hours of inside counsel time (at a total internal time cost equivalent
of $284,400),\410\ and $240,000 in outside counsel expenses.\411\ The
total annual number of respondents would be 300, the total number of
responses would also be 300, and the annual burden per respondent would
be 4 hours and $800 in costs.
---------------------------------------------------------------------------

    \409\ This estimate is based on the following calculations: (1
hour of directors time x 300 newly formed funds = 300 hours); (300
hours x $4500 per hour = $1,350,000).
    \410\ This estimate is based on the following calculation: (3
hours of inside counsel time x 300 newly formed funds = 900 hours);
(900 hours x $316 per hour = $284,400).
    \411\ This estimate is based on the following calculation: ($800
cost of outside counsel time x 300 newly formed funds = $240,000).
---------------------------------------------------------------------------

     We request comment on these estimates and assumptions. If
commenters believe these estimates and assumptions are not accurate, we
request they provide specific data that would allow us to make a more
accurate estimate.

D. Form N-1A

    Form N-1A is the form that funds use to register with the
Commission under the Investment Company Act and to offer their shares
under the Securities Act.\412\ As discussed previously, the proposed
amendments would require funds that file Form N-1A to: (i) Eliminate
the line item currently titled ``Distribution and/or Service (12b-1)
Fee'' and include two new line items (as relevant) titled ``Marketing
and Service Fee'' and ``Ongoing Sales Charge;'' (ii) revise prospectus
narrative disclosure on asset-based distribution fees; and (iii) revise
the SAI disclosure regarding asset-based distribution fees. The
Commission believes that these changes in the collection of information
should better enable fund investors to understand the purpose and use
of the asset-based distribution fees that they may pay. These changes
will be used to better monitor and oversee the use of asset-based
distribution fees by funds, and assist investors in obtaining
information about the use of fund assets. Preparing Form N-1A is a
collection of information under the PRA and is mandatory.
---------------------------------------------------------------------------

    \412\ There are two types of Form N-1A filings: (i) Initial
filings; and (ii) annual post-effective amendments. Funds usually
incur significantly more time and incur greater costs when first
registering a fund under their initial N-1A filings than when filing
their annual post-effective updates. Therefore, we separately
estimate the burden for each type of filing.
---------------------------------------------------------------------------

1. New Defined Term
    The proposed amendments would add the defined term ``Asset-Based
Distribution Fee'' to the general instructions of Form N-1A.\413\ This
term would be used in other parts of our proposed amendments to the
form. The additional definition would not affect the form's collection
of information requirements and therefore would not change current
paperwork burden estimates.
---------------------------------------------------------------------------

    \413\ The proposal would define an ``Asset-Based Distribution
Fee'' as ``a fee deducted from Fund assets to finance distribution
activities pursuant to rule 12b-2(b) (``Marketing and Service
Fee''), rule 12b-2(d), or rule 6c-10(b) (``Ongoing Sales
Charge'').'' Proposed General Instructions to Form N-1A.
---------------------------------------------------------------------------

2. Revised Fee Table
    The proposed amendments would require funds, in the fee table of
Form N-1A, to replace the current line item titled ``Distribution and/
or Service (12b-1) Fees'' with two line items titled ``Marketing and
Service Fee'' and ``Ongoing Sales Charge,'' as relevant. Only funds
that charge asset-based distribution fees would be affected by these
proposed amendments. Funds would be able to refer to the same
information about asset-based distribution fees that they use to
complete the 12b-1 line item currently in the fee table. All
information necessary to disclose these fees in the fee table would be
readily available, and the staff estimates that funds would not require
any additional resources to disclose the fees on two lines, instead of
one. Therefore, the staff estimates that

funds would not incur any additional hourly burdens or costs to
complete the fee table as we propose to amend it. As a result, the
staff estimates that the proposed amendments to the fee table would not
change the collection of information currently approved by OMB to
complete the fee table in Form N-1A, either initially or when
submitting a post-effective amendment.
     We request comment on these assumptions. If commenters
believe these assumptions are not accurate, we request they provide
specific data that would allow us to make a more accurate estimate.
3. Prospectus Revisions
    The proposal would 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. The proposal would
eliminate this requirement, and instead require funds to disclose
whether they charge a marketing and service fee or an ongoing sales
charge, and if they do, to disclose the rate of the fees and the
purposes for which they are used. A fund that imposes an ongoing sales
charge would be required to disclose the number of months (or years)
before the shares would automatically convert to another class without
an ongoing sales charge. In addition, we would 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 an investment in another class.
    Based on information received during conversations with fund
representatives, the staff estimates that funds filing initial Form N-
1A registrations would expend approximately the same amount of time and
costs to provide the narrative prospectus disclosure on asset-based
distribution fees under our proposal as they expend under the current
disclosure requirements.
    The proposed amendments would also require funds that deduct asset-
based distribution fees to revise their narrative prospectus disclosure
in post-effective amendments. The staff further estimates that the
funds would need to incur a one-time cost and time expenditure to
revise and update existing narrative prospectus disclosure to comply
with the proposal. After this one-time revision and update is complete,
the staff estimates that ongoing costs and time expenditures would
remain the same as current estimates because we expect the revised
disclosures to be of similar length and complexity as the previous
disclosure. The staff expects that the revised narrative prospectus
disclosure would be similar in length to the current narrative, and
thus would not change the number of pages in the prospectus or change
printing costs of the prospectus.\414\ The staff estimates that funds
would use outside legal resources to prepare this one-time amendment to
reflect the proposed new framework. The staff expects that all funds in
a fund family would engage in this one-time update at the same time,
and therefore the costs for revising a series prospectus would be
shared among all funds in the family, thereby reducing the cost for
each post-effective update filer. Based on an analysis of data received
on Form N-SAR and information received from fund representatives, the
staff estimates that there are approximately 379 fund families that may
be affected by this proposed change. The staff further estimates that,
on average, each of these fund families would incur approximately $2000
in one-time costs (for outside legal counsel drafting and review) and
expend 10 hours in internal personnel time (at an internal time cost
equivalent rate of $316 per hour) to revise item 12(b) of Form N-1A to
comply with the proposed changes. The staff therefore estimates that
funds will incur a one-time burden of 3710 hours (at an internal cost
equivalent of $1,197,640) and $758,000 in outside costs associated with
this proposed revision to Item 12(b) of Form N-1A.\415\ The staff
estimates that the proposed amendments would not change the ongoing
currently approved collection of information for Item 12(b) of Form N-
1A.
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    \414\ Based on conversations with fund representatives, the
staff understands that, in general, unless the page count of a
prospectus is changed by at least 4 pages, the printing costs would
remain the same.
    \415\ These estimates are based on the following calculations:
(379 x 10 hours = 3790 hours); (3790 hours x $316 per hour =
$1,197,640); (379 x $2000 = $758,000).
---------------------------------------------------------------------------

     We request comment on these estimates and assumptions. If
commenters believe these estimates and assumptions are not accurate, we
request they provide specific data that would allow us to make a more
accurate estimate.
4. Statement of Additional Information
    The proposal would amend a number of items contained in the SAI
portion of Form N-1A. Item 19(g) currently requires funds to describe
in detail the material aspects of their 12b-1 plans, and related
agreements, in the SAI. Under the proposal, 12b-1 plans would no longer
be required, and grandfathered funds would no longer be required to
have written ``plans'' that are supervised and approved by the board of
directors; therefore, the proposal would eliminate paragraphs 2 through
6 of Item 19(g).\416\ However, Item 19(g)(1) (which requires disclosure
of the material aspects of a 12b-1 plan, including a list of the
principal activities paid for under the plan and the dollar amounts
spent on each activity over the last year), may help investors to
better understand how the fund uses asset-based distribution fees, and
the proposal would retain it in substance. The proposal would amend
Item 19(g)(1) to eliminate references to a 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).
---------------------------------------------------------------------------

    \416\ See supra note 313 and accompanying text.
---------------------------------------------------------------------------

    The proposal would add new paragraph (d) to Item 25, which would
require funds that have elected to externalize the sales charge
pursuant to proposed rule 6c-10(c) to disclose this election on Form N-
1A. This disclosure is designed to inform interested investors of the
fund's election. The proposal would also make technical conforming
changes to Instruction 3(b) to Item 3; Instruction 5 to Item 26(b)(4);
and Item 27(d)(1) (and Instruction 2(a)(i) to Item 27(d)(1)) to replace
references to 12b-1 fees and plans with references to the appropriate
types of asset-based distribution fee under the proposal. Finally, the
proposal would eliminate existing Item 28(m) of Form N-1A, which
requires a 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 does not require a
written plan.
    The staff estimates that the proposed amendments to the SAI would
result in overall time and cost savings for funds. Funds would incur
savings because of the reduced time required and lower costs to prepare
disclosure materials for Item 19(g).\417\ The staff further estimates
that responding to proposed paragraph (d) of Item 27 would entail
little additional time and no costs, as it would only require a fund to
make a single affirmative statement (if

applicable) that the fund has taken the election. The staff estimates
that the other proposed technical and conforming amendments to the SAI
would not result in changes in the hourly burdens or cost because they
would not change the legal or disclosure obligations of funds.
---------------------------------------------------------------------------

    \417\ Generally, most SAIs are not printed in advance, but are
instead printed on demand when requested. The staff estimates that
the proposal would not result in a change in printing costs because
the staff does not expect that the number of pages of the SAI would
be reduced as a result of the proposal, and if there were any
reduction; any savings would be minimal due to the few occasions on
which the SAI is printed.
---------------------------------------------------------------------------

    Therefore, based on conversations with fund representatives, the
staff estimates that the proposed amendments to the SAI would result in
a net time savings of approximately 10 hours for each fund's initial
filing and of 1 hour for each post-effective amendment (all of which
time would be spent by fund counsel at a time cost equivalent rate of
$316 per hour). Based on a review of information filed with the
Commission on Form N-SAR, the staff estimates that there are
approximately 300 funds with a 12b-1 plan that newly file each year and
7367 funds that have adopted a 12b-1 plan that file post-effective
amendments. The staff further estimates that the amendments would
reduce costs incurred for outside counsel associated with completing
the SAI, by $500 for each initial filing and $150 for each post-
effective amendment. Therefore, the staff estimates that all funds
submitting their initial SAI filing would experience a reduction of
3000 hours (at an internal cost equivalent of $948,000) and a cost
savings of $150,000.\418\ The staff also estimates that all funds
filing post-effective amendments will experience a reduction of 7367
hours (at an internal cost equivalent of $2,327,972) and cost savings
of $1,105,050.\419\
---------------------------------------------------------------------------

    \418\ These estimates are based on the following calculations:
(300 x 10 hours = 3000 hours); (3000 hours x $316 per hour =
$948,000); (300 x $500 = $150,000).
    \419\ These estimates are based on the following calculations:
(7367 x 1 hour = 7367 hours); (7367 hours x $316 per hour =
$2,327,972); (7367 x $150 = $1,105,050).
---------------------------------------------------------------------------

5. Change in Burden
    In the most recent Paperwork Reduction Act submission for Form N-
1A, the staff estimated that for each fund portfolio or series, the
initial filing burden is approximately 830.47 hours at a cost of
$20,300, and the post-effective amendment burden is approximately 111
hours at a cost of $8894. This hourly burden includes time spent by in-
house counsel, back office personnel, compliance professionals, and
others in preparing the form. The costs include that of outside counsel
to prepare and review these filings.
    As discussed above, in total the staff estimates that our proposed
amendments to Form N-1A would result in net time savings of
approximately 10 hours for each fund's initial filing (for a new total
estimate of 820.47 hours) and of 1 hour for each post-effective
amendment (for a new total estimate of 110 hours).\420\ The staff
further estimates that the proposed amendments would reduce costs spent
on outside counsel associated with completing Form N-1A, by $500 for
each initial filing (for a new total estimate of $19,800) and $150 for
each post-effective amendment (for a new total estimate of $8744). The
staff also estimates that the proposed amendments would require each
fund family with any funds that would file a post-effective amendment
to incur approximately $2000 in one-time costs and expend 10 hours in
internal personnel time.
---------------------------------------------------------------------------

