisements

under rule 482, as was required generally under the

exemptive orders. The Commission cautions

multiple class funds to use care not to mislead

investors in advertising the performance of one

class when multiple classes are being offered to the

same persons. For example, it may be misleading

to quote only performance of a class for

institutional or inside investors (with low expenses)

in a publication with a retail readership.

91See, e.g., IDS Financial Corp. (pub. avail. Dec.

19, 1994) (allowing a multiple class fund to

calculate standardized total return of a new class

following a merger based upon the performance of

the acquiring (and surviving) fund, adjusted to

reflect differences in the sales load, but not

differences in rule 12b–1 fees).

intended to inform investors about the

differences between the investment

options offered together to them.

The proposal would have required

that whenever a prospectus offered two

or more classes or feeder funds, or

provided cross-disclosure about one or

more classes or feeder funds, it must

also contain a discussion of the

differences between the classes or feeder

funds. This aspect of the proposal

elicited little comment. The proposal

also would have required a line graph

comparing the feeder funds’ or classes’

performance over a hypothetical tenyear period, assuming an initial

investment of $10,000 and a 5% rate of

return.80 The Commission intended that

the graph demonstrate the

circumstances under which holding

shares of each class or feeder fund for

various lengths of time would produce

the highest return. The Commission is

not adopting this aspect of the proposal.

The narrative discussion called for by

Guide 34 should provide investors with

similar information. Moreover, the line

graph proposal was predicated upon the

cross-disclosure requirement, which the

Commission is not adopting.

The proposed line graph met with

significant opposition from a number of

commenters, many of which

conjectured that it could mislead

investors into believing that the ‘‘market

always goes up.’’ 81 One commenter

expressed concern that the graph creates

a ‘‘significant potential for litigation.’’ 82

Another commenter observed that,

except for variable life illustrations, ‘‘the

Commission has not previously used

these investment assumptions to project

hypothetical future performance.’’ 83

Many commenters raised numerous

concerns regarding the accuracy of the

graphs given the myriad redemption

possibilities, expenses, sales charges,

and exchange privileges.84 A commenter

also argued that much of the

information would duplicate disclosure

in the fee table, and thus would be

contrary to the goal of prospectus

simplification.85

3. Discussion of Classes Into Which

Shares May Convert or Be Exchanged

The Commission is adopting new

General Instruction I to Form N–1A.

This Instruction states that multiple

class funds that provide for conversions

or exchanges of shares from one class to

another should provide disclosure in

the prospectus about all other classes

into which the shares may be converted

or exchanged. Although Instruction I

does not specify a particular format, it

states that the disclosure should be

designed to aid investor comprehension,

and when appropriate, should use

tables, side-by-side comparisons, or

other parallel presentations to assist an

investor’s understanding of the other

class or classes.

4. Advertising and Sales Literature

The Commission is not adopting

requirements for advertisements or sales

literature about multiple class or masterfeeder funds. The Commission had

proposed amending rules 134 and 482

under the Securities Act and rule 34b–

1 under the Investment Company Act to

require multiple class and master-feeder

fund advertisements to contain a

prominent legend substantially similar

to that proposed for prospectus

disclosure. In addition, the Commission

had proposed amending rules 482 and

34b–1 to require multiple class and

master-feeder fund advertisements that

contain performance figures to include,

with equal prominence, the

performance of all classes and feeder

funds that would have been subject to

the proposed prospectus crossdisclosure requirement. The proposal

would also have required that when an

advertisement contains performance

figures for a class or feeder fund for

which average annual total return

information is not available for one,

five, and ten year periods, and this

information is available for another

class, feeder or master fund, then the

advertisement must include quotations

of average annual total return for the

securities of the other class, feeder or

master fund together with any necessary

explanation.

