SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 230, 239, 270, and 274 [Release Nos. 33Ä7036, ICÄ19955, File No. S7Ä32Ä93] RIN 3235ÄAF00 Exemption for Open-End Management Investment Companies Issuing Multiple Classes of Shares; Disclosure by Multiple Class and Master-Feeder Funds AGENCY: Securities and Exchange Commission. ACTION: Proposed rule, proposed amendments to rules and forms, and request for comment. SUMMARY: The Commission is proposing for public comment a new rule and an amendment to a rule under the Investment Company Act of 1940. The new rule would allow open-end management investment companies ("mutual funds'') to issue multiple classes of voting stock representing interests in the same portfolio, subject to conditions intended to prevent investor confusion, assure fair expense allocation and voting rights, and prevent conflicts of interest among classes. The proposed rule would eliminate the need for funds issuing multiple classes to apply for exemptions. The proposed rule amendment would clarify how the requirements for approval of certain distribution arrangements would apply to funds with multiple classes of shares. Finally, the Commission is proposing for public comment amendments to rules under the Investment Company Act and the Securities Act of 1933, amendments to the form for registration statements of open-end investment companies, and amendments to related forms. These amendments would establish disclosure requirements for prospectuses, advertisements, and sales literature of multiple class funds, as well as of "master-feeder'' funds, which present many of the same disclosure issues as multiple class funds. These disclosure amendments are intended to address concerns about the complexity of sales and service charges of these funds. DATES: Comments must be received on or before February 22, 1994. ADDRESSES: Comments should be submitted in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Stop 6Ä9, Washington, DC 20549. All comment letters should refer to File No. S7Ä32Ä93. All comments received will be available for public inspection and copying in the Commission's Public Reference Room, 450 Fifth Street, NW., Washington, DC 20549. FOR FURTHER INFORMATION CONTACT: Regarding rule 18fÄ3 and amendments to rule 12bÄ1, Roseanne Harford, Senior Counsel, or Diane C. Blizzard, Assistant Director, Office of Regulatory Policy, (202) 272Ä2048, regarding proposed disclosure and reporting requirements, James M. Curtis, Senior Counsel, Office of Investment Company Regulation, (202) 504Ä2406, or Robert G. Bagnall, Assistant Chief, Office of Regulatory Policy, (202) 272Ä3042, and regarding changes to Form NÄSAR, Lawrence A. Friend, Chief Accountant, Office of Disclosure and Review, (202) 272Ä2106, all at the Division of Investment Management, Securities and Exchange Commission, Mail Stop 10Ä6, 450 Fifth Street, NW., Washington, DC 20549. SUPPLEMENTARY INFORMATION: The Commission today is requesting public comment on proposed rule 18fÄ3 [17 CFR 270.18fÄ3], and related amendments to rule 12bÄ1 [17 CFR 270.12bÄ1], both under the Investment Company Act of 1940 [15 U.S.C. 80a] ("Investment Company Act'' or "Act''). The Commission is requesting public comment on proposed amendments to rule 34bÄ1 under the Investment Company Act [17 CFR 270.34bÄ1], rules 134, and 482 [17 CFR 230.134, and 482] under the Securities Act of 1933 ("Securities Act'') [15 U.S.C. 77aÄ77aa], and Forms NÄ1A [17 CFR 239.15A, 274.11A], NÄ14 [17 CFR 239.23], and NÄSAR [17 CFR 274.101]. The Commission also is requesting public comment on a revision to amendments to rule 482 that were proposed for public comment earlier this year relating to "off-the-page'' prospectuses.®1¯ These proposals would implement a recommendation made in the report issued last year by the Division of Investment Management ("Division''), Protecting Investors: A Half Century of Investment Company Regulation ("Protecting Investors Report''), Chapter 8, The Sale of Open-End Investment Company Shares.®2¯ ®1¯ See Off-the-Page Prospectuses for Open-End Management Investment Companies, Securities Act Release No. 6982 (Mar. 5, 1993), 58 FR 16141. ®2¯ SEC Division of Investment Management, Protecting Investors: A Half Century of Investment Company Regulation, 330Ä332 (1992). It is likely that further multiple class exemptive applications will be received and reviewed pending further action on these proposals. These applications will continue to be reviewed on the same basis as previous multiple class applications and should not request relief based on these proposals. Table of Contents Executive Summary I. Background II. Discussion A. Rule 18fÄ3 1. Limits on Class Differences a. Differences in Shareholder Service or Distribution Arrangements and Other Expenses b. Class Voting c. Fund-Wide Rights and Obligations 2. Allocation of Fund-Wide Expenses 3. Board Review 4. Exchange Privileges and Conversions B. Rule 12bÄ1 C. Disclosure 1. Prospectus Disclosure a. Legend Concerning Classes or Feeder Funds Not Offered Through a Prospectus b. Cross-Disclosure about Certain Other Classes or Feeder Funds c. Comparison of Classes or Feeder Funds d. Alternative Regulatory Approaches 2. Advertising and Sales Literature a. Legends Concerning Other Classes or Feeder Funds b. Performance Information 3. Off-the-Page Prospectuses III. Cost/Benefit of Proposed Action IV. Summary of Initial Regulatory Flexibility Analysis V. Statutory Authority VI. Text of Proposed Rule and Rule and Form Amendments EXECUTIVE SUMMARY Since 1985, the Commission has issued over 90 orders allowing funds to issue multiple classes. The orders impose as many as 20 conditions intended to ensure that multiple class funds do not present the investor protection concerns that section 18 of the Investment Company Act was designed to address. Among other things, the conditions limit class differences, subject to oversight by a fund's board of directors. The Commission is proposing rule 18fÄ3 under the Investment Company Act, which would permit funds to issue multiple classes of shares without the need to seek exemptive orders from the Commission. The rule would require certain differences in the rights and obligations of different classes, permit certain other differences among classes, specify the matters on which class voting is required, and prescribe how income and expenses must be allocated. The rule also would delineate the responsibilities of the board of directors. Finally, the rule would permit, but not require, different classes to have different exchange privileges and conversion rights. A related amendment to rule 12bÄ1 would clarify that a rule 12bÄ1 plan must treat each class separately and require separate director and shareholder approval. Rule 18fÄ3 would simplify the process for issuing multiple classes and, by eliminating the need for funds to apply for exemptive orders, save time and reduce expenses. It also would reduce the Commission's burden of reviewing the applications. Over the past few years, a number of fund sponsors have adopted a distribution arrangement designed to achieve the business goals of multiple class funds without the need to obtain Commission relief under section 18. This "master-feeder'' arrangement contemplates the use of a two-tier structure in which one fund invests in another fund.®3¯ Although master-feeder structures are functionally similar to multiple class funds, they do not need exemptive relief and are currently subject to different disclosure requirements. ®3¯ Master-feeder funds are often referred to as "core and feeder'' or "hub and spoke'' funds; "Hub & Spoke'' is a registered service mark of Signature Financial Group, Inc. Proposed disclosure amendments would apply to both multiple class and feeder funds. Prospectuses would be required to include a prominent legend following the fee table providing information regarding the availability of any other classes or feeder funds not offered in that prospectus. If any classes or feeder funds are offered or made available through the same broker, dealer, bank, or other financial intermediary and permit investors to choose among alternative arrangements for sales and related charges (for example "dual distribution'' classes), a prospectus for any of those classes or feeder funds would be required to provide full cross-disclosure about the others in response to Items 2 through 9 of Form NÄ1A. If more than one class or feeder fund is offered in a prospectus, or if there is cross-disclosure about another class or feeder fund, the prospectus would be required to discuss the differences among those classes or feeder funds and include a line graph comparing the hypothetical value of holdings of those classes or feeder funds upon redemption at the end of each year during a ten year period. These requirements should help investors determine and compare the expenses they may pay and the return they may receive under various circumstances. Proposed amendments to advertising and sales literature disclosure requirements are similar to the prospectus proposals. Multiple class and master-feeder funds would be required to include a legend in advertising and sales literature similar to the proposed legend following the fee table in the prospectus. An amendment to 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 cross-disclosure requirement. Another amendment to rule 482 would require advertisements to provide long-term return information for a fund's portfolio even if that information does not exist for the class or feeder fund that is the subject of the advertisement. The proposal would revise the recently proposed amendments to rule 482 to delete those amendments' prohibition on the use of off-the-page prospectuses (advertisements containing an order form) by multiple class and master-feeder funds. As re-proposed, those amendments to rule 482 would permit multiple class funds and feeder funds to use off-the-page prospectuses. I. Background Many mutual funds issue more than one class of shares representing interests in the same portfolio of securities. Some of these funds use different classes to offer investors a choice of methods for paying for the costs of selling fund shares. These funds typically offer a class with a front-end sales load®4¯ and a low distribution fee®5¯ (or no such fee) and a class with a higher distribution fee and a contingent deferred sales load ("CDSL'').®6¯ The latter arrangement is commonly called a "spread load.'' A spread load class also may feature an automatic conversion of its shares for shares in a class with a lower distribution fee after a specified period.®7¯ More recently, some funds have been offering a third class with a so-called "level load,'' which class bears a relatively high distribution fee but no front-end load or CDSL.®8¯ ®4¯ A front-end sales load is a charge paid by the investor at the time of purchase. ®5¯ A distribution fee is a charge to fund assets that may be used to pay certain distribution expenses in accordance with rule 12bÄ1. 17 CFR 270.12bÄ1. Such fees often are referred to as "rule 12bÄ1 fees.'' ®6¯ See, e.g., Putnam Adjustable Rate U.S. Government Fund, Investment Company Act Release Nos. 18637 (Mar. 30, 1992), 57 FR 11639 (Notice of Application) and 18676 (Apr. 24, 1992), 51 SEC Docket 799 (Order). A CDSL is a sales charge that is assessed when shares are redeemed. It generally declines over time and is designed to recover any distribution costs that have not yet been recovered from the distribution fees. To impose a CDSL, funds request exemptions from sections 2(a)(32), 2(a)(35), and 22(d) of the Act [15 U.S.C. 80aÄ2(a)(32), Ä2(a)(35), and Ä22(d)] and rule 22cÄ1[17 CFR 270.22cÄ1]. See e.g., Smith Barney Equity Funds, Investment Company Act Release Nos. 19005 (Oct. 7, 1992), 57 FR 47156, 47158 (Notice of Application) and 19079 (Nov. 3, 1992), 52 SEC Docket 3640 (Order). ®7¯ The Commission's orders require that such conversions occur on the basis of the relative net asset values of the classes and not involve any load or other fee. See, e.g., Colonial Advanced Strategies Gold Trust, Investment Company Act Release Nos. 18650 (Apr. 10, 1992), 57 FR 13780, 13785 (Notice of Application) and 18692 (May 6, 1991), 51 SEC Docket 898 (Order). ®8¯ See, e.g., PaineWebber America Fund, Investment Company Act Release Nos. 18758 (June 4, 1992), 57 FR 25093, 25094 (Notice of Application) and 18820 (June 30, 1992), 51 SEC Docket 1844 (Order). Many funds issue different classes in order to use different channels of distribution and to reach different investor markets. These funds typically target different investor markets, offering each a separate class with an arrangement for shareholder services or a distribution plan that is tailored to that market.®9¯ For example, these funds may create a separate class or classes for financial institutions that invest on behalf of their customers, such as banks, pension plans, and insurance companies. The institutions already may provide certain services to their customers (e.g., maintaining client records, processing purchase orders, and responding to customer inquiries). ®10¯ Multiple classes allow funds to design classes with fees and services that complement those of the institutions. In some cases, the same fund may offer both classes designed for different distribution channels and classes providing a choice of methods for paying distribution costs. ®11¯ ®9¯ See, e.g., SEI Liquid Asset Trust, Investment Company Act Release Nos. 17878 (Nov. 27, 1990), 55 FR 49967, 49968 (Notice of Application) and 17915 (Dec. 24, 1990), 47 SEC Docket 2014 (Order); Centerland Fund, Investment Company Act Release Nos. 18508 (Jan. 30, 1992), 57 FR 4662, 4663 (Notice of Application) and 18566 (Feb. 25, 1992), 50 SEC Docket 1909 (Order). Shareholder services may include establishing and maintaining customer accounts and records, providing periodic account statements, arranging for bank wires, processing divided payments, forwarding fund communications (such as proxies, shareholder reports and dividend, distribution, and tax notices), answering routine customer inquiries, and assisting with changes in dividend options. Distribution services may include advertising and marketing, sales support services, and preparing, printing, and mailing sales literature, prospectuses, and other reports to prospective investors. The scope of "shareholder services'' in this context may differ from that of the term "service fee'' in the rule on maximum mutual funds sales charges of the National Association of Securities Dealers, Inc. ("NASD''). NASD, Rules of Fair Practice, Art. III, section 26(b)(9). That term "is not intended to include transfer agent, custodian, or similar fees'' or "charges for the maintenance of records, recordkeeping and related costs.'' NASD Notice to Members No. 93Ä12 (Feb. 1993). ®10¯Fiduciary obligations under federal banking or pension laws may restrict an institution's ability to invest customer accounts in shares of funds that impose fees for services the institution already provides. See 12 CFR 9.12(a) (restricting bank fiduciaries from accepting shareholder servicing fees). See also Employee Retirement Income Security Act section 406(a)(i), 29 U.S.C. 1106(a)(1). Several funds have created separate classes for institutions depending on whether they have agency or custodial relationships, as opposed to fiduciary relationships, with their customers. See, e.g., The Kent Funds, Investment Company Act Release Nos. 19033 (Oct. 15, 1992), 57 FR 48415 (Notice of Application) and 19094 (Nov. 12, 1992), 52 SEC Docket 3743 (Order). ®11¯See, e.g., The New England Funds, Investment Company Act Release Nos. 19067 (Oct. 28, 1992), 57 FR 52663 (Notice of Application) and 19118 (Nov. 24, 1992), 52 SEC Docket 4261 (Order). Because institutions investing for their own account may need less service than retail investors participating directly or through intermediaries, funds may offer them a separate class with reduced fees and sales loads. ®12¯ On the other hand, individual investors using retail brokers may have greater service needs that funds