Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the National Association of Securities Dealers, Inc. (``NASD'' or ``Association'') Concerning Related Performance Information

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40310; File No. SR-NASD-98-14]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by the National Association of Securities Dealers, Inc.

(``NASD'' or ``Association'') Concerning Related Performance

Information

August 7, 1998.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Exchange Act'' or ``Act''),\1\ notice is hereby given that on March

12, 1998, that National Association of Securities Dealers, Inc.

(``NASD'' or ``Association''), through its wholly-owned subsidiary,

NASD Regulation, Inc. (``NASD Regulation''), filed with the Securities

and Exchange Commission (``SEC'' or ``Commission'') the proposed rule

change as described in Items I, II, and III below, which Items have

been prepared by the self-regulatory organization.\2\ The Commission is

publishing this notice to solicit comments on the proposed rule change

from interested persons.

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\1\ 15 U.S.C. 78s(b)(1).

\2\ NASD Regulation initially submitted the proposed rule change

on February 17, 1998; however, the submission failed to provide a

statutory basis section. Because proposed rule changes are not

deemed filed until all necessary components, such as a statutory

basis section, are provided, the proposed rule change was deemed

filed when the Commission received NASD Regulation's amendment

providing the statutory basis for the proposed rule change

(``Amendment No. 1''). See Letter to Katherine A. England, Assistant

Director, Commission, from Joan C. Conley, Secretary, NASD

Regulation, dated March 12, 1998. NASD Regulation submitted another

amendment on June 11, 1998, making certain technical corrections

(``Amendment No. 2''). Amendment No. 2, however, was insufficient in

form. As a result, on July 13, 1998, NASD Regulation filed another

amendment, superseding and replacing all previous versions of the

filing (``Amendment No. 3''). The substance of Amendment No. 3 is

being published today.

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I. Self-Regulatory Organization's Statement of the Terms of

Substance of the Proposed Rule Change

NASD Regulation is proposing amendments to Rule 2820 (the

``Variable

[[Page 43975]]

Contracts Rule'') and Rule 2830 (the ``Investment Company Rule'') of

the Conduct Rules of the NASD. The Investment Company Rule would be

amended to (1) provide maximum aggregate sales charge limits for fund

of funds arrangements; (2) permit mutual funds to charge installment

loads; (3) prohibit loads on reinvested dividends; (4) impose

redemption order requirements for shares subject to contingent deferred

sales loads; and (5) eliminate duplicative prospectus disclosure. The

Variable Contracts Rule would be amended to eliminate the specific

sales charge limitations in the rule and a filing requirement relating

to changes in sales charges. Below is the text of the proposed rule

change. Proposed new language is italicized; proposed deletions are

[bracketed].

2800 SPECIAL PRODUCTS

* * * * *

2820 VARIABLE CONTRACTS OF AN INSURANCE COMPANY

(a) Application

This Rule shall apply exclusively (and in lieu of Rule 2830) to the

activities of members in connection with variable contracts to the

extent such activities are subject to regulation under the federal

securities laws.

(b) Definitions

(1) The term ``purchase payment'' as used throughout this Rule

shall mean the consideration paid at the time of each purchase or

installment for or under the variable contract.

(2) The term ``variable contracts'' shall mean contracts providing

for benefits or values which may vary according to the investment

experience of any separate or segregated account or accounts maintained

by an insurance company.

[(c) Sales Charges]

[No member shall participate in the offering or in the sale of

variable annuity contracts if the purchase payment includes a sales

charge which is excessive:]

[(1) Under contracts providing for multiple payments a sales charge

shall not be deemed to be excessive if the sales charge stated in the

prospectus does not exceed 8.5% of the total payments to be made

thereon as of a date not later than the end of the twelfth year of such

payments, provided that if a contract be issued for any stipulated

shorter payment period, the sales charge under such contract shall not

exceed 8.5% of the total payments thereunder for such period.]

