[Federal Register Volume 60, Number 41 (Thursday, March 2, 1995)]
[Proposed Rules]
[Pages 11890-11896]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-4998]




Federal Register / Vol. 60, No. 41 / Thursday, March 2, 1995 / 
Proposed Rules 
[[Page 11890]] 

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 239, 270, and 274

[Release Nos. 33-7144; IC-20917; File No. S7-8-95]
RIN 3235-AD18


Exemption for Certain Open-End Management Investment Companies To 
Impose Deferred Sales Loads

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule and form amendments, and request for comment.

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SUMMARY: The Commission is proposing amendments to the rule under the 
Investment Company Act of 1940 that permits certain registered open-end 
management investment companies (``mutual funds'') to impose contingent 
deferred sales loads. The proposed amendments would allow funds to 
offer investors a wider variety of deferred sales loads, including 
installment loads, and would eliminate certain requirements in the 
rule. The Commission also is proposing amendments to the registration 
form for mutual funds, and publishing for comment a staff guide to the 
registration form. These amendments modify the requirements for 
disclosing deferred sales loads in mutual fund prospectuses to reflect 
the changes made in the proposed rule amendments.

DATES: Comments must be received on or before April 17, 1995.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW., Mail Stop 6-9, Washington, DC 20549. All comment letters should 
refer to File No. S7-8-95. All comments received will be available for 
public inspection and copying in the Commission's Public Reference 
Room, 450 Fifth Street NW., Washington, DC 20549.

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 NW., Mail Stop 10-
6, Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is requesting public comment 
on proposed amendments to rule 6c-10 (17 CFR 270.6c-10) under the 
Investment Company Act of 1940 (15 U.S.C. 80a) (the ``Investment 
Company Act'' or the ``Act''), and on proposed amendments to Form N-1A 
(17 CFR 239.15A, 274.11A) under the Securities Act of 1933 (15 U.S.C. 
77a-77aa) (the ``Securities Act'') and the Investment Company 
Act.<SUP>1

    \1\Exemption for Certain Open-End Management Investment 
Companies to Impose Contingent Deferred Sales Loads, Investment 
Company Act Release No. 20916 (Feb. 23, 1995) [hereinafter Rule 6c-
10 Adopting Release].
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Executive Summary

    The Commission is proposing amendments to rule 6c-10 (17 CFR 
270.6c-10) under the Investment Company Act to allow mutual funds to 
impose deferred sales loads other than contingent deferred sales loads 
(``CDSLs''), and to remove certain requirements in the rule. Rule 6c-
10, which allows mutual funds to impose CDSLs, was adopted today in a 
companion release.<SUP>2 The proposed amendments would allow mutual 
funds to assess sales charges such as those paid at redemption (``back-
end loads'') that differ from CDSLs, as well as loads paid after 
purchase during the term of a shareholder's investment in a fund, for 
example, in installments (``installment loads''). These new forms of 
deferred sales load would be an alternative to the existing sales load 
structures. Although mutual funds to date have not used installment 
loads or back-end loads other than CDSLs, the Commission has permitted 
back-end loads under the rules for certain variable insurance products, 
and has issued installment load exemptive orders to separate accounts 
and unit investment trusts.

    \2\Supra note 1.
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    Rule 6c-10 provisions for back-end loads other than CDSLs and 
installment loads were part of proposed rule 6c-10 as originally 
proposed in 1988.<SUP>3 That proposal would have codified for deferred 
sales loads generally the exemptions and the requirements in the CDSL 
exemptive orders granted to date. Rule 6c-10 was adopted today to allow 
CDSLs essentially as proposed. Some commenters on the original proposal 
suggested that, because mutual fund sales charges are regulated by the 
National Association of Securities Dealers, Inc. (the ``NASD''), it is 
unnecessary for the Commission to impose specific requirements on 
deferred loads, other than requirements governing prospectus 
disclosure. The Commission is proposing amendments to rule 6c-10 to 
follow such an approach for CDSLs and other deferred loads by removing 
most of the requirements in rule 6c-10. Under the new approach, the 
terms of any deferred sales load would be subject to specific 
disclosure requirements and would be covered by the overall limits in 
the NASD rule governing the amount of mutual fund sales charges (``NASD 
Sales Charge Rule''). The Commission also is proposing revised 
prospectus disclosure requirements that reflect the proposed changes to 
rule 6c-10.

    \3\Exemptions for Certain Registered Open-End Management 
Investment Companies To Impose Deferred Sales Loads, Investment 
Company Act Release No. 16619 (Nov. 2, 1988), 53 FR 45275 
[hereinafter 1988 Proposing Release].
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I. Background

    The Commission first proposed rule 6c-10 allowing mutual funds to 
impose deferred sales loads on November 2, 1988.<SUP>4 Under the 1988 
proposal, mutual funds would have been able to assess deferred loads 
under the terms and conditions contained in CDSL exemptive orders 
granted to individual funds as of the date of the proposal. The 
proposed rule would have permitted mutual funds to charge not only 
CDSLs,<SUP>5 but also loads paid at redemption whose amount remains the 
same or changes in a manner different than a CDSL, as well as loads 
paid in one or more installments during the term of a shareholder's 
investment in a fund. In accordance with the CDSL exemptive orders, the 
rule as proposed in 1988 would have specified load calculation 
requirements; prohibited deferred loads on reinvested distributions; 
and allowed scheduled load variations. Rule 6c-10 as adopted today to 
allow CDSLs contains these requirements.

