attractive to the investor.\282\ Investors may be able to negotiate
lower loads with their dealers by, for example, forgoing some of the
services that they would otherwise pay for with the distribution
charges, or by engaging in a substantial amount of business with the
dealer (although not necessarily with the particular fund or fund
family). Moreover, externalized fee structures may permit investors to
invest in dealer-sold funds without purchasing associated (and
unwanted) services. If negotiable account-level sales charges are
accepted by market participants, increased competition among dealers
may result in lower overall distribution costs or more attractive
services for investors.\283\
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    \282\ Some participants in our roundtable identified
disadvantageous tax consequences as a reason for retaining asset-
based sales charges rather than externalized sales charges. See,
e.g., Roundtable Transcript, supra note 109, 208-09 (Avi Nachmany,
Strategic Insight). Under the proposed approach, however, investors
purchasing through intermediaries could select a method of payment
that would yield the best after-tax result for them.
    \283\ See Comment Letter of Bridgeway Funds, Inc., and Bridgeway
Capital Management (July 19, 2007); see also Hannah Glover, Schwab
Slashes ETF Expenses in Challenge to Vanguard, BlackRock, Ignites
(June 15, 2010) (noting that ETF distribution model, which similarly
permits the unbundling of the sales charge components of
distribution from fund shares, has seen steady decreases in fees and
commissions).
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    Externalized fee arrangements are currently used in a number of
other contexts and thus appear to be operationally feasible. For
example, separately managed accounts and wrap accounts operate on an
externalized distribution model.\284\ In each case, at least part of
the distribution costs is paid out of the assets of the account. As
discussed above, recent years have seen the growing predominance of
wrap accounts and other arrangements that entail separate fees paid by
investors to intermediaries.\285\ Some of the roundtable participants
expressed concern that current externalized fee arrangements in other
contexts (e.g. separately managed accounts and wrap accounts) tended to
have higher rather than lower fees than mutual funds and thus may be
disadvantageous to smaller investors.\286\
---------------------------------------------------------------------------

    \284\ See, e.g., Roundtable Transcript, supra note 109, at 76-78
(Martin Byrne, Merrill Lynch).
    \285\ See supra text preceding notes 97 and 98.
    \286\ See, e.g., Roundtable Transcript, supra note 109. at 207-
13 (Avi Nachmany, Strategic Insight; Barbara Roper, Consumer
Federation of America). See also Comment Letter of the ICI (July 19,
2007); Comment Letter of Gary Roth (June 13, 2007); Comment Letter
of Rick Sany (June 13, 2007). But see Comment Letter of Mark
Freeland (June 19, 2007) (``But why should a mutual fund wrap
account cost more if it is only providing the same level of service?
Moreover, if the levels of service are indeed different, couldn't
advisers create another tier of service for a lower fee, much as
mutual fund wrap accounts typically charge less than equity wrap
accounts?'').
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     Should this be of concern to us as we consider this
rulemaking? Are those higher charges related to additional services and
features that these products and accounts provide, and therefore not
comparable to the externalized sales charge alternative we are
proposing?
    We request comment on the advantages and disadvantages of allowing
an externalized alternative distribution model.
     Would fund investors benefit from this distribution model?
If so, how would they benefit or otherwise be affected? Are there
significant drawbacks to investors to permitting this distribution
model and, if so, what are they? What competitive or anti-competitive
effects could result from such a model? Would our proposed alternative
distribution model allow investors to effectively choose among dealers
for the right balance of price and service when buying mutual funds?
How else might the availability of this distribution model affect
investor behavior? We are interested in hearing from retirement plan
administrators and trustees whether this distribution alternative might
offer the beneficiaries of the plans increased transparency.
     We request comment on whether the availability of a class
of fund shares that does not carry fixed distribution charges would
increase competition among dealers and lead to lower sales charges for
investors. Since 1975, when we abolished fixed brokerage commission
rates, the cost of brokerage has decreased significantly for both
institutional and retail brokerage customers.\287\ Could we expect a
similar result for fund investors if we permit retail price competition
for at least some classes of shares of mutual funds?
---------------------------------------------------------------------------

    \287\ See, e.g., Evidence from Commission Deregulation, supra
note 273.
---------------------------------------------------------------------------

     How would other market participants react to our proposed
exemption? Would fund managers take advantage of this distribution
model? Would competition among funds for the interest of dealers induce
fund managers to offer a class of shares permitting dealers to control
distribution pricing? Would discount broker-dealers begin offering
funds that had previously been sold only through ``full-service''
brokers? Would ``full-service'' broker-dealers begin offering a class
of the same shares at lower cost to their customers who, for example,
bought and sold funds without the assistance of their representatives?
Would dealers view our proposed exemption as providing an alternative
that would help them reduce complexities and conflicts in selling fund
shares? Would the exemption help reduce conflicts of interest by
permitting dealers to eliminate differences in compensation and thus
encouraging recommendations based solely on the best interests of their
customers? If many funds rely on the proposed rule, what would be the
effects on distribution arrangements, and on distributors that do not
rely upon the rule?
3. Account-Level Sales Charges: Terms of Proposed Rule 6c-10(c)
    The account-level sales charge alternative would be available to
any fund with respect to all of its shares, or any class of its
shares.\288\ As we discussed above, the exemption is optional, and
funds may choose not to take advantage of it and continue to distribute
their shares only with sales charges established by the fund.
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    \288\ Proposed rule 6c-10(c).
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    In order for a fund to rely on the section 22(d) exemption provided
in proposed rule 6c-10(c), it would have to

meet two conditions. First, the fund (with respect to that share class)
would not be permitted to impose an ongoing sales charge as defined in
proposed amendments to rule 6c-10.\289\ We are proposing the account-
level sales charge as an alternative to an ongoing sales charge rather
than as a supplement to it. The fund could, however, charge a marketing
and service fee pursuant to proposed rule 12b-2.\290\ Second, the fund
would have to disclose in its registration statement that it has
elected to rely on the exemption, which would allow interested
investors the ability to better understand the distribution structure
of the fund.\291\ A fund relying on proposed rule 6c-10(c) would be
permitted to use the marketing and service fee to support the fund's
marketing and sales efforts, including advertising, sales material, and
call centers, while permitting dealers to collect loads, fees, and
other account-based charges to support the dealers' sales assistance
and other services provided to its customers.
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    \289\ Proposed rule 6c-10(c)(1).
    \290\ See proposed rule 12b-2(b).
    \291\ See proposed rule 6c-10(c)(2). The disclosure would appear
in the fund's Statement of Additional Information (``SAI''). See
proposed Item 25(d) of Form N-1A.
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    We request comment on all aspects of proposed rule 6c-10(c).
     Should we require that each fund class charge a marketing
and service fee in order to rely on proposed rule 6c-10(c), or should a
fund instead be able to offer a class of its shares in reliance on rule
6c-10(c) without charging such a fee? Alternatively, as we have
proposed, should proposed rule 6c-10(c) be available to all funds,
regardless of whether they use fund assets to finance distribution
pursuant to proposed rule 12b-2? We also request comment on the
condition that the fund class not deduct an ongoing sales charge
pursuant to proposed rule 6c-10(b). Are there any circumstances under
which a fund should be permitted to rely on the exemption under
proposed rule 6c-10(b) and charge an ongoing sales charge under
proposed rule 6c-10(c)?
     We request specific comment on whether the fund's election
to rely on proposed rule 6c-10(c) should be disclosed anywhere other
than the registration statement. We also request comment on where the
fund's election should appear in the registration statement. As
proposed, the election would be disclosed in the fund's Statement of
Additional Information.\292\ Should it appear in the fund's prospectus
or summary prospectus? Should the fund's board be required to make or
specifically approve the election?
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    \292\ Proposed Item 25(d) of Form N-1A.
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     Are any other conditions appropriate? Should we limit the
exemption to funds that sell their shares to dealers at net asset
value? Are there any additional benefits or problems associated with
proposed rule 6c-10(c)?
     We also request comment on the interaction between
proposed rule 6c-10(c) and the other amendments we are proposing in
this Release. For example, if the Commission does not adopt proposed
rule 12b-2, proposed rule 6c-10(b) or the proposed rescission of rule
12b-1, should it nevertheless adopt proposed rule 6c-10(c)? Is any of
the rationale that supports the Commission's adoption of rule 6c-10(c)
diminished (or augmented) if the Commission does not adopt any of the
other amendments it is today proposing?

J. Amendments To Improve Disclosure to Investors

    We are proposing several amendments to our disclosure requirements
to improve the transparency of sales loads and asset-based distribution
fees. The amendments, which reflect the new approach we are proposing
with respect to asset-based distribution fees, are designed to improve
investors' understanding of the distribution related charges they would
directly and indirectly incur as a result of investing in a fund.
1. Amendments to Form N-1A
    Form N-1A is the registration form used by funds to register with
the Commission under the Securities Act and the Investment Company Act.
Item 3 of Form N-1A sets forth the requirements for the prospectus
``fee table,'' which lists all fund expenses.\293\ Rule 12b-1 fees
currently are disclosed as a fund operating expense under the heading
``Distribution [and/or Service] (12b-1) Fees.'' \294\
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    \293\ We recently amended Form N-1A to require key information
to appear in plain English in a standardized order in mutual fund
prospectuses, including information about the fund's investment
objectives and strategies, risks, costs, and performance. In the
same release, we also amended rule 498 under the Securities Act to
allow a fund to satisfy its prospectus delivery obligations under
section 5(b)(2) of the Securities Act by providing the summary
prospectus, if the full statutory prospectus is available on an
Internet Web site. See Enhanced Disclosure and New Prospectus for
Registered Open-End Management Investment Companies, Investment
Company Act Release No. 28584 (Jan. 13, 2009) [74 FR 4546 (Jan. 26,
2009)] (``Summary Prospectus Adopting Release''). In the proposing
release for the summary prospectus, we requested comment as to
whether we should consider other revisions to the headings in the
fee table to make them more understandable to investors, including
eliminating the term 12b-1. See Enhanced Disclosure and New
Prospectus Delivery Option for Registered Open-End Management
Investment Companies, Investment Company Act Release No. 28064 (Nov.
21, 2007) [72 FR 67790 (Nov. 30, 2007)] (``Summary Prospectus
Proposing Release''). However, in the Summary Prospectus Adopting
Release, we concluded that it was more appropriate to consider these
changes in the context of a full reconsideration of sales charges
and rule 12b-1. See Summary Prospectus Adopting Release at text
accompanying n.126.
    \294\ See Item 3 of Form N-1A.
---------------------------------------------------------------------------

    The reference in the current fee table to ``12b-1 fees'' is not, of
course, consistent with the new regulatory approach we are proposing
for asset-based distribution fees. Moreover, the current fee table may
not present the fee most effectively. Many of our roundtable panelists,
as well as a number of commenters on our summary prospectus rule,
agreed that reference to an SEC rule number is not informative.\295\
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    \295\ See, e.g., Roundtable Transcript, supra note 109, at 106
(Bob Uek, MFS Funds). See also Comment Letter of The Honorable
Donald Manzullo (Feb. 28, 2006) (File No. S7-28-07) (``In keeping
with the idea of simplified disclosures, a preferential way to begin
would be by re-naming the fees altogether, as the name `12b-1' is
esoteric, at best.'').
---------------------------------------------------------------------------

    To address these concerns, we are proposing to amend the fee table
requirements to separate asset-based distribution fees into two
component fees. Specifically, we propose to delete the current heading,
and replace it with the heading ``Ongoing Sales Charge,'' which would
be the ongoing sales charge we are proposing today. This line item
would continue to appear in the lower portion of the fee table which
relates to the expenses that shareholders pay indirectly as a result of
holding an investment in the fund, expressed as a percentage of net
asset value.\296\ We would also add a new subheading to the ``Other
Expenses'' category called ``Marketing and Service Fee.'' \297\ Funds
would include each of these line items in their fee tables only if they
charge the relevant fee.\298\
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    \296\ The percentage of the maximum front-end and deferred sales
loads would continue to be presented in the upper part of the fee
table related to fees that are paid directly by shareholders upon
entry to or exit from the fund.
    \297\ The fee table currently requires funds to disclose
separately only two types of operating expenses--management fees
(the fee paid to the investment adviser) and 12b-1 fees. The rest of
a fund's operating expenses are included under the caption ``other
expenses.'' The instructions permit funds to subdivide this caption
into no more than three sub-captions that identify the largest
expense or expenses comprising ``other expenses,'' but the fund must
include a total of all ``other expenses.'' See Instruction 3(c) to
Item 3 of Form N-1A.
    \298\ Instruction 1(c) to Item 3 of Form N-1A.
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    The new heading and subheading correspond to our treatment of these
charges under the new rule and rule

amendments we are proposing today,\299\ and are designed to more
clearly describe the fees to investors.\300\ In particular, the
``Ongoing Sales Charge'' heading should better convey to investors that
this portion of the asset-based distribution fee operates as a
substitute for a sales load. When this heading is used in a prospectus
offering multiple classes with adjacent fee tables, investors may be
more likely to understand the nature of the alternatives available to
them. We view greater investor understanding of this fee as an
important goal of this rulemaking, and expect that it would lead to
more informed decisions by investors when selecting among funds and
fund share classes.
---------------------------------------------------------------------------

