Appendix — Behlen v. Merrill Lynch & Co.

eas

Al

APPENDIX A

311 F.3d 1087

Fed. Sec. L. Rep. P 92,201, 16 Fla. L. Weekly Fed. C 13

United States Court of Appeals,

Eleventh Circuit.

Charles H. BEHLEN, individually and on behalf of a

class of similarly situated persons and entities, Plaintiff-

Appellant,

v.

MERRILL LYNCH, Phoenix Investment Partners, Ltd.,

Defendants-Appellees.

No. 01-16424.

Nov. 8, 2002.

[West headnotes and summary deleted]

[*1089] Albert L. Jordan, Michael L. Jackson, Wallace,

Jordan, Ratliff & Brandt, L.L.C., Birmingham, AL, JosephM.

Druhan, Jr., Mobile, AL, M. Stephen Dampier, Montgomery,

AL, Anthony M. Hoffman, Zieman, Speegle, Oldweiler &

Jackson, L.L.C., Mobile, AL, for Plaintiff-A ppellant.

Luther M. Dorr, Jr., A. Inge Selden, III, Maynard

i

Cooper, Frierson & Gale, Birmingham, AL, Kelly D. Reese,

Mobile, AL, Julie Wilson, Maynard, Cooper & Gale, P.C.,

Montgomery, AL, D. Brent Baker, Frazer, Greene, Upchurch

& Baker, P. Russel Myles, McDowell, Knight, Roedder &

Sledge, LLC, Mobile, AL, for Defendants-Appellees.

A2

Appeal from the United States District Court for the

Southern District of Alabama.

Before WILSON, RONEY and ALARCON*%, Circuit

Judges.

WILSON, Circuit Judge:

Charles H. Behlen, individually and on behalf ofa class

of similarly situated individuals, appeals the districtcourt's

denial of his motion to remand his case to state court and its

order dismissing his lawsuit. The district court determined

that it had removal and supplemental jurisdiction over the

action and therefore denied the motion to remand. The

court further determined that the action was barred by the

Securities Litigation Uniform Standards Act of 1998

(SLUSA), 15 U.S.C. §§77p, 78bb. Thus, the court dismissed

Behlen's class-wide claims with prejudice and his individual

claims without prejudice. Because we determine that the

action was preempted by the SLUSA and subject to

dismissal, we affirm.

BACKGROUND

From November 1999 to March 2000 Behlen purchased

shares in a mutual fund known as the Phoenix-Engemann

Aggressive Growth Fund. Behlen purchased the shares

from Merrill Lynch & Co. and Phoenix Investment Partners,

Ltd. (the defendants). On March 15, 2001, Behlen filed a

civil action in statecourt seeking to recover money damages

*Honorable Arthur L. Alarcon, U.S. Circuit Judge for the

Ninth Circuit, sitting by designation.

A3

resulting from his purchase of those shares. In his original

complaint, which was styled as a class action, Behlen

asserted various state law claims, including claims for

breach of contract, breach of implied covenants and duties,

breach of fiduciary duty, unjust enrichment, suppression,

misrepresentation, and negligence and/or wantonness. He

alleged that the defendants sold him and the class members

Class B shares in the growth fund when they were

unknowingly eligible to purchase Class A shares. He

further alleged that the defendants sold them the wrong

shares, because the Class B shares were subject to higher

fees and commissions than the Class A shares.

On April 27, 2001, the defendants re moved the law suit

from state court to the United States District Court for the

Southern District of Alabama, asserting that the district

court had subject matter jurisdiction over the case pursuant

to the SLUSA. Three days later, the defendants filed a

motion to dismiss Behlen's complaint. Behlen subse quently

filed an amended complaint, in which heasserted the same

state law claims, deleted the daims for misrepresentation

and suppression, and added claims for money had and

[*1090] received and for an accounting. Behlen also

removed all explicit references to any fraudulent activity by

the defendants. He argued that the SLUSA was no longer

applicable to his claims and filed a motion to remand the

case to state court.

The district court ultimately denied Behlen's motion to

remand and granted the defendants' motion to dismiss the

action, dismissing the class-wide claims with prejudice and

Behlen's individual claims without prejudice. This appeal

followed.

A4

STANDARD OF REVIEW

We review the denial of a motion to remand de novo.

Butero v. Royal Maccabees Life Ins. Co., 174 F.3d 1207, 1211

(11th Cir. 1999). We also "review| | de novo the dismissal of

a complaint pursuant to [Federal Rule of Civil Procedure]

12(b)(6)." Oxford Asset Mgmt., Ltd. v. Jaharis, 297 F.3d 1182,

1187 (11th Cir. 2002).

DISCUSSION

I. Removal Jurisdiction

We first address whether the district courthad removal

jurisdictionover this action. Although Behlen asserted only

state law claims in his original complaint, the defendants

removed the case to the district court based upon their

belief that Behlen actually alleged violations of federal

securities laws, which fell within the scope of the SLUSA.

Generally, whether an action raises a federal question

"is governed by the 'well-pleaded complaint rule,’ which

provides that federal jurisdiction exists only when a federal

question is presented on the face of the plaintiff's properly

pleaded complaint." Caterpillar Inc. v. Williams, 482 U.S. 386,

392, 107 S. Ct. 2425, 96 L.Ed.2d 318 (1987). Thus, the

plaintiff is "the master of the claim ... [and] may avoid

federal jurisdiction by exclusive reliance on state law." Id.

Furthermore, "a case may not be removed to federal court

on the basis of a federal defense, including the defense of

pre-emption, even if the defense is anticipated in the

plaintiff's complaint, and even if both parties concede that

the federal defense is the only question truly at issue." Id. at

393, 107 S. Ct. 2425.

The Supreme Court, however, has recognized "an

'independentcorollary' to the well-pleaded complaint rule,

knownas the 'complete pre-emption' doctrine." Id. (citation

omitted). The Court explained,

On occasion, the Court has concluded

that the pre-emptive force of a statute is

so extraordinary that it converts an

ordinary state common-law complaint

into one stating a federal claim for

purposes of the well-pleaded complaint

rule. Once an area of state law has been

completely pre-empted, any claim

purportedly based on that pre-empted

state law is considered, from its inception,

a federal claim, and therefore arises

under federal law.

Id. (citation omitted) (internal quotation marks omitted).

Thus, whether a district court has removal jurisdiction

over a state law case alleging securities fraud depends upon

whether the claims fall within the scope of the SLUSA and

are therefore preempted. In making this determination, it

is helpful to consider the SLUSA and its historical context.

Congress passed the Private Securities Litigation

Reform Act of 1995 (PSLRA), which established uniform

standards for class actions alleging securities fraud. The

procedural reforms enacted by the PSLRA were intended to

prevent plaintiffs [*1091] from bringing "strike suits" in

’ A strike suit is defined as "[a] suit... often based on

no valid claim, brought either for nuisance value or as

leverage to obtain a favorable or inflated settlement."

Black's Law Dictionary 1448 (Bryan A. Gamer ed., 7th ed.

A6é

securities matters. H.R. Conf. Rep. No. 105-803, at 13 (1998)

(discussing the PSLRA). Congress found that the high costs

of defending strike suits often forced defendants to settle

meritless class actions. H.R. Conf. Rep. No. 104-369, at 31

(1995), reprinted in 1995 US.C.C.A.N. 679, 730. The PSLRA

addressed this problem by instituting heightened pleading

requirements for class actions alleging fraud in the sale or

purchase of national securities.’ Riley v. Merrill Lynch,

1999).

? Section 78u-4 provides in relevant part,

(1) Misleading statements and omissions

In any private action arising under this chapter in

which the plaintiff alleges that the defendant--

(A) made an untrue statement of a material fact; or

(B) omitted to state a material fact necessary in order

to make the statements made, in the light of the

circumstances in which they were made, not

misleading;

the complaint shall specify each statement alleged to have

been misleading, the reason or reasons why the statement

is misleading, and, if an allegation regarding the statement

or omission is made on information and belief, the

complaint shall state with particularity all facts on which

that belief is formed.

(3) Motion to dismiss; stay of discovery

(A) Dismissal for failure to meet pleading

requirements

In any private action arising under this chapter, the

court shall, on the motion of any defendant, dismiss

the complaint if the requirements of paragraphs

(continued...)

A7

Pierce, Fenner & Smith, Inc., 292 F.3d 1334, 1340 (11th Cir.),

cert. denied, 71 U.S.L.W. 3178 (U.S. Oct. 15, 2002) (No. 02-

378). The PSLRA also required a mandatory stay of

discovery until the district court could determine the legal

sufficiency of the class action claims. See 15 U.S.C. § 78u-

4(b)(3)(B).

By 1998, however, it became apparent to Congress that

the objectives of the PSLRA were being frustrated, because

plaintiffs were evading its heightened pleading

requirements by bringing suit in state court rather than

federal court. Securities Litigation Uniform Standards Act

of 1998, Pub. L. No. 105-353, § 2(2)-(3), 112 Stat. 3227, 3227;

Lander v. Hartford Life & Annuity Ins. Co., 251 F.3d 101, 108

(2d Cir. 2001) (noting that "litigants were able to assert

many of the same causes of action, butavoid the heightened

procedural requirements instituted in federal court").

Congress thus resolved that in order to prevent certain State

private securities class action lawsuits alleging fraud from

being used to frustrate the objectives of the Private

Securities Litigation Reform Act of 1995, it is appropriate to

enact national standards for securities class action lawsuits

involving nationally traded securities, while preserving the

? (...continued)

(1) and (2) are not met

(B) Stay of discovery

In any private action arising under this chapter, all

discovery and other proceedings shall be stayed

during the pendency of any motion todismiss, unless

the court finds upon the motion of any party that

particularized discovery is necessary to preserve

evidence or to prevent undue prejudice to that party.

