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

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 239, 270, and 274

[Release Nos. 33-7328; IC-22202; File No. S7-8-95]

RIN 3235-AD18

Exemption for Certain Open-End Management Investment Companies to

Impose Deferred Sales Loads

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Commission is adopting amendments to the rule under the

Investment Company Act of 1940 that permits contingent deferred sales

loads to be imposed on the shares of certain registered open-end

management investment companies (``mutual funds'' or ``funds''). The

Commission also is adopting amendments to the registration form for

mutual funds, and publishing a staff guide to the registration form.

The rule amendments allow mutual funds to offer investors a wider

variety of deferred sales loads, including installment loads, and

eliminate certain requirements in the rule. The form amendments modify

the requirements for disclosing deferred sales loads in mutual fund

prospectuses to reflect the changes made by the rule amendments.

EFFECTIVE DATE: The rule and form amendments will become effective

October 17, 1996.

FOR FURTHER INFORMATION CONTACT: Nadya B. Roytblat, Assistant Chief, or

Kenneth J. Berman, Assistant Director, at (202) 942-0690, Office of

Regulatory Policy, Division of Investment Management, Securities and

Exchange Commission, 450 Fifth Street, N.W., Mail Stop 10-2,

Washington, D.C. 20549. Requests for formal interpretive advice should

be directed to the Office of Chief Counsel at (202) 942-0659,

[[Page 49012]]

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 amendments to

rule 6c-10 [17 CFR 270.6c-10] under the Investment Company Act of 1940

[15 U.S.C. 80a] (the ``Investment Company Act'' or the ``Act''), and to

Form N-1A [17 CFR 239.15A, 274.11A] under the Securities Act of 1933

[15 U.S.C. 77a-77aa] (the ``Securities Act'') and the Investment

Company Act. The Commission also is adopting a conforming amendment to

rule 11a-3 [17 CFR 270.11a-3] under the Investment Company Act.

Table of Contents

I. Executive Summary

II. Background

III. Discussion of Amendments to Rule 6c-10

A. Scope of the Amended Rule

B. Deferred Load Calculation

C. Deferred Loads on Reinvested Distributions

D. ``No-Load'' Labeling

E. Rule 11a-3

IV. Discussion of Revised Disclosure Requirements

A. Changes to the Fee Table and the Example

B. General Prospectus Disclosure

C. Performance Data

1. Total Return

2. Yield

D. Dealer Compensation Disclosure

V. Compliance Date

VI. Cost/Benefit Analysis

VII. Summary of the Regulatory Flexibility Analysis

VIII. Statutory Authority

Text of Rule and Form Amendments

Appendix A--Illustration of Fee Table and Example

Appendix B--Illustration of Fee Table and Example

I. Executive Summary

The Commission is adopting amendments to rule 6c-10 under the

Investment Company Act to remove certain restrictions on the types of

deferred sales loads that may be imposed on the shares of mutual funds.

Rule 6c-10 currently permits only contingent deferred sales loads

(``CDSLs''). A CDSL is paid at redemption, but declines to zero if the

shares are held for a certain period of time. The amendments allow

sales charges paid upon redemption (``back-end loads'') that differ

from CDSLs (e.g., sales loads that do not decline to zero) as well as

loads paid after purchase during the term of a shareholder's investment

in a fund, for example, in installments (``installment loads''). These

new types of deferred sales loads would be alternatives to existing

load structures.

II. Background

The Commission is adopting amendments to rule 6c-10 under the

Investment Company Act, the rule that permits CDSLs to be imposed on

mutual fund shares. The amendments allow funds to offer other types of

deferred sales loads that may provide desirable flexibility for both

investors and funds.

Rule 6c-10 was adopted in February, 1995.1 The rule

essentially codified the conditions in the nearly 300 exemptive orders

permitting CDSLs that had been issued by the Commission since 1981. A

CDSL is paid at redemption, but declines to zero if the shares are held

for a certain period of time. CDSLs typically are imposed in

combination with an asset-based distribution fee charged in accordance

with rule 12b-1 under the Act (``rule 12b-1 fee''),2 an

arrangement commonly called a ``spread load.''

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\1\ Exemption for Certain Open-End Management Investment

Companies to Impose Contingent Deferred Sales Loads, Investment

Company Act Release No. 20916 (Feb. 23, 1995) [60 FR 11887 (Mar. 2,

1995)].

\2\ 17 CFR 270.12b-1.

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Contemporaneously with the adoption of rule 6c-10, the Commission

proposed amendments designed to allow greater flexibility in the types

of deferred sales load structures offered to investors, including loads

payable in installments.3 The Commission also proposed changes to

the prospectus disclosure requirements for deferred loads to complement

the proposed changes to rule 6c-10.

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\3\ Exemption for Certain Open-End Management Investment

Companies to Impose Deferred Sales Loads, Investment Company Act

Release No. 20917 (Feb. 23, 1995) [60 FR 11890 (Mar. 2, 1995)]

[hereinafter Proposing Release].

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The Commission received letters from three commenters, all of which

strongly supported the proposed amendments.4 In addition, when

rule 6c-10 was initially proposed in 1988 to allow various types of

deferred sales charges, the Commission received 33 comments, including

19 comments from individual investors.5 Both in 1988 and in

response to the proposed amendments, commenters indicated that

flexibility in deferred load structures would be desirable for both

funds and investors. Individual investors commenting on the 1988

proposal in particular supported installment loads as an option in

paying a sales charge.6 Some investors, for example, compared

installment loads to front-end loads and preferred the former as

allowing them to defer the payment of a sales charge; others compared

installment loads to rule 12b-1 fees, and believed that installment

loads represent a more precise charge, as well as one that would be

payable within a more definite term.7 The Commission is adopting

the amendments to rule 6c-10, and modifying the prospectus disclosure

requirements to reflect these comments as well as its continued study

of deferred sales charges.