    \420\ This is based on the estimates made previously in this
section that there would be no burden change as a result of our
proposed amendments to the prospectus portion of N-1A and that the
proposed changes to the SAI portion would result in the savings
indicated.
---------------------------------------------------------------------------

    The staff assumes that only funds that charge asset-based
distribution fees would be affected by our proposed amendments to Form
N-1A and would realize these reduced burdens and cost savings. The
staff estimates that, each year, there are approximately 7367 funds
with 12b-1 plans that file post-effective amendments, and would
therefore be affected by our proposed amendments. The staff estimates
that an additional 300 funds with asset-based distribution fees would
file an initial Form N-1A each year after our proposed amendments would
go into effect. Based on these estimates, the staff estimates that
funds would save a total of 3000 hours and $150,000 when submitting
initial Form N-1A filings each year.\421\ In addition, the staff
anticipates that funds would save approximately 7367 hours, and
$1,105,050 annually when preparing post-effective updates to Form N-
1A.\422\
---------------------------------------------------------------------------

    \421\ This is based on the following calculations: (300 new
filers x 10 hours savings = 3000 hours in total savings); (300 new
filers x $500 savings = $150,000 total savings).
    \422\ This estimate is based on the following calculations:
(7367 amendments x 1 hour savings = 7367 hours in total savings);
(7367 amendments x $150 savings = $1,105,050 total savings).
---------------------------------------------------------------------------

    Finally, as discussed above, the staff further estimates that all
fund families that file post-effective amendments and have adopted 12b-
1 plans would incur a one-time burden of 3790 hours (at an internal
cost equivalent of $1,197,640) and $758,000 in outside costs when
preparing post-effective amendments to comply with the proposed
amendments for the first time.\423\
---------------------------------------------------------------------------

    \423\ These estimates are based on the following calculations:
(379 x 10 hours = 3790 hours); (3790 hours x $316 per hour =
$1,197,640); (379 x $2000 = $758,000).
---------------------------------------------------------------------------

     We request comment on any of these estimates or
assumptions.

E. Form N-SAR

    Form N-SAR is the form that registered investment companies use to
make periodic reports to the Commission. Completing Form N-SAR is a
collection of information under the PRA and is mandatory. Our proposed
amendments would add an instruction to Form N-SAR to disregard, for
funds that no longer have 12b-1 plans, four questions (Items 41-44)
that relate to the operation of rule 12b-1 plans (because they would be
irrelevant in light of our proposed new framework for asset-based
distribution fees). However, funds that maintain grandfathered fund
classes would continue to respond to these items.
    The total annual hour paperwork burden estimate for Form N-SAR is
107,213 hours. The current approved total number of respondents is
4142, and the total annual number of responses is 7461.\424\ The staff
estimates that there are approximately 1292 management investment
companies that respond to Items 40-44 of Form N-SAR.
---------------------------------------------------------------------------

    \424\ The staff estimates the number of filers and filings based
on the actual number of EDGAR filings and on other Commission
records.
---------------------------------------------------------------------------

    The staff estimates that our proposed amendments would reduce the
time it takes funds that do not have grandfathered share classes to
complete Form N-SAR by 0.25 hours, and that there would be no change
for funds that maintain grandfathered share classes. The staff
estimates that, if these amendments are adopted, in the first three
years after adoption, approximately 20% of these 1292 management
investment companies (or 258) will no longer maintain grandfathered
share classes and experience the estimated savings, while the remaining
80% (or 1034) will continue to have grandfathered share classes and
respond to these items. Because Form N-SAR is completed twice a year,
the staff estimates that each filer that no longer responds to these
items would save approximately 0.5 hour annually (at an internal time
cost equivalent rate of $316 per hour). The staff therefore estimates
that our proposed amendments to Form N-SAR would result in an aggregate
incremental time savings of approximately 129 hours (with a total
internal time equivalent cost savings of

$40,764) \425\ annually compared to the current approved hour burden.
---------------------------------------------------------------------------

    \425\ This estimate is based on the following calculation: (258
x 0.5 hour = 129 hours); (129 hours x $316 per hour = $40,764).
---------------------------------------------------------------------------

     We request comment on these estimates and assumptions.

F. Schedule 14A

    Funds must comply with the requirements of Schedule 14A when they
solicit proxies from their shareholders. Our proposal would amend the
required disclosures under Schedule 14A when a fund seeks approvals
from its shareholders to institute or increase the rate of a marketing
and service fee after shares have been offered to the public. The
proposed amendments would remove items regarding asset-based
distribution fees that would be superfluous in light of our proposed
rescission of rule 12b-1 and new rule and rule amendments on asset-
based distribution fees, and would amend certain other items.
    Based on conversations with fund representatives and the most
recent PRA update to Schedule 14A, the staff estimates that 75% of the
burden of preparing Schedule 14A filings is undertaken by the fund
internally and that 25% of the burden is undertaken by outside counsel
retained by the fund at an average cost of $400 per hour.\426\ The
staff estimates that 3 funds would solicit proxies each year for the
purposes of seeking approval to implement or increase a fee as required
under proposed rules 6c-10(b)(3) and 12b-2(b)(3) (the same number that
the staff has estimated would solicit proxies under rule 12b-1) because
the staff believes the proposed amendments are unlikely to affect the
number of funds that seek proxy approval from their shareholders. For
each of these 3 funds, the staff estimates that our proposed amendments
to Schedule 14A would create an incremental reduction in burden of 3
hours of fund personnel time (at an internal time cost equivalent rate
of $316 per hour) and reduced costs of $400 for the services of outside
counsel, as a result of the proposed amended disclosures relating to
marketing and service fees on Schedule 14A. The staff therefore
estimates that these amendments would reduce the total annual paperwork
burden of Schedule 14A by approximately 9 hours of fund personnel time
(3 funds x 3 hours) at an internal time cost equivalent of $2844,\427\
and by approximately $1200 (3 funds x $400) for the services of outside
counsel.
---------------------------------------------------------------------------

    \426\ This cost estimate is based on consultations with several
registrants and law firms and other persons who regularly assist
registrants in preparing and filing proxies with the Commission.
    \427\ This estimate is based on the following calculation: (9
hours x $316 per hour = $2844).
---------------------------------------------------------------------------

    In our most recent PRA submission for Regulation 14A (which
includes Schedule 14A), the staff estimated that there are a total of
7300 respondents who use Schedule 14A, each of whom responds once a
year, for a total of 7300 responses annually. The staff estimates that
this number of respondents would remain the same under the proposed
amendments because the staff does not expect our proposed amendments to
affect the number of funds that seek approval from their shareholders
to institute or increase marketing and service fees. The current
approved aggregate time burden for these respondents is 669,026 hours
and the cost burden is $78,822,387. The staff estimates that the
proposed amendments would reduce this time burden by a total of 9 hours
(3 hours times the 3 respondents affected by our proposed amendments)
for a new total of 669,017 hours, and would reduce the cost burden by a
total of $1200, for a new aggregate total of $78,821,187. This would
represent an average per respondent time burden of 92 hours, and a cost
burden of $10,797.\428\
---------------------------------------------------------------------------

    \428\ This is based on the following calculations: (669,017
hours / 7300 respondents = 92 hours); ($78,821,187 / 7300
respondents = $10,797).
---------------------------------------------------------------------------

     We request comment on these estimates and assumptions. If
commenters believe these estimates and assumptions are not accurate, we
request they provide specific data that would allow us to make a more
accurate estimate.

G. Form N-3

    Form N-3 is the registration form used by insurance company
separate accounts registered as management investment companies that
offer variable annuity contracts.\429\ The proposed amendments would
require separate accounts that file Form N-3 to: (i) Revise prospectus
narrative disclosure on asset-based distribution fees; and (ii) revise
the SAI disclosure regarding asset-based distribution fees. Preparing
Form N-3 is a collection of information under the PRA and is mandatory.
---------------------------------------------------------------------------

    \429\ There are two types of Form N-3 filings: (i) Initial
filings; and (ii) annual post-effective amendments. Funds usually
incur significantly more time and incur greater costs when first
registering a fund under their initial N-3 filings than when filing
their annual post-effective updates. Therefore, the staff separately
estimates the burden for each type of filing.
---------------------------------------------------------------------------

    The proposal would amend Instruction 2 to Item 7(a) of Form N-3,
which currently requires registrants to list the principal types of
activities for which 12b-1 payments are made and the total amount spent
in the most recent fiscal year, as a percentage of net assets (or, if
the plan has not been in effect for a full fiscal year, a description
of the payments). The proposal would eliminate the requirement that
registrants disclose the total amount spent in the most recent fiscal
year, and instead require registrants to provide a description of
asset-based distribution fees, as defined in the new proposed rule. The
proposal would retain the requirement that registrants list the
principal types of activities for which asset-based distribution fees
are deducted.
    As discussed above, funds would no longer be required to have
written plans that are supervised and approved by the board of
directors under our proposed rule amendments. Therefore, the proposal
would eliminate paragraphs (ii) and (iii) of Item 21(f), which relate
to the specific operation of a 12b-1 plan.\430\ Paragraph (i) of Item
21(f) requires registrants to disclose the manner in which amounts paid
by the registrant under a 12b-1 plan were spent. We believe that the
information required to be disclosed in paragraph (i) of Item 21(f)
would continue to be useful to investors and the Commission. Therefore,
we are proposing to amend Item 21(f) to require disclosure of the
principal activities paid for through asset-based distribution expenses
incurred under rule 12b-2(b) and (d) and rule 6c-10(b), deleting
references to 12b-1 plans. For the reasons discussed above, we are also
proposing to amend Instruction 5 to Item 26(b)(ii) to delete any
references to 12b-1 plans. 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).
---------------------------------------------------------------------------

    \430\ 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.
---------------------------------------------------------------------------

    The current approved aggregate time burden to comply with the
collection of information requirements in Form N-3 is 13,024 hours. The
current approved aggregate cost burden is $601,400.
    Only registrants that charge asset-based distribution fees would be
affected by our proposed amendments to Form N-3. Based upon a review of
filings with the Commission, the staff estimates that 1 registrant that
currently files on Form N-3 charges asset-based distribution fees, and
would file a post effective amendment. Based upon

conversations with fund representatives, the staff estimates that it
would cost this registrant approximately $2,000 in one-time costs (for
outside legal counsel drafting and review) and require an expenditure
of 10 hours in internal personnel time (at an internal time cost
equivalent rate of $316 per hour) to revise its prospectus to comply
with the proposed amendments. The staff further estimates, based on
those conversations, that the proposed amendments to Item 21 and
Instruction 5 of Item 26 would result in time savings when completing a
post-effective amendment of a Form N-3 filing. The staff estimates that
this registrant would save approximately 1 hour (at an internal time
cost equivalent of $316 per hour) annually as a result of the proposed
amendments.
    The staff further estimates that no new registrants that file on
Form N-3 are likely to charge asset-based distribution fees under
proposed rule 12b-2 and the proposed amendments to rule 6c-10.
Accordingly, the staff estimates that there will be no other changes in
burden hours or costs for Form N-3 as a result of the proposed rule and
rule amendments.
     We request comment on these estimates and assumptions.

