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April 18, 1990
TO: BOARD OF GOVERNORS NO. 27-90
SEC RULES MEMBERS NO. 30-90
RE: NASD PROPOSED RULE ON ASSET BASED SALES CHARGES
________________________________________________________
As you know, the SEC proposed substantial amendments to
Rule 12b-1 in June 1988. (See Institute memorandum to Board of
Governors No. 43-88, SEC Rules Members No. 35-88, Operations
Committee No. 20-88, Accounting/Treasurers Advisory Committee
No. 22-88, Marketing Committee No. 21-88, Sales Force Marketing
Committee No. 24-88 and Direct Marketing Committee No. 23-88
dated June 17, 1988.) In its comment letter on the proposed
amendments, the Institute suggested that the NASD propose a
rule governing the payment of 12b-1 fees pursuant to its
authority to regulate sales charges on mutual fund shares.
(See Institute memorandum to Board of Governors No. 59-88,
Members - One Per Complex No. 49-88 and SEC Rules Committee No.
52-88 dated September 21, 1988.)
The attached notice to NASD members proposes a rule that
would subject asset based sales charges to the NASD maximum
sales charge limits. The proposal is designed to achieve
approximate economic equivalence between the maximum permitted
front-end sales load and an asset based sales charge (possibly
combined with a front-end load and/or a contingent deferred
sales charge).
The proposed rule adopts a fund level rather than an
individual shareholder accounting approach. Since this
approach could cause certain long-term shareholders of a fund
to pay more than the economic equivalent of the maximum front-
end sales load, the NASD proposal indicates that this
possibility should be prominently disclosed in a fund's
prospectus.
Under the proposal, a cap of 6.25 percent of new gross
sales, plus interest thereon, would be imposed on funds which
pay a continuing "service fee" not in excess of 25 basis
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points. The cap would be 7.25 percent of new gross sales for
funds which do not pay a service fee. The recommended interest
rate is prime plus .25 percent. An annual cap of .75 percent
of net assets would also be imposed on any asset-based sales
charge imposed by a fund.
In the case of underwriters that have outstanding
liabilities from sales prior to the date of adoption of the
rule, such liabilities and any permissible new charges could be
amortized over time within the limit of the 75 basis point
maximum annual fee and any contingent deferred sales charges.
No interest charges would be permitted on liabilities incurred
in connection with sales prior to adoption of the proposal.
Once the maximum caps have been reached, the proposal
states that any contingent deferred sales charges would have to
be paid to the fund.
The proposal further states that an NASD member would be
prohibited from describing a fund with an asset based sales
charge or a contingent deferred sales charge as "no-load" or as
having "no sales charge".
The NASD has invited comments on the proposal from all
members and interested persons. Since comments must be filed
no later than May 31, 1990, I would appreciate receiving any
suggestions for inclusion in the Institute's letter of comment
by May 22nd.
We will keep you informed of developments.
Catherine L. Heron
Deputy General Counsel
Attachment