    \4\1988 Proposing Release, supra note 3.
    \5\A CDSL is paid at redemption, but declines to zero if the 
shares are held for a certain period of time. Mutual funds typically 
impose a CDSL in combination with an asset-based distribution fee 
charged in accordance with rule 12b-1 under the Act [17 CFR 270.12b-
1] (``rule 12b-1 fee''), in an arrangement commonly called a 
``spread load.'' Under this arrangement, a fund's principal 
underwriter initially pays the fund's sales and promotional 
expenses, including commissions to persons who sell the fund's 
shares. The underwriter then recovers these expenses through a 
distribution fee paid to it by the fund out of the fund's assets. 
Should a shareholder redeem his or her shares before the underwriter 
has been fully reimbursed, the CDSL paid by the shareholder upon 
redemption compensates the underwriter for the balance.
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    The Commission received 33 comment letters on the 1988 
proposal.<SUP>6 [[Page 11891]] The commenters generally supported the 
proposal.<SUP>7 The commenters welcomed a rule allowing CDSLs as 
eliminating the need to file exemptive applications, and many 
maintained that installment loads could offer desirable flexibility to 
funds as well as consumers.<SUP>8 Individual investors in particular 
supported installment loads as an option in paying a sales 
charge.<SUP>9 Some of these investors compared installment loads to 
front-end loads and preferred the former as allowing them to defer the 
payment of a sales charge; others compared installment loads to rule 
12b-1 fees, and believed that installment loads as proposed in 1988 
would be a more clear charge, as well as one that would be payable 
within a more definite term. Other commenters have suggested that 
installment loads would make it easier for smaller mutual fund 
sponsors, as well as sponsors of mutual funds not affiliated with 
brokerage firms, to obtain financing to pay broker commissions through 
securitization of installment load cash flows; and they argued that 
installment loads would thereby encourage competition in the fund 
industry that ultimately would benefit investors.<SUP>10

    \6\The 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. (``Keystone''); the 
National Association of Securities Dealers, Inc.; NASL Financial 
Services, Inc. (commenting outside the comment period); NYLIFE 
Securities, Inc. (``NYLIFE''); Simpson, Thacher & Bartlett 
(``Simpson Thacher'') (commenting outside the comment period); 
Templeton Funds Management, Inc. (``Templeton''); 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.
    \7\The comments addressed CDSLs and installment loads, but did 
not focus specifically on back-end loads other than CDSLs. While 
some earlier industry commenters perceived practical difficulties 
with using installment loads, more recent industry comments suggest 
that any such difficulties either no longer exist or could be 
resolved. Compare Letter from the ABA Subcommittee to Jonathan G. 
Katz, Secretary, SEC (Jan. 11, 1989); Letter from IDS Financial to 
Jonathan G. Katz, Secretary, SEC (Jan. 3, 1989); Letter from the ICI 
to Jonathan G. Katz, Secretary, SEC (Jan. 9, 1989); Letter from 
Keystone to Jonathan G. Katz, Secretary, SEC (Jan. 6, 1989) 
(together, suggesting recordkeeping, transfer agent, accounting and 
tax-related complexities associated with installment loads) to 
Letter from Deutsche Bank, submitted on its behalf by Simpson 
Thacher, to the Division of Investment Management, SEC 2 (Dec. 13, 
1993) (stating that Deutsche Bank ``encountered a great deal of 
interest'' in installment loads in the course of its ``discussions 
with more than 15 well-recognized (both small and large) mutual fund 
management companies'').
    Two earlier commenters also interpreted a statement in the 1988 
Proposing Release that the proposal of rule 6c-10 should be read 
together with the Commission's proposed amendments to rule 12b-1, as 
intending to mandate installment loads as a replacement for spread 
loads. ABA Subcommittee comment letter, supra note 7, at 3; ICI 
comment letter, supra note 7, at 2, 13-16. See also Payment of 
Asset-Based Sales Loads by Registered Open-End Management Investment 
Companies, Investment Company Act Release No. 16431 (June 13, 1988), 
53 FR 23258. The 1988 proposal was not intended to express such a 
view, nor is the Commission today expressing such a view.
    \8\Letter from IDS Mutual to Jonathan G. Katz, Secretary, SEC 
(Nov. 15, 1988); Letter from NYLIFE to Jonathan G. Katz, Secretary, 
SEC (Dec. 30, 1988); Letter from Templeton to Jonathan G. Katz, 
Secretary, SEC (Jan. 9, 1989); Deutsche Bank December 13, 1993 
comment letter, supra note 7; Letter from the NASL to the Division 
of Investment Management, SEC (Feb. 16, 1994).
    \9\All but one of the 16 letters the Commission received from 
individual investors on this subject favored the installment load 
proposal.
    \10\Deutsche Bank December 13, 1993 comment letter, supra note 
7; NASL comment letter, supra note 8. Both commenters compared the 
financing possibilities with installment loads to the financing of 
receivables from rule 12b-1 fees. The commenters noted that the risk 
of a fund board's terminating a rule 12b-1 plan, as well as the risk 
of net asset value fluctuations inherent in an asset-based charge, 
currently restrict the availability of credit to larger mutual fund 
sponsors only; and that installment loads, which would not carry the 
same risks, could broaden the financing possibilities. See also 
Letter from the ICI to Barry Barbash, Director, Division of 
Investment Management, SEC 5 (June 14, 1994) (noting that 
facilitation of the financing of distribution costs is one of the 
principal objectives cited by the proponents of installment loads).
    One commenter's remarks suggested that, from the point of view 
of those concerned with systemic risk, the assurance of a steady 
stream of payments in an installment load structure would mean that 
a fund sponsor would be taking on less risk when it borrows to 
finance commission payments. Deutsche Bank December 13, 1993 comment 
letter, supra note 7, at 4-5.
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II. Discussion of Proposed Amendments to Rule 6c-10