[(2) Under contracts providing for single payments a sales charge

shall not be deemed to be excessive if the prospectus sets forth a

scale of reducing sales charges related to the amount of the purchase

payment which is not greater than the following schedule:

First $25,000-8.5% of purchase payment

Next $25,000-7.5% of purchase payment

Over $50,000-6.5% of purchase payment

[(3) Under contracts where sales charges and other deductions for

purchase payments are not stated separately in the prospectus the total

deductions from purchase payments (excluding those for insurance

premiums and premium taxes) shall be treated as a sales charge for

purposes of this rule and shall not be deemed to be excessive if they

do not exceed the percentages for multiple and single payment contracts

described in paragraphs (1) and (2) above.]

[(4) Every member who is an underwriter and/or issuer of variable

annuities shall file with Advertising/Investment Companies Regulation

Department, prior to implementation, the details of any changes or

proposed changes in the sales charges of such variable annuities, if

the changes or proposed changes would increase the effective sales

charge on any transaction. Such filings should be clearly identified as

an ``Amendment to Variable Annuity Sales Charges.'']

[d](c) Receipt of Payment

No member shall participate in the offering or in the sale of a

variable contract on any basis other than at a value to be determined

following receipt of payment therefore in accordance with the

provisions of the contract, and, if applicable, the prospectus, the

Investment Company Act of 1940 and applicable rules thereunder.

Payments need not be considered as received until the contract

application has been accepted by the insurance company, except that by

mutual agreement it may be considered to have been received for the

risk of the purchaser when actually received.

[e](d) Transmittal

Every member who receives applications and/or purchase payments for

variable contracts shall transmit promptly to the issuer all such

applications and at least that portion of the purchase payment required

to be credited to the contract.

[f](e) Selling Agreements

No member who is a principal underwriter as defined in the

Investment Company Act of 1940 may sell variable contracts through

another broker/dealer unless (1) Such broker/dealer is a member, and

(2) there is a sales agreement in effect between the parties. Such

sales agreement must provide that the sales commission be returned to

the issuing insurance company if the variable contract is tendered for

redemption within seven business days after acceptance of the contract

application.

[g](f) Redemption

No member shall participate in the offering or in the sale of a

variable contract unless the insurance company, upon receipt of a

request in proper form for partial or total redemption in accordance

with the provisions of the contract undertakes to make prompt payment

of the amounts requested and payable under the contract in accordance

with the terms thereof, and, if applicable, the prospectus, the

Investment Company Act of 1940 and applicable rule thereunder.

2830 INVESTMENT COMPANY SECURITIES

(a) Application

This Rule shall apply exclusively to the activities of members in

connection with the securities of companies under the Investment

Company Act of 1940 (the 1940 Act); provided however, that Rule 2820

shall apply, in lieu of this Rule, to members' activities in connection

with ``variable contracts'' as defined therein.

(b) Definitions

(1) ``Associated persons of an underwriter,'' as used in paragraph

(l), shall include an issuer for which an underwriter is the sponsor or

a principal underwriter, any investment adviser of such issuer, or any

affiliated person (as defined in Section 2(a)(3) of the [Investment

Company Act of 1940] 1940 Act) of such underwriter, issuer or

investment adviser.

(2) ``Brokerage commissions,'' as used in paragraph (k), shall not

be limited to commissions on agency transactions but shall include

underwriting discounts or concessions and fees to members in connection

with tender offers.

(2) ``Covered account,'' as used in paragraph (k), shall mean (A)

any other investment company or other account managed by the investment

adviser of such investment company, or (B) any other account from which

brokerage commissions are received or expected as a result of the

request or direction of any principal underwriter of such investment

company or of any affiliated person (as defined in the [Investment

Company Act of 1940] 1940 Act) of such

[[Page 43976]]

investment company or of such underwriter, or of any affiliated person

of an affiliated person of such investment company.

(4) ``Person'' shall mean ``person'' as defined in the [Investment

Company Act of 1940] 1940 Act.

(5) ``Prime rate,'' as used in paragraph (d) shall mean the most

preferential interest rate on corporate loans at large U.S. money

center commercial banks.

(6) ``Public offering price'' shall mean a public offering price as

set forth in the prospectus of the issuing company.

(7) ``Rights of accumulation'' as used in paragraph (d), shall mean

a scale of reducing sales charges in which the sales charge applicable

to the securities being purchased is based upon the aggregate quantity

of securities previously purchased or acquired and then owned plus the

securities being purchased.