H. Rule 10b-10

    Rule 10b-10 requires broker-dealers to convey basic trade
information to customers regarding their securities transactions. The
proposed amendments would revise rule 10b-10 by requiring disclosure of
additional information related to sales charges in connection with
transactions involving mutual funds, requiring disclosure of certain
additional information in connection with callable debt securities, and
removing certain outdated transitional provisions from the rule. This
collection of information would be mandatory. The information would be
used by broker-dealer customers to evaluate the terms of their own
securities transactions. In addition, the information contained in the
confirmations may be used by the Commission, self-regulatory
organizations, and other securities regulatory authorities in the
course of examinations, investigations, and enforcement proceedings. No
governmental agency regularly would receive any of this
information.\431\
---------------------------------------------------------------------------

    \431\ Exchange Act Rule 17a-4(b)(1), 17 CFR 240.17a-4(b)(1),
requires broker-dealers to preserve confirmations for three years,
the first two years in an accessible place.
---------------------------------------------------------------------------

    The proposed amendments to rule 10b-10, in part, would require
transaction confirmations to disclose additional information about
sales charges associated with purchases and redemptions of mutual fund
shares. The purpose of these changes is to help make the confirmation a
more complete record of the transaction, help mutual fund investors
more fully understand the sales charges they pay, and assist investors
in verifying whether they paid the correct sales charge as set forth in
the prospectus. The proposed amendments to rule 10b-10 also would
require confirmation disclosure of certain additional information about
callable debt securities. The purpose of these proposed amendments is
to provide investors with information necessary to evaluate their
transactions involving callable debt securities, by helping to alert
investors to misunderstandings, avoid confusion, promote the timely
resolution of problems, and better enable investors to evaluate
potential future transactions.\432\
---------------------------------------------------------------------------

    \432\ The proposal also would delete certain expired
transitional provisions of rule 10b-10 related to securities futures
products; there would be no burden associated with this deletion.
---------------------------------------------------------------------------

    The rule would apply to the approximately 5,035 broker-dealers
registered with the Commission. The Commission staff understands,
however, that under the current industry practice confirmations are
customarily generated and sent by clearing broker-dealers (``clearing
firms'') subject to agreements (``clearing agreements'') with
introducing broker-dealers (``introducing firms''). Under this industry
practice, the Commission staff understands that clearing firms would
bear most of the costs associated with updating back-office operations
to accommodate the proposed changes to rule 10b-10.\433\
---------------------------------------------------------------------------

    \433\ For purposes of this analysis, the staff assumes that all
registered broker-dealers effect transactions in mutual fund shares.
To the extent that some broker-dealers may not effect transactions
in mutual fund shares, the paperwork burdens and costs may be
overstated. Furthermore, for the purposes of this analysis, broker-
dealers that have not entered into clearing agreements with
introducing firms yet generate and send confirmations, are included
as clearing firms in the staff's estimates.
---------------------------------------------------------------------------

    Based on filings with the Commission, the staff estimates that of
the 5,035 broker-dealers registered with the Commission, approximately
530 are clearing firms. The Commission staff understands that
approximately 30% of clearing firms, or 160 firms, have developed their
own proprietary systems for generating and inputting the information
necessary to generate and deliver a confirmation. The staff further
understands that the other approximately 70% of clearing firms, or 370
firms,\434\ license platforms from third-party service providers (or
vendors) that, among other things, generate the data necessary to
produce and send confirmations.\435\
---------------------------------------------------------------------------

    \434\ The staff's understanding is that these firms are usually
small and medium-sized clearing firms, but may also include some
larger firms as well.
    \435\ The staff's understanding is that there are three primary
vendors that license platforms used by clearing firms to generate
and send confirmations. In addition to licensing platforms, many
clearing firms may also use vendors to separately print and mail
confirmations to investors.
---------------------------------------------------------------------------

    Based on the industry's current practices, the staff understands
that the 160 clearing firms with proprietary systems would have a one-
time burden associated with reprogramming software and otherwise
updating back-office systems and platforms to enable confirmation
delivery systems to generate the information required under the
proposed amendments.\436\ The Commission staff further estimates, based
on discussions with industry representatives, that this one-time
programming burden for clearing firms with proprietary back-office
systems would amount to, on average, approximately 4,500 hours per
clearing firm, for a total of 720,000 burden hours.\437\
---------------------------------------------------------------------------

    \436\ The staff notes that these estimates are based on the
assumption that ongoing sales charges and marketing and service fees
commonly will not change over time for any particular mutual fund.
The staff also assumes that the information necessary to comply with
the proposed changes to rule 10b-10 will be readily available to
clearing firms from various third-party service providers.
    \437\ 160 clearing firms with proprietary systems x 4,500 burden
hours = 720,000 burden hours.
---------------------------------------------------------------------------

    With respect to clearing firms that license vendor platforms
(``clearing firm licensees''), the staff estimates that these vendors
will incur costs similar to those incurred by clearing firms with
proprietary systems to reprogram and update their platform. Thus, staff
estimates that the burden to vendors would be approximately 4,500
burden hours per vendor, resulting in one-time costs to these vendors
of approximately $3.4 million dollars.\438\ Based on discussions with
industry representatives, the staff also understands that clearing firm
licensees would still incur approximately 800 burden hours per firm to
adopt the changes to a vendor's platform and determine that the output
satisfies the requirements of the proposed amendments to the rule. The
staff estimates that the total burden for clearing firm licensees would
be approximately 296,000 total hours.\439\ When we sum the labor hours
borne by clearing firms with proprietary systems with those borne by
clearing firm

licensees, we estimate that the total one-time hour burden as a whole
for entities registered with the Commission will be 1,016,000 burden
hours.\440\
---------------------------------------------------------------------------

    \438\ 3 vendors x 4,500 burden hours x $251 dollars per hour =
$3,388,500. The staff estimates per hour costs to be $251.
    \439\ 370 clearing firm licensees x 800 burden hours = 296,000
total burden hours.
    \440\ (160 clearing firms with proprietary systems x 4,500
burden hours) + (370 clearing firm licensees x 800 burden hours) =
1,016,000 total burden hours.
---------------------------------------------------------------------------

    The Commission staff understands that once completed, this
reprogramming and systems updating should permit clearing firms to have
automated access to the additional information that would be disclosed
in confirmations. Accordingly, the staff does not believe that there
will be a material increase in the ongoing costs associated with
producing and sending confirmations once the initial one-time
reprogramming costs are completed.

I. Request for Comments

    We request comment on whether the estimates provided in this PRA
are accurate. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission
solicits comments in order to: (i) Evaluate whether the proposed
collections of information are necessary for the proper performance of
the functions of the Commission, including whether the information will
have practical utility; (ii) evaluate the accuracy of the Commission's
estimate of the burden of the proposed collections of information;
(iii) determine whether there are ways to enhance the quality, utility,
and clarity of the information to be collected; and (iv) minimize the
burden of the collections of information on those who are to respond,
including through the use of automated collection techniques or other
forms of information technology.
    Persons wishing to submit comments on the collection of information
requirements of the proposed amendments should direct them to the
Office of Management and Budget, Attention Desk Officer for the
Securities and Exchange Commission, Office of Information and
Regulatory Affairs, Room 10102, New Executive Office Building,
Washington, DC 20503, and should send a copy to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090, with reference to File No. S7-15-10. OMB is
required to make a decision concerning the collections of information
between 30 and 60 days after publication of this Release; therefore a
comment to OMB is best assured of having its full effect if OMB
receives it within 30 days after publication of this Release. Requests
for materials submitted to OMB by the Commission with regard to these
collections of information should be in writing, refer to File No. S7-
15-10, and be submitted to the Securities and Exchange Commission,
Office of Investor Education and Advocacy, 100 F Street, NE.,
Washington, DC 20549-0213.

V. Cost-Benefit Analysis

A. Background

    The Commission is sensitive to the costs and benefits imposed by
its rules. We recognize that if adopted, the proposed new rule and rule
amendments would result in costs for some funds and other marketplace
participants.\441\ We have identified certain costs and benefits of the
proposed rule and rule amendments and request comment on all aspects of
this cost-benefit analysis, including identification and assessment of
any costs and benefits not discussed in this analysis. We seek comment
and data on our estimates of the costs and benefits identified. We also
welcome comments on the accuracy of the cost estimates in each section
of this analysis, and request that commenters provide data that may be
relevant to these cost estimates. In addition, we seek estimates and
views regarding these costs and benefits for funds and their
intermediaries, including small entities, and for investors, as well as
any other costs or benefits that may result from the adoption of the
proposed rule and rule and form amendments.
---------------------------------------------------------------------------

    \441\ Although we discuss many of these costs in terms of the
fund, the preparation of these reports is most likely done by
employees of the fund's adviser, because most funds do not have any
employees of their own.
---------------------------------------------------------------------------

    The proposal is designed to protect individual investors from
paying disproportionate amounts of sales charges in certain share
classes, promote investor understanding of fees, eliminate outdated
requirements, provide a more appropriate role for fund directors, and
introduce greater competition among funds in setting sales loads and
distribution fees generally. As discussed in greater detail above, we
are proposing to: (i) Rescind rule 12b-1 under the Act; (ii) adopt new
rule 12b-2 under the Act, which would permit funds to deduct a
marketing and service fee at a rate no greater than the maximum rate
permitted as a service fee under the NASD sales charge rule (currently
25 basis points) annually; (iii) adopt amendments to rule 6c-10, which
would permit funds to deduct asset-based sales charges in excess of the
marketing and service fee in the form of an ``ongoing sales charge''
(up to certain limits); (iv) as an alternative to the ongoing sales
charge, provide an elective alternative that would allow funds to sell
their shares through intermediaries subject to competition in
establishing sales charge rates; (v) amend Form N-1A and N-3 under the
Securities Act and the Investment Company Act, and Schedule 14A under
the Exchange Act to reflect the proposed rule and rule amendments, (vi)
make conforming amendments to rule 11a-3 under the Investment Company
Act; and (vii) make technical amendments to rules 17a-8, 17d-3, and
18f-3, and Forms N-SAR, N-4 and N-6 under the Investment Company Act,
and rule 6-07 of Regulation S-X under the Securities Act.
    In general, for each aspect of the proposal, we have attempted to
estimate the potential costs and benefits in dollars for each entity
that may be affected. Some of the expected costs and benefits from our
proposals cannot be measured in dollars, but are effects nonetheless,
such as the benefits of improved investor understanding of distribution
charges and the costs and benefits of greater equity in the cumulative
amount of sales charges paid by individual investors. When actual
dollar costs and benefits would likely result (such as from the
elimination of certain disclosure requirements that would be eliminated
under the proposal, such as descriptions of 12b-1 plans) we have
estimated the relevant costs and savings.\442\
---------------------------------------------------------------------------

    \442\ We have discussed many of the benefits of this proposal
previously in this Release, and therefore, we will focus more on the
proposal's costs in this section, and will refer back to previous
discussions of our proposal's anticipated benefits when appropriate.
---------------------------------------------------------------------------

    In this analysis, Commission staff has estimated the percentage of
funds or other parties that are likely to change their operations in
response to our proposal. These and other estimates and assumptions are
based on interviews with representatives of funds, their
intermediaries, investor advocates, and the experience of Commission
staff. In addition, in preparing this cost-benefit analysis, Commission
staff reviewed fund prospectuses, periodic reports made to the
Commission pursuant to Form N-SAR and other fund filings, and a
commercial database of information on funds.\443\ Throughout this
analysis, unless otherwise stated, the estimates are based on these
interviews, reviews, and examinations.
---------------------------------------------------------------------------

    \443\ The Commission staff's review is based in part on
information obtained from Lipper's LANA Database.
---------------------------------------------------------------------------

B. Impact of the Proposal

    We have designed our proposal to minimize the cost impact on funds,

intermediaries, and service providers while maximizing the investor
protection and other benefits. As further discussed below, the staff
anticipates that funds representing approximately 93% of all assets
under management will incur minor or no expenses in complying with our
proposal. This section contains some basic estimates about the size of
the fund marketplace and its use of 12b-1 fees, and a general outline
of what we believe our proposal's impact will be on certain market
segments. Much of the information described in this section is included
in two tables at the end of this section. The information is based on
an analysis of data received on Form N-SAR and other filings and a
review of a Lipper database.
    The staff estimates that as of the end of 2009, there were
approximately 9427 funds (consisting of 8611 traditional mutual funds
and 816 ETFs) sponsored by 682 investment advisers.\444\ Approximately
7367 of these funds have adopted a 12b-1 plan for one or more of their
share classes.\445\ Assets managed by all funds, as of the end of 2009,
totaled approximately $12.2 trillion.\446\
---------------------------------------------------------------------------

