1 NASD Notice to Members 97-48 (August 1997). In the same notice, NASDR proposes certain changes to Conduct
Rule 2820, governing the sale and distribution of variable insurance contracts.
[9149]
August 11, 1997
TO: DIRECT MARKETING COMMITTEE No. 17-97
SALES FORCE MARKETING COMMITTEE No. 17-97
RE: PROPOSED AMENDMENTS TO NASD SALES CHARGE RULES
______________________________________________________________________________
NASD Regulation, Inc. is soliciting comments on proposed amendments to NASD
Conduct Rule 2830, governing the sale and distribution of investment company securities
("Investment Company Rule"). The amendments would: (1) impose maximum aggregate sales
charge limits on funds of funds; (2) permit installment loads; (3) prohibit loads on reinvested
dividends; (4) reinstate a requirement specifying the order in which shares subject to a
contingent deferred sales load ("CDSL") must be redeemed; and (5) eliminate a disclosure
requirement regarding the effect of asset-based sales charges. A copy of the notice describing
the proposed amendments is attached,1 and it is summarized below.
As indicated in the attached notice, the National Securities Markets Improvement Act of
1996 and the 1996 amendments to Rule 6c-10 under the Investment Company Act (governing
deferred sales loads) provided mutual funds with greater flexibility in structuring their
distribution arrangements. Changes to the sales charge provisions of the Investment Company
Rule are necessary, however, before funds may take advantage of this additional flexibility.
Funds of Funds
The National Securities Markets Improvement Act amended the Investment Company
Act to relax existing restrictions on fund of funds arrangements, subject to certain conditions.
To address potential layering of sales charges, Section 12(G)(i)(III) requires that either: (1) if the
acquiring fund charges a sales load or other distribution-related fees, it does not incur such
charges at the underlying fund level; or (2) if such fees are charged at both levels, in the
aggregate they do not exceed NASD sales charge limits. NASDR is proposing to amend the
Investment Company Rule to provide that in a fund of funds arrangement, either the acquiring
fund or the underlying fund, or both, may charge an asset-based sales charge that in the
aggregate does not exceed .75% per annum of average annual net assets and a service fee that in
the aggregate does not exceed .25% of average annual net assets. In addition, aggregate front-
end and deferred sales charges would be limited in any transaction to 7.25% (or 6.25% if a
2service fee is charged). As proposed, no cumulative limits would apply to fund of funds sales
charges. NASDR requests comment, however, on whether a cumulative cap should apply and
if so, how it could be calculated. Comment also is requested on the treatment of "master-
feeder" funds, which are included in the proposed definition of "fund of funds."
Installment Loads
As the Institute recommended in a letter to NASDR last year, NASDR proposes to
amend the Investment Company Rule to conform the definition of "deferred sales charge"
(which currently would not include an installment load) to the definition of "deferred sales
load" in Rule 6c-10 (which does include installment loads). This change would subject a fund
with an installment load to the NASD sales charge limits (as required by Rule 6c-10) and to the
prohibition on describing a fund as "no load" if it has a deferred sales charge.
Loads on Reinvested Dividends
NASDR proposes to prohibit funds from charging loads on reinvested dividends.
(Front-end loads on reinvested dividends currently are permitted; deferred loads on reinvested
dividends would be permitted by Rule 6c-10 if covered by the NASD sales charge limits.) The
attached notice indicates that the proposed prohibition is based on a concern that loads on
reinvested dividends typically cause an investor to pay a charge twice on the same assets and
could exceed the appropriate sales charge limits.
CDSL Calculations
Before it was amended last year, Rule 6c-10 required that in the case of a partial
redemption, a CDSL must be calculated as though shares not subject to a load are redeemed
first and remaining shares are redeemed in the order purchased. NASDR proposes to reinstate
this requirement but permit use of another method if the redeeming shareholder would pay a
lower CDSL.
Prospectus Disclosure
NASDR proposes to delete the current requirement for any fund with an asset-based
sales charge to disclose in its prospectus that long-term investors may pay more than the
economic equivalent of the maximum permitted front-end sales charges. NASDR cites the
SEC’s recent proposed changes to Form N-1A, which would require prospectus disclosure
along the same lines.
Frances M. Stadler
Associate Counsel
Attachment