The quantity of securities owned shall be based upon:

(A) the current value of such securities (measured by either net

asset value or maximum offering price); or

(B) Total purchases of such securities at actual offering prices;

or

(C) The higher of the current value or the total purchases of such

securities.

The quantity of securities owned may also include redeemable

securities of other registered investment companies having the same

principal underwriter.

(8) ``Sales Charge'' and ``sales charges,'' as used in paragraph

(d), shall mean all charges or fees that are paid to finance sales or

sales promotion expenses, including front-end deferred and asset-based

sales charges, excluding charges and fees for ministerial,

recordkeeping or administrative activities and investment management

fee. For purposes of this Rule, members may rely on the sales-related

fees and charges disclosed in the prospectus of an investment company.

(A) An ``asset-based sales charge'' is a sales charge that is

deducted from the net assets of an investment company and does not

include a service fee.

(B) A ``deferred sales charge'' is [a sales charge that is deducted

from the proceeds of the redemption of shares by an investor, excluding

any such charges that are (i) nominal and are for services in

connection with a redemption or (ii) discourage short-term trading,

that are not used to finance sales-related expenses, and that are

credited to the net assets of the investment company] any amount

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

shareholder after purchase but before or upon redemption.

(C) A ``front-end sales charge'' is a sales charge that is included

in the public offering price of the shares of an investment company.

(9) ``Service fees,'' as used in paragraph (d), shall mean payments

by an investment company for personal service and/or the maintenance of

shareholder accounts.

(10) The terms ``underwriter,'' ``principal underwriter,

``redeemable security,'' ``periodic payment plan,'' ``open-end

management investment company,'' and ``unit investment trust,'' shall

have the same definitions used in the [Investment Company Act of 1940]

1940 Act.

(11) A ``fund of funds'' is an investment company that invests any

portion of its assets in the securities of registered open-end

investment companies or registered unit investment trusts. An

``acquiring company'' in a fund of funds is the investment company that

purchases or otherwise acquires the securities of another investment

company and an ``acquired company'' is the investment company whose

securities are acquired.

(12) ``Investment companies in a single complex'' are any two or

more companies that hold themselves out to investors as related

companies for purposes of investment and investor services.

(c) Conditions of Discounts to Dealers

No member who is an underwriter of the securities of an investment

company shall sell any such security to any dealer or broker at any

price other than a public offering price unless such sale is in

conformance with Rule 2420 and, if the security is issued by an open-

end management company or by a unit investment trust which invests

primarily in securities issued by other investment companies, unless a

sales agreement shall set forth the concessions to be received by the

dealer or broker.

(d) Sales Charge

No member shall offer or sell the shares of any open-end investment

company or any ``single payment'' investment plan issued by a unit

investment trust (collectively ``investment companies'') registered

under the [Investment Company Act of 1940] 1940 Act if the sales

charges described in the prospectus are excessive. Aggregate sales

charges shall be deemed excessive if they do not conform to the

following provisions:

(1) Investment Companies Without an Asset-Based Sales Charge

(A) Aggregate front-end and[/or] deferred sales charges described

in the prospectus which may be imposed by an investment company without

an asset-based sales charge shall not exceed 8.5% of the offering

price.

[(B)(i) Dividend reinvestment may be made available at net asset

value per share to any person who requests such reinvestment.

(ii) If dividend reinvestment is not made available as specified in

subparagraph (B)(i) above, the maximum aggregate sales charge shall not

exceed 7.25% of offering price.]

[(C)(i)](B)(i) Rights of accumulation (cumulative quantity

discounts) may be made available to any person in accordance with one

of the alternative quantity discount schedules provided in subparagraph

[(D)](C)(i) below, as in effect on the date the right is exercised.

(ii) If rights of accumulation are not made available on terms at

least as favorable as those specified in subparagraph (C)(i) the

maximum aggregate sales charge shall not exceed[:]

[(a)] 8.0% of offering price. [if the provisions of subparagraph

(B)(i) are met; or

(b) 6.75% of offering price if the provisions of subparagraph

(B)(i) are not met.]

