[Federal Register: December 24, 2003 (Volume 68, Number 247)]
[Proposed Rules]
[Page 74731-74743]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24de03-36]
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Part III
Securities and Exchange Commission
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17 CFR Parts 239 and 274
Disclosure of Breakpoint Discounts by Mutual Funds; Proposed Rule
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 239 and 274
[Release Nos. 33-8347; 34-48939; IC-26298; File No. S7-28-03]
RIN 3235-AI95
Disclosure of Breakpoint Discounts by Mutual Funds
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission is proposing amendments
to Form N-1A under the Securities Act of 1933 and the Investment
Company Act of 1940 to require an open-end management investment
company to provide enhanced disclosure regarding breakpoint discounts
on front-end sales loads. Under the proposed amendments, an open-end
management investment company would be required to describe in its
prospectus any arrangements that result in breakpoints in sales loads
and to provide a brief summary of shareholder eligibility requirements.
DATES: Comments must be received on or before February 13, 2004.
ADDRESSES: To help us process and review your comments more
efficiently, comments should be sent by one method only. Comments
should be submitted in triplicate to Jonathan G. Katz, Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
DC 20549-0609. Comments also may be submitted electronically at the
following E-mail address: rule-comments@sec.gov. All comment letters
should refer to File No. S7-28-03; this file number should be included
in the subject line if electronic mail is used. All comments received
will be posted on the Commission's Internet Web site (http://www.sec.gov
) and made available for public inspection and copying in
the Commission's Public Reference Room, 450 Fifth Street, NW.,
Washington, DC 20549.\1\
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\1\ We do not edit personal identifying information, such as
names or electronic mail addresses, from electronic submissions. You
should submit only information that you wish to make available
publicly.
FOR FURTHER INFORMATION CONTACT: Christian L. Broadbent, Senior
Counsel, or Paul G. Cellupica, Assistant Director, Office of Disclosure
Regulation, Division of Investment Management, (202) 942-0721, or with
respect to questions about disclosure by financial intermediaries,
Joseph P. Corcoran, Special Counsel, Office of Chief Counsel, Division
of Market Regulation, at (202) 942-0073, at the Securities and Exchange
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Commission, 450 Fifth Street, NW., Washington, DC 20549-0506.
SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission
(``Commission'') is proposing for comment amendments to Form N-1A (17
CFR 239.15A and 274.11A), the registration form used by open-end
management investment companies to register under the Investment
Company Act of 1940 (``Investment Company Act'') and to offer their
securities under the Securities Act of 1933 (``Securities Act'').
Table of Contents
I. Introduction and Background
II. Discussion
A. Disclosure of Arrangements that Result in Breakpoints in
Sales Loads
B. Disclosure of Methods Used to Value Accounts
C. Disclosure Regarding Information and Records Necessary to
Aggregate Holdings
D. Disclosure of Availability of Sales Load and Breakpoint
Information on Fund's Web site
E. Presentation Requirements
F. Compliance Date
III. General Request for Comments
IV. Paperwork Reduction Act
V. Cost/Benefit Analysis
VI. Consideration of Effects on Efficiency, Competition, and Capital
Formation
VII. Initial Regulatory Flexibility Analysis
VIII. Consideration of Impact on the Economy
IX. Statutory Authority
Text of Proposed Form Amendments
I. Introduction and Background
The shares of open-end management investment companies (``mutual
funds'') are sold to investors in a variety of ways. Many shares are
sold without a sales load, including shares sold directly by the fund
and those sold through retirement plans. An estimated 37% of mutual
fund shareholders purchase shares through a broker-dealer or another
financial intermediary.\2\ Fund shares sold through a broker-dealer or
other intermediary often are subject to a front-end sales load. A
front-end sales load is a sales charge that applies at the time the
fund shares are purchased to compensate the broker-dealer that sells
the fund shares, and is based on a percentage of the purchase price.
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\2\ Investment Company Institute, 2001 Profile of Mutual Fund
Shareholders 13-14 (Fall 2001).
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Mutual funds with a front-end sales load typically establish a
schedule of sales load percentages that are used to calculate the sales
load that an investor pays. Some mutual funds that charge front-end
sales loads will charge lower sales loads for larger investments. For
example, a fund might charge a 5% front-end sales load for investments
up to $50,000, but charge a load of 4% for investments between $50,000
and $100,000 and 3% for investments exceeding $100,000. The investment
levels required to obtain a reduced sales load are commonly referred to
as ``breakpoints.'' \3\ A broker-dealer who sells fund shares to retail
customers must disclose breakpoint information to its customers and
must have procedures reasonably designed to ascertain information
necessary to determine the availability and appropriate level of
breakpoints.\4\
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\3\ Information for investors concerning mutual fund
breakpoints--including how funds calculate breakpoints and the steps
investors can take if they fail to receive the benefit of a
breakpoint to which they were entitled--is available on the
Commission's Web site at http://www.sec.gov/answers/breakpt.htm.
\4\ NASD Special Notice to Members 02-85 (Dec. 23, 2002)
(directing all member firms to immediately review the adequacy of
their existing policies and procedures to ensure that investors are
charged the correct sales load on mutual fund transactions); NASD
Notice to Members 94-16 (Mar. 1994) (discussing the obligation of
member firms to ensure that communications with customers are
accurate and complete regarding mutual fund breakpoints). See NASD
Conduct Rule 2110 (Standards of Commercial Honor and Principles of
Trade) and NASD Conduct Rule IM-2830-1 (``Breakpoint'' Sales); In
the Matter of Application of Harold R. Fenocchio for Review of
Disciplinary Action Taken by the NASD, 46 SEC 279 (1976) (sustaining
NASD's finding of violation of its Rules of Fair Practice where
registered representatives failed to have customers execute a letter
of intent or to inform them of their rights of accumulation in
connection with mutual fund purchases).
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Each mutual fund company establishes its own formula for how it
will calculate whether an investor is entitled to receive a breakpoint.
Funds typically offer investors two principal options that enable them
to take advantage of breakpoints in sales loads for purchases made over
time: a letter of intent and a right of accumulation. A letter of
intent is a written statement by an investor to a fund in which the
investor states that he or she intends to purchase a stated dollar
amount of fund shares over a specified period (frequently, 13 months).
As a result, the investor is charged the reduced sales charge that
applies to the total amount of the investor's intended purchase on his
or her first purchase and all subsequent purchases. If a shareholder
fails to fulfill his or her obligation to purchase the intended total
dollar amount of fund shares, the shareholder must reimburse the
discount.
A right of accumulation permits an investor to aggregate shares
owned in related accounts in some or all funds in a fund family to
reach a breakpoint discount. Funds typically allow
[[Page 74733]]
investors to aggregate fund shares owned by a person or group of
persons related to the investor (e.g., family members). This option
also gives a fund shareholder the ability to count earlier purchases of
shares of funds in his or her accounts and in related accounts towards
the reduction of the sales charge on a current purchase. A right of
accumulation may often be combined with a letter of intent for further
benefits.
Typically, a mutual fund values accounts in order to determine
whether aggregate holdings have reached a sales load breakpoint using
one of three methods: net asset value, public offering price, and
historical cost. Most mutual fund families use the net asset value of
an investor's holdings to determine whether a breakpoint discount is
available. Some fund families, however, permit an investor's holdings
to be valued using the public offering price, which is determined by
adding the maximum front-end sales load charged to the net asset value.
In addition, some fund families permit holdings to be valued based on
the greater of market value (net asset value or public offering price)
and historical cost, which is what the investor actually paid for a
mutual fund at the time of purchase.
A mutual fund that offers breakpoint discounts must disclose its
schedule of breakpoints in its prospectus.\5\ A fund must disclose its
aggregation rules for determining breakpoints, such as letters of
intent and rights of accumulation, in either its prospectus or
statement of additional information (``SAI'').\6\
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\5\ Item 8(a)(1) of Form N-1A. Rule 22d-1 under the Investment
Company Act (17 CFR 270.22d-1) permits a mutual fund to sell shares
at prices reflecting scheduled breakpoints if it meets certain
requirements, such as furnishing to existing shareholders and
prospective investors the information regarding breakpoints required
by applicable registration statement form requirements.
\6\ Items 8(a)(2) and 18(a) of Form N-1A. The SAI is part of a
fund's registration statement and contains information about a fund
in addition to that contained in the prospectus. The SAI is required
to be delivered to investors upon request and is available on the
Commission's Electronic Data Gathering, Analysis, and Retrieval
System.