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\4\ The commenters were the American Bar Association

Subcommittee on Investment Companies and Investment Advisers, the

law firm of Davis Polk & Wardwell, and the Investment Company

Institute (``ICI'').

\5\ Exemptions for Certain Registered Open-End Management

Investment Companies to Impose Deferred Sales Loads, Investment

Company Act Release No. 16619 (Nov. 2, 1988) [53 FR 45275 (Nov. 19,

1988)].

\6\ All but one of 19 letters from individual investors favored

installment loads.

\7\ Industry commenters also suggested that installment loads

would offer greater certainty than CDSLs and spread load structures,

thereby making it easier for certain mutual fund sponsors to obtain

financing for their distribution expenses.

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III. Discussion of Amendments to Rule 6c-10

The amendments to rule 6c-10 allow back-end sales loads other than

CDSLs, as well as loads payable during the term of a shareholder's

investment in a fund, such as in installments. The amendments remove

certain requirements in the rule regarding the way in which a load must

be calculated, as well as the current prohibition on imposing deferred

sales loads on shares purchased through reinvested dividends and other

distributions. The terms of any deferred sales load, however, must be

covered by the NASD Sales Charge Rule.8

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\8\ The NASD Sales Charge Rule prohibits NASD members from

offering or selling shares of a mutual fund if the sales charges

described in the fund'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 Conduct

Rules, Rule 2830(d) (1) and (2).

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A. Scope of the Amended Rule

The rule as amended defines a deferred sales load as any amount

properly chargeable to sales or promotional expenses that is paid by a

shareholder after purchase but before or upon redemption.\9\ The

definition includes CDSLs as well as loads paid at redemption whose

amount may remain the same or change over time in a manner different

from a CDSL, for

[[Page 49013]]

example, not decline to zero. The definition also includes loads paid

after purchase during the term of a shareholder's investment in a fund,

such as in one or more installments that may (or may not) be

accelerated upon early redemption.\10\

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\9\ Paragraph (b)(3) of rule 6c-10 as amended. The rule is not

applicable to certain charges that may be imposed by a mutual fund

to compensate the fund for the cost of redeeming shares and that are

paid directly to the fund. See, e.g., rule 11a-3 under the Act [17

CFR 270.11a-3(a)(7)] (defining a ``redemption fee''). The Commission

staff has taken the position that these charges may be imposed

without the need for exemptive relief under the Act. See, e.g., John

P. Reilly & Associates (pub. avail. July 12, 1979).

\10\ The NASD Sales Charge Rule currently governs only deferred

loads ``deducted from the proceeds of the redemption of shares by an

investor.'' NASD Conduct Rules, Rule 2830(b)(8)(B). A deferred load

paid other than upon redemption (e.g., an installment load) would

fall outside the current definition and would not be covered by the

Rule. Therefore, such a load could not be imposed until the NASD

Sales Charge Rule is amended to cover it. The Commission staff has

requested the NASD to review its Sales Charge Rule in light of the

amendments to rule 6c-10.

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Rule 6c-10 does not apply to insurance company separate accounts,

which are permitted to deduct deferred loads under an existing

rule,\11\ or unit investment trusts (``UITs''). While commenters

generally supported extending the rule to UITs, they identified issues

related to disclosure, the method for calculating deferred sales loads

and the interplay of rules 6c-10 and 11a-3 (the Investment Company Act

rule governing exchanges of fund shares) \12\ that are unique to UITs.

The Commission will continue to study these issues, consider

applications for exemptive orders \13\ and, if appropriate, propose

amendments that would extend rule 6c-10 to UITs.

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\11\ Rule 6c-8 under the Act [17 CFR 270.6c-8].

\12\ 17 CFR 270.11a-3.

\13\ See, e.g., Merrill Lynch, Pierce, Fenner & Smith, Inc.,

Investment Company Act Release Nos. 13801 (Feb. 29, 1984) [49 FR

8512 (Mar. 7, 1984)] (Notice of Application) and 13848 (Mar. 27,

1984) [30 SEC Docket 192] (Order), and 15120 (May 29, 1986) [51 FR

20389 (June 4, 1986)] (Notice of Application) and 15167 (June 24,

1986) [35 SEC Docket 1735] (Order); PaineWebber, Inc., Investment

Company Act Release Nos. 20755 (Dec. 6, 1994) [59 FR 64003 (Dec. 12,

1994)] (Notice of Application) and 20819 (Jan. 4, 1995) [58 SEC

Docket 1504] (Order) (allowing UITs to impose deferred sales loads

payable in installments).

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B. Deferred Load Calculation

Rule 6c-10 currently contains two requirements relating to the

calculation of CDSLs. Under the first requirement, a CDSL must be based

on the lesser of the NAV of the shares at the time of purchase or the

NAV at the time of redemption.\14\ Under the second requirement, in a

partial redemption, the CDSL must be calculated by treating as

redeemed, first shares not subject to a load, and second other shares

as if redeemed in the order they were purchased.\15\

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\14\ Rule 6c-10(a)(1) [17 CFR 270.6c-10(a)(1)].

\15\ Rule 6c-10(a)(3) [17 CFR 270.6c-10(a)(3)].

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The Commission is eliminating both of these requirements and

deferring to the NASD to address these matters in its Sales Charge

Rule. The Commission is, however, limiting the amount of a deferred

sales load to an amount not to exceed a specified percentage of the NAV

of the fund's shares at the time of purchase.\16\ The effect of this

provision would be to require that investors be given the benefit, if

any, of deferring the load payment should there be an increase in the

shares' NAV.

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\16\ The deferred load amount will be specified by the fund in

its prospectus. See infra section IV.A.

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The Commission had proposed allowing a deferred load also to be

based on the higher of the NAV at the time of purchase or at the time

the load is paid.\17\ None of the commenters specifically addressed the

higher of standard. Upon reconsideration of the issue, the Commission

believes that allowing the higher of standard would be inconsistent

with the intent of the proposal and the approach the Commission has

taken to deferred loads generally.\18\ Allowing the higher of standard

would leave investors uncertain about the amount of the deferred load

they would pay and significantly reduce their ability to compare the

amounts they would pay under different load structures.