    \299\ See supra Sections III.C and III.D of this Release.
    \300\ A recent opinion issued by the Second Circuit emphasizes
the importance of accurate description and categorization of fund
fees to investors. The court noted that the full and accurate
description of both the amount and use of fees charged by a fund is
an important part of the ``total mix'' of information in an
investor's decision to purchase shares. See Operating Local 649 v.
Smith Barney Fund Management LLC, 595 F.3d 86 (2d Cir. 2010) (``Few
facts would likely constitute more important ingredients in
investors' `total mix' of information than the fact that, in
violation of these disclosure requirements the expenses categorized
as transfer agent fees were not transfer agent fees at all * * *.
The importance of the accurate reporting of categories of fees in
prospectuses is obvious: A ``comparative'' fee table is not useful
to an investor if the information in the table is incomplete or
otherwise misleading * * *.'').
---------------------------------------------------------------------------

    Today, some funds may pay for certain services (e.g., sub-
accounting fees to a retirement plan administrator) in the form of a
``rule 12b-1 fee,'' while others pay for the same service as an
ordinary fund operating expense and account for the expense as ``other
expenses'' in the operating expenses portion of the current fee
table.\301\ Similarly, under our proposed approach, some funds are
likely to treat expenses for the same service as a ``marketing and
service fee'' or ``other expenses.'' Different approaches to the same
fees do not affect the comparability of fund expense ratios, but will
affect the subcategories of the fee table. Because of the various uses
and purposes of the charges that may be included as marketing and
service fees under our proposal, we believe disclosure of this fee
would fit best as a subheading to the ``other expenses'' category. We
believe that it is important for investors to know whether a fund
charges a marketing and service fee, but do not believe it requires its
own heading in the fee table.
---------------------------------------------------------------------------

    \301\ See Item 3 of Form N-1A.
---------------------------------------------------------------------------

    We request comment on the proposed location for the marketing and
service fee disclosure in the fee table.
     Does including the marketing and service fee in the
``other expenses'' category raise any concerns that it may obscure the
fact that all or a portion of the marketing and service fee is or may
be used for distribution purposes? If so, would it matter to most
investors?
     We request comment on the two headings and the names that
we have proposed for them.\302\ Would they help investors better
understand the nature of the fees? Are there better names we could use?
Should we require the disclosure of additional categories of fees?
Should we require that additional fee information be provided in the
fee table? For example, should the fee table indicate fees paid
initially, annually, and upon redemption? Should we also require that
the conversion period for the ongoing sales charge be included in the
fee table (or a footnote to the table), to provide investors with an
immediate reference for how long the fee would be charged?
---------------------------------------------------------------------------

    \302\ The Commission has long sought to find a descriptive term
that both informs investors and accurately describes the fees
deducted pursuant to a 12b-1 plan. In 1988, when we began requiring
funds to disclose certain fee information in the form of a uniform
fee table, fees deducted pursuant to a 12b-1 plan were simply listed
as an annual operating expense called ``12b-1 Fees.'' Consolidated
Disclosure of Mutual Fund Expenses, Investment Company Act Release
No. 16244 (Feb. 1, 1988) [53 FR 3192 (Feb. 4, 1988)]. This
description of 12b-1 expenses was criticized as being uninformative,
and in 1998 we made a number of amendments to Form N-1A, including
renaming the ``12b-1 Fee'' heading as ``Distribution [and/or
Service] (12b-1) Fees.'' Registration Form Used by Open-End
Management Investment Companies, Investment Company Act Release No.
23064, at text accompanying n.79 (Mar. 13 1998) [63 FR 13916 (Mar.
23, 1998)]. Similar to the approach we are proposing today, the
hypothetical illustrative example that was a part of our summary
prospectus proposal used separate headings (Distribution Fee and
Service Fee) in the fee table. See Summary Prospectus Proposing
Release, supra note 293.
---------------------------------------------------------------------------

     We also request comment on our proposed use of the term
``marketing and service fee.'' Is it too general a term to provide
useful disclosure to investors? We are proposing this term instead of
only the term ``service fee'' because funds could use the marketing and
service fee for different activities than the ``service fee'' defined
by the NASD, and because we are concerned that use of only the term
``service fee'' in some circumstances could mislead investors.\303\
Should we permit funds that do not use the fees for distribution
related purposes to use the term ``service fee'' in lieu of ``marketing
and service fee''? Would such an alternative diminish the comparability
of fund fee tables and thus their usefulness to investors in comparing
expenses among different funds? Would a different term, such as ``sales
and service fee'' or ``distribution and service fee'' be more
descriptive or informative to investors? \304\
---------------------------------------------------------------------------

    \303\ See supra note 100 and accompanying text.
    \304\ See supra text following note 161.
---------------------------------------------------------------------------

     Finally, we request comment on fee table disclosure of
asset-based distribution fees charged under existing 12b-1 plans, as
permitted by proposed rule 12b-2(d).\305\ Should Item 3 continue to
require disclosure of ``12b-1 fees'' that are charged in the future?
\306\ Alternatively, should the 12b-1 fees be disclosed as marketing
and service fees and ongoing sales charges, as appropriate? Should
another term be used?
---------------------------------------------------------------------------

    \305\ See infra Section III.N.3 (treatment of ``grandfathered''
shares).
    \306\ See Item 3 of Form N-1A (requiring disclosure of
``Distribution [and/or Service] 12b-1 Fees'').
---------------------------------------------------------------------------

    We also propose to amend Item 12(b) of Form N-1A, which currently
requires funds that have adopted 12b-1 plans to disclose information
about the operation of the plan in the prospectus.\307\ Because funds
would no longer be required to have a ``plan,'' we are proposing to
eliminate this requirement. Instead, we would require funds to disclose
whether they charge a marketing and service fee or an ongoing sales
charge and, if they do, to disclose the rates of the fees and the
purposes for which they are used.\308\ In addition, if the fund deducts
an asset-based distribution fee for services provided to fund
investors, it would need to describe the nature and extent of the
services provided.\309\ We would also require a fund that imposes an
ongoing sales charge to disclose the number of months (or years) when
the shares will automatically convert (to another class without the
charge) and after which the shareholder would cease paying the
charge.\310\
---------------------------------------------------------------------------

    \307\ This disclosure complements the information presented in
tabular form in the fee table.
    \308\ Proposed Item 12(b) of Form N-1A.
    \309\ Id.
    \310\ For funds that choose the account-level sales charge
alternative, existing regulatory provisions would generally require
the delivery of similar information to investors in their
confirmation statements. See rule 10b-10 under the Exchange Act [17
CFR 240.10b-10].
---------------------------------------------------------------------------

    We would also require a fund offering multiple classes of shares in
a single prospectus (each with its own method of paying distribution
expenses) to describe generally the circumstances under which an
investment in one class may be more advantageous than another
class.\311\ We understand investors often face difficulties when
deciding which share class they should purchase because the advantages
and disadvantages of each class are not

always clearly presented in the prospectus.\312\ Although the differing
fees and terms of each class currently are readily available, the
actual consequences of the decision to purchase a particular class (in
terms of overall loads paid, appropriate holding periods, etc.) may not
be readily apparent. We believe that requiring funds to provide a clear
description of the situations in which one class may be more
advantageous than another would reduce shareholder confusion and
simplify the investment decision making process, and we understand that
some funds currently provide this type of disclosure.
---------------------------------------------------------------------------

    \311\ Proposed Item 12(b)(2) to Form N-1A.
    \312\ FINRA has addressed, on numerous occasions, the
responsibilities of its members in helping investors understand and
evaluate the sales structures of different classes of funds. See,
e.g., Special Notice to Members 95-80 (Sept. 1995) (http://
finra.complinet.com/finra/display/display_
content.html?rbid=1189&element_id=1159003637). See also FINRA,
Understanding Mutual Fund Classes (Jan. 14, 2003) (http://
www.finra.org/Investors/protectyourself/InvestorAlerts/MutualFunds/
p006022).
---------------------------------------------------------------------------

    We request comment on these proposed amendments to Item 12(b).
     Would the disclosure be useful to investors in identifying
the appropriate class to purchase? Should we provide more specific
disclosure requirements? If so, what should they be? Would funds have
difficulties in providing this information?
    We are also proposing to amend Item 19(g) of Form N-1A, which
currently requires a fund to describe in detail the material aspects of
its 12b-1 plans and related agreements, in the Statement of Additional
Information (SAI). Under our proposals, funds would no longer be
required to have written ``plans'' that are approved by the board of
directors, and thus much of this item would no longer serve any
purpose. We therefore propose to eliminate paragraphs 2 through 6 of
Item 19(g).\313\ Because these items relate to the specific operation
of a 12b-1 plan that would no longer be required under our proposal, we
believe that they should be removed.
---------------------------------------------------------------------------

    \313\ Item 19(g)(2) requires a fund to disclose the relationship
between the amounts paid to the distributor under a 12b-1 plan and
the expenses it incurs. Item 19(g)(3) requires disclosure of any
unreimbursed expenses incurred by the plan and carried over to
future years. Item 19(g)(4) requires disclosure of any joint
distribution activities with another fund and the method of
allocating distribution costs (any joint arrangement between funds
that implicates section 17(d) and rule 17d-1 would require the funds
to apply for and obtain an exemption from the Commission prior to
implementing the arrangement). Item 19(g)(5) requires disclosure of
whether any interested person or director has a financial interest
in the operation of the 12b-1 plan. Item 19(g)(6) requires
disclosure of the anticipated benefits of the plan to the fund.
---------------------------------------------------------------------------

     We request comment as to whether we should retain any of
these parts of Item 19(g).
    We believe that some of the other information required to be
disclosed under Item 19(g) may continue to be useful to investors and
the Commission. In particular, Item 19(g)(1) which includes a list of
the principal activities paid for under the plan and the dollar amounts
spent on each activity over the last year as a material aspect of a
12b-1 plan, may help investors to more clearly understand how the
asset-based distribution fees they pay are used. We propose to amend
Item 19(g) to eliminate references to the 12b-1 plan, and instead
require disclosure of the principal activities paid for through asset-
based distribution fees (both ongoing sales charges and marketing and
service fees). As proposed, the amendment would not require disclosure
of dollar amounts.\314\
---------------------------------------------------------------------------

    \314\ We do not believe that disclosure of the actual dollar
amount spent on these activities would be useful to investors
because that figure would depend primarily on the size of the fund,
and not the services purchased.
---------------------------------------------------------------------------

    We request comment on the proposed amendments to Item 19(g).
     Specifically, we request comment whether we should retain
the disclosures required by Item 19(g)(1) as it currently exists,
including the dollar amounts spent on each activity. Our proposal would
remove this disclosure because we believe that the information is
unlikely to be important to investors. Should these disclosure
requirements be eliminated or retained? Should we require funds to
disclose the percentage of fees spent on each type of activity instead?
Are there any other activities that are not disclosed in Item 19(g)
that should be disclosed under our proposal?
    Finally, we propose to: (i) Amend Item 25 of Form N-1A to add a
paragraph (d) requiring funds electing to rely on the exemption to
section 22(d) of the Act provided by rule 6c-10(c) to state that the
fund has made this election; and (ii) eliminate existing Item 28(m) of
Form N-1A, which requires a registered fund to attach its rule 12b-1
plan and any related agreements as an exhibit to its registration
statement. The exhibit would be unnecessary because proposed rule 12b-2
would not require a written plan, and funds that charge grandfathered
fees would not be required to have a written plan.\315\
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    \315\ See infra Section III.N.3 for a discussion of
grandfathering funds and share classes. We also are proposing
additional conforming, technical changes to other items of Form N-
1A, including: Instruction 3(b) to Item 3; Item 26(b)(4); and Item
27(d)(1) (and Instruction 2(a)(i) to Item 27(d)(1)). These changes
are necessary to delete references to rule 12b-1 and rule 12b-1
plans and add references to rules 12b-2(b) and (d) and to 6c-10(b)
as the operative rules regarding asset-based distribution fees.
---------------------------------------------------------------------------

