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
11888 Federal Register / Vol. 60, No. 41 / Thursday, March 2, 1995 / Rules and Regulations

5See supra note 1.

6Like the rule as proposed, rule 6c–10 as adopted

applies only to open-end management investment

companies other than registered separate accounts.

In the Proposing Release, the Commission also

requested comment on whether to propose

amendments to rules 6c–8 [17 CFR 270.6c–8] and

6e–3(T) [17 CFR 270.6e–3(T)] under the Act, and

whether to issue revised proposed amendments to

rule 6e–2 [17 CFR 270.6e–2] under the Act,

governing the use of deferred sales loads by

registered insurance company separate accounts.

The Commission received eight comment letters in

response to that request, suggesting that the

Commission not propose any amendments. The

Commission is not taking any action with regard to

these rules.

7The NASD Sales Charge Rule prohibits NASD

members from offering or selling shares of an openend management investment company registered

under the 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). See also Letter from the

NASD to Jonathan G. Katz, Secretary, SEC (March

14, 1989), File No. S7–24–88; Proposed Rule

Change by NASD Relating to the Limitation of

Asset-Based Sales Charges as Imposed by

Investment Companies, Securities Exchange Act

Release No. 29070 (Apr. 12, 1991), 56 FR 16137;

Order Approving Proposed Rule Change Relating to

the Limitation of Asset-Based Sales Charges as

Imposed by Investment Companies, Securities

Exchange Act Release No. 30897 (July 7, 1992), 57

FR 30985.

Since back-end loads are used by mutual funds

to finance the payment of brokerage commissions,

and brokers selling mutual fund shares must be

members of the NASD, virtually all funds that

impose these loads would be distributed by NASD

members and therefore would be subject to the

Sales Charge Rule.

8NASD, Rules of Fair Practice, Art. III, Sec.

26(d)(3).

9See Proposing Release, supra note 2, at 45283

(referring, in turn, to an earlier Commission

statement of its view).

10Letter from the ABA to Jonathan G. Katz,

Secretary, SEC at 7–8 (Jan. 31, 1989); Letter from

Deutsche Bank, submitted on its behalf by Simpson

Thacher, to the Division of Investment

Management, SEC 8–9 (Nov. 5, 1993); Letter from

the ICI to Barry Barbash, Director, Division of

Investment Management, SEC 3–4 (June 14, 1994);

Letter from the ICI to Jonathan G. Katz, Secretary,

SEC 7–8 (Jan. 9, 1989); Letter from IDS Financial

to Jonathan G. Katz, Secretary, SEC 1–2 (Jan. 3,

1989).

11 ICI June 14 comment letter, supra note 10, at

3–4; Deutsche Bank November 5, 1993 comment

letter, supra note 10, at 9.

12The initial proposal stated that in the view of

the Commission’s Division of Market Regulation,

deferred sales loads likely would not involve an

extension of credit from a fund’s underwriter to the

shareholders that would be prohibited under

section 11(d)(1) of the Securities Exchange Act of

1934 (the ‘‘Exchange Act’’). One commenter

nevertheless raised a concern that section 11(d)(1)

of the Exchange Act would prohibit deferred sales

charges. Deutsche Bank November 5, 1993 comment

letter, supra note 10, at 9–10. The Commission

believes that absent an explicit interest charge, a

deferred sales load would not involve an extension

of credit prohibited by section 11(d)(1) of the

Exchange Act. The Commission notes that the

NASD Sales Charge Rule limits the amount that

NASD members can charge their customers for the

purchase of mutual fund shares.

13 17 CFR 270.22d–1. Under rule 22d–1, any

scheduled variation must be applied uniformly to

all offerees in the specified class; adequate

information about the scheduled variation must be

furnished to the existing and prospective

shareholders; the fund’s prospectus and statement

of additional information must be revised to

describe the new scheduled variation prior to

making the variation available to investors; and

existing shareholders must be advised of the new

scheduled variation within one year of the date the

variation is first made available to investors.

orders, the Commission does not believe

that it is necessary to require funds

seeking to impose CDSLs to continue to

file exemptive applications with the

Commission pending consideration of

these proposed modifications.