15 U.S.C. § 78u-4(b)(1), (3).

A8

appropriate enforcement powers of State securities

regulators and not changing the current treatment of

individual lawsuits.

Pub. L. No. 105-353, § 2(5).

As a result, Congress passed the SLUSA, which

amended the Securities Act of 1933 and the Securities

Exchange Act of 1934 and made federal court, with limited

exceptions, the sole venue for class actions alleging fraud in

the purchase and sale of [*1092] covered securities? Riley,

* The SLUSA amended the 1933 Act to provide as

follows:

(b) Class action limitations

No covered class action based upon the statutory

or common law of any State or subdivision

thereof may be maintained in any State or

Federal court by any private party alleging-

(1) an untrue statement or omission of a material

fact in connection with the purchase or sale of a

covered security; or

(2) that the defendant used or employed any

manipulative or deceptive device or contrivance

in connection with the purchase or sale of a

covered security.

(c) Removal of covered class actions

Any covered class action brought in any State

court involving a covered security, as set forth in

subsection (b), shall be removable to the Federal

district court for the district in which the action

is pending, and shall be subject to subsection (b).

(continued...)

AY

292 F.3d at 1341. Congress further mandated that such

class actions wou'd be governed by federal law rather than

state law. See H.R. Conf. Rep. No. 105-803, at 13. To that

end, the SLUSA preempts certain state law claims, allows

for removal of state actions to federal court, and requires

immediate dismissal of "covered lawsuits." Riley, 292 F.3d

at 1341.

A party seeking to remove an action to federal court

pursuant to the SLUSA bears the burden of showing that

"(1) the suit is a ‘covered class action,’ (2) the plaintiffs'

claims are based on state law, (3) one or more 'covered

securities' has been purchased or sold, and (4) the defendant

misrepresented or omitted a material fact 'in connection

with the purchase or sale of such security.'""" Id. at 1342

(emphasis omitted). The district court found that each of

these requirements had been met and that the action was

therefore removable. Behlen, however, argues that the case

was not removable, because the action was not a "covered

class action" and the misconduct alleged in the complaint

was not "in connection with" the sale or purchase of a

security.

A. "Covered Class Action"

Behlen argues that his case was not removable, because

it was not a "covered class action." Behlen points to the

statutory language of the SLUSA, which provides that "[nJo

covered class action based upon the Statutory or common

law of any State or subdivision thereof may be maintained in

any State or Federal court by any private party." 15 U.S.C.

* (...continued)

15 U.S.C. § 77p(b)-(c). An identical amendment was made

to the 1934 Act. See id. § 78bb(f)(1)-(2).

A10

§§ 77p(b), 78bb(f)(1) (emphasis added). Behlen contends

that at the time of removal the case was not maintained as

a class action, because the state court had not determined

whether the case should proceed in a class-wide fashion.

We find no meritin Behlen's argument and believe that

it is based upon a misreading of the statute. The SLUSA

does not require that an action be "maintained as a class

action" before it can be removed; rather, itmerely provides

that no class action falling within the scope of its coverage

can be maintained in a state or federal court, which means

that dismissal of a "covered class action" is required. Prager

v. Knight/Trimark Group, Inc., 124-F. Supp. 2d 229, 231

(D. N.J.2000).

The SLUSA defines a "covered class action" as

any single lawsuit in which .. . damages

are sought on behalf of more than 50

persons or prospectiveclass members, and

questions of law or fact common to those

persons or members of the prospective

class, without reference to issues of

individualized reliance on an alleged

misstatement or omission, predominate

[*1093] over any questions affecting only

individual persons or members.

15 U.S.C. §§ 77p(f)(2)(A)(i)(I), 78bb(f)(5)(B)(i)() (emphasis

added). We thus believe that it is clear from the statutory

language that prospective class actions are removable to

federal court even if the state court has not determined

whether the action should go forward as a class action.

Were we to find that a class action must be "maintained" as

such before it is subject to removal under the SLUSA, we

All

essentially would require that the action be certified in state

court before it could be removed to federal court. Nothing

in the statutory language of the SLUSA, however, suggests

that certification prior to removal is required. Indeed,

requiring certification prior to removal would frustrate the

objectives of the SLUSA rather than further them. The

SLUSA's provisions "were designed to enable securities

defendants to obtain early dismissal of frivolous class

actions, and thereby avoid the high expense of discovery."

Riley, 292 F.3d at 1341. Requiring certification prior to

removal would entail potentially lengthy and expensive

pretrial practice and discovery in state court, regardless of

the merits of the action. We believe that sucha prospect is

contrary to the stated objectives of the SLUSA.

B. "In Connection with"

Behlen next argues that the district court's exercise of

removal jurisdiction over his case was improper, because

the misconduct alleged in the complaint did not occur "in

connection with" the sale or purchase of securities.

The SLUSA does not define the phrase "in connection

with the purchase or sale of a covered security." The

Supreme Court has not had occasion to interpret this phrase

in the context of the SLUSA, but has interpreted the

identical phrase as it appears in Rule 10b-5, which

implements section 10(b) of the 1934 Act.* See Blue Chip

* Section 10(b) makes it "unlawful for any person...

[t]o use or employ, in connection with the purchase or sale

of any security .. ., any manipulative or deceptive device or

contrivance in contravention of such rules and regulations

as the [SEC] may prescribe." Securities Exchange Act of

(continued...)

A12

Stamps v. Manor Drug Stores, 421 U.S. 723, 737-38, 95 S. Ct.

1917, 44 L.Ed.2d 539 (1975). Thus, in Riley, we looked to

Blue Chip when we determined that Congress intended the

phrase "in connection with" to have the same meaning

under the SLUSA that it has under section 10b-5, because

the SLUSA was enacted as an amendment to the 1933 and

1934 Acts. 292 F.3d at 1342-43; see also Green v. Ameritrade,

Inc., 279 F.3d 590, 597 (8th Cir. 2002).

In Blue Chip, the Supreme Court held that there is no

cause of action under section 10b-5 unless a challenged

misrepresentation or omission caused the plaintiff to buy or

sell a particular stock. 421 U.S. at 748-49, 95 S. Ct. 1917.

Based upon that holding, the Eighth Circuit held in Green

that the SLUSA did not preempt a state law breach of

contract claim where the plaintiff failed to allege that the

defendants made misrepresentations that caused them to

buy a covered security. 279 F.3d at 598-99. Green filed a

breach of contract action in state court, alleging that he

contracted with Ameritrade to receive "real time" stock

quotes on Ameritrade's Web site, but the quotes listed on

the site actually were not in real time. Id. at 593-94. The

court found that Green did not allege in his amended

complaint that the delayed quotes caused him to buy or

[*1094] sell a covered security; rather, he merely alleged

that he contracted for a service, but did not receive the kind

of information for which he believed he was paying. Id. at

598-99.

* (...continued)

1934 § 10(b), 15 U.S.C. § 78j(b). Rule 10b-5 prohibits the use

of "any device, scheme, or artifice to defraud" or any other

‘ "act, practice, or course of business" that "operates ...as a

fraud or deceit." 17C.F.R. § 240.10b-5.

A13

In contrast to the plaintiff in Green, Behlen specifically

alleged that the defendants "negligently, recklessly or

intentionally misrepresented the fact that Plaintiff and the

class would be sold Class A shares," but "sold tothem more

expensive Class Bshares." Additionally, he alleged that the

defendants "suppressed the true facts concerning the

repeated sales to them of Class B Shares" and "concealed

and suppressed the illegality of their conduct ... and

continued to sell them Class B shares." It is clear that the

crux of the complaint was that the defendants either

misrepresented or omitted crucial facts about the Class A

and Class B shares, thus causing him and the class to invest

in inappropriate securities. Behlen argues, however, that

these wrongful acts were not made "in connection with" the

sale of securities, but merely were incidental to the sale of

the securities.

We believe Behlen's claims are similar to the daims

asserted by the plaintiffs in Dudek v. Prudential Securities,

Inc., 295 F.3d 875 (8th Cir. 2002). In that case, the plaintiffs

filed a class action suit in state court alleging that the

defendants improperly marketed tax-deferred annuities to

accounts that already enjoyed tax-deferred status. Id. at 877.

The plaintiffs argued that the annuities were inappropriate

investments, "because tax-deferred accounts did not need

the tax benefits, and therefore the extra fees and costs that

tax-deferred annuities entail[ed] were a waste of the

investors' money." Id. The plaintiffs acknowledged that the

annuities at issue were "covered securities," butargued that

their claims were not preempted by the SLUSA because

they were based upon the defendants excessive fees rather

than misconduct "in connection with" the sale of securities.

Id. at 878. The Eighth Circuit rejected the plaintiffs’

argument that they did not allege fraud, misrepresentation,

or an omission of material fact; it agreed with the district

Al4

court that the gravamen of the plaintiffs' complaint

"involve[d] an untrue statement or substantive omission of

a material fact in connection with the purchase or sale of a

covered security." Id. at 879 (internal quotation marks

omitted).

In the instant case, although Behlen argues that the

excess fees and commissions paid by the class members

were incidental to the sale of the securities, it seems certain

that the very reason they were sold the Class B shares was

because those shares were subject to the excess fees and

commissions. Thus, the fees and commissions were not

incidental to the sale of the securities, but were an integral

part of the transactions. To.the extent that the defendants

misrepresented which shares would be sold to the class,

those misrepresentations were made "in connection with"

the sale of the shares.”

> In support of his argument, Behlen relies heavily

upon SEC v. Zandford, 238 F.3d 559 (4th Cir. 2001), rev'd, 535

U.S. 813, 122 S. Ct. 1899, 153 L.Ed.2d 1 (2002). That decision

was reversed, however, by a unanimous Supreme Court.

See Zandford, 535 U.S. 813, 122 S. Ct. 1899, 153 L.Ed.2d 1.