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In late 2002, the staffs of the Commission and the NASD identified
concerns regarding the extent to which mutual fund investors were
receiving breakpoint discounts, which were first uncovered by NASD's
routine examination program. As a result, the Commission and NASD
launched a multifaceted action plan to address these concerns.\7\
First, broker-dealers were required to review the adequacy of their
policies and procedures in this area, make necessary changes, and
report information concerning their mutual fund businesses. Second, the
Commission and NASD, along with the New York Stock Exchange (``NYSE''),
initiated an examination sweep of 43 broker-dealers that sell front-end
sales load mutual funds to evaluate whether samples of transactions
received the sales load discounts offered by the fund. Third, NASD, the
Securities Industry Association (``SIA''), and the Investment Company
Institute (``ICI'') formed a task force to recommend ways in which the
mutual fund and broker-dealer industries could prevent breakpoint
problems in the future.
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\7\ SEC and NASD Action Plan on Mutual Fund Sales Load Charges,
Securities and Exchange Commission Press Release, Jan. 16, 2003,
http://www.sec.gov/news/press/2003-7.htm.
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The Commission, NASD, and NYSE conducted their examination sweep of
broker-dealers between November 2002 and January 2003. The examination
revealed that most firms, in some instances, did not provide investors
with breakpoint discounts for which they appeared to have been
eligible.\8\ Of the more than 9,000 transactions reviewed, examiners
identified 5,515 transactions that appeared to be eligible for a
reduced sales charge. Of these 5,515 transactions, examiners found
1,757 transactions that did not receive a breakpoint discount or
appeared to have incurred other unnecessary sales charges (representing
20% of all the transactions reviewed, and 32% of the transactions that
were eligible for a discount). For these 1,757 transactions, the
average discount not provided was $364 per transaction. The most
frequent causes for not providing a breakpoint discount involved
problems with rights of accumulation, including not linking a
customer's ownership of different funds in the same mutual fund family,
not linking shares owned in a fund or fund family in all of a
customer's accounts at the firm, and not linking shares owned in the
same fund or fund family by persons related to the customer (e.g.,
spouse, children) in accounts at the firm.\9\
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\8\ Securities and Exchange Commission et al., Joint SEC/NASD/
NYSE Report of Examinations of Broker-Dealers Regarding Discounts on
Front-End Sales Charges on Mutual Funds 14-15 (Mar. 2003)
(hereinafter Joint Report), available at http://www.sec.gov/spotlight/breakpoints.htm
.
\9\ Id. at 1-2, 14-17.
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The NASD formed the Joint NASD/Industry Task Force on Breakpoints
together with the SIA and ICI in February 2003, to recommend ways in
which the mutual fund and brokerage industries can assure that
investors are not overcharged when they purchase funds with front-end
sales loads.\10\ The Task Force issued its report in July 2003.\11\
Consistent with the findings of the joint examination sweep of broker-
dealers, the Task Force reported that many of the significant
challenges in applying breakpoints correctly were with respect to
rights of accumulation. The Task Force explained that to deliver
breakpoint discounts based on rights of accumulation, the parties
involved with the transaction must be able to link the accounts
containing shares eligible to be aggregated and to ascertain the value
of the accounts in order to determine whether a shareholder has met
sales load breakpoints. The Task Force identified particular challenges
to delivering breakpoints based on investors' rights of accumulation.
First, broker-dealers have experienced difficulty in accessing and
understanding the terms upon which mutual funds allow investors to
aggregate both their holdings and those of related parties to reach
breakpoints. Second, broker-dealers and mutual funds must communicate
to investors the terms concerning rights of accumulation, and broker-
dealers must obtain from investors necessary information regarding
accounts eligible to be linked and, if applicable, historical
costs.\12\
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\10\ NASD Announces Joint NASD/Industry Breakpoint Task Force,
NASD News Release, Feb. 18, 2003, http://www.nasdr.com/news/pr2003/release_03_006.html
.
\11\ Joint NASD/Industry Breakpoint Task Force Issues Report,
NASD News Release, July 22, 2003, http://www.nasdr.com/news/pr2003/release_03_030.html
.
\12\ NASD et al., Report of the Joint NASD/Industry Task Force
on Breakpoints 5 (July 2003) (hereinafter Task Force Report),
available at http://www.nasdr.com/pdf-text/breakpoints_report.pdf.
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To address the challenges in providing correct breakpoint discounts
to investors, the Task Force provided 13 recommendations, including:
That mutual fund companies take steps to make investors aware of the
availability of breakpoint discounts; that broker-dealers adopt
policies and practices to gather the appropriate information from
investors so that they can take advantage of all available breakpoint
discounts; that transfer agents and broker-dealers modify the systems
used to execute mutual fund transactions; and that regulators and the
mutual fund and securities industries continue to educate investors
about breakpoint opportunities. Two of the recommendations called for
Commission rules that would require a fund to disclose certain
information regarding breakpoints in its prospectus
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and on its Web site.\13\ First, the Task Force recommended that the
Commission require a mutual fund to provide critical data regarding
pricing methods, breakpoint schedules, and linkage rules in its
prospectus and on its website, in a prominent and clear format.\14\
Second, the Task Force recommended that the Commission require a fund
to disclose in its prospectus that an investor may need to provide his
or her broker-dealer with the information and records necessary to take
full advantage of breakpoint discounts. The information and records
could be used to aggregate, for example, holdings in retirement
accounts, holdings of related parties, and holdings in accounts at
other broker-dealers. In addition, the Task Force recommended that, if
funds permit investors to rely on historical costs, the Commission
require the prospectus to advise the investor to keep records necessary
to demonstrate historical costs.\15\
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\13\ The Task Force also made a number of recommendations to the
NASD, NYSE, and mutual fund and brokerage industries. Working groups
have been formed to address the other Task Force recommendations.
See, e.g., Breakpoints Training Outline, http://www.nasdr.com/breakpoints_training_outline.asp
(last modified Nov. 19, 2003)
(training outline developed by NASD and working group in response to
recommendation that broker-dealers provide enhanced training
regarding mutual fund breakpoint discounts); Breakpoints Checklist
and Worksheet, http://www.nasdr.com/breakpoints_checklist.asp (last
modified Nov. 3, 2003) (checklist and worksheet designed by NASD and
working group to assist member firms in implementing recommendations
that broker-dealers require registered representatives to complete
standardized checklists or worksheets, which record relevant account
data, when executing transactions that carry front-end sales loads).
In addition, the NASD is heading an Omnibus Account Task Force
consisting of members of the fund and brokerage industries, as well
as other intermediaries, to study the issue of trading through
omnibus accounts. Statement of William H. Donaldson, Chairman, U.S.
Securities and Exchange Commission, Testimony Before the Senate
Committee on Banking, Housing and Urban Affairs 14 (Nov. 18, 2003).
Typically, a brokerage firm has one omnibus account with each of the
mutual funds with which it does business and through which all of
its brokerage customers purchase and redeem shares of those mutual
funds. Consequently, these mutual funds do not have information on
the identity of the underlying brokerage customer who is purchasing
or redeeming the funds' shares. In the breakpoint context, omnibus
accounts make it difficult for funds to track information about the
underlying shareholder that might have entitled the shareholder to
breakpoint discounts.
\14\ Task Force Report, supra note 12, at 10.
\15\ Id. at 13-14.
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Today, the Commission is proposing rules that would implement these
recommendations. Specifically, we are proposing to require a mutual
fund to describe briefly in its prospectus any arrangements that result
in breakpoints in sales loads, including a summary of shareholder
eligibility requirements. In addition, we are proposing to require a
mutual fund to describe in its prospectus the methods used to value
accounts in order to determine whether a shareholder has met sales load
breakpoints. We are also proposing to require a mutual fund to state in
its prospectus, if applicable, that in order to obtain a breakpoint
discount, it may be necessary for a shareholder to provide information
and records, such as account statements, to a mutual fund or financial
intermediary. Our proposals would also require a mutual fund to state
in its prospectus whether it makes available on or through its website
information regarding its sales loads and breakpoints. This enhanced
disclosure is intended to assist investors in understanding the
breakpoint opportunities available to them, and to alert investors as
to the information that they may need to provide to funds and broker-
dealers to take full advantage of all available breakpoint discounts.
It also should help broker-dealers to access information about
available breakpoint discounts.
II. Discussion
The Commission is proposing amendments to Form N-1A, the
registration form for mutual funds, that would require enhanced
disclosure regarding breakpoint discounts on front-end sales loads.
These proposed disclosure requirements are intended to assist investors
in receiving the benefit of any breakpoint discounts to which they are
entitled. Nothing in the proposed amendments would eliminate, or
diminish in any respect, a broker-dealer's obligations to its customers
with respect to mutual fund breakpoints, including its obligations to
disclose information about breakpoints.\16\
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\16\ See supra note 4 and accompanying text; In re Russell C.