    \444\ Like mutual funds, most ETFs are registered open-end
management investment companies (a small number of ETFs are UITs).
However, ETFs are counted separately from mutual funds in ICI
statistics. The number of funds above reflects each separate series
of a fund (many funds consist of more than one series or portfolio).
Costs incurred in complying with the proposal may often be incurred
at the fund ``complex'' or ``family'' level, and not at the series
or class level, and, when appropriate, the staff has based its
estimates on the number of sponsors or families affected rather than
the number of series or classes.
    \445\ A fund may have a 12b-1 plan, but not charge 12b-1 fees on
one or more particular share classes of the fund.
    \446\ This figure is based on staff examination of industry
data, and includes traditional mutual funds, funds of funds, ETFs,
and funds underlying insurance company separate accounts.
---------------------------------------------------------------------------

    The number of sponsors is roughly equivalent to the number of
``fund families,'' which are groups of funds that share the same
investment adviser or principal underwriter and hold themselves out to
investors as related companies. Therefore, on average, each fund family
has approximately 14 funds.\447\ Of the 682 fund families, the staff
estimates that approximately 379 (or 56%) have at least one fund in the
family that currently has a 12b-1 plan. These fund families may be
affected in some way by our proposal. The staff estimates that 172 of
these 379 fund families (or 45%) only have funds that charge no more
than 25 basis points in 12b-1 fees, and the remaining 207 (or 55%) have
at least one fund that charges 12b-1 fees in excess of 25 basis points.
The 207 fund families that have at least one fund that charges 12b-1
fees in excess of 25 basis points average 37 funds per fund family, a
significantly higher average number of funds per family than the
typical fund family.\448\ As discussed previously, and in more detail
below, we anticipate that funds that charge 25 basis points or less in
12b-1 fees would incur minimal costs under our proposal, while those
that charge more than 25 basis points may be more significantly
affected by our proposal.
---------------------------------------------------------------------------

    \447\ This is based on the following calculation: (9427 funds /
682 advisers = 14 funds per adviser). This number can and does vary
widely, with some advisers managing only a single fund, and others
managing hundreds of funds.
    \448\ The 207 advisers that advise at least one fund with a 12b-
1 fee in excess of 25 bps advise a total of 7660 funds, for an
average of 37 funds per family.
---------------------------------------------------------------------------

    The staff estimates that, as of the end of 2009, there were
approximately 26,788 fund share classes. On average, the staff
estimates that each mutual fund has approximately 3 share classes.\449\
However, some funds only have one share class (including many no-load
funds), while others may have ten or more classes to support a variety
of distribution arrangements.\450\ Generally, funds that charge 12b-1
fees tend to have more share classes, because they offer multiple
methods of paying for distribution (e.g., at the time of purchase, at
the time of redemption, or over time through the 12b-1 fee charged on
fund assets) for investors with different needs and goals.\451\ Thus,
for purposes of estimating costs per fund in this analysis, the staff
will assume that a typical fund that charges 12b-1 fees would have 4
classes: An A, B, and C share class, as well as an institutional or
retirement share class.\452\
---------------------------------------------------------------------------

    \449\ This is based on the following calculation: (26,788
classes / 8611 funds = 3 classes per fund). The staff excludes ETFs
from this calculation because most ETFs offer only one class of
shares, and therefore have reduced both the total fund and class
number by the number of ETFs in this calculation. An ETF that is
offered as a share class in a fund would be included in this
estimate of average share classes per fund.
    \450\ See, e.g., Prospectus for The Growth Fund of America (Nov
1, 2009) (http://www.americanfunds.com/pdf/mfgepr-905_gfap.pdf).
    \451\ Not all funds that charge 12b-1 fees offer multiple retail
classes. For example, the Legg Mason Funds only offer a single
retail class of shares for their funds, a C share equivalent that
charges 12b-1 fees without a front-end load. See, e.g., Prospectus
for Legg Mason American Leading Companies Value Trust (Aug 1, 2009),
(http://prospectus-express.newriver.com/get_
template.asp?clientid=legg&fundid=52465Q101&level=4&doctype=pros).
    \452\ See supra note 84. We do not expect that institutional
classes would be affected by our proposal because funds do not
typically charges 12b-1 fees on these classes.
---------------------------------------------------------------------------

    Of the 26,788 existing fund share classes, 12,646 (or 47% of all
classes) do not charge a 12b-1 fee. These classes hold approximately
$7.3 trillion in assets.\453\ The remaining 14,142 classes (or 53% of
all classes) that do charge a 12b-1 fee hold approximately $4.9
trillion in assets. The staff believes that 47% of fund classes (those
that do not charge 12b-1 fees) are unlikely to incur any costs as a
result of our rule proposal.\454\ Thus, the staff believes that funds
managing approximately $7.3 trillion in assets, representing 60% of all
assets under management, would not have to change their operations or
disclosures as a result of our proposal.\455\
---------------------------------------------------------------------------

    \453\ This figure is based on a staff examination of industry
data and includes mutual funds, funds of funds, ETFs, and funds
underlying insurance company separate accounts.
    \454\ If our proposal is adopted, we do not expect that fund
classes that do not currently charge 12b-1 fees would begin charging
asset-based distribution fees, because the fund would have already
established a distribution structure and in light of the necessity
of obtaining shareholder approval to institute such a fee.
    \455\ This figure is based on the following calculation: ($7.3
trillion (assets not subject to a 12b-1 fee) / $12.2 trillion (total
assets under management) = 60% of assets under management not
subject to a 12b-1 fee).
---------------------------------------------------------------------------

    A total of 6,482 share classes (or 46% of classes that charge 12b-1
fees) charge a 12b-1 fee of 25 basis points or less. As discussed
further below, although our proposal would affect these classes, we
anticipate that the funds with these classes are likely to incur
minimal costs associated with complying with our proposal. As a result,
the staff anticipates that of all 26,788 fund share classes, 19,128
(which hold $11.3 trillion in assets, representing approximately 93% of
all assets under management) would incur only minor, if any, costs if
our rule proposals are adopted.\456\
---------------------------------------------------------------------------

    \456\ As discussed further below, we recognize that the cost
impact of our proposal would not be distributed evenly across all
funds, but rather that certain funds and fund families are likely to
bear a greater share of the expenses that may result due to the
nature of their distribution and operational models.
---------------------------------------------------------------------------

    Approximately 7,660 (or 54%) of the share classes that have 12b-1
fees charge 12b-1 fees of greater than 25 basis points. All of these
classes would be affected in some way by our rule proposals. These
share classes hold approximately $855 billion in assets, or 17% of the
assets managed by classes that charge 12b-1 fees, and 7% of all assets
under management.
     We request comment on these estimates.

[GRAPHIC] [TIFF OMITTED] TP04AU10.000

C. Marketing and Service Fee

    Proposed rule 12b-2 would allow funds to deduct from fund assets a
marketing and service fee of up to the maximum rate of the service fee
permitted under NASD Conduct Rule 2830 (currently 0.25% or 25 basis
points of net fund assets annually).\457\ The proposed 25 basis point
marketing and service fee could be used for any legitimate distribution
related activity including, but not limited to, the continuing
shareholder account services encompassed by the NASD service fee.
---------------------------------------------------------------------------

    \457\ Proposed rule 12b-2(b); NASD Conduct Rule 2830(d)(5).
---------------------------------------------------------------------------

1. Benefits
    We anticipate that proposed rule 12b-2 would benefit investors by
permitting funds to continue to pay for: (i) Follow-up services
provided to investors by brokers and other intermediaries after the
sale has been made; and (ii) a fund's participation in distribution
channels that offer investors a convenient way of buying shares, such
as fund supermarkets \458\ and retirement plans.\459\
---------------------------------------------------------------------------

    \458\ See supra Section III.C.
    \459\ Because these payments represent an integral part of many
funds' distribution strategies, we believe that significantly
restricting the ability of funds to continue to pay for these
ongoing services through fund assets would likely disrupt existing
distribution systems, impose significant costs on funds and
intermediaries, and may have other unintended consequences that
could adversely affect funds and fund shareholders.
---------------------------------------------------------------------------

    We anticipate that our proposal would also benefit funds and their
directors, and ultimately fund shareholders, by eliminating the
procedural requirements of rule 12b-1. Under proposed rule 12b-2,
boards of directors of funds that deduct a marketing and service fee
would not be required to adopt a 12b-1 plan or annually approve it. As
a result, funds and their advisers would no longer incur many of the
costs of creating a 12b-1 plan, preparing quarterly and fiscal year
reports of plan expenditures, or preparing materials that support the
specific findings that fund boards are required to make annually in
order to approve a 12b-1 plan, as discussed in more detail in Section I
of this analysis.
    As discussed above, fund boards would have discretion to use fund
assets to finance distribution activities within the limits of the rule
and their fiduciary obligations to the fund and fund shareholders.
Therefore, we anticipate that funds would still incur some costs
stemming from director review of arrangements paid for through the
marketing and service fee. Our understanding is that, in general, funds
pay their directors on an annual or per meeting basis, and we do not
expect that the directors will reduce the frequency of their meetings
as a result of the proposed marketing and service fee. Based on this
assumption, we estimate that funds that currently charge a 12b-1 fee of
25 basis points or less will likely not realize significant cost
savings as a benefit deriving from our proposal. However, the directors
of funds that impose a marketing and service fee

under proposed rule 12b-2 might spend less time on reviews and plan
approvals, and instead be able to focus more of their time on other
pressing concerns related to the fund's operations.\460\
---------------------------------------------------------------------------

    \460\ We discuss the cost savings that might result from the
proposed rescission of rule 12b-1 and its attendant director duties
in Section V.I of this Release, infra.
---------------------------------------------------------------------------

2. Costs
    We anticipate that funds that currently charge a 12b-1 fee of 25
basis points or less would not change the amount that they currently
charge under proposed rule 12b-2. The proposed maximum amount of the
marketing and service fee would be the same as the current NASD limit
on service fees, and would also be the same as the current NASD limit
on the amount of asset-based distribution fees that may be charged by
funds describing themselves as ``no-load.'' Thus, we expect that funds
that currently use 12b-1 fees for these purposes would continue to
charge the same level of fees. Because under the proposal, funds that
currently charge 12b-1 fees of 25 basis points or less could charge
marketing and service fees of the same or smaller amount without
holding a shareholder vote, we expect that funds that currently charge
12b-1 fees of 25 basis points or less would incur only the costs of
updating their disclosure documents as a result of our proposed
rulemaking.\461\
---------------------------------------------------------------------------

    \461\ We estimate the costs of such disclosure changes in
Section V.G of this Release, infra.
---------------------------------------------------------------------------

    As discussed above, we do not anticipate that funds that currently
charge 25 basis points or less in 12b-1 fees would have to implement
any significant systems changes or incur other additional operational
costs in order to impose a marketing and service fee under proposed
rule 12b-2 because there should be no significant impact on operational
expenses due to a transition from a 12b-1 fee of that level to a
marketing and service fee. Nevertheless, directors and legal counsel to
these funds and their advisers may require some time and training to
review and understand the permissible uses and limits of marketing and
service fees, compared to current practices. Commission staff estimates
that for each fund family with one or more funds that charge a 12b-1
fee of 25 basis points or less, inside fund counsel would spend \462\
approximately 20 hours \463\ to review and understand the proposal and
the board of directors would spend approximately 3 hours \464\ to
review and understand their responsibilities under the proposal.
Because inside counsel and directors are typically not paid on an
hourly basis, and the staff does not expect that funds would hire
additional personnel or increase the frequency of meetings as a result
of this proposal, the staff does not anticipate that this process would
have any specific dollar costs for funds or advisers. However, we
recognize that this represents time that directors and counsel would
otherwise have spent on other fund business.
---------------------------------------------------------------------------

    \462\ Throughout this analysis we will estimate the cost of the
time spent by internal personnel in complying with the proposal,
because the time spent represents time that would otherwise be
available for other activities of the fund (or relevant entity).
Although these costs may be an economic cost of the proposal, it
would not result in new monetary costs for funds, and would not
result in the hiring of more staff by advisers or funds.
    \463\ The staff estimates that the internal time cost equivalent
for time spent by internal counsel is $316 per hour, for a total
cost per fund family of $6320 (20 hours x 316 per hour = $6230).
This estimate of $316 per hour, 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.
    \464\ The staff estimates that the internal time cost equivalent
for time spent by the boards of directors as a whole is $4500 per
hour, for a total cost per fund family of $13,500 (3 hours x $4500
per hour = $13,500). 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.
---------------------------------------------------------------------------

    Based on these estimates, other than the costs of revising their
disclosure documents which we analyze later in the section on the
disclosure amendments, the staff expects that the 6482 fund classes
that currently charge 12b-1 fees of 25 basis points or less would incur
no new costs in complying with proposed rule 12b-2. The assets under
management of these classes represent approximately 82% of the total
assets under management that are currently subject to 12b-1 fees.
    We request comment on these estimates and assumptions regarding the
costs of compliance with our proposal for funds that currently charge
12b-1 fees of 25 basis points or less.
     Is the staff correct in estimating that, other than costs
to amend disclosure documents, these funds would incur no new dollar
costs in complying with this part of our proposal? Is the estimate
regarding time spent by inside counsel and directors reasonable? Would
funds hire additional personnel, or otherwise incur additional or
different costs or benefits than what we have estimated here?