     We request comment on these proposed changes to Item 25
and Item 28(m) of Form N-1A.
2. Amendments to Schedule 14A
    Our proposal would require funds to obtain shareholder approval
before instituting or increasing the rate of marketing and service fees
deducted from fund assets in existing share classes.\316\ To obtain
shareholder approval, funds generally have to solicit proxies from
their shareholders, and those proxy solicitations must include
sufficient information to allow shareholders to make an informed
decision. Item 22(d) of Schedule 14A under the Exchange Act \317\
requires funds to disclose information regarding any distribution plan
adopted under rule 12b-1 and the fees paid under the plan when
soliciting proxy votes for approval of any material change in that
plan. This disclosure is designed to provide shareholders with relevant
information regarding the distribution costs of the fund when they are
voting on issues that impact their investment.\318\ Our proposal would
eliminate the need for a distribution plan as currently required by
rule 12b-1, which would make much of the disclosure required in Item
22(d) of Schedule 14A no longer relevant. Therefore, we propose to
amend Item 22(d) of Schedule 14A, as well as replace the term
``distribution plan'' used in Schedule 14A with the new defined term
``Marketing and Service Fee.'' \319\
---------------------------------------------------------------------------

    \316\ Generally, as allowed by rule 12b-1 (and as our proposal
would allow), most funds institute a marketing and service fee or an
ongoing sales charge before a fund is offered for sale to the
public. See rule 12b-1(b)(1); Section III.F of this Release. If a
fund wishes to institute a new marketing and service fee after a
public offering, or increase those fees, the fund would be required
to disclose in the proxy the information discussed in this section
of the Release. As discussed in Section III.F, funds may not
increase or impose an ongoing sales charge in a share class of a
fund after any public offering of the fund's voting shares or the
sale of such shares to persons who are not organizers of the fund.
    \317\ 17 CFR 240.14a-101.
    \318\ See Amendments to Proxy Rules for Registered Investment
Companies, Investment Company Act Release No. 19957 (Dec. 16, 1993)
[58 FR 67720 (Dec. 22, 1993)] at section II.F.
    \319\ Proposed Item 22(a)(iii) of Schedule 14A would define
``Marketing and Service Fee'' to mean ``a fee deducted from Fund
assets to finance distribution activities pursuant to rule 12b-
2(b).''
---------------------------------------------------------------------------

    Although our proposal would not require a distribution plan, it
would permit funds to continue to use fund assets for distribution
related purposes. In addition, it would require fund shareholders to
approve any institution of, or increase in the rate of, marketing

and service fees charged by the fund.\320\ In order for fund
shareholders to make appropriate and informed decisions, we believe
that shareholders would continue to find information regarding the rate
of marketing and service fees, the purposes of the fees, the reasons
for any proposed increase, and the identity of certain affiliated
recipients relevant to their voting decisions. Thus, we propose to
leave these disclosures, which are currently required under Item 22(d),
substantially unchanged.\321\
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    \320\ See proposed rule 12b-2(b)(2).
    \321\ See Item 22(d)(1)-(3) of Schedule 14A; proposed Item
22(d)(1), (2) of Schedule 14A.
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    Because our proposal would not require any special action by the
board of directors in approving marketing and service fees, we do not
believe that information regarding the board of directors'
consideration of these fees would be relevant to the shareholder voting
decision. Therefore, we propose to eliminate the disclosure
requirements in Item 22(d) regarding director involvement in approving
asset-based distribution fees.\322\
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    \322\ See Item 22(d)(4) of Schedule 14A.
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    We also propose to eliminate the current requirement that funds
disclose in Item 22(d) the aggregate dollar amount of distribution fees
paid by the fund in the previous year. When we initially discussed such
disclosure in 1979, we envisioned that the disclosure of aggregate
dollar amounts could be useful for shareholders who were being asked to
renew a 12b-1 plan.\323\ This information may have been useful for
shareholders who were evaluating whether the expenditure of dollar
amounts was helpful to address certain problems or circumstances that
the 12b-1 plan addressed. In light of our current proposal to eliminate
12b-1 plans, however, and the fact that the aggregate dollar amount of
marketing and service fees primarily reflects the rate of the fee and
the size of the fund (information that is readily available elsewhere),
we believe this information is unlikely to affect a shareholder's
decision to approve an increase in a marketing and service fee. Thus,
we propose to eliminate the requirement to disclose information
regarding asset-based distribution fees in Item 22(d).\324\
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    \323\ See 1979 Proposing Release, supra note 33, at text
accompanying n.37 (``If shareholders were being asked to vote on the
renewal of a plan, it would appear appropriate to include as well
the amount spent by the fund in the previous fiscal year, as a total
dollar amount and as a percentage of average net assets during that
period, and the benefits to the fund from such expenditures.'').
    \324\ See Item 22(d)(2)(iii) of Schedule 14A. This information
will continue to be available to investors in the financial
statements that are included in annual and semi-annual shareholder
reports. See Item 27 of Form N-1A (requiring the inclusion of
financial statements required by Regulation S-X); 17 CFR 210.6-07
(Regulation S-X requirement that the statement of operations
separately state management and service fees); proposed amendment to
17 CFR 210.6-07 (proposed requirement that Regulation S-X require
the separate statement of ``all fees deducted from fund assets to
finance distribution activities'' pursuant to rules 12b-2(b), (d) or
6c-10(b) under the Investment Company Act). In addition, directors
will continue to review the amounts charged to funds in the course
of their oversight of fund expenses.
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    We request comment on our proposed changes to Schedule 14A.
     Should we require disclosure of any other aspects of
marketing and service fees in the proxy statement? Is information about
the aggregate amount of marketing and service fees collected relevant
and meaningful to investors? Should we include any requirement for
disclosure of director involvement in the setting of marketing and
service fees?
3. Request for Comment on Account Statement Alternative
    The GAO previously suggested that the Commission consider requiring
funds to disclose in account statements the actual dollar amount of
fees and expenses that each shareholder directly or indirectly has paid
as an investor in the fund.\325\ Many commenters argued, however, that
such an approach would be unduly costly and may not be helpful to
shareholders.\326\ We believe that our proposed amendments would
improve transparency of distribution related expenses without requiring
funds and intermediaries to incur the costs that these commenters have
asserted are associated with account statement disclosures.\327\
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    \325\ See GAO, Mutual Fund Fees: Additional Disclosure Could
Encourage Price Competition, supra note 130. See also Roundtable
Transcript, supra note 109, at 221 (Richard Phillips, K&L Gates)
(``[I]f you had [disclosure of 12b-1 fees] in dollars and cents
terms, if you had it in the account statements * * * I think you
would get a mutual fund investing public that is more sensitive to
the issue of sales charge. And, over the long run, it would have a
competitive effect of a more informed investing public.'').
    \326\ See, e.g., Comment Letter of the ICI (July 19, 2007);
Comment Letter of W. Hardy Callcott (June 18, 2007). However,
another commenter argued that account statement disclosure could
provide useful information to shareholders. See Comment Letter of
Access Data Corp. (July 19, 2007).
    \327\ We note that we have addressed this issue in part by
requiring that prospectuses include an example of the costs an
investor would pay on a hypothetical $10,000 investment in the fund.
See Item 3 of N-1A.
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     Is our assumption correct? Or should we pursue the
recommendations made by the GAO and require account statement
disclosure of the actual dollar amount of asset-based distribution
fees? Would such account statement disclosure be helpful or useful to
investors? Have technological advances permitted account statement
disclosure to be provided to investors without undue costs?

K. Proposed Conforming Amendments to Rule 11a-3

    Section 11(a) of the Act requires exchanges between funds to be
based on the relative net asset values of the shares to be
exchanged.\328\ Rule 11a-3 provides a conditional exemption permitting
funds and fund underwriters to charge a sales load on shares acquired
in certain exchanges between funds within the same fund group. Among
other things, the rule limits the total combined sales load that may be
charged on shares that have been subject to an exchange (i.e., all
sales loads incurred on both the exchanged and acquired shares) to the
highest sales load rate applicable to those shares (exchanged or
acquired) in the absence of an exchange.\329\ This provision is
designed to give shareholders credit for all sales loads paid in
connection with a purchase of fund shares, regardless of whether the
sales load was paid with respect to the exchanged or acquired
shares.\330\
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    \328\ Section 11(a) of the Act makes it unlawful for a fund or
its principal underwriter to make an exchange offer to the fund's
shareholders or to shareholders of another fund on any basis other
than the relative net asset values of the shares to be exchanged,
unless the terms of the offer are approved by the Commission or
comply with Commission rules governing exchanges.
    \329\ Rule 11a-3(b)(4).
    \330\ Offers of Exchange Involving Open-End Investment Companies
and Unit Investment Trusts, Investment Company Act Release No.
15494, at text following n.28 (Dec. 23, 1986) [51 FR 47260 (Dec. 31,
1986)].
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    As discussed above, our proposed amendments to rule 6c-10 would
treat traditional sales loads and the sales charge component of
existing 12b-1 fees, (i.e., the ongoing sales charge) similarly under
the Act.\331\ Accordingly, we propose two changes to rule 11a-3 that
would conform that rule with our general approach.
---------------------------------------------------------------------------

    \331\ See supra note 141 and accompanying text.
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1. Credit for Ongoing Sales Charges Paid
    Paragraph (b)(4) of rule 11a-3 requires that funds, in determining
any sales load due upon an exchange, give shareholders credit (i.e.,
reduce the amount of sales load charged on the purchase of new shares)
for their previous payment of sales loads on the shares exchanged, but
does not require funds to give shareholders credit for the payment of
any rule 12b-1 fees. In order to ensure that shareholders are credited
for all sales charges previously paid in connection with a purchase of
fund

shares, we propose to amend rule 11a-3(b)(4) to require funds to also
give shareholders credit for the payment of ongoing sales charges.
    We request comment on our proposed treatment of ongoing sales
charges in rule 11a-3.
     Are there reasons not to treat a sales load and an ongoing
sales charge in the same way when determining the amount of sales load
due upon an exchange? Should we require funds to also give credit for
any marketing and service fee paid under rule 12b-2 when calculating
the sales load due upon an exchange? Should we require funds to also
give credit for any 12b-1 fees previously paid on the exchanged shares?
If so, should we limit the credit to fees paid in excess of 25 basis
points (i.e., the asset-based sales charge component of 12b-1 fees)?
Would our proposed amendments to rule 11a-3 result in significant
operational difficulties? Is there a simpler or less costly method of
accomplishing the goal of ensuring that investors receive credit for
ongoing sales charges during rule 11a-3 exchanges than the approach we
are proposing?
2. Deferred Sales Loads Upon Exchange
    Rule 11a-3 prohibits funds from imposing a deferred sales load at
the time of an exchange.\332\ The provision was designed to remove the
incentive for fund underwriters to induce shareholders to make
exchanges in order to accelerate its collection of a deferred sales
load.\333\ Under the rule, a fund may not treat an exchange as a
redemption for purposes of assessing a deferred sales load, and thus
may impose a deferred sales load only when the acquired shares are
ultimately redeemed.\334\ When the deferred load is imposed, the fund
must determine the amount of the deferred load by ``tacking'' (i.e.,
adding) the time the shareholder held shares of the exchanged fund to
the time the shareholder held shares of the acquired fund.\335\
However, in determining the amount of the deferred load, a fund may
toll (i.e., exclude) the time the acquired shares are held if a new
sales load is not charged upon the exchange and credit is given to the
investor for any 12b-1 fees paid with respect to the acquired
shares.\336\
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    \332\ Rule 11a-3(b)(3).
    \333\ See Rule 11a-3 Adopting Release, supra note 186, at text
following n.28.
    \334\ Rule 11a-3(b)(5).
    \335\ Id.
    \336\ Rule 11a-3(b)(5)(i). The rule provides an analogous
provision for acquired shares that have a CDSL. Rule 11a-
3(b)(5)(ii). The rule recognizes that CDSLs typically are reduced
over time to reflect amounts paid by investors indirectly through a
12b-1 plan. We reasoned that ``if a shareholder is making any
payments for distributions through a 12b-1 plan, those payments
should be reflected in a commensurate reduction of the CDSL owed,
[but] * * * tolling would prevent a shareholder from receiving
credit for the 12b-1 payments made while holding the acquired
shares. * * *'' See Offers of Exchange Involving Registered Open-End
Investment Companies and Unit Investment Trusts, Investment Company
Act Release No. 16504, at text following n.35 (July 29, 1988) [53 FR
30299 (Aug. 11, 1988)] (revised proposal of rule 11a-3). Thus, rule
11a-3 permits tolling of the time the acquired shares are held only
if ``a credit is given to investors for any 12b-1 fees with respect
to the acquired shares. * * *'' Rule 11a-3 Adopting Release, supra
note 186, at text accompanying n.35.
---------------------------------------------------------------------------

    We propose to modify the ``tolling'' provision of rule 11a-3 to
permit funds, in determining the amount of deferred sales load due upon
ultimate redemption, to provide credit only for the sales charge
component of any asset-based distribution fee, i.e., the ongoing sales
charge. Because the marketing and service fee is not considered to be
an alternative sales charge under our proposal, we would not require
funds to give credit for such fees when determining the sales load
payable upon an exchange. In addition, we propose to modify the rule to
clarify that funds must provide credit for ongoing sales charges in
terms of the cumulative rate of the ongoing sales charge previously
paid rather than the amount of fees paid. As discussed previously, we
understand that funds generally do not have the ability to track dollar
amounts of 12b-1 fees that are attributable to individual shareholder
accounts.\337\ In addition, requiring that credit be given in terms of
rates rather than dollar amounts would make rule 11a-3 consistent with
the method of calculating maximum sales loads under rule 6c-10(b).\338\
---------------------------------------------------------------------------

    \337\ See supra note 170 and accompanying text.
    \338\ See supra Section III.D.1 of this Release.
---------------------------------------------------------------------------

     Should rule 11a-3 require funds to give shareholders
credit for the payment of any marketing and service fee when relying on
the tolling provisions? We request comment on any aspect of our
proposed changes to rule 11a-3. Should rule 11a-3 operate in terms of
dollar amounts instead of rates? Would it be difficult or costly for
funds to comply with the new requirements? Is it difficult or costly
for funds today to comply with the tolling provisions of rule 11a-3? Is
our understanding correct that funds generally do not have the ability
to track dollar amounts of 12b-1 fees? Would it be difficult or costly
for funds to track these amounts?