[(D)](C)(i) Quantity discounts, if offered, shall be made available

on single purchases by any person in accordance with one of the

following two alternatives:

a. A maximum aggregate sales charge of 7.75% on purchases of

$10,000 or more and a maximum aggregate sales charge of 6.25% on

purchases of $25,000 or more, or

b. A maximum aggregate sales charge of 7.50% on purchases of

$15,000 or more and a maximum aggregate sales charge of 6.25% on

purchases of $25,000 or more.

(ii) If quantity discounts are not made available on terms at least

as favorable as those specified in subparagraph [(D)(i)](C)(i)) the

maximum aggregate sales charge shall not exceed:

a. 7.75% of offering price if the provisions of subparagraphs

[(B)(i) and (C)(i)(B) are met.

b. 7.25% of offering price if [the provisions of subparagraph

(B)(i) are met but] the provisions of subparagraph [(C)(i)](B) are not

met.

[c. 6.50% of offering price if the provisions of subparagraph

(C)(i) are met but the provision of subparagraph (B)(i) are not met.]

[d. 6.25% of offering price if the provisions of subparagraphs

(B)(i) and (C)(i) are not met.]

[(E)](D) If an investment company without an asset-based sales

charge pays a service fee, the maximum aggregate sales charge shall not

exceed 7.25% of the offering price.

[[Page 43977]]

[(F) If an investment company without an asset-based sales charge

reinvests dividends at offering price, it shall not offer or pay a

service fee unless it offers quantity discounts and rights of

accumulation and the maximum aggregate sales charge does not exceed

6.25% of the offering price.]

(2) Investment Companies with an Asset-Based Sales Charge

(A) Except as provided in subparagraph (C) and (D), the aggregate

asset-based, front-end and deferred sales charges described in the

prospectus which may be imposed by an investment company with an asset-

based sales charge, if the investment company has adopted a plan under

which service fees are paid, shall not exceed 6.25% of total new gross

sales (excluding sales from the reinvestment of distributions; [and]

exchanges of shares between investment companies in a single complex,

between classes [of shares] of an investment company with multiple

classes of shares or between series [shares] of a series investment

company) plus interest charges on such amount equal to the price rate

plus one percent per annum. The maximum front-end or deferred sales

charge resulting from any transaction shall be 6.25% of the amount

invested.

(B) Except as provided in subparagraph (C) and (D), if an

investment company with an asset-based sales charge does not pay a

service fee, the aggregate asset-based, front-end and deferred sales

charges described in the prospectus shall not exceed 7.25% of total new

gross sales (excluding sales from the reinvestment of distributions;

[and] exchanges of shares between investment companies in a single

complex, between classes [of shares] of an investment company with

multiple classes of shares or between series [shares] of a series

investment company) plus interest charges on such amount equal to the

prime rate plus one percent per annum. The maximum front-end or

deferred sales charge resulting from any transaction shall be 7.25% of

the amount invested.

(C) The maximum aggregate sales charge on total new gross sales set

forth in subparagraph (A) and (B) may be increased by an amount

calculated by applying the appropriate percentages of 6.25% or 7.25% of

total new gross sales which occurred after an investment company first

adopted an asset-based sales charge until July 7, 1993 plus interest

charges on such amount equal to the prime rate plus one percent per

annum less any front-end, asset-based or deferred sales charges on such

sales or net assets resulting from such sales.

(D) The maximum aggregate sales charges of an investment company in

a single complex, a class or share issued by an investment company with

multiple classes of shares or a separate series of a series investment

company, may be increased to include sales of exchanged shares provided

that such increase is deducted from the maximum aggregate sales charges

of the investment company, class or series which redeemed the shares

for the purpose of such exchanges.

(E) No member shall offer or sell the shares of an investment

company with an asset-based sales charge if:

(i) The amount of the asset-based sales charge exceeds .75 of 1%

per annum of the average annual net assets of the investment company;

or

(ii) Any deferred sales charges deducted from the proceeds of a

redemption after the maximum cap described in subparagraph (A), (B),

(C) and (D) hereof, has been attained are not credited to the

investment company.

