NASD Proposes Amendments to Sales Charge Rule

Washington, DC, August 20, 1998 - The Securities and Exchange Committee has published for comment proposed revisions by NASD Regulation, Inc. (NASDR) to NASD Conduct Rule 2830, which governs the sale and distribution of investment company securities. (Ed. Note: The Release, which relates to amendments to the NASDR's sales charges rule, is incorrectly titled "Notice of Filing of Proposed Rule Change by the National Association of Securities Dealers, Inc. Concerning Related Performance Information.") In particular, Rule 2830 would be revised to:

The Release is summarized below. Comments on it are due by September 8th. (The Institute filed a comment letter on substantially similar amendments proposed by NASDR in August 1997.)

Sales Charge Limits for Fund of Funds Arrangements
The National Securities Markets Improvement Act of 1996 amended the Investment Company Act of 1940 to, among other things, broaden the ability of mutual fund sponsors to establish fund of funds arrangements. Currently, however, the provisions of NASD Rule 2830 that impose limits on sales charges, do not take into account those two-tiered fund of funds structures in which asset-based sales charges are imposed at both tiers. The proposed amendments would address this by limiting the combined sales charges of both tiers to the maximum percentage limits currently contained in the rule. In addition, the Commission has modified the NASDR's earlier proposal to clarify that: (1) the cumulative limits imposed on asset-based sales charges and on services fees under the rule would continue to apply individually to the acquiring and acquired funds in a fund of funds structure; (2) in a fund of funds arrangements between affiliated funds, if the acquired fund has an asset-based sales charge, sales made to the acquiring fund shall be excluded from total gross new sales for purposes of applying the cumulative sales charge limits; and (3) the amendments restrict the aggregate rate of asset-based sales charges permissible under the rule.

Installment Loads
The proposed amendments would conform the definition of "deferred sales load" in Paragraph (b)(8)(B) of Rule 2830, which currently does not include installment loads, to Rule 6c-10 under the Investment Company Act, which does include such 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
The proposed amendments would prohibit loads on reinvested dividends. The proposal includes a "grandfather provision, " which would exempt from the operation of the prohibition all investment companies that currently impose such fees.

CDSL Calculations
NASDR has proposed to impose a first-in-first-out ("FIFO") redemption order for partial shareholder redemptions, unless an alternative redemption method would result in a redeeming shareholder paying a lower CDSL, in which case the alternative method could be used. This amendment would be consistent with a provision previously found in Rule 6c-10, which required, in the case of a partial redemption, that a CDSL be calculated as though shares not subject to a load are redeemed first and remaining shares are redeemed in the order purchased.

Prospectus Disclosure
Under the proposed amendments, 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 would be deleted. The Commission's recent amendments to Form N-1A include a requirement that the prospectuses of funds with asset-based sales charges include disclosure regarding Rule 12b-1 plans. Therefore, it is no longer necessary for Rule 2830 to require this disclosure.