may meet by offering a different class with relatively higher fees and loads. ®12¯See, e.g., PaineWebber, supra note 8, 57 FR at 25094. Investment company sponsors seeking to implement multiple class arrangements have asserted that the arrangements offer a number of benefits. Multiple classes avoid the duplicative portfolio and fund management costs that are required by "clone funds'' ®13¯ and thus may be a less expensive alternative to the creation of these funds. Moreover, multiple classes may enable funds to attract larger asset bases, which, in turn, may permit them to spread fixed costs over more shares, qualify for discounts in advisory fees known as "breakpoints,'' and otherwise experience economies of scale, all of which may lower per share fees and expenses. ®14¯ Funds also have maintained that a larger asset base permits greater portfolio liquidity and diversification. ®15¯ ®13¯Clone funds are separate funds with similar portfolios but different distribution or service arrangements. For small investor markets, clone funds may not be viable. See, e.g., Arch Fund, Inc., Investment Company Act Release Nos. 15489 (Dec. 22, 1986), 51 FR 51250, 51251 (Notice of Application) and 15532 (Jan. 13, 1987), 37 SEC Docket 568 (Order) ("Applicants believe that it would be inefficient, and in some instances economically or operationally infeasible, to organize a separate investment Portfolio for each class of New Shares created''). ®14¯See, e.g., G.T. Global Growth Series, Investment Company Act Release Nos. 18961 (Sept. 17, 1992), 57 FR 43992 (Notice of Application) and 19022 (Oct. 14, 1992), 52 SEC Docket 2887 (Order). ®15¯See, e.g., MarketMaster Trust, Investment Company Act Release Nos. 17785 (Oct. 9, 1990), 55 FR 42136 (Notice of Application) and 17838 (Nov. 5, 1990), 47 SEC Docket 1324 (Order). The issuance of multiple classes implicates sections 18(f)(1), 18(g), and 18(i) of the Investment Company Act. ®16¯ Section 18(f)(1) generally makes it unlawful for a registered open-end management investment company to issue any class of "senior security.'' Section 18(g) defines senior security to include any stock of a class having a priority over any other class as to distribution of assets or payment of dividends. Section 18(i) requires that every share of stock issued by a registered management investment company be voting stock, with the same voting rights as every other outstanding voting stock. ®16¯15 U.S.C. 80aÄ18(f)(1), (g), (i). The issuance of multiple classes may conflict with section 18(f)(1) because a class with lower expenses will have a greater net asset value or higher dividend per share than other classes. ®17¯ A class with a higher net asset value may be considered to have a priority as to the distribution of assets; similarly, a class receiving a higher dividend may be considered to have a priority over classes with lower dividends. The issuance of multiple classes also may conflict with section 18(i) unless each class has the same voting rights. ®18¯ Section 18 is, to a large extent, designed to prohibit material differences among the rights of shareholders in a fund. This section implements the policy expressed in section 1(b)(3) of the Investment Company Act ®19¯ of preventing funds from "issu[ing] securities containing inequitable or discriminatory provisions.'' Thus, funds have applied for exemptions from these sections to issue multiple classes. ®17¯Because each class has different asset-based service or distribution fees, the classes have different total expenses and, thus, different net incomes. Differences in net income may be reflected in different net asset values, different dividends, or both. ®18¯Cf. Comm. on Interstate and Foreign Commerce, Investment Company Act Amendments of 1970, H.R. Rep. No. 1382, 91st Cong., 2d Sess. 28 (1970) and Comm. on Banking and Currency, Investment Company Amendments Act of 1969, S. Rep. No. 184, 91st Cong., 1st Sess. 38 (1969) (both discussing the need to clarify section 18(i) to permit separate voting rights for classes of shareholders in series funds when their interests may be distinct). ®19¯15 U.S.C. 80aÄ1(b)(3). Section 18(f)(1) was intended to protect investors from certain abuses associated with complex investment company capital structures, including excessive leverage, conflicts of interest among classes, and investor confusion. ®20¯ Section 18(i) addresses certain inequitable and discriminatory shareholder voting provisions that were associated with many investment company securities before the enactment of the Investment Company Act. ®21¯ Multiple class funds do not involve leverage because each class represents interests in the same portfolio of investments and participates in all the portfolio's gains and losses. Multiple class funds, however, arguably could implicate the other concerns underlying these sections. ®20¯See Investment Trusts and Investment Companies: Hearings on S. 3580 Before a Subcomm. of the Senate Comm. on Banking and Currency, 76th Cong., 3d Sess. 272Ä74, 1044 (1940). ®21¯Id. at 265Ä75, 1025Ä37. The issuance of classes of shares with different rights and obligations may create conflicts among those classes. For example, it may not be clear whether certain expenses appropriately represent expenses of the fund or expenses of a particular class. Voting rights may be of concern in multiple class funds because each class pays for its own service or distribution arrangements and might approve different expenses and terms than would be approved by shareholders who do not pay for those arrangements. In such a case, equal shareholder voting could be inappropriate. ®22¯ Fee and load variations among classes, if not adequately disclosed, also may confuse investors and make comparisons with other funds more difficult. ®22¯For example, when each class pays all the expenses of its shareholder services or distribution plan, one class has no interest in whether the other classes' services are being provided on a cost-effective basis. It does, however, have an interest in whether the services attract new investors to the fund, if fund-wide economies of scale are realized as a result. If shareholders who do not bear the expenses of an arrangement are permitted to vote on it, they could approve higher fees and expenses than the class itself would choose. Since 1985, the Commission has issued over 90 exemptive orders allowing funds to issue multiple classes. ®23¯ The orders impose as many as 20 conditions intended to ensure that multiple class funds do not present the investor protection concerns that section 18 was designed to address. ®24¯ Among other things, the conditions limit class differences and subject them to oversight by the fund's board of directors. ®23¯See, e.g., orders cited supra notes 4Ä13. Multiple class funds have become a particularly significant phenomenon in the last three years: since January 1, 1990, the Commission has issued more than 70 multiple class orders. ®24¯The conditions vary somewhat depending on the particular features of the structure (e.g., whether the fund intends to offer conversion rights or to allocate expenses other than service and distribution fees). An exemptive rule would simplify the process for issuing classes and, by eliminating the need for funds to apply for orders, save time and reduce expenses. It also would reduce the Commission's burden of reviewing the applications. Therefore, the Commission is proposing such a rule, which is designed to streamline the conditions imposed on multiple class funds while preserving investor protection. The Commission also is proposing amendments to rule 12bÄ1 to clarify its applications to multiple class funds. Finally, the Commission is proposing certain related disclosure and reporting requirements that would apply both to multiple class funds and to master-feeder funds. Consistent regulatory treatment of multiple class and master-feeder funds is appropriate because of certain similarities between them. In master-feeder structures, one or more open-end management investment companies with their own service or distribution arrangements (the "feeder funds'') hold as their only investment securities shares of a single open-end management investment company (the "master fund'') that has the same investment objective as the feeder funds. This fund structure generally relies on a statutory exemption, ®25¯ in contract to the multiple class arrangement, which necessitates exemptive relief from certain provisions of section 18. ®26¯ Like multiple class funds, feeder funds may be sold to customers of different institutions (such as brokers, banks, and insurance companies) and may target different markets (such as retail investors, institutional investors, and bank trust customers, as well as off-shore investors). Like the multiple class structure, the master-feeder structure also may be used to offer investors a choice of methods for paying distribution costs: e.g., a choice between a feeder fund with a front-end sales charge and a low asset-based distribution fee and a feeder fund with a higher asset-based distribution fee and a CDSL but no front-end sales charge. Thus far, however, this use is infrequent. ®27¯ ®25¯Section 12(d)(1)(E) of the Investment Company Act has been interpreted to except the master-feeder structure from the general prohibition against fund holding companies or "funds of funds.'' 15 U.S.C. 80aÄ12(d)(1)(E) (the exception applies if the only investment security held by a registered investment company is the security of another investment company). ®26¯Unlike the classes of multiple class funds, the feeder funds of master-feeder funds are considered separate issuers, whose securities are not senior securities subject to the limitations of section 18. See supra notes 16 to 22 and accompanying text. Consequently, feeder funds do not require exemptive relief from section 18 to offer their shares. ®27¯But see, e.g., Hyperion Short Duration U.S. Government Fund, Prospectus, File Nos. 33Ä38378 and 811Ä6262 (Feb. 26, 1993) (front-end load) and Hyperion Short Duration U.S. Government Fund II, Prospectus, File Nos. 33Ä38380 and 811Ä6210 (Feb. 26, 1993) (spread load); Eaton Vance Municipals Trust II, Registration Statement, File Nos. 33Ä71320 and 811Ä8134 (Nov. 5, 1993) (different feeder funds are different series of same trust and offer choice of level load, spread load, and front-end load). II. Discussion A. Rule 18fÄ3 Proposed rule 18fÄ3 would create a limited exemption from sections 18(f)(1) and 18(i) for funds that issue multiple classes of shares with varying arrangements for shareholder services and distribution. Multiple class funds with existing exemptive orders would be allowed to use the rule but would not be required to do so. ®28¯ ®28¯In either case, funds would be required to comply with the proposed disclosure requirements discussed below. Proposed rule 18fÄ3 includes a number of conditions that would require certain differences in the rights and obligations of different classes, permit certain other differences among classes, and specify the matters on which class voting is required. The rule also would prescribe how income and expenses must be allocated and delineate the responsibilities of the board of directors, including the directors who are not "interested persons.'' ®29¯ Finally, the rule would permit, but not require, different classes to have different exchange privileges and conversion rights. ®29¯See section 2(a)(19) of the Investment Company Act, 15 U.S.C. 80aÄ2(a)(19). This release refers to such directors as "independent directors.'' 1. Limits on Class Differences The exemptive orders issued to date by the Commission for multiple class funds have addressed the potential for conflicts among classes by limiting the permissible differences in shareholder or distribution services and payments applicable to each class; certain other expenses borne by the classes; and the voting rights applicable to the classes. ®30¯ The orders require that all classes represent interests in the same portfolio of investments and be identical in all respects except for differences in fees and expenses related to their different arrangements, separate voting on their different arrangements and other matters for which separate class voting is appropriate, and any differences in exchange privileges, conversion, features, and class designations. ®31¯ ®30¯To a large degree, similar conflicts may arise today with separate funds in the same investment company complex, when different funds share the administrators and providers of services. For example, funds and fund complexes allocate the shared cost of responding to shareholder inquiries. ®31¯See, e.g., Smith Barney, supra note 6, 57 FR at 47159. Proposed paragraph (a) essentially would codify this approach. ®32¯ Paragraph (a)(1) would require that each class have a different arrangement for distribution or shareholder services, paragraph (a)(2) would require that each class bear all of the expenses of its arrangement, paragraph (a)(3) would require that each class have the exclusive right to vote on matters relating solely to its arrangement, and paragraph (a)(4) would require that each class vote separately on matters in which the interest of that class are different from the interests of any other class. Paragraph (a)(5) would require that fund shareholders have, in all other respects, the same rights and obligations, regardless of class. ®32¯Exchange privileges and conversion features are discussed below in connection with proposed paragraph (d). See infra section II.A.4. a. Differences in shareholder service or distribution arrangements and other expenses. Proposed paragraph (a)(1)(i) would require that each class have a different arrangement for shareholder services, the distribution of securities, or both. Paragraph (a)(1)(i) is intended to encompass all of the class arrangements that the Commission has exempted by order. Thus, an arrangement for shareholder services could include any services provided to shareholders of one class, including transfer agency services and services related to shareholder relationships and account administration. An arrangement for the distribution of securities could include various distribution activities on behalf of the fund and the terms of payment for those activities. ®33¯ ®33¯See supra note 9 for more detailed examples of shareholder and distribution services. An arrangement would be considered a different arrangement if it involved differences in the amount or form of payment, the nature and extent of services provided, or both. For example, a class that pays a front-end load and a class with a rule 12bÄ1 fee would be considered to have different distribution arrangements because they differ in the amount, the form (by shareholders individually versus by the class as a whole), and timing (at purchase versus over time) of distribution charges. Paragraph (a)(1)(ii) also provides that certain other expenses may be allocated to an individual class. Thus, under paragraph (a)(1), funds would have to determine whether each expense should be allocated to the fund as a whole (a fund expense) or to each class individually (a class expense). ®34¯ Expenses may be treated as expenses of a class if they are directly related to the arrangement of that class for shareholder services or distribution, or if they are actually incurred in a different amount pro rata. Paragraph (a)(1)(ii) expressly provides that a fund may not allocate advisory or custodial fees or other expenses related to management of the fund's assets. Class allocations would have to be approved by the board of directors following the procedures specified in paragraph (c). ®34¯The orders do this through two conditions. First, each class bears a separate fee for its separate distribution or service arrangement. Second, the orders permit certain specified fund expenses to be allocated at different rates for each class. See, e.g., Goldman Sachs Equity Portfolios, Inc., Investment Company Act Release Nos. 19241 (Jan. 26, 1993), 58 FR 6830, 6834 (Notice of Application) and 19309 (Mar. 3, 