The Court noted that the SEC always has adopted a broad

reading of the phrase "in connection with the purchase or

sale of any security." Id. at 1903. The Court stated, "While

the statute must not be construed so broadly as to convert

every common-law fraud that happens to involve securities

into a violation of § 10(b), neither the SEC nor this Court has

ever held that there must be a misrepresentation about the

value of a particular security in order to run afoul of the

Act." Id. (citation omitted). The Court went on to state that

the securities sales and the broker's fraudulent acts were not

independent events, but, in fact, coincided with each other

because each sale was made to further the broker's

A15

[*1095] Having determined that the action was a

"covered class action" alleging misrepresentation "in

connection with" thesale of covered securities, we conclude

that the removal of the case pursuant to the SLUSA was

proper. Furthermore, once the case was removed to the

district court, the SLUSA required that it be dismissed.°

II. Remand

We now address whether the district courtshould have

remanded the case to state. court after Behlen amended his

complaint. Behlen argues that even if the action was

removable to district court, the court should have remanded

the case back to state court after he amended his com plaint.

Behlen admits that he amended the complaint to delete all

fraudulent scheme. Id. at 1904.

* Behlen further argues that the district court erred in

dismissing the class-wide claims with prejudice. Behlen

characterizes the district court's dismissal of the class-wide

claims as aruling that theclass action could notbe certified.

The district court, however, did not determine whether

Behlen satisfied the certification requirements of Federal

Rule of Civil Procedure 23. The district court simply

adhered to the text of §§ 77p and 78bb and determined that

Behlen's class-wide claims were barred.

Because Behlen's case was a “covered class action"

asserting state law claims that fell within the scope of the

SLUSA, the district court had no choice but to dismiss the

class-wide claims. Furthermore, the claims were subject to

dismissal with prejudice, because Behlen could not recover

on any state law claim alleging that he and the class were

wrongfully induced to buy the Class B shares.

Al16

claims and allegations that might be deemed to fall within

the scope of the SLUSA. Absent allegations of

misrepresentation, he argues, the complaint no longer

contained allegations of the kind of misconduct covered by

federal securities laws. Behlen thus contends that the

district court no longer had subject matter jurisdiction over

the case and should have remanded the case to state court.

In Poore v. American-Amicable Life Insurance Co. of Texas,

218 F.3d 1287, 1290-91 (11th Cir. 2000), we joined our sister

circuits in holding that if a district court has subject matter

jurisdiction over a diversity action at the time of removal,

subsequent acts do not divest the court of its jurisdiction

over the action. Accordingly, we held that even though the

plaintiffs amended their complaint to red uce the amount in

controversy, the district court still retained diversity

jurisdiction over the actionand "committed reversible error

by remanding based on Appellees' post-removal amended

complaint." Id. at 1292.

In the instant case, the district court had federal

question jurisdiction over Behlen's original complaint,

because the claims therein were preempted by the SLUSA.

Pursuant to 28 U.S.C. § 1367(a), the court also had

supplemental jurisdiction over the remaining state law

claims in the original complaint. The court had discretion

to retain jurisdiction over the state law claims even after

Behlen amended the complaintto remove any federal cause

of action. See Porsche Cars N. Am., Inc. v. Porsche.Net, 302

F.3d 248, 256 (4th Cir. 2002); Mauro v. S. New England

Telecomms., Inc., 208 F.3d 384, 388 (2d Cir. 2000) (per

curiam). Moreover, it was proper for the court to retain

jurisdiction over Behlen's amended complaint, because,

despite his removal of the allegations that would bring his

A17

in March 1997 and again in September 1997 — for driving

under the influence of alcohol, although he had not been

convicted of either offense. E.T. admitted that he had

continued to drive home on occasion after he had "had two

or three beers at the Stadium Grill... I mean, it's kind of

hard to stop at Applebee's or wherever and not drive to get

{ home whether you have one or twenty."

A representative of DHR testified that, although DHR's

policy was to seek a relative for placement when an

appropriate relative could be located, in the representative's

five and one-half years of experience with DHR she had

never known DHR to remove a child from a home after the

child had been placed in the home as an infant and had

remained in the home for three years.

A.M.A. is now five and one-half years old. Every

witness testified that the child is a happy, loving child. The

trial court, in its discretion, awarded custody of A.M.A. to

S.P., who has had physical custody of the child since she

was an infant and who has provided the only home, and in

a real sense, has been the only mother, the child has ever

known.

Because the lead opinion in W.T.M. II considered this

case to involve a dependency proceeding, our mandate that

the trial court apply a "best-interests" standard on remand

was consistent with Ala. Code 1975, § 12-15-71(a). That

statute provides, in pertinent part:

"If a child is found to be dependent, the court may

make any of the following orders of disposition to

protect the welfare of the child:

i

A18

APPENDIX B

IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVEN TH CIRCUIT

FILED

U.S. COURT OF APPEALS

ELEVENTH CIRCUIT

JAN 13 2003

THOMAS K. KAHN

CLERK

No. 01-16424-DD

CHARLES H. BEHLEN,

individually and on behalf of a

class of similarly situated persons

and entities,

Plaintiff-Appellant,

versus

MERRILL LYNCH,

PHOENIX INVESTMENT PARTNERS, LTD.,

Defendants-Appellees.

On Appeal from the United States District Court for the

Southern District of Alabama

Al19

ON _ PETITION(S) FOR REHEARING AND PETITION(S)

FOR REHEARING EN BANC

(Opinion , 11th Cir.,19_, F.2d

cancel

Before: WILSON, RONEY and ALARCON*, Circuit Judges.

PER CURIAM:

The Petition(s) for Rehearing are DENIED and no member

of this panel nor other Judgein regularactive service on the

Court having requested that the Court be polled on

rehearing en banc (Rule 35, Federal Rules of Appellate

Procedure; Eleventh Circuit Rule 35-5), the Petition(s) for

Rehearing En Banc are DENIED.

ENTERED FOR THE COURT:

s/ Charles R. Wilson

UNITED STATES CIRCUIT JUDGE

ORD-42

(6/95)

*Honorable Arthur L. Alarcon, U.S. Circuit Judge for the

Ninth Circuit, sitting by designation.

A20

APPENDIX C

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF ALABAMA

SOUTHERN DIVISION

FILE COPY

FILED AUG 27 '01 PM 4:09 USDCALS

CHARLES H. BEHLEN,

Plaintiff,

V. : CIVIL ACTION 01-0298-M

MERRILL LYNCH & CO.,

INC., et al.,

Defendants.

MEMORANDUM OPINION AND ORDER .

This action comes before the Court on Defendants'

Motion to Dismiss (Docs. 2-3), Plaintiff's Motion to Remand

(Doc. 15), Defendants' Motion to Dismiss Plaintiff's First

Amended Complaint (Docs. 16-17), Defendants' Brief

Opposing Plaintiff's Motion to Remand (Doc. 21), Plaintiff's

Response to Defendants! Motion to Dismiss (Doc. 22),

Plaintiff's Reply to Defendants' Brief regarding Remand

(Doc. 25), and Defendants' Reply Brief Regarding Dismissal

(Doc. 26). Jurisdiction has been invoked in this Courtunder

The Securities Litigation Uniform Standards Act of 1998

A21

(hereinafter SLUSA). 15 U.S.C. §§ 77p, 78bb(f). The parties

consented in writing to haveall matters and proceedings in

this action conducted by the undersigned Magistrate Judge

pursuant to 28 US.C. § 636(c) (see Doc. 14). After

consideration, Defendants' M otion to Dismiss is GRANTED

and this action is DISMISSED.

The facts of this action, briefly, are as follows.

_ Beginning on November 5, 1999, Plaintiff Charles H. Behlen

purchased shares in the Phoenix-Engemann Aggressive

Growth Fund, and from other affiliated Phoenix funds from

Defendants Merrill Lynch & Co, Inc and Phoenix

Investment Partners, Ltd. (Doc. 1, Complaint 4 1,11).' On

March 15, 7601, Behlen brought a civil action in the Mobile

County Circuit Court to recover monetary damages which

accrued from the purchase of those Growth Fund shares

(Doc. 1, 4 1). Plaintiff raised sevenclaims in that complaint:

breach of contract, breach of implied covenants and duties,

breach of fiduciary duty, unjust enrichment, suppression,

misrep‘esentation, and negligence and/or wantonness;

Behlen’'s action is styled as a class action complaint (Doc. 1,

Complaint). On April 27, 2001, Defendants removed the

action to this Court, asserting SLUSA jurisdiction (Doc. 1).

Plaintiff subsequently filed an amended com plaint (Doc. 9).

Defendants now seek to have this action dismissed while

Plaintiff would have the action remanded back to the state

court.

" The Court will refer to Merrill Lynch and Phoenix

Investment Partners, Ltd. collectively as Defendants.

The Court first needs to determine whether it properly

has jurisdiction over this matter. In its removal petition,

Defendant alleges jurisdiction under 15 US.C. §§ 77p,

A22

78bb(f) and that this action is removable pursuant to 28

U.S.C. § 1441(b) (Doc. 1). In a removal action, the party

assertingjurisdiction hasthe burden of establishing proof of

it by a preponderance of the evidence. McNutt v. General

Motors Acceptance Co. of Indiana, Inc., 298 U.S. 178 (1936). In

a removal action, that burden is upon the defendant. Wilson

v. Republic Iron & Steel Co., 257 U.S. 92 (1921). Removal is a

Statutory remedy which must be narrowly construed so as

to limit federal jurisdiction. Shamrock Oil & Gas Corp. v.