Turek, Exchange Act Release No. 45459 (Feb. 20, 2002) (Commission
sanctioned registered representative for, among other violations,
failing to inform customers of the availability of breakpoint
discounts); In re Mason, Moran & Co., Exchange Act Release No. 4832
(Apr. 23, 1953) (registrant claimed it complied with disclosure
requirements of the federal securities laws by furnishing the
customer with a prospectus which included breakpoint information;
Commission held that while the prospectus requirements were intended
to provide the investor with more information than had theretofore
been generally available in the ordinary securities transaction,
these requirements were not intended to abrogate the greater
disclosure duties traditionally imposed on brokers and dealers in a
fiduciary position).
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A. Disclosure of Arrangements That Result in Breakpoints in Sales Loads
We are proposing to revise Form N-1A to require a mutual fund to
provide a brief description in its prospectus of arrangements that
result in sales load breakpoints, including a summary of shareholder
eligibility requirements. Currently, Item 8(a)(2) of Form N-1A requires
disclosure of arrangements that result in breakpoints in, or
elimination of, sales loads, including letters of intent and rights of
accumulation. Item 8(a)(2) also requires that each class of individuals
or transactions to which the arrangements apply be identified and that
each different breakpoint be stated as a percentage of both the
offering price and the amount invested. This information may be
provided in either the prospectus or the SAI.
The proposed amendments would require that a mutual fund include
the description required by Item 8(a)(2) of arrangements that result in
breakpoints in, or elimination of, sales loads in its prospectus and
not the SAI. We believe that information regarding breakpoints, which
can significantly affect the cost of a shareholder's investment, should
be included in the prospectus that is delivered to all shareholders.
This will provide greater prominence to breakpoint disclosure than
inclusion in the SAI, which is delivered to investors upon request. Our
proposals would direct that prospectus disclosure regarding breakpoints
be brief, in order to avoid overwhelming investors with excessively
detailed information. Proposed Item 8(a)(2) would not require the
prospectus to include the information currently required in the SAI
regarding breakpoints for affiliated persons of the fund and
breakpoints in connection with a reorganization.\17\ This information
would continue to be required in the SAI.
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\17\ Proposed Instruction 3 to Item 8(a)(2) of Form N-1A. Item
13(d) of Form N-1A requires that a mutual fund disclose any
arrangements that result in breakpoints in, or elimination of, sales
loads for directors and other affiliated persons of the fund. Item
18(b) of Form N-1A requires that a mutual fund disclose any
arrangements that result in breakpoints in, or elimination of, sales
loads in connection with the terms of a merger, acquisition, or
exchange offer made under a plan of reorganization.
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We are proposing to amend Item 18(a) of Form N-1A to require that
information regarding breakpoint arrangements that is not included in
the prospectus be included in the SAI. We are also proposing to modify
Item 18(a) to conform the enumeration of types of special purchase
plans or methods in that Item to the enumeration in Item 8(a)(2) of
types of arrangements that result in breakpoints, so that references to
``dividend reinvestment plans,'' ``employee benefit plans,'' and
``redemption reinvestment plans'' would be added to Item 18(a) and
``services in connection with retirement
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plans'' would be eliminated from Item 18(a). The proposals would also
add ``waivers for particular classes of investors'' to the enumeration
in both Items 8(a)(2) and 18(a). To assist investors and financial
intermediaries in finding all information about breakpoints, the
prospectus would be required to state, if applicable, that additional
information concerning sales load breakpoints is available in the SAI.
Our proposed amendments would add an instruction to require that
the description of arrangements resulting in breakpoints include a
brief summary of shareholder eligibility requirements. This summary
would be required to include a description or list of the types of
accounts (e.g., retirement accounts, accounts held at other financial
intermediaries), account holders (e.g., immediate family members,
family trust accounts, solely-controlled business accounts), and fund
holdings (e.g., funds held within the same fund complex) that may be
aggregated for purposes of determining eligibility for sales load
breakpoints. We believe that requiring such a summary of the
eligibility requirements for sales load breakpoints in the mutual fund
prospectus would assist investors and financial intermediaries in
better understanding the ways in which investors may take full
advantage of breakpoint opportunities.
We request comment generally on the proposed requirement to
disclose in the prospectus arrangements that result in breakpoints in
sales loads, including a summary of shareholder eligibility
requirements, and specifically on the following issues:
[sbull] Is the proposed requirement for a brief description in the
prospectus of arrangements that result in breakpoints in, or
elimination of, sales loads appropriate or necessary? Should this
description include a brief summary of shareholder eligibility
requirements with respect to sales load breakpoints? Is there any
additional information that we should require? Would these proposed
requirements benefit investors or other parties?
[sbull] As discussed above, our proposals would require a mutual
fund to provide a brief description of arrangements that result in
breakpoints in its prospectus, and would require any additional details
regarding these arrangements in the SAI. Is this proposed division of
disclosure regarding breakpoints appropriate? Is there information that
would be required in the prospectus under our proposals that is more
appropriate for the SAI, or vice versa? Is the information regarding
breakpoints for affiliated persons of the fund and breakpoints in
connection with a reorganization more appropriately included in the SAI
or in the prospectus? Should we permit a mutual fund to choose whether
to include information regarding breakpoints in either its prospectus
or SAI? Should we require that all information regarding breakpoints be
included in the prospectus? Would the breakpoint information that we
propose to require in the prospectus detract from other important
information in the prospectus? How should we strike a balance between
requiring enhanced disclosure and not overwhelming investors with
information that they do not consider important?
[sbull] Should the information we are proposing to require in the
prospectus be required in another location, such as the confirmation,
account statement, document provided by a financial intermediary prior
to share purchases, or shareholder report?
B. Disclosure of Methods Used to Value Accounts
We are also proposing to require a mutual fund to describe in its
prospectus the methods used to value accounts in order to determine
whether a shareholder has met sales load breakpoints, including the
circumstances in which and the classes of individuals to whom each
method applies.\18\ The methods required to be disclosed, if
applicable, would include historical cost, net amount invested, and
offering price.\19\ We believe that requiring a mutual fund to describe
in its prospectus the methods that it uses to value accounts in
determining breakpoint eligibility would assist investors and financial
intermediaries in more effectively determining investors' eligibility.
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\18\ Proposed Item 8(a)(3) of Form N-1A.
\19\ See Section I, ``Introduction and Background,'' supra
(discussing net asset value, public offering price, and historical
cost methods of valuing accounts). We refer here to ``net amount
invested'' rather than ``net asset value,'' and to ``offering
price'' rather than ``public offering price,'' because these are the
terms currently used in Form N-1A. See Instruction 3(a) and (b) to
Item 8(a)(1) of Form N-1A.
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We request comment generally on the proposed requirement to
describe the methods used to value accounts and specifically on the
following issues:
[sbull] Is our proposed requirement that a mutual fund describe the
methods used to value accounts in order to determine whether a
shareholder has met sales load breakpoints appropriate? Would our
proposals provide sufficient information to investors? Should we
require any additional information about these methods?
[sbull] Is the prospectus the most appropriate location for a
description of the methods used to value accounts? Should we require or
permit this disclosure to be included in the SAI, confirmation, account
statements, shareholder reports, document provided by a financial
intermediary prior to share purchase, or some other location?
C. Disclosure Regarding Information and Records Necessary to Aggregate
Holdings
The proposals would also require a mutual fund to state in its
prospectus, if applicable, that, in order to obtain a breakpoint
discount, it may be necessary at the time of purchase for a shareholder
to inform the fund or his or her financial intermediary of the
existence of other accounts in which there are holdings eligible to be
aggregated to meet sales load breakpoints.\20\ In addition, a mutual
fund would be required to describe any information or records, such as
account statements, that may be necessary for a shareholder to provide
to the fund or his or her financial intermediary in order to verify his
or her eligibility for a breakpoint discount. The description would be
required to include, if applicable:
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\20\ Proposed Item 8(a)(4)(i) of Form N-1A.
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[sbull] Information or records regarding shares of the fund or
other funds held in all accounts (e.g., retirement accounts) of the
shareholder at the financial intermediary; \21\
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\21\ Proposed Item 8(a)(4)(i)(A) of Form N-1A.
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[sbull] Information or records regarding shares of the fund or
other funds held in any account of the shareholder at another financial
intermediary; \22\ and
[sbull] Information or records regarding shares of the fund or
other funds held at any financial intermediary by related parties of
the shareholder, such as members of the same family or household.\23\
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\22\ Proposed Item 8(a)(4)(i)(B) of Form N-1A.
\23\ Proposed Item 8(a)(4)(i)(C) of Form N-1A.