1993), 53 SEC Docket 2308 (Order) (conditions 1 and 7). Some expenses may not always be classified automatically as fund expenses or class expenses. In their applications, funds have treated in varied fashion expenses for services that are available to all classes but are used more by one class than another. For example transfer agency services are available to all shareholders but arguably may be used more by some classes than others. Some funds have requested exemptions to allocate transfer agency fees on a class basis, while others have allocated them to all shareholders pro rata. ®35¯ Funds also have sought to allocate on a class basis expenses such as printing and postage related to preparing and distributing shareholder reports, prospectuses, and proxies of a specific class, administrative expenses and services required to support the shareholders of a class, and directors' fees incurred as a result of issues relating to one class of shares. ®36¯ Other funds, however, have not requested that they be able to allocate these expenses on a class basis. ®37¯ This variation may relate, in part, to tax considerations. ®38¯ ®35¯Compare Kidder Peabody California Tax Exempt Money Fund, Investment Company Act Release Nos. 19226 (Jan. 22, 1993), 58 FR 6545 (Notice of Application) and 19269 (Feb. 17, 1993) 53 SEC Docket 1558 (Order) (class expenses include transfer agency fees), with Goldman Sachs, supra note 34, 58 FR at 6834 (class expenses do not include transfer agency fees). ®36¯Other expenses that sometimes are treated as class expenses include blue sky registration fees incurred by a class, Securities Act registration fees incurred by a class, and litigation or other legal expenses relating solely to a class. See, e.g., Dreyfus A Bonds Plus, Inc., Investment Company Act Release Nos. 19165 (Dec. 18, 1992), 57 FR 61944 (Notice of Application) and 19214 (Jan. 14, 1993), 53 SEC Docket 518 (Order). ®37¯See, e.g., Declaration Funds, Investment Company Act Release Nos. 19172 (Dec. 21, 1993), 57 FR 61942 (Notice of Application), 19218 (Jan. 19, 1993), 53 SEC Docket 554 (Order), and 19218A (Feb. 22, 1993), 53 SEC Docket 1527 (Amended Order) (requesting exemption to allocate only plan fees). ®38¯Funds are required to allocate most of their expenses other than rule 12bÄ1 fees and transfer agency fees on a pro rata basis without regard to class in order to avoid the issuance of a "preferential dividend'' and the consequent loss of pass-through tax treatment under Subchapter M of the Internal Revenue Code. The Internal Revenue Service has allowed funds to allocate varying de minimis class expenses. See, e.g., IRS Private Letter Rulings No. 9234005 (May 11, 1992) (expenses for class shareholder meeting expenses and printing and postage costs for distributing prospectuses, shareholder reports, and proxies to current class shareholders), and No. 9336009 (June 4, 1993) (permitting differences in transfer agency fees, printing and postage expenses, SEC and state registration fees, litigation and other legal expenses related solely to one class, and certain fees and expenses of directors). Paragraph (a)(1) would not create a bright-line test to classify expenses or provide a list of permissible and impermissible class expenses. Instead, under that provision, it would be appropriate to treat some expenses as class expenses or not depending on the relation to the arrangement of a class or the actual extent to which expenses are incurred in different amounts. The existence of any actual difference would depend on whether, for example, certain services are provided to one class to a different degree than to other classes. These determinations would be left to the board of directors making the findings required under paragraph (c). The Commission requests comment on whether rule 18fÄ3 should provide more specific limits on differential allocation of expenses. One alternative would be to limit such allocation to rule 12bÄ1 fees, shareholder servicing fees, and transfer agency expenses. Commenters are asked to address whether establishing a brighter line between class expenses and general fund expenses would be desirable, or whether it would, instead, interfere with fair allocation of expenses among classes. Commenters are encouraged to supply examples of expenses that properly should be classified as class expenses. Proposed paragraph (a)(2) would require that each class bear all expenses of its arrangement except to the extent of any waiver or reimbursement. Paragraph (a)(2) addresses only expenses that are charged as the costs of those arrangements; it would not prohibit the other party to a contract or other arrangement from providing its goods or services at a reduced rate or free of charge. Moreover, paragraph (a)(2) expressly provides for waiver or reimbursement of class expenses by the fund's adviser or underwriter. ®39¯ Because paragraph (a)(2) only provides for waiver of the class expenses of an individual class, the amount of any such waiver or reimbursement may not exceed the amount of those expenses. ®40¯ Any waiver or reimbursement beyond those expenses must be allocated pro rata among the classes based on their relative net asset values. ®39¯Cf. Bearing of Distribution Expenses by Mutual Funds, Investment Company Act Release No. 11414 (Oct. 28, 1980), 45 FR 73898 (adoption of rule 12bÄ1) (to the extent that an adviser's profits are "legitimate'' and "not excessive,'' the adviser's payments for distribution expenses are not an indirect use of fund assets). ®40¯This provision addresses only a waiver or reimbursement for a specific class. It does not address waivers or reimbursements that apply to all classes in the same proportion as the relative net asset value of each class or that cap the expenses of each class at the same percentage of net assets. The rule does not provide an exemption from section 18 for different waivers or reimbursements of fund expenses, such as investment advisory fees. The Commission believes that it would not be appropriate for an adviser to waiver its advisory fees for one class and not for other classes. b. Class voting. So that voting in multiple class funds is consistent with the purposes of section 18(i), proposed paragraph (a)(3) would require that each class have the exclusive right to approve matters submitted to shareholders that relate solely to its different arrangement. Paragraph (a)(3) would govern which class of shareholders would vote on a matter, but would not affect whether the matter is one required to be submitted to shareholders. For example, if the board of directors decided to adopt a shareholder services plan for one class of shareholders that was not subject to rule 12bÄ1, a shareholder vote to approve that plan would not be required. ®41¯ If, however, the board of directors decided that the fund should submit the matter for shareholder approval, paragraph (a)(3) would require that the matter be submitted only to the class of shareholders subject to the plan. ®41¯The Commission has stated that "[w]hether particular shareholder or other services are `primarily intended to result in the sale of fund shares' and therefore, must be paid under a 12bÄ1 plan, will depend on the surrounding circumstances.'' Payment Asset-Based Sales Loads by Registered Open-End Management Investment Companies, Investment Company Act Release No. 16431 at n. 126 (June 13, 1988), 53 FR 23258, 23271 (proposing amendments to rule 12bÄ1). Proposed paragraph (a)(4) would require that each class have the right to vote separately on matters in which its interests are different from those of other classes. For the most part, classes are likely to have different interests only in matters that involve the arrangements of the classes under paragraph (a)(1) and hence fall within paragraph (a)(3). However, should a matter arise that does not involve those arrangements, paragraph (a)(4) would ensure that each class has a separate vote. Like paragraph (a)(3), paragraph (a)(4) would govern all shareholder votes that are subject to it, but would not affect whether or not a shareholder vote is required. c. Fund-wide rights and obligations. The multiple class exemptive orders require that all classes in a multiple class fund be identical except for differences expressly permitted by order. Similarly, proposed paragraph (a)(5) would require that a fund relying on the rule establish the same rights and obligations for all shareholders regardless of class, except as provided by paragraphs (a)(1), (2), (3), and (4). Thus, paragraph (a)(5) effectively would require multiple class funds to allocate all expenses of the fund that are not class expenses, and voting rights on matters that affect all shareholders equally, to all fund shareholders pro rata. ®42¯ ®42¯Allocation of expenses to all shareholders pro rata generally means allocation on the basis of relative net asset value. See infra section II.A.2. Pro rata allocation of voting rights generally means allocation on a per share basis but can also mean allocation on the basis of relative net asset value. See Sentinel Group Funds, Inc. (pub. avail. Oct. 27, 1992) (voting rights of different series in a fund may be tied to relative net asset values of each class to avoid vesting unfair voting power in classes with per share net asset values that are significantly lower than those of other classes). The Commission requests comment whether rule 18fÄ3 should require voting to be allocated on the basis of relative net asset value. 2. Allocation of Fund-Wide Expenses Proposed paragraph (b) would apply the general principle of paragraph (a)(5) specifically to the allocation of fund expenses. Paragraph (b) would provide that all income, gains and losses, and expenses of the fund ®43¯ other than class expenses, must be allocated to each class on the basis of relative net asset value. This provision is intended to clarify an issue that has arisen under some exemptive applications. The exemptive orders have required the filing of a separate report from an expert in response to sub-item 77P of Form NÄSAR. ®44¯ In these reports, an expert has reported on the adequacy of accounting procedures unique to multiple class funds. The reports have stated whether the methodology and procedures for calculating net asset value of each class, including allocation of income, expenses, dividends, and distributions, are appropriate. In these reports, some applicants have proposed to allocate fund expenses and income on a per share basis, regardless of class, but this treatment has not been permitted. Such an approach is not appropriate and would not be permitted under paragraph (b). ®43¯As is clear from the definition of "company'' in the introductory paragraph of the rule, in the case of a fund with more than one series of securities, the "income, realized and unrealized capital gains and losses, and expenses of the company'' and the "net asset value of the company'' in paragraph (a)(5) refer to the specific series in question. ®44¯17 CFR 274.101. Under these proposals a separate report from an expert would no longer be necessary. Instead, to assure that the registrant's internal control structure is adequate to perform the accounting procedures unique to multiple class funds, the Commission is proposing to amend sub-item 77B of Form NÄSAR to state a requirement that accountants preparing the report on internal control refer expressly to the procedures for calculating the classes' net asset values. Sub-item 77B requires independent accountants to report on the company's system of internal accounting control (internal control structure). The report is to be based on the review, study and evaluation of the accounting system, internal accounting controls, and procedures for safeguarding securities made during the audit of the financial statements. The proposed amendment would add a specific reference in the accountant's report on internal control (structure) directed to the procedures for calculating multiple equity class net assets. While an audit of the financial statements would include a review of the accounting system, which would likely include an evaluation of such procedure, specifying that the independent accountant's report must include a reference should ensure a uniform level of responses. 3. Board Review The multiple class exemptive orders ®45¯ address potential conflicts of interest among classes by looking to fund boards of directors. ®46¯ The Commission's orders include conditions requiring the boards to approve the issuance of multiple classes and to include in the minutes of their meetings a detailed discussion of the reasons for approval; to review and approve the specific allocations of class expenses; and to monitor for any conflicts of interest among classes and take any actions reasonably necessary to eliminate them. ®47¯ ®45¯E.g., Smith Barney, supra note 6, 57 FR at 47159. ®46¯The definition of "director'' in section 2(a)(12) of the Investment Company Act also includes any persons performing similar functions for any organization, whether incorporated or unincorporated, including any natural person serving as trustee of a management investment company created as a common-law trust. 15 U.S.C. 80aÄ2(a)(12). ®47¯E.g., Dreyfus, supra note 36, 57 FR at 61948. In addition, the orders typically have required the independent directors to approve quarterly and annual expense reports presented to the board under rule 12bÄ1(b)(3)(ii), have referenced the board's fiduciary responsibilities under the Investment Company Act and, when bank intermediaries are involved, under federal banking laws have required funds to develop written guidelines for the directors setting forth the conditions of the orders and the duties and responsibilities of the boards for the use of multiple classes. E.g., id. (conditions 4, 6, 7, 9, and 14). Like the exemptive orders, proposed rule 18fÄ3 would give boards of directors, particularly the independent directors, significant responsibility. Proposed paragraph (c) would require that the fund adopt a written plan specifying all of the differences among classes. The plan would have to set forth the different shareholder service and distribution arrangements for each class, any allocation of other expenses, and any conversion features or exchange privileges. Thus, the plan would provide the board of directors with a clear statement of the differences among the classes. Paragraph (c) also would require that the board, including a majority of the independent directors, approve the plan before the issuance of multiple classes and annually thereafter. ®48¯ In doing so, it would have to find that the plan is fair to, and in the best interests of, each class and the company as a whole. ®49¯ Thus, the rule would replace several board reviews required by the orders with one finding that the written plan be fair to, and in the best interests of, each class individually and the fund. In making this finding, the board should focus on the relationship among the classes and examine potential conflicts of interest among classes regarding allocation of fees, services, and voting rights. Most significantly, the board should evaluate the level of services provided to each class and the cost of those services to ensure that the services are appropriate and that the allocation of expenses is reasonable. ®50¯ ®48¯The Commission has taken a number of steps recently to reduce burdens on fund boards of directors. E.g., Exemption of Acquisition of Securities Issued by Persons Engaged in Securities-Related Businesses, Investment Company Act Release No. 19716 (Sept. 16, 1993), 58 FR 49425 (amending rule 12d3Ä1 [17 CFR 270.12d3Ä1]); and Revision of Certain Annual Review Requirements of Investment Company Boards of Directors, Investment Company Act Release No. 19719 (Sept. 17, 1993), 58 FR 49919 (amending rules 10fÄ3, 17aÄ7, 17eÄ1, 17fÄ4, and 22cÄ1 [17 CFR 270.10fÄ3, .17aÄ7, .17eÄ1, .17fÄ4, and .22cÄ1]). The Commission believes that boards are most effective when they are evaluating potential conflicts between funds and their advisers, not when they are involved with day-to-day activities of funds or are making findings that involve more ritual than substance. Because of the conflict between funds and their advisers over advisory and other fees, the Investment Company Act places a great deal of responsibility on boards to evaluate fees paid to advisers and their affiliated persons. See, e.g., Investment Company Act section 15(a),(c), 15 U.S.C. 80aÄ15 (a), (c). Multiple class arrangements involve potential conflicts over fees. Therefore, the Commission believes that board review of multiple class arrangements is appropriate. ®49¯Section 36(b) of the Act, 15 U.S.C. 80aÄ35(b), imposes a fiduciary duty on fund investment advisers and their affiliated persons as to their receipt of compensation from the fund. That section does not contemplate multiple class funds. The Commission believes, however, that a determination of whether class-specific compensation (such as a rule 12bÄ1 fee) paid to a fund's investment adviser or an affiliated person of the adviser meets the standards of that section should be made on a class-by-class basis, and would depend on all the facts and circumstances, including the fees paid by other classes of the fund, and the effect of any waiver or reimbursement. ®50¯In this regard, rule 12bÄ1 requires board review of expenditures under plans of distribution. Such review could be performed concurrently with the review of the multiple class plan. Proposed amendments to Forms NÄ1A and NÄ14 would require a copy of the rule 18fÄ3 plan to be filed as an exhibit. ®51¯ ®51¯New Item 24(b)(18) of form NÄ1A, and new Item 16, Exhibit (17) of Form NÄ14. 