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\17\ For example, if a shareholder makes a $1000 investment that

subsequently increases in value to $2,000 by the time the

shareholder redeems his shares, a 3% deferred load based on the

higher of standard would result in the shareholder paying a $60

deferred load (3% of $2,000), which is 6% of the initial $1,000

investment.

\18\ See, e.g., Exemptive Relief for Separate Accounts to Impose

A Deferred Sales Load on Variable Annuity Contracts Participating in

Such Accounts and to Deduct from Such Contracts in Certain Instances

an Annual Fee for Administrative Services That is Not Prorated,

Investment Company Act Release No. 13048 (Feb. 28, 1983) [48 FR

9532, 9534 (Mar. 7, 1983)] (adopting rule 6c-8 and noting that a

deferred load is intended to reimburse the same expenses as a front-

end load).

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Rule 6c-10, as amended, permits any deferred load in the amount not

greater than a specified percentage of the NAV at the time of

purchase.\19\ This approach is consistent with existing deferred load

structures, and will permit deferred loads to be charged on the same

basis as front-end loads. This approach also will assure that investors

receive the benefit of any growth in the NAV subsequent to purchasing

the shares,\20\ and facilitate investor comparisons of sales load

structures. Unlike the current requirements, whereby fund underwriters

bear the risk of a decrease in NAV (because the amount of the deferred

load is based on the lesser of the NAV at the time of purchase or

redemption), amended rule 6c-10 will permit fund underwriters to

receive the amount they would have received had the sales load been

charged at the time of purchase.

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\19\ Paragraph (a)(1) of rule 6c-10 as amended. The requirement

that the deferred load amount not exceed a ``specified percentage''

of the NAV at the time of purchase does not mean that the load may

not be based on a percentage of the NAV at the time the load is

paid, even if the NAV at the time the load is paid is greater than

the NAV at the time of purchase. The total amount of the load paid

by an investor, however, could not exceed the amount represented by

the specified percentage of the shares' offering price. Thus, if the

final installment of an installment load would result in the

investor paying more than the amount permitted by the rule, the

amount of the final installment would have to be reduced

accordingly.

\20\ Industry representatives have suggested that the principal

benefit of a deferred sales load is that it allows all of an

investor's funds to ``go to work'' immediately rather than being

deducted to pay sales charges. If the deferred sales load is based

on the NAV at the time of payment, and the NAV has increased because

of investment gains, any benefit that would have inured to the

investor as a result of deferring the load payment would be

collected by the fund's distributor when the load is paid.

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The amended rule does not require any particular method of

collecting installment loads. Installment load payments could be

collected, for example, out of distributions, by automatic redemptions,

or through separate billing of an investor's account. Different methods

of collecting installment load payments could result in different tax

consequences for investors.\21\ The method used, and any material tax

consequences of such method, must be described in the fund's

prospectus.\22\

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\21\ Commenters have pointed out, for example, that payment

through automatic redemptions would mean that a shareholder might

incur a capital gain or loss on each such redemption; if additional

shares then were purchased by the shareholder within 30 days of the

automatic redemption, any capital loss might be disallowed under the

``wash sale'' rule contained in the Internal Revenue Code. See,

e.g., Letter from the ICI to Jonathan G. Katz, Secretary, SEC (Jan.

9, 1989), File No. S7-8-95.

\22\ See infra section IV.A.

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C. Deferred Loads on Reinvested Distributions

Rule 6c-10 currently prohibits CDSLs to be imposed on shares

purchased through the reinvestment of dividends or capital gains

distributions.23 The Commission proposed to delete this

prohibition from the rule. The Commission reasoned, and the commenters

agreed, that this prohibition is unnecessary so long as a fund

appropriately discloses the manner in which loads are assessed and so

long as mutual fund sales loads are subject to the limits in the NASD

Sales Charge Rule. The prohibition has been deleted from the rule as

amended.

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\23\ Rule 6c-10(a)(2) [17 CFR 270.6c-10(a)(2)].

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The NASD Sales Charge Rule currently does not cover deferred loads

on reinvested dividends, nor loads on reinvested capital gains

distributions or

[[Page 49014]]

returns of capital.24 Under amended rule 6c-10, therefore,

deferred loads may not be imposed on shares purchased with reinvested

distributions unless and until the NASD amends its Sales Charge Rule to

address this issue. Should the NASD Sales Charge Rule be so amended,

the prospectus disclosure requirements will require deferred sales

charges on shares purchased with reinvested dividends and other

distributions to be disclosed in fund prospectuses.25

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\24\ A return of capital generally occurs when a fund's

distribution exceeds the fund's aggregate amount of undistributed

net taxable income and net realized capital gains. See

Determination, Disclosure, and Financial Statement Presentation of

Income, Capital Gain, and Return of Capital Distributions by

Investment Companies, American Institute of Certified Public

Accountants, Statement of Position 93-2, 8 (Feb. 1, 1993).

\25\ See infra section IV.B.

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D. ``No-Load'' Labeling

The NASD Sales Charge Rule expressly prohibits 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 rule 12b-1 and/or service fee that exceeds .25%

of average net assets per year.26 When adopting rule 6c-10, the

Commission concluded that it was unnecessary to retain the provision in

the proposed rule which contained a similar ``no-load'' labeling

prohibition for a fund whose shares are subject to a CDSL. The

prohibition similarly is unnecessary for funds whose shares are subject

to deferred loads other than CDSLs under today's amendments to rule 6c-

10. If the NASD amends its Sales Charge Rule to permit installment

loads, the Commission anticipates that the NASD would address the

applicability of its ``no-load'' labeling policy to funds whose shares

are subject to such loads. The Commission reiterates that it would be

misleading and a violation of the federal securities laws for a mutual

fund whose shares are subject to a deferred sales load to be held out

to the public as a no-load fund.27

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\26\ NASD Conduct Rules, Rule 2830(d)(3).