    Like the 1988 proposal, the proposed amendments to rule 6c-10 would 
allow mutual funds to impose back-end sales loads other than CDSLs as 
well as installment loads, and would permit scheduled load variations. 
In a change from the 1988 proposal and the rule as adopted, the 
proposed amendments no longer would specify load calculation 
requirements, nor prohibit deferred sales loads on reinvested dividends 
and other distributions. Instead, the terms of any deferred sales load 
would be required to be covered by the overall limits in the NASD Sales 
Charge Rule,<SUP>11 and would be subject to specific prospectus 
disclosure requirements under the proposed amendments to the 
Commission's mutual fund registration form.

    \11\The NASD Sales Charge Rule prohibits NASD members from 
offering or selling shares of an open-end management investment 
company registered under the Investment Company Act if the sales 
charges described in the company's prospectus are excessive. 
Aggregate sales charges are deemed excessive under the Rule if they 
do not conform to the specific provisions set forth in the Rule. 
NASD, Rules of Fair Practice, Art. III, Secs. 26(d) (1) and (2).
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A. Scope of the Rule as Amended

    Under the proposed amendments, paragraph (b)(3) of the rule would 
define a deferred sales load as any amount properly chargeable to sales 
or promotional expenses that is paid by a shareholder after purchase 
but before or upon redemption.<SUP>12 The definition would include 
CDSLs, as well as other loads paid at redemption whose amount may 
remain the same or change in a manner different than a CDSL. The 
definition also would include loads paid after purchase during the term 
of a shareholder's investment in a fund, such as in one or more 
installments that could be accelerated upon an early redemption.

    \12\Rule 6c-10 as amended would not be applicable to certain 
charges that may be imposed by a mutual fund to discourage short-
term trading in its shares and that are paid directly to the fund. 
See, e.g., 17 CFR 270.11a-3(a)(7) (defining a ``redemption fee''). 
The Commission's staff has taken the position that such charges may 
be imposed without the need for exemptive relief under the Act. See, 
e.g., John P. Reilly & Associates (pub. avail. July 12, 1979).
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    Rule 6c-10 as adopted and as originally proposed does not apply to 
registered insurance company separate accounts. The exemption to impose 
deferred sales loads under the proposed amendments also would not 
extend to unit investment trusts. The Commission has issued installment 
load exemptive orders to unit investment trusts (``UITs''),<SUP>13 and 
requests comment on the appropriateness of a rule allowing UITs to 
assess deferred loads.<SUP>14

    \13\See Merrill Lynch, Pierce, Fenner & Smith, Inc., Investment 
Company Act Release Nos. 13801 (Feb. 29, 1984), 49 FR 8512 (Notice 
of Application to allow UITs to impose a deferred sales load payable 
in installments) and 13848 (Mar. 27, 1984), 30 SEC Docket 192 
(Order), and 15120 (May 29, 1986), 51 FR 20389 (Notice of 
Application) and 15167 (June 24, 1986), 35 SEC Docket 1735 (Order). 
See also PaineWebber, Inc., Investment Company Act Release Nos. 
20755 (Dec. 6, 1994), 59 FR 64003 (Notice of Application to allow a 
UIT to impose a deferred sales load payable in installments) and 
20819 (Jan. 4, 1995) (Order).
    \14\See Rule 6c-10 Adopting Release, supra note 1, at n.7 
regarding deferred sales loads in the context of separate accounts.
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    Unlike the 1988 proposal, which would have required installment 
loads to be deducted directly from a shareholder's account, the 
amendments would not require any particular method of collecting 
installment loads. The loads, for example, could be paid out of 
distributions, by automatic redemptions, or through separate billing of 
an investor's account. Two commenters indicated that funds most likely 
would deduct installment load payments from dividend 
distributions.<SUP>15 The Commission invites further comment on the 
methods that could be used to pay installment loads. Whichever method 
is used, however, it would have to be disclosed in the fund's 
prospectus, as required by the proposed [[Page 11892]] amendments to 
Form N-1A.<SUP>16 Because different methods of collecting load payments 
could carry different potential tax consequences for investors,<SUP>17 
funds also would be required to disclose those consequences briefly in 
the prospectus.<SUP>18