4. Exchange Privileges and Conversions In addition to the differences among classes provided under paragraph (a), the exemptive orders have allowed classes to differ in exchange privileges and conversion features. Proposed paragraph (d) would codify these provisions of the orders. Paragraph (d)(1) would let multiple class funds offer different exchange privileges to different classes. Proposed paragraph (d)(2) would allow funds to offer one or more classes with conversion features. This provision would specify that conversions must be made at net asset value and prescribe that a conversion feature must limit the total rule 12bÄ1 fees paid by shareholders with a conversion feature. Differences in exchange privileges and conversion features would be subject to board review and approval under paragraph (c) to determine that they are fair to each class individually and to the fund as a whole. In addition, the exchange privileges continue to be subject to section 11 of the Investment Company Act and the rules thereunder. ®52¯ ®52¯15 U.S.C. 80aÄ11(a); 17 CFR 270.11aÄ1, Ä2, and Ä3 (requiring offers of exchange to be made on the basis of net asset value, with exceptions). If a fund has a class with a conversion feature ("purchase class''), proposed paragraph (a)(4) would require that any material increase in the rule 12bÄ1 fee charged to the class into which the purchase class converts (the "target class'') also be approved by a separate vote of the purchase class. If the target class approves the increase but the purchase class does not, paragraph (d)(2) would provide that the fund could not increase the rule 12bÄ1 fee of the target class unless it established a separate target class for shareholders in the purchase class. That separate class would have to have the same fees and terms as the target class did before the increase. B. Rule 12bÄ1 Rule 12bÄ1 was adopted in 1980 before the issuance of any orders permitting multiple class funds. The wording of the rule implicitly assumes that a fund has a single class of securities and does not specify how its procedures apply when the fund includes separate classes. The Commission is proposing to amend rule 12bÄ1 by adding new paragraph (g), which would provide 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 that is taken on the plan must be taken separately for each class. ®53¯ Thus, a plan would be subject to separate requirements of director and shareholder approval for each class. Thus, in determining under paragraph (e) that a distribution plan presents a "reasonable likelihood of benefit'' to the company and its shareholders, the board would be required to make that finding separately for each class. Similarly, where rule 12bÄ1 requires that a plan for the distribution of securities be approved by a majority of the fund's outstanding voting securities, the proposed amendment would require shareholder approval by the outstanding voting securities of each separate class only. ®54¯ The amendment is consistent with the orders, which have not allowed shareholders not subject to a plan to vote on it. ®53¯In the case of funds issuing more than one series of shares, rule 12bÄ1 has been interpreted to treat each series as a separate fund. See Inv. Co. Act Rel. 16431, supra note 41, at n.202 and accompanying text. ®54¯As noted in the text above, under paragraph (d)(2) of proposed rule 18fÄ3, however, any shareholder vote on the rule 12bÄ1 plan of a target class also would require a separate vote of any purchase class. Proposed new paragraph (g) of rule 12bÄ1 would contain an express cross-reference to rule 18fÄ3 to address this limited exception expressly. The amendment also would be consistent with paragraph (a)(3) of proposed rule 18fÄ3. That provision requires that each class have exclusive voting rights on any matter submitted to shareholders that relates solely to the shareholder servicing or distribution arrangement of that class. ®55¯ ®55¯The orders also have required that multiple class funds adopt and operate their shareholder service plans in accordance with the procedures set forth in rule 12bÄ1 (b) through (f), other than the rule's requirements for shareholder approval. Rule 18fÄ3 would not retain this requirement, in light of the requirement under paragraph (c) that a multiple class fund's board review the fairness of the fund's plan. C. Disclosure 1. Prospectus Disclosure Current exemptive orders generally require every prospectus of a multiple class fund to disclose the respective expenses, performance, distribution arrangements, services, fees, sales charges, and exchange privileges of all classes, regardless of whether each class is offered through that prospectus. ®56¯ This cross-disclosure requirement is intended to highlight the existence of the different classes and provide information about investors' choices among those classes. The orders, however, do not expressly require information to be disclosed with equal prominence for all classes. Therefore, practice varies. Some prospectuses provide expenses for one class in the fee table and for other classes in notes following the fee table, and other prospectuses put disclosure about other classes in the text further back in the prospectus. ®56¯E.g., Merrill Lynch California Municipal Series Trust, et al., Investment Company Act Release Nos. 16503 (July 28, 1988), 53 FR 29294 (Notice of Application) and 16535 (Aug. 23, 1988), 41 SEC Docket 955 (Order). Some orders have included an exception from the cross-disclosure requirement for classes of shares that are available solely to institutional investors investing for their own account, institutional intermediaries that have investment discretion over each underlying account, and certain persons related to the fund, its adviser, or principal underwriter ("institutional or inside investors''). ®57¯ Under these orders, prospectuses for classes available to the general public must disclose only the identity of the class not available for purchase and identify those persons eligible to participate in them. This approach recognizes that certain classes are not available to the general public, either through direct investment or by exercising investment discretion through an intermediary such as a bank or an employee benefit plan. Detailed information concerning these classes may have little relevance to an individual investor's evaluation of the class best suited to his or her investment needs, and may confuse rather than inform investors. ®57¯E.g., John Hancock Asset Allocation Fund, Investment Company Act Release Nos. 18921 (Sept. 1, 1992), 57 FR 40934 (Notice of Application) and 18984 (Sept. 29, 1992), 52 SEC Docket 2575 (Order) (disclosure not required about class offered solely to certain unaffiliated benefit plans in which investment discretion is vested with a separate trustee (excluding self-directed plans), tax-exempt retirement plans for employees of the fund's adviser and its affiliates, certain unit investment trusts, banks and insurance companies purchasing for their own account, investment companies not affiliated with the adviser, and endowment funds of non-profit organizations); Shearson Lehman Appreciation Fund Inc., Investment Company Act Release Nos. 18770 (June 11, 1992), 57 FR 27830 (Notice of Application) and 18832 (July 7, 1992), 51 SEC Docket 2021 (Order) (disclosure not required about class offered solely to, among others, employees of the fund's principal underwriter and its affiliates, directors, general partners, or trustees of any investment company for which the principal underwriter serves as distributor, and the spouses and minor children of the foregoing). As noted above, funds may use the master-feeder structure to achieve many of the same marketing objectives as the multiple class structure. Unlike multiple class funds, however, which generally must disclose the material features of each class regardless of how that class is marketed, feeder funds currently are not required to provide detailed prospectus disclosure concerning other feeder funds investing in the same master fund. Each feeder fund prospectus must contain only a statement that other feeder funds invest in the master fund and that their expenses and consequently their performance may differ, and a toll-free telephone number for information about the availability of other feeder funds. ®58¯ ®58¯Letter from Carolyn B. Lewis, Assistant Director, Division of Investment Management, SEC, to Registrants (Feb. 22, 1993) (hereinafter "1993 Generic Comment Letter''), Comment II.H: feeder fund prospectuses also must contain: (i) Certain information regarding the master fund (e.g., its investment objectives and policies), (ii) a unified fee table summarizing the fees of both the master fund and the feeder fund, (iii) a discussion of certain factors, including whether the aggregate fees assessed at the master fund and feeder fund levels would be more or less than if the feeder fund invested directly in the securities held by the master fund, that the feeder fund's directors considered when adopting the master-feeder structure, (iv) a discussion of the pass-through voting procedures followed by the feeder fund when the master fund requests a vote of its security holders, and (v) a discussion of the consequences of a feeder fund's being required to redeem its shares in the master fund in the event that the feeder fund's shareholders fail to approve a change in the feeder fund's investment objectives that conforms with changes in the master fund's investment objectives. These prospectus disclosure requirements closely resemble the standards recently adopted by the North American Securities Administrators Association for registration of master-feeder funds at the state level. See "Guidelines for the Registration of Master Fund/Feeder Funds,'' NASAA Reports (CCH) 2252. The Commission is proposing to modify the prospectus disclosure requirements for multiple class funds and master-feeder funds to make them generally consistent and to promote understanding of investors' options among these funds' sales and service arrangements. The proposal seeks to respond to concerns that the complexity of sales and service charges may confuse many investors; some reports indicate that many investors may not understand that they are paying sales or related charges or the effect different sales and related charges will have on performance. ®59¯ These concerns are greatest with rule 12bÄ1 fees and contingent deferred sales charges, whose significance may not be fully appreciated by investors because they are not paid at the time of purchase and because the amounts that investors ultimately will pay cannot be determined precisely at that time. ®59¯Several news reports have indicated that the complexity of distribution charge options can be confusing to investors. See, e.g., Carole Gould, Clearing Up Confusion Over Class, N.Y. Times, Nov. 14, 1993, at F14; Gene Colter, In ABCs of Shares, "B'' is for Beware, Wall St. J., Oct. 5, 1993, at R22 (spread loads in particular may confuse investors, who may believe that they are holding no-load funds); Robert N. Veres, Alphabet Soup, Worth, July/August 1993, at 88 (the array of classes and distribution charges "can bewilder even brokers and financial advisors''); Carole Gould, Looking Ahead, Long and Hard, N.Y. Times, June 6, 1993, at F16 (the multiple class fund can create a "byzantine pricing structure'' that confuses investors); Allen Myerson, No Front or Back Fees But Watch That Middle, N.Y. Times, May 29, 1993, at D31 (investors baffled by the level load); Amey Stone, Will Supermarket-Style Pricing Work With Mutual Funds, Financial Planning, Feb. 1993, at 37 (president of complex describes level load as designed to look or feel nothing like a load); Amy Dunkin, Mastering the Maze of Fund Loads and Fees, Bus. Wk., Aug. 24, 1992, at 78 ("Figuring out what impact the sales charges and expenses have on your return is getting more difficult''). Thus, the proposed amendments would require the prospectuses of both multiple class and feeder funds to include a prominent legend following the fee table providing information about the availability of other classes or feeder funds, unless all classes or feeder funds are offered through the same prospectus. A prospectus for a multiple class or feeder fund would be required to include full cross-disclosure about all classes or feeder funds investing in the same master fund that are offered or made available through the same broker, dealer, bank, or other financial intermediary and that permit investors to choose among alternative arrangements for sales and related charges. For example, classes with a "dual distribution'' arrangement (a choice between a class with a front-end load and a class with a spread load) would be subject to this requirement. If a prospectus offers more than one class or feeder fund, or contains cross-disclosure about other classes or feeder funds, the prospectus would be required to discuss the differences among the classes or feeder funds that are offered in the prospectus or subject to the cross-disclosure requirement; that discussion would be required to include a line graph comparing the hypothetical performance of those classes or feeder funds over a ten year period, assuming a $10,000 initial investment and a 5% annual return for all classes or feeder funds before expenses; this graph would show the circumstances in which each would produce the highest total return upon redemption. Thus, when investors are offered alternative sales and related charges, the proposed prospectus requirements should focus investor attention on a comparison of sales and service charge options and make it easier to understand when a given option is likely to produce the lowest costs and hence the highest return. These amendments would apply to all multiple class funds, no matter whether they rely on rule 18fÄ3 or continue to rely on exemptive orders for their exemption from section 18. ®60¯ ®60¯For example, an Investment Company Institute committee has been considering proposed standard nomenclature for multiple class funds. See 1993 ICI Securities Law Procedures Conference at VÄ5. The proposed amendments would not provide the only prospectus disclosure requirements for these funds. Certain other disclosure requirements applicable to master-feeder funds would remain in effect notwithstanding the proposal or adoption of these amendments. ®61¯ The proposed amendments, however, would not include certain other disclosure currently required for multiple class funds under the exemptions. ®62¯ The Commission requests comment on whether other amendments are necessary to address differences among multiple class, master-feeder, and single class funds. For example, should the Commission impose standardized class designations (e.g., Class A for front-end sales charges, Class B for spread loads, etc.) upon all multiple class funds, or would variations in class structures make such a requirement unworkable? ®61¯Thus, the Division's guidelines in the 1993 Generic Comment Letter for feeder fund prospectus disclosure would continue to apply with one exception: following the adoption of these amendments, the Division would no longer require a general description of the master-feeder structure on the cover page. See 1993 Generic Comment Letter, supra note 58 (Comment II.H.