\27\ See Proposing Release, supra note , at 11893.

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E. Rule 11a-3

The Commission requested comment whether the definition of deferred

sales load in rule 11a-3 under the Investment Company Act, governing

exchanges of fund shares, should be amended to correspond expressly

with the proposed definition in rule 6c-10. Commenters favored amending

the definition in rule 11a-3 to avoid any confusion over the

interaction of rules 6c-10 and 11a-3. The Commission is adopting the

conforming amendment.28

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\28\ Paragraph (a)(3) of rule 11a-3 as amended. 17 CFR 270.11a-

3. Commenters also suggested other, substantive amendments to rule

11a-3. The Commission will continue to study the issues raised by

the commenters and consider them in the context of a separate

proposal.

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IV. Discussion of Revised Disclosure Requirements

The Commission is tailoring the prospectus disclosure requirements

applicable to deferred sales loads in light of the changes to rule 6c-

10 discussed above. These modifications relate to the disclosure of

deferred sales loads in the fee table and the example in the front of

fund prospectuses. The modifications also relate to the general

prospectus disclosure about the deferred load calculation and payment.

Finally, the amendments address the manner in which deferred sales

loads are required to be reflected in calculations of fund performance

data.

A. Changes to the Fee Table and the Example

The front part of every mutual fund prospectus is required to

contain a fee table--a tabular presentation of the transactional

expenses paid by an investor, such as sales loads, and the annual fund

operating expenses, such as management and any rule 12b-1 fees. The fee

table is followed by an example that sets forth the cumulative amount

of various fund expenses over one, three, five and ten year periods

based on a hypothetical investment of $1000 and an annual 5% return

(``Example''). The Example was intended to provide a relatively

straight-forward means for investors to compare the expense levels of

funds with different fee structures over varying time periods.

The fee table requirements in Item 2 of Form N-1A, among other

things, currently require a line showing the maximum sales load imposed

on purchases (i.e., a front-end load) and a separate line showing any

deferred sales load based on the purchase price or redemption proceeds.

The fee table currently does not contemplate deferred loads payable

other than upon redemption (e.g., in installments) and based on a share

price or NAV other than that at purchase or redemption (i.e., at the

time an installment is paid). Similarly, Instructions to the Example

currently refer only to CDSLs.

The Commission proposed to amend the deferred sales load line in

the fee table so that the total installment load or the maximum

contingent deferred load (expressed as a percentage) would be shown

there. Specifically, the Commission proposed to replace most of the

current wording inside the parentheses following the words ``Deferred

Sales Load'' with a blank, requiring funds to insert the appropriate

description of the basis on which the load is computed. The Commission

is adopting this amendment.29 The Commission also is amending

Instruction 14(f) to Item 2 of Form N-1A to require deferred loads

other than CDSLs to be reflected in the Example as well.30

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\29\ The ``Deferred Sales Load'' line also is redesignated

``Maximum Deferred Sales Load.''

\30\ Amended Instruction 14(f) to Item 2 also requires a

deferred load that is calculated based on the shares' NAV at the

time the load is paid to be based on an account value that

incorporates the 5% annual return for each year during the period.

Under amended rule 6c-10, a deferred load may be calculated based on

the NAV at the time the load is paid, even if the NAV at the time

the load is paid is greater than the NAV at the purchase, provided

the total amount of the deferred load paid by an investor does not

exceed the amount represented by the specified percentage of the

offering price. See supra note 19.

In addition, as suggested by a commenter, the Commission is

clarifying that any deferred sales load, whether based on the offering

price or on the NAV, be shown in the fee table as a percentage of the

offering price. This is the same basis on which front-end loads are

presented.31 This presentation is intended to enable investors to

better compare sales loads (whether front-end or deferred), since the

percentage will be based on the same amount (the offering price).

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\31\ A fund that calculates its deferred load on the basis of

the NAV at the time of purchase that does not equal the offering

price (i.e., a fund with a front-end load), should explain in the

prospectus, in response to new Item 7(g) of Form N-1A, that the load

amount paid by investors is the same even though the percentage

amount used in load calculations is different from that shown in the

fee table.

When a combination of sales loads is imposed on a fund's shares

(e.g., a 1% front-end and a 5% deferred load), the fee table is

required to include a ``Maximum Sales Load'' line showing the

cumulative percentage of those charges; the terms of the particular

sales charges comprising that figure must be shown on separate lines

underneath the ``Maximum Sales Load'' line. This format is designed to

enable investors to better appreciate the cumulative effect of the

sales charges and compare one fund's sales charges to another's.

Finally, as proposed, the Commission is allowing funds to include

within the larger fee table a tabular presentation of the schedule of a

deferred sales load, including installment payments.32

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\32\ As currently required by Instruction 1 to the fee table, a

fund also must provide a reference following the fee table to the

discussion of any scheduled sales load variations and other

information about installment loads elsewhere in the prospectus.

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[[Page 49015]]

With regard to loads on shares purchased with reinvested

distributions, the fee table currently includes a line showing the

``Maximum Sales Load on Reinvested Dividends (as a percentage of the

offering price).'' The current format does not contemplate deferred

loads on reinvested capital gains distributions and returns of capital,

nor loads based on a price other than the offering price. The

Commission is modifying this line in the fee table to read ``Maximum

Sales Load on Reinvested Dividends [and other Distributions]'' and is

replacing most of the current wording in the parenthetical with a

blank. A fund that charges a deferred load on shares purchased with

reinvested capital gains distributions or returns of capital would

include the bracketed words in the caption. Funds will fill in the

blank in the parenthetical with the basis on which the load is

computed. A conforming amendment is made to Instruction 14(d) regarding

disclosure in the Example of deferred sales loads on shares purchased

with reinvested distributions.