L. Other Proposed Conforming Amendments

1. Rule 17a-8
    Rule 17a-8 provides an exemption from section 17(a) of the Act to
permit mergers of funds with certain of their affiliated persons,
including other funds (affiliated funds), subject to certain
conditions.\339\ Among other requirements, the rule requires the board
of the merging fund to have made certain determinations, the surviving
fund to keep certain records, and the shareholders of the merging fund
to approve of the merger.\340\ The rule allows for affiliated funds to
merge in the absence of a shareholder vote, if, among other conditions,
the 12b-1 fees of the surviving company are no greater than the 12b-1
fees of the merging company.\341\ This condition prevents 12b-1 fees
from being instituted or increased as a result of a merger on which the
acquired fund's shareholders have not had an opportunity to vote.\342\
We propose to preserve this protection by amending rule 17a-8 to
replace references to rule 12b-1 with references to rule 12b-2(b) or
(d) and rule 6c-10(b).\343\
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    \339\ ``Affiliated person'' is defined in section 2(a)(3) of the
Act.
    \340\ See rule 17a-8(a)(2), (a)(5), and (a)(3), respectively.
    \341\ Rule 17a-8(a)(3)(iv).
    \342\ Investment Company Mergers, Investment Company Act Release
No. 25666 (July 18, 2002) [67 FR 48512 (July 24, 2002)].
    \343\ See proposed amendments to rule 17a-8(a)(3)(iv).
---------------------------------------------------------------------------

     We request comment on this proposed revision. Should we
continue to permit affiliated funds to merge in reliance on this
provision in light of our new approach to asset-based distribution fees
and the different role that fund directors would have in overseeing
these fees under our proposal? Is there another approach we should take
in amending rule 17a-8 to conform with our proposal?
2. Rule 17d-3
    When the Commission adopted rule 12b-1 in 1980, it also adopted
rule 17d-3 because a fund's payments for distribution under a rule 12b-
1 plan may involve it in a ``joint enterprise'' with an affiliated
person that otherwise would be prohibited by section 17(d) of the Act
and rule 17d-1 unless an application regarding the joint arrangement
was filed with the Commission and granted by order.\344\

The rule grants an exemption for funds to enter into agreements with
certain affiliated persons and the fund's principal underwriter in
connection with the distribution of its shares, provided that such an
agreement is in compliance with rule 12b-1, among other
requirements.\345\
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    \344\ See 1980 Adopting Release, supra note 23, at section
titled ``Proposed Rule 17d-3'' (rule 17d-3 was adopted in the same
release as rule 12b-1). Section 17(d) of the Act and rule 17d-1, in
general, prohibit an investment company from entering into a ``joint
enterprise or other joint arrangement or profit-sharing plan'' (as
defined in the rule) with any affiliated person or principal
underwriter (or their affiliated persons) unless the Commission by
order grants an exemption before the agreement goes into effect.
    \345\ The Commission stated that prior review and approval as
required by rule 17d-1 would not be necessary if the safeguards of
rule 12b-1 have already been applied to the arrangement. 1979
Proposing Release, supra note 33. The exemption does not extend to
arrangements for the joint sharing of distribution costs by funds
that are affiliates (or affiliates of affiliates) of each other
(e.g., mutual funds in the same fund complex). 1980 Adopting
Release, supra note 23, at section titled ``Proposed Rule 17d-3.''
---------------------------------------------------------------------------

    We believe that under our proposed new rules, funds should continue
to be afforded the exemption provided by rule 17d-3 with respect to
distribution payments made to certain affiliated persons and the
principal underwriter, so long as those payments are consistent with
the conditions set forth in proposed rule 12b-2 and amended rule 6c-
10.\346\ We therefore propose to revise rule 17d-3(a) to replace the
reference to 12b-1 with references to rule 12b-2(b), rule 12b-2(d) and
rule 6c-10(b) in order to permit a fund to enter into an asset-based
distribution fee arrangement with an affiliated underwriter.\347\
---------------------------------------------------------------------------

    \346\ We note that fund boards would continue to review and
scrutinize arrangements involving asset-based distribution fees and
ongoing sales charges, as discussed above. See supra section
III.D.4.
    \347\ See proposed amendments to rule 17d-3(a).
---------------------------------------------------------------------------

     We request comment on any aspect of this proposed
revision. Would the revised role of directors in approving asset-based
distribution fees under our proposal make this type of exemption less
warranted? Is there another approach we should take in revising rule
17d-3 to conform with our proposal?
3. Rule 18f-3
    Rule 18f-3 permits funds to offer multiple classes of fund shares.
Section (f) of the rule permits funds to convert shares of one class to
shares of another class after a specified period of time, provided
that, among other things, the expenses (including 12b-1 fees) charged
to the converted class are no higher than the expenses of the original
share class. We believe that, under our proposed amendments, funds
should continue to be able to convert shares under the same conditions.
We believe that expenses attributable to proposed rule 12b-2 and
proposed amendments to rule 6c-10 should be taken into account when
making these conversions, much like rule 12b-1 expenses are today. We
therefore propose that rule 18f-3(f)(ii) be amended to delete the
reference to 12b-1 fees and replace it with references to fees under
rule 12b-2(b), rule 12b-2(d) and rule 6c-10(b).\348\
---------------------------------------------------------------------------

    \348\ See proposed amendments to rule 18f-3(f)(ii).
---------------------------------------------------------------------------

     We request comment on any aspect of this revision. Is
there another approach we should take in revising rule 18f-3 to conform
with our proposal?
4. Forms N-3, N-4, and N-6
    Form N-3 is the registration form used by insurance company
separate accounts registered as management investment companies that
offer variable annuity contracts. Instruction 2 to Item 7(a) requires
separate accounts to disclose, among other things, the principal
activities for which 12b-1 payments are made and the total amount spent
under a 12b-1 plan in the most recent fiscal year, as a percentage of
net assets. We believe that most of the information required to be
disclosed by Instruction 2 to Item 7(a) would continue to be useful to
investors and the Commission, and thus we propose to amend Instruction
2 to Item 7(a) to replace references to rule 12b-1 and 12b-1 plans with
references to asset-based distribution expenses incurred under rule
12b-2(b), rule 12b-2(d) and rule 6c-10(b). The proposal would eliminate
the requirement that registrants disclose the total amount spent in the
most recent fiscal year (although this information would continue to be
available in funds' financial statements), and would instead require
registrants to provide a description of asset-based distribution fees.
As discussed above, disclosure of the aggregate total of asset-based
distribution fees may not be helpful to investors because it primarily
reflects the size of the fund and not the distribution activities that
are paid for with these amounts.\349\ The proposal would retain the
requirement that registrants list the principal types of activities for
which asset-based distribution fees are charged.
---------------------------------------------------------------------------

    \349\ See supra note 323 and accompanying text.
---------------------------------------------------------------------------

    As discussed above, under our proposals funds would not be required
to have written ``plans'' that are supervised and approved by the board
of directors. We therefore propose to eliminate paragraphs (ii) and
(iii) of Item 21(f) because these items relate to the specific
operation of a 12b-1 plan that would no longer exist under our
proposal.\350\
---------------------------------------------------------------------------

    \350\ Item 21(f)(ii) requires a registrant to disclose whether
any interested person or director has a financial interest in the
operation of the 12b-1 plan. Item 21(f)(iii) requires disclosure of
the anticipated benefits of the plan to the fund.
---------------------------------------------------------------------------

     We request comment whether we should retain any of these
parts of Item 21(f).
    We believe, however, that the information required to be disclosed
in paragraph (i) of Item 21(f), which requires registrants to disclose
the manner in which amounts paid by the registrant under a 12b-1 plan
were spent, would continue to be useful to investors and the
Commission. This information may be relevant to an investor making an
investment decision because it discloses the types of services the fund
(and its investors) may receive in exchange for these fees. We propose
to amend Item 21(f) to eliminate references to the 12b-1 plan, and
instead require disclosure of the principal activities paid for through
asset-based distribution expenses incurred under rule 12b-2(b), rule
12b-2(d) and rule 6c-10(b). For the reasons discussed above, we also
propose to amend Instruction 5 to Item 26(b)(ii) \351\ to delete any
references to 12b-1 plans.\352\ However, registrants would be required
to provide the same information with respect to expenses and
reimbursements accrued pursuant to rule 12b-2(b), rule 12b-2(d) and
rule 6c-10(b).
---------------------------------------------------------------------------

    \351\ Instruction 5 to Item 26(b)(ii) explains how registrants
should include expenses related to 12b-1 fees in the calculation of
their performance data.
    \352\ See proposed amendments to Instruction 5 to Item
26(b)(ii).
---------------------------------------------------------------------------

     We request comment on any aspect of these proposed
revisions to Form N-3.
    We are also proposing to amend the fee tables in Forms N-4 and N-6,
the registration forms used by insurance company separate accounts
registered as unit investment trusts that offer variable annuity
contracts and variable life insurance contracts, respectively. We
propose to replace existing references to ``distribution [and/or
service] (12b-1) fees'' with a new defined term, ``asset-based
distribution fees.'' We also propose to add new instructions that would
define the term ``asset-based distribution fee'' as ``all asset-based
distribution fees paid under rule 12b-2(b), rule 12b-2(d), and rule 6c-
10(b).''
     We request comment on these proposed revisions to Forms N-
4 and N-6.
5. Form N-SAR
    We are proposing to amend the instructions to Form N-SAR, the

reporting form that is used by mutual funds for filing annual and semi-
annual reports with the Commission.\353\ Form N-SAR currently requires
funds to answer a series of five questions about their 12b-1 plans in a
yes/no or fill-in-the-blank format, which provides the Commission
information regarding the use and amount of 12b-1 fees. The first of
these questions asks a fund to state whether it has adopted a rule 12b-
1 plan, and if the answer is ``no,'' the fund need not answer the next
four questions.\354\ Because under our new approach funds would no
longer be required to have 12b-1 plans, funds would answer ``no'' to
the first question, and would not be required to respond to the
remaining four questions. Under the proposed amended instructions,
funds with share classes subject to a grandfathered 12b-1 plan (as
discussed in Section N.3 below) would respond ``yes'' to the first
question, and provide the information required in the remaining
questions. Funds that do not have grandfathered 12b-1 plans would
answer ``no'' to the first question, and would not be required to
respond to the remaining four questions.
---------------------------------------------------------------------------

    \353\ Mutual funds that have effective registrations statements
for their shares under the Securities Act are required to file
annual and semi-annual reports with the Commission on Form N-SAR
under section 30(b) of the Act and rule 30b1-1.
    \354\ Item 40 of Form N-SAR.
---------------------------------------------------------------------------