(a)). ®62¯For example, when multiple class funds provide the net asset value or public offering price of any class for publication in a newspaper or similar listing, the exemptions have required the funds to provide this information for all classes. The Commission is not proposing such a requirement here. a. Legend concerning classes or feeder funds not offered through a prospectus. The Commission is proposing to revise Instruction 1 to Item 2(a) of Form NÄ1A ®63¯ to require every prospectus of a multiple class or feeder fund to include a prominent legend in the narrative following the fee table unless all classes or all feeder funds are offered through the same prospectus. ®64¯ The legend would state that a multiple class fund issues other classes or that other feeder funds invest in the master fund, and that because sales charges and expenses vary among classes and feeder funds, performance also varies. The legend would be required to identify those other classes ®65¯ or feeder funds, and to include a toll-free telephone number that investors could use to obtain further information about other classes or feeder funds not offered through the prospectus. As under the exemptive orders, in multiple class fund prospectuses, the legend also would be required to state that a sales representative may receive different compensation for selling one class than for another class. ®63¯17 CFR 239.15A, 274.11A. ®64¯Rule 8bÄ12(d) under the Act requires the body of all printed registration statements to be in roman type at least as large as 10 point modern type. 17 CFR 270.8bÄ12(d). The legend would be required to appear in the text and therefore must be printed in at least 10 point modern type. Disclosure is "prominent'' if it appears in a typographically distinctive manner (e.g., boldface, italics, red letters, etc.). See 1993 Generic Comment Letter, supra note 58 (Comment II.J.). ®65¯Thus, the legend would provide for multiple class funds some of the disclosure required by Item 6(d) of Form NÄ1A, which requires identification of other classes in the prospectus and a statement whether those classes have any preference over the security being offered. Proposed new Item 32(d) of Form NÄ1A would require an undertaking to provide investors calling the toll-free telephone number with information about purchasing procedures and eligibility requirements for each class or feeder fund, and comparable information to be provided about any investment vehicle other than a mutual fund that invests only in the same master fund. ®66¯ The undertaking would also require funds to provide prospectuses for other classes or feeder funds upon request. ®66¯A pension fund, bank collective trust fund or other commingled fund, as well as another public or private investment vehicle also could invest in a master fund. The proposed legend requirement is intended to alert investors to the existence of other classes and feeder funds and how to obtain information about them. Thus, it would substitute for the more extensive information about other classes that now is required under the exemptive orders to appear in the prospectus. ®67¯ Current disclosure requirements for most feeder funds would be unchanged under the proposal, except that the proposal would require specifically that some of the disclosure now required for feeder fund prospectuses be presented in the legend following the fee table. ®68¯ ®67¯See supra note 56 and accompanying text: prospectuses generally are required to provide cross-disclosure about expenses, performance, distribution arrangements, services, fees, sales charges, and exchange privileges of classes other than institutional or inside investor classes. Prospectuses for classes offered to the general public are not required, however, to provide that cross-disclosure about institutional or inside investor classes; instead, they are required only to identify the institutional or inside investor class and the category of investors eligible to purchase that class. See supra note 57 and accompanying text (defining institutional and inside investors). Because, however, the proposed legend would be more conspicuous than the disclosure of the existence of the institutional or inside investor class provided by many multiple class funds under the exemptive orders, investors should be more likely to notice it. Currently, many multiple class funds place this disclosure at the end of the prospectus. ®68¯In general, the substance of the legend, including the inclusion of a telephone number that investors may use to obtain further information, closely resembles a current feeder fund prospectus disclosure requirement. See 1993 Generic Comment Letter, supra note 58 (Comment II.H.(c)). The Commission requests comment on whether, instead of requiring that the legend identify all other classes or feeder funds, the Commission should amend Item 6(d) (which already requires identification of all classes) to require identification also of all feeder funds, and require the legend to include a cross-reference to the Item 6(d) disclosure. b. Cross-disclosure about certain other classes or feeder funds. Proposed new General Instruction I to Form NÄ1A would require a prospectus offering any class or feeder fund to provide disclosure responding to Items 2 through 9 of Form NÄ1A for all other classes or feeder funds investing in the same master fund that are offered or made available through the same broker, dealer, bank, or other financial intermediary ®69¯ and have alternative arrangements for sales and related charges, whether or not those classes or feeder funds are offered in the same prospectus. This requirement would ensure that investors have available the information necessary for choosing among different sales charges and related expenses while investing in the same underlying portfolio. The principal purpose of the proposed cross-disclosure requirement, coupled with proposed new Item 6(h) discussed below, is to focus the attention of investors on a comparison among different forms and/or amounts of sales charges and related expenses. This arrangement would facilitate comparisons among classes or feeder funds that have alternative arrangements for sales and related charges by providing information in a readily accessible format. When, as under Items 2 and 3 of Form NÄ1A, information is required to be presented in tabular form, those tables must list separately in parallel and adjacent columns data for each class or feeder fund that is offered in the prospectus or about which cross-disclosure is required. ®69¯Other financial intermediaries would be any other entities that, like brokers or dealers, act as agents or principals in the sale of a fund's shares, or that, like certain banks, provide shareholder services under an agreement with a fund. The determination of whether classes or feeder funds have alternative arrangements for sales and related charges and therefore require cross-disclosure would depend on the facts and circumstances of each situation. Generally, classes or feeder funds would be considered to have alternative sales and related charges if they differ primarily in offering investors different methods for paying distribution costs (e.g., a choice among a front-end load, a spread load, and a level load). ®70¯ By contrast, a class or feeder fund offered exclusively to institutional or inside investors ®71¯ would not be considered to have an alternative arrangement to a class or feeder fund offered to the general public. The typical case to which this requirement would apply is a dual distribution arrangement. ®72¯ ®70¯As an illustration of the proposed requirement, assume a fund offers four classes, with Class A and Class B sold to retail investors through brokers, Class C available only to institutions investing for their own account, and Class D available through banks to retail investors. Class A has a 5.0% front-end sales load and a .25% asset-based service fee, Class B has a .75% asset-based distribution fee and a 5.0% CDSL that declines 1.0% per year, Class C has no sales charges or asset-based distribution fees, and Class D has no sales charge but a .75% asset-based distribution fee and a .25% asset-based service fee. A prospectus for Class A must contain full cross-disclosure about Class B, and vice versa. Prospectuses for Classes A and B would not be required to include cross-disclosure about Classes C and D. Although Class D shares also are offered to retail investors, Class D is available only to customers of a financial intermediary that does not offer Classes A and B to its customers; therefore, cross-disclosure about Class D would not be required. Furthermore, if Classes A and B were each available only through a separate bank, the prospectus for each class would not be required to provide cross-disclosure about the other. ®71¯See supra note 57 and accompanying text. ®72¯See, e.g., Merrill Lynch California Municipal Bond Trust, supra note 56. Under proposed new General Instruction I and the proposed legend requirement, an investor's existing or potential relationship to a broker, dealer, bank, or other financial intermediary would determine whether the investor would find information about various classes or feeder funds in the same prospectus or would be referred to a toll-free telephone number for that information. If classes or feeder funds are sold to customers of the same financial intermediary and differ primarily in the sales charge arrangements, cross-disclosure would be required; the cross-disclosure requirement, together with the requirement of a discussion of differences among classes or feeder funds, would focus investor attention on the differences among sales charges and related expenses. If classes or feeder funds are sold to customers of different financial intermediaries, or if they are sold to customers of the same intermediary but differ primarily in the services provided, the proposal assumes that they are being offered to investors with different existing or potential customer relationships. Those different relationships would involve different conditions and charges that generally would not be required to be disclosed in the prospectus in any event. ®73¯ Thus, an investor would need to look outside the prospectus to learn about other customer relationships and to establish such a relationship in order to purchase certain classes or feeder funds. Because prospectuses currently are not required to disclose all of the costs and terms of establishing and maintaining these relationships and investing in these classes or feeder funds (and such disclosure, if required, would be lengthy, complex and constantly changing), the Commission is proposing to provide for investors to obtain those classes or feeder funds by calling the toll-free number listed in the legend following the fee table. ®73¯For example, the prospectus would not be required to disclose all the terms and costs of specific customer relationships or transactions with particular financial intermediaries such as brokers or banks. Disclosure is not always required about the amount of transaction fees or ongoing fees, such as account fees, that are charged by financial intermediaries. See, e.g., Form NÄ1A, Items 7(b)(v) and 8(b). Item 7(b)(v) requires disclosure whether any person such as a broker-dealer or bank may impose any charges in connection with purchases, unless a registrant believes those charges are disclosed in a wrapper. Item 8(b) requires disclosure whether a broker-dealer may impose charges for selling shares to a registrant through the broker-dealer. In either case, the amount of such fees need not be disclosed. When banks or other financial institutions impose service fees, a footnote should be added to the fee table to inform investors that such fees exist; and when there is only one institution levying an additional fee, that fee may have to be included as an item in the fee table. Letter from Carolyn B. Lewis, Assistant Director, Division of Investment Management, SEC, to Registrants at 4 (Jan. 17, 1992) (Comment II.C). The cross-disclosure requirement should result in minimal change for current multiple class and master-feeder funds. The multiple class exemptive orders already require cross-disclosure of virtually all the features that are likely to differ among classes; current disclosure, however, may not be as extensive or in the same format as what would be required under the proposal. For example, in prospectuses of funds operating under current exemptive orders, sales charge and expense disclosure may be found in footnotes or the text and not in parallel columns in the fee table; under the proposed new Instruction, such disclosure would be required to appear in the same form and extent as if the class or feeder were being offered in the same prospectus. In any event, virtually all funds with classes that would be subject to the cross-disclosure requirement already offer those classes in the same prospectus. Although feeder fund prospectuses have been required only to provide disclosure about both the feeder funds and the master fund, ®74¯ few feeder funds currently have alternative arrangements for sales charges that would bring them within the proposed cross-disclosure requirement. ®75¯ ®74¯See "Hub-And-Spoke'' Funds: A Report Prepared By the Division of Investment Management at n. 22 (report delivered to The Honorable John D. Dingell on April 15, 1992). The master fund is a co-issuer with each feeder fund under Securities Act rule 140. The master fund and its officers and directors sign each feeder fund's registration statement. 