D. Ongoing Sales Charge: Funds

    The proposed amendments to rule 6c-10 would permit funds to deduct
asset-based distribution fees in excess of the marketing and service
fee in the form of an ongoing sales charge.\465\ Proposed rule 6c-10(b)
would limit ongoing sales charges to an amount that does not exceed the
amount of the highest front-end load that the investor would have paid
if he or she had invested in another class of shares in the same fund.
Funds could also comply with the proposed rule amendments by deducting
the ongoing sales charge only until the cumulative rates imposed on
each share purchase matches the maximum front-end load, or in some
circumstances, the maximum sales charge limit set forth in NASD Conduct
Rule 2830(d)(2)(A) (currently 6.25% of the amount invested). In effect,
the proposal would treat asset-based distribution fees in excess of the
marketing and service fee as a type of deferred sales load.
---------------------------------------------------------------------------

    \465\ For a complete discussion of the proposed ongoing sales
charge, see Section III.D, supra. All funds that charge an ongoing
sales charge would also incur the costs of implementing a marketing
and service fee pursuant to proposed rule 12b-2 as well, as
discussed in Section C above.
---------------------------------------------------------------------------

1. Benefits
    We believe that the ongoing sales charge proposal would create a
number of benefits, many of which are discussed above.\466\ The
proposed amendment would limit the cumulative ongoing sales charges
that may be imposed on a purchase of fund shares to a set ``reference
load'' (generally the highest front-end load charged on the fund's
class A shares). As a result, investors would have the benefit of
knowing, at the time of their purchase, either the maximum amount that
they would pay for distribution, or the maximum length of time ongoing
sales charges would be deducted. As a result, long-term shareholders
would be protected from paying disproportionate amounts of sales
charges in certain share classes, as is currently possible under rule
12b-1.\467\ Finally, the ongoing sales charge would also be clearly
identified and described in the fund prospectus and fee table, which
should increase

transparency and improve investor understanding of fees.
---------------------------------------------------------------------------

    \466\ See supra Section III.M.
    \467\ See, e.g., Comment Letter of Bridgeway Funds, Inc. and
Bridgeway Capital Management, Inc. (July 19, 2007).
---------------------------------------------------------------------------

    We believe that the ongoing sales charge proposal would also result
in benefits for funds and fund directors. Under our proposal, funds
would not have to adopt a ``plan'' in order to impose an ongoing sales
charge, and fund directors would not be required to undertake time-
consuming formal reviews and approvals of 12b-1 plans. Instead, funds
and their boards would consider ongoing sales charges as integral parts
of a fund's sales load structure and would review them under the same
procedures under which boards currently review and approve the fund's
underwriting contract. Boards could benefit from this to the extent it
permits them to focus more on the fund's distribution system as a
whole.
    As a result of our proposal, funds may eventually incur lower
compliance costs in tracking the sales charge limits established by
NASD Conduct Rule 2830. As discussed previously, NASD Conduct Rule
2830(d)(2) imposes a complex, fund-level cap on the aggregate amount of
sales charges, including asset-based sales charges, that may be imposed
by funds sold by broker-dealer members. The investor-level cap on
ongoing sales charges created by our proposal would provide an
alternative means of ensuring that the NASD sales charge rule's maximum
sales charge limits are not circumvented through the use of asset-based
sales charges. If our proposal is adopted, FINRA may consider amending
(or interpreting), this provision to eliminate the need for funds to
track aggregate sales charges at the fund level.\468\
---------------------------------------------------------------------------

    \468\ See note 74 supra (discussing how rule 2830 provides a
``minimum standard,'' and does not prevent a fund from developing a
better method of tracking the loads paid by shareholders and
ensuring that they do not overpay).
---------------------------------------------------------------------------

    If FINRA were to amend (or interpret) this provision of Rule 2830,
it could reduce compliance costs for these funds.\469\ The staff
estimates that funds currently spend $2000 in costs and 5 hours of
internal staff time tracking these caps annually for each class that
charges a 12b-1 fee in excess of 25 basis points. The costs are for
computer and software resources, outside accountants, and other
compliance costs. The 5 hours of internal time spent by these funds
include 4 hours of time spent by accountants (at a cost of $153 per
hour) and 1 hour spent by an assistant compliance director (at a cost
of $326 per hour), for a total internal time cost equivalent of $938
per fund class.\470\ As discussed above, approximately 7660 classes
charge a 12b-1 fee in excess of 25 basis points, and we estimate that
approximately 50% of these (or 3830 classes) may no longer need to
incur these expenses. Therefore, the staff estimates a potential total
annual cost savings of $7,660,000 and a time savings of 19,150 hours
(representing an internal time cost equivalent of $3,592,540) \471\ for
this portion of the proposal for all funds.
---------------------------------------------------------------------------

    \469\ Funds that continue to have shares in classes with
grandfathered 12b-1 fees pursuant to proposed rule 12b-2(d) would
continue to incur these costs, however, during the grandfathering
period.
    \470\ This estimate is based on the following calculations:
($153 x 4 hours = $612; $612 + $326 = $938).
    \471\ This is based on the following calculation: ($938 x 3830
classes = $3,592,540 time savings value; 5 hours x 3830 classes =
19,150; $2,000 x 3830 classes = $7,660,000 cost savings).
---------------------------------------------------------------------------

     We request comment on these estimates and assumptions.
    We considered several alternative methods of achieving the goals of
this rulemaking, including potentially requiring individual shareholder
level accounting of asset-based distribution fees, and prohibiting the
deduction of asset-based distribution fees entirely. Although these
alternatives might result in some of the benefits of the ongoing sales
charge proposal, we expect they would come at a significant cost. Our
proposal for an ongoing sales charge instead is designed to provide
many of these benefits to investors, without significantly disrupting
current distribution models or requiring most funds and intermediaries
to develop costly new operating systems.
2. Costs
    If adopted, the limitations on ongoing sales charges contained in
proposed rule 6c-10(b) would require funds that currently charge 12b-1
fees in excess of 25 basis points to amend their share classes and/or
alter their operations in one of several ways. First, some funds may
choose to amend their share classes so that they conform to the new
requirements (e.g., by reducing their fees to a level that would not
implicate the ongoing sales charge limitations). Second, other funds
might restructure their expenses and separate non-distribution related
expenses from their asset-based distribution fees in order to keep
total fees from exceeding 25 basis points. Third, some funds might keep
their present share classes, but issue new shares that comply with the
proposed rule amendments after a certain date (i.e., ``old'' and
``new'' shares would be mixed in the same class). Fourth, other funds
might create new share classes on or before the compliance date that
meet the proposal's requirements. The chosen method of complying with
the new requirements would likely be driven by the fund's business
model and the cost-effectiveness of each option given the fund's
particular circumstances. In general, the staff assumes that either
funds or their advisers or other service providers would bear the costs
of implementing these changes.\472\ The costs of each of these
potential compliance options are discussed below.
---------------------------------------------------------------------------

    \472\ Fund families are organized in many ways, with some having
affiliated transfer agents, underwriters and other service
providers, and others contracting these services out to unaffiliated
third parties. The staff understands that some contracts obligate
the fund to reimburse the transfer agent for system costs related to
regulatory changes, while other contracts require the transfer agent
to bear these expenses. Because of the variability in these contract
terms, throughout this analysis, when the staff estimates costs, the
staff generally assumes that the estimated costs would be borne
directly by the affiliated service providers and the fund family, or
indirectly through increased expenses charged by unaffiliated
service providers. Except in the case of retirement plan record
keepers, who may face unique issues in responding to this proposal,
the staff does not break these costs out separately.
---------------------------------------------------------------------------

a. Fee Reductions
    Funds with classes that currently charge 12b-1 fees of more than 25
basis points might determine that it would be cost effective to reduce
their asset-based distribution fees to the 25 basis point cap of the
marketing and service fee. Funds could accomplish this by either
reducing their distribution expenses or shifting a portion of the costs
to their adviser or another party. These funds could continue offering
their existing share classes without having to provide for a conversion
period under proposed rule 6c-10(b).
    We anticipate that, out of the funds that charge a 12b-1 fee of
more than 25 basis points, only those funds that charge up to 30 basis
points would likely reduce their asset-based distribution fee to 25
basis points or less. We expect that funds that charge more than 30
basis points would be unlikely to find the reduction to 25 basis points
or less to be the most cost effective means of complying with our
proposal, and therefore would be unlikely to pursue this alternative.
Commission staff estimates that there are approximately 471 fund
classes that charge 12b-1 fees of more than 25 up to and including 30
basis points (representing $143 billion in assets), and that 40% of
these classes (188) may reduce their fees to 25 basis points or less in
response to our proposal. The average class that charges 12b-1 fees in
this range has approximately $304 million in assets. If a class with
$304 million in assets that charged 30 basis

points reduced its 12b-1 fees to 25 basis points, investors in that
class would see their 12b-1 fees reduced by approximately $152,000
annually. If all of the classes that chose to reduce their fees charged
the full 30 basis points, the maximum fee reduction would be
approximately $28,576,000 a year.\473\
---------------------------------------------------------------------------

    \473\ This estimate is based on the following calculation:
($152,000 x 188 classes = $28,576,000).
---------------------------------------------------------------------------

    These reductions in fees could be viewed as a cost to these funds
or their advisers. Nonetheless, investors in the funds would experience
a corresponding and offsetting dollar-for-dollar benefit due to lower
expenses. In any event, a fund likely would only elect this alternative
if it determined that the reduction would be cost effective. We request
comment as to the likelihood that funds would respond to our proposal
with fee reductions.
     Are we correct in assuming that only funds that charge
between 25 and 30 basis points are likely to reduce their fees? How
many funds would choose this option? What kind of costs would they or
their affiliates bear to reduce their current 12b-1 fee, if any?
b. Fee Restructuring
    Many funds currently pay for expenses that are not distribution
related with 12b-1 fees (such as administrative, sub-transfer agency,
or other fees). As a result, we expect that some funds with classes
that impose 12b-1 fees of more than 25 basis points, up to and
including 50 basis points (e.g., some A and R share classes), might
instead be able to treat the amount greater than 25 basis points as a
fund operating expense. These funds would have to carefully examine
their 12b-1 fees and identify which, if any, expenses could be properly
classified as non-distribution expenses. If non-distribution expenses
paid through 12b-1 plans are significant enough, these funds might be
able to reduce their asset-based distribution fees to the 25 basis
point cap and avoid being subject to the ongoing sales charge limits
and conversion periods in proposed rule 6c-10(b).
    The staff estimates that there are approximately 2168 fund classes
that charge 12b-1 fees of more than 25 up to and including 50 basis
points. The staff previously estimated that approximately 188 of these
classes may respond by reducing their fees, leaving a total of 1980
classes that fall into this category. Of those classes, the staff
estimates that approximately 50% (or 990 classes) may be able, and find
it cost effective, to re-characterize a portion of their current 12b-1
fee.
    We expect that funds that choose this course of action would incur
the costs of: (i) Conducting an internal review of the fees and
expenses charged by the affected share classes; (ii) amending fund
prospectuses and disclosure documents to reflect the fee re-structuring
(as discussed in greater detail below); and (iii) modifying operational
and accounting systems to reflect the restructured fees. The staff
estimates that it would take approximately 20 hours of inside counsel
time (at an internal time cost equivalent of $316 per hour), and 1 hour
of time for each board as a whole (at an internal time cost equivalent
of $4500 per hour), for a total internal time cost equivalent of
$10,820 to complete these tasks for each class.\474\ The staff
estimates that funds may incur an additional $5,000 in outside counsel
expenses associated with the internal review and disclosure
changes.\475\
---------------------------------------------------------------------------