    Although the operation of grandfathered 12b-1 fees would differ in
certain ways from current 12b-1 fees if the proposal is adopted
(primarily because there would no longer be board approval of a 12b-1
plan), those differences should not affect the disclosures required
under Form N-SAR, and this information could continue to be useful to
the Commission and investors.
     We request comment on our proposed changes to Form N-SAR.
Should we delete the Form N-SAR questions related to 12b-1 plans
entirely and not require funds with grandfathered share classes to
answer the questions? Or should we amend the questions so that they
apply not only to funds with a 12b-1 plan, but also to any fund with
asset-based distribution fees pursuant to our proposed new rule 12b-2
and amended rule 6c-10? Is there a continuing need for the information
to be disclosed in the questions related to 12b-1 plans in Form N-SAR
if our proposal is adopted?
6. Regulation S-X
    Mutual funds must include in their registration statements and
shareholder reports the financial statements required by Regulation S-
X.\355\ As part of this requirement, mutual funds file a statement of
operations listing their income and expenses.\356\ Under the expense
category, funds currently must state separately all amounts paid in
accordance with a plan adopted under rule 12b-1.\357\ We propose to
delete the reference to rule 12b-1 and replace it with a requirement
that funds list separately, in two line items in the statement of
operations, the portion of this expense that represents marketing and
service fees under proposed rule 12b-2(b), and the portion of this
expense that represents ongoing sales charges under proposed amendments
to rule 6c-10(b) or other fees under rule 12b-2(d).\358\ Multiple-class
funds would be permitted to disclose the marketing and service fees and
ongoing sales charges incurred by each class either in the statement of
operations or in a note to the financial statements, so that investors
in each class would have an understanding of the expenses paid by their
particular distribution arrangement. This change is designed to provide
investors with information about marketing and service fees and ongoing
sales charges in a fund's financial statements and is consistent with
the proposed changes to the prospectus fee table.\359\ In addition,
funds that receive reimbursements relating to distribution would
continue to report these reimbursements as a negative amount and deduct
them from current 6c-10(b), 12b-2(b) or (d) expenses in the statement
of operations.
---------------------------------------------------------------------------

    \355\ Item 27 of Form N-1A. Article 6 of Regulation S-X contains
special rules applicable to the financial statements of registered
investment companies. 17 CFR 210.6-01 et seq.
    \356\ Rule 6-07 of Regulation S-X contains the requirements for
an investment company's statement of operations. 17 CFR 210.6-07.
The statement of operations reports changes in a fund's net assets
resulting from the amount of net investment income, net realized
gains and losses on investments, and net unrealized appreciation or
depreciation of investments.
    \357\ 17 CFR 210.6-07.2(f).
    \358\ Shares subject to grandfathering under proposed rule 12b-
2(d) would continue to list asset-based fees as a single line item,
as under current practices.
    \359\ See supra Section III.J of this Release.
---------------------------------------------------------------------------

     We request comment on the proposed amendments. Would
listing ongoing sales charges in the statement of operations help
investors understand that they are paying a sales charge as part of
their investment in the fund? Should this information be presented in
the statement of operations separately for each class of the fund? Is a
note to the financial statement the appropriate place to provide this
information? If not, where should we require disclosure of class-
specific information? Should we also require that the conversion period
for the ongoing sales charge be included in shareholder reports to
provide investors with a regular reminder and reference for how long
the fee would be charged?

M. Potential Impact of Proposed Rule Changes

    Our rule proposals are designed to resolve many of the difficulties
that investors, as well as fund directors, managers, underwriters, and
intermediaries, have experienced with rule 12b-1 and 12b-1 fees over
the years. We also recognize that, if adopted, our proposals would
affect how some fund groups and their distributors conduct business.
The benefits and potential impacts of the proposed rule changes on
various market participants, which we summarize below, are also
discussed further in the Cost-Benefit Analysis contained in Section V
of this Release.
1. Fund Investors
    Our proposals are designed to make it easier for fund investors to
understand fund expenses. As a result, investors would be better able
to select the fund or fund class that offers the combination of costs
and services that is most advantageous for them. In addition, our
proposals would provide for equivalent limitations on sales charges for
shareholders who invest in a fund through a class of shares that
charges front-end sales loads and those who choose to invest in a class
of shares that bears an ongoing sales charge. We believe the proposals
would yield investors two benefits. First, they would protect investors
from the imposition of excessive sales loads, in furtherance of the
goals of section 22(b) of the Act,\360\ by limiting the cumulative
amount of sales charges that an investor could bear directly or
indirectly.\361\ Second, they would promote a fairer allocation of
distribution costs among investors who invest through different share
classes by limiting the extent to which one class of shares (e.g.,
class C shares) may bear these costs. In addition, the proposed rule
amendments may lead to lower distribution costs if greater retail price
competition develops.
---------------------------------------------------------------------------

    \360\ See supra note 20.
    \361\ See infra Section III.N.3 (discussing grandfathered share
classes).
---------------------------------------------------------------------------

    Some investors wrote to us urging the elimination of rule 12b-1 as
a way of reducing the cost of owning mutual funds.\362\ Although one
consequence of

the proposed rule amendments may be to reduce distribution costs, the
elimination of asset-based sales charges would not eliminate the need
to compensate fund intermediaries for fund distribution and for the
other services they provide. Investors who do not want to pay 12b-1
fees have available to them a range of funds that do not charge these
fees, although investors in these funds may pay distribution costs
through other means. In recent years, expenses of funds as a group have
begun to decline as more investors have sought funds with lower
expenses, and as index funds and exchange-traded funds have become more
popular with investors.\363\ We believe that more transparent
disclosure of fund expenses may help investors to better evaluate
different fund options. This transparency also may lead to greater
competition among funds and ultimately downward pressure on fund costs.
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    \362\ See, e.g., Comment Letter of Melvyn H. Mark (June 17,
2007); Comment Letter of Jack Thomas (June 19, 2007); Comment Letter
of Weiwan Ng (June 19, 2007).
    \363\ See, e.g., Fee Trends Report, supra note 22 (discussing
the decline in expense ratios during the past 20 years, but noting
that the expense ratios of stock funds and bond funds increased in
2009).
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2. Fund Intermediaries and Distributors
    We received comments from a large number of financial planners,
broker-dealer representatives, and brokerage firm managers who
expressed concern that the ``trail commissions'' or ``service fees''
they receive from the proceeds of 12b-1 fees might be cut off as a
result of this rulemaking, and they could no longer provide ongoing
services to their customers.\364\ These proposals should address these
concerns.\365\ Approximately 80 percent of fund assets that are subject
to 12b-1 fees are charged 12b-1 fees of 25 basis points or less. They
therefore would not be subject to the portion of our rule proposals
related to ongoing sales charges.\366\
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    \364\ See, e.g., Comment Letter of Jill Shannon (Aug. 6, 2007);
Comment Letter of Bernard Smit (Oct. 9, 2007); Comment Letter of
Eric Connors (June 19, 2007)). See also Comment Letter Type A and
Comment Letter Type B.
    \365\ But see supra notes 100 and 168 of this Release.
    \366\ According to industry statistics derived from Lipper's
LANA Database analyzed by our staff, funds that charge 12b-1 fees
have aggregate assets of $4.86 trillion, which we assume is the
source of payments for trail commissions or services fees (or a
combination) to intermediaries. 12b-1 fees of 25 basis points or
less are charged on approximately 82 percent of these assets ($4.0
trillion).
---------------------------------------------------------------------------

    Intermediaries that may be affected by our proposed rules are
primarily broker-dealers that currently receive payments from the sale
of classes of fund shares that pay 12b-1 fees that exceed 25 basis
points (e.g., class C shares). Under our rule proposals, funds could
continue to pay broker-dealers 12b-1 fees at previously approved levels
for grandfathered shares.\367\ For shares issued after the compliance
date, fund underwriters would likely reduce the stream of payments when
the shares convert to a class that pays no more than 25 basis points of
asset-based distribution expenses (e.g., class A shares) or else find a
different source of revenue to fund the payments. The amount of time
before conversion would depend on the amount of sales load charged on
the class A shares, i.e., the reference load, and the rate of the
ongoing sales charge (the amount of asset-based distribution fees that
exceeds 25 basis points). Thus, for example, if a fund offers class A
shares with a 5.25 percent front-end load and class C shares with an
ongoing sales charge of 75 basis points, then the class C shares would
have to convert no later than seven years from the time of
purchase.\368\ This consequence flows from the premise (discussed
above) that amounts paid by funds in excess of the marketing and
service fee are charged as an alternative to sales loads, and thus are
properly limited by the NASD sales load caps.
---------------------------------------------------------------------------

    \367\ See infra Section III.N of this Release.
    \368\ We calculated the length of the conversion period by
dividing the rate of the front-end load (5.25%) by the rate of the
ongoing sales charge (0.75%).
---------------------------------------------------------------------------

    Some commenters and roundtable participants described ``level
load'' classes of shares as providing for an alternative to front-end
or spread-load arrangements, and thus acknowledged them as a form of
sales load designed to support distribution of fund shares.\369\
Others, however, have asserted that the 12b-1 fees associated with
level load funds (often 100 basis points) pay for valuable ongoing
investment advice provided by the intermediary, and are an alternative
to mutual fund wrap fee programs, which often charge a 100 basis point
(or greater) wrap fee.\370\ The use of fund assets to finance personal
advisory services (rather than support fund distribution), however,
raises issues regarding whether those advisory services provided by an
intermediary to a customer years after the sale ought to be payable
from fund assets. Such expenditures arguably do not relate to the
operation of the fund or to the distribution of its shares.
---------------------------------------------------------------------------

    \369\ See, e.g., Roundtable Transcript, supra note 109, at 198-
99 (Richard Phillips, K&L Gates) (``I think you have got to separate
the 25 basis point service fee from the 75 basis point sales
compensation fee, or broker's compensation fee. * * * The 75 basis
point substitute for the front-end load * * * is pure sales
compensation.'').
    \370\ See, e.g., Comment Letter of Gregory A. Keil (June 1,
2007) (``The current `Class C' share is really the next step toward
a more `advice driven' model * * * removing a `transaction cost'
from the equation--and applying an ``always-on'' Advisory Fee to a
DISCRETIONARY investment vehicle--the mutual fund. * * *''); Comment
Letter of Daryl Nitkowski (July 19, 2007) (``In fact, I believe the
typical 1% fee charged on class C shares represents the best option
for clients who want continuing advice, but do not want to have a
fee based account.'').
---------------------------------------------------------------------------

     We request comment on these matters. Are asset-based
distribution fees associated with level load share classes an efficient
means to pay for ongoing investment advice?
    With respect to level load share class arrangements, roundtable
panelists and commenters raised questions regarding the applicability
of the Investment Advisers Act of 1940 (``Advisers Act'') \371\ to
intermediaries that receive those ongoing fees.\372\
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    \371\ 15 U.S.C. 80b.
    \372\ Intermediaries that are broker-dealers are excluded from
the definition of investment adviser under the Advisers Act with
respect to advice they provide that is ``solely incidental to the
conduct of [their] business as a broker or dealer'' and for which
they receive ``no special compensation.'' Section 202(a)(11)(C) of
the Advisers Act [15 U.S.C. 80b-2(a)(11)(C)]. Some commenters
asserted that broker-dealers receiving 12b-1 fees are ineligible for
this exclusion. See, e.g., Comment Letter of Ron A. Rhoades (June
18, 2007) (``It is clear from various comments recently submitted by
broker-dealer firm registered representatives, as well as * * *
industry representatives and the ICI, that 12b-1 fees are being
utilized as `special compensation' for advice which is ongoing * * *
and which clearly cannot be considered incidental to the mutual fund
sales transaction * * *. I would submit that the payment of 12b-1
fees for such purposes violates the Investment Advisers Act, when
such fees are paid in connection with brokerage (not investment
advisory) accounts.''); Comment Letter of Harold Evensky (June 26,
2007). See also Roundtable Transcript, supra note 109, at 203
(Barbara Roper) (``The other thing I would just like to point out,
having listened to today's discussion, this advice we're getting
doesn't sound remotely like anything I would call solely incidental
to product sales. And these fees sound a lot like special
compensation for advice.''). See also Beagan Wilcox Volz, Class
Action Firm Mounts Legal Attack on 12b-1 Fees, Ignites (Apr. 9,
2010) (discussing recent lawsuits alleging that broker-dealers may
not properly receive 12b-1 fees without registration as investment
advisers).
---------------------------------------------------------------------------