    \15\ICI comment letter, supra note 7, at 8; Letter from Simpson 
Thacher to the Division of Investment Management, SEC 2 (Dec. 13, 
1993).
    \16\See infra section III.B.
    \17\One commenter on the 1988 proposal, for example, pointed out 
that paying installments out of dividend distributions would mean 
that a shareholder would incur dividend income, yet not actually 
receive the portion of that income that was used to pay the 
installment. ICI comment letter, supra note 7, at 2, 9. Payment 
through automatic redemptions, on the other hand, would mean that a 
shareholder might incur a capital gain or loss on each such 
redemption; if additional shares then were purchased by the 
shareholder within 30 days of the automatic redemption, any capital 
loss might be disallowed under the ``wash sale'' rule contained in 
the Internal Revenue Code. Id. at 9; IDS Financial comment letter, 
supra note 7, at 1; NYLIFE comment letter, supra note 8, at 3.
    According to another commenter, installment loads could present 
potential difficulties for tax-privileged investors, such as 
retirement plans subject to the Employee Retirement Income Security 
Act of 1974, as amended (``ERISA''). Simpson Thacher comment letter, 
supra note 15, at 1-8. Automatic redemptions to pay installment 
loads, for example, might result in the mutual fund's being deemed a 
fiduciary of the investor for purposes of ERISA, the redemption's 
being deemed a prohibited transaction under ERISA, and the 
investor's losing its tax-exempt status. Id. This commenter noted, 
however, that a fund could seek to obtain a favorable ruling from 
the Internal Revenue Service on these issues. Simpson Thacher 
comment letter, supra note 15, at 5-6. A fund also could choose not 
to offer installment loads to its tax-privileged investors.
    \18\See infra section III.B (discussing staff Guide 30 to Form 
N-1A).
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B. Deferred Load Calculation

    Rule 6c-10 sets two requirements for calculating a deferred sales 
load. Under the first requirement, a CDSL must be based on the lesser 
of the net asset value (the ``NAV'') at the time of purchase or the NAV 
at the time of redemption.<SUP>19 The 1988 proposal would have required 
the ``lesser of'' standard for all deferred loads paid at redemption, 
but would have allowed deferred loads paid other than at redemption 
(such as installment payments) to be based at a fund's option either on 
the NAV at the time of purchase or on the lesser of the NAV at the time 
of purchase or the NAV at the time the load was paid. The mandatory 
``lesser of'' standard for loads paid at redemption was designed to 
eliminate any impediment to redemption in a falling market that might 
be created by the load. The second requirement prescribes the method 
for load calculation in a partial redemption.<SUP>20 This requirement 
was intended to allow shareholders the maximum benefit from shares in 
their deferred load accounts that carried no load.

    \19\17 CFR 270.6c-10(a)(1).
    \20\17 CFR 270.6c-10(a)(3). A fund must treat as if redeemed 
first shares or amounts representing shares not subject to a load, 
and treat other shares or amounts representing shares as if redeemed 
in the order they were purchased. In a partial redemption, this 
method would allow a shareholder, in effect, to delay the payment of 
the deferred sales charge. In a full redemption, no particular order 
of load calculation would have affected the amount of a deferred 
sales charge due.
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    Commenters on the 1988 proposal generally argued that neither 
requirement is necessary as long as deferred loads are subject to the 
limits of the NASD Sales Charge Rule and properly disclosed.<SUP>21 
None of the commenters addressed the concern about an impediment to 
redemption associated with the ``lesser of'' requirement, nor any 
benefits or drawbacks of the order of load calculation. Some commenters 
suggested, however, that allowing, but not requiring, the ``lesser of'' 
method would make it easier for fund sponsors to obtain financing to 
pay commissions to brokers by eliminating the risk of NAV 
fluctuation.<SUP>22 One commenter also argued that eliminating the 
``lesser of'' requirement would eliminate the need to build a cushion 
into the load structure to account for the risk of a lower NAV.<SUP>23 
This commenter suggested that the ``lesser of'' standard may cause fund 
sponsors to set the load at a higher percentage amount than they 
otherwise would in order to allow a margin for a possible decline in 
the NAV.

    \21\ABA Subcommittee comment letter, supra note 7, at 6; ICI 
comment letter, supra note 7, at 2; IDS comment letter, supra note 
7, at 2.
    \22\Deutsche Bank December 13, 1993 comment letter, supra note 
7, at 5; ICI June 14, 1994 comment letter, supra note 10, at 5.
    \23\Deutsche Bank December 13, 1993 comment letter, supra note 
7, at 5.
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    The Commission is proposing to eliminate the two load calculation 
requirements from rule 6c-10. Under the proposed amendments, paragraph 
(a)(1) would allow a deferred load to be a specified percentage of the 
NAV at the time of purchase, redemption, or the payment of an 
installment, but would not otherwise limit load calculation.<SUP>24 
Paragraph (a)(2) would require the terms of a deferred load to be 
subject to the NASD Sales Charge Rule.

    \24\This provision also would allow funds to base a deferred 
sales load on a combination of these standards, such as on the 
lesser of, or the higher of, the NAV at the time of purchase or 
redemption, provided the standard is disclosed and is consistent 
with any applicable provisions in the NASD Sales Charge Rule. A 
``higher of'' standard, for instance, currently is not allowed under 
the NASD Sales Charge Rule for mutual funds without an asset-based 
sales charge, because the Rule limits the sales loads for these 
funds to a set percentage of the offering price. NASD, Rules of Fair 
Practice, Art. III, Sec. 26(d)(1)(A).
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    The Commission requests comment on whether paragraph (a)(1) should 
provide for a deferred load to be based on the offering price either 
instead of, or in addition to, the NAV at the time of purchase. The fee 
table appearing in mutual fund prospectuses calls for deferred loads to 
be expressed, where applicable, as a percentage of the original 
purchase price. This disclosure provides easier comparability with 
front-end sales loads, which are expressed as a percentage of the 
offering price.
    The requirement in paragraph (a)(1) that the load be a ``specified 
percentage'' stated in the prospectus would allow investors to know at 
the time of purchase the maximum percentage amount of the load.<SUP>25 
Under the revised prospectus disclosure requirements, funds also would 
have to disclose in the fee table, and explain elsewhere in the 
prospectus, the manner in which the load is calculated.<SUP>26 In 
addition, funds would have to disclose the method by which they would 
calculate a deferred load in a partial redemption. The requirement in 
paragraph (a)(2) that the terms of a deferred load be covered by the 
NASD Sales Charge Rule would subject all deferred sales loads to the 
NASD's limits on maximum sales charges.<SUP>27 Such an approach is 
consistent with that currently taken with front-end sales charges 
assessed on mutual fund shares. The Commission requests comment on the 
proposed elimination of the load calculation restrictions and the 
reliance on revised prospectus disclosure requirements and the NASD 
Sales Charge Rule for deferred sales charges.