Commenters opposed the requirement

of disclosure about other classes or

feeder funds in advertisements.86 One

stated that ‘‘[i]n many respects, these

requirements are so onerous that they

are unworkable’’ and that ‘‘[t]he volume

of disclosure required by the Proposal

and the equal prominence requirement

would make advertising prohibitively

expensive as well as highly impractical

for funds in the master-feeder fund

structure.’’ 87 Some commenters

objected to the requirement because of

the amount of space the disclosure

would occupy in an average

advertisement.88

In view of those objections, the

Commission has determined not to

adopt the proposed advertising

disclosure requirements.89 Instead, the

Commission will address disclosure of

performance under the general antifraud provisions of the federal securities

laws 90 and expects that the staff will

continue to address issues relating to

performance disclosure on an

interpretive or no-action basis.91

D. Effective Dates

Rule 18f–3 and the amendment to rule

12b–1 will become effective April 3,

1995. Registration statements and posteffective amendments filed with the

Commission after April 3, 1995 must be

in compliance with the amendments to

Forms N–1A and N–14.

III. Cost/Benefit of the Proposals

Rule 18f–3 and the rule and form

amendments adopted today should

impose less of a reporting or

recordkeeping burden and less

regulatory compliance cost on multiple

class funds than those imposed by the

multiple class exemptive orders. Under

rule 18f–3 and the form amendments,
Federal Register / Vol. 60, No. 41 / Thursday, March 2, 1995 / Rules and Regulations 11885

multiple class funds would be subject to

fewer disclosure requirements and

lower costs than under the exemptive

orders. Any additional time required to

comply with the rule’s written plan

requirement should be minimal because

multiple class funds already would have

to commit material class differences to

writing in order to enter into

distribution or service agreements, or to

disclose their terms. The prospectus

disclosure should impose little burden,

and in fact requires less disclosure than

currently required for multiple class

funds. The disclosure is similar to that

presently required for master-feeder

funds, and thus should impose little or

no additional burden on those funds.

The amendment to rule 12b–1 should

not impose any additional costs because

it essentially would incorporate in the

rule existing requirements in the

exemptive orders for multiple class

funds.

IV. Regulatory Flexibility Act Analysis

A summary of the Initial Regulatory

Flexibility Analysis, which was

prepared in accordance with 5 U.S.C.

603, was published in the Proposing

Release. No comments were received on

this analysis. The Commission has

prepared a Final Regulatory Flexibility

Analysis, a copy of which may be

obtained by writing to Karrie McMillan,

Esq., Division of Investment

Management, Mail Stop 10–6, Securities

and Exchange Commission, 450 Fifth

Street, N.W. 20549.

V. Statutory Authority

The Commission is adopting rule 18f–

3 under the authority in sections 6(c),

18(i), and 38(a) of the Investment

Company Act [15 U.S.C. §§ 6(c), 18(i),

and 37(a)], and the amendment to rule

12b–1 under section 12(b) of the

Investment Company Act [15 U.S.C.

§ 12(b)]. The Commission is adopting

the amendments to Form N–1A under

sections 6, 7(a), 10 and 19(a) of the

Securities Act [15 U.S.C. 77g(a), 77j, and

77s(a)], and sections 8(b), 24(a), and

38(a) of the Investment Company Act

[15 U.S.C. §§ 80a–8(b), 24(a), and 37(a)],

and the amendments to Form N–14

under sections 6, 7, 8, 10 and 19(a) of

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

77j and 77s(a)] and sections 14(a), 14(c)

and 23(a) of the Exchange Act of 1934

[15 U.S.C. 78n(a), 78n(c) and 78w].

VI. Text of Adopted Rule and Rule and

Form Amendments

List of Subjects in 17 CFR Parts 239,

270, and 274

Investment Companies, Reporting and

record keeping requirements, Securities.

For the reasons set out in the

preamble, Title 17, Chapter II of the

Code of Federal Regulations is amended

as follows:

PART 270—RULES AND

REGULATIONS, INVESTMENT

COMPANY ACT OF 1940

1. The authority citation for Part 270

continues to read, in part, as follows:

Authority: 15 U.S.C. 80a–1, et seq., 80a–37,

80a–39 unless otherwise noted;

* * * * *

2. Section 270.12b-1 is amended by

adding paragraph (g) to read as follows:

§ 270.12b–1 Distribution of shares by

registered open-end management

investment company.

* * * * *

(g) If a plan covers more than one

class of shares, the provisions of the

plan must be severable for each class,

and whenever this section provides for

any action to be taken with respect to

a plan, that action must be taken

separately for each class, provided,

however, that under § 270.18f–3(e)(2),

any shareholder vote on a plan of a

target class must also require a vote of

any purchase class.