     We request comment on these matters, and whether the
conversion provisions of our proposed rules would appropriately address
them by requiring a nexus between the sale of a share of a mutual fund
and the amount of ongoing sales charges an intermediary's customer pays
through the fund.
    Finally, we note that our proposed relaxation of restrictions on
retail price competition could provide fund intermediaries with greater
control over the pricing of fund shares sold to their customers by
permitting intermediaries to establish their own sales loads
specifically tailored for their customers. This may result in greater
competition

among intermediaries and in particular may impact smaller broker-
dealers that lack the distribution capacity and negotiating ability of
larger broker-dealers. However, some smaller broker-dealers may use
this alternative to create new pricing structures that permit them to
better compete with larger broker-dealers.
     We request comment on the likely effects on competition
that may result from our proposal, including the effects with regard to
smaller broker-dealers.
3. Fund Managers and Principal Underwriters
    Our proposals would largely preserve existing distribution
arrangements, and should provide fund managers, directors, etc., with
greater legal certainty regarding many distribution financing practices
that have developed over the years.\373\ In this regard, our proposals
would respond to the many calls we have received from mutual fund
managers and others to revise rule 12b-1 in a way that recognizes that
12b-1 fees are today a substitute for sales loads, and to eliminate the
procedural requirements of the rule that they view as outdated.\374\
---------------------------------------------------------------------------

    \373\ One of the uncertainties involves whether fund boards can
appropriately approve continuation of 12b-1 fees for funds that are
no longer selling shares. See Standard & Poor's, Closed Funds and
12b-1 Fees (Aug. 2008) (http://www2.standardandpoors.com/spf/pdf/
index/concept_12B1-Fess&ClosedFunds.pdf) (the existence of 12b-1
fees in funds closed to new investments may seem ``counter-
intuitive,'' but may be appropriate when viewed as a substitute for
a sales load).
    \374\ See supra Section II.E.
---------------------------------------------------------------------------

    Today's proposals are designed to address the criticism of funds
and fund managers expressed by investors, the academic community, and
the financial press who argue that rule 12b-1 fees may not collectively
benefit fund shareholders because they do not produce economies of
scale and, in fact, operate to increase fund expense ratios.\375\ We
anticipate that the proposed rules, if adopted, would shift the focus
from whether fund expenses are increased by a 12b-1 fee to whether the
sales charges imposed by a particular fund are appropriate in light of
the services provided by the intermediary. This is the issue we believe
investors should be exploring before they decide to invest in a fund
and pay sales charges.
---------------------------------------------------------------------------

    \375\ See, e.g., Haslem, supra note 108; William Dukes et al.,
Mutual Fund Mortality, 12b-1 Fees, and the Net Expense Ratio, 29 J.
Fin. Res. 235 (2006); Charles Trzcinka & Robert Zweig, An Economic
Analysis of the Cost and Benefits of SEC Rule 12b-1, Monograph
Series in Finance and Economics 67 (Leonard N. Stern School of
Business, NYU) (1990). See also William P. Dukes & James B. Wilcox,
The Difference Between Application and Interpretation of the Law as
It Applies to SEC Rule 12b-1 Under the Investment Company Act of
1940, 27 New Eng. L. Rev. 9 (1992).
---------------------------------------------------------------------------

4. Small Fund Groups
    Some fund and broker-dealer industry participants expressed concern
about the possible effects of changes to rule 12b-1 on smaller fund
groups. Several asserted that use of fund assets to pay for
distribution has played an important role in permitting smaller fund
groups to compete with larger fund groups for the attention of
intermediaries by permitting them to access a wide array of
distribution networks.\376\ Of particular importance to small funds is
their continued ability to use fund assets to pay for participation in
fund supermarkets,\377\ which are an important means by which investors
find smaller fund groups.\378\ A number of studies of the role of
brokers and fund supermarkets in selling shares of mutual funds offered
by smaller fund groups appear to support these assertions.\379\
---------------------------------------------------------------------------

    \376\ See, e.g., Roundtable Transcript, supra note 109, at 67-68
(Mellody Hobson, Ariel Capital Management). See also Comment Letter
of Thornburg Investment Management (July 19, 2007) (``[L]arge
brokerage firms have increasingly become more open to using funds
managed by independent advisors, rather than relying entirely on in-
house managed products'' because of compensation from 12b-1 fees);
Comment Letter of the Securities Industry and Financial Markets
Association (July 19, 2007) (``[A]vailability of 12b-1 fees makes
smaller funds more attractive to larger intermediaries, and
correspondingly smaller intermediaries, that do not enjoy the same
economies of scale as larger ones, are able to support and offer a
broader choice of funds for their clients''); Comment Letter of the
ICI (July 19, 2007) (``[T]he ability of small funds to assess asset-
based distribution fees has enabled these funds to remain
competitive by allowing them to gain access to a wider array of
distribution channels * * *'').
    \377\ See supra note 96.
    \378\ See Comment Letter of Charles Schwab & Co., Inc. (July 16,
2007) (``Repeal of rule 12b-1 would undoubtedly restrict a fund's
ability to rely on supermarkets and their superior infrastructure,
and, in particular, we believe it would have a disproportionate
impact on smaller and new funds that lack the resources outside of
fund assets to pay for shareholder servicing.'').
    \379\ Conrad S. Ciccotello et al., Supermarket Distribution and
Brand Recognition of Open-End Mutual Funds, 16 Fin. Servs. Rev. 309
(Winter 2007) (http://findarticles.com/p/articles/mi_qa3743/is_
200701/ai_n25499878) (fund families that are focused and smaller in
size are more likely to rely on fund supermarkets for distribution);
Xinge Zhao, The Role of Brokers and Financial Advisors Behind
Investments Into Load Funds (August 2003) (http://ssrn.com/
abstract=438700) (brokers and financial advisors are more likely
than self-directed investors to allocate investment dollars to
smaller funds).
---------------------------------------------------------------------------

    In developing our proposals, we have considered their potential
effect on smaller fund groups. A representative of a smaller fund group
participated in our roundtable discussion, and our staff met with
representatives from other small fund groups to listen to their
concerns and explore ways in which we might address them.
    We believe that our proposal reflects consideration of the concerns
small fund groups shared with us, and would preserve their ability to
compete with larger fund groups. Based on an analysis of data collected
from the Lipper LANA Database by our staff, we estimated that
approximately 108 ``small fund groups,'' offered 189 classes of fund
shares to the public.\380\ Our analysis found that of these classes,
166 (88 percent) either charged no 12b-1 fee or charged a 12b-1 fee of
25 basis points or less.\381\ The remaining 23 classes (12 percent),
under our proposal, would be required to comply with the limits on
ongoing sales charges, reduce their distribution expenditures, or
otherwise change their distribution arrangements. Alternatively, as
discussed above, where non-distribution related expenses are now paid
under 12b-1 plans, many funds may be able to allocate that portion of
their existing 12b-1 fees to administrative expenses, and thus ensure
that their asset-based distribution expenses fall within the limits of
the 25 basis points marketing and service fee.\382\
---------------------------------------------------------------------------

    \380\ We are using, for purposes of our estimates, the
definition of ``small business'' or ``small entity'' that we use for
purposes of the Regulatory Flexibility Act [5 U.S.C. 601, et seq.].
Rule 0-10 under the Act defines a ``small entity'' for purposes of
the Act as a group of related management companies (funds) that has
net assets of $50 million or less as of the end of its most recent
fiscal year.
    \381\ 111 classes (59 percent) do not have a 12b-1 plan in
effect.
    \382\ See supra Section III.C of this Release. See also
Roundtable Transcript, supra note 109, at 89 (Mellody Hobson, Ariel
Capital Management) (explaining that Ariel funds may treat 15 basis
points of a 40 basis point fund supermarket fee as a sub-transfer
agent fee.).
---------------------------------------------------------------------------

    Only 11 of the small fund groups (6 percent) offered class C
shares, and fund assets attributable to these classes amounted to only
$60 million of assets (0.2 percent of small fund group assets). Based
on this data, we do not believe that our proposals would require many
small funds to restructure their fund classes.\383\
---------------------------------------------------------------------------

    \383\ Our staff also evaluated the potential impact of our
proposal on somewhat larger fund groups--those with less than $250
million of assets under management--and obtained similar results.
This group consisted of 191 fund groups that offered 497 share
classes. Of these classes, 397 (79.9 percent) carried no 12b-1 fee
or a fee of 25 basis points or less. Only 22 of the 191 fund groups
offered class C shares (11.5 percent), with total assets of
approximately $400 million (3.5 percent of the assets of these fund
groups). See also Section V.B of this Release.
---------------------------------------------------------------------------

     We request comment on the impact of our proposals on small
fund groups. In particular, we request comment on the competitive
impact of our rule proposals on smaller fund groups. Is

this data correct? Should our rules treat small fund groups differently
than larger fund groups?
5. Retirement Plans
    Many investors invest in mutual funds through tax-advantaged
retirement plans, such as 401(k) plans.\384\ Some of these funds use
fund assets to compensate plan administrators for services provided to
plans and plan participants, including recordkeeping, sub-accounting,
transaction processing, account maintenance services, and participant
education.\385\ Many of these payments essentially reimburse plan
administrators for costs they incurred to provide services (such as
shareholder recordkeeping) that typically funds would have to bear as
operational expenses for direct accounts.\386\ Other payments, in whole
or in part, may be distribution related, and thus many funds today make
them to plan administrators and financial intermediaries pursuant to a
rule 12b-1 plan.\387\ Different funds take different approaches to
paying these expenses. Some funds may specifically identify operational
costs and pay them outside of rule 12b-1.\388\ Other funds might, for
convenience, use 12b-1 fees to pay all of these expenses to avoid the
need to determine exactly which of the expenses contribute to fund
distribution.\389\
---------------------------------------------------------------------------

    \384\ According to data compiled by the ICI, 36 percent of long-
term mutual fund assets were held in tax-advantaged retirement plans
as of the end of 2009. See 2010 ICI Fact Book, supra note 6, at 112.
    \385\ See Comment Letter of The Spark Institute, Inc. (July 17,
2007).
    \386\ See Roundtable Transcript, supra note 109, at 79 (Charles
P. Nelson, Great-West Retirement Services).
    \387\ See Deloitte Consulting LLP, Inside the Structure of
Defined Contribution/401(k) Plan Fees: A Study Assessing the
Mechanics of What Drives the `All-In' Fee (Spring 2009--updated June
2009) (conducted by Deloitte Consulting LLP for the ICI) (http://
www.ici.org/pdf/rpt_09_dc_401k_fee_study.pdf) (noting portions
of the distribution fee may be used to compensate financial
intermediaries and service providers for services provided to the
plan and its participants and to offset recordkeeping and
administration costs). To the extent that plan administrators
receive these fees as compensation for the sale of fund shares,
broker-dealer registration may be required unless an exemption is
available. See supra note 168. As discussed previously, broker-
dealer registration would be required if a plan administrator
received the proceeds of an ``ongoing sales charge'' under the
proposal.
    \388\ See Thomas P. Lemke & Gerald T. Lins, Mutual Funds Sales
Practices Sec.  5:1 (Aug. 2009) (noting that third-party services in
retirement plans may be paid by employer subsidies, direct charges
to employees, or fees included in mutual fund expenses, such as rule
12b-1 fees and service fees).
    \389\ See Paul G. Haaga, Jr. & Michele Y. Yang, Practicing Law
Institute, Distribution of Mutual Fund Shares: Rule 12b-1, Corporate
Law and Practice Course Handbook Series (June 1998) (indicating that
rule 12b-1 fees may cover things that are not purely ``sales'' or
``distribution'' and pointing out that many fund groups subsidize
the cost of 401(k) recordkeeping).
---------------------------------------------------------------------------

    According to the Investment Company Institute, retirement plan
assets are typically invested in low cost funds.\390\ Approximately 80
percent of 401(k) plan assets are held in mutual fund share classes
that pay no 12b-1 fees or 12b-1 fees of 25 basis points or less.\391\
If our proposals are adopted, we would therefore expect that funds
could continue to make the payments from the proceeds of the marketing
and service fee.
---------------------------------------------------------------------------

    \390\ See ICI, The Economics of Providing 401(k) Plans:
Services, Fees and Expenses, 2008 (Aug. 2009) (http://www.ici.org/
pdf/fm-v18n6.pdf).
    \391\ See id. at 9.
---------------------------------------------------------------------------

    Some funds with higher 12b-1 fees may identify a portion of those
expenditures as not distribution related and treat them accordingly,
and may thus be able to reduce their distribution related payments so
that they do not exceed the limits of the marketing and service fee. As
a result, these funds would not be subject to the ongoing sales charge
limits discussed above. Other funds, however, may be required by our
rule proposals to treat a portion of their 12b-1 fee as an ongoing
sales charge and provide for a conversion period. We understand that
many plan administrators currently do not track and age shares both
because plan beneficiaries do not pay taxes on capital gains realized
on sales of shares in retirement plans and because many (or most) plans
do not offer share classes that impose CDSLs.\392\ Plan administrators
would have to either develop this capability, which most other
intermediaries have, or offer only classes of shares that do not impose
an ongoing sales charge, i.e., classes of shares that carry an asset-
based distribution fee of only 25 basis points or less.\393\
---------------------------------------------------------------------------