An illustration of fee table disclosure reflecting the amendments

adopted today, and suggested calculation methodologies for the Example,

appear as Appendices A and B to this Release.

B. General Prospectus Disclosure

As proposed, the Commission is amending prospectus disclosure

requirements concerning the way in which a specific fund's deferred

sales load is imposed and computed.33 New Item 7(g) of Form N-1A

covers many operational details that have been mandatory for all funds

under current rule 6c-10 but are now subject to greater flexibility

under the amendments. These details include the price on which the load

is based, whether deferred sales loads may be imposed on shares

acquired through reinvested distributions, and the way in which the

load is calculated. In a change from the proposal, a deferred load

calculated based on the offering price or the NAV at the time of

purchase must be presented both as a percentage of the offering price

and of the NAV. This disclosure will demonstrate that, although the

percentage amount used in load calculation and that shown in the fee

table may be different, the dollar amount of the load paid by the

investor is the same.

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\33\ The Commission also is amending Instruction 2 to Item 5A of

Form N-1A, Management's Discussion of Fund Performance, to require

that deferred loads charged other than upon redemption (i.e.,

installment loads) be reflected in the line graph showing fund

performance. This change is similar to the amendment to Instruction

14(f) to Item 2 discussed in section IV.A above.

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If a deferred load is charged on shares acquired through reinvested

dividends or other distributions, Item 7(g) requires a statement to

that effect, but it does not require this disclosure if the fund does

not charge such a load. Item 7(g) also requires an explanation of the

way(s) in which a shareholder may be required to pay an installment

load, such as through the withholding of dividend payments, involuntary

redemptions, or separate billing of an investor's account. Because

different methods of collecting load payments could carry different

potential tax consequences for investors, the Commission also is

publishing a revision to staff Guide 30 of the Guidelines for Form N-1A

to require funds to describe briefly in the prospectus any material tax

consequences for investors related to an installment load.34

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\34\ See supra note 21 and accompanying text.

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C. Performance Data

1. Total Return

The Commission is amending Instruction 1 to Item 22(b)(i) of Form

N-1A, as proposed, to require deferred sales loads to be included in

calculations of advertised total return data. The amendment requires

the calculation to be based on the deduction of the maximum amount of a

deferred sales load at the times, in the amounts, and under the terms

disclosed in the prospectus.

2. Yield

CDSLs currently are not included in advertised yield calculations.

Under existing rule 482(a)(6) under the Securities Act, however,

advertisements containing yield data must disclose the maximum amount

of a CDSL, state that the performance figures do not reflect the load

and that, if reflected, the load would reduce the quoted

performance.\35\ In addition, rule 12b-1 fees that usually accompany

CDSLs are required to be included in the numerator in the yield formula

in Item 22(b)(ii) of Form N-1A as expenses, and thereby reflected in

the yield data. The amendments will not change the current approach

with regard to CDSLs.

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\35\ 17 CFR 230.482(a)(6).

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With regard to installment loads, the Commission requested comment

on two possible approaches to including them in the yield formula. The

first approach, modeled on the existing treatment of front-end loads,

would require that the total installment load be added to the NAV to

reach an assumed ``offering price'' in the denominator in the yield

formula (the ``gross-up'' approach). Under the second approach, a

thirty-day percentage amount of an installment load would be included

as an expense in calculating the yield formula (similar to the manner

in which rule 12b-1 fees are treated). This method would understate the

yield for those shareholders that have completed paying the installment

load.\36\

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\36\ This method also would have suggested that installment

loads should be reflected in a fund's expense ratio as are rule 12b-

1 fees. It is more appropriate, however, for transaction-specific

expenses such as installment loads to be considered separately

rather than as a component of the fund's expense structure.

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Commenters believed that installment loads should not be reflected

in yield calculations, but that performance data should be accompanied

by disclosure of the existence of an installment load pursuant to rule

482(a)(6) under the Securities Act. The Commission, however, has

determined that installment loads should be reflected in fund yield

calculations, and that the ``gross-up'' approach is the most

appropriate way to do so. The fixed percentage amounts of installment

loads, and the certainty that the load will be paid, suggest similarity

to front-end loads. Installment loads also are assessed on the

shareholder account level, rather than deducted from fund assets as is

the case for rule 12b-1 fees. Therefore, new Instruction 10 is added to

Item 22(b)(ii) of Form N-1A to require installment loads to be

reflected in the yield calculations based on the gross-up approach.

D. Dealer Compensation Disclosure

Deferred sales charges are used to pay for a fund's sales or

promotional expenses, including commissions to persons who sell fund

shares. The amount of commissions paid from front-end sales loads and

rule 12b-1 fees currently is required to be disclosed in fund

prospectuses.\37\ The Commission requested comment whether it should

amend Item 7(b)(iv) of Form N-1A to require funds that impose deferred

sales loads to provide disclosure about the commissions comparable to

that now provided by funds with front-end loads. Alternatively, the

Commission requested comment whether proposed new Item 7(g) of Form N-

1A should be modified to require this disclosure.

---------------------------------------------------------------------------

\37\ Item 7(b)(iv) of Form N-1A requires funds to show in a

tabular format in the prospectus the sales load reallowed to dealers

as a percentage of the public offering price. Item 7(c) requires

similar disclosure for payments to dealers from rule 12b-1 fees.

---------------------------------------------------------------------------

Commenters generally opposed any changes from the current

disclosure requirements for dealer compensation.

[[Page 49016]]

They pointed out that the NASD currently is studying dealer

compensation practices and that related disclosure issues would best be

addressed in that context. The Commission will consider revisiting the

issue of dealer compensation disclosure in fund prospectuses after the

NASD has had an opportunity to complete its study and after further

experience with installment loads.

V. Compliance Date

The rule and form amendments will become effective thirty days

after publication in the Federal Register. Funds may begin to comply

with amended rule 6c-10 on the effective date. Funds that have received

exemptive orders allowing deferred sales loads may continue to rely on

those orders for all the funds covered by the order.