Sheets, 313 U.S. 100 (1941); Robinson v. Quality Ins. Co., 633

F. Supp. 572 (S.D. Ala. 1986).

Before the jurisdictional issue can be settled, the Court

must determine which complaint to examine. Behlen

asserts that the Court should look at theamended complaint

while Defendants argue that the original complaint is the

appropriate pleading to consider. The Eleventh Circuit

Court of Appeals has held that "the district court must

determine whether it had subject matter jurisdiction at the

time of removal." Poore v. American-A micable Life Ins. Co. of

Texas, 218 F.3d 1287, 1290-91 (11th Cir. 2000). The Poore

Court went on to say that events occurrin g after removal...

do not oust the district court's jurisdiction." Poore, 218 F.3d

at 1291; see also St. Paul Mercury Indem. Co. v. Red Cab Co.,

303 U.S. 283, 287 (1938). On the basis of Poore, the Court will

examine the original complaint to determine if jurisdiction

existed at the time of removal.

The Court notes, summarily, that Congress, in 1995,

passed the Private Securities Litigation Reform Act as a

means of limiting a plaintiff's ability to bring class action

securities lawsuits. To bypass the new restrictions,

plaintiffs began filing securities actions in state courts. In

1998, Congress passed SLUSA to prevent this practice.

2 ee

A23

Under SLUSA,

[n]o covered class action based upon

the statutory or common law of any State

or subdivision thereof may be maintained

in any State or Federal court by any

private party alleging —

(1) an untrue statement or

omission of a material fact in

connection with the purchase or sale

of a covered security; or

(2) that the defendant used or

employed any manipulative or

deceptive device or contrivance in

connection with the purchase of sale

of a covered security.

15 U.S.C. § 77p(b). Any state action which meets these

criteria shall be removed "to the Federal district court for the

district in which the action is pending." 15 U.S.C. § 77p(c).

Defendants removed this action to this Court, citing these

Statutes.

To determine if this Court enjoys jurisdiction over this

matter, it will be necessary to examine § 77p(b) more

closely. The term covered class action has been defined to

include a single lawsuit "in which damages are sought on

beha't of more than 50 persons or prospective class

members, and questions of law or fact common to those

persons or members of the prospective class

predominate over any "questions affecting only individual

persons or members." 15 U.S.C. § 77p(f) (2) (A) (i) (I). In the

complaint, Behlen alleges that "the class exceeds several

thousand members" (Doc. 1, Complaint, § 19) . The

complaint further states that "[t]here are questions of law

a aac ccaaea ener

A24

and fact common to members of the class which have

resulted in a common pattern of damage sustained. These

questions of law and fact predominate over any questions

affecting individual class members." Id. at 4 22. Plaintiff

seeks both compensatory and punitive damages. Id. at p.9,

4 c. The Court finds that this action is a covered class

action.

The definition of covered security includes "a security

issued by an investment company that is registered, or that

has filed a registration statement, under the Investment

Company Act of 1940." 15 U.S.C. § 77r(b) (2); see also 15

U.S.C. § 77p(f) (3). Defendants assert that"[t]he Funds are,

of course, registered under the Investment Company Act of

1940, and the Class B shares purchased by Plaintiff and the

class were issued by the Funds" (Doc. 1, 4 12). Though the

Court has found no evidence in the record to support the

assertion, Behlen has not challenged it. The Court finds that

the securities which are the su bject of this action fall within

the definition of covered securities.

The Court now must make a determination as to

whether the remainder of § 77p(b) is satisfied. This requires

an assertion of "an untrue statement or omission of a

material fact" or that Defendants "used or employed any

manipulative or deceptive device or contrivance in

connection with the purchase or sale of a covered security."

15 U.S.C. § 77p(b) (1, 2).

In bringing this action, Behlen, in the opening

paragraphs of the complaint, makes the following

assertions:

1. This is a class action brought by

Plaintiff Charles H. Behlen "Behlen") on

——s oe es

A25

behalf of a class composed of all

individuals and entities who were

wrongfully sold and charged excessive

commission on Class B shares in the

Phoenix-Engemann Aggressive Growth

Fund ("Growth Fund") and other

"affiliated Phoenix funds," by Merrill

Lynch & Co., Inc. and Phoenix

Investments Partners, Ltd., along with

_other possible unknown parties, when

they were eligible for reduced sales

charges of commissions from the

purchase of Class A shares in the same.

2. Defendants wrongfully sold to

Plaintiff and the class Class B shares in

the Growth Funds and other "affiliated

Phoenix funds" when they should have

sold to Plaintiff and the class Class A

shares at reduced sales charges and

‘commissions. The Defendants knew or

should have known that Plaintiff and the

class were eligible to purchase Class A

shares for reduced sales charges and

commissions, but deliberately sold to

Plaintiff and the class the Class B shares

so as to wrongfully charge higher

commissions for such transactions.

3. Recognizing that they should have

sold to Plaintiff and the class members

Class A shares and not Class B shares, the

Defendants concealedand suppressed the

illegality of their conduct from the

Plaintiff and the class and continued to

sell them Class B shares at higher

commissions and charges.

A26

4. Defendants' wrongful and

unconscionable conduct constitutes a

pattern and practice of intentional,

willful, wanton, reckless, negligent

and/or grossly negligent conduct.

Doc. 1, Complaint. This language, which provides clear

evidence of Behlen's assertion of Defendants' misfeasance,

would appear to satisfy the requirement of § 77p (b) .

Plaintiff asserts, though, that Defendants have not

proven that the transactions were "in connection with" the

purchase or sale of the underlying securities. More

specifically, Behlen argues that he is not challenging the

securities; rather, his problem is "with the overcharging of

sales commissionsand fees" (Doc. 22, p. 26). Plaintiff asserts

that his purchase of ap proximately $500,000 worth of shares

was split into three separate purchases, rather than one

large purchase, which resulted in higher commissions and

fees charged to him (Doc. 22, p.4). Additionally, Behlen has

asserted that because of the large volume of shares that he

was purchasing, he should have been acquiring Class A

shares rather than the Class B shares which he actually

purchased (id. at p. 5). Plaintiff maintains that these

additional commissionsand fees, for which she has brought

this action, do not fall within the "in connection with"

language of SLUSA.

Plaintiff has pointed to several cases as support for his

argument. See, e.g., Green v. Ameritrade, Inc., 120 F. Supp. 2d

795 (D. Neb. 2000) (SLUSA did not preempt subscribers'

state law claims against internet securities information

service's failure to provide "real time" market quotes as

promised); Abada v. Charles Schwab & Co., Inc., 127 F.Supp.

2d 1101 (S.D. Cal. 2000) (SLUSA did not preempt investors'

i i be “ e

— =

A27

claim that stockbroker failed to deliver on assertion of

immediate online trade transactions); Shaw v. Charles Schwab

_ &Co., Inc., 128 F.Supp. 2d 1270 (C.D. Cal. 2001) (GSLUSA did

not preempt claim that stock broker's promise resulted in

selection of that broker, as opposed to other brokers, as

claim did not concern selection of particular securities). The

Court does not, however, find these cases instructive

because the plaintiffs are not claiming that they got the

wrong securities; while their lawsuits revolved around the

purchase of securities, the securities themselves were only

tangentially related to the actual claim.

In this action, the heart of Plaintiff's claim is that he did

not get the shares that he now believes that he should have

received. Behlen repeatedly states that he should have been

purchasing Class A shares rather than the Class B shares

because he could have acquired them and paid less money

for fees and commissions.

The Court finds that Defendants have satisfied their

burden of establishing that this Court has jurisdiction over

this action pursuant to SLUSA. Accordingly, Plaintiff's

Motion to Remand is DENIED (Doc. 15).

Defendants have also sought to have this action

dismissed. The Court notes that Plaintiff has not provided

any indication that he wishes to continue with this action in

the event that this Court determines that it is governed by

SLUSA. Because Behlen has not indicated a preference of

pursuing his own individual claims in either the state or

federal courts, this Court will assume that he would prefer

the state court as that was where the action was originally

filed.

A28

Having reached the determination that this action falls

within the language of SLUSA, and finding that SLUSA

requires such action, the Court GRANTS Defendant's

Motion to Dismiss (Doc. 2). This action is DISMISSED

WITH PREJUDICE as to the class action claims and

DISMISSED WITHOUT PREJUDICE as to Behlen's

individual claims.

DONE this 27th day of August, 2001.

s/ Bert W. Milling, Jr.

BERT W. MILLING, JR.

UNITED STATES MAGISTRATE JUDGE

JUDGMENT ENTERED

ON DOCKET

Date _ 8/31/01 s/ [illegible initials]

CHARLES R. DIARD, JR. CLERK

U.S. DISTRICT COURT

SOU. DIST. ALA.

FILED THIS THE

27TH DAY OF AUGUST,

2001. JUDGMENT ENTRY ____

NO. _10034-D

CHARLES R. DIARD, JR., CLERK

BY s/ Cynthia [illegible]

DEPUTY CLERK

A29

APPENDIX D

Public Law 105-353

105th Congress

An Act

To amend the Securities Act of 1933 and the Securities

Exchange Act of 1934 to limit the conduct of securities class

actions under State law, and for other purposes. [Nov. 3,

1998 [S. 1260]]

Be it enacted by the Senate and House of Representatives of the

United States of America in Congress assembled,

SECTION 1.SHORT TITLE. [Securities Litigation Uniform

Standards Act of 1998. 15 USC 78a note.]

This Act may be cited as the "Securities Litigation

Uniform Standards Act of 1998".

SEC. 2. FINDINGS. [15 USC 78a note]

The Congress finds that —

(1) the Private Securities Litigation Reform Act of 1995

sought to prevent abuses in private securities fraud

lawsuits;

(2) since enactment of that legislation, considerable

evidence has been presented to Congress that a number of

securities class action lawsuits have shifted from Federal to

State courts;

(3) this shift has prevented that Act from fully achieving

its objectives;

A30

(4) State securities regulation is ofcontinuing importance,

together with Federal regulation of securities, to protect

investors and promote strong financial markets; and

(5) in order to prevent certain State private securities

class action lawsuits alleging fraud from being used to

frustrate the objectives of the Private Securities Litigation

Reform Act of 1995, it is appropriate to enact national

standards for securities class action lawsuits involving

nationally traded _ securities, while preserving the

appropriate enforcement powers of State securities

regulators and not changing the current treatment of

individual lawsuits.