(3) Fund of Funds

(A) If neither an acquiring company nor an acquired company in a

fund of funds structure has an asset-based sales charge, the maximum

aggregate front-end and deferred sales charges that may be imposed by

the acquiring company, the acquired company and those companies in

combination, shall not exceed the rates provided in paragraph (d)(1).

(B) Any acquiring company or acquired company in a fund of funds

structure that has an asset-based sales charge shall individually

comply with the requirements of paragraph (d)(2), provided:

(i) If the acquiring and acquired companies are in a single complex

and the acquired fund has an asset-based sales charge, sales made to

the acquiring fund shall be excluded from total gross new sales for

purposes of acquired fund's calculations under subparagraphs (d)(2)(A)

through (d)(2)(D); and

(ii) If both the acquiring and acquired companies have an asset-

based sales charge: (a) the maximum aggregate asset-based sales charge

imposed by the acquiring company, the acquired company and those

companies in combination, shall not exceed the rate provided in

subparagraph (d)(2)(E)(i); and (b) the maximum aggregate front-end or

deferred sales charges shall not exceed 7.25% of the amount invested,

or 6.25% if either company pays a service fee.

(C) The rates described in subparagraphs (d)(4) and (d)(5) shall

apply to the acquiring company, the acquired company and those

companies in combination. The limitations of subparagraph (d)(6) shall

apply to the acquiring company and the acquired company individually.

[(3)](4) No member or person associated with a member shall, either

orally or in writing, describe an investment as being ``no load'' or as

having ``no sales charge'' if the investment company has a front-end or

deferred sales charge or whose total charges against net assets to

provide for sales related expenses and/or service fees exceed .25 of 1%

of average net asset per annum.

[(4) No member or person associated with a member shall offer or

sell the securities of an investment company with an asset-based sales

charge unless its prospectus discloses that long-term shareholders may

pay more than the economic equivalent of the maximum front-end sales

charges permitted by this Rule. Such disclosure shall be adjacent to

the fee table in the front section of a prospectus. This subparagraph

shall not apply to money market mutual funds which have asset-based

sales charges equal to or less than .25 of 1% of average net assets per

annum.]

(5) No member or person associated with a member shall offer or

sell the securities of an investment company if the service fees paid

by the investment company, as disclosed in the prospectus, exceed .25

of 1% of its average annual net assets or if a service fee paid by the

investment company, as disclosed in the prospectus, to any person who

sells its shares exceeds .25 of 1% of the average annual net asset

value of such shares.

(6) No member or person associated with a member shall offer or

sell the securities of an investment company if:

(A) The investment company has a deferred sales charge paid upon

redemption that declines over the period of a shareholder's investment

(``contingent deferred sales load''), unless the contingent deferred

sales load is calculated as if the shares or amounts representing

shares not subject to the load are redeemed first, and other shares or

amounts representing shares are then redeemed in the order purchased,

provided that another order of redemption may be used if such order

would result in the redeeming shareholder paying a lower contingent

deferred sales load; or

(B) The investment company has a front-end or deferred sales charge

imposed on shares, or amounts representing shares, that are purchased

through the reinvestment of dividends, unless the registration

statement registering the investment company's

[[Page 43978]]

securities under the Securities Act of 1933 became effective prior to

[insert the effective date of this rule amendment].

* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the self-regulatory organization

included statements concerning the purpose of and basis for the

proposed rule change and discussed any comments it received on the

proposed rule change. The text of these statements may be examined at

the places specified in Item IV below. The self-regulatory organization

has prepared summaries, set forth in Sections A, B, and C below, of the

most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

1. Purpose

a. Background. Regulatory initiative adopted in 1996 by Congress

and the Commission provide mutal funds and variable insurance sponsors

with greater flexibility in structuring distribution arrangements. In

1997, NASD Regulation published Notice to Members 97-48 requesting

comment on proposed amendments to the sales charge provisions in the

Investment Company Rule and the Variable Contracts Rule that would

adapt the rules to these regulatory initiatives and new distribution

arrangements. NASD Regulation received nine comment letters in response

to Notice to Members 97-48. The commenters generally supported the

proposed amendments to the Investment Company Rule. The commenters

strongly supported the proposed amendments to the Variable Contracts

Rule.

b. Description. (1) Proposed Amendments to the Investment Company

Rule. (A) Fund of Funds. The National Securities Markets Improvement

Act of 1996 (the ``1996 Amendments'') amended the Investment Company

Act of 1940 (``1940 Act'') to, among other things, broaden the ability

of mutual fund sponsors to establish ``fund of funds'' arrangements.