In addition, if a mutual fund permits breakpoints to be determined
based on historical cost, it would be required to state in its
prospectus that a shareholder should retain any records necessary to
substantiate historical costs because the fund, its transfer agent, and
financial intermediaries may not maintain this information.\24\
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\24\ Proposed Item 8(a)(4)(ii) of Form N-1A.
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We believe that prospectus disclosure regarding the information or
records that may be necessary for a shareholder to provide would
facilitate the correct application of breakpoint discounts in
transactions in which shares are
[[Page 74736]]
aggregated to meet sales load breakpoints. As the Task Force report
noted, in order to deliver breakpoint discounts where investor
eligibility is based on rights of accumulation, financial
intermediaries must obtain the necessary information from investors
regarding accounts that may be linked (and, if applicable, historical
costs).\25\ In addition, our proposed disclosure may heighten
investors' awareness of the importance of maintaining records when
breakpoints are determined using the historical cost method. The Task
Force reported that broker-dealers would not generally have historical
cost information for customer positions transferred into their firm or
for positions held at another firm that a customer may be able to link
in order to receive a breakpoint discount.\26\ In addition, the fund
and its transfer agent may not have historical cost information for
shareholders, for example, in the many cases where a financial
intermediary places an omnibus order to purchase and sell fund shares
on behalf of all its customers without identifying individual customer
transactions.
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\25\ Task Force Report, supra note 12, at 5.
\26\ Id. at 5 n.7.
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We request comment generally on the proposed disclosure requirement
regarding information or records that may be necessary for a
shareholder to provide and specifically on the following issues:
[sbull] Should we require a mutual fund to state in its prospectus
that it may be necessary for a shareholder to inform the fund or a
financial intermediary of the existence of accounts that are eligible
to be aggregated to meet sales load breakpoints? Should we require a
mutual fund to describe the information and records that it may be
necessary for a shareholder to provide in order to verify his or her
eligibility for breakpoint discounts? Is there any additional
information that we should require in this description?
[sbull] Do the proposed disclosure requirements reflect the
appropriate allocation of responsibility among the mutual fund, the
financial intermediary, and the shareholder for ensuring that the
shareholder obtains a breakpoint discount to which he or she is
entitled? Will the proposed disclosures be adequate to enable
shareholders to obtain the breakpoint discounts for which they are
eligible, or would this proposed approach place too great a burden on
shareholders?
[sbull] Is the prospectus the most appropriate location for the
proposed disclosure regarding the need for a shareholder to inform the
fund or his or her financial intermediary of the existence of other
accounts in which there are holdings eligible to be aggregated, and the
information and records necessary to aggregate holdings? Should we
require or permit any, or all, of this disclosure to be included in the
SAI? Should this disclosure be required in shareholder reports,
confirmations, account statements, or a document delivered by a
financial intermediary prior to a purchase of mutual fund shares?
Should shareholders be notified periodically, e.g., in shareholder
reports or account statements, that it is their responsibility to
monitor whether they have qualified for breakpoint discounts?
D. Disclosure of Availability of Sales Load and Breakpoint Information
on Fund's Web Site
We are proposing to require that a mutual fund state in its
prospectus whether it makes available free of charge, on or through its
Web site at a specified Internet address, and in a clear and prominent
format, the information that would be required regarding the fund's
sales loads and breakpoints in the prospectus and SAI pursuant to Items
8(a) and 18(a), including whether the Web site includes hyperlinks that
facilitate access to the information.\27\ A mutual fund that does not
make the sales load and breakpoint information available in this manner
would be required to disclose the reasons why it does not do so
(including, where applicable, that the fund does not have an Internet
Web site).
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\27\ Proposed Item 8(a)(5) of Form N-1A.
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This proposal is intended to encourage mutual funds to provide
accessible Web site disclosure regarding the availability of breakpoint
discounts to complement the prospectus disclosure regarding breakpoints
that we are proposing. Modernizing the disclosure system under the
Federal securities laws involves recognizing the importance of the
Internet in fostering prompt and more widespread dissemination of
information.\28\ We believe that mutual fund disclosure should be more
readily available to investors in a variety of locations to facilitate
investor access to that information. We also believe that it is
important for funds to make investors aware of the different sources
that provide access to information about a fund. In addition, we
believe that encouraging website disclosure of information regarding
breakpoint discounts may assist broker-dealers and other financial
intermediaries to more easily access and understand the terms upon
which mutual funds allow investors to aggregate their holdings and the
holdings of related parties.
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\28\ See Securities Act Release No. 8128 (Sept. 5, 2002) (67 FR
58480 (Sept. 16, 2002)) (adopting requirement for an operating
company to disclose in its annual report on Form 10-K whether it
makes available free of charge on or through its Web site its annual
reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments).
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Our proposal would require that the disclosure about website
availability of sales load and breakpoint information indicate whether
the information is in a clear and prominent format, including whether
the website includes hyperlinks that facilitate access to the
information. We believe that it is important for website disclosure
regarding sales loads and breakpoint discounts to be clear and
prominent, in order to help investors and financial intermediaries to
find this information easily. Hyperlinks that facilitate access to the
information may contribute to a clear and prominent presentation. Thus,
websites could provide sales load and breakpoint information in a clear
and prominent format by, for example, using clear and prominent
hyperlinks that provide direct linkage to the relevant portions of the
fund's prospectus and SAI or the specific pages on a third-party
website containing the information.\29\
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\29\ See Securities Act Release No. 8128 (Sept. 5, 2002) (67 FR
58480, 58493 (Sept. 16, 2002)). We direct funds to this release for
guidance concerning satisfaction of this requirement through
hyperlinking to a third-party Web site.
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We request comment on the proposed requirement to disclose whether
sales load and breakpoint information is available on or through a
fund's website and specifically on the following issues:
[sbull] Is the proposed requirement for a mutual fund to state in
its prospectus whether the required information regarding its sales
loads and breakpoints is available on or through its Web site necessary
or appropriate? Should a mutual fund that does not maintain a Web site
be required to state that it does not make this information available
because it does not have a Web site? What other disclosures in this
area, if any, should funds be required to make?
[sbull] Is the prospectus the appropriate location for a mutual
fund to provide the proposed disclosure regarding Web site
availability? Would this disclosure be more appropriately located in
the SAI, Form N-CSR, shareholder reports, account statements,
confirmations, a document provided by a financial intermediary prior to
share purchase, or another location?
[sbull] Should we require mutual funds with Web sites to include
sales load and
[[Page 74737]]
breakpoint disclosure information on their Web sites?
[sbull] Are there other measures that we should consider in order
to encourage mutual funds to provide disclosure regarding sales loads
and breakpoints on their Web sites in a prominent and readily
accessible manner?
[sbull] Are there other mechanisms besides prospectus and Web site
disclosure to better inform investors about breakpoints to which they
may be entitled (e.g., requiring a financial intermediary to provide a
document prior to share purchase that describes breakpoint discounts,
or requiring this information to be included in shareholder reports,
account statements, or confirmations)?
E. Presentation Requirements
Our proposals would require that the disclosure in Item 8(a)(2)
regarding arrangements resulting in breakpoints in, or elimination of,
sales loads, and all other sales load disclosure required by Item 8(a),
be adjacent to the table of sales loads and breakpoints required by
Item 8(a)(1).\30\ This would include the description of sales loads
required by Item 8(a)(1), as well as the information about breakpoints,
including valuation methods, shareholder information and records, and
Web site availability that would be required by proposed Items 8(a)(3),
(4), and (5). The proposals also would require that a mutual fund
present the information required by Item 8(a) in a clear, concise, and
understandable manner, and include tables, schedules, and charts as
expressly required by Item 8(a)(1) or where doing so would facilitate
understanding.\31\ These requirements are intended to encourage mutual
funds to present information regarding sales loads and breakpoints in
an integrated manner that will be easily understood by investors, which
would address the Task Force recommendation that critical data
regarding pricing methods, breakpoint schedules, and linkage rules be
presented in a prominent and clear format.
---------------------------------------------------------------------------
\30\ Proposed Instruction to Item 8(a) of Form N-1A.
\31\ Id. Cf. rule 421 under the Securities Act of 1933 (17 CFR
230.421) (plain English requirements for prospectuses).
---------------------------------------------------------------------------
General Instruction C.3.(a) to Form N-1A currently requires the
information required by Item 8 to be in one place in the prospectus.