Registration statements and post-effective amendments filed with

the Commission, and yield quotations appearing in fund advertisements

or other sales literature, after the effective date must be in

compliance with the form amendments. Post-effective amendments made for

the purpose of complying with the amendments to Form N-1A may be made

pursuant to the immediate effectiveness provisions of rule 485(b) under

the Securities Act [17 CFR 230.485(b)], provided the post-effective

amendment otherwise meets the conditions for immediate effectiveness

under that rule.

VI. Cost/Benefit Analysis

The amendments to rule 6c-10 and Form N-1A should not impose any

significant burdens on mutual funds. Rather, the amendments should

benefit funds by providing them with alternatives in financing their

sales and promotional expenses. The amendments also will enable

investors to defer the payment of a sales charge on the purchase of

mutual fund shares until redemption or over one or more installment

payments during the term of their investment.

VII. Summary of the 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. 20917. No comments were received on that

analysis. The Commission has prepared a Final Regulatory Flexibility

Analysis in accordance with 5 U.S.C. 604. The Analysis explains that

the amendments to rule 6c-10 allow mutual funds to impose deferred

sales loads other than CDSLs and remove certain restrictions in the

rule. The Analysis further explains that the amendments to Form N-1A

modify the prospectus disclosure requirements for deferred loads to

reflect the changes to rule 6c-10, but provide for disclosure similar

to that currently made by funds and, therefore, do not impose any

additional burdens. A copy of the Analysis may be obtained by

contacting Nadya B. Roytblat, Mail Stop 10-2, Securities and Exchange

Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.

VIII. Statutory Authority

The Commission is adopting the amendments to rules 6c-10 and 11a-3

under sections 6(c), 11(a) and 38(a) of the Investment Company Act [15

U.S.C. 80a-6(c), -11(a), and -37(a)]. The authority citations for the

amendments to Form N-1A precede the text of the amendments.

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

Investment companies, Reporting and recordkeeping requirements,

Securities.

Text of Rule and Form Amendments

For the reasons set out in the preamble, Title 17, Chapter II of

the Code of Federal Regulations is amended as follows:

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

1. The authority citation for Part 270 continues to read, in part,

as follows:

Authority: 15 U.S.C. 80a-1 et seq., 80a-37, 80a-39 unless

otherwise noted;

* * * * *

2. Section 270.6c-10 is revised to read as follows:

Sec. 270.6c-10 Exemption for certain open-end management investment

companies to impose deferred sales loads.

(a) A company and any exempted person shall be exempt from the

provisions of sections 2(a)(32), 2(a)(35), and 22(d) of the Act [15

U.S.C. 80a-2(a)(32), 80a-2(a)(35), and 80a-22(d), respectively] and

Sec. 270.22c-1 to the extent necessary to permit a deferred sales load

to be imposed on shares issued by the company, Provided, that:

(1) The amount of the deferred sales load does not exceed a

specified percentage of the net asset value or the offering price at

the time of purchase;

(2) The terms of the deferred sales load are covered by the

provisions of Rule 2830 of the Conduct Rules of the National

Association of Securities Dealers, Inc.; and

(3) The same deferred sales load is imposed on all shareholders,

except that scheduled variations in or elimination of a deferred sales

load may be offered to a particular class of shareholders or

transactions, Provided, that the conditions in Sec. 270.22d-1 are

satisfied. Nothing in this paragraph (a) shall prevent a company from

offering to existing shareholders a new scheduled variation that would

waive or reduce the amount of a deferred sales load not yet paid.

(b) For purposes of this section:

(1) Company means a registered open-end management investment

company, other than a registered separate account, and includes a

separate series of the company;

(2) Exempted person means any principal underwriter of, dealer in,

and any other person authorized to consummate transactions in,

securities issued by a company; and

(3) Deferred sales load means any amount properly chargeable to

sales or promotional expenses that is paid by a shareholder after

purchase but before or upon redemption.

3. Section 270.11a-3 is amended by revising paragraph (a)(3) to

read as follows:

Sec. 270.11a-3 Offers of exchange by open-end investment companies

other than separate accounts.

(a) * * *

(3) Deferred sales load means any amount properly chargeable to

sales or promotional expenses that is paid by a shareholder after

purchase but before or upon redemption;

* * * * *

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

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

4. The authority citation for Part 239 continues to read, in part,

as follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77sss, 78c, 78l,

78m, 78n, 78o(d), 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 79l, 79m,

79n, 79q, 79t, 80a-8, 80a-29, 80a-30 and 80a-37, unless otherwise

noted.

* * * * *

5. The authority citation for Part 274 continues to read as

follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m,

78n, 78o(d), 80a-8, 80a-24, and 80a-29, unless otherwise noted.

Note: Form N-1A does not, and the amendments will not, appear in

the Code of Federal Regulations.

6. Item 2 of Part A of Form N-1A [referenced in sections 239.15A

and

[[Page 49017]]

274.11A] is amended by revising the caption ``Deferred Sales Load'' and

the parenthetical after such caption in paragraph (a)(i), and revising

the caption ``Maximum Sales Load Imposed on Reinvested Dividends'' and

the parenthetical in paragraph (a)(i), Instruction 5, the parenthetical

in Instruction 14(d), and Instruction 14(f) to read as follows:

Form N-1A

* * * * *

Part A. Information Required in a Prospectus

* * * * *

Item 2. Synopsis

(a)(i) * * *

* * * * *

Shareholder Transaction Expenses

* * * * *

Maximum Deferred Sales Load (as a percentage of

____________)............%

Maximum Sales Load Imposed on Reinvested Dividends [and other

Distributions]............% (as a percentage of____________)

* * * * *

Instructions:

* * * * *

Shareholder Transaction Expenses

5. ``Maximum Deferred Sales Load'' includes the maximum total

deferred sales load payable upon redemption, in installments, or

both, expressed as a percentage of the amount or amounts stated in

response to Item 7(g), provided that a sales load that is based on

the net asset value at the time of purchase shall be expressed as a

percentage of the offering price at the time of purchase. The fee

table may include a tabular presentation, within the larger table,

of the range over time of any deferred sales load (such as a

contingent deferred sales load) that may change over time, or a

schedule of any installment load payments.