TITLE I—SECURITIES LITIGATION UNIFORM

STANDARDS

SEC. 101. LIMITATION ON REMEDIEIES.

(a) AMENDMENTS TO THE SECURITIES ACT OF 1933. —

(1) AMENDMENT. — Section 16 of the Securities Act of

1933 (15 U.S.C. 77p) is amended to read as follows:

"SEC. 16. ADDITIONAL REMEDIES; LIMITATION ON

REMEDIES.

"(a) REMEDIES ADDITION AL. — Except as provided in

subsection (b), therights andremedies provided by this title

shall be in addition to any and all other rights and remedies

that may exist at law or in equity.

A31

"(b) CLASS ACTION LIMITATIONS. — No covered class

action based upon the statutory or common law of any State

or subdivision thereof may be maintained in any State or

Federal court by any private party alleging —

"(1) an untrue statement or omission of a material fact

in connection with the purchase or sale of a covered

security; or

"(2) that the defendant used or employed any

manipulative or deceptive device or contrivance in

connection with the purchase or sale of a covered

security.

"(c) REMOVAL OF COVERED CLASS ACTIONS. — Any

covered class action brought in any State court involving a

covered security, as set forth in subsection (b), shall be

removable to the Federal district court for the district in

which the action is pending, and shall be subject to

subsection (b).

"(d) PRESERVATION OF CERTAIN ACTIONS. —

"(1) ACTIONS UNDER STATE LAW OF STATE OF

INCORPORATION. —

"(A) ACTIONS PRESERVED. — Notwithstanding

subsection (b) or (c), acovered class action described

in subparagraph (B) of this paragraph that is based

upon the statutory or common law of the State in

which the issuer is incorporated (in the case of a

corporation) or organized (in the case of any other

entity) may be maintained in a State or Federal court

by a private party.

"(B) PERMISSIBLE ACTIONS. —A covered class

action is described in this subparagraph if it

involves—

A32

"(i) the purchase or sale of securities by the issuer

or an affiliate of the issuer exclusively from or to

holders of equity securities of the issuer; or

"(ii) any recommendation, position, or other

communication with respect to the sale ofsecurities

of the issuer that —

"(I) is made by or on behalf of the issuer or an

affiliate of the issuer to holders of equity

securities of the issuer; and

"(II) concerns decisions of those equity holders

with respect to voting their securities, acting in

response to a tender or exchange offer, or

exercising dissenters’ or appraisal rights.

"(2) STATE ACTIONS. —

"(A) IN GENERAL. — Notwithstanding any other

provision of this section, nothing in this section may

be construed to preclude a State or political

subdivision thereof or a State pension plan from

bringing an action involving a covered security on its

own behalf, or as a member of aclass comprised solely

of other States, political subdivisions, or State pension

plans that are named plaintiffs, and that have

authorized participation, in such action.

"(B) STATE PENSION PLAN DEFINED. —For

purposes of this paragraph, the term 'State pension

plan' means a pension plan established and

maintained for itsemployees by the government of the

State or political subdivision thereof, or by any agency

or instrumentality thereof.

"(3) ACTIONS UNDER CONTRACTUAL

AGREEMENTS BETWEEN ISSUERS AND INDENTURE

TRUSTEES. — Notwithstanding subsection (b) or (c), a

covered class action that seeks to enforce a contractual

agreement between an issuer and an indenture trustee

A33

may be maintained in a State or Federal court by a party

to the agreement or a successor to such party.

"(4) REMAND OF REMOVED ACTIONS. —In an

action that has been removed froma State court pursuant

to subsection (c), if the Federal court determines that the

action may be maintained in State court pursuant to this

subsection, the Federal court shall remand such action to

such State court.

"(e) PRESERVATION OF STATE JURISDICTION. — The

securities commission (or any agency or office performing

like functions) of any State shall retain jurisdiction under

the laws of such State to investigate and bring enforcement

actions.

"(f) DEFINITIONS. —For purposes of this section, the

following definitions shall apply:

"(1) AFFILIATE OF THE ISSUER. — The term ‘affiliate

of the issuer' means a person that directly or indirectly,

through one or more intermediaries, controls or is

controlled by or is under common control with, the

issuer.

"(2) COVERED CLASS ACTION. —

"(A) IN GENERAL. — The term 'covered class action’

means —

"(i) any single lawsuit in which —

"(I) damages are sought on behalf of more

than 50 persons or prospective class members,

and questions of law or fact common to those

persons or members of the prospective class,

without reference to issues of individualized

reliance on an alleged misstatement or omission,

predominate over any questions affecting only

individual persons or members; or

A34

"(II} one or more named parties seek to

recover damages on a representative basis on

behalf of themselves and other unnamed parties

similarly situated, and questions of law or fact

common to those persons or members of the

prospective class predominate over any

questions affecting only individual persons or

members; or

"(ii) any group of lawsuits filed in or pending in

the same court and involving common questions of

law or fact, in which —

"(I) damages are sought on behalf of more

than 50 persons; and

"(II) the lawsuits are joined, consolidated, or

otherwise nroceed ac a sinole action for anv

purpose.

"(B) EXCEPTION FOR DERIVATIVE ACTIONS.

—Notwithstanding subparagraph (A), the term

‘covered class action' does not include an exclusively

derivativeaction brought by oneor more shareholders

on behalf of a corporation.

"(C) COUNTING OF CERTAIN CLASS MEMBERS.

—For purposes of this paragraph, a corporation,

investment company, pension plan, partnership, or

other entity, shall be treated as one person or

prospective class member, but only if the entity is not

established for the purpose of participating in the

action.

"(D) RULE OF CONSTRUCTION. — Nothing in this

paragraph shall be construed to affect the discretion of

a State court in determining whether actions filed in

such court should be joined, consolidated, or

otherwise allowed to proceed as a single action.

"(3) COVERED SECURITY.—The term ‘covered

security’ means a security that satisfies the standards for

A35

a covered security specified in paragraph (1) or (2) of

section 18(b) at the time during which it is alleged that

the misrepresentation, omission, or manipulative or

deceptive conduct occurred, except that such term shall

not include any debt security that is exempt from

registration under this title pursuant to rules issued by

the Commission under section 4(2).".

(2) CIRCUMVENTION OF STAY _ OF

DISCOVERY. -— Section 27(b) of the Securities Act of 1933

(15 U.S.C. 77z-1(b)) is amended by inserting after

paragraph (3) the following new paragraph:

"(4) CIRCUMVENTION OF STAY OF

DISCOVERY. — Upon a proper showing, a court may stay

discovery proceedings in any private action in a State

court as necessary in aid of its jurisdiction, or to protect

or effectuate its judgments, in an action subject to a stay

of discovery pursuant to this subsection.".

(3) CONFORMING AMENDMENTS. —Section 22(a)

of the Securities Act of 1933 (15 U.S.C. 77v (a)) is amended

(A) by inserting "except as provided in section 16

with respect to covered class actions," after "Territorial

courts,"; and

(B) by striking "No case" and inserting "Except as

provided in section 16(c), no case".

(b) AMENDMENTS TO THE SECURITIES EXCHANGE

ACT OF 1934. —

(1) AMENDMENT.-—Section 28 of the Securities

Exchange Act of 1934 (15 US.C. 78bb) is amended —

(A) in subsection (a), by striking "The rights and

remedies" and inserting "Except as provided in

subsection (f), the rights and remedies"; and

(B) by adding at the end the following new

subsection:

A36

"(f) LIMITATIONS ON REMEDIES. —

"(1) CLASS ACTION LIMITATIONS. —No covered

class action based upon the statutory or common law of

any State or subdivision thereof may be maintained in

any State or Federal court by any private party alleging

"(A) a misrepresentation or omission of a material

fact in connection with the purchase or sale of a

covered security; or

"(B) that the defendant used or employed any

manipulative or deceptive device or contrivance in

connection with the purchase or sale of a covered

security.

"(2) REMOVAL OF COVERED CLASS ACTIONS.

—Any covered class action brought in any State court

involving a covered security, as set forth in paragraph

(1), shall be removable to the Federal district court forthe

district in which the action is pending, and shall be

subject to paragraph (1).

"(3) PRESERVATION OF CERTAIN ACTIONS. —

"(A) ACTIONS UNDER STATE LAW OF STATE

OF INCORPORATION. —

"(i) ACTIONS PRESERVED. — Notwithstanding

paragraph (1) or (2), a covered class action

described in clause (ii) of this subparagraph that is

based upon the statutory or common law of the

State in which the issuer is incorporated (in the case

of a corporation) or organized (in the case of any

other entity) may be maintained in a State or

Federal court by a private party.

"(ii) PERMISSIBLE ACTIONS. — A covered class

action is described in this clause ifit involves —

"(I) the purchase or sale of securities by the

issuer or an affiliate of the issuer exclusively

A37

from or to holders of equity securities of the

issuer; Or

"(Il) any recommendation, position, or other

communication with respect to the sale of

securities of an issuer that —

"(aa) is made by or on behalf of the issuer or

an affiliate of the issuer to holders of equity

securities of the issuer; and

"(bb) concerns decisions of such equity

holders with respect to voting their securities,

acting in response to a tender or exchange offer,

or exercising dissenters’ or appraisal rights.

"(B) STATE ACTIONS. —

"(i) INGENERAL. — Notwithstanding any other

provision of this subsection, nothing in this

subsection may be construed to precludea State or

political subdivision thereof or a State pension plan

from bringing an action involving a covered

security on its own behalf, or as a member of a class

comprised solely of other States, political

subdivisions, or State pension plans that are named

plaintiffs, and that have authorized participation, in

such action.