17 CFR 230.140. ®75¯See supra note 27 and accompanying text for examples of feeder funds investing in the same master fund that are offered or made available through the same intermediaries and have alternative sales charge arrangements; such funds would appear to be subject to the proposed cross-disclosure requirement. The Commission requests comment on whether it is appropriate to limit the proposed cross-disclosure requirement to classes or feeder funds with alternative sales charge arrangements. Should prospectuses be required instead to provide cross-disclosure about all classes or feeder funds investing in the same portfolio, or all such classes or feeder funds other than those offered to institutional or inside investors, ®76¯ or all classes or feeder funds offered or made available through the same financial intermediary? Such a requirement arguably might help investors understand all their possible options for investing in a portfolio, and might promote greater competition among different financial intermediaries. Would, however, such a requirement result in mandatory prospectus disclosure so complex that it would defeat the Commission's goal of promoting investor understanding? ®76¯See supra note 57 and accompanying text (defining institutional and inside investors). The rationale for this alternative would be that when one class or feeder fund is offered through a broker, and another class or feeder fund is made available through a bank, investors would be eligible in theory to purchase each class or feeder fund, either through the broker or by opening an account with the bank, and hence should receive information in the prospectus about those other choices. c. Comparison of classes or feeder funds. If a prospectus offers two or more classes or feeder funds, or provides cross-disclosure about one or more classes or feeder funds, proposed new Item 6(h) would require the prospectus to discuss the differences among the classes or feeder funds that are offered in the prospectus or about which the prospectus provides cross-disclosure under General Instruction I. It also would require the prospectus to provide a line graph comparing the performance of those classes or feeder funds over a hypothetical ten-year period. Like the line graph required under Item 5A, the graph would compare the net asset value on the first day of the first year to the subsequent net asset values at redemption on the last day of each year starting with a $10,000 initial investment; unlike the graph under Item 5A, this graph would be hypothetical and not based on historical performance. ®77¯ The graph would show, for example, the circumstances under which holding shares of a class or feeder fund for a given length of time would produce the highest return; with this comparison, investors could consider how long they are likely to hold their shares in determining which class or feeder fund to purchase. ®78¯ ®77¯The proposed Instructions to new Item 6(h) also are based on the Instructions to Item 5A; they have been modified to reflect the differences between historical and hypothetical performance, and between a comparison to an index and a comparison among different classes or feeder funds. Unlike Item 5A disclosure, Item 6(h) disclosure would be required to appear in the prospectus; it would not be sufficient to include this disclosure in a fund's annual report. ®78¯Cf. Vanessa O'Connell, Mastering the ABCs of Fund Shares, Money, Sept. 1993, at 44 (providing hypothetical example in which level-load class would have the highest value if an investor stays in the fund for five or fewer years, spread load would have the highest value for an investor redeeming in year six, and front-end shares for an investor holding for seven years or longer). The computation of those net asset value figures would use a five percent annual return before expenses for all classes or feeder funds. This five percent rate like that under the example in Item 2, is used to ensure comparability and illustrate the hypothetical nature of the line graph. The Commission requests comment on whether Item 6(h) would require more than one rate of return in order to illustrate differences among different market conditions, ®79¯ or should permit the use of a rate other than five percent selected by the issuer so long as the rate is reasonable in comparison to the historical performance of the fund or other funds with comparable investment objectives. The Commission also requests comment on whether Item 6(h) should require textual discussion instead of the proposed line graph. ®79¯For example, prospectuses for variable life insurance contracts include tables showing how contract values can change over time at hypothetical gross investment rates of zero, four, and eight percent, or zero, six, and twelve percent. Cf. also Regulation SÄK, Item 402(c), 17 CFR 229.402(c) (executive compensation disclosure instructions regarding stock options require valuation of options assuming five or ten percent annual rate of stock price appreciation). The graph would be required to be accompanied by a brief statement explaining that the graph is a hypothetical illustration of the effect on performance of the expenses of the different classes or feeder funds. The statement also must explain the graph's assumptions and state that the assumed five percent return should not serve as a basis for predicting future returns. The line graph would complement the example in the fee table required by Item 2: The example requires disclosure of total expenses over periods of one, three, five, and ten years; thus it may not identify the point at which one class or feeder fund would come to have a higher value on redemption than another class or feeder fund. When a prospectus includes the disclosure required by proposed Item 6(h), the legend following the fee table also would be required to include a cross-reference to the location of the Item 6(h) disclosure in the prospectus. The Commission requests comment on whether this disclosure should be required to follow the fee table. d. Alternative regulatory approaches. The Commission requests comment on whether prospectus disclosure requirements alone are effective to ensure that investors understand their options among these funds' sales and related charges before making an investment decision. Various reports suggest that many investors find these funds complicated, and do not understand what sales charges they will be paying; ®80¯ these reports raise questions whether adequate information about sales charges is communicated to investors today. ®80¯See supra note 59 (for references to press reports). The Commission requests comment on whether these reports of investor confusion are accurate. If so, is it likely that the recently effective amendments to the National Association of Securities Dealers, Inc. ("NASD'') Rules of Fair Practice regarding asset-based sales charges will lessen investor confusion? ®81¯ ®81¯NASD Rules of Fair Practice, Article III, Section 26, NASD Manual (CCH) 2176. Among other changes, these amendments preclude the use of the term no-load and similar terms for funds with rule 12bÄ1 or service fees exceeding 0.25%. The Commission also requests comment on whether some other regulatory approach is necessary to address these concerns. Should the Commission require multiple class and master-feeder funds to deliver a prospectus or some shorter document before sale? ®82¯ For example, representatives might provide an off-the-page prospectus (if available) or some other document containing information about sales charges and a comparison such as that required by proposed Item 6(h)\83\. Or should the Commission work with the NASD to set standards for basic information that representatives must communicate to customers, whether orally or in writing, before investment in multiple class and master-feeder funds? ®82¯But see Protecting Investors, supra note 2, at 351 (recommending that delivery of the section 10(a) prospectus should not be required before all mutual fund sales in the absence of evidence that investors are dissatisfied with, or being harmed by, the current practice of requiring the delivery of the statutory prospectus at the earlier of the confirmation of the sale or the delivery of the security in the case of mutual fund shares sold through brokers). ®83¯For example, such a document might consist of photocopies of pertinent pages of the section 10(a) prospectus. As with rule 15c2Ä8 [17 CFR 240.15c2Ä81], the Commission could adopt such a rule under the authority in section 15(c)(2) of the Securities Exchange Act [15 U.S.C. 78o(c)(2)], which provides the Commission with rulemaking authority over fraudulent, deceptive, and manipulative acts and practices. 2. Advertising and Sales Literature Multiple class orders generally require advertising and sales literature to include expense and performance data for all classes of shares whenever they provide this information for any one class. ®84¯ This requirement addresses concerns that advertising and sales literature featuring the performance of only one class might be misleading. Investors, for example, could be misled if the performance of a class available only to institutions were advertised without disclosure that classes available to the general public would have higher sales charges and expenses and, consequently, poorer performance. ®84¯ E.g., Merrill Lynch California Municipal Bond Trust, supra note 56, 53 FR 29294. The same orders that do not require prospectus disclosure about institutional or inside classes also permit a comparable exception in advertising and sales literature disclosure. Under this exception, advertising or sales literature need not include performance or expense data for classes that are available solely to institutional or inside investors. ®85¯ Moreover, the orders do not explicitly require any information regarding the multiple class structure to be included in advertisements or sales literature that do not contain performance or expense data. For master-feeder funds, there are currently no Commission guidelines or requirements regarding advertising and sales literature. ®85¯See supra note 57 and accompanying text. In contrast to their requirements for prospectus disclosure, however, the exemptions do not require any disclosure in advertising or sales literature regarding the excepted classes. a. Legends concerning other classes or feeder funds. The Commission proposes to amend rule 134 under the Securities Act by adding new paragraph (a)(3)(iv) to specifically address multiple class and master-feeder fund advertising and sales literature. ®86¯ Because master-feeder arrangements serve many of the same functions as multiple class funds and raise many of the same concerns, the Commission believes that, as with prospectus disclosure, advertising for both types of funds should be subject to similar requirements. ®87¯ Proposed new paragraph (a)(3)(iv) would require multiple class and master-feeder funds to include a legend in advertising and sales literature similar to the proposed legend following the fee table in the prospectus. The legend would disclose that a multiple class fund issues other classes or that other feeder funds invest in the master fund, and that because sales charges and expenses vary among classes and feeder funds, performance also varies. ®88¯ Unlike the prospectus legend, the advertising legend would not be required to list the names of other classes or feeder funds. In addition, the legend would include a toll-free telephone number that investors may use to obtain further information concerning other classes or feeder funds not featured in the advertising or sales literature. The proposal would require that the legend by in a type at least as large as, and of a style different from, but at least as prominent as, that used in the major portion of the advertisement. ®89¯ These format requirements are intended to prevent the legend from being placed in a footnote or in any other inconspicuous location that might not draw investor attention. The legend would not be required that advertising or sales literature includes all classes of a fund or all feeder funds that invest in a master fund. ®86¯17 CFR 230.134. Existing paragraph (a)(3)(iv) would be renumbered as paragraph (a)(3)(v). Rule 134 permits advertising and sales literature with content strictly limited to certain items set forth in paragraph (a)(3)(ii) of the rule. Rule 134 does not provide for the use of performance figures. ®87¯See supra section II.C.1. ®88¯The Commission is proposing to require that the legend discuss expenses and performance even though rule 134 does not provide for the use of performance data such as yield and total return figures; rule 134 advertisements, however, may include rankings based on performance data. ®89¯This standard is the same as that required by paragraph (a)(3)(iii) for legends in mutual fund print advertisements and sales literature. 17 CFR 230.134(a)(3)(iii). Proposed new paragraph (a)(8) of rule 482 would require a legend similar to the legend proposed for rule 134. ®90¯ The Commission also is proposing to add a legend requirement for sales literature subject to rule 34bÄ1 under the Investment Company Act. ®91¯ Proposed new paragraph (b)(1)(iii) of rule 34bÄ1 would require sales literature used by multiple class or feeder funds that contains performance figures for fewer than all classes of a fund or all feeder funds that invest in the same master fund to include the legend required by proposed new paragraph (a)(8) of rule 482. ®90¯17 CFR 230.482. ®91¯17 CFR 270.34bÄ1. Rule 34bÄ1 generally requires any pamphlet, circular, or other sales literature that contains investment company performance data to comply with certain of the disclosure requirements of rule 482. b. Performance information. Proposed new paragraph (a)(9) of rule 482 would require multiple class and masterfeeder fund advertising that contains performance figures to include, with equal prominence, the performance of all classes and feeder funds that are subject to the prospectus cross-disclosure requirement. ®92¯ Thus, for multiple class funds, the proposal would require generally less extensive expense and performance information than the exemptions do at present. The equal prominence requirement is intended to address the concern that advertisements or sales literature might disclose the performance of some classes inconspicuously, e.g., in a footnote or in print much smaller than that used for the performance figures of another class. The Commission requests comment, however, on whether the requirement of equal prominence may result in unduly bulky performance disclosure that might emphasize performance data at the expense of other disclosure or might inhibit the disclosure of performance data. Should the Commission instead require performance information to be presented in a table? Would the proposed legend (discussed above) be sufficient to inform investors of the fund's capital structure, the possible availability of classes or feeder funds not otherwise mentioned in the advertising or sales literature and a means of obtaining further information? The Commission also requests comment on whether rules 134, 482, and 34bÄ1 should require funds to disclose with equal prominence performance or expense data for all classes or feeder funds except classes or feeder funds offered exclusively to institutional or inside investors ®93¯ to the extent that performance or expense data for any class or feeder fund are included in that advertising or sales literature. ®92¯Proposed new paragraph (b)(1)(iii) of rule 34bÄ1 would extend this requirement to sales literature. ®93¯See supra note 57 and accompanying text (defining institutional and inside investors). Under Securities Act rule 482 and Investment Company Act rule 34bÄ1, advertisements or sales literature containing performance data for open-end investment companies other than money market funds must include one, five, and ten year average annual total return. ®94¯ When an advertisement or sales literature contains performance data for a class or feeder fund with a shorter performance history than other classes or feeder funds, the advertisement or sales literature might be misleading if it did not include long-term performance data; for example, short-term disclosure alone might be misleading if the performance were excellent in the short-term, but poor over the longer term. The exemptive orders generally require disclosure of the performance of all classes. ®95¯ ®94¯17 CFR 230.482(e)(3), 270.34bÄ1. An important purpose for requiring the presentation of long-term average annual return quotations in advertising or sales literature that contains performance figures is to provide investors with information on the fund's performance over the business cycle. See, e.g., Advertising By Investment Companies; Proposed Rules and Amendments to Rules, Forms, and Guidelines, Securities Act Release No. 6660 (Sept. 7, 1986), 51 FR 34384, 34386. ®95¯Supra note 56 and accompanying text. Cf. Merrill Lynch Asset Management, Inc. (pub. avail. Mar. 9, 1990) (fund permitted to advertise performance for a new class since sales of the new class commenced, rather than restating the fund's historical performance data for that class; because investors would have available the performance of the older class, they "in no way would be denied information about the long-term performance of the Fund''). The proposed additional proviso for paragraph (e)(3) of rule 482 would require long-term total return information to be provided for another class or another feeder fund or the master fund when that information is not available for the class or feeder