3. By adding § 270.18f–3 to read as

follows:

§ 270.18f–3 Multiple class companies.

Notwithstanding sections 18(f)(1) and

18(i) of the Act (15 U.S.C. 80a–18(f)(1)

and (i), respectively), a registered openend management investment company

or series or class thereof established in

accordance with section 18(f)(2) of the

Act (15 U.S.C. 80a–18(f)(2)) whose

shares are registered on Form N–1A

[§§ 239.15A and 274.11A of this

chapter] (‘‘company’’) may issue more

than one class of voting stock, provided

that:

(a) Each class:

(1)(i) Shall have a different

arrangement for shareholder services or

the distribution of securities or both,

and shall pay all of the expenses of that

arrangement;

(ii) May pay a different share of other

expenses, not including advisory or

custodial fees or other expenses related

to the management of the company’s

assets, if these expenses are actually

incurred in a different amount by that

class, or if the class receives services of

a different kind or to a different degree

than other classes; and

(iii) May pay a different advisory fee

to the extent that any difference in

amount paid is the result of the

application of the same performance fee

provisions in the advisory contract of

the company to the different investment

performance of each class;

(2) Shall have exclusive voting rights

on any matter submitted to shareholders

that relates solely to its arrangement;

(3) Shall have separate voting rights

on any matter submitted to shareholders

in which the interests of one class differ

from the interests of any other class; and

(4) Shall have in all other respects the

same rights and obligations as each

other class.

(b) Expenses may be waived or

reimbursed by the company’s adviser,

underwriter, or any other provider of

services to the company.

(c) Income, realized and unrealized

capital gains and losses, and expenses of

the company not allocated to a

particular class pursuant to paragraph

(a) of this section:

(1) Except as permitted in paragraph

(c)(2) of this section, shall be allocated

to each class on the basis of the net asset

value of that class in relation to the net

asset value of the company; or

(2) For companies operating under

§ 270.2a–7 (including the provision

allowing the calculation of net assets on

an amortized cost basis), and for other

companies declaring distributions of net

investment income daily that maintain

the same net asset value per share in

each class, may be allocated:

(i) To each share without regard to

class, provided that the company has

received undertakings from its adviser,

underwriter or any other provider of

services to the company, agreeing to

waive or reimburse the company for

payments to such service provider by

one or more classes, as allocated under

paragraph (a)(1) of this section, to the

extent necessary to assure that all

classes of the company maintain the

same net asset value per share; or

(ii) On the basis of relative net assets

(settled shares). For purposes of this

section, ‘‘relative net assets (settled

shares)’’ are net assets valued in

accordance with generally accepted

accounting principles but excluding the

value of subscriptions receivable, in

relation to the net assets of the

company.

(d) Any payments made under

paragraph (a) of this section shall be

made pursuant to a written plan setting

forth the separate arrangement and

expense allocation of each class, and

any related conversion features or

exchange privileges. Before the first

issuance of a share of any class in

reliance upon this section, and before

any material amendment of a plan, a

majority of the directors of the

company, and a majority of the directors

who are not interested persons of the

company, shall find that the plan as

proposed to be adopted or amended,

including the expense allocation, is in
11886 Federal Register / Vol. 60, No. 41 / Thursday, March 2, 1995 / Rules and Regulations

the best interests of each class

individually and the company as a

whole; initial board approval of a plan

under this paragraph (d) is not required,

however, if the plan does not make any

change in the arrangements and expense

allocations previously approved by the

board under an existing order of

exemption. Before any vote on the plan,

the directors shall request and evaluate,

and any agreement relating to a class

arrangement shall require the parties

thereto to furnish, such information as

may be reasonably necessary to evaluate

the plan.