    \392\ See Comment Letter of Charles P. Nelson (June 19, 2007)
(``B and C shares usually aren't used by group retirement plan
platforms due to the back-end loads that are assessed, which cause
recordkeeping problems at the participant level.''). Some retirement
plans do, however, invest in share classes that require the tracking
of share lots. See The Economics of Providing 401(k) Plans:
Services, Fees, and Expenses, supra note 390 at Appendix (the ICI
estimates that approximately one percent of 401(k) assets invested
in mutual funds are invested in class B shares). We also understand
that in light of rule 22c-2, some plan administrators now track the
holding periods of fund shares to ensure that redemption fees are
properly assessed.
    \393\ This issue is also raised in the context of insurance
company separate accounts, as discussed in Section III.H of this
Release, supra. We discuss the potential costs of implementing a
conversion feature in Section V of this Release, infra.
---------------------------------------------------------------------------

    A small number of funds today issue a class of shares created
especially for retirement plans, often called ``R shares.'' R type
shares typically carry a 12b-1 fee of 50 to 100 basis points that
generates sufficient revenue to pay for a substantial amount of plan
expenses. The Commission staff estimates that less than two percent of
plan assets are invested in R shares.\394\ Treating amounts deducted in
excess of 25 basis points as an ongoing sales charge and eventually
converting these shares may not be a viable option for retirement plans
with R share classes because plan expenses are ongoing. Thus, our
proposal would likely make R shares a less attractive investment option
for plans to offer.
---------------------------------------------------------------------------

    \394\ The staff's estimate is based in part on information
obtained from Lipper's LANA Database.
---------------------------------------------------------------------------

    We request comment on the potential consequences of our rule
proposals on R shares, and whether investors would be harmed.\395\ We
also note that public policy, as embodied in the securities laws we
administer and the laws administered by other agencies, favors
transparency of expenses.\396\
---------------------------------------------------------------------------

    \395\ We believe that our proposal will complement disclosure
initiatives proposed by the Department of Labor (``DOL''), which
were designed to ensure that retirement plan participants and
beneficiaries could make informed investment decisions about their
retirement savings. Fiduciary Requirements for Disclosure in
Participant-Directed Individual Account Plans, 73 FR 43014 (July 23,
2008). The proposed DOL regulation would require, among other
things, enhanced disclosure of the fees and expenses of certain
retirement plans and their investment options. Id.
    \396\ See, e.g., Employee Retirement Income Security Act of 1974
(29 U.S.C. 1001, et seq.); U.S. Dept. of Labor, Reasonable Contract
or Arrangement Under Section 408(b)(2)--Fee Disclosure (Dec. 7,
2007) [72 FR 70988, 70995 (Dec. 13, 2007)]. See also U.S. Dept. of
Labor, Reasonable Contract or Arrangement Under Section 408(b)(2)--
Fee Disclosure (July 6, 2010) [75 FR 41600 (July 16, 2010)] (interim
final rule).
---------------------------------------------------------------------------

     Do R share classes subsidize significant plan expenses or
obscure plan costs by bundling them with mutual fund costs? Are R
shares most attractive to plan sponsors that either are unable or
choose not to bear plan expenses as an employee benefit? Does this tend
to obscure that plan participants are paying the costs themselves
through their investments? Do payments to plan administrators from the
proceeds of 12b-1 fees on R shares pay for services that may not be
exclusively attributable to the funds in which those assets are
invested? If so, then are fund assets potentially being used to pay for
services to non-fund investors (i.e., not for exclusive benefit of fund
investors)? \397\
---------------------------------------------------------------------------

    \397\ We understand that representatives from the fund industry
have asserted that because the plan rather than plan participants is
the legal owner of the fund shares, the use of plan assets will
exclusively benefit the fund shareholder. This reliance on legal
ownership is, however, inconsistent with the justifications given
for the use of fund assets to pay for sub-accounting, transfer
agency and other plan expenses. If the plan is the owner for purpose
of this analysis, then only the cost of effecting plan transactions
and maintaining records (and not transactions of plan beneficiaries)
would be legitimate fund expenses.

---------------------------------------------------------------------------

N. Transition

    If we adopt the rule and amendments we are proposing today, we
expect to provide for a transition period in order to minimize
disruption and costs to funds, fund shareholders, and those who
participate in the distribution of fund shares.
1. Effective Date
    We would expect to provide for an effective date within 60 days of
issuing a release adopting the proposed amendments, which would permit
(but not require) funds to take advantage of the new rules quickly.
     We request comment on the effective date.
2. Compliance Period
    We would anticipate providing a compliance period of at least 18
months after the effective date in the adopting release for funds to
come into compliance with rule 12b-2, amended rule 6c-10, and the other
amendments, for new shares sold. Although we want to provide fund
shareholders with the benefits we believe will be afforded by the rule
amendments as soon as possible, we are sensitive to the operational
consequences of the changes we are proposing, and the potential
complexities of altering existing fund distribution arrangements. We
believe a period of 18 months should be sufficient for funds and fund
managers to make the necessary changes to their operating systems,
distribution and other agreements, and registration statements.
     We request comment on the length of the compliance period,
particularly in light of the ``grandfathering'' provisions we describe
below.
3. Grandfathering
a. Grandfathered Classes and Shares
    Five-year grandfathering period. Under our proposal, funds would be
required to comply with the changes discussed above with respect to all
shares issued after the compliance date of the new rules. We would
provide a five-year grandfathering period after the compliance date for
share classes issued prior to the compliance date, and that deduct fees
pursuant to rule 12b-1 as it exists today, after which those shares
would be required to be converted or exchanged into a class that does
not deduct an ongoing sales charge.\398\ New sales would not be
permitted in grandfathered share classes after the compliance date of
the new rules.\399\
---------------------------------------------------------------------------

    \398\ Proposed rule 12b-2(d).
    \399\ Dividends or other distributions on the old shares,
however, could be reinvested in the same share class as the shares
on which the dividend or distribution was declared. These
investments are not considered ``sales'' of securities for purpose
of the Securities Act and this grandfathering provision. See
Interpretation of the Division of Corporation Finance Relating to
Dividend Reinvestment and Similar Plans, Securities Act Release No.
5515 (July 22, 1974), 4 SEC Docket 623 (Aug. 6, 1974).
---------------------------------------------------------------------------

    We are proposing this five-year grandfathering period so that
investors, including those in classes currently subject to rule 12b-1
plans, would benefit from the protections provided by the proposed new
rules. The grandfathering period is also designed to avoid
unnecessarily disrupting existing distribution arrangements under which
fund underwriters may have advanced commissions to pay dealers who have
sold fund shares, and who may depend upon cash flow from existing rule
12b-1 fees. The five-year grandfathering period would provide time for
funds and dealers to revisit and revise existing arrangements to
reflect the approach to asset-based distribution fees we are proposing
today. This period could allow the existing 12b-1 classes to wind down
in an orderly manner. The five-year period is designed to allow
sufficient time for funds and their boards to institute any necessary
conversion or exchange procedures, and prepare to transition all
remaining assets out of grandfathered 12b-1 classes.
    We request comment on the proposed grandfathering period for the
transition of existing shares into shares that comply with any new
rules we adopt.
     Does this approach make sense in light of the compelling
need for the regulatory changes we have discussed in this Release?
Should we not provide a grandfathering period and instead require
compliance immediately? Should we provide a shorter or longer period
than five years (e.g., one, three, eight, or ten years)? Instead of a
five-year grandfathering period, should we permit the grandfathering of
12b-1 share classes to continue indefinitely?
     Should the proposed grandfathering period apply only to
certain types of classes, such as ``level load'' share classes, and not
apply to other classes, permitting them to convert on their own
schedules? What benefits might result from such an approach? Should the
proposed grandfathering period apply only to classes that charge a
certain level of 12b-1 fees (e.g., 12b-1 fees greater than 50 or 75
basis points)?
    Alternative transition approaches. We also request comment on
alternative approaches to carrying out the transition of existing share
classes into classes that comply with any new rules we adopt.
     Should we adopt a ``sunset'' provision requiring that, by
a certain date in the future, all share classes that do not conform to
the new rules must be converted or exchanged into share classes that do
conform to the new rule? Should we require, in connection with this
approach, that shares in an existing fund class that are charged 12b-1
fees at a certain rate per annum be converted or exchanged into shares
of a class that are charged a total of marketing and service fees and
ongoing sales charges at the same or lower rate per annum? For example,
under this approach, shares in an existing class that are currently
charged a 12b-1 fee of 100 basis points would have to be converted or
exchanged into a class that charges a marketing and service fee of no
more than 25 basis points, and an ongoing sales charge of no more than
75 basis points for a limited time period. Should such an approach also
take into account the existence of contingent deferred sales loads in
existing classes or classes into which shareholders may be converted or
exchanged?
     In addition, if we were to adopt this approach, when
should we require that all fund shares be converted or exchanged into
shares that comply with the new rules? By the compliance date of the
rules (i.e., 18 months), or within a shorter period (e.g., six months
or one year) or longer period (e.g., two, three, five or seven years)
of time? Should we exclude from the sunset provision any shares (such
as certain B shares) that by their terms already convert automatically
into shares with no ongoing sales charge?
     We request comment whether certain share classes would
encounter special difficulty in complying with the proposed five-year
transition period. For example, R share classes (which often charge a
50 basis point asset-based distribution fee for an indefinite period)
may not be designed to convert to another class, and are often
structured to pay certain costs that might otherwise be paid by the
plan provider or the plan participants. If these classes are required
to transition into a class that does not charge an ongoing sales charge
after five years, this may result in a situation in which fees used to
pay for these services may no longer be available. However, as
discussed previously, this situation could also arise after the
conversion period of an ongoing sales charge R

