1December 27, 1993
TO: ACCOUNTING/TREASURERS COMMITTEE NO. 40-93
OPERATIONS COMMITTEE NO. 36-93
SEC RULES COMMITTEE NO. 115-93
RE: SEC PROPOSED RULES GOVERNING MULTIPLE CLASS AND
MASTER-FEEDER FUNDS
__________________________________________________________
The Securities and Exchange Commission recently proposed new Rule 18f-3
under the Investment Company Act to allow open-end management investment
companies to issue multiple classes of voting stock, "subject to conditions
intended to prevent investor confusion, assure fair expense allocation and voting
rights, and prevent conflicts of interest among classes." (Under the proposal,
multiple class funds with existing exemptive orders would be allowed to use the
rule but would not be required to do so.)
The Commission also proposed amendments to rules under the Investment
Company Act and the Securities Act, to Form N-1A, and to related forms to
establish disclosure requirements for multiple class and master-feeder funds.
(These disclosure requirements would apply to all multiple class funds, including
those with existing exemptive orders.)
A copy of the Commission's proposing release is attached.
1. Disclosure
Under the Commission's proposal, prospectuses, advertisements, and sales
literature for multiple class and master-feeder funds would have to include a
prominent legend discussing the existence of other classes, the fact that sales
charges, expenses and performance vary, and a toll-free telephone number
investors may use to obtain information concerning other classes or feeder funds.
The prospectuses (but not the advertisements or sales literature) would have to
name the other classes or feeder funds.
If any classes or feeder funds "are offered or made available through the
same broker, dealer, bank, or other financial intermediary" and "have alternative
arrangements for sales and related charges," the prospectus for each class or
feeder fund would have to provide full cross-disclosure about the
others in response to Items 2 through 9 of Form N-1A. The prospectus also would
have to contain a line graph comparing the initial account value at the beginning
of a hypothetical ten-year period with the subsequent account values at the end
of each of the intervening years, assuming a $10,000 investment in each class or
feeder fund at the beginning of the first year, redemption on the last day of
each year, and a 5% annual return before operating expenses for all such classes
or feeder funds.
An amendment to Securities Act Rule 482 would require multiple class and
master-feeder fund advertising that contains performance figures to include with
equal prominence the performance of all classes and feeder funds that are subject
to the full cross-disclosure requirement. If an advertisement is for a class or
feeder fund for which average accrued total return "is available for less than
. . . one, five, and ten year periods," Rule 482 would require the advertisement
2to disclose the average annual total return for any class, feeder fund or master
fund that "has been offered for the longest time or for at least ten years . .
. ."
The proposal also would revise the Commission's recent proposal to permit
the use of summary prospectuses that contain a purchase application. Under the
new proposal, multiple class and master-feeder funds could use the summary
prospectus, provided they include the line graph that would be required in the
statutory prospectus and discuss the differences among classes or feeder funds
offered by the same financial intermediary and that have alternative arrangements
for sales and related charges. The release requests comment on whether the
Commission should require multiple class and master-feeder funds to deliver a
prospectus or some shorter document, such as the summary prospectus, before each
sale.
2. Rule 18f-3
roposed Rule 18f-3 would require each class relying on the rule to:
- have a different arrangement for distribution or shareholder
services;
- bear all of the expenses of its arrangement;
- have the exclusive right to vote on matters relating solely to its
arrangement;
- vote separately on matters in which the interests of that class are
different from the interests of any other class.
In all other respects, fund shareholders would have to be given the same
rights and obligations regardless of class. All income, gains and losses, and
expenses of the fund other than class expenses must be allocated to each class
on the basis of relative net asset value.
Proposed Rule 18f-3 would require the fund to adopt a written plan
specifying all the differences among classes. The board of directors, including
a majority of the independent directors, would have to approve the plan before
issuance of multiple classes and annually thereafter.
3. Exchange Privileges and Conversions
Proposed Rule 18f-3 would permit multiple class funds to offer different
exchange privileges to different classes and to offer one or more classes with
conversion features. Conversions would have to be made at net asset value and
any material increase in Rule 12b-1 fees charged to the class into which the
purchase class converts would have to be approved by a separate vote of the
purchase class.
4. Rule 12b-1
The Commission has proposed to amend Rule 12b-1 by providing that if a plan
covers more than one class of shares, the provisions of the plan must be
severable for each class and any action taken on the plan must be taken
separately for each class.
* * *
The comment period for the proposal ends 60 days after its publication in
the Federal Register. The Institute will hold a meeting to discuss the proposal
on January 13, 1994, at 10 a.m., at Loews L'Enfant Plaza, 480 L'Enfant Plaza,
S.W., Washington, D.C. The meeting will be held in the Monet room. If you plan
3to attend, please contact Shirley McCoy at the Institute (202/326-5820) (fax
202/326-5827/28).
Thomas M. Selman
Assistant Counsel
Attachment