The Investment Company Rule currently does not take into account

two-tier fund of funds structures in which asset-based sales charges

are imposed at both the acquiring and acquired fund levels. The

proposed amendments would amend the Investment Company Rule to ensure

that if a fund of funds charges distribution fees at both levels, the

combined sales charges do not exceed the maximum percentage limits

currently contained in the rule.

(B) Deferred Sales Loads. In September 1996, the Commission amended

Rule 6c-10 under the 1940 Act to permit new types of deferred loads,

such as back-end and installment loads. The proposed amendments to the

Investment Company Rule also would permit these types of deferred sales

charges. The amendments would conform the definition of ``deferred

sales charge'' in the Investment Company Rule to the definition of

``deferred sales load'' in Rule 6c-10 (i.e., ``any amount properly

chargeable to sales or promotional expenses that is paid by a

shareholder after purchase but before or upon redemption'').

(C) Loads on Reinvested Dividends. The proposed amendments would

prohibit loads on reinvested dividends. When NASD Regulation proposed

to prohibit loads on reinvested dividends in Notice to Members 97-48,

commenters representing unit investment trust (``UIT'') sponsors

objected to the proposed amendments. NASD Regulation, however,

continues to believe that it is appropriate to prohibit loads on

reinvested dividends for all investment companies, including UITs. In

order to minimize the possibility that investors could incur additional

costs associated with the restructuring of distribution financing to

eliminate loads on reinvested dividends, the proposed amendments

include a ``grandfather provision'' that would exempt from the

operation of the prohibition all investment companies that currently

impose such fees.

(D) CDSL Calculations. The proposed amendments would prohibit

members from selling fund shares that impose a CDSL unless the method

used by the fund to calculate CDSLs in partial redemptions requires

that investors be given full credit for the time they have invested in

the fund. Because a CDSL declines over the period of a shareholder's

investment, a first-in first-out (``FIFO'') redemption order

requirement generally would ensure that transactions are subject to the

lowest applicable CDSL. The proposed amendments, however, also would

expressly provide that if a redemption order other than FIFO (for

example, last-in first-out) would result in a redeeming shareholder

paying a lower CDSL, the other method could be used.

(E) Prospectus Disclosure. The Investment Company Rule currently

prohibits a member from offering or selling shares of a fund with an

asset-based sales charge unless its prospectus disclosures that long-

term shareholders may pay more than the economic equivalent of the

maximum front-end sales charges permitted by the rule. In March 1998,

the Commission adopted significant revisions to prospectus disclosure

requirements for mutual funds. Included in the amendments is a

requirement that the prospectuses of funds with asset-based sales

charges include disclosure regarding Rule 12b-1 plans that is similar

to the disclosure required in the Investment Company Rule. Accordingly,

the proposed amendments would eliminate the prospectus disclosure

requirement in the Investment Company Rule.

(2) Proposed Amendments to the Variable Contracts Rule. In Notice

to Members 97-48, NASD Regulation proposed to amend the Variable

Contracts Rule to eliminate the maximum sales charge limitations. The

commenters strongly supported the proposed amendment because they view

specific sales charge limits in the Variable Contracts Rule as

unnecessary and inconsistent with the ``reasonableness'' standard

enacted in the 1996 Amendments. Consistent with these comments, the

proposed amendments would eliminate the maximum sales charge

limitations in the Variable Contracts Rule. The proposed amendments

also would make a conforming change to eliminate the requirements in

the rule to file with the Advertising/Investment Companies Regulation

Department the details of any changes in a variable annuity's sales

charges.