(e) Nothing in this section prohibits a

company from offering any class with:

(1) An exchange privilege providing

that securities of the class may be

exchanged for certain securities of

another company; or

(2) A conversion feature providing

that shares of one class of the company

(the ‘‘purchase class’’) will be

exchanged automatically for shares of

another class of the company (the

‘‘target class’’) after a specified period of

time, provided that:

(i) The conversion is effected on the

basis of the relative net asset values of

the two classes without the imposition

of any sales load, fee, or other charge;

(ii) The expenses, including payments

authorized under a plan adopted

pursuant to § 270.12b–1 (‘‘rule 12b–1

plan’’), for the target class are not higher

than the expenses, including payments

authorized under a rule 12b–1 plan, for

the purchase class; and

(iii) If the amount of expenses,

including payments authorized under a

rule 12b–1 plan, for the target class is

increased materially without approval

of the shareholders of the purchase

class, the fund will establish a new

target class for the purchase class on the

same terms as applied to the target class

before that increase.

(3) A conversion feature providing

that shares of a class in which an

investor is no longer eligible to

participate may be converted to shares

of a class in which that investor is

eligible to participate, provided that:

(i) The investor is given prior notice

of the proposed conversion; and

(ii) The conversion is effected on the

basis of the relative net asset values of

the two classes without the imposition

of any sales load, fee, or other charge.

PART 239—FORMS PRESCRIBED

UNDER THE SECURITIES ACT OF 1933

PART 274—FORMS PRESCRIBED

UNDER THE INVESTMENT COMPANY

ACT OF 1940

4. The authority citation of Part 239

continues to read, in part, as follows:

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

77sss, 78c, 78l, 78m, 78n, 78o(d), 78w(a),

78ll(d), 79e, 79f, 79g, 79j, 79l, 79m, 79n, 79q,

79t, 80a–8, 80a–29, 80a–30 and 80a–37,

unless otherwise noted.

* * * * *

5. The authority citation for Part 274

continues to read as follows:

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

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

and 80a–29, unless otherwise noted.

Note: Form N–1A does not, and the

amendments to Form N–1A will not, appear

in the Code of Federal Regulations.

6. By adding new General Instruction

I to Form N–1A [referenced in

§§ 239.15A and 274.11A] to read as

follows:

Form N–1A

* * * * *

General Instructions

* * * * *

I. Multiple Class and Master-Feeder Funds

Registrants issuing multiple classes of

shares that provide for conversions of

exchanges of shares from one class to another

class of the same fund should disclose the

information required by Form N–1A about all

other classes into which the shares may be

converted or exchanged. This information

should be presented in a format designed to

facilitate comprehension by investors, and

when appropriate, should use tables, side-byside comparisons, or other presentations to

assist an investor’s understanding of the

other class or classes. A ‘‘multiple class

fund’’ is an open-end management

investment company that issues more than

one class of shares, each of which represents

interests in the same portfolio of securities,

and either meets the requirements of rule

18f–3 under the Act [17 CFR 270.18f–3] or

operates pursuant to an exemptive order. A

‘‘feeder fund’’ is an open-end management

investment company, except a company that

issues periodic payment plan certificates,

that holds shares of a single open-end

management investment company (the

‘‘master fund’’) as its only investment

securities.

7. By amending Form N–1A

[referenced in §§ 239.15A and 274.11A]

by adding Instruction 4A to Item 2(a)(i),

to read as follows:

Form N–1A

* * * * *

Item 2. Synopsis

(a)(i) * * *

Instructions:

* * * * *

4A. If the prospectus offers shares of a

feeder fund, reflect the expenses of both the

feeder fund and the master fund in which the

feeder fund invests in a single fee table using

the captions provided. In the brief narrative

following the fee table, state that the fee table

reflects the expenses of both Registrants.

* * * * *

8. By amending Form N–1A

[referenced in §§ 239.15A and 274.11A]

by adding Item 6(h) to read as follows:

Form N–1A

* * * * *

Item 6. Capital Stock and Other Securities

* * * * *

(h) Registrants that offer multiple classes of

shares or that are feeder funds should briefly

describe the salient features of the multiple

class or master-feeder structure. In the case

of a feeder fund, explain the circumstances

under which the feeder fund could no longer

invest in the master fund (e.g., if the master

fund changed its investment objectives to be

inconsistent with those of the feeder fund),

and the consequences to shareholders of such

an event. If the Registrant has publicly

offered any class of shares of the same series

not offered through the prospectus, or if any

publicly offered feeder fund not offered

through the prospectus invests in the same

master fund as the Registrant, include the

following disclosure: (i) that the Registrant

issues other classes or that other funds invest

in the same master fund (using the same

terminology for classes or master and feeder

funds as elsewhere in the prospectus), (ii)

that those other classes or feeder funds may

have different sales charges and other

expenses, which may affect performance, (iii)

a telephone number investors may call to

obtain more information concerning the other

classes or feeder funds available to them

through their sales representative, and (iv)

that investors may obtain information

concerning those classes or feeder funds from

(as applicable) their sales representative, or

any person, such as the principal

underwriter, a broker-dealer or bank, which

is offering or making available to them the

securities offered in the prospectus.