share class under our proposal.\400\ Does the proposed grandfathering
period pose any special issues for certain share classes? If so what
type of issues, and how should we deal with them? Should we exempt any
funds or share classes from the requirement to eventually end existing
12b-1 share classes? Should we provide different grandfathering periods
for different funds or classes? If so, how should we identify and
define those funds or classes?
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    \400\ See supra Section III.M.5.
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     Should we take another approach to dealing with the
problem of old 12b-1 share classes other than grandfathering or a
sunset provision, and if so what should that approach require? Should
we instead require funds to make special exchange offers to
shareholders of old classes?
    Funds could comply with the new rules by adding a conversion
feature to newly issued shares. These funds would disclose in their
prospectuses that shares issued before a specified date (the compliance
date or earlier) will not convert on the same schedule as new shares
would convert.
     Would this approach confuse shareholders? If so, should we
require that shares offered under the new rules be issued in a separate
class from grandfathered shares?
b. Operation of Grandfathered Classes
    During the grandfathering period, under proposed rule 12b-2(d),
funds could continue to charge 12b-1 fees on grandfathered share
classes at the same (or lower) rate as was approved in the fund's 12b-1
plan.\401\ A fund that wants to increase the rate of distribution fees,
as a result, would have to comply with the proposed new rules. Because
the level of fees charged on old share classes could not be increased,
we do not believe any investor protection purpose would be served by
requiring these funds to continue to have a formal 12b-1 plan, if we
adopt these proposed rules. Thus, directors could eliminate mandatory
provisions of 12b-1 plans that require board annual approval, quarterly
reports, and allow for board or shareholder termination of plans.\402\
Directors would continue to exercise responsibility over the 12b-1
plans in accordance with their general oversight responsibilities. In
addition, pursuant to their broad authority, directors could terminate
the plan at any time.
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    \401\ Proposed rule 12b-2(d)(2).
    \402\ Proposed rule 12b-2(d)(1).
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    After the expiration of the proposed grandfathering period,
grandfathered shares would be required to be converted or exchanged
into a class of shares that does not charge an ongoing sales charge. We
are concerned that permitting the deduction of an ongoing sales charge
on grandfathered fund shares could continue to result in shareholders
overpaying for distribution. In addition, it may lead to operational
and administrative difficulties in identifying the asset-based
distribution fees that the shareholders may have already paid and
providing proper credit for these fees. Not permitting the deduction of
ongoing sales charges on grandfathered shares that have been exchanged
or converted is likely to reduce investor confusion and provides equal
treatment to investors.
    Because under both rule 12b-1 and our proposal a shareholder vote
is required to materially increase the rate of a 12b-1 fee, we would
also require that the marketing and service fee of the class that the
grandfathered shares are exchanged or converted into not be higher than
the 12b-1 fee charged on the shares in the last fiscal year. This is
designed to ensure that shareholders are not transitioned into a class
that charges higher asset-based distribution fees than they agreed to
when they originally bought the fund.
    We request comment on any aspect of the proposed grandfathering
provision.
     Should we require that directors continue to have
specific, annual approval duties pursuant to existing rule 12b-1 until
those fees are no longer collected? Should the rule provide further
flexibility in addition to what we propose? We request comment on how
grandfathered 12b-1 fees should be presented in the prospectus fee
table. Should classes with grandfathered 12b-1 fees be required to
separate and label their distribution fees just as they would under our
proposed amendment to the fee table (i.e., by assigning the first 25
basis points charged as a marketing and service fee and the remainder
as an ongoing sales charge)? Is there another label for grandfathered
12b-1 fees that would be descriptive without a reference to ``12b-1''?
     Instead of providing requirements regarding which class
grandfathered shares would need to be transitioned into after the
expiration of the grandfathering period, should we instead leave the
decision to the discretion of the board? If so, should we provide any
guidance to the board, and what should that guidance provide? For
example, should we require that the board take into account the length
of time that the grandfathered shares have already paid 12b-1 fees, the
rate of the ongoing sales charge that might be charged, the technical
capabilities of the fund and its service providers, or other factors?
4. Shareholder Voting
    For funds that decide to convert current 12b-1 share classes to
conform with the proposed rules, proposed rule 12b-2 would prohibit a
fund from instituting a marketing and service fee unless the fee has
been approved by a vote of at least a majority of outstanding voting
securities.\403\ A shareholder vote would not be required if the fund:
(i) Currently deducts from fund assets annual 12b-1 fees of 25 basis
points or less, and does not increase the rate of the fee; or (ii)
reduces the amount of the 12b-1 fees it currently deducts to an annual
rate of 25 basis points or less, and renames the 12b-1 fee a
``marketing and service fee.'' We understand that approximately two-
thirds of fund classes either do not deduct a 12b-1 fee, or deduct a
12b-1 fee of 25 basis points or less annually. The proposed rule also
would not require funds that currently impose a 12b-1 fee to obtain
shareholder approval if the combined ongoing sales charge and marketing
and service fee would not exceed amounts that could be deducted under a
12b-1 plan in effect at the time the proposed amendments, if adopted,
become effective. In those instances, funds only would be required to
separate the 12b-1 fee into a marketing and service fee and an ongoing
sales charge, and treat each fee in conformity with the new rule and
rule amendments.
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    \403\ See proposed rule 12b-2(b)(3).
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    We believe that, in the circumstances described above, a
shareholder vote would serve no useful purpose because shareholders
have already implicitly approved the fee, and a shareholder vote would
thus impose unnecessary costs on funds and their shareholders.
     We request comment on whether a shareholder vote would
serve any purpose in either of these situations.

IV. Paperwork Reduction Act

    Certain provisions of our proposal would result in new or altered
``collection of information'' requirements within the meaning of the
Paperwork Reduction Act of 1995 (``PRA'').\404\ The Commission is
therefore submitting proposed rule 12b-2 and proposed amendments to
rule 6c-10 and Form N-SAR under the Act; proposed amendments to Forms
N-1A and N-3 under the Act and the Securities Act; and proposed
amendments to Schedule 14A and rule 10b-10 under the Exchange Act to
the Office of Management and Budget (``OMB'') for

review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11.
Responses to the collection of information requirements of our
proposals would not be kept confidential.
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    \404\ 44 U.S.C. 3501-3520.
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    The proposed amendments to rule 6c-10 would result in a new
collection of information requirement within the meaning of the PRA.
The title for the collection of information requirement is ``Rule 6c-10
under the Investment Company Act of 1940, `Exemptions for Certain Open-
End Management Investment Companies to Impose Deferred Sales Loads and
Other Sales Charges.' '' If adopted, this collection would not be
mandatory, but would be required in order for a fund to deduct asset-
based distribution fees in excess of the proposed limits in rule 12b-2.
    Proposed rule 12b-2 would result in a new collection of information
requirement within the meaning of the PRA. The title for the collection
of information requirement is ``Rule 12b-2 under the Investment Company
Act of 1940, `Investment Company Distribution Fees.' '' If adopted,
this collection would not be mandatory, but would be required in order
for funds to deduct certain asset-based distribution fees. In addition,
our proposal would rescind rule 12b-1 and its associated collection of
information requirement. We are submitting to OMB the proposed
rescission of rule 12b-1's collection of information requirement.
    The Commission is also proposing amendments to existing collection
of information requirements titled ``Form N-1A under the Investment
Company Act of 1940 and Securities Act of 1933, `Registration Statement
of Open-End Management Companies.' '' Compliance with the disclosure
requirements of Form N-1A is mandatory. The Commission is also
proposing amendments to existing collection of information requirements
titled ``Form N-3 under the Investment Company Act of 1940 and
Securities Act of 1933, `Registration Statement of Separate Accounts
Registered as Management Investment Companies.' '' Compliance with the
disclosure requirements of Form N-3 is mandatory. The Commission is
also proposing amendments to existing collection of information
requirements titled ``Form N-SAR under the Investment Company Act of
1940, `Semi-Annual Report for Registered Investment Companies.' ''
Compliance with the disclosure requirements of Form N-SAR is mandatory.
The Commission is further proposing amendments to existing collection
of information requirements titled ``Regulation 14A under the
Securities Exchange Act of 1934 and the Investment Company Act of 1940,
`Commission Rules 14a-1 through 14a-16 and Schedule 14A.'' Compliance
with the disclosure requirements of Regulation 14A is mandatory. The
Commission is also proposing amendments to existing collection of
information requirements titled ``Rule 10b-10.'' Compliance with the
disclosure requirements of rule 10b-10 is mandatory.
    Finally, the Commission is also proposing a number of technical and
conforming amendments that would not amend the existing collection of
information burdens for rules 11a-3, 17a-8, 17d-3, and 18f-3 under the
Investment Company Act, and Forms N-4 and N-6, and Regulation S-X under
the Securities Act and the Investment Company Act. These technical and
conforming amendments would not constitute new or altered collections
of information because they would not alter the legal requirements of
these rules and forms.\405\ We estimate that the approved burdens for
these rules and forms would not change if our proposal is adopted.
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    \405\ As discussed in the cost-benefit analysis in Section V of
this Release, infra, we have estimated that complying with these
amended rules and forms would take the same amount of time and cost
the same amount of money as complying with the existing rules and
forms, with the exception of rule 11a-3. The additional costs that
the staff has estimated that funds may incur as a result of our
proposed amendments to rule 11a-3 are not related to collections of
information in the rule (certain disclosure, recordkeeping, and
notice requirements), but are instead a result of system changes
that funds may undertake. As a result, we do not expect that these
proposed technical and conforming rule and form amendments would
change existing approved collection of information burdens for any
of these rules and forms.
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    An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a
currently valid control number. OMB has not yet assigned control
numbers to the new collections for proposed rule 12b-2 and amended rule
6c-10. The approved collection of information associated with Form N-
1A, which would be revised by the proposed amendments, displays control
number 3235-0307. The approved collection of information associated
with Form N-SAR, which would be revised by the proposed amendments,
displays control number 3235-0330. The approved collection of
information associated with Form N-3, which would be revised by the
proposed amendments, displays control number 3235-0316. The approved
collection of information associated with Schedule 14A, which would be
revised by the proposed amendments, displays control number 3235-0059.
The approved collection of information associated with rule 10b-10,
which would be revised by the proposed amendments, displays control
number 3235-0444.

A. Rule 6c-10

    Proposed rule 6c-10(c) would give funds and their underwriters the
option of offering classes of shares that could be sold by dealers
subject to competition in establishing sales charge rates. A fund could
rely on this provision if it discloses its election on Form N-1A. This
disclosure would be a collection of information within the meaning of
the PRA. The collection of information for rule 6c-10(c), however, is
incorporated into the total collection of information burden for our
amendments to Form N-1A, discussed below. As a result, the collection
of information burden for proposed rule 6c-10(c) is not a separate
collection of information within the meaning of the PRA.

B. Rescission of Rule 12b-1

    We are proposing to rescind rule 12b-1. If adopted, the rescission
would eliminate the current collection of information requirement for
rule 12b-1 in its entirety. Therefore, there would no longer be a
collection of information burden for rule 12b-1.

C. Rule 12b-2

    Proposed rule 12b-2(b) would permit funds to deduct a ``marketing
and service fee'' from fund assets that is limited to the maximum rate
permitted by NASD Conduct Rule 2830 for ``service fees.'' In order to
institute or increase the rate of a marketing and service fee after the
initial public sale of class shares, proposed rule 12b-2(b)(3) would
require a fund to obtain approval from a majority of the class's
shareholders. As under proposed rule 6c-10(b)(3), funds would obtain
shareholder approval by soliciting proxies from shareholders, which
would be a collection of information under the PRA on Schedule 14A
under the Exchange Act. As noted above, Schedule 14A has an approved
collection of information which our proposed amendments would change.
As a result, the collection of information burden for proposed rule
12b-2(b)(3) is not a separate collection of information, but is
incorporated into the estimated paperwork burden for Schedule 14A.
    Proposed rule 12b-2(c) would maintain the restrictions in current
rule 12b-1(h) that prohibit funds from using brokerage commissions to
finance distribution. Among other things, proposed rule 12b-2(c) would
maintain

the requirement that a fund (and its board of directors) approve
policies and procedures designed to prevent: (i) The persons
responsible for selecting brokers and dealers to effect the fund's
portfolio securities transactions from taking into account the brokers'
and dealers' promotion or sale of shares issued by the fund or any
other registered investment company; and (ii) the fund, or any
investment adviser or principal underwriter of the fund, from entering
into any agreement or other understanding under which the fund directs
portfolio securities transactions to a broker or dealer to pay for the
distribution of fund shares. The requirement to adopt these policies
and procedures would be a collection of information under the PRA, and
would be mandatory in order to direct brokerage transactions to a
broker or dealer that distributes fund shares. The Commission has
determined that these collections of information would continue to be
necessary to protect against the inappropriate use of fund assets to
finance distribution, and would continue to be used by the Commission
and its examination staff to monitor these activities.
    As discussed in the most recent PRA update to rule 12b-1, we
understand that funds (if they intend to pay brokerage commissions to
brokers and dealers who distribute their shares) generally adopt these
policies and procedures when the fund is created, and incur any burden
associated with this collection of information at that time. We assume
that all funds that are currently operating have already adopted these
policies and procedures (if relevant), and therefore only new funds
that begin to operate in the future will incur this burden. As
previously estimated in the most recent update to the rule 12b-1 PRA,
the staff estimates that approximately 300 new funds would begin
operations annually that would comply with proposed rule 12b-2(c) and
adopt these policies and procedures. Based on information received
during conversations with fund representatives, the staff estimates
that adopting these policies and procedures would take a total of
approximately 1 hour of the board of directors' time as a whole, at an
internal time cost equivalent rate of $4500 per hour.\406\ The staff
further estimates that preparing these policies and procedures for
adoption would take approximately 3 hours of internal fund counsel
time, at an internal time cost equivalent rate of $316 per hour.\407\
Finally, the staff estimates that it would cost funds approximately
$800 in outside counsel time (2 hours multiplied by an estimated $400
per hour for outside counsel time)\408\ to adopt these policies and
procedures.
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    \406\ The staff has estimated the average cost of board of
director time as $4500 per hour for the board as a whole, based on
information received from funds, intermediaries, and their counsel.
    \407\ The staff estimates that the internal time cost equivalent
for time spent by internal counsel is $316 per hour. This estimate,
as well as all other internal time cost estimates made in this
analysis (unless otherwise noted) is derived from SIFMA's Management
& Professional Earnings in the Securities Industry 2009, modified by
Commission staff to account for an 1800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead or from SIFMA's Office Salaries in the
Securities Industry 2009, modified by Commission staff to account
for an 1800-hour work-year and multiplied by 2.93 to account for
bonuses, firm size, employee benefits and overhead.
    \408\ The staff has estimated the average cost of outside
counsel as $400 per hour based on information received from funds,
intermediaries, and their counsel.
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    Therefore, the collection of information related to adopting
directed brokerage policies and procedures pursuant to proposed rule
12b-2(c) would require a total annual burden of 300 hours of director
time (at a total internal time cost equivalent of $1,350,000),\409\ 900