    \25\The requirement that the load be a ``specified percentage'' 
does not mean that the amount must be fixed and may not decrease or 
increase over time. Rather, it requires only that the percentage 
amount of the load to be charged at a given time be disclosed in the 
prospectus. Therefore, the phrase ``the same or a lower percentage'' 
in paragraph (a)(1) as adopted for CDSLs has been deleted from the 
proposed text. Funds would be able to show in the prospectus fee 
table the range of any deferred load that changes over time, as well 
as a schedule of any installment load payments. See infra section 
III.A.
    \26\See infra sections III.A and B.
    \27\The NASD Sales Charge Rule in its current form governs only 
deferred loads paid at redemption. The Rule applies to, among other 
things, ``deferred sales charges,'' which it defines, in relevant 
part, as ``a sales charge that is deducted from the proceeds of the 
redemption of shares by an investor.'' NASD, Rules of Fair Practice, 
Art. III, Sec. 26(b)(8)(B). To the extent deferred loads would be 
allowed to be paid other than upon redemption (e.g., installment 
loads), they would fall outside the current definition and would not 
be covered by the Rule. The proposed amendments to rule 6c-10 
contemplate the NASD's amending its Sales Charge Rule to address 
deferred loads paid other than upon redemption. The Commission's 
staff has requested the NASD to review its Sales Charge Rule in 
light of the proposed amendments. [[Page 11893]] 
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C. Deferred Loads on Reinvested Distributions

    Rule 6c-10 prohibits mutual funds from imposing CDSLs on shares 
purchased through the reinvestment of dividends or other 
distributions.<SUP>28 Some commenters on the 1988 proposal argued that 
this prohibition is unnecessary so long as a mutual fund appropriately 
discloses the manner in which loads are assessed and so long as loads 
charged by mutual funds generally are subject to the limits in the NASD 
Sales Charge Rule.<SUP>29 The Commission is proposing to delete this 
prohibition from rule 6c-10. Under the revised prospectus disclosure 
requirements, funds that impose deferred sales charges on reinvested 
dividends and other distributions would have to disclose this fact in 
their prospectuses.<SUP>30 This approach would be consistent with the 
Commission's approach to front-end loads on reinvested dividends. The 
Commission requests comment on the appropriateness of the proposed 
approach for deferred loads.

    \28\17 CFR 270.6c-10(a)(2). The 1988 proposal also would have 
prohibited funds from charging deferred loads on capital 
appreciation. Because under the proposed amendments paragraph (a)(1) 
would allow deferred loads to be based on the NAV at the time of 
redemption and at the time an installment is paid, a load could be 
charged on any capital appreciation to the extent the load is based 
on the higher of the NAV at purchase or at the time of redemption or 
load payment.
    \29\ABA Subcommittee comment letter, supra note 7, at 8-9; ICI 
comment letter, supra note 7, at 5.
    \30\See infra section III.B.
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    The NASD Sales Charge Rule currently covers front-end loads, but 
not deferred loads, on reinvested dividends. The NASD Sales Charge Rule 
also does not cover loads on reinvested capital gains distributions or 
returns of capital.<SUP>31 The proposed amendments to rule 6c-10 
contemplate the NASD's amending its Sales Charge Rule to address these 
issues.

    \31\A return of capital generally occurs when a fund's 
distribution exceeds the fund's aggregate amount of undistributed 
net taxable income and net realized capital gains. See 
Determination, Disclosure, and Financial Statement Presentation of 
Income, Capital Gain, and Return of Capital Distributions by 
Investment Companies, American Institute of Certified Public 
Accountants, Statement of Position 93-2, 8 (Feb. 1, 1993).
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D. ``No-Load'' Labeling

    As proposed in 1988, rule 6c-10 would have prohibited any exempted 
person and its first and second tier affiliates (all as set forth in 
the proposed rule) from holding a mutual fund out to the public as 
being ``no-load'' or as having ``no sales charge'' if the fund imposed 
a deferred load. After rule 6c-10 was proposed, the NASD amended its 
Sales Charge Rule expressly to prohibit NASD members and their 
associated persons from describing a mutual fund as ``no load'' or as 
having ``no sales charge'' if the fund imposes a front-end load, a 
back-end load, or a 12b-1 and/or service fee that exceeds .25% of 
average net assets per year.<SUP>32 In light of this amendment to the 
NASD Sales Charge Rule, the Commission concluded that it was 
unnecessary to retain a separate no-load labeling prohibition for CDSLs 
in rule 6c-10 as adopted. The prohibition similarly is unnecessary for 
back-end loads other than CDSLs. Although the NASD Sales Charge Rule 
currently does not address installment loads, the Commission 
anticipates that the NASD would amend its Sales Charge Rule if the 
proposed rule 6c-10 amendments are adopted, and believes that it is 
unnecessary to amend rule 6c-10 to prohibit no-load labeling in the 
case of installment loads. The Commission also believes that it would 
be misleading and a violation of the federal securities laws for a fund 
that imposes a deferred sales load to be held out to the public as a 
no-load fund.<SUP>33