9. By amending Form N–1A

[referenced in §§ 239.15A and 274.11A]

by adding paragraph (b)(18) to Item 24

before the Instructions to read as

follows:

Form N–1A

* * * * *

Item 24. Financial Statements and Exhibits

* * * * *

(b) * * *

(18) copies of any plan entered into by

Registrant pursuant to Rule 18f–3 under the

1940 Act, any agreement with any person

relating to the implementation of a plan, any

amendment to a plan or agreement, and a

copy of the portion of the minutes of a

meeting of the Registrant’s directors

describing any action taken to revoke a plan.

* * * * *

10. By adding Guide 34 to the

Guidelines for Form N–1A [referenced

in §§ 239.15A and 274.11A] to read as

follows:

Guidelines for Form N–1A

* * * * *
Federal Register / Vol. 60, No. 41 / Thursday, March 2, 1995 / Rules and Regulations 11887

1Exemption for Certain Open-End Management

Investment Companies to Impose Deferred Sales

Loads, Investment Company Act Release No. 20917

(Feb. 23, 1995).

2Exemptions for Certain Registered Open-End

Management Investment Companies To Impose

Deferred Sales Loads, Investment Company Act

Release No. 16619 (Nov. 2, 1988), 53 FR 45275

[hereinafter Proposing Release].

3The commenters included the American Bar

Association Subcommittee on Investment

Companies and Investment Advisers (the ‘‘ABA

Subcommittee’’); the American Council of Life

Insurance; Deutsche Bank AG New York Branch

(‘‘Deutsche Bank’’) (commenting outside the

comment period); Fidelity Management and

Research Company; Gaston & Snow; IDS Financial

Services, Inc. (‘‘IDS Financial’’); IDS Mutual Fund

Group; the Investment Company Institute (the

‘‘ICI’’) (commenting both within and outside the

comment period); the Keystone Group, Inc.; the

National Association of Securities Dealers, Inc.;

NASL Financial Services, Inc. (commenting outside

the comment period); NYLIFE Securities, Inc.;

Simpson, Thacher & Bartlett (‘‘Simpson Thacher’’)

(commenting outside the comment period);

Templeton Funds Management, Inc.; and 19

individual investors. The comment letters are

available for public inspection and copying at the

Commission’s public reference room in File No. S7–

24–88.

4 17 CFR 270.12b-1.

Guide 34. Multiple Class and Master-Feeder

Structures

In response to Item 6, if a single prospectus

is used to offer more than one class of a

multiple class fund or more than one feeder

fund that invests in the same master fund,

the prospectus should provide a separate

response to Item 2(a)(i) (the fee table

requirement) for each class or feeder fund

and should clearly explain the differences

between the expense and/or sales load

arrangements of the classes or feeder funds.

The fee table information should be arranged

to facilitate a comparison by shareholders of

the different fee structures.

11. By amending Form N–14

[referenced in § 239.23] by revising Item

16(10) to read as follows:

Note: Form N–14 does not, and the

amendment to Form N–14 will not, appear in

the Code of Federal Regulations.

Form N–14

* * * * *

Item 16. Exhibits

* * * * *

(10) copies of any plan entered into by

registrant pursuant to rule 12b–1 under the

1940 Act [17 CFR 270.12b–1] and any

agreements with any person relating to

implementation of the plan, and copies of

any plan entered into by Registrant pursuant

to Rule 18f–3 under the 1940 Act [17 CFR

270.18f–3], any agreement with any person

relating to implementation of the plan, any

amendment to the plan, and a copy of the

portion of a meeting of the minutes of the

Registrant’s directors describing any action

taken to revoke the plan;

* * * * *

Dated: February 23, 1995.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–4997 Filed 3–1–95; 8:45 am]

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE

COMMISSION

17 CFR Part 270

[Release No. IC–20916; File No. S7–24–88]

RIN 3235–AD18

Exemption for Certain Open-End

Management Investment Companies

To Impose Contingent Deferred Sales

Loads

AGENCY: Securities and Exchange

Commission.