    \474\ This is based on the following calculations: ($316 x 20 =
$6320); ($6320 + $4500 = $10,820).
    \475\ Any operational and accounting system costs would be
likely made at the fund family level, and are included in the
staff's estimated costs for fund families complying with the ongoing
sales charge proposal, as discussed below.
---------------------------------------------------------------------------

    Therefore, we estimate that it would cost the 990 fund classes that
might perform this internal review and re-assessment of expenses
approximately $4,950,000 in outside expenses and $10,711,800 in
internal time cost equivalent to comply with our proposal.\476\ We
assume that the other 990 fund classes that charge between 25 and 50
basis points in 12b-1 fees, but do not re-assess these fees or
otherwise reduce their fees to 25 basis points or less, would impose an
ongoing sales charge in compliance with proposed rule 6c-10(b). Their
costs are discussed below.
---------------------------------------------------------------------------

    \476\ This estimate is based on the following calculations:
($5000 per class x 990 classes = $4,950,000 total expenses);
($10,820 per class x 990 classes = $10,711,800 total internal time
cost equivalent).
---------------------------------------------------------------------------

    We request comment on these estimates and assumptions.
     Is the staff's estimate of $5,000 per fund class for
outside counsel expenses, 20 hours of inside counsel time, and 1 hour
of board time reasonable for the internal review and disclosure
amendment process? If not, what would be a better estimate? Are there
other costs that might be associated with such a review?
c. Ongoing Sales Charge: Conversion and Modified Share Classes
    Under our proposed amendments to rule 6c-10, funds with asset-based
distribution fees in excess of 25 basis points (i.e. with ongoing sales
charges) that issue new shares after the compliance date, must have, or
create, a share class that does not impose an ongoing sales charge
(such as a typical class A) into which shares with the ongoing sales
charge would convert after a set period of time (a ``target
class'').\477\ We anticipate that there would be two primary sets of
costs that these fund families may incur related to our proposed
amendments to rule 6c-10: (i) Updating or creating a conversion system,
and (ii) amending or creating new share classes. Both sets of costs
would include expenses related to building or enhancing systems and
back office technology and operations.
---------------------------------------------------------------------------

    \477\ See supra Section III.D for a further discussion of the
operation of the proposed rule.
---------------------------------------------------------------------------

(i) Conversion System
    As a preliminary matter, the staff estimates that approximately 90%
(or 186) of the 207 fund families \478\ that may be affected by our
proposed amendments to rule 6c-10 have at least one fund with a class
of B shares and, as a result, have a conversion system in place that
they could use to convert shares with ongoing sales charges. The staff
estimates that it may cost a fund family $100,000 in one time initial
costs, and $50,000 annually, to modify an existing B share conversion
system to manage the conversions of funds with ongoing sales charges.
These costs would include: (i) Computer hardware needed to store an
increased volume of transaction activity; (ii) computer software to
expand and update the systems' ability to track share lots and convert
the shares based on the new aging schedules; and (iii) expanding back
office and accounting operations and hiring and training additional
back office personnel.
---------------------------------------------------------------------------

    \478\ As we have discussed previously, a number of funds may
avoid these costs by reducing their asset-based distribution fees or
by re-characterizing expenses. Although some funds in a family may
be able to avoid such costs, it may be that only a few funds in the
family could do so, and therefore the fund family as a whole would
still incur these costs of complying with this part of our proposal.
The staff has therefore chosen to be conservative and include all
fund families that might be affected by the ongoing sales charge
proposal in the cost estimates below.
---------------------------------------------------------------------------

    The other 10% or 21 fund families that do not have conversion
systems may incur additional costs to create a conversion system, or
contract for one through an external service provider. The staff
estimates that it would cost a fund family (or its affiliated transfer
agent) approximately $250,000 in initial costs and $100,000 in annual
costs to purchase or create a conversion system, integrate existing
computers, software, and networks, train personnel, and

update records. The staff estimates it would cost approximately the
same amount to outsource this type of system to an outside vendor.
Because a fund family's class structure generally is intimately tied to
its conversion system, as discussed below, we expect that the decision
to amend or create new share classes would be made in coordination with
any changes to the conversion system.
(ii) Operational Changes and Modified Share Classes
    Next, we describe four potential routes that we believe fund
families could use to come into compliance with our proposed amendments
to rule 6c-10. In addition, we describe the staff's estimates of the
number of fund families that may use each route and the potential
costs. These routes include: (1) Retaining existing share class
structures and conversion systems; (2) updating the fund family's
existing conversion system and amending the class structure; (3)
updating the fund family's existing conversion system, amending the
class structure, and creating new share classes; and (4) creating/
purchasing a new conversion system, amending the class structure, and
creating new share classes. Because these routes are general paths to
compliance with our proposed amendments to rule 6c-10, we expect that
the experience of each fund family would likely vary significantly from
the average costs outlined below. In addition, some fund families may
need to ``mix and match'' parts of these outlined routes to meet the
particular needs of each fund within the fund family. However, we would
expect that affected fund families would generally comply with the
proposed amendments in one of the ways described above.
    Funds would also have a variety of choices in managing shares with
12b-1 fees that have been grandfathered pursuant to proposed rule 12b-
2(d). Some fund families may choose to retain grandfathered 12b-1 share
classes for the period allowed, and amend those classes so that future
share purchases comply with the proposed amendment to rule 6c-10
(essentially mixing shares with differing conversion dates in the same
class), and then converting or exchanging the grandfathered shares into
the amended classes after five years. Other fund families may decide
not to grandfather 12b-1 shares and instead amend their existing
classes to fully comply with the proposed amendments to rule 6c-10 for
both new and existing shareholders (effectively applying the
requirements of the proposal to existing shares and not taking
advantage of the grandfathering provisions of proposed rule 12b-2(d)).
Finally, some funds may choose to manage grandfathered shares by
leaving those assets in existing classes for the period allowed, and
creating new share classes for all future share purchases, and then
converting or exchanging the grandfathered shares into the new classes
after five years. In any event, we anticipate that fund families would
choose the method that is most cost-effective and is in the best
interest of the fund family and its shareholders. The method of
managing share classes with grandfathered 12b-1 fees selected by the
fund family is likely to influence the route that the fund family would
select in complying with our proposed amendments to rule 6c-10(b), and
we have included the costs of managing share classes with grandfathered
fees in the staff's estimates below.\479\
---------------------------------------------------------------------------

    \479\ Funds that amend or update existing share classes as a
result of our proposal would provide notification to their existing
shareholders. If the proposal is adopted, we anticipate providing a
transition period of at least 18 months, which should allow most
funds to provide this notification in their next regularly scheduled
prospectus update, or in an annual or semi-annual report. In some
cases, due to timing constraints, a fund may determine that it needs
to ``sticker'' its registration statement and inform its
shareholders of the share class changes in a separate and
unscheduled communication. These funds would incur additional costs.
---------------------------------------------------------------------------

Route 1: Retain Existing Share Class Structure and Conversion Systems
    A fund family that sells funds with an existing class structure
that already generally complies with our proposed amendments to rule
6c-10 might only need to make minor changes to its operations in
response to our proposal. A fund family that does not sell C shares,
sells B shares that convert at a time that is consistent with proposed
rule 6c-10(b), and has a target class for converted shares (i.e., a
class that deducts 25 basis points or less in asset-based distribution
fees), would be included in this category.\480\ The costs and time
expended by such a fund family to comply with the proposed amendments
to rule 6c-10 would include: Reviewing the requirements of the rule (if
adopted); updating fund prospectuses, SAIs, and shareholder reports to
reflect the changed terminology and function of the two new types of
asset-based distribution fees; reviewing and making any necessary
updates to compliance policies and procedures; hiring outside counsel
to perform these reviews and updates; and providing training to
relevant internal personnel (i.e., staff from the fund, adviser, or
underwriter).
---------------------------------------------------------------------------

    \480\ Such a fund would be unlikely to incur any costs relating
to managing shares with grandfathered 12b-1 fees because its
existing class structure would already be in compliance with our
proposed amendments and, thus, it would not need to maintain
separate classes for shares with grandfathered 12b-1 fees.
---------------------------------------------------------------------------

    The staff estimates that approximately 15% (or 28) of the 186 fund
families that may be affected would be able to comply with the proposal
by making these minor changes to their operations. The staff estimates
that fund families that would make these operational changes would
incur approximately $20,000 in one-time costs, and 100 hours of time
expended by internal personnel to implement these changes for the
entire fund family. The staff estimates that the 100 hours spent by
internal personnel would break down as follows: 50 hours spent by
accountants and other back office personnel at $153 per hour; 30 hours
spent by programmers and other IT personnel at $190 per hour; 18 hours
spent by internal counsel at $316 per hour; and 2 hours spent by the
board of directors at $4500 per hour, for a total internal time cost
equivalent of $28,038.\481\ The staff therefore estimates that the
total costs for all affected fund families that use this route would be
$560,000 in one-time costs and 2800 hours of internal personnel time
expended at a total internal time cost equivalent of $785,064.\482\
---------------------------------------------------------------------------

    \481\ These figures are based on the following calculations: (50
hours x $153 = $7650); (30 hours x $190 = $5700); (18 hours x $316 =
$5688); (2 hours x $4500 = $9000); ($7650 + $5700 + $5688 + $9000 =
$28,038 total internal time cost equivalent).
    \482\ These figures are based on the following calculations:
($20,000 costs x 28 fund families = $560,000); (100 hours x 28 fund
families = 2800); ($28,038 x 28 fund families = $785,064).
---------------------------------------------------------------------------

     We request comment on these estimates and assumptions.
Route 2: Update Conversion System and Make Amendments to Class
Structure
    Alternatively, funds might need to make amendments to their
existing share classes to comply with our proposal.\483\ These funds
may need to change the conversion period of their class B shares,
institute a conversion period for class C shares, or make other changes
to their class structure. However, the staff assumes that fund families
that choose this route would not need to create new share classes,
because they would already have a target class for conversions that
meets the requirements of proposed rule 6c-10(b) (e.g., an existing
share class with

12b-1 fees of 25 basis points or less). The staff expects that these
fund families would not choose to create new share classes for
purchases made after the compliance date of the proposal (if adopted),
but would instead amend their existing classes.\484\ These fund
families would also have to update their conversion systems, at a
previously estimated one-time cost of $100,000 and $50,000 annually.
The staff estimates that approximately 50% (or 93) of the 186 fund
families that may be affected would need to amend their existing share
classes as a result of our proposal. The staff estimates that, on
average, each fund that amends its share classes would need to amend an
average of two share classes. The staff estimates that it would
typically cost approximately $10,000 and 25 hours of internal personnel
time to amend a share class to meet the requirements of our proposed
amendments to rule 6c-10.
---------------------------------------------------------------------------