fund advertised. The proviso would require that when an advertisement contains performance figures for a class or feeder fund for which average annual total return information is available for less than the one, five, and ten year periods required by paragraph (e)(3), and this information is available for a longer period for another class, feeder fund, or master fund, then the advertisement must include quotations of average annual total return for the securities of the other class or feeder fund or master fund together with any necessary explanation. ®96¯ This requirement is intended to ensure that funds do not attempt to hide poor past performance by creating a new class. Funds must select the class or feeder fund or master fund with performance figures for the longest period if none has been offered for ten years or more. If more than one class or feeder fund or master fund has been offered for ten years or more, then the fund may select a class or feeder fund or master fund from this group. ®97¯ When presenting performance figures for a class or feeder fund or master fund, funds must be careful to include any additional information necessary to ensure that such performance data are not misleading; ®98¯ For example, they should disclose the effect of differences in sales charges or other expenses. The Commission requests comment on whether rule 482 instead should be amended to provide that, when complete long-term total return information is not available for a class or feeder fund, the advertisement must include long-term total return figures that incorporate the performance of another class or the master fund, adjusted to reflect applicable sales loads and account fees. ®99¯ The Commission also requests comment on whether issues of long-term performance data for multiple class and master-feeder funds should continue to be treated interpretively under the general requirements of rule 482, instead of under the specific amendment proposed here. ®96¯Proposed new paragraph (b)(1)(iii) of rule 34bÄ1 would extend this requirement to sales literature. ®97¯In the case of classes or feeder funds with alternative sales charge arrangements, this provision may not have much effect, because the performance of all such classes would be required to appear in the same advertisement. ®98¯See, e.g., Sec. Act Rel. 6660, supra note 94, 51 FR 34384, 34391 (whoever sponsors an advertisement or sales literature, whether the fund, the underwriter, or the dealer, bears the primary responsibility for assuring that the advertisement or sales literature is not false or misleading). Cf. Kidder Peabody Equity Income Fund, Inc. (pub. avail. Nov. 1, 1991) (when a fund changed from a CDSL with a 1.0% 12bÄ1 fee to a front-end load with a 0.5% 12bÄ1 fee, historical performance data must be based on rule 12bÄ1 fees actually charged and may not be recalculated to reflect the changed 12bÄ1 fee); Investment Company Institute (pub. avail. May 13, 1988) (a fund must adjust performance data to reflect its current sales load for each of the one, five, and ten year periods under rule 482). ®99¯See The Managers Core Trust (pub. avail. Jan. 28, 1993) (when an existing fund becomes a master fund, the new feeder fund may restate the historical performance data of the master fund to reflect any applicable sales loads and account fees at the feeder fund). 3. Off-the-Page Prospectuses The Commission recently proposed amendments to rule 482 to permit open-end management investment companies to use advertisements containing applications to purchase their securities ("off-the-page prospectuses''). ®100¯ Proposed paragraph (g)(1)(v), however, would prohibit the use of off-the-page prospectuses by multiple class and master-feeder funds. The proposing release stated that these types of funds would not be eligible to use off-the-page prospectuses because of the complexity of the disclosure that would be necessary to comply with the proposed amendments. The proposing release also stated that the Commission would later consider whether multiple class and master-feeder funds should be able to use off-the-page prospectuses. ®101¯ Although a few commenters agreed that multiple class and master-feeder funds should not be eligible to use off-the-page prospectuses, ®102¯ most commenters argued that these types of funds would not require extraordinary disclosure ®103¯ and that the disclosure required under the exemptions could fit in an off-the-page prospectus without confusion. ®104¯ ®100¯See Off-the-Page Prospectuses for Open-End Management Investment Companies, Securities Act Release No. 6982 (Mar. 5, 1993), 58 FR 16141. ®101¯Id., 58 FR at 16144. ®102¯See Letter from North American Securities Administrators Association to Jonathan G. Katz, Secretary, SEC (June 23, 1993), File No. S7Ä11Ä93; Letter from Savings & Community Bankers of America to Jonathan G. Katz, Secretary, SEC (July 21, 1993), File No. S7Ä11Ä93. ®103¯See, e.g., Letter from American Bar Association to Jonathan G. Katz, Secretary, SEC (June 23, 1993), File No. S7Ä11Ä93. ®104¯See, e.g., Letter from the Investment Company Institute to Jonathan G. Katz, Secretary, SEC (June 23, 1993), File No. S7Ä11Ä93; Letter from the Vanguard Group of Investment Companies to Jonathan G. Katz, Secretary, SEC (June 23, 1993), File No. S7Ä11Ä93. In light of these comments and the other changes to rule 482 proposed in this release, the Commission is proposing to revise proposed rule 482(g) to delete the provision excluding multiple class funds and feeder funds from eligibility to use off-the-page prospectuses. A new General Instruction to paragraph (g)(2) would require cross-disclosure for all classes or feeder funds that are subject to the prospectus cross-disclosure requirement. Like other advertisements under rule 482, off-the-page prospectuses also would be subject to the legend requirement of proposed paragraph (a)(8). In addition, off-the-page prospectuses would be required to include the discussion and line graph required under proposed new Item 6(h) of Form NÄ1A concerning differences among classes or feeder funds. The Commission requests comment on whether any other disclosure requirements are necessary to address the specific features of these types of funds. III. Cost/Benefit of Proposed Action Taken as a whole, proposed rule 18fÄ3 and the proposed rule and form amendments should not impose greater burdens of reporting or recordkeeping or greater regulatory compliance costs than those imposed by the multiple class exemptive orders; and the proposed disclosure requirements also should impose little burden on feeder funds. Under proposed rule 18fÄ3, multiple class funds would be subject to fewer requirements and lower costs than under the exemptive orders. Any additional time required to comply with proposed rule 18fÄ3's written plan requirement should be minimal because multiple class funds already would have to commit any material class differences to writing in order to enter into distribution or service agreements, or to disclose their terms. The proposed amendment to rule 12bÄ1 should not impose any additional costs because it essentially would incorporate in the rule existing requirements in the exemptive orders for multiple class funds. The proposed amendment to Form NÄSAR would merely articulate what good accounting practice should already dictate and would be less burdensome than the condition in the multiple class exemptive orders requiring that multiple class funds file a separate expert's report on internal control relating to fund procedures for calculating each class's net assets. The proposed legend and cross-disclosure requirements should impose little burden, because they essentially would involve only disclosure that already exists in other disclosure documents. Any burden of this disclosure would be outweighed by the benefits of more informed investment decisions. IV. Summary of Initial Regulatory Flexibility Analysis The Commission has prepared an Initial Regulatory Flexibility Analysis in accordance with 5 U.S.C. 603 regarding proposed rule 18fÄ3 and the proposed amendments to rules 12bÄ1 and 34bÄ1 under the Investment Company Act, to rules 134 and 482 under the Securities Act, and to Forms NÄ1A, NÄ14, and NÄSAR. The analysis explains that the proposals are intended to allow mutual funds to issue multiple classes of shares without the burden of obtaining individual exemptive orders. The disclosure proposals are intended to minimize investor confusion and focus investor attention on differences in sales charges and related expenses; the disclosure proposals also are intended to clarify and consolidate disclosure and reporting requirements for multiple class and master-feeder funds, including small entities. The Analysis states that the Commission considered significant alternatives to the proposal, including establishing different compliance or reporting requirements, and exempting small entities from the rule 18fÄ3 plan and the disclosure requirements. The Commission concluded that the alternatives would remove little, if any, burden, while removing significant investor protections. To obtain a copy of the Initial Regulatory Flexibility Analysis, write to Roseanne Harford, Division of Investment Management, Mail Stop 10Ä6, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. V. Statutory Authority The Commission is proposing rule 18fÄ3 under the authority granted to the Commission in section 6(c), 18(i), and 38(a) of the Investment Company Act [15 U.S.C. 6(c), 18(i), and 37(a)], and the amendment to rule 12bÄ1 under section 12(b) of the Investment Company Act [15 U.S.C.  12(b)]. The Commission is proposing the amendment to Form NÄSAR under sections 30 and 38(b) of the Investment Company Act [15 U.S.C. 80aÄ29, and 37(b)], the amendments to Form NÄ1A under sections 6, 7(a), 10, and 19(a) of the Securities Act [15 U.S.C. 77g(a), 77j, and 77s(a)], and sections 8(b), 24(a), and 38(a) of the Investment Company Act [15 U.S.C. 80aÄ8(b), 24(a), and 37(a)]. The amendments to rule 482 are proposed under sections 10(b) and 19(a) of the Securities Act [15 U.S.C. 77j(b) and 77s(a)]. The amendment to rule 34bÄ1 is proposed under section 38(a) of the Investment Company Act [15 U.S.C. 37(a)]. VI. Text of Proposed Rule and Rule and Form Amendments List of Subjects in 17 CFR Parts 230, 239, 270, and 274 Investment companies, Reporting and record keeping requirements, Securities. For the reasons set out in the preamble, Title 17, Chapter II of the Code of Federal Regulations is proposed to be amended as follows: PART 230 GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933 1. The authority citation for part 230 continues to read, in part, as follows: Authority: The Securities Act of 1933, 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77s, 77sss, 78c, 78l, 78m, 78n, 78o, 78w, 79ll(d), 79t, 80aÄ8, 80aÄ29, 80aÄ30, and 80aÄ37, unless otherwise noted. * * * * * 2. Section 230.134 is amended by redesignating paragraph (a)(3)(iv) as paragraph (a)(3)(v) and adding paragraph (a)(3)(iv) to read as follows:  230.134 Communications not deemed a prospectus. (a) * * * (3) * * * (iv) in the case of a multiple class fund or a feeder fund (as defined in  230.482(a)(8)), if a communication contains information regarding fewer than all classes of shares of the same series or fewer than all feeder funds that invest in the same master fund, and uses either legend required by paragraph (a)(3)(iii) of this section, a legend disclosing: that the fund issues other classes or that other feeder funds invest in the master fund, that because sales charges and expenses vary among classes or feeder funds, performance also varies, and a toll-free telephone number investors may use to obtain information concerning other classes or feeder funds; provided that, if such communication is printed, the legend shall be in a size type at least as large as and of a style different from, but at least as prominent as, that used in the major portion of the advertisement, and that if such communication is used in a radio or television advertisement, the legend shall be given emphasis equal to that used in the major portion of the advertisement. * * * * * 3. Section 230.482 is amended by adding paragraphs (a)(8) and (a)(9) preceding the Note to read as follows:  230.482 Advertising by an investment company as satisfying requirements of section 10. (a) * * * (8) In the case of a multiple class fund or a feeder fund, unless it contains performance data for all classes offered by a multiple class fund or all feeder funds that invest in the same master fund, it includes a legend set in a size type at least as large as and of a style different from, but at least as prominent as, that used in the major portion of the advertisement that discloses that the fund issues other classes or that other feeder funds may invest in the master fund, that because sales charges and expenses vary among classes or feeder funds, performance also varies, and a toll-free telephone number investors may use to obtain information concerning other classes or feeder funds. A "multiple class fund'' is an open-end management investment company that issues more than one class of shares, each of which represents interests in the same portfolio of securities, and either meets the requirements of  270.18fÄ3 of this chapter or operates pursuant to an exemptive order. A "feeder fund'' is an open-end management investment company, other than a periodic payment plan, that holds shares of a single open-end management investment company (the "master fund'') as its only investment securities. (9) In the case of an advertisement containing performance data for any of two or more classes of a multiple class fund or two or more feeder funds that invest in the same master fund that are offered or made available through the same broker, dealer, bank, or other financial intermediary and that have alternative arrangements for sales and related charges, it includes performance data for all such classes or feeder funds set forth with equal prominence. * * * * * 4. Section 230.482 is amended by removing the word "and'' at the end of paragraph (e)(3)(iv) and adding concluding text to read as follows:  230.482 Advertising by an investment company as satisfying requirements of section 10. * * * * * (e) * * * (3) * * * (iv) * * * and provided further, that if an advertisement is for securities of a class or feeder fund for which average annual total return information is available for less than the one, five, and ten year periods required by this paragraph, and information for such longer period is available for another class or for the master fund or another feeder fund that holds shares of the same master fund as its only investment securities, any quotations of average annual total return for the securities offered in the advertisement shall be accompanied by quotations of average annual total return for a class or feeder fund or master fund (which other average annual total return information need not be set out with equal prominence) that has been offered for the longest time or for at least ten years, together with any necessary explanation; and * * * * * 5. Section 230.482 is amended by amending paragraph (g), as proposed on March 19, 1993, in 58 FR 16149 (March 25, 1993), by adding the word "and'' following the semicolon at the end of paragraph (g)(1)(iii), removing the semicolon and the word "and'' at the end of paragraph (g)(1)(iv) and adding in its place a period, removing paragraph (g)(1)(v), removing the word "and'' following the semicolon at the end of paragraph (g)(2)(vi)(A), adding the word "and'' following the semicolon at the end of paragraph (g)(2)(vi)(B), adding paragraph (g)(2)(vi)(C), removing the words "General Instruction'' following paragraph (g)(2)(ix), adding in their place the words "General Instructions'', redesignating the existing text in the General Instruction as General Instruction 1, and adding General Instruction 2, to read as follows:  230.482 Advertising by an investment company as satisfying requirements of section 10. * * * * * (g)* * * (2)* * * (vi)* * * (C) In the case of a multiple class or feeder fund, a discussion of the differences among all classes or all feeder funds holding shares of the same master fund as their only investment securities that are offered through the same section 10(a) prospectus or that are offered or made available through the same broker, dealer, bank, or other financial intermediary and that have alternative arrangements for sales and related charges; and 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 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), accompanied by a brief statement explaining that the graph is a hypothetical illustration of the effect on performance, over a ten-year period, of the expenses of the different classes or feeder funds, assuming a $10,000 initial investment and a 5% return before expenses, and that the assumed 5% return should not serve as a basis for predicting future returns. * * * * * General Instructions * * * * * 2. In any advertisement for one or more classes of a multiple class fund or one or more feeder funds investing in a master fund, provide information in response to paragraphs (g)(2) (ii) through (ix) of this section for all classes or all feeder funds investing in the same master fund that are offered or made available through the same broker, dealer, bank, or other financial intermediary and that have alternative arrangements for sales and related charges. * * * * * PART 270 RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940 6. The authority citation for part 270 continues to read, in part, as follows: Authority: 15 U.S.C. 80aÄ1, et seq., 80aÄ37, 80aÄ39 unless otherwise noted. * * * * * 7. Section 270.12bÄ1 is amended by adding paragraph (g) to read as follows:  270.12bÄ1 Distribution of shares by registered open-end management investment company. * * * * * (g) If a plan covers more than one class of shares, the provisions of the plan must be severable for each class, and whenever this section provides for any action to be taken with respect to a plan, that action must be taken separately for each class, provided, however, that under  270.18fÄ3 any shareholder vote on a plan of a target class must also require a vote of any purchase class. 