2. Statutory Basis

NASD Regulation believes that the proposed rule change is

consistent with Section 15A(b)(6) of the Act,\3\ which requires, among

other things, that the Association's rules be designed to prevent

fraudulent and manipulative acts and practices, to promote just and

equitable principles of trade, to remove impediments to and perfect the

mechanism of a free and open market, and, in general, to protect

investors and the public interest, in that the proposed rule change, by

adapting the Investment Company Rule and the Variable Contracts Rule to

take into account recent legislation, regulations promulgated by the

Commission, and new distribution arrangements, will further these

requirements.

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\3\ 15 U.S.C. 78o-3.

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[[Page 43979]]

B. Self-Regulatory Organization's Statement on Burden on Competition

NASD Regulation does not believe that the proposed rule change will

result in any burden on competition that is not necessary or

appropriate in furtherance of the purposes of the Act, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed

Rule Change Received From Members, Participants, or Others

The commenters generally supported the proposed amendments to the

Investment Company Rule. The commenters strongly supported the proposed

amendments to the Variable Contracts Rule. The comments are summarized

below.

1. Amendments to the Investment Company Rule

a. Fund of Funds. NASD Regulation proposed to amend the Investment

Company Rule to ensure that the combined sales charges for funds of

funds that charge a sales load or asset-based distribution fee at both

the acquiring and underlying fund levels do not exceed the maximum

percentage limits that are currently contained in the Rule. The

proposed amendments, however, would not require funds of funds to

calculate cumulative sales charge limits required for funds that charge

asset-based fees. The Investment Company Institute (ICI) and the

Securities Industry Association (SIA) supported the proposed approach

to regulating fees charged by funds of funds. The ICI recommended

certain technical changes to the proposed rule language to clarify that

the limits apply to the aggregate rate of asset-based sales charges

rather than the amount deducted based on net asset values. In addition,

the ICI recommended that NASD Regulation clarify that the acquiring and

acquired funds in a fund of funds structure remain individually subject

to the cumulative limits in the rule.

Banc One Corporation (Banc One) stated that the cumulative limits

should apply to funds of funds. Banc One noted that acquiring funds in

a fund of funds structure typically purchase institutional class shares

in underlying funds that typically do not carry an asset-based sales

charge. Accordingly, Banc One believes that it is feasible for the

acquiring fund to calculate a single remaining amount that reflects

both its own gross new sales and its proportionate share of the

underlying fund's new sales and charges.

b. Installment Loads. NASD Regulation proposed to amend the

definition of ``deferred sales charge'' in the Investment Company Rule

to permit installment loads. The ICI was the only commenter on this

proposal, which it supported.

c. Loads on Reinvested Dividends. NASD Regulation proposed to

prohibit sales loads on reinvested dividends. The ICI and Davis Polk &

Wardell (Davis Polk) opposed this proposal. The ICI believes that, as

an alternative to prohibiting loads on reinvested dividends, funds that

impose such charges should be subject to lower maximum limits in the

Rule and be required to make appropriate disclosure.

d. CDSL Calculations. NASD Regulation proposed to impose redemption

order requirements (first-in-first-out or FIFO) for shares subject to

contingent deferred sales loads so that investors incur only the lowest

applicable CDSL. The proposed amendments also would provide that if a

redemption order other than FIFO (e.g., LIFO) would result in a

redeeming shareholder paying a lower CDSL, that method could be used.

In addition, the Notice to Members clarified that the proposed

amendment would concern only the manner in which a fund calculated the

CDSL and should not affect a shareholder's ability to identify for tax

purposes which shares have been redeemed. The ICI did not object to

NASD Regulation's approach. The SIA, however, stated that NASD

Regulation should not impose order of redemption requirements because

marketing or business considerations may justify use of methodologies

other than FIFO, and investors should retain the right to designate

which shares they wish to sell for tax purposes.

e. Prospectus Disclosure. In deference to the recent adoption by

the SEC of new prospectus disclosure regarding the long-term effects of

Rule 12b-1 fees, NASD Regulation proposed to eliminate the equivalent

prospectus disclosure requirement in the Investment Company Rule. The

ICI and the SIA supported this proposal.

f. Other Comments. Federated Investors (Federated) recommended that

NASD Regulation consider an additional amendment to the Investment

Company Rule that would permit funds to calculate the cumulative limits

in the Rule by aggregating all shares of the same class within a fund

complex that have exchange privileges, rather than calculating the cap

for each fund individually. For example, all sales charges for ``B''

shares in a fund complex and gross new sales of B shares would be

aggregated to determine the remaining amount under the Rule.