    \483\ Pursuant to rule 18f-3, fund share classes are required to
be organized according to a written plan that is approved by the
fund's directors, and thus this plan must be amended when changes
are made to a share class.
    \484\ Instead, they would either amend existing classes to mix
grandfathered 12b-1 fee shares with new purchases with differing
conversion dates, or would not grandfather existing 12b-1 fees. In
either case, these funds would amend existing share classes, but
would not create new ones. The costs for funds that choose to create
new share classes as a means of managing share classes with
grandfathered 12b-1 fees or in response to our proposed amendments
to rule 6c-10 are described in our discussion of route 3, below.
---------------------------------------------------------------------------

    However, the staff expects that most fund families would amend all
of the relevant share classes at the same time as part of a coordinated
plan for compliance with the proposed rules, and therefore should be
able to achieve significant economies of scale. Much of the work
involved in amending one share class is similar to that involved in
amending other classes, and if all amendments are undertaken at the
same time, significant efficiencies and elimination of duplicative
effort should result. The staff therefore estimates that a fund family
with 35 funds (the average for fund families that have at least one
fund with 12b-1 fees in excess of 25 basis points) would incur a total
of $100,000 in outside expenses and 250 hours of internal personnel
time expended. The time would represent approximately 140 hours spent
by accountants and other back office personnel at a rate of $153 per
hour, 100 hours spent by inside counsel at a rate of $316 per hour, and
10 hours spent by the board of directors as a whole, at a rate of $4500
per hour, for a total internal time cost equivalent of $98,020.\485\
---------------------------------------------------------------------------

    \485\ These figures are based on the following calculations:
($153 x 140 hours = $21,420); ($316 x 100 hours = $31,600); ($4500 x
10 hours = $45,000); ($21,420 + $31,600 + $45,000 = $98,020).
---------------------------------------------------------------------------

    These costs and time expenditures would include internal staffing
and outside counsel review to establish the amended terms of the class,
creating and/or amending relevant disclosure documents, amending the
written plan setting forth the terms of the funds' class structure,
holding a director vote on the class plan if necessary, any training
expenses, costs related to amending distribution or underwriting
agreements, and any costs related to altering the terms of the class on
the fund or its transfer agent's systems, the costs of exchanging or
converting remaining grandfathered shares into appropriate share
classes after the expiration of the grandfathering period, as well as
the costs of updating the fund family's operations discussed
above.\486\ The staff assumes that the costs of maintaining these
amended share classes would be the same as the cost of maintaining
current share classes, and therefore the staff estimates that funds
that choose this option would incur no additional ongoing annual cost
burden.
---------------------------------------------------------------------------

    \486\ The costs of amending the fund family's operations, as
discussed above under route 1, is included in this estimate.
---------------------------------------------------------------------------

    Therefore, the staff estimates that each fund family would incur
$100,000 in costs and 250 hours in internal personnel time (at an
internal time cost equivalent of $98,020) to amend their share classes,
and an additional $100,000 in one-time costs and $50,000 in annual
costs to update their conversion systems, for a total one-time cost of
$200,000, annual costs of $50,000, and 250 hours of time expended for
each of these fund families to comply with the ongoing sales charge
portion of our proposal. Based on these estimates, the staff further
estimates that all 93 potentially affected fund families that may
choose this option would incur a total of $18,600,000 in one-time
costs, $4,650,000 annually, and 23,250 hours in one-time internal
personnel time expended at an internal time cost equivalent of
$9,115,860.\487\
---------------------------------------------------------------------------

    \487\ These figures are based on the following calculations:
($200,000 one-time costs x 93 fund families = $18,600,000); ($50,000
annually x 93 fund families = $4,650,000); (250 hours x 93 fund
families = 23,250 hours); ($98,020 x 93 fund families = $9,115,860).
---------------------------------------------------------------------------

     We request comment on these estimates and assumptions.
Route 3: Update Conversion System, Make Significant Changes to Class
Structure, and Create New Share Classes
    Other fund families may need to create new share classes to comply
with our proposed amendments to rule 6c-10. These fund families might
need to create new share classes either because they do not have an
appropriate target class for conversions (for example, if their class A
shares deduct more than 25 basis points in asset-based distribution
fees), or if they chose to maintain grandfathered 12b-1 assets in
existing share classes and create new share classes for all future
share purchases after the compliance date of the rule (if
adopted).\488\ In addition to creating new share classes, these fund
families would also likely need to amend their existing share classes.
These fund families would also need to update their conversion systems,
at a previously estimated one-time cost of $100,000, and $50,000
annually.\489\
---------------------------------------------------------------------------

    \488\ For example, a fund might have a class A that deducts 35
basis points in asset-based distribution fees, class B shares that
convert at a date later than the proposal would require, and class C
shares that do not convert. This fund might need to create a new
class A that deducts 25 basis points or less as a target class for
conversions, and if the fund chose to maintain grandfathered assets
in the existing A and C shares classes, might also create a new
class A and C that meets the terms of the proposal. In addition, the
fund may choose to amend the conversion requirements of the class B
shares to comply with the requirements of the proposal for both new
and existing shareholders (``mixing'' conversion dates in the same
class). This fund would be creating three new share classes and
amending one other class.
    \489\ See supra Section V.D.2.c.(i).
---------------------------------------------------------------------------

    The staff estimates that the remaining 35% (or 65) of 186
potentially affected fund families with conversion systems would create
new share classes in response to our proposed amendments to rule 6c-10.
The staff estimates that it would cost each fund approximately $100,000
and 100 hours of internal personnel time to create a new share
class.\490\ These expenses would include internal staffing and outside
counsel involvement to establish the terms of the new class, create
and/or amend relevant disclosure documents, amend the written plan
setting forth the terms of the funds' class structure, hold a director
vote if necessary, any training expenses, the costs of amending
distribution and underwriting agreements, the costs of exchanging or
converting remaining grandfathered shares into appropriate share
classes after the expiration of the grandfathering period, any costs
related to implementing the new class on the fund's or transfer agent's
systems, and any costs related to updating the fund's operations
discussed above. The staff's estimate assumes that the costs of
maintaining these new share classes would be the same as the costs of
maintaining current share classes, and the staff estimates that funds
that choose

this option would incur no additional ongoing annual cost burden
related to the class structure changes. The staff estimates that, on
average, each fund that creates new share classes would need to create
two new share classes and amend one additional share class (at the same
cost as amending share classes discussed above).
---------------------------------------------------------------------------

    \490\ As discussed below, funds that choose this option would
likely achieve significant cost savings and economies of scale by
creating all new classes simultaneously. To be conservative,
however, Commission staff has also estimated the costs of creating
each class individually.
---------------------------------------------------------------------------

    However, as discussed previously, the staff expects that most fund
families would make all necessary changes to their distribution
structure as part of a coordinated plan for compliance with the
proposed rules, and therefore should be able to achieve significant
economies of scale and costs savings over the costs of amending or
creating a single share class. For example, often, a number of funds in
a family share a single prospectus, which could be amended at a single
time, and the class structure could be amended with a single director
vote. In light of these expected economies of scale, the staff
estimates that a typical fund family would incur $800,000 in costs and
500 hours in internal personnel time to create new share classes, and
$50,000 in costs and 100 hours in internal personnel time expended to
amend existing share classes, for a total of $850,000 in outside costs
and 600 hours of internal personnel time expended. The internal
personnel time expended would include approximately 200 hours spent by
programmers and other back office IT staff at a rate of $190 per hour,
200 hours spent by accountants at a rate of $153 per hour, 190 hours
spent by inside counsel at a rate of $316 per hour, and 10 hours spent
by the board of directors as a whole at $4500 per hour, for a total
internal time cost equivalent of $173,640.\491\ Including $100,000 in
one-time costs and $50,000 in annual costs to update their conversion
systems, the total cost for each fund family would be $950,000 in one-
time costs, $50,000 in annual costs and 600 hours expended.
---------------------------------------------------------------------------

    \491\ These figures are based on the following calculations:
($190 x 200 hours = $38,000); ($153 x 200 hours = $30,600); ($316 x
190 hours = $60,040); ($4500 x 10 hours = $45,000); ($38,000 +
$30,600 + $60,040 + $45,000 = $173,640).
---------------------------------------------------------------------------

    Based on these staff estimates, the 65 potentially affected fund
families would incur a total of $61,750,000 in one-time costs,
$3,250,000 in annual costs, and 39,000 hours in one-time internal
personnel time expended (at an internal time cost equivalent of
$11,286,600) to comply with our proposal.\492\
---------------------------------------------------------------------------

    \492\ These figures are based on the following calculations:
($950,000 one-time costs x 65 fund families = $61,750,000); ($50,000
annually x 65 fund families = $3,250,000); (600 hours x 65 fund
families = 39,000 hours); ($173,640 x 65 fund families =
$11,286,600).
---------------------------------------------------------------------------

     We request comment on these estimates and assumptions.
Route 4: Purchase New Conversion System, Make Significant Changes to
Class Structure, and Create New Share Classes
    Finally, if our proposed amendments to rule 6c-10 are adopted, some
funds would have to purchase or create a conversion system. As
previously discussed, the staff estimates that 10% or 21 fund families
that may be affected by our proposed amendments to rule 6c-10 currently
do not have a conversion system, either because they only sell a single
class of shares, or if they sell multiple classes of shares, none of
their share classes has a conversion feature. The staff has previously
estimated that it would cost approximately $250,000 in initial costs
and $100,000 in annual costs to purchase or create a conversion system.
    In addition to purchasing a new conversion system, these fund
families would also need to create a new target class for converted
shares and amend existing share classes to meet the requirements of our
proposed amendments to rule 6c-10. For example, if a fund sold only
class C shares that deducted asset-based distribution fees in excess of
25 basis points, the fund would need to create a new target class for
converted shares. In addition, if the fund chose to maintain
grandfathered 12b-1 assets in the existing class, the fund may need to
create a second class of shares for future purchases. On the other
hand, if the fund chose to dispense with grandfathering 12b-1 fees, it
might amend the existing C class so that it complied with our proposed
amendments to rule 6c-10 for both existing and new shareholders.
    The staff has previously estimated that it may cost each fund
approximately $100,000 and 100 hours of internal personnel time to
create a new share class and $10,000 and 25 hours to amend a share
class. The staff assumes that each affected fund that does not
currently convert shares would have to create two new share classes and
amend one additional share class to meet the requirements of the
proposed amendments to rule 6c-10.
    However, as discussed previously, the staff expects that most fund
families would make all necessary changes to their distribution
structure as part of a coordinated plan for compliance with the
proposed rules, and therefore should be able to achieve significant
economies of scale and costs savings over the costs of amending or
creating a single share class. In light of these expected economies of
scale, the staff estimates that each fund family would incur $800,000
in costs and 500 hours in internal personnel time to create new share
classes, and $50,000 in costs and 100 hours in internal personnel time
expended to amend existing share classes, for a total of $850,000 in
outside costs and 600 hours of internal personnel time expended. The
internal personnel time expended would include approximately 200 hours
spent by programmers and other back office IT staff at a rate of $190
per hour, 200 hours spent by accountants at a rate of $153 per hour,
190 hours spent by inside counsel at a rate of $316 per hour, and 10
hours spent by the board of directors as a whole at $4500 per hour, for
a total internal time cost equivalent of $173,640.\493\ Including
$250,000 in one-time costs and $100,000 in annual costs to purchase or
build a conversion system, the total cost for each fund family would be
$1,100,000 in one-time costs, $100,000 in annual costs and 600 hours
expended.
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    \493\ These figures are based on the following calculations:
($190 x 200 hours = $38,000); ($153 x 200 hours = $30,600); ($316 x
190 hours = $60,040); ($4500 x 10 hours = $45,000); ($38,000 +
$30,600 + $60,040 + $45,000 = $173,640).
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    Based on these staff estimates, the 21 potentially affected fund
families would incur a total of $23,100,000 in one-time costs,
$2,100,000 in annual costs, and 12,600 hours in one-time internal
personnel time expended (at an internal time cost equivalent of
$3,646,440) to comply with our proposal.\494\
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    \494\ These figures are based on the following calculations:
($1,100,000 one-time costs x 21 fund families = $23,100,000);
($100,000 annually x 21 fund families = $2,100,000); (600 hours x 21
fund families = 12,600 hours); ($173,640 x 21 fund families =
$3,646,440).
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     We request comment on these estimates and assumptions.