    \32\NASD, Rules of Fair Practice, Art. III, Sec. 26(d)(3).
    \33\See 1988 Proposing Release, supra note 3, at 45283 
(referring, in turn, to an earlier Commission statement of its 
view).
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E. Exchanges Involving Deferred Loads

    The Commission is not proposing any amendments to rule 11a-3 under 
the Investment Company Act governing exchanges of shares, that relate 
to deferred sales loads.<SUP>34 Back-end and installment loads would 
fall under the current definition of ``deferred sales load'' in rule 
11a-3,<SUP>35 and therefore would be covered by the requirements in 
that rule on the imposition of deferred sales charges in connection 
with an exchange. The Commission invites comment on whether it should 
amend the definition of deferred sales load in rule 11a-3 to correspond 
expressly with the deferred load definition in the proposed amendments 
to rule 6c-10. The Commission also invites comment on whether rule 11a-
3 needs to include any additional provisions for deferred loads.

    \34\17 CFR 270.11a-3. The 1988 proposal did not address rule 
11a-3.
    \35\Rule 11a-3 defines a ``deferred sales load'' as ``any amount 
properly chargeable to sales or promotional activities that is or 
may be deducted upon redemption of all or a portion of a 
securityholder's interest in an open-end investment company.'' 17 
CFR 270.11a-3(a)(3). Deferred loads paid other than upon redemption 
would fall within this definition because they could be accelerated 
upon redemption.
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III. Discussion of Revised Disclosure Requirements

    The Commission is proposing new disclosure requirements for 
deferred sales loads in light of the proposed changes to rule 6c-10 
discussed above. These requirements would reflect the rule's scope 
under the proposed amendments, which would permit loads paid at 
redemption or in installments. They also respond to the proposed 
elimination of the limitations in the 1988 proposal that would have 
required a back-end load to be based on the lower of the NAV at the 
time of purchase or redemption, and permitted installment loads to be 
based on the NAV at the time of purchase or on the lower of the NAV at 
the time of purchase price and the NAV at the time an installment was 
paid.

A. Fee Table Disclosure

    The fee table requirements in Item 2 of Form N-1A currently require 
disclosure of deferred sales loads, but do not contemplate installment 
loads the amount of which is based on a price other than the purchase 
price or redemption proceeds. The Commission is proposing amendments to 
the fee table requirements to require disclosure concerning all forms 
of deferred sales loads, including installment loads.
    The parenthetical explanation following the caption ``Deferred 
Sales Load'' in the fee table currently provides for deferred loads to 
be expressed only as a percentage of the original purchase price or the 
redemption proceeds. The proposed amendment would replace most of the 
current wording inside the parentheses with a blank, indicating that a 
registrant should provide appropriate disclosure describing the basis 
on which the load is computed. This change reflects the greater variety 
of load formulations that rule 6c-10 would permit under the proposed 
amendments: in contrast to the limitations in the rule as adopted and 
as initially proposed, the proposed amendments would permit deferred 
loads to be a percentage of the NAV at the time of purchase, 
redemption, or the payment of an installment, or the higher or lower of 
those amounts.
    The proposed revisions to Instruction 5 to the fee table are 
intended to clarify how the fee table should address all deferred loads 
and to respond to the greater range of practices that would be 
permitted under the proposed amendments. The addition of the word 
``total'' would make clear that the response to the ``Deferred Sales 
Load'' caption for an installment load should be the sum of the 
installments (e.g., 6%, [[Page 11894]] rather than 1% a year for six 
years). Like the 1988 proposal, the proposed amendments would permit a 
fund to include within the larger fee table a tabular presentation of 
the schedule of installment payments.<SUP>36

    \36\As currently required by Instruction 1 to the fee table, a 
fund also would have to provide a reference following the fee table 
to the discussion of any scheduled variations and other information 
about installment loads elsewhere in the prospectus.
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B. General Prospectus Disclosure

    The Commission is proposing to require more detailed prospectus 
disclosure concerning the way in which a specific fund's deferred sales 
load is imposed and computed. Proposed new Item 7(g) would cover many 
operational details that have been mandatory for all funds under rule 
6c-10 as adopted and as originally proposed but would be subject to 
greater flexibility under the proposed amendments. These details 
include the price on which the load is based, whether deferred sales 
loads may be imposed on shares acquired through reinvestments of 
distributions, and the way in which the load is calculated.<SUP>37 If a 
fund charges deferred loads on shares from reinvestment of dividends or 
other distributions, Item 7(g) would require a statement to that 
effect, but it would not require this disclosure if the fund did not 
charge such a load. In addition, as a general matter, to the extent 
that a fund's sales charges do not differ from those of other funds, 
the disclosure in response to proposed new Item 7(g) should be 
relatively brief, but to the extent that the fund's charges differ, 
more detail may be required.<SUP>38