This includes the information about sales loads and breakpoints
required by Item 8(a)(1), information about 12b-1 fees required by Item
8(b), and information about multiple class and master-feeder funds
required by Item 8(c). It does not include the information on
breakpoints required by Item 8(a)(2) because this information may be
included in the SAI or in a separate purchase and redemption document
pursuant to Item 7(f). Item 7(f) of Form N-1A permits a mutual fund to
omit from the prospectus information about purchase and redemption
procedures required by Items 7(b)-(d)\32\ and 8(a)(2) and provide it in
a separate disclosure document if the fund delivers the document with
the prospectus, incorporates the document into the prospectus by
reference and files the document with the prospectus, and provides
disclosure explaining that the information disclosed in the document is
part of, and incorporated into, the prospectus.
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\32\ Items 7(b)-(d) require a description of the procedures for
purchasing and redeeming the fund's shares, as well as the fund's
policy with respect to dividends and distributions.
---------------------------------------------------------------------------
Under our proposals, Item 7(f) would continue to permit the
information required by Item 8(a)(2) to be included in a separate
purchase and redemption document.\33\ In addition, we are proposing to
amend Item 7(f) to permit the information about breakpoints required by
proposed Items 8(a)(3), (4), and (5) (i.e., valuation methods,
shareholder information and records, and Web site availability) to be
included in the separate purchase and redemption document. We are also
proposing to amend General Instruction C.3.(a) to Form N-1A to make it
clear that this information may be disclosed in a separate purchase and
redemption document, provided that all the information required by
paragraphs 8(a)(2), (3), (4), and (5) is included in the separate
document. This instruction will also clarify that if the information
required by paragraphs 8(a)(2)-(5) is disclosed in a separate purchase
and redemption document, the table of sales loads and breakpoints
required by Item 8(a)(1) must be included in the separate purchase and
redemption document, as well as the prospectus, in order to comply with
the proposed requirement that all disclosure required by Item 8(a) be
adjacent to the table of sales loads and breakpoints.
---------------------------------------------------------------------------
\33\ We are, however, proposing to eliminate, as duplicative,
the reference to this procedure in Item 8(a)(2).
---------------------------------------------------------------------------
We request comment generally on the proposed requirements for
presentation of information about sales loads and breakpoints and
specifically on the following:
[sbull] Will our proposal to require that the disclosure regarding
sales loads and breakpoints required by Item 8(a)(1) and (a)(2) be
presented in a clear, concise, and understandable manner, and include
tables, schedules, and charts where expressly required by Item 8(a)(1)
or where doing so would facilitate understanding result in disclosure
that is easily understood by investors? Are there additional
requirements that we should adopt regarding the presentation of this
information?
[sbull] Should we require that the sales load and breakpoint
information required by Item 8 be adjacent to the table of sales loads
and breakpoints required by Item 8(a)(1)? Are there other ways to
ensure that all information related to breakpoints is provided in an
integrated manner that will facilitate investor understanding? Should
we adopt a ``close proximity'' or other standard instead of an
``adjacent'' standard?
[sbull] For a mutual fund that includes information about
breakpoints in a separate purchase and redemption document, would the
requirement that the table of sales load and breakpoint information
required by Item 8(a)(1) appear in both the prospectus and the separate
document result in unnecessary duplication? If so, how should we
address this duplication, which arises from the existing requirement
that the table be included in the prospectus along with other
information currently required by Item 8 and the proposed requirement
that all information about breakpoints be adjacent to the table? If we
do not require the information about breakpoints required by proposed
Items 8(a)(2)-(5) to be adjacent to the table, how should we address
the Task Force recommendation that we require a mutual fund to provide
critical data regarding pricing methods, breakpoint schedules, and
linkage rules in a prominent and clear format? Should we require all
information required by Item 8 to be in the prospectus? Should we
permit all information required by Item 8 to be in the separate
purchase and redemption document?
[sbull] Should we continue to permit the separate purchase and
redemption document? Does this document facilitate investor
understanding of the information it contains? We note that, in a recent
release, we proposed to amend Item 7 to require new disclosure
regarding frequent purchases and redemptions to be included in the
prospectus and not a separate purchase and redemption document.\34\ To
what extent do funds currently use the separate purchase and redemption
document? If we should continue to permit this document, what
information
[[Page 74738]]
should it be permitted to include? Are there other means for
effectively communicating purchase and redemption information to
investors?
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\34\ Investment Company Act Release No. 26287 (Dec. 11, 2003).
---------------------------------------------------------------------------
F. Compliance Date
If we adopt the proposed disclosure requirements, we expect to
require all new registration statements, and all post-effective
amendments that are either annual updates to effective registration
statements or that add a new series, filed on or after the effective
date of the amendments to comply with the proposed amendments. The
Commission requests comment on this proposed compliance date.
III. General Request for Comments
The Commission requests comment on the amendments proposed in this
release, whether any further changes to our forms are necessary or
appropriate to implement the objectives of our proposed amendments, and
on other matters that might have an effect on the proposals contained
in this release.
IV. Paperwork Reduction Act
Certain provisions of the proposed amendments contain ``collection
of information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (44 U.S.C. 3501, et seq.), and the Commission is
submitting the proposed collection of information to the Office of
Management and Budget (``OMB'') for review in accordance with 44 U.S.C.
3507(d) and 5 CFR 1320.11. The title for the collection of information
is: ``Form N-1A under the Investment Company Act of 1940 and Securities
Act of 1933, Registration Statement of Open-End Management Investment
Companies.'' An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a currently valid OMB control number.
Form N-1A (OMB Control No. 3235-0307) was adopted pursuant to
section 8(a) of the Investment Company Act (15 U.S.C. 80a-8) and
section 5 of the Securities Act (15 U.S.C. 77e). We are proposing
amendments to Form N-1A to require a mutual fund to describe briefly in
its prospectus any arrangements that result in breakpoints in sales
loads, including a summary of shareholder eligibility requirements. In
addition, we are proposing to require a mutual fund to describe in its
prospectus the methods used to value accounts in order to determine
whether a shareholder has met sales load breakpoints. We are also
proposing to require a mutual fund to state in its prospectus, if
applicable, that in order to obtain a breakpoint discount, it may be
necessary for a shareholder to provide information and records, such as
account statements, to a mutual fund or financial intermediary. Our
proposals would also require a mutual fund to state in its prospectus
whether it makes available on or through its Web site, and in a clear
and prominent format, information regarding its sales loads and
breakpoints. In addition, our proposals would require a mutual fund to
provide prospectus disclosure regarding sales loads and breakpoints
adjacent to the table of sales loads and breakpoints, and to present
the information in a clear, concise, and understandable manner. This
enhanced disclosure is intended to assist investors in understanding
the breakpoint opportunities available to them, and to alert investors
to the information that they may need to provide to funds and broker-
dealers to take full advantage of all available breakpoint discounts.
Form N-1A, including the proposed amendments, contains collection
of information requirements. The likely respondents to this information
collection are open-end funds registering with the Commission.
Compliance with the disclosure requirements of Form N-1A is mandatory.
Responses to the disclosure requirements are not confidential.
The current hour burden for preparing an initial Form N-1A filing
is 809 hours per portfolio. The current annual hour burden for
preparing post-effective amendments of Form N-1A is 101 hours per
portfolio. The Commission estimates that, on an annual basis,
registrants file initial registration statements on Form N-1A covering
483 portfolios, and file post-effective amendments on Form N-1A
covering 6,542 portfolios. Additional burdens of 6,524 hours for the
preparation and filing of initial registration statements and 49,065
hours for the filing of post-effective amendments are expected to
result from the Commission's recent proposed rules relating to ``fund
of funds'' arrangements, and the recent proposed rule relating to
frequent purchases and redemptions of fund shares and selective
disclosure of portfolio holdings.\35\ Thus, the Commission estimates
that the current total annual hour burden for the preparation and
filing of Form N-1A is 1,107,078 hours.\36\
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\35\ See Investment Company Act Release No. 26198 (Oct. 2, 2003)
(68 FR 58226 (Oct. 8, 2003)); Investment Company Act Release No.
26287 (Dec. 11, 2003).
\36\ This estimate is based on the following calculation: (809
hours x 483 portfolios) + (101 hours x 6,542 portfolios) = 1,051,489
hours. An additional annual hour burden of 24,591 hours (1,694 hours
for initial registration statements and 22,897 hours for post-
effective amendments) resulting from the proposed rules described in
the fund of funds proposing release, and an additional annual hour
burden of 30,998 hours (4,830 hours for initial registration
statements and 26,168 hours for post-effective amendments) resulting
from the proposed rule relating to market timing and selective
disclosure, yield a total annual hour burden of 1,107,078 hours.