E. Ongoing Sales Charge: Investors

    Investors currently appear to have difficulty understanding 12b-1
fees and the activities and services for which they are used.\495\ Our
proposal would differentiate between the two constituent parts of
current 12b-1 fees (asset-based sales charges and service fees). It
would allow funds to use a limited amount of assets as a marketing and
service fee, and deduct any excess amounts over the marketing and
service fee as an ongoing sales charge. The renamed fees would appear
separately in an amended fee table in the prospectus under the headings
``marketing and service fees'' and ``ongoing sales charge.''
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    \495\ See supra Section II.E.

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    By more clearly identifying the two types of asset-based
distribution fees, we expect that the proposal would make it easier for
investors to understand when they are paying a sales charge. In
addition, these proposed changes to the fee table and the revised
narrative disclosure in the prospectus should also help investors
better understand the services they are paying for through the
marketing and service fee and the ongoing sales charge. This improved
understanding should help investors more easily compare sales charges
in alternative share classes and competing funds and, therefore, choose
the sales charge option that best meets their investment needs. We
anticipate that this would lead investors to choose lower priced
offerings of funds or share classes that offer comparable services,
which should lead to greater price competition among funds and lower
sales charges.
    Investors empowered with this information may invest differently.
Although we cannot predict investor behavior, we assume that if offered
lower prices for the same services, or provided with better information
regarding the distribution services received, many investors would
choose to move their investments to, or make new investments in, a fund
or share class with lower asset-based distribution fees or loads.
Conversely, investors may decide to avoid funds that charge high asset-
based distribution fees if they believe that they would not get, or
want, commensurate levels of service. We expect that investors who
choose to shift invested assets would only move assets that are not
subject to a CDSL, or on which they had not already paid a front-end
load. Thus, we do not anticipate that investors would shift assets
invested in class A or B shares if our proposal were adopted. In
addition, our proposal would require that assets held for long periods
of time in level load classes (for example, class C shares) eventually
convert to classes that do not deduct an ongoing sales charge, which
would result in a net movement of assets out of these level load
classes into lower cost classes.
    Commission staff estimates that approximately $686 billion in total
net assets currently are invested in level load share classes, and that
approximately $3.4 billion in 12b-1 fees are deducted from these assets
fees annually, for an average 12b-1 fee as a percentage of total net
assets in these classes of 50 basis points.\496\ The staff further
estimates that if our proposed rule and disclosure amendments are
adopted, improved investor understanding of distribution related
charges would result in an aggregate total of between five and ten
percent of assets currently invested in level load classes (for
example, C shares) moving to share classes (within the same fund or in
a different fund) that do not deduct an asset-based distribution fee.
If five percent of the $686 billion in assets in these classes (or $34
billion) were moved to share classes without asset-based distribution
fees, at an annual 12b-1 fee rate of 50 basis points, investors would
save approximately $170 million annually.\497\ If ten percent of the
$686 billion in assets in these classes (or $68 billion) were moved to
share classes without asset-based distribution fees, investors would
save approximately $340 million annually.\498\ Over a ten-year period,
this would represent a potential savings of between $1.7 billion and
$3.4 billion to investors in asset-based distribution fees that they
would otherwise have paid, but would avoid because of better informed
decision making.
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    \496\ We recognize that some portion of the 50 basis points may
represent service fees and that an investor who shifts their assets
from a level load fund class may still select a fund class that
charges a service fee or a reduced ongoing sales charge. However,
for purposes of this analysis, the result of the staff's estimates
represent the total cumulative effect of all asset movement from
level load funds to no-load or lower load funds.
    \497\ This estimate is based on the following calculation:
($34,000,000,000 x 0.005 = $170,000,000).
    \498\ This estimate is based on the following calculation:
($68,000,000,000 x 0.005 = $340,000,000).
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    If our proposal is adopted, we would provide a grandfathering
provision for current 12b-1 share classes for a five-year period.
However, at the end of that five-year period, all shares that are
currently subject to a 12b-1 plan would need to be converted or
exchanged into a class that does not deduct an ongoing sales charge and
with a marketing and service fee that is no higher than the 12b-1 fee
in effect in the previous fiscal year. This expiration of the
grandfathering period would effectively time limit level load share
classes as they exist today. All assets that remain in level load share
classes after the expiration of the grandfathering period would need to
be converted to a class that does not deduct an ongoing sales charge;
effectively a class that charges 25 basis points or less in asset-based
distribution fees. This conversion or exchange would benefit investors
who remained in these level load classes at the end of the
grandfathering period to the extent that the asset-based distribution
fees on the share class they are converted into is lower than the
current 12b-1 fee.
    The staff estimated above that the average 12b-1 fee on level load
share classes is 50 basis points. Because no ongoing sales charge could
be charged on the converted or exchanged shares and the highest
marketing and service fee allowed under the proposal is 25 basis
points, the staff estimates that investors who remain in the
grandfathered 12b-1 share class would save 25 basis points a year after
the expiration of the grandfathering period. However, as discussed
above, the staff estimates that some investors may move their existing
level load assets to lower load classes as a result of this proposal,
and further reductions in the assets of existing level load share
classes may occur through redemptions or reduced investment. The staff
estimates that at the expiration of the grandfathering period in five
years, approximately 50% of the $686 billion (or $343 billion) in
existing level load share class assets will remain. Upon the conversion
or exchange of these assets into share classes that do not deduct an
ongoing sales charge, the staff estimates that investors in these
classes will save 25 basis points a year (the asset-based distribution
fees charged in excess of the amount permitted as a marketing and
service fee), or a total of $857,500,000 annually.\499\
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    \499\ This estimate is based on the following calculation:
($343,000,000,000 x 0.0025 = $857,500,000).
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    In addition, if our proposal is adopted, we estimate that net new
investments in level load fund classes would decline as investors
choose share classes with no or lower sales charges, whether in the
form of an asset-based distribution fee, front-end load or CDSL, and as
a result of requirements in the proposal to eventually convert shares
that charge an ongoing sales charge into a class that does not deduct
such a fee at a set time. The staff estimates net new investments in
level load fund classes may decline between ten and twenty percent as a
result of our proposal (with a commensurate increase in net new
investments in no or low load funds). Based on a review of Lipper's
LANA Database and data filed with the Commission, the staff estimates
that approximately $52 billion in net new cash flowed to level load
classes in 2009, with those level load classes charging an average
asset-based distribution fee of approximately 50 basis points. Assuming
that there would be similar net cash flow to these classes in future
years, if ten percent of the net new cash flow to level load classes
(or

$5.2 billion) is invested in classes that do not charge asset-based
distribution fees, Commission staff estimates that investors would save
approximately $26 million annually.\500\ If twenty percent of the net
new cash flow to these classes (or $10.4 billion) is instead invested
in classes that do not charge asset-based distribution fees, Commission
staff estimates that investors would save approximately $52 million
annually.\501\ Over a ten-year period, this represents potential
savings of between $260 million and $520 million for investors who
might be better served in other classes with a more appropriate level
of service for their needs or wants.
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    \500\ This estimate is based on the following calculation:
($5,200,000,000 x .005 = $26,000,000).
    \501\ This estimate is based on the following calculation:
($10,400,000,000 x .005 = $52,000,000).
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    As discussed above, we expect that one result of our proposal would
be a net shift by investors to lower load share classes. As part of
this net shift, we would expect that some investors might determine
that they need or want continuing high levels of service, and may
choose to move their assets out of level load share classes and into
fee-based or wrap fee accounts, which may have higher expenses than the
level load share classes the investor had previously owned.\502\ These
investors may pay higher expenses as a result of this choice, but would
presumably also receive higher levels of service, and the ability to
trade between funds in different fund families without paying
additional loads. The proposal would provide investors with better
information regarding the asset-based distribution fees they pay, which
should enhance the ability of investors to select the type of account
or method of paying distribution fees that is best for them, even if
some investors choose to invest through more costly methods as a
result.
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    \502\ Other investors, however, would move their assets into
lower cost funds, as discussed previously. Level-load share classes
typically deduct 100 basis points or less in asset-based
distribution fees annually. Fee-based or wrap accounts often charge
higher fees (between 100 and 200 basis points annually) but the
broker-dealers that offer wrap accounts also provide additional
services and transaction options for their clients.
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    There is some question as to whether a reduction in asset-based
distribution fees paid by investors would be purely a benefit of the
proposal resulting from markets that are more efficient and investors
making better-informed investment choices, or whether it would
represent a transfer of assets from investment managers or broker-
dealers to investors. The goals of this rulemaking include providing
better and more transparent information to investors regarding the
asset-based distribution fees they pay, enabling investors to more
efficiently allocate their investments and meet their investment goals,
and promoting competitive markets. In light of these goals, we believe
that any reduction in asset-based distribution fees paid by investors
that is due to better-informed investment decisions made as a result of
this proposal should be counted as a benefit.
     Do commenters agree that the estimated reductions in sales
charges investors would pay are a benefit of this proposal? We further
request comment on the estimates and assumptions we have made in this
section regarding the benefits of our proposal to investors and the
likelihood that a certain portion would invest in funds with lower
sales charges. In particular, we request comment on the quantitative
estimates the staff has made and request that commenters provide any
quantitative data they may have on the likely behavior of investors in
response to our proposals.
    Currently, funds with class C shares typically do not charge a CDSL
after the first year, which allows the potential for some short-term
shareholders in C share classes to redeem soon after purchase and pay
less asset-based distribution fees compared to longer-term shareholders
in the same share class. Essentially, the longer-term C class
shareholders subsidize some of the distribution expenses of the
shorter-term shareholders. Funds typically structure their C shares in
this manner to attract investors who may not want to be committed to a
long-term investment in a fund, and who may pay significantly more or
less in distribution costs depending on how long they remain invested
in the fund. Funds also take the risk that the distribution expenses
associated with short-term investments in C shares will not be balanced
out by long-term C class shareholders who may pay significantly more in
asset-based distribution fees than if they had instead invested in some
other class.
    Proposed new rule 12b-2 and amended rule 6c-10 would have the
effect of limiting the total asset-based distribution fees that long-
term shareholders would pay, and may thereby alter the economic
incentives involved in structuring a C share class without a CDSL. If
the proposal is adopted, some funds may reconsider the economics of C
share classes, and could restructure those classes, perhaps imposing a
CDSL similar to B share classes. If this occurs, this could effectively
eliminate the opportunity for some short-term C class shareholders to
avoid paying a portion of the distribution expenses associated with
their investment. However, it would also effectively eliminate the
potential for some longer-term shareholders in C classes to subsidize
those costs by paying significantly more in asset-based distribution
fees over time. One of the goals of this rulemaking is to help ensure
more equity between shareholders in the payment of fund distribution
expenses. However, we acknowledge that achieving this more equitable
treatment between shareholders may come at a cost to certain short-term
shareholders whose distribution expenses would no longer be subsidized
by long-term C class shareholders.
    We request comment on the likelihood of funds restructuring their C
share classes as discussed above, and any potential impact such a
restructuring might have on both long- and short-term investors in
those classes.
     In particular, we request comment on any quantitative
estimates of the amount of additional asset-based distribution fees
that short-term investors may pay and the amount of such fees that
long-term shareholders may save as a result of this proposal.

F. Ongoing Sales Charge: Intermediaries

    Broker-dealers and other intermediaries may also be affected by the
proposed limitations on ongoing sales charges. Currently, FINRA rules
do not limit the total amount of asset-based sales charges that an
individual fund investor may pay. NASD Conduct Rule 2830 limits the