March 1, 1991
TO: STATE LIAISON COMMITTEE NO. 5-91
CONTRACTUAL PLANS COMMITTEE NO. 2-91
RE: INSTITUTE COMMENTS ON NEW MEXICO REVISED PROPOSED RULES
__________________________________________________________
As we previously informed you, for the past several months
the New Mexico Securities Division has undertaken the task of
revising its administrative rules to "clarify existing policy and
to address changing market conditions." The original version of
the proposed rules was issued last fall and the Institute
submitted an extensive comment letter on the proposed rules. The
Division has since issued revised proposed rules which
incorporated some, but not all, of the Institute’s original
recommendations. (See Memoranda to State Liaison Committee No.
27-90, dated November 8, 1990 and Contractual Plan Committee Nos.
12-90, dated October 26, 1990 and 1-91, dated January 24, 1991.)
In its comment letter on the revised proposed rules, the
Institute objected to the provisions affecting contractual plans
and once again sought clarification of the definition of "sales
charge or load" as follows.
Provisions Affecting Contractual Plans
The revised proposed rules state that a contractual plan
cannot register its securities, or claim the blue chip exemption
unless certain requirements are met. The Institute disagreed
with the proposal to require each plan investor to read and
execute a "load disclosure document" in that such disclosure is
already required to be prominently disclosed in each contractual
plan’s prospectus and in other forms required to be delivered to
shareholders.
The Institute further objected to the proposed requirement
that all proceeds of the contractual plan investment be placed in
portfolios dedicated exclusively to contractual investors and
that the investment objective of the portfolios be long term
capital growth. The letter states that "these requirements would
transform what might be a reasonable investment strategy into a
regulatory straightjacket which would deprive contractual plan
investors of the right to make choices that are available to all
other mutual fund investors." We also question the Division’s
purpose in restricting the investment objective of a contractual
plan and note that while long term capital growth in many cases
is a suitable investment objective, it is not the only suitable
investment objective for a long term investor.
The letter further states that the provision requiring a
refund of all sales loads in excess of 15% of payments is
unnecessary for the protection of investors and would disrupt the
careful balancing of interests provided in Section 27 of the
Investment Company Act of 1940.
Limitation on Sales Charges or Loads
The Institute once again requested the Division to clarify
the definition of "sales load or charge" so that asset-based
sales charges under Rule 12b-1 of the 1940 Act are specficially
excluded. As written, 12b-1 fees could be within the proposed
rules’ definition of "sales load or charge" or construed as
"compensation to distributors, brokers, dealers and agents".
Since it would be impracticable for funds to comply with the
proposed rules’ definition of "sales load or charges", we urged
the Division to clarify this point.
* * *
A copy of the Institute’s comment letter is attached. We
will keep you advised of further developments.
Patricia Louie
Assistant General Counsel
Attachment (without enclosures)