---------------------------------------------------------------------------
We estimate that the proposed amendments would increase the hour
burden per portfolio per filing of an initial registration statement on
Form N-1A by 2 hours and would increase the hour burden per portfolio
per filing of a post-effective amendment to a registration statement on
Form N-1A by 1 hour. We also estimate that 30% of mutual fund
portfolios would be affected by the proposed amendments.\37\ The
additional incremental hour burden resulting from the proposed
amendments would be 2,252 hours (2 hours for initial registration
statements x 483 portfolios x 30%) + (1 hour per post-effective
amendment x 6,542 portfolios x 30%). Thus, if the proposed amendments
to Form N-1A are adopted, the total annual hour burden for all funds
for preparation and filing of initial registration statements and post-
effective amendments to Form N-1A would be 1,109,330 hours (2,252 hours
+ 1,107,078 hours).
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\37\ This estimate is based on information regarding the number
of mutual fund portfolios with one or more classes of shares that
have front-end sales loads, derived by the staff from Commission
filings and third-party information sources.
---------------------------------------------------------------------------
Request for Comments
We request your comments on the accuracy of our estimates. Pursuant
to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments to: (i)
Evaluate whether the proposed collection of information is necessary
for the proper performance of the functions of the agency, including
whether the information will have practical utility; (ii) evaluate the
accuracy of the Commission's estimate of burden of the proposed
collection of information; (iii) determine whether there are ways to
enhance the quality, utility, and clarity of the information to be
collected; and (iv) evaluate whether there are ways to minimize the
burden of the collection of information on those who are to respond,
including through the use of automated collection techniques or other
forms of information technology.
Persons submitting comments on the collection of information
requirements should direct the comments to the Office of Management and
Budget, Attention: Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Room 10102,
New Executive
[[Page 74739]]
Office Building, Washington, DC 20503, and should send a copy to
Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450
5th Street, NW., Washington, DC 20549-0609, with reference to File No.
S7-28-03. OMB is required to make a decision concerning the collection
of information between 30 and 60 days after publication of this
release. Consequently, a comment to OMB is best assured of having its
full effect if OMB receives it within 30 days after publication of this
Release.
V. Cost/Benefit Analysis
The Commission is sensitive to the costs and benefits imposed by
its rules. Our proposals would require mutual funds to provide enhanced
disclosure regarding breakpoint discounts on front-end sales loads.
Specifically, the proposals would:
[sbull] Require a mutual fund to describe briefly in its prospectus
any arrangements that result in breakpoints in sales loads, including a
summary of shareholder eligibility requirements;
[sbull] Require a mutual fund to describe in its prospectus the
methods used to value accounts in order to determine whether a
shareholder has met sales load breakpoints;
[sbull] Require a mutual fund to state in its prospectus, if
applicable, that in order to obtain a breakpoint discount, it may be
necessary for a shareholder to provide information and records, such as
account statements, to a mutual fund or financial intermediary;
[sbull] Require a mutual fund to state in its prospectus whether it
makes available on or through its Web site, and in a clear and
prominent format, information regarding its sales loads and
breakpoints; and
[sbull] Require a mutual fund to provide prospectus disclosure
regarding sales loads and breakpoints adjacent to the table of sales
loads and breakpoints, and to present the information in a clear,
concise, and understandable manner.
A. Benefits
The proposed form amendments are expected to benefit mutual fund
investors by providing them with enhanced disclosure about breakpoint
discounts on front-end sales loads. This enhanced disclosure is
intended to assist investors in understanding the breakpoint
opportunities available to them, and to alert investors to the
information that they may need to provide to funds and financial
intermediaries to take full advantage of all available breakpoint
discounts. An examination sweep by the Commission, the NASD, and the
NYSE between November 2002 and January 2003 found that in 32% of the
transactions reviewed that appeared to be eligible for a reduced sales
charge, investors did not receive a breakpoint discount or appeared to
have incurred other unnecessary sales charges.\38\ The average discount
not provided was $364 per transaction.\39\ We anticipate that our
proposals, if adopted, may result in a decrease in the number of
transactions in which investors do not receive breakpoint discounts to
which they are entitled.
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\38\ Joint Report, supra note 8, at 14-15.
\39\ Id. at 16.
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Specifically, we believe that the proposed amendments relating to
disclosure of arrangements that result in breakpoints in sales loads
would benefit investors by requiring that information regarding
breakpoints, which can significantly affect the cost of a shareholder's
investment, be included in the prospectus that is delivered to all
shareholders. In addition, the proposed requirement that this
prospectus disclosure include a summary of the eligibility requirements
for sales load breakpoints may assist investors in better understanding
the ways in which they may take full advantage of breakpoint
opportunities.
The proposed amendments relating to disclosure of methods used to
value accounts in determining breakpoint eligibility also may benefit
investors by assisting them and their financial intermediaries in more
effectively determining investors' eligibility. Also, the proposed
disclosure relating to information and records necessary to aggregate
holdings may benefit investors because prospectus disclosure regarding
the information or records that it may be necessary for a shareholder
to provide may facilitate the correct application of breakpoint
discounts in transactions in which shares are aggregated to meet sales
load breakpoints. In addition, the proposed disclosure may heighten
investors' awareness of the importance of maintaining records when
breakpoints are determined using the historical cost method.
The proposed amendments relating to disclosure regarding the
availability of sales load and breakpoint information on a mutual
fund's Web site may benefit investors by encouraging mutual funds to
provide accessible Web site disclosure regarding the availability of
breakpoint discounts to complement the proposed prospectus disclosure
regarding breakpoints. In addition, the proposed amendments relating to
the presentation of disclosure regarding breakpoints may benefit
investors by encouraging mutual funds to present information regarding
sales loads and breakpoints in an integrated manner that will be easily
understood by investors.
We seek comment on the benefits of the proposed amendments (and any
alternatives suggested by commenters) as well as any data quantifying
those benefits.
B. Costs
The proposals would impose new requirements on mutual funds that
have front-end sales loads to provide several new prospectus
disclosures regarding breakpoint discounts on these front-end sales
loads. We estimate that complying with the proposed new disclosures
would entail a relatively small financial burden. The information
regarding breakpoint discounts should be available to management and
the board of directors of a fund, and mutual funds already disclose
much of the breakpoint disclosure that would be required by the
proposed amendments in their registration statements (although they are
not required to include this information in their prospectuses).
Therefore, we expect that the cost of compiling and reporting this
information should be limited.
Specifically, we are proposing amendments to Form N-1A to require a
mutual fund to describe briefly in its prospectus any arrangements that
result in breakpoints in sales loads, including a summary of
shareholder eligibility requirements. In addition, we are proposing to
require a mutual fund to describe in its prospectus the methods used to
value accounts in order to determine whether a shareholder has met
sales load breakpoints. We are also proposing to require a mutual fund
to state in its prospectus, if applicable, that in order to obtain a
breakpoint discount, it may be necessary for a shareholder to provide
information and records, such as account statements, to a mutual fund
or financial intermediary. Our proposals would also require a mutual
fund to state in its prospectus whether it makes available on or
through its Web site, and in a clear and prominent format, information
regarding its sales loads and breakpoints.
The costs of adding these new prospectus disclosures may include
both internal costs (for attorneys and other non-legal staff of a fund,
such as computer programmers, to prepare and review the required
disclosure) and external costs (for printing and typesetting of the
disclosure). For purposes of the Paperwork Reduction Act, we have
estimated that the proposed new disclosure requirements would add 2,252
hours to the total
[[Page 74740]]
annual burden of completing Form N-1A.\40\ We estimate that this
additional burden would equal total internal costs of $101,903
annually, or approximately $48 per fund portfolio.\41\
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\40\ This estimate is based on the following calculation: (2
hours per initial registration statement x 483 portfolios x 30% of
portfolios) + (1 hour per post-effective amendment x 6,542
portfolios x 30% of portfolios) = 2,252 hours.
\41\ These figures are based on a Commission estimate that
approximately 781 registered investment companies, with 2,108
portfolios, would file initial registration statements or post-
effective amendments annually that would be subject to the proposed
disclosure requirements, and an estimated hourly wage rate of
$45.25. The estimate of the number of investment companies is based
on data derived from the Commission's EDGAR filing system. The
estimated wage figure is based on published compensation for
compliance attorneys outside New York City ($37.60) and programmers
($29.44), and the estimate that attorneys and programmers would
divide time equally on compliance with the proposed disclosure
requirements, yielding a weighted wage rate of $33.52 (($37.60 x
.50) + (29.44 x .50)) = $33.52). See Securities Industry
Association, Report on Management & Professional Earnings in the
Securities Industry 2002 (Sept. 2002). This weighted wage rate was
then adjusted upward by 35% for overhead, reflecting the costs of
supervision, space, and administrative support, to obtain the total
per hour internal cost of $45.25 (33.52 x 1.35) = $45.25.