    \37\As noted above, paragraphs (a)(1), (a)(5) and (a)(6) of rule 
6c-10 as originally proposed required a load paid at redemption to 
be based on the lower of the NAV at the time of purchase or 
redemption; specified the order in which shares should be treated as 
being redeemed for purposes of load calculation; and prohibited the 
imposition of deferred loads on reinvested dividends and capital 
gains distributions.
    \38\The General Instructions to Form N-1A emphasize the 
importance of brevity in describing practices ``that do not differ 
materially from those of other investment companies.'' General 
Instruction G (Preparation of the Registration Statement or 
Amendment), Part A, Instruction 1.
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    The proposed provision also would require an explanation of the 
ways in which a shareholder may be required to pay an installment load, 
such as through the withholding of dividend payments, involuntary 
redemptions, or separate billing of an investor's account. The 
Commission also is publishing for comment a revision to staff Guide 30 
of the Guidelines for Form N-1A to require funds to describe briefly in 
the prospectus any tax consequences for investors related to an 
installment load.<SUP>39

    \39\See, e.g., supra note 17 (describing potential tax 
complications suggested by commenters on the original proposal).
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C. Performance Data

    The Commission is proposing to amend Instruction 1 to Item 22(b)(i) 
of Form N-1A to require deferred sales loads to be included in 
calculations of advertised total return data. The amendment would 
require the calculation to be based on the deduction of the maximum 
amount of a deferred sales load at the times, in the amounts, and under 
the terms disclosed in the prospectus.
    The Commission is not proposing to amend Item 22(b)(ii) of Form N-
1A to require installment loads to be included in advertised yield 
calculations. Paragraph (a)(6) of rule 482 under the Securities 
Act<SUP>40 requires advertisements containing yield data to disclose 
the maximum amount of any sales load; if the sales load is not 
reflected in performance figures, the advertisement also must disclose 
that the figures do not reflect the load and that, if reflected, the 
load would reduce the quoted performance. Because installment loads 
would not be reflected in yield figures, rule 482(a)(6) would apply to 
advertisements containing yield figures of funds with installment 
loads.<SUP>41

    \40\17 CFR 230.482.
    \41\A fund's yield advertisement would disclose the amount of an 
installment load, and the period of time during which a shareholder 
is subject to the installment load.
---------------------------------------------------------------------------

    The treatment of installment loads in advertised yield calculations 
would be different from the current treatment of rule 12b-1 fees, which 
are included in the numerator in the yield formula in Item 22(b)(ii) of 
Form N-1A as expenses, and thereby reflected in the yield data. 
Therefore, for example, a fund with a rule 12b-1 fee of 1% would show a 
lower yield than a fund with comparable performance and an installment 
load of 1% per year for six years. The Commission requests comment on 
whether it should require a thirty-day percentage amount of an 
installment load similarly to be included as an expense in the 
numerator in the yield formula in Item 22(b)(ii), or, alternatively, 
require that the installment load be added to the net asset value to 
reach an assumed ``offering price'' in the denominator in the yield 
formula. The first alternative would allow greater comparability to 
rule 12b-1 fees, but would understate the yield for those shareholders 
that have completed paying the installment load. The second alternative 
would treat installment loads as if they were front-end loads.

D. Dealer Compensation

    The amount of commissions paid to persons selling funds' shares 
currently is not required to be disclosed in prospectuses, except in 
the case of front-end sales loads. Item 7(b)(iv) of Form N-1A requires 
funds to show in a tabular format in the prospectus the sales load 
reallowed to dealers as a percentage of the public offering price. This 
requirement currently is deemed to apply only to front-end sales loads. 
The Commission requests comment on whether it should amend Item 
7(b)(iv) to require mutual funds that impose deferred sales loads to 
provide disclosure about the commissions received by dealers selling 
the funds' shares comparable to that now provided by funds with front-
end loads. Alternately, the Commission requests comment on whether 
proposed new Item 7(g) should be modified to require such disclosure.

IV. Cost/Benefit Analysis

    The proposed amendments to rule 6c-10 and Form N-1A would not 
impose any significant burdens on mutual funds. Rather, the amendments 
should benefit funds by providing them with alternatives in financing 
their sales and promotional expenses. The amendments also would enable 
investors to defer the payment of a sales charge on the purchase of 
mutual fund shares until redemption or over one or more installment 
payments during the term of their investment.

V. Summary Of the Regulatory Flexibility Analysis

    The Commission has prepared an Initial Regulatory Flexibility 
Analysis. The Analysis explains that the proposed amendments to rule 
6c-10 would allow mutual funds to impose deferred sales loads other 
than CDSLs and would remove certain restrictions in the rule. The 
Analysis further explains that the proposed amendments to Form N-1A 
would set prospectus disclosure requirements for deferred loads that 
reflect the proposed changes to rule 6c-10, but that are similar to the 
disclosure currently provided by funds and that would not impose any 
additional burdens. A copy of the Analysis may be obtained by 
contacting Nadya B. Roytblat, Esq., Mail Stop 10-6, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 
[[Page 11895]] 

VI. Statutory Authority

    The Commission is proposing amendments to rule 6c-10 under sections 
6(c) and 38(a) of the Investment Company Act [15 U.S.C. 80a-6(c), and -
37(a)]. The authority citations for the proposed amendments to Form N-
1A precede the text of the amendments.

List of Subjects in 17 CFR Parts 239, 270, and 274

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

Text of Proposed Rule and Form Amendments

    For the reasons set out in the preamble, Title 17, Chapter II of 
the Code of Federal Regulations is proposed to be 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;
* * * * *
    Section 270.6c-10 is also issued under sec. 6(c) [15 U.S.C. 80a-
6(c)];
* * * * *
    2. Section 270.6c-10 is revised to read as follows:

Sec. 270.6c-10  Exemption for certain open-end management investment 
companies to impose deferred sales loads.

