January 7, 1992
TO: SEC RULES COMMITTEE NO. 1-92
RE: OUTSTANDING ISSUES UNDER NASD ASSET-BASED SALES CHARGE
PROPOSAL AND RULE 12b-1
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As you know, the Institute recently filed a supplemental
submission with the Securities and Exchange Commission relating
to the NASD's proposal to regulate asset-based sales charges
under its Rules of Fair Practice ("NASD Proposal"). (See
Memorandum to SEC Rules Committee No. 77-91, dated December 23,
1991.) In the event that the SEC approves most, if not all, of
the NASD Proposal in the near future, there are several related
outstanding issues that require attention. As further described
below, these include both issues under the NASD Proposal and
questions about the status of Rule 12b-1. The Institute plans to
form an ad hoc task force to address these matters. In addition,
they will be discussed at the January 14 meeting of the SEC Rules
Committee.
Issues Under the NASD Proposal
In its May 10, 1991 comment letter to the SEC recommending
approval of the NASD Proposal (see Memorandum to SEC Rules
Members No. 30-91, dated May 14, 1991), the Institute supported
the NASD's recommendation that the proposed rule change become
effective one year after its approval by the SEC because, among
other things, this transition period would provide an opportunity
for the industry to work with the NASD to iron out any remaining
technical issues. The Institute suggested that this might be
accomplished through an NASD question-and-answer release.
Issues Regarding Rule 12b-1
Another area for consideration is whether any changes to
Rule 12b-1 are warranted in view of the SEC's expected approval
of the NASD Proposal. In this regard, we note that the SEC
proposed sweeping amendments to Rule 12b-1 in June 1988 that were
never adopted or withdrawn. (The Commission has indicated that
it is considering the comments received on the proposed
amendments as part of the ongoing 1940 Act study.)
As you may recall, the Institute supported certain aspects
of the 1988 proposed amendments and strongly opposed others.
Although several of the changes supported by the Institute are
addressed in the NASD Proposal, the Institute also favored
adoption of those amendments that would: make explicit that
compensation paid under Rule 12b-1 plans must be "within the
range of what would have been negotiated at arm's length" in
light of all the surrounding circumstances; clarify that, for
purposes of Rules 12b-1 and 17d-3, each separate series of
aseries fund should be treated as a separate fund; and provide
exemptive relief enabling funds with 12b-1 plans to enter into
joint arrangements for the distribution of their shares.
At the meeting on January 14, the Committee will discuss
whether to recommend these and/or other changes to Rule 12b-1.
For your convenience, copies of Rule 12b-1 as currently in effect
and as proposed to be amended are attached.
Miscellaneous
Another question to be considered is whether funds will be
required to amend their 12b-1 plans to comply with the NASD
Proposal and, if so, whether a shareholder vote is necessary.
Thus, an issue exists as to whether a request for industry-wide
relief would be appropriate in this regard, and/or whether there
are other areas where regulatory relief may be needed.
Formation of Ad Hoc Task Force
We plan to discuss these and related issues at the January
14 SEC Rules Committee meeting. In addition, as noted above, the
Institute plans to form an ad hoc task force to address
outstanding issues. A sign-up sheet will be circulated at the
meeting. If you would like to participate on the task force but
will not be able to attend the January 14 Committee meeting,
please call me at (202) 955-3514.
Frances M. Stadler
Assistant General Counsel
Attachment