8. By adding  270.18fÄ3 to read as follows:  270.18fÄ3 Multiple class companies. Notwithstanding Sections 18(f)(1) and 18(i) of the Act, a registered open-end management investment company or series or class thereof established in accordance with Section 18(f)(2) of the Act whose shares are registered on Form NÄ1A [ 239.15A and 274.11A of this chapter] ("company'') may issue more than one class of voting stock, provided that: (a) Each class: (1)(i) Must have a different arrangement for shareholder services or the distribution of securities or both, and (ii) May have a different allocation of other expenses, not including advisory or custodial fees or other expenses related to the management of the company's assets, that are: (A) Directly related to that arrangement, or (B) Actually incurred in a materially different amount for that class than for other classes on the basis of the net asset value of that class in relation to the net asset value of the company; (2) Must bear all of its expenses under paragraph (a)(1) of this section, except to the extent that the company's investment adviser or principal underwriter may waive or reimburse those expenses; (3) Must have exclusive voting rights on any matter submitted to shareholders that relates solely to its arrangement; (4) Must have separate voting rights on any matter submitted to shareholders in which the interests of one class are different from the interests of any other class; and (5) Must have in all other respects the same rights and obligations as each other class. (b) Income, realized and unrealized capital gains and losses, and expenses of the company not allocated to a particular class pursuant to paragraph (a) of this section must be allocated to each class on the basis of the net asset value of that class in relation to the net asset value of the company. (c) Any payments made under paragraph (a) of this section must be made pursuant to a written plan setting forth the separate arrangement and allocation of each class, and any related conversion features or exchange privileges. Before the issuance of any share of each class, at least annually thereafter, and before any material amendment of a plan, the directors of the company, and the directors who are not interested persons of the company, must find that the plan, including the allocation of expenses, is fair to, and in the best interests of, each class individually and the company as a whole. The directors must request and evaluate, and any agreement relating to a class arrangement must require the parties thereto to furnish, such information as may be reasonably necessary to evaluate the plan. (d) Nothing in this section prohibits a company from offering any class with: (1) An exchange privilege whereby securities of the class may be exchanged for securities of another company; or (2) A conversion feature whereby shares of one class of the company (the "purchase class'') will be exchanged automatically for shares of another class of the company (the "target class'') after a specified period of time, provided that: (i) The conversion is effected on the basis of the relative net asset values of the two classes without the imposition of any sales load, fee, or other charge; (ii) The payments authorized under a plan adopted pursuant to  270.12bÄ1 ("rule 12bÄ1 plan'') for the target class are lower than the payments authorized under a rule 12bÄ1 plan for the purchase class; and (iii) If the amount of payments authorized under a rule 12bÄ1 plan for the target class is increased materially without approval of the shareholders of the purchase class, the fund will establish a new target class for the purchase class on the same terms as applied to the target class before that increase. 9. Section 270.34bÄ1 is amended by removing the word "and'' at the end of paragraph (b)(1)(i), removing the period and adding a semicolon in its place at the end of paragraph (b)(1)(ii), and adding paragraph (b)(1)(iii) to read as follows:  270.34bÄ1 Sales literature deemed to be misleading. * * * * * (b)(1)* * * (iii) In the case of a multiple class fund or a feeder fund (as defined in paragraph (a)(8) of  230.482 of this chapter) the disclosure required by paragraphs (a)(8) and (a)(9) of  230.482 of this chapter, unless such performance data are included for all classes of a multiple class fund or all feeder funds investing in the same master fund. * * * * * PART 239 FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933 PART 274 FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940 10. The authority citation for part 239 continues to read, in part, as follows: Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77sss, 78c, 78l, 78m, 78n, 78o(d), 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 79l, 79m, 79n, 79q, 79t, 80aÄ8, 80aÄ29, 80aÄ30, and 80aÄ37, unless otherwise noted. * * * * * 11. The authority citation for part 274 continues to read, in part, as follows: Authority: 15 U.S.C. 80aÄ1, et seq., unless otherwise noted. * * * * * Note: The following forms do not, and the amendments will not, appear in the Code of Federal Regulations. 12. By adding General Instruction I to Form NÄ1A [ 239.15A and 274.11A] to read as follows: Form NÄ1A * * * * * General Instructions * * * * * I. Multiple Class and Master-Feeder Funds In any registration statement on this Form for one or more classes of a multiple class fund or one or more feeder funds investing in a master fund (as defined in Securities Act rule 482(a)(8) [17 CFR 230.482(a)(8)], provide information in response to Items 2 through 9 for all classes or all feeder funds investing in the same master fund that are offered or made available through the same broker, dealer, bank, or other financial intermediary and that have alternative arrangements for sales and related charges. 13. By amending Form NÄ1A [ 239.15A and 274.11A] by adding the following sentence to the end of Instruction 1 to Item 2(a): Form NÄ1A * * * * * Item 2. Synopsis (a) * * * General Instructions (1) * * * If the Registrant has issued any class of shares of the same series not offered through the prospectus, or if any feeder funds not offered through the prospectus invest in the same master fund as the Registrant, include a prominent statement in the narrative disclosing, as applicable (i) that the fund issues other classes or that other feeder funds invest in the master fund, (ii) the names or designations of those other classes or feeder funds, (iii) that, because sales charges and expenses vary among classes and feeder funds, performance also varies, and (iv) a toll-free telephone number investors may use to obtain information concerning other classes or feeder funds. If the prospectus includes the disclosure required by Item 6(h), state the location in the prospectus of that disclosure. If the Registrant has issued more than one class of shares, state that sales representatives may receive different compensation for one class than for another class. * * * * * 14. By adding Item 6(h) to Form NÄ1A ( 239.15A and 274.11A) to read as follows: Form NÄ1A * * * * * Item 6. Capital Stock and Other Securities * * * * * (h) Discuss the differences among all classes or among all feeder funds investing in the same master fund that are offered in the same prospectus or about which the prospectus contains disclosure pursuant to General Instruction I; and provide 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 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. Immediately next to the graph, provide a brief statement explaining that the graph is a hypothetical illustration of the effect on performance, over a ten-year period, of the expenses of the different classes or feeder funds, assuming a $10,000 initial investment and a 5% return before expenses, and that the assumed 5% return should not serve as a basis for predicting future returns. Instructions In preparing the line graph comparison: 1. Computation: a. Assume that the initial investment is made on the first day of the first year at the public offering price stated in the prospectus. b. Base subsequent account values on a 5% annual return for each class or feeder fund before subtraction of operating expenses, assuming the operating expenses stated in the fee table, adjusted to their actual level absent any reimbursement or waiver. c. If any class or feeder fund requires a minimum initial investment of more than $10,000, base the line graph on initial investment of the highest minimum amount. d. If any class has a conversion feature, assume that shares are converted at the time and on the terms disclosed in the prospectus. 2. Sales Load. Reflect any front-end sales load (or any other fee charged at the time of purchasing shares) by beginning the line graph at the amount that actually would be invested, i.e., a dollar amount below $10,000. Assume that the maximum sales load (and other charges deducted from payments) is deducted from the initial $10,000 investment. In the case of a class or feeder fund that charges a deferred sales load (or other amounts at redemption or upon closing of an account), assume the deduction of the maximum deferred sales load (or other charges) that would be applicable for a complete redemption on the last day of each year (i.e., assume redemption before any reduction in the amount of any deferred sales load or other charges). 3. Dividends and Distributions. Assume all dividends and distributions by each class or feeder fund are reinvested. If any sales load is charged upon reinvestment of dividends and distributions, the brief statement next to the graph must state that the graph does not include the effect of that sales load on reinvestment. 4. Account Fees. Reflect all recurring fees that are charges to all accounts. a. For any account fees that vary with the size of the account, assume a $10,000 account size (unless using a higher initial investment according to Instruction 1.c.). b. If recurring fees charged to shareholder accounts are paid other than by redemption of fund shares, they should be appropriately reflected. 5. Scale. Construct the axis of the graph measuring dollar amounts using a linear scale. * * * * * 15. By amending Form NÄ1A ( 239.15A and 274.11A) by adding paragraph (b)(18) to Item 24 before the Instructions to read as follows: Form NÄ1A * * * * * Item 24. Financial Statements and Exhibits * * * * * (b) * * * (18) copies of any plan entered into by Registrant pursuant to Rule 18fÄ3 under the 1940 Act, and any agreement with any person relating to implementation of such plan. * * * * * 16. By amending Form NÄ1A ( 239.15A and 274.11A) by adding paragraph (d) to Item 32 to read as follows: Form NÄ1A * * * * * Item 32. Undertakings * * * * * (d) If the legend described in instruction 1 to Item 2(a) requires the inclusion in the prospectus of a legend containing a toll-free telephone number, an undertaking to provide to persons calling that number information about: any eligibility requirements for purchasing shares of each other class or other feeder fund investing in the same master fund; the procedures for investing in each such class or feeder fund; and in the case of a master-feeder fund, comparable information for any other publicly offered investment vehicle whose only investment securities are securities of the same master fund; and an undertaking to send by first class mail or other means designed to ensure equally prompt delivery, within two business days of receipt of a written or oral request, any Prospectus or Statement of Additional Information for those other classes, feeder funds, or other investment vehicles. * * * * * 17. By amending Form NÄ14 (17 CFR 239.23) by revising Items 5(a) and 16(10) to read as follows: Form NÄ14 * * * * * Item 5. Information About the Registrant * * * * * (a) if the registrant is an open-end management investment company, furnish the information required by Items 3, 4(a) and (b), 5, 5A, 6(a), (c), (d), (e), (f), (g), and (h), and 7 through 9 of Form NÄ1A under the 1940 Act; provided, however, that the information required by Item 5A may be omitted if the prospectus is accompanied by an annual report to shareholders containing the information otherwise required by Item 5A; * * * * * Item 16. Exhibits * * * * * (10) copies of any plan entered into by registrant pursuant to Rule 12bÄ1 under the 1940 Act (17 CFR 270.12bÄ1) and any agreements with any person relating to implementation of the plan, and copies of any plan entered into by Registrant pursuant to Rule 18fÄ3 under the 1940 Act, and any agreement with any person relating to implementation of the plan; * * * * * 18. By amending Form NÄSAR ( 274.101) by revising the first paragraph of Sub-item 77B to read as follows: Form NÄSAR * * * * * General Instructions * * * * * Instructions to Specific Items Item 77: Attachments * * * * * Sub-Item 77B: Accountant's report on internal control structure. Except as provided below, a management investment company shall furnish a report of its independent accountant on the company's system of accounting controls. The accountant's report shall be based on the review, study, and evaluation of the accounting system (including procedures for calculating multiple equity class net assets), internal accounting controls and procedures for safeguarding securities made during the audit of the financial statements. The report should disclose material weaknesses in the accounting system (including procedures for calculating multiple equity class net assets), system of internal accounting control and procedures for safeguarding securities, which exist as of the end of the registrant's fiscal year. Disclosure of a material weakness should include an indication of any corrective action taken or proposed. * * * * * Dated: December 15, 1993. By the Commission. Margaret H. McFarland, Deputy Secretary. [FR Doc. 93Ä31161 Filed 12Ä22Ä93; 8:45 am] BILLING CODE 8010Ä01ÄP