"(ii) STATE PENSION PLAN DEFINED. — For

purposes of this subparagraph, the term ‘State

pension plan’ means a pension plan established and

maintained for its employees by the government of

a State or political subdivision thereof, or by any

agency or instrumentality thereof.

"C) ACTIONS UNDER CONTRACTUAL

AGREEMENTS BETWEEN ISSUERS AND

INDENTURE TRUSTEES. —Notwithstanding

paragraph (1) or (2), a covered class action that seeks

to enforce a contractual agreement between an issuer

and an indenture trustee may be maintained ina State

A38

or Federal court by a party to the agreement or a

successor to such party.

"(D) REMAND OF REMOVED ACTIONS. —In an

action that has been removed from a State court

pursuant to paragraph (2), if the Federal court

determines that the action may be maintained in State

court pursuant to this subsection, the Federal court

shall remand such action to such State court.

"(4) PRESERVATION OF STATE JURISDICTION. —

The securities commission (or any agency or office

performing like functions) of any State shall retain

jurisdiction under the laws of such State to investigate

and bring enforcement actions.

"(5) DEFINITIONS. [Applicability.] — For purposes of

this subsection, the following definitions shall apply:

"(A) AFFILIATE OF THE ISSUER. —The term

‘affiliate of the issuer' means a person that directly or

indirectly, through one or more intermediaries,

controls or is controlled by or is under common

control with, the issuer.

"(B) COVERED CLASS ACTION. — The term

‘covered class action' means —

"(i) any single lawsuit in which —

"(I) damages are sought on behalf of more

than 50 persons or prospective class members,

and questions of law or fact common to those

persons or members of the prospective class,

without reference to issues of individualized

reliance on an alleged misstatementor omission,

predominate over any questions affecting only

individual persons or members; or

"(II} one or more named parties seek to

recover damages on a representative basis on

behalf of themselves and other unnamed parties

similarly situated, and questions of law or fact

A39

common to those persons or members of the

prospective class predominate over any

questions affecting only individual persons or

members; or

"(ii) any group of lawsuits filed in or pending in

the same court and involving common questions of

law or fact, in which —

"(1) damages are sought on behalf of more

than 50 persons; and

"(II) the lawsuits are joined, consolidated, or

otherwise proceed as a single action for any

purpose.

"(C) EXCEPTION FOR DERIVATIVE ACTIONS.

— Notwithstanding subparagraph (B), the term

‘covered class action' does not include an exclusively

derivative action brought by one or more shareholders

on behalf of a corporation.

"(D) COUNTINGOF CERTAIN CLASS MEMBERS.

—For purposes of this paragraph, a corporation,

investment company, pension plan, partnership, or

other entity, shall be treated as one person or

prospective class member, but only if the entity is not

established for the purpose of participating in the

action.

"(E) COVERED SECURITY. —The term ‘covered

security’ means a security that satisfies the standards

for a covered security specified in paragraph (1) or (2)

of section 18(b) of the Securities Act of 1933, at the

time during which it is alleged that the

misrepresentation, Omission, or manipulative or

deceptive conduct occurred, except that such term

shall not include any debt security that is exempt from

registration under the Securities Act of 1933 pursuant

to rules issued by the Commission under section 4(2)

of that Act.

A40

"(F) RULE OF CONSTRUCTION. — Nothing in this

paragraph shall beconstrued to affectthe discretion of

a State court in determining whether actions filed in

such court should be joined, consolidated, or

otherwise allowed to proceed as a single action.".

(2) CIRCUMVENTION OF STAY OF DISCOVERY.

—Section 21D(b)(3) of the Securities Exchange Act of

1934 (15 U.S.C. 78u-4(b)(3)) is amended by adding at the

end the following new subparagraph:

"(D) CIRCUMVENTION OF STAY OF DISCOVERY.

— Upon a proper showing, a court may stay discovery

proceedings in any private action in a State court, as

necessary in aid of its jurisdiction, or to protect or

effectuate its judgments, in an action subject to a stay of

discovery pursuant to this paragraph.".

(c) APPLICABILITY. [15 USC 77p note.] —The

amendments made by this section shall not affect or apply

to any action commented before and pending on the date of

enactment of this Act.

SEC. 102. PROMOTION OF RECIPROCAL SUBPOENA

ENFORCEMENT. [15 USC 78u note.]

(a) COMMISSION ACTION. —The Securities and

Exchange Commission, in consultation with State securities

commissions (or any agencies or offices performing like

functions), shall seek to encourage the adoption of State

laws providing for reciprocal enforcement by State

securities commissions of subpoenas issued by another

State securities commission seeking to compel persons to

attend, testify in, or produce documents or records in

connection with an action or investigation by a State _

securities commission of an alleged violation of State

securities laws.

A41

(b) REPORT. [Deadline] — Not later than 24 months after

the date of enactment of this Act, the Securities and

Exchange Commission (hereafter in this section referred to

as the "Commission") shall submit a report to the

Congress —

(1) identifying the States that have adopted laws

described in subsection (a);

(2) describing the actions undertaken by the

Commission and State securities commissions to promote

the adoption of such laws; and

(3) identifying any further actions that the

Commission recommends for such purposes.

TITLE IIL— REAUTHORIZATION OF THE SECURITIES

AND EXCHANGE COMMISSION SEC. 201.

AUTHORIZATION OF APPROPRIATIONS.

Section 35 of the Securities Exchange Act of 1934 (15

U.S.C. 78kk) is amended to read as follows:

"SEC. 35. AUTHORIZATION OF APPROPRIATIONS.

"(a) IN GENERAL. —In addition to any other funds

authorized to be appropriated to the Commission, there are

authorized to be appropriated to carry out the functions,

powers, and duties of the Commission, $351,280,000 for

fiscal year 1999.

"(b) MISCELLANEOUS EXPENSES. — _ Funds

appropriated pursuant to this section are authorized to be

expended —

"(1) not to exceed $3,000 per fiscal year, for official

reception and representation expenses;

A42

"(2) not to exceed $10,000 per fiscal year, for funding a

permanent secretariat for the International Organization

of Securities Commissions; and

"(3) not to exceed $100,000 per fiscal year, for expenses

for consultations and meetings hosted by _ the

Commission with foreign governmental and other

regulatory officials, members of their delegations,

appropriate representatives, and staff to exchange views

concerning developments relating to securities matters,

for development and implementation of cooperation

agreements concerning securities matters, and provision

of technical assistance for the development of foreign

securities markets, such expenses to include necessary

logistic and administrative expenses and the expenses of

Commission staff and foreign invitees in attendance at

such consultations and meetings, including —

"(A) such incidental expenses as meals taken inthe

course of such attendance;

"(B) any travel or transportation to or from such

meetings; and

"(C) any other related lodging or subsistence.".

SEC. 202. REQUIREMENTS FOR THE EDGAR SYSTEM.

Section 35A of the Securities Exchange Act of 1934 (15

U.S.C. 78ll) is amended —

(1) by striking subsections (a), (b), (c), and (e); and

(2) in subsection (d) —

(A) by striking "(d)";

(B) in paragraph (2), by striking "; and" at the end

and inserting a period; and

(C) by striking paragraph (3).

A43

SEC. 203. COMMISSION PROFESSIONAL

ECONOMISTS.

Section 4(b) of the Securities Exchange Act of 1934 (15

U.S.C. 78d(b)) is amended —

(1) by redesignating paragraph (2) as paragraph (3);

and

(2) by inserting after paragraph (1) the following:

"(2) ECONOMISTS. —

"(A) COMMISSION AUTHORITY.

— Notwithstanding the provisions of chapter 51 of title

5, United States Code, the Commission is authorized

"(i) to establish itsown criteria for the selection of

such professional economists as the Commission

deems necessary to carry out the work of the

Commission;

"(ii) to appoint directly such _ professional

economists as the Commission deems qualified;

and

"(iii) to fix and adjust the compensation of any

professional economist appointed under this

paragraph, without regard to the provisions of

chapter 54 of title 5, United States Code, or

subchapters II, Ill, or VIII of chapter 53, of title 5,

United States Code.

"(B) LIMITATION ON COMPENSATION. —No

base compensation fixed for an economist under this

paragraph may exceed the pay for Level IV of the ~

Executive Schedule, and no payments to an economist

appointed under this paragraph shall exceed the

limitation on certain payments in section 5307 of title

5, United States Code.

"(C) OTHER BENEFITS. — All professional economists

appointed under this paragraph shall remain within the

A44

existing civil service system with respect to employee

benefits.".

TITLE III—CLERICAL AND TECHNICAL

AMENDMENTS

SEC. 301. CLERICAL AND TECHNICAL

AMENDMENTS.

(a) SECURITIES ACT OF 1933.—The Securities Act of

1933 (15 U.S.C. 77 et seq.) is amended as follows:

(1) Section 2(a)(15)i) (15 U.S.C. 77b(a)(15)(i)) is

amended —

(A) by striking "3(a)(2) of the Act" and inserting

"3(a)(2)"; and

(B) by striking "section 2(13) of the Act" and

inserting "paragraph (13) of this subsection".

(2) Section 11(f)(2)(A) (15 U.S.C. 77k(f)(2)(A)) is

amended by striking "section 38" and inserting "section

21D(f)".

(3) Section 13 (15 US.C. 77m) is amended —

(A) by striking "section 12(2)" each place it appears

and inserting "section 12(a)(2)"; and

(B) by striking "section 12(1)" each place it appears

and inserting "section 12(a)(1)".

