June 4, 1990
TO: BOARD OF GOVERNORS NO. 39-90
SEC RULES MEMBERS NO. 40-90
RULE 12b-1 AD HOC COMMITTEE
RE: INSTITUTE COMMENT LETTER ON NASD 12b-1 PROPOSAL
________________________________________________________
In response to the recent proposal by the NASD to extend
its sales load regulation to asset-based distribution fees, the
Institute has filed the attached comment letter. (See
Institute memorandum to Board of Governors No. 27-90 and SEC
Rules Members No. 30-90, dated April 18, 1990.) The letter
notes the strong support for the proposal by the Institute's ad
hoc committee on Rule 12b-1, while urging the adoption of
certain clarifications.
Specifically, the following modifications to the proposal
were suggested:
1. Sales Occurring Prior to the Effective Date
The language of the proposed NASD rule does not discuss
the treatment of distribution expenses incurred in connection
with sales prior to the effective date of the rule, although
the introduction to the rule indicates that such prior expenses
could be recovered. To clarify this issue, the letter proposes
an addition to the rule that would expressly permit the payment
of distribution expenses incurred in connection with prior
sales, to the extent authorized by 12b-1 plans, provided that
these payments do not exceed the aggregate cap that would have
existed if the rule were applied retroactively.
2. Treatment of Interest
Although the proposed rule permits interest charges to be
added to the aggregate cap applicable to sales after the
effective date of the rule, it does not permit interest to be
added to deferred amounts attributable to sales prior to the
effective date. The comment letter opposes this distinction
between old and new sales and urges an amendment permitting
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interest charges on both amounts at the rate of prime plus 1
percent.
3. The Definition of Sales Charges
The NASD proposal suggests that members may be required to
ascertain whether any part of an investment company's
management fee is used for sales or sales promotion expenses.
The comment letter urges a clarification that would permit NASD
members to rely on the sales-related fees and charges disclosed
in an investment company's prospectus to determine the amount
of sales charges paid by such company.
4. Accommodation of Alternatives
Because the NASD proposal does not provide investment
companies with the flexibility to adopt sales charge structures
which do not comply with all of the terms of proposed rule, the
letter recommends an amendment to the rule that would establish
an NASD procedure to permit approved alternatives. The
standard proposed for reviewing a nonconforming asset-based
sales charge structure would be a finding of economically
equivalent protection to that provided by the rule.
5. The Definition of Service Fees
The NASD proposal defines service fees not subject to the
maximum caps as payments for "personal, continuing service to
investors". The comment letter proposes the use of the term
"account maintenance fees" in lieu of "service fees", since
this phrase more accurately describes the purpose of the fees.
6. Use of No-Load Terminology
The NASD proposal would prohibit the use of no-load
terminology with respect to any investment company with a
deferred or asset-based sales charge. The letter urges an
exception to this prohibition if the combination of asset-based
sales charges and account maintenance fees does not exceed 25
basis points a year.
The comment letter also addresses other issues relating to
the NASD proposal, such as the treatment of exchanges and the
effective date of the rule. We will keep you informed of
developments.
Catherine L. Heron
Deputy General Counsel
Attachment