Therefore, the Commission is adopting

rule 6c–10 to permit the imposition of

CDSLs, but not other forms of deferred

sales load.5

II. Discussion

The Commission is adopting rule 6c–

10 substantially as originally proposed

to permit mutual funds 6 to impose

CDSLs. The rule as adopted and as

originally proposed requires CDSLs to

be calculated based on the lesser of the

net asset value at the time of purchase

or at the time of redemption; specifies

a particular order of load calculation in

a partial redemption; prohibits CDSLs

on reinvested dividends and capital

gains distributions; and allows

scheduled CDSL variations. The rule as

adopted does depart from the proposal

in certain respects in light of comments

on the 1988 proposal and of the

adoption of amendments to the NASD

Sales Charge Rule.

A. The NASD Rule on Maximum Sales

Charges

Paragraph (a)(2) in the proposed rule

provided that the maximum amount of

a back-end load, or any combination of

a back-end load and a front-end load,

may not exceed the maximum allowed

under the NASD Sales Charge Rule. At

the time rule 6c–10 was proposed, the

NASD Sales Charge Rule did not

expressly apply to back-end loads. Since

then, the NASD has amended its Sales

Charge Rule to include expressly backend loads, as well as asset-based

distribution fees.7 Because a

Commission rule no longer is necessary

to bring CDSLs within the limits of the

NASD Sales Charge Rule, the proposed

paragraph has been deleted from rule

6c–10 as adopted to permit CDSLs.

B. ‘‘No-Load’’ Labeling

As initially proposed, 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 sales load. The

amendments to the NASD Sales Charge

Rule also expressly prohibited 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.8 Therefore, the rule as

adopted to permit CDSLs omits the

prohibition in proposed paragraph (b) as

duplicative of the provision in the

NASD Sales Charge Rule. 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 as a no-load fund.9

C. Interest, Carrying, and Finance

Charges

As proposed in 1988, rule 6c–10

would have prohibited a fund from

imposing a deferred load if any amount

were charged on the shareholders or the

fund that was intended to be a payment

of interest related to the load or a

similar charge. Several commenters

pointed out that a prohibition on

interest charges would leave a fund’s

underwriter uncompensated for the cost

of advancing the sales and promotional

expenses later reimbursed through

deferred loads.10 Commenters noted that

the NASD Sales Charge Rule allows the

inclusion of an interest component in

the computation of the aggregate sales

load limits.11

The proposed provision was not

intended to prohibit any interest charges

that might be reflected in the specified

load amount. Rather, the provision was

designed to prohibit any interest or

similar charge that was separate from

and in addition to the load amount.

Because paragraph (a)(1) of the rule

already requires all components of a

deferred load to be included in one

specified amount, rule 6c–10 as adopted

does not include the interest charge

prohibition.12

D. Scheduled Variations

Paragraph (a)(4) of the rule as adopted

permits a fund to offer a scheduled

variation in, or eliminate, a CDSL for a

particular class of shareholders or

transactions, provided that the

scheduled variation meets the

conditions in rule 22d–1 under the

Act.13 Paragraph (a)(4) also permits a

fund to offer an existing shareholder any

new scheduled variation that would
Federal Register / Vol. 60, No. 41 / Thursday, March 2, 1995 / Rules and Regulations 11889

14E.g., paragraph (a)(1)(ii) and pertinent

provisions of other paragraphs such as paragraph

(c)(3) in the original proposal.

waive or reduce the amount of a CDSL

not yet paid.