(4) Section 18 (15 US.C. 77r) is amended —

(A) in subsection (b)(1)(A), by inserting ", or

authorized for listing," after "Exchange, or listed";

(B) in subsection (c)(2)(B)(i), by striking "Capital

Markets Efficiency Act of 1996" and _ inserting

"National Securities Markets Improvement Act of

1996";

(C) in subsection (c)(2)(C)(i), by striking "Market"

and inserting "Markets";

(D) in subsection (d)(1)(A) —

A45

(i) by striking "section 2(10)" and _ inserting

"section 2(a)(10)"; and

(ii) by striking "subparagraphs (A) and (B)" and

inserting "subparagraphs (a) and (b)";

(E) in subsection (d)(2), by striking "Securities

Amendments Act of 1996" and inserting "National

Securities Markets Improvement Act of 1996"; and

(F) in subsection (d)(4), by striking "For purposes of

this paragraph, the" and inserting "The".

(5) Sections 27, 27A, and 28 (15 U.S.C. 77z-1, 77z-2,

77z-3) are transferred to appear after section 26, in that

order.

(6) Paragraph (28) of schedule A of such Act (15 U.S.C.

77aa(28)) is amended by striking "identic" and inserting

"identical".

(b) SECURITIES EXCHANGE ACT OF 1934. —The

Securities Exchange Act of 1934 (15 U.S.C. 78 et seq.) is

amended as follows:

(1) Section 3(a)(10) (15 U.S.C. 78c(a)(10)) is amended

by striking "deposit, for" and inserting "deposit for".

(2) Section 3(a)(12)(A)(vi) (15 U.S.C. 78c(a)(12)(A)(vi))

is amended by moving the margin 2 em spaces to the left.

(3) Section 3(a)(22)(A) (15 U.S.C. 78c(a)(22)(A)) is

amended —

(A) by striking "section 3(h)" and inserting "section

3"; and

(B) by striking "section 3(t)" and inserting "section

>.

(4) Section 3(a)(39)(B)(i) (15 U.S.C. 78c(a)(39)(B)(i)) is

amended by striking "an order to the Commission" and

inserting "an order of the Commission".

(5) The following sections are each amended by

striking "Federal Reserve Board" and inserting "Board of

Governors of the Federal Reserve System": subsections

A46

(a) and (b) of section 7 (15 U.S.C. 78g (a), (6)); section

17(g) (15 U.S.C. 78q(g)); and section 26 (15 U.S.C. 78z).

(6) The heading of subsection (d) ofsection 7 (15U.S.C.

78g(d)) is amended by striking "EXCEPTION" and

inserting "EXCEPTIONS".

(7) Section 14(g)(4) (15 U.S.C. 78n(g)(4)) is amended by

striking "consolidation sale," and _ inserting

"consolidation, sale,".

(8) Section 15 (15 US.C. 780) is amended —

(A) in subsection (c)(8), by moving the margin 2 em

spaces to the left;

(B) in subsection (h)(2), by striking "affecting" and

inserting "effecting";

(C) in subsection (h)(3)(A)(i)(II)(bb), by inserting

"or" after the semicolon;

(D) in subsection (h)(3)(A)(ii)(I), by striking

"maintains" and inserting "maintained";

(E) in subsection (h)(3)(B)(ii), by striking

"association" and inserting "associated".

(9) Section 15B(c)(4) (15 U.S.C. 780-4(c)(4)) is amended

by striking "convicted by any offense" and inserting

"convicted of any offense".

(10) Section 15C(f)(5) (15 U.S.C. 780-5(f)(5)) is

amended by striking "any person or class or persons" and

inserting "any person or class of persons".

(11) Section 19(c)(5) (15 U.S.C. 78s(c)6)) is amended by

moving the margin 2 em spaces to the right.

(12) Section 20 (15 U.S.C. 78t) is amended by

redesignating subsection (f) as subsection (e).

(13) Section 21D (15 U.S.C. 78u-4) is amended —

(A) in subsection (g)(2)(B)(i), by striking "paragraph

(1)" and inserting "subparagraph (A)".

(B) by redesignating subsection (g) as subsection (f);

and

A47

(14) Section 31(a) (15 U.S.C. 78ee(a)) is amended by

striking "this subsection" and inserting "this section".

(c) INVESTMENT COMPANY ACT OF 1940.—The

Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) is

amended as follows:

(1) Section 2(a)(8) (15 U.S.C. 80a-2(a)(8)) is amended

by striking "Unitde" and inserting "United".

(2) Section 3(b) (15 U.S.C. 80a-3(b)) is amended by

striking "paragraph (3) of subsection (a)" and inserting

"paragraph (1)(C) of subsection (a)".

(3) Section 12(d)(1)(G)]G)(III)(bb) (15 USC.

80a-12(d)(1)(G)(i)(III)(bb)) is amended by striking "the

acquired fund" and inserting "the acquired company".

(4) Section 18(e)(2) (15 U.S.C. 80a-18(e)(2)) is amended

by striking "subsection (e)(2)" and inserting "paragraph

(1) of this subsection".

(5) Section 30 (15 US.C. 80a-29) is amended —

(A) by inserting "and" after the semicolon at theend

of subsection (b)(1); ;

(B) in subsection (e), by striking "semi-annually"

and inserting "semiannually"; and

(C) by redesignating subsections (g) and (h), as

added by section 508(g) of the National Securities

Markets Improvement Act of 1996, as subsections (i)

and (j), respectively.

(6) Section 31(f) (15 U.S.C. 80a-30(f)) is amended by

striking "subsection (c)" and inserting "subsection (e)".

(d) INVESTMENT ADVISERS ACT OF 1940.—The

Investment Advisers Act of 1940 (15 U.S.C. 80b et seq.) is

amended as follows:

(1) Section 203(e)(8)(B) (15 U.S.C. 80b-3(e)(8)(B)) is

amended by inserting "or" after the semicolon. |

A48

(2) Section 222(b)(2) (15 U.S.C. 80b-18a(b)(2)) is

amended by striking "principle" and_ inserting

"principal".

(e) TRUST INDENTURE ACT OF 1939.—The Trust

Indenture Act of 1939 (15 U.S.C. 77aaa et seq.) is amended

as follows:

(1) Section 303 (15 U.S.C. 77ccc) is amended by striking

"section 2" each place it appearsin paragraphs (2) and (3)

and inserting "section 2(a)".

(2) Section 304(a)(4)(A) (15 U.S.C. 77ddd(a)(4)(A)) is

amended by striking "(14) of subsection" and inserting

"(13) of section".

(3) Section 313(a) (15 U.S.C. 77mmm(a)) is amended —

(A) by inserting "any change to" after the paragraph

designation at the beginning of paragraph (4); and

(B) by striking "any change to" in paragraph (6).

(4) Section 319(b) (15 U.S.C. 77sss(b)) is amended by

striking "the Federal Register Act" and inserting "chapter

15 of title 44, United States Code,".

SEC. 302. EXEMPTION OF SECURITIES ISSUED IN

CONNECTION WITH CERTAIN STATE HEARINGS.

Section 18(b) (4)(C) of the Securities Act of 1933 (15 U.S.C.

77r(b)(4)(C)) is amended by striking “paragraph (4) or (11)"

and inserting "paragraph (4), (10), or (11)".

Approved November 3, 1998.

A49

APPENDIX E

15 U.S.C. § 77p — Additional remedies; limitation on

remedies

(a) Remedies additional

Except as provided in subsection (b) of this section, the

rights and remedies provided by this subchapter shall be in

addition to any and all other rights and remedies that may

exist at law or in equity.

(b) Class action limitations

No covered class action based upon the statutory or

common law of any State or subdivision thereof may be

maintained in any State or Federal court by any private

party alleging —

(1) an untrue statement or omission of a material fact

in connection with the purchase or sale of a covered

security; or

(2) that the defendant used or employed any

manipulative or deceptive device or contrivance in

connection with the purchase or sale of a covered

security.

(c) Removal of covered class actions

Any covered class action brought in any State court

involvinga covered security, as set forth in subsection (b) of

this section, shall be removable to the Federal district court

for the district in which the action is pending, and shall be

subject to subsection (b) of this section.

(d) Preservation of certain actions

(1) Actions under State law of State of incorporation

A50

(A) Actions preserved

Notwithstanding subsection (b) or (c) of this

section, a covered class action described in

subparzeraph (B) of this paragraph that is based

upon the statutory or common law of the State in

which the issuer is incorporated (in the case of a

corporation) or organized (in the case of any other

entity) may be maintained ina State or Federal court

by a private party.

(B) Permissible actions

A covered class action is described in this

subparagraph if itinvolves —

(i) the purchase or sale of securities by the

issuer or an affiliate of the issuer exclusively

from or to holders of equity securities of the

issuer; Or

(ii) any recommendation, position, or other

communication with respect to the sale of

securities of the issuer that —

(I) is made by or on behalf of the issuer or

an affiliate of the issuer to holders of equity

securities of the issuer; and

(II) concerns decisions of those equity

holders with respect to voting their securities,

acting in response to a tender or exchange

offer, or exercising dissenters' or appraisal

rights.

(2) State actions

(A) In general

Notwithstanding any other provision of this

section, nothing in this section may be construed to

precludea State or political subdivision thereof or a

State pension plan from bringingan action involving

a covered security on its own behalf, or as a member

of a class comprised solely of other States, political

AS1

subdivisions, or State pension plans that are named

plaintiffs, and that have authorized participation, in

such action.

(B) "State pension plan" defined

For purposes of this paragraph, the term ''State

pension plan" means a pension plan established and

maintained for its employees by the government of

the State or political subdivision thereof, or by any

agency or instrumentality thereof.

(3) Actions under contractual agreements between

issuers and indenture trustees

Notwithstanding subsection (b) or (c) of this section,

a covered class action that seeks to enforce a contractual

agreement between an issuer and an indenture trustee

may be maintained in a State or Federal court by a party

to the agreement or a successor to such party.

(4) Remand of removed actions

In an action that has been removed from a State

court pursuant to subsection (c) of this section, if the

Federal court determines that the action may be

maintained in State court pursuant to this subsection,

the Federal court shall remand such action to such State

court.