If more than one type of sales load is charged (e.g., a deferred

sales load and a front-end sales load), the first line in the table

should read ``Maximum Sales Load'' and show the maximum cumulative

percentage. Show the percentage amounts and the terms of each sales

charge comprising that figure on separate lines just below.

If a sales charge is imposed on shares purchased with reinvested

capital gains distributions or returns of capital, the third line in

the table should include the bracketed words.

* * * * *

Example

14. For purposes of the Example in the table:

* * * * *

(d)* * * (A Registrant that charges a sales load on shares

purchased with reinvested dividends or other distributions should

not reflect these fees in the Example, but should explain in the

brief narrative following the table that the Example does not

reflect these fees and that the amounts shown would be increased if

the fees were reflected.)

* * * * *

(f) Reflect any contingent deferred sales load by assuming

redemption of the entire account on the last day of the year;

reflect any other type of deferred sales load as being paid at the

end of the year in which it is due. In the case of a deferred sales

load that is based on the Registrant's net asset value at the time

of payment, assume that the net asset value at the end of each year

includes the assumed 5% annual return for that and each preceding

year.

* * * * *

7. Instruction 2 to Item 5A of Part A of Form N-1A [referenced in

sections 239.15A and 274.11A] is amended by removing the phrase ``(or

other amounts at redemption or upon closing of an account)'' in the

third sentence and adding at the end a sentence to read as follows:

Form N-1A

* * * * *

Part A. Information Required in a Prospectus

* * * * *

Item 5A. Management's Discussion of Fund Performance

* * * * *

Instructions:

* * * * *

2. Sales Load. * * * In the case of any other deferred sales

load, assume the deduction in the amount(s) and at the time(s) the

load actually would have been deducted.

* * * * *

8. Item 7 of Part A of Form N-1A [referenced in sections 239.15A

and 274.11A] is amended by removing the word ``and'' at the end of

paragraph (e), removing the period at the end of paragraph (f) and

adding ``; and'' in its place, and adding paragraph (g) to read as

follows:

Form N-1A

* * * * *

Part A. Information Required in a Prospectus

* * * * *

Item 7. Purchase of Securities Being Offered

* * * * *

(g) a concise explanation of the way in which any deferred sales

load is imposed and computed, including: (i) an explanation of the

basis on which the specified percentage is calculated (i.e., the

offering price, or the lesser of the offering price or the net asset

value at the time the load is paid); (ii) the sales charges as a

percentage of both the offering price and the net asset value at the

time of purchase; (iii) if the method of determining the amount of

the load results in the load being applied to shares or amounts

representing shares acquired through the reinvestment of dividends

or other distributions, a statement to that effect; (iv) a

description of the way in which the load is calculated (e.g., in the

case of a partial redemption, whether or not the load is calculated

as if shares or amounts representing shares not subject to a load

are redeemed first, and other shares or amounts representing shares

are then redeemed in the order purchased); and (v) if applicable, an

explanation of the way(s) in which a shareholder may be required to

pay an installment load (e.g., through the withholding of dividend

payments, involuntary redemptions, separate billing of an investor's

account).

9. Item 22 of Part B of Form N-1A [referenced in sections 239.15A

and 274.11A] is amended by adding a sentence to the end of Instruction

1 to paragraph (b)(i) and an Instruction 10 to paragraph (b)(ii) to

read as follows:

Form N-1A

* * * * *

Part B. Information Required in a Statement of Additional

Information

* * * * *

Item 22. Calculation of Performance Data

* * * * *

(b) Other Registrants

(i) Total Return * * *

Instructions:

1. * * * If shareholders are charged a deferred sales load,

assume the maximum deferred sales load is deducted at the times, in

the amounts, and under the terms disclosed in the prospectus.

* * * * *

(ii) Yield * * *

Instructions:

* * * * *

10. If a Registrant (other than a Registrant described in

paragraph (a)) imposes, in connection with sales of its shares, a

deferred sales load payable in installments, the ``maximum public

offering price'' shall include the aggregate amount of such

installments (``installment load amount'').

10. Guide 30 to Form N-1A [referenced in sections 239.15A and

274.11A] is amended by adding a paragraph before the last paragraph to

read as follows:

Guidelines for Form N-1A

* * * * *

Guide 30. Tax Consequences

* * * * *

If the registrant imposes a sales load payable in installments

on the securities being offered, the registrant must describe

briefly in response to Item 6 any related material tax consequences

for investors.

* * * * *

By the Commission.

Dated: September 9, 1996.

Margaret H. McFarland,

Deputy Secretary.

BILLING CODE 8010-01-P

[[Page 49018]]

[GRAPHIC] [TIFF OMITTED] TR17SE96.000

BILLING CODE 8010-01-C

[[Page 49019]]

Appendix A Continued.--Example Calculations

Assuming Redemption at the End of Each Time Period

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Annual

Ending Average value Annual Deferred deferred Amount

Year Amount invested- Front-end load= Beginning value+(5%-1.4%)= value x 1.4%= expenses load @ load shown in

redemption installment table

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(1)................................. $1,000.00- $10.00= $990.00+$35.64= $1,025.64 $1,007.82 $14.11 $50.00 [$10.00] $74

(2)................................. ....................... ..................... $1,015.64+$36.56= $1,052.20 $1,033.92 $14.47 $40.00 [$10.00] ..........