ACTION: Final rule.

SUMMARY: The Commission is adopting

a new rule under the Investment

Company Act of 1940 to permit certain

registered open-end management

investment companies (‘‘mutual funds’’)

to impose contingent deferred sales

loads (‘‘CDSLs’’). A CDSL is a sales

charge that is paid at redemption; its

amount declines over several years until

it reaches zero. The adoption of the rule

is intended to allow mutual funds to

offer investors the choice of an

additional form of sales load without

applying to the Commission for

exemptive relief.

EFFECTIVE DATE: The new rule will

become effective April 3, 1995.

FOR FURTHER INFORMATION CONTACT:

Nadya B. Roytblat, Staff Attorney, (202)

942–0693, or Robert G. Bagnall,

Assistant Chief, (202) 942–0686, Office

of Regulatory Policy, Division of

Investment Management, Securities and

Exchange Commission, 450 Fifth Street,

N.W., Mail Stop 10–6, Washington, D.C.

20549.

Requests for formal interpretive

advice should be directed to the Office

of Chief Counsel at (202) 942–0659,

Division of Investment Management,

Securities and Exchange Commission,

450 Fifth Street, N.W., Mail Stop 10–6,

Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: The

Commission is adopting rule 6c–10 [17

CFR 270.6c–10] under the Investment

Company Act of 1940 [15 U.S.C. § 80a]

(the ‘‘Investment Company Act’’ or the

‘‘Act’’). The Commission is not adopting

the amendments that were proposed to

Form N–1A [17 CFR 239.15A, 274.11A].

In a companion release, the Commission

is proposing amendments to rule 6c–10

that would permit mutual funds to

impose deferred sales loads generally,

including loads payable in installments

(‘‘installment loads’’); the amendments

also would modify most of the

substantive requirements of rule 6c–10

as adopted here.1

A condition in many CDSL exemptive

orders granted to date requires

applicants to comply with rule 6c–10 as

originally proposed or as it may be

reproposed, adopted, or amended. Rule

6c–10 as adopted here constitutes the

rule as adopted within the meaning of

that condition; the amendments that the

Commission is proposing in the

companion release do not constitute the

rule as reproposed or amended within

the meaning of that condition and may

not be relied upon by those applicants.

I. Introduction and Background

The Commission proposed rule 6c–10

in 1988 to allow mutual funds to impose

deferred sales loads generally, including

CDSLs, as well as other loads paid at

redemption and sales loads payable in

installments.2 The Commission received

33 comment letters.3 Although the

commenters generally supported the

proposal to allow CDSLs, some

commenters questioned the need for

certain substantive requirements in the

rule. Commenters had mixed reactions

to the proposed provisions for

installment loads.

Since the proposal of rule 6c–10, the

Commission (or the Division of

Investment Management exercising

delegated authority) has issued almost

200 exemptive orders permitting funds

to impose CDSLs and continues to

receive such applications. Also since

the original proposal, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’) has amended the provisions

of its Rules of Fair Practice that govern

mutual fund sales charges (‘‘NASD Sales

Charge Rule’’). The amendments

address certain deferred sales charges,

including CDSLs, and distribution

charges paid by funds in accordance

with rule 12b–1 under the Investment

Company Act.4

The Commission has considered the

comments on the proposal and the

implications of the amendments to the

NASD Sales Charge Rule and has

concluded that it may be appropriate to

modify the rule to eliminate most of the

substantive requirements in the original

proposal and rely upon the roles of

disclosure and the overall limits in the

NASD Sales Charge Rule. Instead of

adopting rule 6c–10 with these changes,

the Commission is proposing

modifications to rule 6c–10 to obtain the

benefit of public comment on this

approach and on issues raised by

deferred loads other than CDSLs.

In light of the Commission’s extensive

experience under the CDSL exemptive