March 8, 1989
TO: BOARD OF GOVERNORS NO. 16-89
STATE SECURITIES MEMBERS NO. 9-89
RE: PROPOSED AMENDMENT OF CALIFORNIA EXPENSE LIMITATION RULE
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As you know, the Institute has been working for several
years to eliminate expense limitations in all states. In 1978,
at the Institute's urging, the North American Securities
Administrators Association (NASAA) and the Midwest Securities
Commissioners Association adopted a resolution encouraging states
to repeal their expense limitations. At that time, there were
twenty-eight states with either formal or informal expense
limitations in effect. In 1984, again at the Institute's urging,
NASAA adopted a similar resolution recommending the states to
suspend or repeal their expense limitations. As a result of the
Institute's efforts, no state, except California, continues to
enforce a traditional expense limitation.
The Institute has met with the California Department of
Corporations many times to urge the Department to repeal their
expense limitation. In 1985, the Commissioner of the Department
agreed to grant liberal waivers from the limitation until such
time as his staff had an opportunity to study the continuing need
for the limitation. Since that time, funds have been required to
submit an annual expense report to the Department. Based on the
information collected during the last three years, the Department
has proposed to amend their expense limitation. Attached is a
copy of the proposed Notice to amend the expense limitation rule.
The Notice proposes to increase the annual expense
limitation percentage caps to two and one-half percent of the
first $30 million of the average net assets of the fund, two
percent of the next $70 million and one and one-half percent of
the remaining average net assets. Currently, the cap on annual
expenses is two percent of the first $10 million of the average
net assets, one and one-half percent of the next $20 million and
one percent of the remaining net assets.
The Notice also proposes to exclude a portion of annual
distribution plan expenses (12b-1 fees) for purposes of
calculating the expense limitation. The Notice provides that a
fund may exclude all 12b-1 fees up to one percent of its average
net assets if sales charges are not collected at the time of the
sale of shares. In addition, if the fund has a front-end load,
the fund may exclude part or all of the 12b-1 fee, depending on
the amount of the 12b-1 fee. This proposed amendment simply
formalizes the position the staff has taken in the past regarding
12b-1 fees.
In addition, the Notice proposes to exclude from the
aggregate annual expenses the excess custodian costs attributable
to investments in foreign securities compared to custodian costs
incurred if the investments had been in domestic securities.
Finally, only funds that must reduce or rebate advisory or
management fees or that have received a waiver from the expense
limitation will be required to file an annual expense limitation
report. Currently, all funds registered in California must file
an annual expense limitation report.
Comments are due by May 17, 1989. Please provide your
comments to the Institute by April 28, 1989 so that an
appropriate response to the proposal can be prepared.
Natalie Shirley
Associate General Counsel
Attachment