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We expect the external costs of providing the new prospectus
disclosure will be limited, because the amendments relating to
disclosure of arrangements that result in breakpoints in sales loads
require the description of the arrangements to be brief. We expect that
the proposed disclosure would not add significant length to the
prospectus. We request comment on the nature and magnitude of our
estimates of the costs of the additional disclosure that would be
required if our proposals were adopted.
C. Request for Comments
We request comments on all aspects of this cost-benefit analysis,
including identification of any additional costs or benefits of, or
suggested alternatives to, the proposed amendments. Commenters are
requested to provide empirical data and other factual support for their
views to the extent possible.
VI. Consideration of Effects on Efficiency, Competition, and Capital
Formation
Section 2(c) of the Investment Company Act (15 U.S.C. 80a-2(c)) and
section 2(b) of the Securities Act (15 U.S.C. 77(b)) require the
Commission, when engaging in rulemaking that requires it to consider or
determine whether an action is necessary or appropriate in the public
interest, to consider, in addition to the protection of investors,
whether the action will promote efficiency, competition, and capital
formation.
The proposed amendments are intended to provide greater
transparency for mutual fund shareholders regarding breakpoint
discounts on front-end sales loads. These changes may improve
efficiency. The enhanced disclosure requirements are intended to assist
investors in understanding the breakpoint opportunities available to
them, and to alert investors to the information that they may need to
provide to funds and financial intermediaries to take full advantage of
all available breakpoint discounts, which could promote more efficient
allocation of investments among mutual funds. The proposed amendments
may also improve competition, as enhanced disclosure regarding the ways
in which investors can aggregate holdings to meet sales load
breakpoints may prompt investors to seek out mutual funds that offer
the most favorable breakpoint schedules and aggregation rules for their
particular circumstances, and may prompt funds to compete for the
business of these better informed investors. Finally, the effects of
the proposed amendments on capital formation are unclear.
Although, as noted above, we believe that the proposed amendments
would benefit investors, the magnitude of the effect of the proposed
amendments on efficiency, competition, and capital formation, and the
extent to which they would be offset by the costs of the proposals, are
difficult to quantify. We note that, with respect to our proposals, in
many cases mutual funds currently provide disclosure in their
registration statements regarding breakpoint discounts on front-end
sales loads.
We request comment on whether the proposed amendments, if adopted,
would promote efficiency, competition, and capital formation.
Commenters are requested to provide empirical data and other factual
support for their views if possible.
VII. Initial Regulatory Flexibility Analysis
This Initial Regulatory Flexibility Analysis has been prepared in
accordance with 5 U.S.C. 603, and relates to the Commission's proposed
form amendments under the Securities Act and the Investment Company Act
to require mutual funds to provide enhanced disclosure about breakpoint
discounts on front-end sales loads. Specifically, the proposals would:
[sbull] Require a mutual fund to describe briefly in its prospectus
any arrangements that result in breakpoints in sales loads, including a
summary of shareholder eligibility requirements;
[sbull] Require a mutual fund to describe in its prospectus the
methods used to value accounts in order to determine whether a
shareholder has met sales load breakpoints;
[sbull] Require a mutual fund to state in its prospectus, if
applicable, that in order to obtain a breakpoint discount, it may be
necessary for a shareholder to provide information and records, such as
account statements, to a mutual fund or financial intermediary;
[sbull] Require a mutual fund to state in its prospectus whether it
makes available on or through its Web site, and in a clear and
prominent format, information regarding its sales loads and
breakpoints; and
[sbull] Require a mutual fund to provide prospectus disclosure
regarding sales loads and breakpoints adjacent to the table of sales
loads and breakpoints, and to present the information in a clear,
concise, and understandable manner.
A. Reasons for, and Objectives of, Proposed Amendments
The Commission is proposing rules to address the concerns that have
been identified regarding the extent to which mutual fund investors
receive breakpoint discounts. An examination sweep by the Commission,
the NASD, and the NYSE between November 2002 and January 2003 found
that in 32% of the transactions reviewed that appeared to be eligible
for a reduced sales charge, investors did not receive a breakpoint
discount or appeared to have incurred other unnecessary sales
charges.\42\ The enhanced disclosure that would be required by the
Commission's proposed rules is intended to assist investors in
understanding the breakpoint opportunities available to them, and to
alert investors to the information that they may need to provide to
funds and broker-dealers to take full advantage of all available
breakpoint discounts.
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\42\ Joint Report, supra note 8, at 14-15.
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B. Legal Basis
The Commission is proposing amendments to Form N-1A pursuant to
authority set forth in sections 5, 6, 7, 10, and 19(a) of the
Securities Act (15 U.S.C. 77e, 77f, 77g, 77j, and 77s(a)), and sections
8, 24(a), 30, and 38 of the Investment Company Act (15 U.S.C. 80a-8,
80a-24(a), 80a-29, and 80a-37).
C. Small Entities Subject to the Rule
For purposes of the Regulatory Flexibility Act, an investment
company is a small entity if it, together with other investment
companies in the same
[[Page 74741]]
group of related investment companies, has net assets of $50 million or
less as of the end of its most recent fiscal year.\43\ Approximately
145 investment companies registered on Form N-1A meet this
definition.\44\
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\43\ 17 CFR 270.0-10.
\44\ This estiamte is based on analysis by the Division of
Investment Management staff of information from databases compiled
by third-part information providers, including Morningstar, Inc.,
and Lipper.
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D. Reporting, Recordkeeping, and Other Compliance Requirements
The proposed amendments would require mutual funds that have front-
end sales loads to provide several new prospectus disclosures regarding
breakpoint discounts on these sales loads, as described above.
The Commission estimates some one-time formatting and ongoing costs
and burdens that would be imposed on all mutual funds, including funds
that are small entities. We note, however, that in many cases funds
currently provide disclosure in their registration statements regarding
breakpoint discounts. For purposes of the Paperwork Reduction Act, we
have estimated that the proposed new disclosure requirements would
increase the hour burden per portfolio per filing of an initial
registration statement on Form N-1A by 2 hours and would increase the
hour burden per portfolio per filing of a post-effective amendment to a
registration statement by 1 hour. We estimate that this additional
burden would increase total internal costs of filing an initial
registration statement by $91 per affected mutual fund portfolio
annually, and would increase total internal costs of filing a post-
effective amendment by $45 per affected mutual fund portfolio
annually.\45\
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\45\ These figures are based on an estimated hourly wage rate of
$45.25. See supra note 41.
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We expect the external costs of providing the new prospectus
disclosure will be limited, because some funds currently provide some
of this information in their registration statements, and we do not
expect that the disclosure will add significant length to the
prospectus. The Commission solicits comment on the effect the proposed
amendments would have on small entities.
E. Duplicative, Overlapping or Conflicting Federal Rules
There are no rules that duplicate, overlap, or conflict with the
proposed amendments.
F. Significant Alternatives
The Regulatory Flexibility Act directs us to consider significant
alternatives that would accomplish our stated objective, while
minimizing any significant adverse impact on small issuers. In
connection with the proposed amendments, the Commission considered the
following alternatives: (i) The establishment of differing compliance
or reporting requirements or timetables that take into account the
resources available to small entities; (ii) the clarification,
consolidation, or simplification of compliance and reporting
requirements under the proposed amendments for small entities; (iii)
the use of performance rather than design standards; and (iv) an
exemption from coverage of the proposed amendments, or any part
thereof, for small entities.
The Commission believes at the present time that special compliance
or reporting requirements for small entities, or an exemption from
coverage for small entities, would not be appropriate or consistent
with investor protection. The proposed disclosure amendments would
provide shareholders with greater transparency of breakpoint discounts
on front-end sales loads. Different disclosure requirements for mutual
funds that are small entities may create the risk that the shareholders
in these funds would not be as able as investors in larger funds to
assess the terms upon which breakpoint discounts in sales loads are
offered. We believe it is important for the disclosure that would be
required by the proposed amendments to be provided to shareholders by
all mutual funds, not just funds that are not considered small
entities.
We have endeavored through the proposed amendments to minimize the
regulatory burden on all funds, including small entities, while meeting
our regulatory objectives. Small entities should benefit from the
Commission's reasoned approach to the proposed amendments to the same
degree as other investment companies. Further clarification,
consolidation, or simplification of the proposals for funds that are
small entities would be inconsistent with the Commission's concern for
investor protection. Finally, we do not consider using performance
rather than design standards to be consistent with our statutory
mandate of investor protection in the present context.