E. Other Changes

The text of the rule as adopted also

departs from the originally proposed

text in two other respects. First, because

the adoption of the rule is limited to

CDSLs, the adopted rule text omits

provisions relating to installment loads

or other forms of back-end loads.14

Second, paragraph (a) of the rule as

adopted omits an exemption from

section 22(c) of the Investment

Company Act [15 U.S.C. § 80a–22(c)],

because section 22(c) is solely a grant of

rulemaking authority to the Commission

and no exemption from that section is

required.

F. Form N–1A

The Commission is not adopting the

amendments to Form N–1A that were

proposed in 1988. Because the

Commission is not adopting the

provisions of rule 6c–10 for installment

loads, no adjustments to the fee table are

necessary now.

III. Cost/Benefit Analysis

Rule 6c–10 as adopted does not

impose any significant burdens on

mutual funds. Rather, the rule should

benefit the funds by making it possible

to impose CDSLs without having to file

exemptive applications with the

Commission. The adoption of the rule

would give investors an additional

option for a means of paying sales

charges.

IV. Summary of Regulatory Flexibility

Analysis

A summary of the Initial Regulatory

Flexibility Analysis, which was

prepared in accordance with 5 U.S.C.

603, was published in Investment

Company Act Release No. 16619. No

comments were received on this

analysis. The Commission has prepared

a Final Regulatory Flexibility Analysis

in accordance with 5 U.S.C. 604. The

Analysis explains that the new rule

allows mutual funds to impose CDSLs

without having to file exemptive

applications with the Commission. A

copy of the Final Regulatory Flexibility

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.

V. Statutory Authority

The Commission is adopting 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)].

List of Subjects in 17 CFR Part 270

Investment Companies, Reporting and

recordkeeping requirements, Securities.

Text of Adopted Rule

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

is amended by adding the following

citation:

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 added to read

as follows:

§ 270.6c–10 Exemption for certain openend management investment companies to

impose contingent deferred sales loads.

(a) A company and any exempted

person shall be exempt from the

provisions of Sections 2(a)(32), 2(a)(35),

and 22(d) of the Act [15 U.S.C. 80a–

2(a)(32), 80a–2(a)(35), and 80a–22(d),

respectively] and § 270.22c–1 to the

extent necessary to permit a contingent

deferred sales load to be imposed on

shares issued by the company, Provided,

that:

(1) The amount of a contingent

deferred sales load is calculated as being

the lesser of the amount that represents

a specified percentage of the net asset

value of the shares at the time of

purchase, or the amount that represents

the same or a lower percentage of the

net asset value of the shares at the time

of redemption;

(2) No contingent deferred sales load

is imposed on shares, or amounts

representing shares, that are purchased

through the reinvestment of dividends

or capital gains distributions;

(3) The contingent deferred sales 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,

Provided, however, that another order of

redemption may be used if such order

would result in the redeeming

shareholder paying a lower contingent

deferred sales load; and

(4) The same contingent deferred sales

load is imposed on all shareholders,

except that scheduled variations in or

elimination of a contingent deferred

sales load may be offered to particular

classes of shareholders or in connection

with particular classes of transactions,

Provided, that the conditions in

§ 270.22d–1 are satisfied. Nothing in

this paragraph (a) shall prevent a

company from offering to existing

shareholders a new scheduled variation

that would waive or reduce the amount

of a contingent deferred sales load that

has not yet been paid.

(b) For purposes of this section:

(1) Company means a registered openend management investment company,

other than a registered separate account,

and includes a separate series of such

company;

(2) Exempted person means any

principal underwriter of, dealer in, and

any other person authorized to

consummate transactions in, securities

issued by such company; and

(3) Contingent deferred sales load

means any amount properly chargeable

to sales or promotional expenses that is

paid by a shareholder, if at all, at the

time of redemption, the amount of

which would decrease to zero if the

shares were held for a reasonable period

of time specified by the company.

Dated: February 23, 1995.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–4996 Filed 3–1–95; 8:45 am]

BILLING CODE 8010–01–P