Federated claimed that the current calculation methods for the

transfer of remaining amount balances in share exchanges within a fund

complex result in some funds being undercharged while others are

overcharged. (The Investment Company Rule permits a fund either to

increase its remaining amount by treating the shares received through

an exchange as gross new sales and deducting the amount of such

increase from the remaining amount of the fund from which shares were

exchanged, or to transfer less than this maximum amount pursuant to a

fund policy that is consistently applied.) Federated believes that if

fund companies are permitted to aggregate the remaining amount pools

for exchangeable shares, inaccuracies inherent in the current methods

would be significantly reduced.

2. Amendments to the Variable Contracts Rule

a. Sales Charge Limits. The National Association for Variable

Annuities (NAVA), Allstate Life Financial Services (Allstate), and New

England Insurance and Investment Company (New England) strongly

supported the proposed amendment to the Variable Contracts Rule to

eliminate the sales charge limit for variable annuities. They viewed

the specific sales charge limits in the Rule as unnecessary and

inconsistent with the ``reasonableness standard'' enacted in the 1996

Amendments. NAVA described the reasonableness standard as a compromise

between the SEC and the insurance industry that was intended to

eliminate SEC regulation of individual charges in favor of the new

comprehensive standard. Allstate believes that the intent of the 1996

Act was to eliminate specific limits on fees in favor of a

reasonableness standard for aggregate fees. New England also noted that

practical considerations render the fee limits in the Variable

Contracts Rule ineffective because distribution expenses typically are

not recovered by charging sales loads on premium payments.

b. Limitations on Sales Charges of Underlying Funds. NAVA and New

England believe that sales charge limits on funds underlying variable

annuities would be unnecessary and inconsistent with the 1996 Act. NAVA

notes that the 1996 Act provides that for purposes of the

reasonableness requirement, ``the fees and charges deducted under the

contract shall include all fees and charges imposed for any purpose and

in any manner.'' Allstate stated that specific limits on underlying

funds should not be necessary, but NASD

[[Page 43980]]

Regulation should consider how insurance company issuers are

administering the ``reasonableness'' requirement. The NASD has

determined not to impose sales charge limits in the Investment Company

Rule on funds underlying variable annuities. The Variable Contracts

Rule will continue to apply exclusively to the activities of members in

connection with variable contracts.

III. Date of Effectiveness of the Proposed Rule Change and Timing

for Commission Action

Within 35 days of the publication of this notice in the Federal

Register or within such longer period (i) as the Commission may

designate up to 90 days of such date if it finds such longer period to

be appropriate and publishes its reasons for so finding or (ii) as to

which the self-regulatory organization consents, the Commission will:

(A) By order approve the proposed rule change, or

(B) Institute proceedings to determine whether the proposed rule

change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views and

arguments concerning the foregoing, including whether the proposed rule

change is consistent with the Act. In addition, the Commission solicits

comment on whether the proposed ``grandfather provision'' relating to

the prohibition on loads on reinvested dividends should become

effective as of the date this proposed rule change is approved, or,

rather, as of the date the proposed rule change was filed with the

Commission. Persons making written submissions should file six copies

thereof with the Secretary, Securities and Exchange Commission, 450

Fifth Street, N.W., Washington, D.C. 20549. Copies of the submission,

all subsequent amendments, all written statements with respect to the

proposed rule change that are filed with the Commission, and all

written communications relating to the proposed rule change between the

Commission and any person, other than those that may be withheld from

public in accordance with the provisions of 5 U.S.C. 552, will be

available for inspection and copying at the Commission's Public

Reference Room, located at the above address. Copies of such filing

will also be available for inspection and copying at the principal

office of the NASD. All submissions should refer to File No. SR-NASD-

98-14 and should be submitted by September 8, 1998.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\4\

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\4\ 17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98-21957 Filed 8-14-98; 8:45 am]

BILLING CODE 8010-01-M