G. Solicitation of Comments
The Commission encourages the submission of written comments with
respect to any aspect of this analysis. Comment is specifically
requested on the number of small entities that would be affected by the
proposed amendments and the likely impact of the proposals on small
entities. Commenters are asked to describe the nature of any impact and
provide empirical data supporting the extent of the impact. These
comments will be considered in the preparation of the Final Regulatory
Flexibility Analysis, if the proposed amendments are adopted, and will
be placed in the same public file as comments on the proposed
amendments themselves. Comments should be submitted in triplicate to
Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450
Fifth Street, NW., Washington, DC 20549-0609. Comments also may be
submitted electronically at the following E-mail address: rule-
comments@sec.gov. All comment letters should refer to File No. S7-28-
03; this file number should be included on the subject line if E-mail
is used. All comments received will be posted on the Commission's
Internet Web site (http://www.sec.gov) and made available for public
inspection and copying in the Commission's Public Reference Room, 450
Fifth Street, NW., Washington, DC 20549-0102.\46\
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\46\ We do not edit personal identifying information, such as
names or electronic mail addresses, from electronic submissions. You
should submit only information that you wish to make available
publicly.
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VIII. Consideration of Impact on the Economy
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996,\47\ a rule is ``major'' if it results or is likely to
result in:
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\47\ Pub. L. 104-21, Title II, 110 Stat. 857 (1996).
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[sbull] An annual effect on the economy of $100 million or more;
[sbull] A major increase in costs or prices for consumers or
individual industries; or
[sbull] Significant adverse effects on competition, investment, or
innovation.
The Commission requests comment on the potential impact of the proposed
amendments on the U.S. economy on an annual basis. Commenters are
requested to provide empirical data to support their views.
IX. Statutory Authority
The Commission is proposing amendments to Form N-1A pursuant to
authority set forth in sections 5, 6, 7, 10, and 19(a) of the
Securities Act (15 U.S.C. 77e, 77f, 77g, 77j, and 77s(a)) and sections
8, 24(a), 30, and 38 of the Investment Company Act (15 U.S.C. 80a-8,
80a-24(a), 80a-29, and 80a-37).
[[Page 74742]]
List of Subjects
17 CFR Part 239
Reporting and recordkeeping requirements, Securities.
17 CFR Part 274
Investment companies, Reporting and recordkeeping requirements,
Securities.
Text of Proposed Form Amendments
For the reasons set out in the preamble, the Commission proposes to
amend title 17, chapter II of the Code of Federal Regulations as
follows:
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
1. The authority citation for part 239 continues to read in part as
follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77sss, 78c,
78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d), 79e, 79f, 79g, 79j,
79l, 79m, 79n, 79q, 79t, 80a-8, 80a-24, 80a-26, 80a-29, 80a-30, and
80a-37, unless otherwise noted.
* * * * *
PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940
2. The authority citation for part 274 continues to read in part as
follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m,
78n, 78o(d), 80a-8, 80a-24, 80a-26, and 80a-29, unless otherwise
noted.
* * * * *
3. Form N-1A (referenced in Sec. Sec. 239.15A and 274.11A) is
amended by:
a. Replacing the final sentence of General Instruction C.3.(a) with
two new sentences;
b. Revising the introductory language to Item 7(f);
c. Revising Item 8(a)(2);
d. Adding new Instructions to Items 8(a)(1) and (2);
e. Adding new Items 8(a)(3), (4), and (5);
f. Adding a new Instruction to Item 8(a); and
g. Revising Item 18(a).
These additions and revisions read as follows:
Note: The text of Form N-1A does not, and these amendments will
not, appear in the Code of Federal Regulations.
Form N-1A
* * * * *
General Instructions
* * * * *
C. Preparation of the Registration Statement
* * * * *
3. Additional Matters:
(a) * * * Disclose the information required by Item 8 (Distribution
Arrangements) in one place in the prospectus, except that the
information required by paragraphs 8(a)(2), (3), (4), and (5) may be
disclosed in a separate purchase and redemption document pursuant to
Item 7(f), provided that all the information required by paragraphs
8(a)(2), (3), (4), and (5) is included in the separate document. If the
information required by paragraphs 8(a)(2), (3), (4), and (5) is
disclosed in a separate purchase and redemption document, the table
required by paragraph 8(a)(1) must be included in the separate purchase
and redemption document, as well as the prospectus, in order to comply
with the Instruction to Item 8(a), which states that all information
required by paragraph 8(a) must be adjacent to the table required by
paragraph 8(a)(1).
* * * * *
Item 7. Shareholder Information
* * * * *
(f) Separate Disclosure Document. A Fund may omit from the
prospectus information about purchase and redemption procedures
required by Items 7(b)-(d) and 8(a)(2)-(5) and provide it in a separate
document if the Fund:
* * * * *
Item 8. Distribution Arrangements
(a) * * *
(2) Unless disclosed in response to paragraph (a)(1), briefly
describe any arrangements that result in breakpoints in, or elimination
of, sales loads (e.g., letters of intent, accumulation plans, dividend
reinvestment plans, withdrawal plans, exchange privileges, employee
benefit plans, redemption reinvestment plans, and waivers for
particular classes of investors). Identify each class of individuals or
transactions to which the arrangements apply and state each different
breakpoint as a percentage of both the offering price and the net
amount invested. If applicable, state that additional information
concerning sales load breakpoints is available in the Fund's SAI.
Instructions.
1. The description, pursuant to paragraph (a)(1) or (a)(2) of this
Item 8, of arrangements that result in breakpoints in, or elimination
of, sales loads should include a brief summary of shareholder
eligibility requirements, including a description or list of the types
of accounts (e.g., retirement accounts, accounts held at other
financial intermediaries), account holders (e.g., immediate family
members, family trust accounts, solely-controlled business accounts),
and fund holdings (e.g., funds held within the same fund complex) that
may be aggregated for purposes of determining eligibility for sales
load breakpoints.
2. The description pursuant to paragraph (a)(2) of this Item 8 need
not contain any information required by Items 13(d) and 18(b).
(3) Describe, if applicable, the methods used to value accounts in
order to determine whether a shareholder has met sales load
breakpoints, including the circumstances in which and the classes of
individuals to whom each method applies. Methods that should be
described, if applicable, include historical cost, net amount invested,
and offering price.
(4)(i) State, if applicable, that, in order to obtain a breakpoint
discount, it may be necessary at the time of purchase for a shareholder
to inform the Fund or his or her financial intermediary of the
existence of other accounts in which there are holdings eligible to be
aggregated to meet sales load breakpoints. Describe any information or
records, such as account statements, that it may be necessary for a
shareholder to provide to the Fund or his or her financial intermediary
in order to verify his or her eligibility for a breakpoint discount.
This description must include, if applicable:
(A) Information or records regarding shares of the Fund or other
funds held in all accounts (e.g., retirement accounts) of the
shareholder at the financial intermediary;
(B) Information or records regarding shares of the Fund or other
funds held in any account of the shareholder at another financial
intermediary; and
(C) Information or records regarding shares of the Fund or other
funds held at any financial intermediary by related parties of the
shareholder, such as members of the same family or household.
(ii) If the Fund permits eligibility for breakpoints to be
determined based on historical cost, state that a shareholder should
retain any records necessary to substantiate historical costs because
the Fund, its transfer agent, and financial intermediaries may not
maintain this information.
(5) State whether the Fund makes available free of charge, on or
through the Fund's website at a specified Internet address, and in a
clear and prominent format, the information required by paragraphs
(a)(1) through (a)(4) and Item 18(a), including whether the website
includes hyperlinks that facilitate access to the information. If the
Fund does not make the information
[[Page 74743]]
required by paragraphs (a)(1) through (a)(4) and Item 18(a) available
in this manner, disclose the reasons why it does not do so (including,
where applicable, that the Fund does not have an Internet website).
Instruction. All information required by paragraph (a) of this Item
8 must be adjacent to the table required by paragraph (a)(1) of this
Item 8; must be presented in a clear, concise, and understandable
manner; and must include tables, schedules, and charts as expressly
required by paragraph (a)(1) of this Item 8 or where doing so would
facilitate understanding.
* * * * *
Item 18. Purchase, Redemption, and Pricing of Shares
(a) Purchase of Shares. To the extent that the prospectus does not
do so, describe how the Fund's shares are offered to the public.
Include any special purchase plans or methods not described in the
prospectus or elsewhere in the SAI, including letters of intent,
accumulation plans, dividend reinvestment plans, withdrawal plans,
exchange privileges, employee benefit plans, redemption reinvestment
plans, and waivers for particular classes of shareholders.
* * * * *
By the Commission.
Dated: December 17, 2003.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-31545 Filed 12-23-03; 8:45 am]
BILLING CODE 8010-01-P