    (a) A company and any exempted person shall be exempt from the 
provisions of Sections 2(a)(32), 2(a)(35), and 22(d) of the Act [15 
U.S.C. 80a-2(a)(32), 80a-2(a)(35), and 80a-22(d), respectively] and 
Sec. 270.22c-1 to the extent necessary to permit a deferred sales load 
to be imposed on shares issued by the company, Provided, that:
    (1) Any deferred sales load is a specified percentage of the net 
asset value at the time of purchase, redemption, or the payment of an 
installment;
    (2) The terms of the deferred sales load are covered by the 
provisions of Article III, Section 26 of the Rules of Fair Practice of 
the National Association of Securities Dealers, Inc.; and
    (3) The same deferred sales load is imposed on all shareholders, 
except that scheduled variations in or elimination of a deferred sales 
load may be offered to a particular class of shareholders or 
transactions, Provided, that the conditions in Sec. 270.22d-1 are 
satisfied. Nothing in this paragraph (a) shall prevent a company from 
offering to existing shareholders a new scheduled variation that would 
waive or reduce the amount of a deferred sales load not yet paid.
    (b) For purposes of this section:
    (1) Company means a registered open-end management investment 
company, other than a registered separate account, and includes a 
separate series of the company;
    (2) Exempted person means any principal underwriter of, dealer in, 
and any other person authorized to consummate transactions in, 
securities issued by a company;
    (3) Deferred sales load means any amount properly chargeable to 
sales or promotional expenses that is paid by a shareholder after 
purchase but before or upon redemption.

PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

    3. The authority citation for Part 239 continues to read, in part, 
as follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77sss, 78c, 78l, 
78m, 78n, 78o(d), 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 79l, 79m, 
79n, 79q, 79t, 80a-8, 80a-29, 80a-30 and 80a-37, unless otherwise 
noted.

* * * * *
    4. 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.

    5. Item 2 of Part A of Form N-1A [referenced in Secs. 239.15A and 
274.11A] is amended by revising the parenthetical after ``Deferred 
Sales Load'' in paragraph (a)(i), and Instruction 5, to read as 
follows:

    Note: Form N-1A does not, and the amendment will not, appear in 
the Code of Federal Regulations.

Form N-1A

* * * * *

Part A. Information Required in a Prospectus

* * * * *

Item 2. Synopsis

    (a)(i) * * *
* * * * *

Shareholder Transaction Expenses

* * * * *
    Deferred Sales Load (as a percentage of ________); %
* * * * *
    Instructions:
* * * * *

Shareholder Transaction Expenses

    5. ``Deferred Sales Load'' includes the maximum total deferred 
sales load payable upon redemption, in installments, or both, 
expressed as a percentage of the amount or amounts stated in 
response to Item 7(g), and may include a tabular presentation, 
within the larger table, of the range over time of any deferred 
sales load (such as a contingent deferred sales load) that may 
change over time, or a schedule of any installment load payments.
* * * * *
    6. Item 7 of Part A of Form N-1A [referenced in Secs. 239.15A and 
274.11A] is amended by removing the word ``and'' at the end of 
paragraph (e), removing the period at the end of paragraph (f) and 
adding ``; and'' in its place, and adding paragraph (g) to read as 
follows:

Form N-1A

* * * * *

Part A. Information Required in a Prospectus

* * * * *

Item 7. Purchase of Securities Being Offered

* * * * *
    (g) a concise explanation of the way in which any deferred sales 
load is imposed and computed, including: (i) an explanation of the 
basis on which the specified percentage is calculated (e.g., the 
original purchase price, the price at redemption, or the net asset 
value at the time an installment is paid); (ii) if the method of 
determining the amount of load results in a load being applied to 
shares or amounts representing shares acquired through the 
reinvestment of dividends or other distributions, a statement to 
that effect; (iii) a description of the way in which the load is 
calculated (e.g., in the case of a partial redemption, whether or 
not the load is calculated as if shares or amounts representing 
shares not subject to a load are redeemed first, and other shares or 
amounts representing shares are then redeemed in the order 
purchased); and (iv) if applicable, an explanation of the way(s) in 
which a shareholder may be required to pay an installment load 
(e.g., through the withholding of dividend payments, involuntary 
redemptions, separate billing of an investor's account).

    7. Item 22 of Part B of Form N-1A [referenced in Secs. 239.15A and 
274.11A] is amended by adding at the end of Instruction 1 to paragraph 
(b)(i) a sentence that reads as follows:

Form N-1A

* * * * *

Part B. Information Required in a Statement of Additional 
Information

* * * * *

Item 22. Calculation of Performance Data

* * * * *
    (b) Other Registrants
    (i) Total Return * * *
    Instructions:
    1. * * * If shareholders are charged a deferred sales load, 
assume the maximum deferred sales load is deducted at the times, 
[[Page 11896]] in the amounts, and under the terms disclosed in the 
prospectus.
* * * * *
    8. Guide 30 to Form N-1A [referenced in Secs. 239.15A and 274.11A] 
is amended by adding a paragraph before the last paragraph to read as 
follows:

Guidelines for Form N-1A

* * * * *

Guide 30. Tax Consequences

* * * * *
    If the registrant imposes a sales load payable in installments 
on the securities being offered, the registrant must describe 
briefly in response to Item 6 any related tax consequences for 
investors.
* * * * *
    Dated: February 23, 1995.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-4998 Filed 3-1-95; 8:45 am]
BILLING CODE 8010-01-P