(3)................................. ....................... ..................... $1,042.20+$37.52= $1,079.72 $1,060.96 $14.85 $30.00 [$10.00] $103

(4)................................. ....................... ..................... $1,069.72+$38.51= $1,108.22 $1,088.98 $15.25 $20.00 [$10.00] ..........

(5)................................. ....................... ..................... $1,098.22+$39.54= $1,137.76 $1,117.99 $15.65 $10.00 [$10.00] $134

(6)................................. ....................... ..................... $1,127.76+$40.60= $1,168.36 $1,148.06 $16.07 .......... ........... ..........

(7)................................. ....................... ..................... $1,168.36+$42.06= $1,210.42 $1,189.39 $16.65 .......... ........... ..........

(8)................................. ....................... ..................... $1,210.42+$43.58= $1,254.00 $1,232.21 $17.25 .......... ........... ..........

(9)................................. ....................... ..................... $1,254.00+$45.14= $1,299.41 $1,276.57 $17.87 .......... ........... ..........

(10)................................ ....................... ..................... $1,299.14+$46.77= $1,345.91 $1,322.52 $18.52 .......... ........... $221

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Assuming No Redemption

--------------------------------------------------------------------------------------------------------------------------------------------------------

Annual

Amount invested- Front-end Beginning value+(5%- Ending Average value Annual deferred Amount

Year load= 1.4%)= value x 1.4%= expenses load shown in

installment table

--------------------------------------------------------------------------------------------------------------------------------------------------------

(1).......................... $1,000.00- $10.00= $990.00+$35.64= $1,025.64 $1,007.82 $14.11 $10.00 $34

(2).......................... ............... ............. $1,015.64+$36.56= $1,052.20 $1,033.92 $14.47 $10.00

(3).......................... ............... ............. $1,042.20+$37.52= $1,079.72 $1,060.96 $14.85 $10.00 $83

(4).......................... ............... ............. $1,069.72+$38.51= $1,108.22 $1,088.98 $15.25 $10.00 ..........

(5).......................... ............... ............. $1,098.22+$39.54= $1,137.76 $1,117.99 $15.65 $10.00 $134

(6).......................... ............... ............. $1,127.76+$40.60= $1,168.36 $1,148.06 $16.07 ........... ..........

(7).......................... ............... ............. $1,168.36+$42.06= $1,210.42 $1,189.39 $16.65 ........... ..........

(8).......................... ............... ............. $1,210.42+$43.58= $1,254.00 $1,232.21 $17.25 ........... ..........

(9).......................... ............... ............. $1,254.00+$45.14= $1,299.14 $1,276.57 $17.87 ........... ..........

(10)......................... ............... ............. $1,299.14+$46.77= $1,345.91 $1,322.52 $18.52 ........... $221

--------------------------------------------------------------------------------------------------------------------------------------------------------

BILLING CODE 8010-01-P

[[Page 49020]]

[GRAPHIC] [TIFF OMITTED] TR17SE96.001

BILLING CODE 8010-01-C

[[Page 49021]]

Appendix B Continued.--Example Calculations

Assuming Redemption at the End of Each Time Period

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Average Amount

Year Amount invested Front-end load = Beginning value+(5%-1.9%) = Ending value x 1.9% Annual Deferred shown in

value = expenses load table

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(1)................................... $1,000.00- $0.00= $1,000.00+31.00= $1,031.00 $1,015.50 $19.29 $50.00 $69

(2)................................... ......................... ...................... 1,031.00+31.96= 1,062.96 1,046.98 19.89 40.00 ...........

(3)................................... ......................... ...................... 1,062.96+32.95= 1,095.91 1,079.44 20.51 30.00 90

(4)................................... ......................... ...................... 1,095.91+33.97= 1,129.88 1,112.90 21.15 20.00 ...........

(5)................................... ......................... ...................... 1,129.88+35.03= 1,164.91 1,147.39 21.80 10.00 113

(6)................................... ......................... ...................... 1,164.91+36.11= 1,201.02 1,182.97 22.48 ........... ...........

(7)................................... ......................... ...................... 1,201.02+37.23= 1,238.25 1,219.64 23.17 ........... ...........

(8)................................... ......................... ...................... 1,238.25+38.39= 1,276.64 1,257.44 23.89 ........... ...........

(9)................................... ......................... ...................... 1,276.64+39.58= 1,316.22 1,296.43 24.63 ........... ...........

(10).................................. ......................... ...................... 1,316.22+40.80= 1,357.02 1,336.62 25.40 ........... 222

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Assuming No Redemption

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Average Amount

Year Amount invested Front-end load = Beginning value+(5%-1.9%) = Ending value x 1.9% Annual Deferred shown in

value = expenses load table

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(1)................................... $1,000.00- $0.00= $1,000+31.00= $1,031.00 $1,015.50 $19.29 $0.00 $19

(2)................................... ......................... ...................... 1,031.00+31.96= 1,062.96 1,046.98 19.89 0.00 ...........

(3)................................... ......................... ...................... 1,062.96+32.95= 1,095.91 1,079.44 20.51 0.00 60

(4)................................... ......................... ...................... 1,095.91+33.97= 1,129.88 1,112.90 21.15 0.00 ...........

(5)................................... ......................... ...................... 1,129.88+35.03= 1,164.91 1,147.39 21.80 0.00 103

(6)................................... ......................... ...................... 1,164.91+36.11= 1,201.02 1,182.97 22.48 0.00 ...........

(7)................................... ......................... ...................... 1,201.02+37.23= 1,238.25 1,219.64 23.17 0.00 ...........

(8)................................... ......................... ...................... 1,238.25+38.39= 1,276.64 1,257.44 23.89 0.00 ...........

(9)................................... ......................... ...................... 1,276.64+39.58= 1,316.22 1,296.43 24.63 0.00 ...........

(10).................................. ......................... ...................... 1,316.22+40.80= 1,357.02 1,336.62 25.40 0.00 222

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[FR Doc. 96-23438 Filed 9-16-96; 8:45 am]

BILLING CODE 8010-01-P