(e) Preservation of State jurisdiction

The securities commission (or any agency or office

performing like functions) of any State shall retain

jurisdiction under the laws of such State to investigate and

bring enforcement actions.

(f) Definitions

For purposes of this section, the following definitions

shall apply:

A52

(1) Affiliate of the issuer

The term "affiliate of the issuer" means a person that

directly or indirectly, through one or more

intermediaries, controls or is controlled by or is under

common control with, the issuer.

(2) Covered class action

(A) In general

The term "covered class action" means —

(i) any single lawsuitin which —

(1) damages are sought on behalf of more

than 50 persons or prospective class

members, and questions of law or fact

common to those persons or members of the

prospective class, without reference to issues

of individualized reliance on an alleged

misstatement or omission, predominate over

any questions affecting only individual

persons or members; or

(Il) one or more named parties seek to

recover damages ona representative basis on

behalf of themselves and other unnamed

parties similarly situated, and questions of

law or fact common to those persons or

members of the prospective class

predominate over any questions affecting

only individual persons or members; or

(ii) any group of lawsuits filed in or pending

in the same court and involving common

questions of law or fact, in which —

(1) damages are sought on behalf of more

than 50 persons; and

(II) the lawsuits are joined, consolidated,

or otherwise proceed as a single action for

any purpose.

A53

(B) Exception for derivative actions

Notwithstanding subparagraph (A), the term

“covered class action" does not include an

exclusively derivative action brought by one or more

shareholders on behalf of a corporation.

(C) Counting of certain class members

For purposes of this paragraph, a corporation,

investment company, pension plan, partnership, or

other entity, shall be treated as one person or

prospective class member, but only if the entity is

not established for the purpose of participating in

the action.

(D) Rule of construction

Nothing in this paragraph shall be construed to

affect the discretion of a State court in determining

whether actions filed in such court should be joined,

consolidated, or otherwise allowed to proceed as a

single action.

(3) Covered security

The term "covered security" means a security that

satisfies the standards for a covered security specified in

paragraph (1) or (2) of section 77r(b) of this title at the

time during which it is alleged that the

misrepresentation, omission, or manipulative or

deceptive conduct occurred, except thatsuch term shall

not include any debt security that is exempt from

registration under this subchapter pursuant to rules

issued by the Commission under section 77d(2) of this

title.

A54 '

APPENDIX F

15 U.S.C. § 1441 — Actions removable generally

(a) Except as otherwise expressly provided by Act of

Congress, any civil action brought in a State court of which

the district courts of the United States have original

jurisdiction, may be removed by the defendant or the

defendants, to the district court of the United States for the

district and division embracing the place where such action

is pending. For purposes of removal under this chapter, the

citizenship of defendants sued under fictitious names shall

be disregarded.

(b) Any civil action of which the district courts have

original jurisdiction founded on a claim or right arising

under the Constitution, treaties or laws of the United States

shall be removable without regard to the citizenship or

residence of the parties. Any other such action shall be

removable only if none of the parties in interest properly

joined and served as defendants is a citizen of the State in

which such action is brought.

(c) Whenever a separate and independent claim or

cause of action within the jurisdiction conferred by section

1331 of this title is joined with one or more otherwise

non-removable claims or causes of action, the entire case

may be removed and the district court may determine all

issues therein, or, in its discretion, may remand all matters

in which State law predominates.

(d) Any civil action brought in a State court against a

foreign state as defined in section 1603(a) of this title may be

removed by the foreign state to the district court of the

United States for the district and division embracing the

a, ae

A55

place where such action is pending. Upon removal the

action shall be tried by the court without jury. Where

removal is based upon this subsection, the time limitations

of section 1446(b) of this chapter may be enlarged at any

time for cause shown.

(e) The court to which such civil action is removed is

not precluded from hearing and determining any claim in

such civil action because the State court from which such

civil action is removed did not have jurisdiction over that

claim.

A56

APPENDIX G

[The Wall Street Journal, July 17, 2001, at p. C23]

Prudential Limits Brokers' B-Share Sales

FUND

TRACK

By AARON LUCCHETTI

Staff Reporter of THE WALL STREET JOURNAL

In a move likely to highlight the dilemma of which

mutual-fund share classés are appropriate for different

investors, Prudential Securities Inc. has instructed its

brokers to limit sales of "B-share" mutual funds to clients

investing $100,000 or less in a single fund. The decision,

which took effect this month, follows regulatory scrutiny of

brokers who steered wealthy clients to B-share mutual

funds when other share classes would have offered cost

savings. The policy at Prudential, a unit of Prudential

Insurance Co. of America in Newark, N.J., affects its 6,500

brokers as well as insurance agents who sell mutual funds

at a separate Prudential subsidiary.

"In most cases, we found that it's better for the client

economically," to buy A-class shares when investing more

than $100,000, Prudential spokeswoman Susan Atran said.

Before this month, managers at Prudential branch offices

decided on their own which share class to sell to investors.

Now, while branch offices may still sell B shares to

wealthier mutual-fund clients, they will have to show the

"transaction is economically in the best interest of the

client" Ms. Atran said. ;

Mutual-fund share classes are essentially different

pricing packages for entry into a fund, With so-called A

A57

shares, investors pay an up front charge - usually 3% to 6%

of assets. When buying B shares, investors usually pay a

charge upon exiting the fund, as wellasa higher annual fee.

The issue has grown in importance as a higher percentage

of mutual funds are bought through advisers and brokers

who charge some kind of commission in addition to the

fund's annual management fee.

For most mutual-fund investors, deciding between A

shares and B shares is a difficult decision that has to do in

part with how long they plan to hold the fund. Giving up

money at the start is painful for many, buta higher annual

fee can hurt performance during the long run. "I don'tthink

there's a simple answer on the face of it," said Geoffrey

Bobroff, a fund consultant in East Greenwich, R.I. "It really

turns on your belief as to where the markets are going."

With wealthier clients, however, mutual funds often

reduce or waive the upfront sales charge on A shares,

making them a lower-cost alternative to B shares. In April,

the National Association of Securities Dealers' regulatory

arm levied a fine onSt. Louisbrokerage firm Stifel, Nicolaus

& Co., alleging that one of its brokers erroneously advised

customers to buy 13 shares instead of A shares. Without

admitting or denying the allegations, Stifel agreed to

ex-change the customers' Class B shares for Class A at no

charge.

While some mutual-fund companies limit the amount

allowed to flow into B shares, often at $250,000, Prudential

is among the first in the brokerage industry to add its own

rules. "It's another layer of supervision," said Pru dential's

Ms. Atran.

Merrill Lynch, the nation's largest brokerage firm in

terms of registered representatives, hasn't put a dollar

restrictionon B shares. But a spokesman said yesterday that

the New York company "continues to take Suitability issues

very seriously. They're a prime concern in terms of the

distribution of differentclasses of mutual fundsshares." He

A58

added that brokers are trained and educated about which

mutual-fund shares are appropriate to sell to different

clients in different situations.

For investors who buy and sell their funds rapidly, a

third share class, often called C shares, makes sense because

they usually don't charge a commission on either the

purchase or sale of the fund. But these "level load" funds

often have higher continuing, annual expenses, which

makes them a worse deal for buy-and-hold investors.

Proponents of A shares say they are a good idea for

long-term investors since they usually have the lowest

annual expenses, but B shares often convert to A shares

after they are held by the investor for several years.

A59

APPENDIX H

[The New York Times, March 12, 2003, at p. C17]

Most Fund Brokers in Study Failed to Give Full Discounts

By FLOYD NORRIS

An examination of 43 brokerage firms found that all but

2 had overcharged at least some customers who were

eligible for discounts on the purchases of mutual funds,

regulators said yesterday. Over all, almost a third of

customers who were eligible were overcharged.

The regulators said that some disciplinary actions were

possible but added that in many cases the problems

appeared to have stemmed from inadequate procedures at

brokerage firms rather than an intent to overcharge

customers.

"Over all, we thought it was more sloppiness than

intentional," said Lori Richards, the directorof the Securities

and Exchange Commission's office of compliance

inspections and examinations.

The discounts related to the sale of mutual funds that

charge sales commissions, known in the fund industry as

loads.

Most load funds offer lower commissions to investors

who exceed certain "break points" by investing more money

in their funds.

Different fund families have different break points and

different policies on other issues, including what family

accounts can be consolidated for purposes of calculating

them and whether investors can geta lower rate by signing

a letter of intent, promising to invest a certain amount in a

group of funds over the next year or 13 months.

The inquiry by the S.E.C., NASD and the New York

Stock Exchange was conducted from November to January

A60

and looked at more than 9,000 mutual fund transactions at

the 43 firms. It chose transactions in which miscalculations

seemed possible and discovered 5,515 transactions that

appeared to be eligible for reduced sales charges. Of those,

1,757 did not receive a discount or received one that was

smaller than deserved. That came to 32 percent of the

transactions that were eligible.

The discounts not provided ranged from $2 to $10,289

and averaged $364 for each transaction. While two firms

provided all the discounts that were required, three others

did not provide any of them. The regulators did not identify

the firms but said they would be required to refund

overcharges. All firms that sell load mutual funds will also

be required to review their records.

Mary Schapiro, NASD's vice chairwoman, said errors

were far more likely at firms that process orders

electronically rather than use paperforms. "Thishas become

an incredibly complex business, with volume discounts and

linkages of various accounts, and technology in many firms

did not keep up with it," she said.

In some cases, the regulators found instances of

investors missing out on commission discounts they might

have been eligible for had they received better advice. Some

investors bought almost enough shares to receive a

discount, raising the question of whether the broker had

informed them of the savings available if they had invested

a little more. In other cases, customers were sold several

similar funds, like several high-yield bond funds, when they

would have paid significantly lower commissions had they

put the entire investment in one fund.